Smurfit WestRock PLC (SW) 2013 Q3 法說會逐字稿

Welcome to the Smurfit Kappa Q3 results conference call. (Operator Instructions). 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, ladies and gentlemen, and thank you for taking the time to join us for our third quarter results call.

I'm joined on the call today by our President and Group COO, Tony Smurfit; and our Group CFO, Ian Curley.

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

We're reporting revenue growth of 10%, and EBITDA growth of 9% to EUR303 million for the third quarter. Year-to-date revenue increased almost 8%, and EBITDA increased 5% to EUR815 million.

Our performance in the quarter and year to date reflects a strong contribution from our Americas business, and, following a weaker start, sequential improvement in Europe.

Strong cash generation of EUR190 million in the quarter has delivered free cash flow of EUR262 million for the year to date; almost EUR100 million ahead of the same period last year.

Our third quarter and first nine months' operating and financial results mean we're on track to deliver EBITDA for 2013, in line with market consensus of EUR1.1 billion.

Looking at our third quarter performance in more detail, the numbers demonstrate the start of an improving financial performance in Europe, and a continuing strong performance in the Americas.

Year on year, European revenue rose by EUR45 million as a result of higher containerboard pricing and volumes continuing to perform well, with box volumes up 2% on a same-day basis in the year to September.

Demand for both kraftliner and testliner remain strong. Following the successful implementation of a EUR40 per tonne recycled containerboard price increase in August, the Group recently announced a further price increase of EUR30 per tonne, effective from November 1, supported by strong market conditions, where demand for recycle grades remained solid, and inventories at a relatively low level.

The price increases are also driven by input costs, which remained at a consistently high level throughout the year.

European corrugated pricing remained broadly unchanged in the third quarter. However, rising containerboard pricing will lead to further corrugated price recovery, with the usual three to six months' time lag.

Together with the continuing focus on cost take out, these dynamics are expected to result in a full-year performance in line with market consensus, and will also drive performance for 2014.

Turning to the Americas, the overall performance of the region was strong in the third quarter, with a revenue increase of EUR141 million year on year as a result of the inclusion of Smurfit Kappa Orange County, together with strong underlying revenue growth.

Corrugated volumes across our markets increased by 3% year on year. And the region reported an EBITDA margin of 19.7% in the quarter, which is within its normal EBITDA range, following the somewhat depressed margin level recorded in 2012 as a result of a number of one-off issues.

Smurfit Kappa Orange County is continuing to perform well, and its management is focused on enhancing margins through its synergies, cost take out, and targeted growth in the valued-added box market. The increased synergies target of $32 million are on track to be delivered, as expected.

The Group's Venezuelan business performance is very strong, as a result of our leading market position in the country, and the rest of the Americas region is also performing well. This region provides access to higher growth markets, and our intention is to continue to grow our operations there.

As previously indicated, Venezuela is a hyper-inflationary country, and there's a growing expectation by economic indicators, and economic commentators, that there will be devaluation of the bolivar in early 2014.

In terms of our overall business model, our ability to deliver growth across the total business reflects our significant geographic presence, our high quality differentiated service offering, and the value-added element of our packaging that has been continually recognized in the marketplace. This is evidenced by numerous customer and industry awards, the most recent being the award from the Swedish Packaging Association.

Innovative smart packaging delivers tangible benefits to our customers in the form of prominence on the shelf, cost reduction through their supply chain, and the provision of strong sustainability credentials.

As the European market leader, and the largest pan-regional supplier in the Americas, Smurfit Kappa Group is uniquely placed to provide our customers with first-class packaging solutions, tailored to the increasing needs of our customers. Reflective of this, the Group's pan-European packaging business continues to make significant progress, with 4% volume growth in the first nine months of the year.

The Group's service culture supports consistent product innovation, and the provision of real added value for our 64,000 customers worldwide. Smurfit Kappa Group's ability to drive cost reduction and retailing impact are increasingly regarded as defining differentiators in the marketplace.

