Earnings Transcript for SMFKY - Q3 Fiscal Year 2024

Operator: Good day, and thank you for standing by. Welcome to the Smurfit Westrock 2024 Q3 Results Webcast and Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Ciaran Potts, Smurfit Westrock Group, VP, Investor Relations. Please go ahead.

Ciaran Potts: 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.

Tony Smurfit: 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 of $1.265 billion and a margin of 16.5%. Since combining our two companies on July 5, which is a little over 100 days ago, we have 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've 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, bespoke 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, we'll 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 to date. The new leadership 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 through a short INSEAD 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 paper system already visited, along with many converting facilities across all regions. We like what we see and we have generally a very well-invested asset base. We've introduced a much sharper commercial focus, whereby we are not going to use expensive machines to run loss-making 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 are identifying operational efficiencies, reducing SG&A, reducing the use of external consultants, and taking the hard decisions on the reduction in head count, 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 organizations 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.

Ken Bowles: 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. 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'll 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 year numbers in the earnings release will be legacy Smurfit Kappa numbers reported on the U.S. GAAP. We have, however, recreated the company's third quarter 2024 results on a combined non-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 of our three segments in the quarter. As a reminder, our North American segment includes the U.S., Canada, and Mexico, and I'm delighted to report a very strong quarter. Smurfit Westrock North America has leading market positions in both corrugated and consumer packaging, and security of 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 chain 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 Smurfit Westrock, we're 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 of $780 million, and a very solid adjusted EBITDA margin of 16.8%. Looking at the comparative performance for the segment on a combined non-GAAP basis as per the 8-K filed on 24th of September, we saw 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 were 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 our Europe, EMEA, and APAC division. Much like the U.S. 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 1 market position in corrugated and containerboard and our existing consumer and specialty packaging operations. In the quarter, the business delivered gross sales of $2.7 billion, with adjusted EBITDA of $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 were up 2.7% on an absolute basis, or 0.7% higher on a same-day basis. The adjusted EBITDA 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 $0.5 billion, adjusted EBITDA of $116 million, and an adjusted EBITDA margin of above 23%. This is an excellent outcome for a region we have operated in for over 40 years. And again, when looking at the comparative performance for the segment on a combined non-GAAP basis as per the September 8-K, 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 helped 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 -- Smurfit Westrock 's adjusted EBITDA margin of over 16%, the company is beginning 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 as 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 client company, we believe that for the full year 2025, total CapEx will be in the range of $2.2 billion to $2.4 billion. The dividend is another cornerstone of our capital allocation strategy. And as a reminder, subject to Board approvals, Smurfit 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 $0.3025 per share. In Smurfit 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 Smurfit 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 2 times levered 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 benchmarked 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.

Tony Smurfit: Thank you, