Smurfit WestRock PLC (SW) 2012 Q2 法說會逐字稿

Good afternoon to all of those here in the room, and good morning or good afternoon to those who are on the call. Welcome to the Smurfit Kappa second quarter/first half results call.

I'm joined on the call and in the room by Tony Smurfit, who's the Group President and COO, and by Ian Curley, who's our Group CFO. I'm going to take the normal disclaimer as read, and draw your attention also to [the certain risks and uncertainties] that are listed in the first half press release you should all have by now.

Let me turn, first of all, to the first half performance. I think we're pleased to present a first half performance of EUR500 million EBITDA, which is, I think, commendable in the context of the challenging macroeconomic circumstances. It's underpinned by fairly stable Box volumes, which again is commendable in the current circumstances, and particularly underpinned by strong price performance by our market facing businesses, Corrugated and [equivalent businesses].

We've continued to focus, as you would expect, on net debt, and net debt pay-down, and we've delivered a net debt reduction of (technical difficulty) related to (inaudible) and so on. Notwithstanding that fact, and the fact that we have paid out dividends this year of EUR33 million and some dividends to minorities, and indeed the currency has been adverse to our cash flow at EUR18 million, the combination of all of those, with working capital outlay, I should say, of EUR97 million has still only resulted in net debt going up about EUR33 million, and obviously, we [confidently] expect that to come down and continue its trend over the last few years.

In the second half of the year, which is a much stronger cash flow generation period, you can see the free cash flow in quarter 2, and again that will increase and accelerate in quarter 3, 4.

You'll all be aware of the fact that we've announced containerboard price increases for September. In terms of recycled paper pricing, effectively prices are at levels that are not economic for the industry, first and foremost. Secondly, the inventories are trending in the right direction, to support the price increase.

And while OCC prices are trending downward still, the underlying OCC trend is unequivocally upwards. The underlying reality of OCC is in its high collection stage in most of the developed markets and, obviously, supply/demand is tight through the cycle, and therefore, we reasonably expect it to go back up and, again support [paper] pricing. And another of our industry colleagues has come out and announced a paper price increase as well.

On the Kraftliner side, it's even more challenging, in the sense that Kraftliner is extremely tight. The market has been very tight for some months now for a number of reasons. Firstly, the demand is reasonably good. Secondly, imports from the US are down about 19% or 20% half year on half year, driven by better domestic demands, better/other uses for the Kraftliner, and some downtime from (inaudible).

And the net consequence of that is that the market is extremely tight, and therefore, on top of the EUR40 per tonne we increased in the first half, we've announced a further EUR50 per tonne for the second half of the year, in September. And again, effectively, the industry collectively in Europe has announced now, and indeed the US has announced for August, which is compatible and consistent with that announcement.

In terms of the first half, I think, as we've said on a number of occasions and particularly in this half year, the Company is very well positioned for continued performance and growth. Despite the macro headwinds, we have, over the last couple of years, delivered strongly.

And I think it pays testimony to something that we tend to use language-wise regularly, but I'm not sure people fully understand it, and that is the concept of the integrated model, which is basically a packaging company backward-integrated into paper and then into the fiber basket, whether it's wood or recovered paper.

And you can see, if you look over the last couple of years, and bear in mind that we probably have gone through unprecedented volatility in macro terms, and the general sense is that this is an industry which is cyclical.

If you allow for those two factors, you can see that the quality of our earnings is such that we have traded at a very limited range, in terms of the [peak to valley] in EBITDA margin terms, from 13% to 14.5% in round sum number. And that A, gives a lot of predictability, B, takes out a lot of volatility out of the earnings, and C, underpins a far less volatile or cyclical type of profile of business than maybe other players in this industry have been called.

I think the other important thing to draw to your attention is that we now have, on the financial side, our capital structure management, which is a very proactive part of our business, as you know, has begun to deliver very significant benefits for us. And we now have a capital structure that is more and more attractive from the general marketplace point of view, the general circumstances in which we operate. And our key priority continues to be to maximize free cash flow for debt pay-down. As I said at June 2012, we've reduced debt by over EUR500 million in the last few years, and our current net debt to EBITDA at 2.8 times is well within our target range of being below 3 times at all points in the cycle, if the cycle continues.

And obviously, I don't need to remind you we have been upgraded by the key rating agencies, both S&P and Moody's in the first half of the year.

So I think Smurfit Kappa Group is equipped now with a unique set of operational and financial (inaudible) which allows us to look confidently into the future in terms of delivering strong organic performance, as I believe we have been doing, but also tackle the enhancing growth opportunities that we believe are starting to become visible.

Just turning to the operating underpinned to the performance for the half year and, indeed, in general terms, as you know corrugated is increasingly becoming the packaging medium of choice for customers in general, and it benefits from a number of factors.

