Smurfit WestRock PLC (SW) 2024 Q3 法說會逐字稿

Thank you, Sarah. As a reminder statements in today's earnings release and presentation and the comments made by management during this call may be considered forward-looking statements. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from our expectations and projections.

These risks and uncertainties include but are not limited to the factors identified in the earnings release and in our SEC filings, the company undertakes no obligation to revise any forward-looking statements. Today's remarks also refer to certain non-GAAP financial measures, reconciliations to the most comparable GAAP measures are included in today's earnings release and in the appendix to the presentation which are available at investors.smurfitwestrock.com.

In order to accommodate all those who want to ask questions, we ask that participants limit themselves to two questions during Q&A and should you require any clarifications on what we are discussing today myself and Frank will make ourselves available after the call. I will now hand you over to Tony Smurfit, CEO Smurfit Westrock.

Thank you, Ciaran and good morning or good afternoon, everyone and thank you for taking the time to join us today. As you will have seen from this morning's release, which is the first reporting period for Smurfit Westrock. I think it's fair to say we reported an excellent third quarter performance with adjusted EBITDA $1.265 billion and a margin of 16%.

Since combining our two companies on July 5, which is a little over 100 days ago, we've made great progress in bringing these two companies together and I think the results demonstrate that we are building a strong foundation for the continued development and success of Smurfit Westrock.

I want to emphasize the enthusiasm and resolve I have seen across Smurfit Westrock to deliver on the combined potential and I fully anticipate as time progresses. This will be absolutely apparent when combining Smurfit Kappa and Westrock. We were very clear on the kind of company that we could create.

We were going to create the global leader in sustainable packaging and with the applications that we have and the knowledge we have of the industry, we would be able to deliver the most value adding and innovative packaging across the industry.

We will be able to leverage all of our applications and knowledge across a broader geographic reach and across an unparalleled product diversity. We felt very confident that we could deliver improved operating efficiency and drive excellence for our customers.

We also felt that in legacy Smurfit Kappa we had developed a tremendous culture which we could bring to the new Smurfit Westrock. A culture that is performance driven, teamwork orientated with accountability for results and a deep desire to perform and deliver for all stakeholders.

And we also felt that our capital allocation approach, which is the foundation for the success of legacy Smurfit Kappa in creating value for shareholders would be a fundamental pillar for success in Smurfit Westrock.

After the first 100 plus days, we have even more confidence as we enter the next phase of our journey. It is interesting after such a short period of time to see what we have identified in the new Smurfit Westrock, which is nothing short of compelling. Across our world across our industries we have excellent, strong and defendable market positions.

What I have been so impressed with is the level of experience and knowledge at the operational level of legacy Westrock. For sure, we have seen many opportunities for growth and cost reduction. We've also been able to identify a much sharper customer focus where value over volume will be a philosophy to be adhered to.

Additionally, all designers, all product innovations, all supply chain knowledge has a much larger pool of customers. This will take time as we develop the systems but it is an immense opportunity for growth and for customers to attain unique before packaging to help reduce their costs and increase their sales.

And finally, but by no means least across the spectrum of businesses in the combination, a renewed focus on quality and service and right, first time through productivity initiatives, through further footprint initiatives will deliver higher operating efficiency and customer retention.

So that's all good and well, but what have we done so far? I'm very proud of what we've accomplished today. The new leader teams across Smurfit Westrock organization are now in place and all are aligned around the culture and the way forward for the business.

We have already put over 80 legacy Westrock managers to a short [NSAD] program and a further 80 will soon commence the program. 400 legacy Smurfit Kappa managers have already completed this development course.

As many of you will note, there have been multiple plant visits occurred with over 85% of the legacy Westrock per system already visited along with many converting facilities across all regions. We like what we see, and we have generally very well invested asset base.

We've introduced a much sharper commercial focus whereby we are not going to use expensive machines to run lossmaking products. This is an anathema to us and also not good business for our customers. And of course, on a step-by-step basis, we're identifying operational efficiencies, reducing [sgna] reducing the use of external consultants and taking the hard decisions on the reduction in headcount.

Again on a step-by-step basis, whereby recently we've eliminated some 800 positions. Sometimes you have to look back to see how far you've come. In this case, you can see that neither legacy organization have been standing still.

Over the last 22 months, nearly 30 consumer and corrugated facilities have closed as well as three paper mills who have also closed and four paper mills have been divested. This has radically improved the operational footprint of the combination.

In a company of this size, there will always be a continued need to look at different operations based upon operating efficiency and market positioning. But over the last period of time, the combination has radically improved as a result of these closures, significant cost savings have been achieved. And of course, this allows for us to better allocate capital and resources in the future.

We know we've done a lot with a lot more still to do. But we have developed a very strong foundation and platform for growth and development. I'll now pass you over to Ken who will take you through the financial performance and I'll wrap up at the end.

