Smurfit WestRock PLC (SW) 2013 Q1 法說會逐字稿

Welcome to the Smurfit Kappa Group 2013 first quarter earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. Please note that this conference is being recorded.

I will now turn the call over to your host, Gary McGann. Sir, you may begin.

Thank you very much, operator. Good morning, or good afternoon, and thank you for taking the time to join our first quarter earnings call. I'm joined on the call by our President and COO, Tony Smurfit; and our CFO, Ian Curley.

Before commencing, I'd refer you to the note on forward-looking statements set out in our press release, which also applies to our discussion today.

For the first quarter, we recorded revenue growth of 4%, and underlying EBITDA remains strong at EUR241 million. This EBITDA income was achieved despite a number of one-off costs in the quarter and the predicted margin compression in Europe, following OCC and recycled containerboard price increases not yet reflected in corrugated pricing. A EUR40 a tonne recycled containerboard price increase in Europe, during the quarter, supports corrugated pricing.

Input costs, including OCC, continue to move upwards. And together with paper price increases and satisfactory paper inventories in Europe, should lead to corrugated price recovery in the second half of 2013.

The performance and integration of Smurfit Kappa Orange County has exceeded our expectations, and we've doubled our synergy target to $28 million. We expect to deliver $9 million of those synergies in the current financial year, as against an original estimate of $6 million.

The improved performance expectation reflects the benefits of two consecutive paper price increases, translating into higher corrugated pricing, positive progress in the integration process, and the higher than anticipated synergies.

The overall performance of our Americas segment has resulted in the region returning towards its long-term average EBITDA margin range, with a margin of 15.2% for the quarter. The Americas contributed over 27% of Group EBITDA in quarter 1, and is an important source of growth for the future. Our objective remains to increase our exposure to this higher growth region over time.

Consistent with our continued focus on operating efficiency, we recently announced a further one-year cost take-out program with a target of EUR100 million. This new initiative follows two such programs over the last five years, which have delivered approximately EUR500 million in cost savings.

Operating efficiency and the strength of our platform has contributed to the consistent quality of our earnings.

Turning to our capital expenditure initiatives, we have decided to bring forward the closure of our two existing paper machines at our Townsend Hook mill in the UK. They have a combined capacity of approximately 250,000 tonnes, and are now expected to close on July 1, 2013, after consultation process with all of our employees.

Instead of July 2014 as originally planned, we're bringing forward the closure in order to extend the training period for our workers to advance of the start-up date of the new paper machine, and to increase the pace of the expected ramp-up after the restart.

We will rebuild the facility using a machine acquired from the Cadidavid liquidator in 2011 into one 250,000 tonne modern lightweight machine, which is expected to be operational by quarter 4 of 2014, rather than quarter 1 of 2015. While the earlier closure will bring long-term benefits, it will negatively impact the 2013 full-year EBITDA by EUR5 million.

The Group will also incur exceptional charges of EUR15 million, EUR4 million of it in cash, of which approximately EUR5 million relates to additional accelerated appreciation as a result of the early closure. Much of the balance of exceptional costs would have impacted the 2014 results based on the original plan.

This investment of approximately GBP100 million sterling, or EUR114 million, combined with the EUR46 million investment in our 420,000 tonne Hoya mill, which will be completed in May of this year, will enhance the lightweight capability of the Group in response to current market dynamics. Together, these investments will further increase productivity, and significantly lower costs in our UK business.

Turning to our quarter 1 results. Our sales revenue was EUR66 million, are 4% higher, year on year, in quarter 1. Underlying sales were broadly flat when adjusted for a positive EUR104 million from acquisitions, and negative currency movements and hyperinflationary adjustments of EUR32 million. Compared to the fourth quarter of 2012, sales revenue was EUR65 million higher in quarter 1.

Demand was relatively strong for Smurfit Kappa Group in quarter 1, with our European box volumes up 4%, year on year, and adjusted for the average of two fewer working days in the quarter. This was achieved despite continued economic weakness throughout most of Europe.