The Group is progressing well against its 2013 cost take-out target, and expects to deliver EUR100 million of cost take out for the full year. Incremental cost take out of EUR27 million was reported in the third quarter, bringing the year total to date of EUR73 million.

Turing to cash flow, we delivered strong free cash flow in the third quarter of EUR190 million. This is EUR72 million higher than prior year, driven primarily by a combination of higher EBITDA and a larger working capital inflow, partly offset by higher capital outflows. This has resulted in free cash flow of EUR262 million for the first nine months; an increase of almost EUR100 million on last year.

At September 30, working capital amounted to EUR634 million, and represented 7.9% of annualized revenue, compared to 9% at the same point in 2012.

Capital expenditure to EUR218 million in the first nine months to September, equaling 79% of depreciation, compared to EUR180 million and 69% in the first nine months of 2012.

Capital expenditure will increase to approximately 100% of depreciation for the 2013 full year.

The Group achieved strong net debt reduction in the quarter of EUR187 million, bringing the actual net debt to EUR2.63 billion at the end of September; and the net debt-to-EBITDA ratio of 2.5 times, comfortably within our stated objective of remaining below 3 times net debt-to-EBITDA through the cycle.

We continued to target credit ratings of BB+, Ba1.

In terms of the balance sheet, the Group's commitment to incremental improvement to our capital structure has delivered material financial benefits for our shareholders by way of lower debt service costs, extended debt maturities, and a more diversified capital funding base.

In July, we successfully refinanced our EUR1.375 billion senior credit facility at materially lower interest rates, and on a non-secured basis, with a reduced number of relationship banks. This was only made possible through our continued strong operational performance and our steady progress in the bond markets since the amend-and-extend transaction in February 2012.

On November 4, we completed the redemption of our 2017 EUR500 million senior notes, which carried an interest rate of 7.25%. This redemption was partly funded from cash and existing credit facilities. And when combined, the two transactions have fundamentally improved the Group's capital structure, and will deliver EUR43 million in annualized cash interest savings.

The Group continues to grow the business through value-accretive acquisitions, and in October acquired a specialty business called CRP, which is located in the UK.

CRP is a high quality packaging business specializing in retail-ready lighter laminated display and pre-print packaging and further establishes the Group's capabilities in this area within the UK, and further afield.

The primary focus of the Group's acquisition strategy remains on higher growth regions, such as Latin America and Eastern Europe, and we remain active in assessing opportunities in these geographies.

The strength of our capital structure, together with the expectation of materially improved free cash flow, will expand the available range of strategic and financial options to drive shareholder value from 2014, and beyond.

I want to thank you for taking the time to be on the call today. Operator, we're now happy to take questions.

(Operator Instructions). Barry Dixon, Davy.

A few questions. Firstly, just in terms of the containerboard price increase, Gary, which you announced for November, can you give us any sense as to how successful you have been in terms of implementing that?

And then, I suppose, a related question is to how, or when, should we start to see that feed through into corrugated prices?

Second question just in terms of volume growth, and you've indicated 2% box volume growth. Could you give us a sense as to how much the industrial part of your business is growing, and how much the FMCG part is moving?

And if, as we think, the industrial part if growing faster, should we see -- could that explain some of the margin deterioration that we saw in Q3, given that you're probably putting a lower value box into that industrial market?

And then finally, just on acquisitions, any thoughts in terms of how -- or anything imminent? I know you're not going to tell that there's anything imminent, but in terms of multiples how that market is looking at the moment. Thank you.

First of all, I'll ask Tony to deal with the containerboard price increase, bearing in mind, guys, that this is November 5, November 6, and it's announced from November 1. But, Tony?

Yes, on the increase, the EUR40 announced in August was fully implemented, as planned.

As you know, there were a number of announcements in the marketplace for EUR30 to EUR40 for November 1. We would expect to get somewhere between EUR20 and EUR30 of that announcement as of November 1. And that's currently -- will depend a little bit by the marketplace, but somewhere between EUR30 and EUR40 would be our expectation of the last increase in November. That will be a very strong help to us in fully implementing that through to box prices as we move forward into Q1, Barry.

As you know, it takes a while. First of all, the increase in August was communicated to box customers in September, and we've been working diligently to put that through. With the normal time lags for, obviously, the very commodity-orientated piece of our business, that goes though relatively quickly; and for the more long-term relationship orientated piece of our business, that goes in between three and six months.

Okay, thank you.

In terms of the volume growth, just to be clear, what we're guiding overall is that the volume growth is of the order of 2%, marginally above 2%, which is effectively consistent with the overall market growth. Obviously, across Europe that ranges from decent markets in the more stable markets that have not been impacted by the significant recession and crisis, to the more troubled markets, where in some cases we have very good market positions.

It also is worth bearing in mind that, in the context of those numbers, we have effectively done well in the type of target markets where innovative packaging and high end value-add in servicing does distinguish and discriminate. So, for our pan-European sales business, our volume growths are of the order of 4% year on year.

In terms of splitting it, Barry, between FMCG and industrial production, it's extremely difficult to do that in any meaningful way. Effectively, we don't have a sense, let me put it this way, that there's any material skew.

We did have, as you know, in the downturn a very strong view that FMCG, and more particularly food and beverage, held up reasonably well; they might have been switching between higher price and lower price, but in general held up very well, whereas the industrial side didn't.

Our sense at the mid-year, we guided that we thought we saw a bottom in Europe, and we weren't calling a turn. But the sense we certainly have in quarter 3 is some degree of uptick, but we don't have a sense that it's particularly in any areas.

Ian, on the margins?

In relation to the margins, Barry, when you look at the year to date and the segmental analysis, as Gary highlighted there, you're looking at quarter 1 our EBITDA EUR167 million, and EUR195 million about, and just a tad over EUR200 million. So, you're seeing that sequential improvement quarter by quarter.

On the acquisition side, we are looking, as Gary said, at a number of things, but, Barry, as we always have looked at a number of things at any point of time. It comes back to really, effectively, where do we allocate the capital, and it comes back to the example of Orange County.

In that case, when we're looking for equity value with accretion we believe that Orange County was the best place to put it, to put the capital, at that point of time. And that's, effectively, how we will judge any acquisition in the light of equity accretion.

Okay, thank you very much.

Thanks, Barry.

Lars Kjellberg, Credit Suisse.

I have just a couple of follow ups. When you're looking at the demand picture, as you pointed out, you saw some bottoming out in Q3. Have you seen any directional change in any particular market now heading into Q4? There's been some concerns, I guess, about the attraction of European economy, in particular. You also mentioned some headwinds in certain markets in LatAm, if you want to expand on that.

And another question just relating to testliner and kraftliner; the spread between the two. There's, obviously, various views on this in the trade press, how this is playing through, but have you seen any evidence of the kraftliner market is perking up again. As you mention in your own report, testliner is now bolstering kraftliner. Just wanted to see where you stand on that, and where you expect kraft to go next.

Let me deal with the first two, and I'll get Tony to deal with the kraftliner, testliner. I think in terms of demand, what we said, Lars, was, effectively, at the half year, we certainly sensed that Europe has bottomed out.

We have been fairly consistent in our views that Europe is a very mixed bag. And then, in our business it isn't necessarily mixed in the way that European macroeconomics are. So, in macroeconomic terms, generally speaking, Northern Europe is stronger than Southern Europe, and to some extent that is true for us.

But the key for us is, basically, selling to companies -- or countries that are strong branded and export branded-type activities and markets gives us an advantage. But also, there are some elements of uniqueness. For example, our business in Spain, which would typically be presumed to be challenged given the Spanish economic situation, is doing reasonably well. But that's basically we're very strong in agro products, and our fruit and produce, and so on, is doing quite well.

As a general comment, I think there are a number of markets that are doing well. The Benelux is doing well; UK is doing well; Germany is doing well; France is difficult. But it ranges. There isn't a particular pattern that helps you, and, obviously, there's probably some mixed messages also at the political and economic level as to whether the uptick is really happening. But certainly on the ground, as we see it, based on our numbers, there is progress. Now, it's not dramatic progress, but it's progress.

I think, Tony, on the -- sorry, in terms of the headwinds, the main headwind is Mexico demographically is one of the really good markets in the sense of the population, the proximity to the US, member of NAFTA, etc., and yet it hasn't done as well this year as people thought. Obviously, while the new government has settled in well, there's budgetary activities that are certainly making the marketplace a little bit nervous.

Our view is in the round it's okay for us. But there is certainly some nervousness around that has certainly kept Mexico a little bit slower than we would have anticipated.

Tony, in terms of kraftliner and testliner?

Yes, Lars, on the increases in testliner, they've been around 100 from the low point. That certainly brought testliners more competitive versus kraftliners -- sorry, kraftliner more competitive versus testliners.

Additionally, we haven't seen any demand erosion at all. But we've seen some future threat against the potential of American liners coming into some of the southern countries, and that's causing us to adjust our prices somewhat in those markets by between EUR10 and EUR20, depending on the market. That in itself is giving that spread differential to a point where it would almost be ambivalent as to which grade you would use in certain applications.

We're already starting to see in some of our own box operations whereby we can now use kraftliners instead of testliners should we so choose to, and that will be the same for the market. But that would be a now issue, rather than a Q3 issue, or before.

I think the substitution issue, while it's always there, the reality is that we would be at a point where there is not that much difference between the two grades on a square meter basis.

On the basis of importers, are you seeing any change there?

No, we haven't seen any significant import increases yet, Lars. I think the inventory buildup in the States in September, which was reversed in October somewhat, probably spooked a few market players. That caused a little bit of a wobble on, as I say, some of the more southern import-orientated countries, hence the reason why we've had to adjust somewhere between EUR10 and EUR20.

But you pretty much think that's done now?

As I say, I think it now becomes a point where you can actually transfer into kraftliner from testliners with no particular extra costs. Therefore, as we have been saying, the demand for recycle liners is very strong at the moment. Inventory levels are at historically low levels. There is difficulty to get paper in certain instances, so, therefore, using kraftliner is a decent alternative now with the price differential. And addition, kraftliner volumes are pretty good, so there's no reason for it to fall any further.

Understood. Final question; working capital [you've taken] was very good, 7.9% of annualized sales, is that a number that is sustainable? Or should we see any reverse to the mean from that level?

Ian, do you want to take that one?

Yes. Lars, when you look at, going back over, say, the last quarters, quarter 3 we're at 7.9%, 8.9%, 9.4%, 8.7%. So, we're around the 8%. Within that, when you break it out, actually, our debtor days have improved in the order of about a 1.5 days over that four-quarter period, and our stock levels have improved, so they're the general improvements on the working capital.

Our creditor days are off a tad, and probably gone out by a day-and-a-bit from the comparable period, but improved over quarter 2.

So, working capital, in general, we've always said we're around the 8%, and I'd still think it'll be a number we're comfortable with. There's a lot of pressure out there, but guys are doing a lot of good work with regards to working capital in general.

Understood. Thank you.

David O'Brien, Goodbody.

Just two from me, please; both on the Americas. I suppose, given your position with Smurfit Kappa Orange County in the North American market, could you give us your view on the outlook for pricing for container more within that market, given the capacity that's coming online over the next period?

Secondly, just with regards to the Americas as a division, and stripping out Orange County, maybe, could you give us an idea what your underlying EBITA growth was for the quarter, please?

Okay, let's take the first one. I think a couple of comments to make, David, is, a, you probably have in the Americas, in the North American market specifically, as good a market environment as there's ever been. The supplier side, in terms of ownership and consolidation, has never been better.

More importantly, there's a significant investment gone into making that consolidation the way it is; the most recent one, obviously, being the substantial acquisition by PCA. But each of the three big guys of international paper, Rock-Tenn and PCA, now have invested huge money to consolidate the market. They're all plcs, and they've all wowed their investors by virtue of these investments, but only because they have an expectation that they're going to deliver decent returns.