Thank you, Tony and good morning, everyone. As Tony mentioned at the top, this is our first set of results reporting as a combined business and with net sales in the quarter of nearly $7.7 billion adjusted EBITDA of $1.265 billion and EBITDA margin above 16% and adjusted free cash flow of almost $120 million.

This is a strong foundation from which we begin our journey as you have seen in the release and likely know already. Legacy Smurfit Kappa was the accounting acquirer in the period. And as such with the combination closing on July 5, the reported numbers here on slide 10 will not include the first five days of legacy Westrock earnings which equates to around $33 million in adjusted EBITDA for the group.

Furthermore, any prior numbers in the earnings release would be Legacy Smurfit Kappa numbers reported on the US GAAP. We have however recreated the company's third quarter, 2024 results on a combined-on GAAP basis a little further down in the presentation. And I'll take you through that in a few moments.

Turning now to the reported performance for three segments in the quarter. As a reminder, our North American segment includes the US, Canada and Mexico and I'm delighted to report a very strong quarter.

Smurfit Westrock, North America has leading market position in both corrugated and consumer packaging and security supply across a number of paper grades to feed our diverse network of converting operations. As Tony also mentioned, operational improvements have begun already and we have an even greater conviction in the growth potential of the business having spent the first three months gaining a far deeper understanding of the legacy Westrock operations.

Those of you who followed the Smurfit Kappa journey over the years will be familiar with our long-standing approach of delivering differentiated packaging solutions, becoming supply and partner of choice and prioritizing the value we deliver to our customers over delivering volume.

This is a track record we are very proud of and as for Westrock, we are already seeing the initial benefits of aligning this commercial strategy across the organization. In the quarter our North American operations delivered gross sales of $4.6 billion with adjusted EBITDA $780 million and a very solid adjusted EBITDA margin of 16.8%.

Looking at the comparative performance for this went on a combined non-GAAP basis as per the [AK] file on September 24, we saw a significant margin improvement year-on-year due to both higher volumes and higher selling prices with cost headwinds on items such as recovered fiber energy and distribution alongside wages and other inflationary costs.

Which were more than offset by reduced economic downtime, aided by increased internal paper integration and operational improvements. Corrugated box pricing was up compared to the prior year. While volumes are 1.1% lower on a same day basis.

We saw weaker demand in the South and Midwest region, stable volumes in the North Atlantic region and solid growth in Western states. Finally, consumer packaging performed well with food and beverage demand growth of 4% year-on-year.

And now looking at a Europe, MEA and APAC division much like the US and Canadian elements of our North America segment. Our European operations saw limited operational overlap post July 5. With an addition of mainly consumer converting facilities to complement legacy Smurfit Kappa's number one market position in corrugated and container board and our existing consumer and specialty packaging operations.

In the quarter, the business delivered gross sales of $2.7 billion with adjusted EBITDA $411 million and an adjusted EBITDA margin of 15.5%. Corrugated box prices were down year-on-year although they continued higher versus the previous quarter, and we expect to see continued box price recovery going forward.

Corrugated volumes are up 2.7% on an absolute basis or [0.7%] higher on a same day basis. The adjusted margin was lower year-on-year, predominantly due to lower corrugated prices and higher recovered fiber costs partly offset by higher volumes.

Our Latin American segment remained very strong in the third quarter. And as you can see here with gross sales of half billion adjusted EBITDA of $116 million and an adjusted EBITDA margin of above 23%. This is an excellent outcome for region we have operated in for over 40 years.

And again, when looking at the comparative performance of the segment on a combined non-GAAP basis as per the September a year-on-year EBITDA was broadly unchanged. The region saw lower average box prices and lower box volumes in year as shipments per day were down 2.7% with demand in Argentina being a particular drag on segment volumes.

However, we also saw generally lower operating costs, offsetting these movements with the margin performance being held by our unrelenting focus on costs and operational efficiency. As mentioned earlier slide 12 shows our third quarter results for the group prepared on a combined non-GAAP basis.

I don't propose to dwell on this slide as the reported numbers for the three segments are included here. Plus, the Legacy Westrock sales and earnings for the first five days of July. Which I think gives a more complete picture of the company's performance in the third quarter.

With Westrock's adjusted EBITDA margin of over six, Westrock adjusted EBITDA margin of over 16%. The company getting its first chapter from a position of strength and speaking about that journey ahead slide 13 maps out our capital allocation framework.

Those who have followed the performance of Smurfit Kappa over the years will be familiar with it. Our capital allocation framework will remain flexible, and returns focused at its core. As a team with long standing experience in the industry, we believe that capital allocated to internal projects, what we see is the lowest risk form of capital will be central to our future success.

We are taking a disciplined bottom-up approach to assessing the capital needs of the business. And as Tony said earlier, having visited the vast majority of the legacy Westrock operations, we are very happy with the asset base and the opportunity to unlock significant value through operational improvements and empowering local plant managers who are closer to the customer.