Due to the negative momentum in paper pricing in the second half of 2012, we face pressure on pricing in quarter 1 2013, with European corrugated prices decreasing by over 1%. Paper price increases achieved in February should act as a catalyst for further corrugated price recovery, the benefit of which will be expected to accrue mainly in the second half of the year.

Our European recycle containerboard system benefits from a EUR40 per tonne price increase implemented in February. The recycle containerboard market was relatively strong in quarter 1, as a result of good demand, strong export markets, effective inventory management, and OCC prices appreciating since September last.

Turning to the Americas, our Orange County acquisition is exceeding initial expectations, partly driven by the benefit of last year's $50 a tonne paper price increase, and its impact on our integrated Packaging business. The outperformance also reflects the successful integration process to date. Following a detailed review, we have upgraded our expected synergy run rate went to $28 million over a 2-year period, twice the level of the initially identified synergies.

With established positions in the Mexican and US markets, and the potential for upside to pricing as a result of the US paper price increase in April, we remain very positive about Orange County's performance for the remainder of the year.

The main factors underpinning the improvement of our Latin American EBITDA margin to 15.2% in quarter 1, from 13.8% in quarter 4 2012, were a strongly performing Mexican business, and a solid performance in our Columbian business.

Unsurprisingly, our Venezuelan business was negatively affected by the 32% devaluation during the quarter; and the business disruption and reduced working days around the time of President Chavez's death, and the recent Presidential elections. However, volumes remain in line, year on year, and compensating price increases have been achieved.

The Argentine market remains challenging. However, our corrugated volumes are recovered significantly from last year, following the resumptions of productivity at our Sunchales plant, which had a significant industrial relations dispute in 2012.

In profit terms, our quarter 1 EBITDA was EUR241 million, EUR4 million lower than last year. Allowing for net currency movements, hyperinflationary adjustments, and the contribution from recent acquisitions, primarily Orange County, the underlying year-on-year move was a decline of EUR10 million, which reflects the margin squeeze and one-off costs previously mentioned.

We had a small free cash flow outflow of EUR23 million on quarter 1. Although EBITDA decreased by only EUR4 million, year on year, there was an exceptional outflow of EUR13 million, primarily in respect of the devaluation of the Bolivar.

Our working capital outflow was also higher, while both cash interest and capital outflows were lower. The working capital outflow of EUR98 million, which compares to EUR88 million last year, is largely attributable to our European business, and reflects corrugated volume growth, and the impact of the recycled containerboard price increase.

Our annualized working capital to sales ratio in quarter 1 was 9.4%, compared to 8.7% last year, due in part to the negative effect of Easter on cash receipts and the rising cost of kraftliner inventories, as a result of the increased paper prices, year on year.

We continue to maintain a strong focus on free cash flow generation, thereby expanding the available range of capital allocation options open to us. We also continued to maintain our strong capital investment discipline. Capital expenditure of EUR69 million in quarter 1 equated to 76% of depreciation. However, for the full-year 2013, as previously advised, we expect to increase CapEx towards 100% of depreciation.

Our cash interest cost was expected to decrease materially, year on year, for the full year, due to our successful refinancing activities over the past 12 months; while our cash tax payments are expected to remain comparable to the 2012 level.

Cash interest at EUR54 million in quarter 1 was EUR7 million lower than last year, reflecting the benefit of the refinancing activity.

Our net debt increased by EUR79 million, to EUR2.87 billion in quarter 1, which includes the free cash flow outflow of EUR23 million, and a EUR31 million negative currency movement, as a result of the Venezuelan devaluation.

Our net debt to EBITDA ratio of 2.8 times at the end of March remains comfortably below our committed target of less than 3 times through the cycle. This level of leverage has been maintained, despite the inclusion of only four months' EBITDA of the newly-acquired Smurfit Kappa Orange County business, with 100% of the associated debt.

Our liquidity remains strong, with un-drawn credit facilities of EUR517 million; and EUR510 million of cash on the balance sheet at the end of March 2013.

We continue to actively manage our capital structure. And, in January, we issued EUR400 million 7-year senior secured notes, at a rate of 4.125%. The successful issuance at these low rates highlights the recognition in the credit market of our consistently strong operating performance, sustained strong free cash flow and the focus on de-leveraging.

Our commitment to incremental improvements in our capital structure has consistently delivered material benefits for the business, by way of lower debt service cost, extended debt maturities and a more diversified capital funding base.

In terms of our ongoing business focus, our drive to deliver increasing returns for all our stakeholders is underpinned by a clear commitment to using free cash flow to pay a progressive dividend; to spend judiciously on both efficiently-led and customer-facing capital projects; to continue to drive debt paydown; and to invest in accretive acquisitions in our targeted higher growth markets.

In committing to these goals, we remain firmly focused on our fundamental priorities of increasing profit, while maintaining a strong financial discipline, and keeping our leverage below 3 times net debt to EBITDA through the cycle.

I want to thank you for your presence on the call today. And now, Tony, Ian and myself would be happy to take any questions you have.

(Operator Instructions). Mark Wilde, Deutsche Bank.

Can you guys just help give us a little progression on how you think box prices will move, if normal pattern holds as we go through the remaining three quarters? I notice that you were pretty careful to say you expect improving box prices in the second half, rather than the second quarter.

Well, as you know, Mark, obviously we can't front-run pricing. But the conditions in our industry are fairly straightforward. Basically, if OCC prices improve, they put pressure on paper pricing, which we've seen. And if paper pricing increases, the norm is that that will follow on in three to six months with box pricing.

What we've had and what we always have is movements in both directions, because mid-2012 we saw paper prices reducing into the third quarter. And, at the back end of the year, into 2013, we saw paper prices recovering again. So you've got a lot of moving parts here, with some pricing already moving up or down, depending on where they are in the cycle.

The index business is somewhere around 40% between contracted or habitual. And then the open market prices are, obviously, a function of negotiation.

So in the normal course of events, bearing in mind that we have re -- fairly flat economic circumstances in Europe, but our own business is doing well, volume-wise. And, given the fact that we've got good inventory levels, sensible inventory levels in the Paper business, a reasonable balance in the supply/demand balance, the normal circumstances are that we can expect to see the normal activity of box pricing following the paper pricing.

Okay, that's fair enough. Second question -- Gary, can you or Tony give us a sense of, beyond Townsend Hook, where capital spending is this year, because 100% is a little bit high for you? And I wondered what the projects were beyond Townsend Hook that were in there.

Tony, do you want to talk about some of the bigger projects?

Yes, well we've a number of projects, Mark. We, as you know, have recently completed a box plant in Mexico. And we continue to look at opportunities in those countries to further make our efficiency levels better. We've got opportunities in our -- we're a big buyer of paper, as you know, in Mexico, so we continue to look at how we would augment our position in that country as well as Colombia.

We have just -- we're just completing a EUR46 million project in Hoya in Northern Germany; that's going to bring us about 80,000 tonnes additional. So we've had a number of projects on the go.

We're making our Roermond mill more efficient in Northern Holland -- sorry, southern Holland, and that's going to improve our efficiency in that mill; that's about a EUR50 million project.

So there's a number of areas that we're continuing to improve our asset base. And, as you say, Townsend Hook is a big piece of that. But one of the things that I would stress is that we have many, many opportunities for cost reduction and we try to do this in a logical manner within the capital base of 100%. It can certainly be lower if we decide to choose so.

But there are so many opportunities for us to reduce our cost base that we will be looking to do so, because, as you know, one of our biggest costs is labor, and that continues to be going up, not down, and that's obviously something -- and very expensive in Europe. So that's something that we need to continue to look for efficiencies in.

And the other -- sorry, Mark, the other two areas, obviously, are the energy area, where you see we're making good inroads into energy efficiency in places like Nervion and previously Sanguesa, which is our MG paper assistant in Spain.

And then the market-facing, you've seen us announce on a number of occasions in recent times. And we continue market-facing-type investments, such as, basically, Masterflexes, or (inaudible) or rotary die cutters and so on, so there's quite a number of those going in across Europe and Latin America.