It benefits from being a very significant marketing friendly substrate. Obviously, we can customize it, we can print it and allow our customers to differentiate their products very significantly on the [marketplace], or in the DIY store or wherever else. And the box is effectively a part of the merchandising aspect of our customers' product, and plays a significant part in helping them sell their product.

Most importantly, as the world evolves, and as we all look towards the general environment in which we live, it's becoming more and more clear that paper-based packaging is the most environmentally friendly substrate in the packaging world, and it's 100% renewable and recyclable.

Smurfit Kappa Group is also effectively a one stop shop that offers its customers a number of choices in terms of what they might buy from us, whether it's transport packaging, whether it's retail ready packaging, solidboard packaging, Bag-in-Box etc.

And in addition we still have a unique presence in 31 countries and, effectively, two continents where we're in a position to guarantee the presentation and standards of our customer's products in their marketplace and basically, live to a very high standard in our customers' world.

We continue to invest to remain and retain this positioning towards our customers and their end market, whether that's retailing or industrial. And in the first half of the year, to that end, we've spent EUR126 million in capital expenditure finalizing a new five color flexo folder gluer in Interwell in Austria, for example, a six color flexo die cut machine in Stalybridge in England, and significant expansion of our production capacity in our Bag-in-Box business in Epernay, France.

And I think what's important is to see some evidence of payback for these efforts, and I think it's rewarding to see our packaging solutions being valued by the customers.

We now provide over 50% of Unilever's packaging needs, and we are now a partner in their Partners to Win program. We were awarded the number one packaging supplier by Nestle in 2011 out of 118 suppliers, and we also won two sustainability awards from both Unilever and Coca Cola.

So most importantly, they're interesting and very nice to have, but the most important issue is the score. And interestingly, in the pan-European world in which we have a very, very significant presence now, we have been successful in growing our business by 6% half year on half year in 2012.

Regardless of the customer structure that we serve, and we serve large, medium and small customers, our main endeavor is to innovate and deliver cost efficient packaging solutions for the customers.

To that purpose, we employ over 650 packaging designers throughout our total systems, and they are basically available in a virtual design library. And this is an unrivalled source of technical and design capability, which is available not just for the big customers, but to the medium and small customers.

And these [four] Innotools which are on the slide in front of you allow us to harness the collective designs and engineering strengths of our total systems and marshal them and direct them to all the customers, irrespective of where they are.

If you take the InnoBook which, as you can see, there are 480 design viewings every day in the InnoBook, this harnesses the output of the design team. And we have approximately 4,500 designs online in the InnoBook library and, indeed, the usage in 2011 over 2010 increased by about 21% year on year. So it's increasing in its attractiveness to our customers for their purposes.

Paper To Box, which determines the optimal fiber content in the packaging we produce, is, again, growing in attractiveness and has increased year on year by 12% in terms of its utilization.

Pack Expert, which guarantees the box structure there will perform to the customers' specifications, has more than doubled year on year in terms of the number of calculations our customers being used by that tool.

And in terms of the world of retail, where we are spending a lot of time understanding our customers' world, and our customers' customers, and where we have implants and joint programs underway with many retailers, we are working with our customers and the retailers to optimize the packaging for the future and try to anticipate what it is.

Packaging in the future needs to be from all the various perspectives and, to that end, we have a Retail Test Center in our R&D center in Hoogeveen in Holland which allows us to basically, in real time, mark off the [obstacles] and alternatives available. We have attracted 600 customers to this Retail Center in the last year.

So I think, with all of those tools and with the integrated models, we have a very strong position in terms of positioning ourselves towards the current market and the target market for growth for Smurfit Kappa Group.

Just turning to trading, generally the stable demand environment on the Box side and bear in mind our Box business is almost 90% of our business, has underpinned our profitability, as has the strong pricing activity in boxes which has been unchanged in the first half of the year.

And that, basically, is made up of a range of different performances throughout Europe and, indeed, through Latin America where we have negative growth in some markets, and positive growth in others.

For example, in the UK we're up 3% half year on half year, France and Germany are softer, Italy is good, Poland is good, Ireland is actually good half year on half year and, indeed, in Latin America we have Mexico and Columbia good, and Venezuela and Argentina softer.

So it's a mixed bag, and one of the benefits of the model and the spread we have is, of course, that we're able to have the portfolio effect of different businesses for different customers, different markets and different dynamics which allow us to maintain volumes and pricing in the challenging marketplaces that prevail.

On the OCC side, as you'll all be aware of, OCC peaked at around EUR150 a tonne in April and since then, prices have been under downward pressure and have declined to approximately EUR115 a tonne in July.

This EUR35 a tonne reduction has triggered a decline in recycled paper pricing; recycled paper pricing has come off by EUR70 a tonne, leading to significant margin compression.