Having spent some time assessing the initial capital needs of the coin company. We believe that for the full year 2025 total CapEx will be in the range of $2.2 to $2.4 billion. The dividend another cornerstone of our capital allocation strategy and as a reminder, subject to board approvals, Smurf Westrock intends to pay a dividend in line with the progressive dividend policy of legacy Smurfit Kappa.

As we harmonize the different dividend streams and payment cycles for the remainder of 2024, we are paying a dividend for this quarter of [30.25¢] per share work at Westrock. We plan to remain disciplined in relation to M&A and benchmark those opportunities against all other forms of capital allocation.

The combination between Smurfit Kappa and Westrock undoubtedly transformative in nature was rooted in our history of discipline best illustrated by combining both companies on equivalent enterprise multiples to create a global leader in sustainable packaging.

The balance sheet of Murphy Westrock has significant strength and flexibility and we are committed to maintaining a strong investment grade credit rating. We also believe that given the size and strength of our operations and the ability to generate significant free cash flow.

Smurfit Westrock can be less than times ever through the cycle and the inclusion of other forms of shareholder returns underscores the flexibility and agility of this framework and ensures that all avenues to create and return value to our shareholders are considered and benchmark against all other options.

Ultimately, the framework at its simplest is about creating long term value for all stakeholders. And with that, I'll pass you back to Tony for some concluding remarks.

Thank you, Ken. I have a saying that [Ces] is never a straight line, but in legacy Smurfit Kappa, we have proved over a long period of time that we deliver against all performance measures. And this is evident on the slide in front of you.

I won't go through every point. But please note that as Rome wasn't built in a day, neither is a great company. And Smurfit Kappa was a great company, but I have the utmost confidence that Smurfit Westrock will be an even better company with an even better coverage with a better product portfolio and great people consistently delivering for our stakeholders.

This is a journey and not a destination. We will continue to optimize our operating model. We will continue to be customer centric in all that we do. We'll continue to have a performance led culture where responsibility lands at the local plant level and we'll continue to capital discipline which has stood [smerf] from its inception back in the 30s, recognizing that all capital must be paid for and that all capital invested in the business provide a return for our stakeholders.

Laying on top of that is ensuring that we continue our sustainability and innovation leadership. We believe this is a central element to our success both now and in the years ahead. And of course, with that, as you're all aware, we identified some $400 million of synergies, which I would call hard synergies, which will be delivered.

I will make the point that there is considerably more potential than this $400 million. At least the same again as we implement commercial practices and improve our operating efficiency. Through the combination. This is driven by the owner operator mentality that we have introduced at Smurfit Westrock, all senior managers are significant shareholders and as such understand the need for higher returns.

As I said earlier, I'm deeply encouraged by the level of skill, experience and knowledge that exists at local level which we in Smurfit Westrock will unleash. I'm also encouraged by the initial benefits we are seeing from this approach. And while we expect this year to be approximately $4.7 billion this of course is not the summit of our ambitions.

As Ken said in the year ahead, we will invest somewhere between $2.2 and $2.4 billion, which is lower than our initial estimate for year one without affecting our expected returns. As we run through the course of next year, we will be assessing our capital needs to take advantage of the opportunities for development across the world for the new Smurfit Westrock and we'll update you further as we, as our thinking progresses.

I do hope that you'll all understand that we have very significant opportunities ahead for this company and we look forward to delivering on those opportunities in the short medium and long term. And now with that operator, myself and Ken, we're open to taking any questions from (technical difficulty).

Thank you. (Operator Instructions)

Thank you. We'll now take our first question.

This is from the line of Charlie Muir-Sands from BNP Paribas Exane. Please go ahead.

Good morning, Good afternoon, guys. Thank you for taking my questions just to please. Firstly, on the full year guidance, if taken literally with no desperate places beyond what you've given suggests a slight reduction in the EBITDA fourth quarter versus the third quarter.

Is that a fair assumption or is there a bit of conservatism or just rounding in there or are there any particular factors we should bear in mind such as maintenance downtime in the long paper position in North America, for example.

Yeah, Charlie. The guidance is based on this is the first time we've gone into December with the new code. So there were, obviously we tend to be a little bit conservative, but also there's $60 million of additional downtime and a small some downtime and maintenance downtime that we have built into this quarter that we didn't have before Q3.

So an additional $60 million hit for downtime, both for commercial downtime and some of our consumer mills and also in just regular maintenance downtime that is more than in Q3. So, some degree of conservatism, we hope, I mean obviously December is always a funny month and then $60 million hit.

[I think Charlie can, I think as well.] If you look at the year-on-year, you can see the progression Q4 versus Q4. So quite significant in '24 '23 for the combined non-GAAP basis. So, keep that in mind as well.

Yeah, we do. And secondly, just on the CapEx plan for next year. And I guess the mid-term historically, you guys have managed to target as a mid to high 10s pretax return on anything that could be considered, beyond maintenance spend, given what you've seen from the restaurant business is the opportunity better there perhaps because there's more low hanging fruit or less because it's more of that budget needs to go into sort of catch up maintenance.

I wouldn't say it's catch up. I mean, listen, we think that's a reasonable number to be looking to go for on non-maintenance CapEx and I wouldn't rush to change that right now. But obviously there is a lot of opportunity as we are bringing the two businesses together and are thinking together to and how we approach the customer and that includes some investment to make sure that we deliver right on time for some time to have [otif] to our customers at the historical levels of Smurfit Kappa and that's not an overnight job, Charlie.

But I mean, I think we have a plan and the capital investments that we see for next year is taken into account what we need for next year. But then obviously, as we go through the year and we see where the opportunities are and the way to continue to reduce cost, we'll develop that out as we go through the year and then communicate accordingly.

Thank you.

Thank you.

We'll now take our next question.

This is from [Lars Kilberg from Steil]. Please go ahead.

Thank you for taking the questions and congrats on the first 100 days. Just a couple of questions on, synergies, you seem to be executing quite rapidly. So can you share with us how we should think about the cadence of those $4 million that you've spoken to?

And then secondly, of course the next comment that you made about finding incremental meaningful incremental operational commercial improvements that could deliver a similar or greater number than that anything you can share today. And again, in terms of pace and delivering that and what you've identified.

Hey lars' Ken, here on the what Tony described in his script as the hard synergies. I think we're still on track as you would have outlined in September that by the end of next year, we will have trapped all that [$400]. So you go into 26 if you like, you've got the full year run rate on that number and we are getting through some of those, some take longer, as you can imagine particularly in terms of optimizing the system and integrating tons and not the space in the market.

So we're very much on track in terms of what Tony describes as the hard synergies is very much in line with what we have said back when we close the deal in July on the other bucket. If you like the number, we expect to get through operational improvement and everything else that's probably going to take slightly longer.

We would expect to get some of that during '25 and the rest are in '26. It's probably more like an 18-month, two-year time frame to execute all of that. Simply because a lot of that's probably wrapped up in terms of commercial opportunity and when contracts roll off and how we see about it and linking back to Tony's point around,

Improvements around [otif] and quality and service and everything else. But in terms of simple wins, It's taking cost out around some areas like consultants and extra and 25 with them through fairly quickly. So, it's probably a slightly longer time frame than the hearts energy, but it's not a long-term goal. It's still, 12 months 18 months, 24 months at the max.

I think LARS just as an overall view on it, we're very much streamlining the business to devolve responsibility back to plant level and to operational level. That, head office is there to support not to run the business. And that is empowering people to understand that their P&L is their responsibility.

And obviously when you look at your P&L and you find you've got contracts that are not necessarily good ones of course some of them are take a while to unwind but they do unwind and then obviously we'll, I mean, I hate, and we hate as a company to have expensive machinery running businesses where you don't, get a return and it's no good for our customers either because then you get yourself in a situation where you're not able to continue to invest in the business and grow the business.

And so we have a very strong view in how we run the business as over the years. And I think when you add into it that all the applications and the tools that we have to give to our customers to help them reduce their costs not necessarily reduce our margins but help them reduce their costs.

Then it's a very powerful organization and what you bring to customers and customers want to work with you. So, I think we've proven over the years in Legacy Smurfit Kappa how to do it and it's not an overnight success. It doesn't just happen straight away, but over time with the empowerment giving, I feel really comfortable when I see some of the people that we've met in Legacy Smurfit Westrock or sorry Legacy Westrock that we've got a huge opportunity here.

One follow up if I may you to somewhat lower CapEx requirements, at least near term in 2025 what have you found as you tour toward those 85% of the mills that has potentially surprised you. You've alluded to that? There's been an ongoing business improvement. Does that have anything to do with that lower CapEx number or is it just we need a bit more time to identify where we're going to spend more money?

Well, we are spending a bit more in Legacy Westrock a bit less in Legacy Smurfit Kappa because we are very well invested in Smurfit Kappa through the programs that we've done and we are spending a bit more there are I mean, obviously like even in legacy Smurfit Kappa, not all of our assets are perfect.

And we've just closed this year in France, and we tend to deal with things when we need to. So, there will be always things to do in the asset-based business. But what I've been very happy with is that the assets are very well maintained with very good people. Most of the consumer plants that we've seen are good or excellent and that's across the world and sometimes I have to pinch myself of how good they are.

And frankly, the, some corrugated box plants need work, but there's some that are truly excellent. And so, sometimes a bit and the mills on the mill side, there are some mills that are won't be around in 5,10, 20 years. But there are many that are I think 65% of the corrugated mills are in the first or the second quartile as we see it and plenty of opportunity to improve those in the third quartile and as we go forward, so I think we've got a strong mill system which is at this moment in time, relatively sold out.

And as we integrate more to our own businesses in Mexico as we do a little bit of small movement of product around the place, it gives us a lot of hope for the future.

Very good. Thank you.

Thank you.

We now take our next question.

This is from the line of Gabe Hajde from Wells Fargo. Please go ahead.

Good morning, Tony. I had a question? I guess maybe on based on the information that we have in our modeling and our model, I appreciate that. It looks like legacy kind of [Murphy] was a little bit below what we were, what we would have expected. And I'm just curious if you can give us the cadence of kind of price or what you expect to continue to realize based on movements that have already transpired if that question makes sense.

Yeah, I think basically if you look at our European system and the German market has not, I mean, it's promised to improve all through the year, but it hasn't. I mean, and so it's a bit of an anchor in a business, it's our largest market in Europe. So, I suppose if we were to say where is disappointing, I'd say Germany, slightly, not slightly is disappointing in relation to, how we have a very good system there that hasn't been able to exploit its strategic advantages because we haven't had the volume this year that we would have expected.

So, if you said where, where we've fallen down a little bit, it's in our German operations that really haven't, hit the ball out of the park. Most other businesses gave have done okay to our expectations. And we've had some very strong performances in places like Spain and the Eastern European businesses. But overall we would have liked to be a little bit better in Europe and where we're not is because I suppose of Germany and I don't think that's going to be a surprise to you.

Obviously, we would have expected slightly more when we sat here in April and we were talking to you, we would have expected that the Olympics and the European Cup would have brought forward some consumer spending and while comparisons are getting tougher and we're staying line ball with those comparisons versus last year.

Which is I suppose a good thing. It's still not massively improved. I think we're about 3% 2.5% up year on year but that's not on the same day basis. We're about 1% up on the same day basis in Europe overall, taking into account the week. Germany. Not particularly great in France.

So, we didn't see the pickup of demand that we would have anticipated when we were sitting here back in April based upon the events that were supposed to happen. But it's not awful either. It's just a big sort of let's get out of the year and let's see if at lower interest rates next year, we'll start to hopefully help consumer spending.

I suppose. Just to add on Tony where the volumes are sitting in relation to the comps and remaining strong. I think it's also fair to say while corrugated pricing is probably down, 4% year-on-year, I think sequentially Q3 over Q, we saw a bit of improvement there too. So, [it's not all doom and gloom], it could be slightly better.

No, listen, I mean, I think the data in North America hasn't been great either. Okay, I'm going to try to frame this up for you all. Maybe second half EBITDA combined of [$2,465] is directionally what we're coming up with.

I'm trying to think about kind of calendar '25. And I appreciate you gave us a CapEx number if we were to double that and you already told us the December quarter is tough to predict and then layer in some, $253 million of synergies.

Would that directionally be what we should be thinking about for '25? And then we can make our own assumptions for volumes. Any other moving parts that, that you would point us to would be helpful as well.

I'm definitely giving that one over to Ken.

I can see myself and Tony visually kind of said, no, you take it. No, you take it. I suppose gave the first thing to say is we haven't produced a budget for 25 years and we haven't taken to our board, but I suppose in the round I don't think your direction of travel is a what we see because I think. If you look sequentially through 2024 you see improvement Q2 on one as a combined three on two and these four on three and four on four last year.

So I don't think where your starting point is And as Ciaran and Frank said they look they clarifications they can help you with anyway but we haven't put we haven't kind of finished and finalized on a budget for 25 years. But I don't think your thought process. Is that off the mark either?

And I wouldn't disagree. So, we're agreeing.

Okay, thanks.

Thank you.

We'll now take our next question.

This is from the line of Anthony Pettinari from city, please. Go ahead.

Hi, good morning. I was wondering if you could, hey, looking at North America, I was wondering if you could talk about and maybe contrast the performance of the corrugated and the consumer businesses and Tony, I guess, could you talk about your impressions of the consumer business more broadly, given that it's a little bit of a different exposure than this perfect business.

Okay. Well, we have obviously consumer businesses, not just in the United States, but also in Europe and actually the rest of the world, which is where Westrock were, we had businesses. And so, my overall impression of the consumer business is a very good business, very well-run good people. We've segmented it now into three different areas which are food into beverage and into health and beauty, and they're very complementary to our businesses.

And we expect to continue to improve those businesses both through investment and through putting flat level responsibility back. And as I say, I have been nothing short of very impressed with the consumer side of those businesses still lots to do. And we'd like the market to be a little bit stronger in certain areas. But overall good mill systems for consumer are certain parts are good. Obviously, there's an issue with [SBS] in the marketplace and we need to figure it strategically out how to deal with that.

Our folding boxboard machines are they're smaller than the main competition, but there is basically ourselves and the main competition, which is graphic packaging and while we're going to be obviously way smaller mills but, way significantly less capital invested in those mills, so we just need to figure out, what's the shape of those as we go forward with regard to the corrugated business.