As a consequence of it, we've seen the two price increases; and we've benefited in Orange County through our [40 million] taxes, and the knock-on pricing into the box plants.

The new -- the conversions, and the indication of one, or two, new machines are, a, in the recycle paper area, where, obviously, the cost to recover paper -- if you take the US market's view on the cost to recover paper, they are very, very substantially strongly of the view that it's onwards and upwards, and there's going to be a significant advantage to the wood-based business. That's almost a doctrinaire position they have.

We would take a more pragmatic view of that, obviously. Given that we have both grades in Europe, there's a trade-off; nothing goes up forever.

But, certainly, the view would be that between China, where the major exporters, the default exporter, if you like, and the domestic market now with the new conversions and capacity, the pressure on recovered paper is going to be substantial, which will keep the pressure for pricing substantial.

Then secondly, the investment that's been made by these guys is going to be such that the expectation is they'll do the appropriate thing. As Tony indicated, they ran fast and built stock, and maybe some stock leaked into Europe, but they very quickly ramped back down from 98%/99% run rates to 93% run rate.

So, you're already seeing sensible behavior, and I think that behavior is likely to continue. Will it lead to further pricing? I think it depends on the general market. But the expectation would be that they need to make a return on their investment and, therefore, the logic should be in time.

But I think the trick, as in this European market, and our other market, need to get it into the box prices. All of these guys are integrated; all of them need to get it into the box price for it to be a meaningful proposition.

Ian, in terms of the --

Yes, David, the underlying growth from a volume point of view, if you backed out of Orange County, nine months on nine months would be about 4%.

Great stuff. Thanks very much.

Gerard Moore, Investec.

Just a few more questions, please, on the Latin American business, or the Americas business. First of all, maybe on Mexico, can you talk us through the recent price increases for containerboards that have gone through in Mexico? Is it a case that everything that has been announced has now been implemented at this stage?

Is there the prospect maybe for further price increases, or will that really depend on what happens in North America, and what you've just talked about a second ago?

Secondly then, on Venezuela, I was wondering if you could give us an indication of the volume growth there in Q3. I guess the comparison basis might have been distorted by some industrial action, and a few things like that, so maybe just an idea of what you think the underlying level of growth is there. Should we expect that to continue into Q4, and next year?

And while we're on Venezuela, if you could also just talk a little bit about the risk of a devaluation there. If we did have a devaluation, would you expect a similar impact on your financials, as we saw at the beginning of this year, obviously, if the rate is equivalent, etc.? Thanks.

Okay, let me get Tony, first of all, to take the Mexican pricing and pass through.

Yes, on the Mexican side, Gerard, we've broadly passed through the increases.

The demand in Mexico has not been as strong as we would have liked. As Gary mentioned earlier, we do have a few headwinds there, mainly due to political issues, that are creating political unrest with regard to teachers, and electricity issues, and gas issues, which is disappointing for us because we had actually believed, very strongly, that, and we still believe, the demographics of Mexico, and the country itself, are a real big potential for us, and obviously for the country, to grow; and, hence, the reason why we have invested, and will continue to invest, in Mexico.

But we have passed through increases. Any further increases will be really at the -- based upon what's happening in the US market. It's very heavily influenced by the US, and, hence, the reason why we tend to look at that.

But as Gary has mentioned, our Orange County acquisition, which is on the border of the Maquiladora region, which is a bit less affected by the current unrest on the political side, is continuing to do well, and we're continuing to see growth. Certainly, we're seeing the macro issues that we have talked about before, that's business moving from China back to Mexico and the Maquiladora region, is there, and is very visible and very evident to us in demand terms.

Yes, and just one quick additional point, before I go into Venezuela, Gerald, I suppose one of the pieces of unfinished business, in our view, and we're a small player in this context, but, nonetheless, one that you've heard us speak to before, and one that kind of puzzles us, is that the default market for US excess capacity, where the domestic market doesn't need the tonnes from the paper mills, is obviously the near markets, like Latin America, and particularly Mexico.