And as you can see on the trough of the graph on the slide, basically we have now reached a similar level of margin compression as that which [compelled] price increases in quarter 1.

These unsustainably low margins and the reducing inventory levels, and indeed, the underpinning of the structural shape that OCC tends to be has facilitated Smurfit Kappa Group EUR100 a tonne price increase with effect from September.

One of the things that strategically advantages Smurfit Kappa Group in a world where OCC and recovered paper is under pressure and upward pricing pressure and supply/demand challenges is the strategic option of having two different sources of paper available to our Box business, which is our core business.

And so our Kraftliner business in Europe, where we're the number one with 35% market share, is a particular market advantage and competitive advantage. As you can see from the slide, the geographic location, both in terms of access to raw materials and, indeed, access to the end markets, is quite optimal and allows us to spread our activity, minimize our transport costs, minimize our inventories in the logistical chain. And, most importantly, service our customers to a very substantial standard.

Kraftliner, as you've heard us say on many occasions, is a market with major barriers to entry. To replace our system in Europe would cost in excess of EUR3 billion. And in our view, and I think it's a reasonable view, no new capacity will be built in central or western Europe for Krafliner in the foreseeable future.

By way of note, and you will have picked it up, I'm sure, in the press release, in July our 520,000 tonne Kraftliner mill in [Pitea] has had a stoppage in its resourcing due to tank spillage, black liquor tank spillage. Our current estimation is that it'll be down for about six weeks, restarting somewhere in mid-August. And we don't expect any material effects on our results in 2012 from this spillage.

Obviously, it goes without saying that it does further impact on the supply side of the Kraftliner business. But notwithstanding that incident, even before and independent of it, Kraftliner market has been very strong, as I said, we've lower imports from the US. And the permanent closure of Petersen's in Europe, which is about 7% of the market.

So as a result of this, following the EUR40 a tonne increase we had in the second quarter of 2012, we've announced EUR50 a tonne price increase for September 2012.

Just turning to Latin America; and you'll have noted that, in Latin America, we've had a challenging quarter in quarter 2, due to unique one-off particular events, mostly in Argentina and Venezuela; a couple of strikes, some machine downtime issues, all of which have now been addressed, completed and are resolved. And so we're confidently expecting that the second half of the year we'll return to the type of performances that we'd expect from Latin America year on year.

I think Latin America, again, as to the portfolio effect of the Smurfit Kappa story, where we have geographic diversity and, indeed, business diversity, not only across Latin America but, obviously, across the wider marketplace that we serve, we have a unique portfolio of businesses. We are the number one in corrugated in Latin America, present in nine countries, with the four major countries being Colombia, Mexico, Venezuela and Argentina.

Although this region, and we've always said it, benefits from the making available of secondhand equipment from Europe as part of the synergistic benefit of having it, they're also benefiting from significant new investments in Latin America consistent with their expectations of growth and opportunity there. And so for the last number of years, Latin America would be the recipient of well in excess of depreciation in terms of capital expenditure in that marketplace. Indeed, in the first half of 2012, CapEx depreciation is 104%, whereas the Group average is 73%.

In the first half, just to put some numbers on it, Latin America represented 18% of Group EBITDA and delivered EBITDA margins of 14.3%. You will have heard us say consistently that EBITDA margins expectations in Latin America are somewhere between 16% and 21%.

The one-off items, as I said, are around issues like strikes in Argentina and Venezuela, and some machine downtime in Venezuela.

Let me now hand over to Ian, who will put some further color on the financial numbers for you.

Thank you, Gary. Let me start with an overview of the half 1 financials. A stable revenue in half 1 of EUR3.7 billion reflects unchanged Corrugated prices and 1% reduction in total Corrugated volume. If we look more closely at the volume trends, Box volumes are unchanged over half 1. The decline only was driven from the sheet market with 11% reduction year on year.

The Group's EBITDA of EUR500 million, a margin of 13.6%, were in line with the prior year, despite a number of one-off items which were reflecting benefits of our integrated model in a difficult operating environment, and EUR45 million cost take-out delivered in the half 1 of 2012. And our return on capital was 12.2%.

Despite a number of significant cash outflows, free cash flow was a positive of EUR47 million in half 1. And these outflows were EUR97 million in working capital, EUR33 million in dividend payments, and EUR18 million in adverse currency movements. This highlights our clear focus on cash generation and also (inaudible).

If we turn now to the second quarter specifically, we delivered 4% sequential growth in EBITDA in quarter 2, EUR255 million, and a margin of 13.7% versus quarter 1, 2012 [up 13 basis points]. We experienced a number of one-off items in quarter 2, which in total had a broadly neutral impact on our EBITDA performance in the period.

Free cash flow was EUR63 million in quarter 2, which was EUR3 million lower than the prior year, despite the lower EBITDA.