Okay. Your box volume, Gary, was stronger in Europe than I would have expected, given what I've heard from some other packagers with big operations in Europe, say, guys in the industrial packaging. Was there any kind of particular countries or businesses that you really want to call out as underlying that strength?

Tony, why don't you take that?

Mark, not really. I would say that we've had a couple of decent customer wins across some of our pan-European business. We continue to outperform in that area. We do believe that our offering to the customer gives them significant savings. But also, at the same time, in doing so we're able to attract some volume.

So I wouldn't say there's any specific country per se that is booming ahead. We had, obviously, difficulties in France, because of the general malaise of the economy there. But, in a general sense, I'd say the volume growth has been because we've been better at our pan-European customers than our competitors.

Okay. And then finally, Ian, I notice you've still got some debt out there that's between 7% and 8%, I think kind of maturing around 2017/2018. Is it possible to take any of that out cost efficiently?

We do, actually, have some bonds that are callable -- that we've always said are callable. But, as you can see, we've done a lot of work on the cap structure and we had significant interest savings over the past number of years. As you can appreciate, Mark, we always look and see what our options are going forward.

Okay, fair enough. Good luck in the coming quarter and through the year, guys.

Thanks, Mark.

James Armstrong, Vertical Research Partners.

My first question is as you look towards more acquisitions in the future, are you still seeing interesting opportunities, or have the number of attractive opportunities less than a year ago? Also, where are you seeing the most opportunities right now?

I think, in general, James, our focus strategically is on the higher growth markets of Eastern Europe, and Latin America and Central America, which we've been consistent on, with opportunistic possibilities elsewhere.

In terms of the availability, our pipeline, we constantly look at all opportunities. And, I suppose, the type of deals that we are attracted to have to be ones that make economic sense in terms of the fundamental returns and, therefore, we can't pay a premium for something if we can't make it better, or it's operating in more attractive markets or there are synergies attaching to it.

And so I think the type of shape of business we're looking for is the Orange County-type business, where they -- it's complementary to our existing business. It's in the right geographic area; has synergistic potential; and we get very good people with it, which we've done in Orange County.

I would say, looking at Tony and Ian, I don't think it's any more or any less, but it takes time to get the right fit.

I would just add to that, James, I suppose our default position is -- our focus is on debt paydown in the business. And we look at every acquisition in the context of debt paydown. So when -- we look to see whether we should do the acquisition or do the debt paydown.

In the case of Orange County, when we looked at that equation, our view is that we'd sure like to do the Orange County, but our default position is to focus on debt paydown and do acquisitions, where Gary said we think they are very worthwhile, as in Orange County.

Thanks. And then moving to Latin America, with the Venezuela devaluation, what do you think the EBITDA hit was in the quarter? I know you put out a press release. But I just wanted to know how much do you think will that rebound into the second quarter?

Ian?

I suppose when we look at devaluations in general, I just speak to them generally, we've normally said that when you look at our figures in some of the countries where you see devaluations going through, historically, we would have seen over a period of time prices going up over -- at some stage. And we would expect to see that happen in the case of any of the Latin American countries.

I think we said, James, on our press release at the time of the devaluation, it wouldn't be a material impact and that stands.

Okay, perfect. Thank you very much.

Thanks very much.

Barry Dixon, Davy Stockbrokers.

A couple of questions, if I may. The first one is just really to get your sense, Gary, on OCC pricing. What are the dynamics that are impacting that at the moment in Europe? And in particular, I suppose, there's lots of different things going on, particularly with, say, Stora Enso's plant in Poland; is that having an impact? We're hearing about a slowdown in Chinese imports. Is that impacting? I guess, really, how you are thinking about OCC costs between now and the end of the year.

Okay. I think, let me give you a general view, and I'll get Tony to talk to some of the specifics. Our standard position is based, I think, on kind of overall medium-term -- short- to medium-term logic that recovered paper costs have to trend upwards, because there's more demand than supply, quite frankly, given that, effectively, all new capacity is effectively in recycled whether it's in China, Europe or North America.

Tony, in terms of the specifics?