I think as I said earlier I'm pretty happy with all the mills. There's one or two that we'd have question mark for the long term, but we need to figure those out. But basically, what I've seen is good or very good and especially internationally when you go to the Mexican Mill system or the Brazilian Mill system it's, outstanding.

And then on the corrugated side, we have certain areas in certain regions that are, we need to change the focus of certain of the box plants, but, that's just that's work in progress and normal stuff, but, we haven't even started. Right now, Anthony in bringing in our innovation from Europe into, into the United States yet, that's work in progress.

That's going to take us a little bit of time to get the system, as I mentioned in my script, get the systems right to make sure that I'm the right person leading that. And so, a little bit of time to get there before we're able to transfer all the worldwide knowledge of packaging that we have into our corrugated system. But it's coming and it's going to be huge for our customers and it's going to be a big opportunity for our customers to have better packaging in the United States.

Okay. That's very helpful. And then, with your approach to the box business or the car business and the focus on value over volume, I think you referenced maybe potentially some contracts turning over and I guess to the extent that you anticipate, maybe some churn and customers or maybe a period where, volumes could be a little bit, a bit choppier. How long does that process take to kind of sort that out? I mean, is that six months or a year or two years?

Oh no, it's not it's basically Anthony you bad business. If you have sales people who can't replace bad business with slightly better business, then you don't have good sales people. So, obviously we believe that all of the poor business that we will lose or could lose over time and will be replaced with better business because, we will, this we're still only, I don't know, 20% of the market or so. So, there's 80% to go for.

And there's plenty of good business out there as long as you're offering something different. And, this is something that we have been doing for decades. I mean this is the way that we sell. This is the way that we don't we give our customers better value by producing better boxes rather than just a straight brown box.

And it doesn't happen overnight. But we will have the systems to be able to give our sales people the tools to sell better. And that's, when you lose a big chunk of business, it might hurt a factory for let's say a year, but you typically come back within a year if it's bad business.

Yeah, understood. That's, that's very helpful. I'll turn it over.

Thanks.

Thank you.

We'll take our next question.

This is from the line of Matthew Mckellar from RBC Capital Markets. Please go ahead.

Good morning. Thanks for taking my question. You talked about retaining and winning business through quality and service improvements, and I think you've talked around quality, but can you maybe give a bit more color here on what execution and service improvement in particular looks like to you and what your focus.

Items are here?

Matt, I mean at the end of the day we believe in delivering on time in full as close to 100%. And we have a measure in our European business of [PPM parts] per million of defects. And we expect all of our plants to have less than 500 parts per million boxes in defects. And obviously not all plants are there at the same time. A lot depends on the equipment that you have a lot depends on the planning systems.

You have a lot depends on your customer mix. But basically the gold standard is to have [APPM] under [300] a not around 98%. And you've got to be set up for that. You've got to have it doesn't happen overnight. But that's where we need to get to. Certainly, on the five 100 PF.

Thank. You and maybe just one for Ken. In terms of timing are able to share whether you'll capture the full benefit of the recent head count reduction you noted in Q4 or whether there are further cost savings as a result of these reductions will flow through in '25.

Thanks. Most of the head count reduction in '24 we trapped in '24 would be very little bleed over into '25 in that sense.

But there's, there's still a lot of reengineering to be done and that's part of the synergy program.

Okay. Thanks. Very much. I'll turn it back.

Thank you.

Thank you.

We'll take our next question.

This is from Patrick Mann, from Bank of America. Please go ahead.

Good day. Thanks very much for taking the question and, and for the presentation. I think it's a bit of a follow up question just on the value of volume approach which you've mentioned a few times. How should we think about this playing out? I mean, Tony, I was listening to you saying, we can replace that business with good business over time.

So, should we think about it as kind of the same base business but with improving margins improving commercial success over time or does it end up at least partly that you have a smaller but more profitable business over time through divestments or closures or restructuring? I mean just help us through practically how that takes hold or gets implemented over time. Thanks.

Thank you. It's a lot of everything that you've said. I mean clearly, if you have a number of facilities in the same area you can rationalize a little bit some of those facilities and that's something that legacy Westrock was doing. And that's so that's part of it.

But also it is really about recognizing what you're offering the customer, and can you offer him something other than just a brown box? And that is about selling for value rather than just for price. And so our whole, ethos has always been in Smurfit Kappa is to deliver something more for customers and understand what the customer's pain is and each customer has been paying someone is in the logistics, some is in their sustainability agenda, some is in their own machine line efficiencies, and we have all the ability to offer all of the things for the customer is each individual customer has a different requirement, and they are hundreds of thousands of customers.

It's not just the big customers that we all know and love. It's, there's many small manufacturers around the place, many small businesses that require [TLC] and help and how to package their books more efficiently. And as I say we do that, that's what we, that's where we come from. That's what we built our business on. That's what, what Smurfit Kappa is acknowledged as the leader in Europe by practically every customer.