In part, (inaudible) working capital outflows in 2012 and resulted in the Group's continued progress in that area. Our working capital sales ratio reduced to 8.9% in June 2012 compared to 9.3% in the (inaudible).

As you can see from the chart here, in the past three years our free cash flow generation has been much stronger in half 2 compared to 1. This trend will repeat in 2012 and we'll, therefore, expect our free cash flow to accelerate to a sustained, strong free cash flow that allows us to reduce our leverage ratio from 4.2 times two years ago to 2.8 times today.

Further, we've set ourselves an objective to remain below 3 times, and we've been operating within that leverage ratio since quarter 2, 2011.

In half 2, 2012, we finalized amendments to our senior credit facility, providing us with extended debt maturities and greater financial flexibility. As a result, we've no material senior credit facility maturity before June 2016, and an average debt profile of 5.2 years.

Further, we have the flexibility to refinance. We pay our bank debt and our 2015 bond, and we will do so at a time of our choosing with a view to maximizing all shareholder interests.

We continue to maintain a strong liquidity position. We've over EUR500 million cash in the balance sheet and EUR525 million of unused revolving credit facilities. All these developments have positioned for Smurfit Kappa to deliver continued strong performance and growth in the future.

I'll now hand back to Gary for the outlook.

Thanks, Ian. As I said at the beginning, again, I think we're pleased to report a strong EBITDA of EUR500 million in the first half of 2012, which is a margin of 13.6% EBITDA. And this is underpinned by the strength of our integrated model, which delivers significant quality of earnings through a volatile and cyclical environment.

This is also supported by stable box prices, and the continuing focus on operating efficiency and the drive to maximize the amount of [calculated] (inaudible) we can take in our business consistent with service and standards of delivery for our customers.

Our Latin American business, despite the minor blip in quarter 2, continues to provide us with very strong geographic diversity, superior margins and good growth prospects. Our announced paper price increases should contribute to more economic margins in our paper business in the second half of the year.

While the macroeconomic risks remain, we continue to expect to deliver in 2012 a full year EBITDA similar to that achieved in 2011. Our free cash flow generation will accelerate in the second half, as I've said, thereby further expanding our available range of strategic and financial options. Our aim is to continue expanding our position as the industry leader in the Corrugated.

I'm going to pause at that point for some Q&As, and then there's just some final remarks I want to make at the end. So let me take questions, first of all, from the floor, and Tony, Ian and myself will see if we can answer them.

Barry Dixon, Davy. A couple of questions, Gary, please. In terms of the containerboard price increase that you've announced, just give us some sense of what confidence you have that you will be able to implement that fully, or in part, particularly, say, given the probably broadly negative macro indicators that we're seeing in terms of industrial production and PMIs, etc., that would point to a weaker demand environment over the next six to 12 months.

And maybe a related question on that is really on OCC prices that traditionally, as OCC prices come down, containerboard prices seem to come down in tandem. What's your thought process on OCC prices for the rest of the year, and are you assuming that those could turn later on in the year, perhaps, as [Asian buyers] come back into the market.

And then one last question in terms of just could you quantify what were the one-off effects in financial terms in Lat Am versus the impact of the declining volume number? Thank you.

Thanks. Tony, do you want to take the price increase question?

Yes, hi Barry. We see a very strong possibility of [maintaining] both grades. I would say, right at this moment in time, inventories are trending in the right direction. In recycled and containerboard, wastepaper, while still weak, inventories are going down. And the Chinese are not very present. They are present, but they're not overly present in the market, and it would not take very much for them to step up a gear to start buying white paper and, therefore, tightening the market very strongly.

I think demand levels are good in containerboard at the moment. Much to our surprise, I would say that June and July have been much better than anticipated in demand, while May and April were weaker. And I would say that, on the recycled containerboard side, we will have a very good chance of getting an increase, I think. As the slide demonstrated that Gary put up, you are at very uneconomic levels in most mills whereby it is nearly better to shut than to continue to run. So I would say it's a very good chance of increase in recycled.

On Kraftliner, I would say that Kraftliner is exceptionally strong; there's very little stock in the system. The Americans are not present; they're fairly sold out. You, as you know, had the closure, as Gary mentioned, of Petersen. You also have the coming closure of a mill in Western Russia, which will have a knock-on effect to exports out of the United States, and ergo Russia into Europe. So the outlook for Kraftliner is as good as I have seen it in a long time.

As to OCC, as I say, I would think that, sooner or later, the Chinese will step into the market. Stocks are still a little bit high, so I wouldn't know if that's going to happen immediately, but it could happen at any time. And I would be fairly confident that, as Gary said, the macro side of things is that OCC will start building up again, if you believe in any sort of world growth.

I think it's important to bear in mind, Barry, that the Chinese have [made] [35 million tonnes], and 80% of it was imported. Year on year, imports to China are up 13%, even with the notable drop between May and June.

We need to be very careful, the volatility of the import activity into China is a perennial fact of life. It goes up by [30%]; it goes down to [2%]. You've got a minus in some month on month, but overall, year to date, in total it's up 17% from Europe and 13% from all sources. And of course, Europe with the weaker currency now is more attractive than the US.

In terms of the one-offs, Ian do you want to take them?

Yes. In the half 1 in Latin America, the one-offs were about EUR10 million. EUR3 million of that was (inaudible) highlighted before and the balance about EUR7 billion was, as Gary said, the two strikes in Argentina and Venezuela.

David O'Brien, Goodbody. If I just go back to the Corrugated volume trend, would you be able to give us a little bit more color on, say, diversions and trends across the different sectors and geographies that you're seeing?

I know you commented, secondly, just on market share, that you'll take market share in the likes of the UK. Could you give us an idea of just Europe as a whole? Could you quantify the level of outperformance that you're seeing versus the market?

Tony?

As to outperformance, I would say generally speaking, we are doing a little bit better than the market. UK, as Gary mentioned, we've had a couple of exceptional customer wins there. And we continue to see a number of our larger, what we call, PES, or pan-European sales, gain in volume.

Because of the product offering that we offer, I think we're very comfortable with the innovation, the quality, the service, and most importantly in today's world, the cost advantage that we can give to our customers by the redesigns that we do for them that allows them to win in their own marketplace. So we are seeing across the market, broadly speaking, a slight win versus the market.

Some markets have been a bit better than others, and indeed, in certain markets, there are price wars going on that we decide not to participate in, because that's not what we try and [sell on].

With regard to sectors, I would say that agriculture and food and beverage, generally, are doing well, despite the lousy summer we've had. And I would say that, obviously, the certain markets, such as the Spanish industrial market, not being as strong as we would like. Little bit of slowdown in some of the French industrial markets. But, in a general sense, we don't see anything dramatic, nothing like 2008, 2009.

[John Shane]. Just a few quick questions. Firstly, on the working capital; if you're looking at a broadly flat top line, is it reasonable to assume that the first half outflow we'd see that coming back by year end? I know as a percentage of sales it was down at June versus the previous year.

Secondly, just maybe a quick split of the maintenance versus enhancement CapEx?

Then two other questions, one in terms of development opportunities; anything that you've seen out there, your appetite for them, and how valuations look?

Then finally, just downtime, obviously you mentioned [factor] there earlier on, but any other market-related downtime, or how ready are you to do something if needs be? Thanks.

Ian, do you want to take the working capital?

Yes. If you look at the working capital [growth] and you look at the flowchart of the working capital, which as you typically see in Corrugated, you see strong activity in May, June, July. You're seeing stocks being built up in anticipation of the [agri] sector around Europe. And so that does [alter] by the August holidays.

Then you can see in quarter 3, particularly the Corrugated side, you see working capital then improving, as those [dots] go through the system. You see a typically strong Q3 working capital growth, on the Corrugated side.

Then on the Paper side, typically [then] you're seeing at the end of the year. September, which is a quiet month in the Paper side (inaudible), and you're seeing reduction in recycled and Kraftliner stock. So it's a combination of, effectively, the two different [growths], from the Corrugated in Q3 and on the Paper side in Q4.

Thanks, Ian. Tony, on maintenance versus total CapEx.

That's a difficult one, John. I would say that, broadly speaking, we spend about EUR100 million to EUR150 million a year on maintenance, depending on the year. Expansionary, if you're doing EUR300 million, that's the same, EUR150 million to EUR200 million in expansionary CapEx.

On the downtime, market-related, we are hearing that some independents are taking some market-related downtime, but we don't have any firm numbers on that. We don't really know that, but we're hearing, roughly, that some are.

We don't actually envisage ourselves taking any downtime in the recycled containerboard market, as we are a net buyer anyway. We buy about 400,000 tonnes to 500,000 tonnes, 600,000 tonnes, depending on the year. I would say that we are certainly doing our bit for downtime in the Kraftliner, with our 60,000 tonnes out of [Kraft] (inaudible) at the moment. So I think that's a very tight market, as I said.

John, in terms of development opportunities, our overall stance is that -- well, first of all, we're obviously not a front runner, but our overall stance is we're clearly focused on the parts of the world that we currently operate in, which have more material growth than the more developed part of Western Europe, and that's predominantly Eastern Europe, Latin America, and both organically in terms of our own investment in our own businesses, which I mentioned earlier, and indeed, possible expansion.

In terms of our approach to -- and Ian, maybe you just want to talk about our approach to -- if we were to do acquisitions, how we'd approach it in terms of leverage, in terms of prices we're prepared to pay and circumstances and so on.