In terms of the specifics, Gary, I think we're not seeing a tremendous effect. We're seeing OCC prices move up a little bit in the first quarter and into April. They're stable at the moment. You have this green issue in China, where they seem to be talking about sending back -- or they are sending back some waste paper, which was not fit for purpose, and that's having a slight destabilizing effect on the market. But on the other hand, you have the new capacity of Stora Enso, which is dragging in some waste paper.

So, at the moment, there's stability. But, as Gary said, I think the long-term movement is certainly upwards.

And I think, Barry, in terms of the Chinese situation, the reality of life is that that economy is growing; that consumerism within that economy is growing. But capacity in that economy is growing fairly substantially this year and it has to be fibered, and they don't have the fiber domestically. They have some, but nothing like what they need.

Thank you. The second question is really around kraftliner and you've announced a EUR40 a tonne increase; EUR20 of it has gone through. How confident are you of getting the other EUR20, Gary, particularly in the context of where we're hearing that in Southern Europe, perhaps, the weather is maybe slowing the crop development down there. So, just your sense in terms of crop prices from here.

Well, our objective is very clear. When we announced it in -- in a market that's short of kraftliner and, as the leading player in the market, our objective is to get the EUR40 a tonne, but it does require everybody to sign up for it. The circumstances are absolutely supportive of it, in terms of the need for it.

I suppose the real challenge is to ensure that recycled paper prices don't open excessive gaps on the downside between it and kraftliner. And, at this point in time, the gap is quite sizeable. But I think it -- time will tell, Barry, but our objective is clearly to get it.

Tony, I don't know whether you have any insights on it?

No, I think we are going into a busier -- aside from specific issues on weather from time to time, we are going into a busier period for kraftliner, so that should give us some potential. But it is, as Gary said, I think the issue with the gap between waste paper-base fluting and liners to kraftliner is quite significant. So we just don't want to see ourselves lose any market share to our competing products. So it's something we watch, but we are pushing very strongly to get the second part of that.

But the indications are that the US is quite disciplined, at the moment, and that's a key variable, as you know.

Yes okay, thanks, Gary. Thanks for that.

Thank you, Barry. Thank you.

Lars Kjellberg, Credit Suisse.

Just to carry on there with OCC and testliner pricing, etc., obviously, you announce the fixed price hike for testliner. OCC keeps on moving up. It appears that testliner profitability, generally, is very poor. What are your thoughts there? And again, you have a bit of too large a gap, I suppose to kraftliner, but what are you seeing in testliner and any chance you can continue to lift prices higher?

Well, the general conditions are reasonably good, particularly in our own system. But, in general, Europe demand-wise is flat, but it's not in any way disastrous. And, certainly, on a same-day basis, it's reasonably okay.

Inventories are fine. They're in the zone that should underpin pricing. And obviously, the need for it in many circumstances is extreme or acute. And in many cases, those who want to make money need more profits and more pricing in it. And we have certainly opened a gap between it and its normal spread and margin through the cycle.

Obviously, it requires the industry to want to get it and you don't -- you're in no doubt of where we stand on that. Some of the issues, I suspect, are a nervousness around volumes, particularly with the new Stora Enso machine.

But there's a lot of moving parts in the marketplace and the circumstances are supportive of a price increase, if the industry wants it. All we can do is define what we want and we want further pricing, because the margins and the returns in this part of our business are not adequate at all.

Accelerating the Townsend Hook project, has that had anything to do with getting a better balance into the market?

No, I mean --

Because it's quite early, of course, a year and a half ahead of the new machine starting up.

No, I think what we're doing there is, in many ways as a testimony to what I've just said, Townsend Hook is loss-making in our system and is, obviously, having impacts on other parts of our system, in terms of the work it does and how we might redistribute that work.

We have our own Hoya machine, with the extra tonnage coming on in May. And, obviously, the market supply in the UK is available and it allows us to more efficiently deliver on a project, which is the biggest project we've undertaken, I think, ever, in terms of investment.

And we want to get it right. We want to get it efficiently done. We want to get the people trained; we want them participating in the build of the machine, so that they know it intimately. And we want the ramp up to efficient and fast. And we want to advance the restart of that machine, which is a 250,000 tonne lightweight machine, by at least orders from quarter 1 2015 to quarter 4 2014.