We're one of the biggest importers of paper from the US into Mexico, and it surprises us, in all honesty, as to why the pricing is not more like US-type pricing. This -- the Laredo price, which is the price of which the US are -- the Mexican business is priced, is lower, and consistently lower, than the domestic price.

Now, it has been increased on two occasions, but it surprises us that the gap between the Laredo price and the domestic US price is not as strong as it should be. If it were, it acts as a platform for local pricing in Mexico because the pass through, as Tony says, it's quite efficient.

But it is what it is. Our sense is that there's a logic that says it should progress. In terms of -- in other words, that the Mexican market should be more like the US market.

Now, we all know, as we live in Europe, and the European model is basically not necessarily complete either, and so the -- it may never happen. But the sense is there's certainly the basis for it to move further, and that may be a further opportunity. Certainly, Mexico, in our view, is one of the markets, because of our investment, and because of our positioning, where we think there's real upside.

In terms of Venezuela, the volume growth, as you quite rightly point our, Gerald, there's effectively a, if you like, windfall benefit in volumes in Venezuela year on year by virtue of the one-off issues, industrial relations issues, we had in a number of places that impacted both the top line and bottom line.

The volume growth is around 7% in the year. The real volume growth is more like the normalized Latin American ones of around 3%; 2% to 3%. The reality of life for us is it depends on our customers, whether they're able to produce the product, and have the raw materials, and the dollars to get the raw materials.

In general, our -- again, as in many parts of our world, food and beverage and basic necessities are the key focus area in Venezuela. A lot of them are domestically manufactured, and we are the go-to company in terms of the packaging, so we would tend to do reasonably well, and expect to continue to do so.

Ian, in terms of the devaluation?

Gerald, in terms of devaluation, market commentators in Venezuela highlighting that somewhat maybe in quarter 1 of 2014 that you'd expect to see a devaluation. There's no consensus necessarily around the number, but we're sort of using an example of VEF10; we've highlighted that in the press release.

The previous devaluation, as you rightly said, was in February of this year, where it devalued from VEF4.3 to VEF6.3. And we outlined there in the press release the effect in relation to the net assets and the cash, and, again, we've highlighted that in the press release.

But it's very hard to say, Gerald, what actually will happen, but the feeling is that probably a devaluation in quarter 1 of next year.

I think the general sense, Gerald, is in any hyper-inflationary country it's only a matter of when you actually get a devaluation. But that's part of doing business in that part of the world, and we're well used to it.

Okay. Thanks a lot.

(Operator Instructions). Aurelie Charpentier, BlackRock.

It is actually Stephan Donati calling for her. Congratulations for the results. I got a question -- two questions; one like acquisitions, and one related to capital allocation. In your presentation you referred to the deleveraging targets, so I was wondering how you considering -- how far you consider yourself from your target leverage, and your target rating.

And also, the other question is you mentioning opportunities in deploying capital. How should we think about it, going forward?

Okay, Ian, do you want to take that?

Yes. Our target rating is BB+. Bear in mind, we have been investment grade, we have been B. We are good. Solidly, we're BB, with positive outlook out of two-out-of-three of the rating agencies. And so it's by choice that we decided our focus is on BB+; based on our metrics, and these results, and the view of the year end, we would have a view that we would be heading positively in that direction.

Then, with regard to the capital allocation, very much, we divide it in between dividends, CapEx, debt pay down, and growth/acquisitions. At the moment, our dividend is about EUR70 million; our CapEx, as Gary outlined, is about 100% of depreciation forecast for this year. And our target, as I said, is BB+. At 2.5 times leverage, we're there, or thereabouts.

Our focus really is on the cash and cash generation for 2014, and what do we do about it, but we see very much capital allocation really in those four buckets.

Okay, operator, we have time for probably one, or two, more questions.

(Operator Instructions). Jake Thomson, Odey.

Just a couple of questions, really. In terms of -- could you just help me out with the math? I always seemed to get a bit muddled on the flow through of price increases, assuming you get traction in box prices and what that might mean for profit.

So, could you just follow -- so assuming, in a blue sky scenario, that the whole EUR70 per tonne goes -- gets translated into box prices, how should I think about the drop through of that into your EBITDA? I think that's probably a question for Ian.

Well, actually, no, because he's very bad at giving -- he'll give you a direct answer, Jake, and I'll give you, and on the one hand, on the other hand. And then --

(multiple speakers) Right, well, let's stick to Ian then.

This is on the one hand, on the other hand, because it depends, Jake. There are customers that will get very limited price increase because we've already contracted our business with them. We have three year-contracts with six-month reviews, we have annual contracts; we've all sorts of situations.

I think the way to think about this is probably that, in essence, we have signaled, for the last 12 months, that recycled paper, which is the dominant paper in Europe, needed about EUR100 a tonne price increase in order to get into sensible economic territory again. Because we, as probably one of the certainly the biggest, and we believe one of the most well invested, across our system, needed that to make any sense of the business. We have got there, or thereabouts now; 12 months later, mind you.

If you think about it, that paper is, effectively, about half the cost of a -- in a box plant. And if you think about it from the key movers in ways that resist pricing in [our world] are the independents. An independent box plant in good shape, in good times is probably making about 10% EBITDA margin; and in difficult times, more like 5% EBITDA margin. And if you take it that the price of packaging, in round sum numbers, is probably of the order of EUR1,000 a tonne, and we're basically increasing by EUR70 a tonne, then it is almost impossible for a guy on 5% price -- EBITDA margin to resist it.

So, depending on where you are in the pricing, when the prices are at their low levels every EUR10 a tonne was worth about 1 percentage point increase on packaging, the reality is, in our world, and we can't talk about anybody else's world, we probably need around 8% to 10% to get back to where we were.

And that's only on the paper inflation pressure. It ignores all the other stuff that is not in paper, or partly in paper, but is also impacting on our box plans, and our other plants; that's energy; oil prices; labor costs; other materials; etc. So, 8% to 10% just to get back to where we were.

Sorry, 8 to 10?

Percent.

In terms of box price increases?

Yes.

Okay. And your total corrugated volumes are -- sorry, I didn't [hear it].

5 billion square meters.

Which is how many tonnes?

It's about 2.5 million tonnes; 2.6 million tonnes.

Okay, that's fantastic. And can you just give us a quick overview of any salient, or changing cost pressures?

No, I think -- sorry, I can. Energy is still under upward pressure. On the kraftliner side, there's some upward pressure on wood. Recovered paper is fairly stable. Labor costs will always inflate at 2% to 3% across our total system, less in [Europe]. So -- but there's no dramatics.

But bearing in mind, I suppose, the one that is irksome is we've invested significantly in energy, and biomass, and so on, and despite that fact we're still seeing a lot of upward pressure on energy across [our businesses].

Okay. Okay, thank you. I suppose, lastly, the question's about Townsend Hook, and how that's progressing. Forgive me if you've already talked about this.

No, we haven't, no.

Is that presumably where the CapEx spike is going in the fourth quarter?

Yes, we've a couple of big ones.

Yes, we've a couple of major projects, and hence the reason why we're seeing an increased capital spend. It's progressing as planned. We would expect to start up, hopefully, in December of next year, latest January.

Of December next year?

Yes.

Okay. So that's quite impressive you've done what you've done, considering that Townsend Hook's already shut.

Yes.

And that's 300,000 tonnes?

250,000 tonnes.

250,000 tonnes, okay. Thanks so much for answering my questions, really appreciated. Cheers, bye.

Thank you. If there's one more question, operator, otherwise we'll fold.

We have no more questions at this time. I will now turn the call back to your hosts.

Thanks, operator. Again, ladies and gentlemen, thank you for taking the time to be with us today. As I said earlier, following the third quarter results, we remain on track to deliver full-year EBITDA in line with market consensus of EUR1.1 billion.

I think the important message is the strength of our capital structure now, together with the expectation, materially improve free cash flow. We'll expand the available ranges, strategic, and financial options to drive shareholder volume from 2014, and beyond.

So, thank you, again, for your time and support, and have a good day.

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