Yes. I suppose I bring it back always to the cash flow itself. When you look at the cash flow, you've got four real demands in the cash flow. The first is dividend; we put the dividend back in place, and that's about EUR50 million a year. We then have capital expenditure; we spend northwards of about EUR300 million, on average, in capital expenditure.

Then after that, the other uses of the cash flow really are in relation to acquisitions or debt pay-down. And as we've highlighted, a debt of EUR3.3 billion was too high. So we paid down a significant amount of debt, and our leverage now is below that magic 3 times of where we've moved out of the leverage world, more into the crossover credit world.

So when you come to look at an acquisition, it's in the light of balancing debt pay down and accretion for the equity shareholders versus actually going and doing an acquisition. So when you at look and then you look at the multiples you yourself are creating versus the target versus the synergies that you can pull out of the business, that's effectively the way we look at it. And at this moment of time, our focus continues to be on the debt pay-down [sort of thing].

But our clear objective from a market perspective, from an equity perspective, is we want to grow our business organically. We think we've been driving the cost base hard enough; we could get proper remuneration for our products and our services that will actually deliver to the bottom line. As it is, it's staying fairly sticky. As I said, we're trading in a very narrow range of EBITDA margins right through a volatile period.

Secondly, we are in an acquisitive company. Historically, our DNA has been to be acquisitive, and that has not departed from us. And as we've got into a more satisfactory [position in the Company] from a debt perspective, and indeed from a cash flow certainty perspective, then we are now beginning to cast our eyes outside of the Company as well. But, meantime, debt pay-down is the driver.

I'm going to take one more from the floor, here, and then I'll go to the phones, then I come back to the floor further to follow on. So can I take one more from the floor here?

[John Bland, Dolmen]. Just in terms of cash takeout, you've been very successful today in terms of driving through -- in terms of your program for the end of 2012. Do you see scope for further reductions as we move into 2013?

I think, John, the reality of our business is that a large amount of the business is outside of our control; energy costs, some raw materials, and some of the indirect materials. Labor costs are driven by the reality of life on the ground wherever we operate.

So you can take it as almost a given, that our cost base is inflating. You can equally take it as a given that, despite our differentiated offering and service, and while we may get a premium to some of our competitors, it is not a reality that inflation-type price adjustments on an upward trend are available in this industry, or indeed any industry.

So the net consequence of that is we have to take cost out. So the issue is how? We've been doing it in two ways; one by management activities across a range of different businesses. We've 330-odd plants, and so benchmarking the best, or the less best against the best, and investing in the CapEx, as Tony has said.

It's often forgotten that, if you take it that your 50%/60% maintenance CapEx, and 40%/50%, whatever the number is of investment CapEx, those investment CapExs need to make a return, and they're never counted into models. And those investment CapExs make the return by better efficiencies, better output, higher quality products.

So it ranges from the top line to the cost of sales line. And then we're into biomass energy investments, which are improving our energy cost; we're into headcount reduction, where we've closed plants. You can see, from time to time we close plants, [and cluster them in], basically, carry the business from those plants into a bigger sister plant.

So all of those type of activities drive the cost base, and those are activities we've been very, very seriously involved in. Since the merger of Smurfit and Kappa, we've closed more mills and more box plants than anybody in this industry. And so, from a leadership of the industry perspective, we stand on our reputation. We have done the hard yards, in that regard, and we're beginning to see the benefits from it in our cost base and our margins.

Okay, I'm going to go to the phones, and take some calls from people on the line.

(Operator Instructions). Lars Kjellberg, Credit Suisse.

The line was bad; I actually missed when you responded. If I may repeat the question; when you talked about the one-offs in Lat Am, just to get that out of the way.

(technical difficulty) of EUR3 million, and strikes in Argentina and Venezuela of EUR7 million, totaling EUR10 million.

[I didn't hear. Do you mind repeating]?

Okay, do you want to try again, Ian?

Basically EUR10 million from Latin America, made up of, effectively, EUR3 million, which was previously flagged for maintenance downtime for our Venezuelan mill system, and basically, another EUR7 million, strikes in Argentina, and work-to-rule strikes in Venezuela.

All of these have now been resolved, and the strikes are over, people are back at work, and the mill system is working again. So our expectation is, half 2, we'll perform back to the type of norms we would've expected.

Thanks. I just wanted to come back to the European [business]. When you talked about (inaudible) trending down, (inaudible) for EUR100 price increase the inventory (inaudible), and are you actually seeing any pressure, meaningful pressure on non-integrated producers today in the Testliner world?

I think, Lars, what we are saying -- I think the first trigger, and I'll try and answer it here, because we seem to have some trouble with the voice system. What we are saying is the first trigger is, if you look at the graph in the presentation, you will see that we have now reached spreads similar to the levels that were experienced when the [last] price increase was put through, by necessity, led by the smaller independent players, because the economics of the business were no longer viable for them.