So, all of those factors are driving the decision. It's a reality that the withdrawal of the inefficient tonnes from -- or the inefficient machine does deliver some tonnes into the system for others to supply, but that's a byproduct.

And the -- just to understand the math, the EUR5 million EBITDA hit that relates then, that you're keeping some fixed costs, of course, right?

Exactly, yes.

And the balance --

There's a cost. It's effectively like -- well, it's not an investment because, obviously, it's a charge to EBITDA. But it's, effectively, an investment in making the project better and more efficient and quicker in terms of the startup.

Do you want share any views on the actual benefit in terms of when you're up and running. You talk about significant cost savings and efficiency gains, but give us any numbers, 2015, when this is ramped up?

I think the best we can do, Lars, is to say that this is a similar machine to our [Zodfish] machine, which is one of the best machines in Europe. It's a lightweight machine, operating in a market that is, effectively, a lightweight or predominately lightweight market.

And the machines that we're taking out are predominately heavier weight machines, with inefficient running rates and not the best of [decels]. Tony, I don't know whether you --

I'd just add that we have a very strong box system, which serves a lot of customers in the UK. And in doing this project, not only is it highly cost reduction for us, but it's also helping our other mill in the UK, our SSK Mill in Birmingham, so we get a double benefit. Plus, in addition, we are going to support our box system with the right papers for our customers -- our ultimate customers. So it's a win/win situation and it's done at a fraction of the cost of doing it from new.

And as you know, Lars, in terms of our capital projects that are accretive, and it's the same for maintenance side for health and safety, we expect, ideally, at least 20% return on the investment.

Understood. Just two smaller questions if I may just to finish off with. Can you quantify at all what you call one-off costs in Q1?

And the second one that I'm slightly confused about, when you talk about normalized margins in LatAm. You previously talk about 17%/18%. Now you're at 15%. Is that the new margin, including then Smurfit Kappa Orange County, or what is, actually, the long-term normalized margins for this business?

I think, as we've said, first of all, we're heading back towards our normalized margin range. And obviously, the 15.2% is versus 13.8%. You're correct; the 13.8%, generally speaking, had no real impact from Orange County in it. So they're factors.

And secondly, we had, obviously, in quarter 1, the Calais shut, which is not normal to quarter 1. And thirdly, the normalized range -- the normalized type of EBITDA margins are in the order of the 17%/17.5% and that's where we're targeting to be. There's no reason for us not to be able to get back to those levels.

Very good.

Thanks, Lars.

And the one-off costs that you had in Q1 --?

Sorry, I beg your pardon, there was the one-off costs. Ian, do you want to take the one-off costs?

The two one-off costs, the two main ones actually, as Gary outlined there, were Calais and Nettingsdorf where, in the total, that was, effectively, EUR7 million.

EUR7 million out of EUR9 million are those two items. So these were not normal in quarter 1. Normally, we don't have maintenance downtime in quarter 1.

Understood, very good, thank you.

Thanks, Lars.

David O'Brien, Goodbody Stockbrokers.

Two from me. Could you give us a comment on the trends you're seeing in kraftliner reports and into Europe? And also, just, I suppose, testliner exports situation out of Europe.

And then secondly, I suppose, with the one-off costs, and related to downtime, is there any more downtime that wouldn't really be seasonal planned for Q2?

Tony, do you want to take the kraftliner trends in and testliner exports.

Exports out, we're seeing the export price, which is probably the best indication is quite strong. The price is, at the port level, somewhat equating to around the level of what we would expect for spot tonnage in Europe, which is very good for export pricing. And so there's strong demand in export. I'm not sure exactly how much is going out.

On kraftliner, we are seeing broadly similar year-on-year imports to Europe. We're a month behind. We, obviously, have seen April's figures yet, but broadly similar for the first quarter versus last year. But we do see some tightness across the globe when we -- as you know, operate in Mexico. We buy a lot of kraftliner in Latin America and we're seeing that the kraftliner, in a general sense, is quite tight and difficult to get.

And in terms of the one-offs, in quarter 2, we don't have particular maintenance there. The normal maintenance downtime, David, tends to be -- first of all, on the Kraftliner side, it's statutory, so there's no issue in terms of choice; we have to do it.

But we tend to do these things during holiday periods and one of the reasons, for example, why Calais was down in quarter 1, rather than normally in quarter 2, is into Easter, where is a time that you would take the downtime. And so quarter 3 tends to be the downtime period for the kraftliner mills. And so you'll see the normal maintenance downtime for [Pitea] and for Facture in quarter 3?

Okay, thanks very much.

Thanks, David.

Kartik Swaminathan, BofA Merrill Lynch.

I just had a quick request for some clarification on OCC volumes into China. I wasn't entirely sure on whether you meant the green fence program had expanded to include OCC, or whether it was just a broad-based impact from other grades being filtered out. And any kind of color on that front would be quite useful, and whether you see this trend continuing in the short to medium term?

I think, Kartik, the green fence phenomenon is -- first of all, the right to engage in it has been there and available to authorities in China for some time. They have now actively enforced it from around about now, and they have time period during which they can implement it, but obviously they could go for renewal of that.

Secondly, basically it's a quality orders of incoming, particularly mixed waste, which tends to go into China. And, I suspect, undoubtedly, they've not been getting the best quality of waste, and the test is that a number of containers have been sent back.

The third reality is that China needs raw material. They need to recover paper. The major sources for recovered paper are US and Europe. They have to have access to both, because if they didn't they'd take it all from the US, which is better quality, but the price/availability is a definer as well.

So they have growth. They have extra capacity additions. They have the need for the raw material. And they have a temporary, I suppose, sanitation of the -- sanitization of the quality of what they're getting, and two things will happen. Obviously, near-term nervousness on the exported parts, the agents who are sending it, in case it will be sent back; probably the desired effect of improving the quality of what does go out to them again. And possibly, some minor turbulence in the very near term, but we don't see any particular reason why that should in any way sustain.

Great. The second question I had, very quickly, was with the recovery of the Latin American segment back to historical levels of production and margin efficiency, should we expect any major impact on working capital? I know in emerging markets, typically you do have a little bit more of a working capital drain in -- for a variety of reasons including logistics. And I was wondering if that was going to be the case with Smurfit.

Ian?

It would depend very much on the country, Kartik because working capital as a percentage of sales varies country by country within Latin America. And it's fair to say if you do, and we've always said this, if you've got growth in a country and your top line grows, you will see working capital grow by 8% or 9%. And we've been fairly -- if you look at working capital as a percentage of sales over the past five years, at a low of 7-odd-% or the highest 9-odd-%, so somewhere towards the higher end of that range. As you say, working capital will grow as Latin America grows.

But our stance, Ian, is we're not changing our guidance in terms of 8% to 9% of working capital to sales is the number. So it's really a function of what your estimation of the top line is.

Exactly.

Okay, great. Thank you very much.

Thanks, Kartik.

Gerard Moore, NCB Stockbrokers.

Just a few follow-up questions, if I may. First of all, on the 4% growth that you achieved in Q1; if a lot of that growth came from additional customer wins within the quarter, is it fair to say that that benefit should continue to roll through the rest of the year? And would your target for the year be to outperform the overall European market?

Secondly, I was wondering if you could just give us an update on the non-OCC cost inflation that you're experiencing throughout the system, in terms of energy costs, fiber costs, etc.

Thirdly then -- third question is just if you could come back to the issue of the spread between recycled prices and kraftliner prices. At the current spread, have you actually started to see any switching from kraft to recycled, or is that more something that you anticipate could happen if the spread widens to excessive levels?

And then the final question, if I may, just when you indicated that for your UK investment you would like to make a return investment of 20%, over what time period would you be aiming to get that 20%? Thank you.

Let me take the last one first, and I'll get Tony and Ian to cover a number of the other ones.

What I said, Gerard, just to be absolutely clear, our expectation in projects in general that are accretive is that we will want to get 20%. I don't want in any way to suggest to you that I'm telling you what the return on this project will be. However, you know what our expectations will be.