And there's no reason why we won't do that in time in Europe and or in the United States and in the rest of Latin America. And you can already see that we're making good progress. We can see we're making good progress and that's not there yet. And that's the extra $400 plus million that we would expect to get as we move forward.

Got it. Thank.

You. Thank you very much.

Thank you.

We'll take our next question.

This is from the line of Mark Weintraub from Seaport research partners. Please go ahead.

Thank You. So there looks like there's a fair bit of capacity coming on in Europe next year and when sitting in North America, when that's happened, we tend to get worried but I know Europe is a different market but I don't know it nearly as well as you do.

So, I was hoping to get some perspective on how we should be thinking about the new capacity that at least on paper is supposed to be coming on in Europe next year.

Yeah, there's new capacity and it tends to be lumpy. But, at the moment you all you saw last week, mark the announced bankruptcy of an independent paper, it's pretty well the same kind of structure in Europe as it is in the US to some extent that new capacity has to find a home.

And if they don't have people to sell it to they have to take down time. And we saw that last year and H1stly with, with the amount of independence out there who are not doing very well. Actually, in the business, you've seen some, large groups being sold recently, a large group being sold recently, so you can readily say well where is the new capacity going to go?

And frankly speaking, there is no answer to that other than downtime, which is what happens during 2022 or '23 when the market got soft, people took a lot of downtime because they have to and there just won't be a market for it.

And they most of the new capacity market that's coming on in Europe is owned by people who have existing capacity. So, if they take the price down, they're only taking the price down on their other business and that's not a good strategy. So, I suspect there'll be a lot of downtime as this capacity have been introduced or exported out to rest of the world, which is generally speaking Asia or some of the Middle East and other areas.

I don't think the other thing with those, this mark is just remember that they tend to have a rose colored view on machines starting up a jam one full for the year. So, it tends to the tons never really come on in the way that they're listed on those sheets.

I think we've had new capacity in Europe. I mean, I've been in the business now. For nearly 40 years. And it's always been new capacity coming on in Europe, it's always been either absorbed or other stuff has been shut down. And you continue to see nonintegrated mill suffering and will continue to suffer if they don't have the integrated strategy, which we others have.

Thank you very much. And it just, you had mentioned smaller machines in folding box but in North America, that that's a reference to coded recycle board. I assume that's not [SBS] correct. Is that coded recycle board?

That's coded recycle. Yeah, and there's some that are very, niche orientated. So they're in areas that are fully integrated and that doesn't really cause us any particular long-term problem. There's, some that we'll just have to continue to look at.

Do they have the quality? Not really, do they have the price because we have almost no invested capital in those businesses? But do they have the quality that is going to be existing in the marketplace going forward? And that's something we'll have to analyze over the next couple of years or so.

Thanks so much.

Thank you.

We'll now take our next question.

This is from the line of Guarav Jain from Barclays. Please go ahead.

Hi, good afternoon. Tony and 10, a couple of questions from me one is on, free cash flow and net deck. So, the net debt number is slightly higher than what we had. And this is the first time we have a combined balance sheet. And the free cash flow is lower. So, is there some quarterly thing happening? And Q4 will be a much better free cash flow than what we had?

So, that was my question number one. And secondly you told about upon us container board European container board, us consumer board separately. But could you just talk about what you are seeing in the near term? Because some of your peers have been sounding concerns especially on the European container board side.

I think it's probably around pricing grab. I think what we've seen is broadly flat pricing in North America, but in the European price had gone up by about 140 ton. It's just come up 40 in the last month or so. So, not necessarily a call for concern.

As a result of lower wastepaper price.

On the back cover fiber prices dropping also. So, I think that's probably where we sit on the on the first one. I think there's probably a bit of a seasonal effect, I think also as recovered fiber drops you have less creditors, there's a small, bigger credit outflow than we might have thought. But also sequentially box prices were up. So, you get the adverse effect of that.

Would you like more investment in working capital? I think you're probably slightly higher than the net debt level too because, we did get through a fair bit of work in terms of cost and head count reduction and things like that, that probably drove the number slightly higher. But I think at a kind of, combined net debt basis of 2.8 times, it's probably not materially higher than where you are.

And generally the back half of the year tends to be slightly more cash generative, but there's probably nothing fundamental there, but probably the moving parts around where creditors sit and falling prices around that. Some of those credit items versus, investment in investment and working capital as a result of box price increases are probably two big sizes with inventory, 10 individual tends to be in good shape. And so, but beyond that, they're really the only moving parts.

Thank you.

Thank you.

We'll now take the next question.

This is from the line of [Filton from Jeffrey]. Please go ahead.

Hey guys. Now that you've had some time to look at your asset, what are some areas where you want to put capital to work, whether it's on the mill level or box side of things, the $2.22 to $2.4 billion CapEx framework you've provided, is that a reasonable framework for the next few years.