That fundamental hasn't changed, because those spreads are based on, obviously, pricing, relative to cost of raw material inputs.

Secondly, we have indicated that inventories which had been higher, and Tony has mentioned, are trending in the right direction, and coming down, are below levels where, historically, we have been able, as an industry, to achieve price increases.

And then, thirdly, while OCC is still coming off, it is still materially higher than in any previous downturn in this industry. And the fundamentals, in China for example, in terms of growth, are not collapsing, they're actually holding up reasonably well.

But more importantly, imports are continuing to be reasonably good. And so near-term aberrations in OCC have, historically, been just that, near-term aberrations. And the fundamentals -- as you know, if you look at the industry from a more structural and medium-term perspective, is that OCC and recovered paper is a scarce commodity. Collection rates are high, and demand is growing.

Inevitably, there's only one way that that's going to go, and our sense is that that will happen sooner rather than later. So that's the context of the pricing.

(inaudible) Kraftliner the price increase. I suppose you should be seeing that in your Mexican division. How quickly can you pass that on, if you want to comment on that?

Mark Wilde, Deutsche Bank.

[One of the questions I have is] whether you can talk about the interplay between the Testliner prices, which have been coming down, and then what we should expect in terms of Box prices over the next three to six months?

Tony, do you want to -- ?

Mark, I would say that inevitably, Box prices will trend down if recycled Containerboard prices stay at these levels. We obviously have a different service offering, and we have contracts, some of which three months, some of which six months, some of which a year, and some of which are multiyear. And we have mechanisms whereby we adapt pricing. So obviously, as the indexes reflect the lower pricing of Testliner, we will adapt our indexes accordingly with the customers.

With pre-market customers we obviously have different deals at different times, and we will resist, as best as possible. Clearly, a recycled price increase will make sure that the -- to go down, to come up, doesn't make a whole lot of sense. So we'll negotiate as best as possible with customers.

But as is always the case, as prices drop we follow with a lag, and as prices increase, we follow with a lag as well. So there wouldn't be anything different in this cycle, I wouldn't say.

Just to put numbers on it, Mark, it's basically 33% of the business is indexed, 9% is fixed, and so you've got 52%, as Tony said, which is part of that negotiation process.

Okay. [Another question,] do you expect benefit from the weakness in the euro, if we just look broadly at your business?

I think we've always argued that a strong dollar was ultimately in our best interest, on the basis that, A, we had very strong competitiveness of our own customer base out of Europe, in terms of exports, and that's particularly important in the current climate where domestic European economies are struggling, certainly in some parts of Europe.

And then, secondly, obviously the translation benefit from the dollar proxy business, which we have in Latin America, obviously gives us the extra benefit there. That's all set clearly by the dollar debt, which obviously translates as a higher euro number in the liability side. But the multiples are very much favorable for the stronger dollar being of benefit to us.

Okay, (technical difficulty) and I'm just curious, with Brazil slowing down, from slowing and Central and Eastern Europe, whether this starting to create more acquisition opportunities at favorable valuations? Or whether you think that process will take a little bit longer to play out.

Mark, there's a sense that maybe a more sane approach to valuations might prevail in markets where, historically, we've seen [yo-yo] type of volume growth, which, question mark, was sustainable.

But I think in terms of where we're at, we've never stopped scanning the horizon, but we're now probably -- it's a bit like window shopping versus shopping for serious. We're in the market, looking at possibilities. But we're not in a hurry; we've always been very careful to try and find businesses that have a good fit and a synergistic fit for us, as Ian has said.

And we've only recently come out of a situation where the market didn't like our leverage. And we have worked very hard to get that into shape, and so we're going to protect it and mind it carefully. But this business has to be a growth business to be of interest to the equity holders. So our objective will be to marry both, and our sense is, the marketplace is maybe a little more attractive in the in the current circumstances.

Okay, [you told a story a few weeks] ago about the subsidy case that you're pushing I think in regards to a [German mill]. Would there be any benefit to you financially if you were to win that case?

No, the main purpose and the main benefit would be to stop excessive capacity coming into the market, other than with people's own money. So that we stop taxpayers' money being used to subsidize excessive capacity in the market, normally at the wrong time and in the wrong place.

So our main objective is to get the rules changes in the regional aid guidelines, which are due to be reissued in 2013 for the next five years. And that was the primary objective of this case. The case itself is interesting in there, but the consequence of that case, it will be ultimately won and [just to go yet] is that the subsidy would probably need to be repaid.

Yes. (technical difficulty).

James Armstrong.

A quick question; with lower volumes in Europe or volumes up just a little, how much of that do you believe was inventory destocking by your customers versus real decline in demand?

And on that, are you seeing any movement between demand for your specialty boxes versus the standard boxes? And any shift in recycled versus virgin?

Yes, firstly on the shift of boxes, recycled versus virgin, I think we are not really seeing any particular movement. Obviously, with the current shortage of Kraftliner, you're seeing some substitution into semi-Kraft grade, such as TL1. But I would say that's more a temporary phenomenon than a long-term phenomenon. We've seen some trends in that direction for small tonnage over the years, but nothing significant because, obviously, if people can use Kraft and need to use Kraft, they will use Kraft. So I don't see anything particular.

As to the shift towards specialty boxes, here I would say there is a very large shift towards retail ready packaging. Gary referred to it in his speech. What we need to offer our customers today is the ability to be able to, basically, stack their products on the shelf directly, rather than taking them out of the box, a straight transit case, and putting them on the shelf.

And so there's more and more graphics needed, more and more color needed. And hence, the reason why we continue, as a Company, to invest in better quality print machines, better quality flexo folder gluers, so that we're able to offer our customers very unique designs to help them sell more on the shelf for their own products.

And that's a very big trend. I think there's over 35% of the brown market has gone over to white, Testliner white, in order to help that whole trend. And you see that in both discount stores and in regular supermarkets. So that is the big trend over here in Europe.

And then inventory question --?

Is it out of inventory declines, basically, as a result of destocking or is there real demand decline?

I would say, James, that since 2008 and 2009, inventories are extremely lean. And what we're seeing is that order times are very, very short. So for example, you might have an empty factory on a Monday and it may be completely full on Thursday because customers are keeping their inventories extremely lean, as lean as possible, and I don't think that's changed since 2008/2009.

Thank you.

(Operator Instructions)

While we're waiting, let me go back to the room and see if there are any further questions from the floor,

Just a quick question, Gary. The guidance for the full year, is that dependent on the EUR100 per tonne going through in part or in whole?

No, I think we've given our guidance exactly as we said. Basically, notwithstanding the economic circumstances, we reconfirm our guidance. Obviously, I've never yet given a guidance that didn't have the assumptions in it. And there are many assumptions in it, but the guidance [is clean].

Any other questions from the listeners, no? Okay, well, let me just take a minute or two of your time just to wrap up.

Let me back out of today's presentation and maybe just take a more medium term view of Smurfit Kappa Group in terms of value drivers. We consider the value drivers to be the factors which distinguish Smurfit Kappa Group in terms of its delivery and consistency of its future performance, and the sustainability of that performance.

We believe we have built a word-class corrugated system, which delivers quality earnings streams. And you can see that and have seen that through the volatility and cyclicality of the industry over the last number of years.

If you look at our EBITDA margins over the last few years, the range they've traded within, as I said earlier, is somewhere between 13% and 14.5% if you take quarter 2, 2010 to quarter 2, 2012. So a superior and comparatively stable EBITDA margin is delivered against this backdrop of significant volatility.

Our Latin American business, which we've talked about on many occasions, has been, and will continue to be, a very important source of growth for the Group. These are consolidated markets, much more consolidated than many of the European markets, and we enjoy very strong market position in them. And typically, they are growing at above intrinsic growth rates.

Within our own current system, we've some compelling growth opportunities. By sector, we have the Bag-in-Box business, for example, which is growing extremely well. And, indeed, by market, again, Latin America, as I've just mentioned, is a very attractive area for growth.

So as we continue to pay down debt, our free cash flow, by definition obviously, increases. And this provides us with the resource to fund internal and external growth opportunities. And it's the same with the progressive dividend to provide certainty of value to the shareholders.

So finally, reduced debt, increased cash flow and the significant available liquidity provided to us will enable us to, again, grow through acquisition. We have a proven track record in this regard. We've delivered in the past through acquisitions.

And most importantly in that regard, the ability to identify, acquire and integrate not just in financial or operational or marketing terms, but also in people and cultural terms, is a significant feature of our business and our DNA, and is the basis on which we believe we can go forward and grow well into the future.

And finally, can I take a moment to advertise the fact that we have an Investor Day in September -- Investor Days I guess, because it's really a full day, September 4 and 5 in Epernay in Northern France.

And at this day, we are really keen to get as many investors as possible to the day, where we will showcase what we believe to be out key differentiators as a Company. We will show the range and the quality not only of our products that we sell to our customers, but the tools and the support systems that allow us to deliver those products and differentiate ourselves.

We will also have there a very wide range of our key management, whom you don't seen on a regular basis from General Managers, CEOs, Head of R&D, Head of Operating Excellence and so on. So it's a unique opportunity to access the people who are delivering these results and, more importantly, who passionately believe in our differentiated offerings.

And then as a piece de resistance, we have our Chairman there for those of you who don't believe us. You can ask him directly and see whether he, as the Chairman of the Board, is equally confident and believing of the future opportunities and growth potential for Smurfit Kappa Group.

So we would love to see you all there and, again, let me thank you all for being on the call today and here present, and have a good day.