In terms of a big system like this, there is always a ramp up time. We tended to guide that brand new machines tend to ramp up in three to six months. Rebuilt machines maybe take a couple of months longer. We, ideally, will have a good -- given the steps we've taken to optimize the project management and project optimization of this build, we'd expect to do well. So it will be, certainly, 2015 before we're in that type of zone, because it's targeting a quarter 4 start up now rather than a quarter 1. So I think that's the first one.

Again, if I take the questions in reverse order, and ask Tony to talk about the spread between recycled and kraft, and the extent to which we're seeing any contamination.

Yes, Gerard, hi. I think we're seeing a little bit of contamination in the sense there is some movement towards TL1, which is a substitute product for kraftliner whereby you put pulp on the top of recycled paper. There's some movement towards that grade of paper. That happens to be in a reasonably good place right now, because waste paper prices are stable at lower levels and pulp is available -- brown pulp is available.

So there is some movement in that direction, but it's not wholesale and it's not worrying. But it's, obviously, something we keep an eye on. In fact, we actually make some ourselves, because we needed to during the crisis of last year, and it's a product that can work at certain points in the cycle. So that's why we keep an eye on the spread as such.

As to -- sorry.

Okay, then with the third one, Ian, maybe you take the non-OCC cost?

If you take the non-OCC cost when you look at the face of the P&L, you're looking at the raw materials, in general, as Tony said, of 5%. But it's very difficult here because -- well, in actual fact, the comp isn't necessarily the same, because you have Orange County in quarter 1 of this year, and you don't have Orange County in quarter 1 of last year. So the comps really aren't meaningful from that point of view.

So as Tony's outlined, the broad costs with regards to OCC and paper etc., the main guidance that we can give you are the overall -- the cash tax we say in the order of about EUR110 million; as we were saying, working capital 8%/9% of sales; cash interest about EUR210 million; and CapEx towards the order of about EUR350 million, heading towards 100% of depreciation. Like for like, on the face of the P&L, we just don't break out what the Orange County costs were.

But just to be clear, Gerard, I think it's true to say, Ian, in all of our costs, energy costs, labor costs, all of our costs are going up. And one of the reasons why we're very focused on the cost take-out program is to neutralize the impact of, at least, the labor and the more controllable aspects of our business. But you can take it that all costs -- sorry.

Yes, specifically, like, energy costs you would expect in the order of about EUR540 million this year. And so that's --

And labor, I suppose it tends to inflate it at the type of European inflation, 2% maybe 3%, when you put in Latin America into the land. Okay?

Yes.

Then the last question, Tony, in terms of the volume growth quarter 1 underlying 4% on the boxes, is that likely to --?

Gerard, I think the 4% would be a bit bullish, given the fact that we acquired some of these customers that we won last year during the year. So I think I wouldn't use 4% as a full-year figure.

But certainly, to your point do we expect to outperform our competition, the answer is absolutely yes.

And bear in mind, Gerard that our priority, as a Company, is to make money. And price over volume is always a greater priority for us, notwithstanding the fact that we, obviously, need to maintain our positioning in the market with our key customers.

Thanks very much.

Okay.

As we have no further questions at this time, I will now hand the call back over to your host, Gary McGann.

Thank you very much, operator. Again, ladies and gentlemen, can I thank you for taking the time to be with us today.

We're pleased to report a solid quarter 1 EBITDA outcome, and we believe our business is increasingly well positioned to continue to drive value. And, while the current corrugated demand remains positive and corrugated price recovery should progress in line with increased paper pricing, there are clear macroeconomic challenges.

We're particularly pleased to highlight the strong performance of our recently acquired Orange County business, and to double our synergy targets for that business.

Our overall business continues to deliver a consistent quality of earnings, and this has contributed to a substantially improved capital structure, with net debt reduction of EUR190 million in the past 24 months, despite acquisitions. Our net debt to EBITDA multiple is, and will remain, comfortably within our stated range. The strength of our business today has increased the available range of options open to us to deliver value for all our stakeholders.

So again, thank you for your time and support, and I wish you all a good day.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.