And then lastly when you kind of look at your footprint, any assets that stand out, I know SBS isn't something that you're sure if it's a strategic fit over a long term, but that market is very oversupplied. Is that something you plan to tackle, and making supply demand is in a better spot, call it in the medium term.

Hi, Philip. Yeah, I mean, just on the [SBS side], I mean we're still analyzing that business, we're into it three months now has been a very, it has been a very good business. We need to figure out how we deal with the imports of the replacement product of [SBS] into the marketplace, which is [BB] and we need to figure out, where does SBS sit versus that?

Obviously, the imported product that's replacing it has got some issues attached to that which are you've seen the port strikes, you've seen the uncertainty that some of those imports can have. So, we're not 100% sure yet where [SBS] sits, but I would say that the two big mills that we have are actually good mills.

So we need to figure out and they're very efficient mills. So, I think we've got a very good starting point to figure out where do we, where do we stand with that grade? It is somewhat integrated. We'd like it to be more integrated. But it's something that we'll have to look at over time. But I don't, we're not ready to make a decision on [sbs]. All I can say is for the moment it's staying with us with regard to.

Where we put the money. I mean, we have some work on our converting businesses to make sure that they are able to give the quality and service that our customers require and is going to make us different. And so we've got some work to do, not necessarily in the consumer side but more in the corrugated side but not in a massive way.

It's just something some of our facilities, we need to continue to upgrade, some upgrade some of our corrugators and, and obviously, as I said earlier maybe some smaller rationalizations as we look forward. So that's probably where we'll be concentrating our efforts, other than the normal maintenance capital, the winders the electrical things that we have to do in some of the mills that are sort of pretty standard and then going forward, we are going to develop a plan and we don't know yet whether it's going to fit in the $2.2 to & $2.4 or higher than that.

I would say it's going to be higher than that because we've got a lot of opportunities as we can see right now. But we want to do that more in a more cohesive way rather than just jump into it. In our first year. We have initiated a program of what we call quick wins.

So anything that has got a very quick payback, we just authorized $150 million this week or sorry, last week of the board for some quick wins which have really quick paybacks like, less than two-year paybacks that we can get and we see a lot more opportunities there, but we just need some time to engineer those correctly. But so that's the kind of thing we're looking at and then obviously the returns get worse. We'll look at that.

And then, I was really impressed by your comment earlier that on the commercial front you could see another $4 million and potentially unlock that call it the next 18 months to 24 months. So, my question really is, do you have the ability to do the Smurf? It's kind of things in terms of being decentralized, empowering the people. Having the KPIS aligned your biggest competitor in the US on the container board side.

They're taking a much more rigorous approach on the commercial side, they're expecting significant disruption on the box out of things. Like how are you going to manage that process? Call it the next 18 months to 24 months? It sounds like it might be less choppy but give us some kind of perspective. [That'd be a].

I think it's already happening. Philip. We're already empowering our operations. We've, already taking responsibility back to the divisional level and then ultimately drilling down into the regional level and then ultimately delivering down into the plant level. Now, plant level can be two or three plants in a particular region that we manage with a central, let's say sales service or central purchasing or central administration for three plants, but they are in their local market in their local market selling. So, we've already done that.

That doesn't mean that every person in our organization is going to be able to make that adjustment. But I can tell you that there's a palpable sense of enthusiasm for people to say okay we're now responsible for our P&L I mean, for a plant manager for a regional manager. As long as they know they're getting the price of paper at the market price, there can be no excuse for not having a decent return. I mean, or a plan to get to a decent return. And that's what we've already implemented.

And as I said, that's starting that's the first 100 days of work 120 days of work. And our team there is rigorously pushing that through and, and as you've seen that we have already taken out some central staff and that, that is speaking to that particular business model that we have. And that's what we've done all of our lives. And since the time that we started back in 1,934 we have had local plant responsibility and that's what we're going to continue.

Any thoughts on the disruption of the next few years as you kind of transition to this or fairly smooth.

I listen, there'll always be some Philip but I don't envisage. I mean, the interesting thing about the West Rock group of companies is many of the managers were already operating in that kind of environment. If you go to Southern Container, you go to the Old Rock 10 companies, that were folding carton base they were all profit responsible in the past. And so, for a lot of them this is going back to what they knew and what they wanted and what they liked.

So, it’s not, it's not rocket science for many of them. For some of them it will be different, and we'll have to adjust and move forward. But I wouldn't say it would be massively disrupted.

Okay, appreciate all the great color guys. Thank you.

Thanks Philip. So, I think operator we have to tie up. So, guys everybody thank you so much for joining us this morning and this afternoon and really appreciate your time and we look forward to reporting again at the end of the year and the continued progress of Smurfit Westrock. We're very excited about the future. A lot to do a lot more to do a lot done but an exciting future ahead for us. I'm quite sure. So, thanks for joining and have a good rest of the day.

Thank you.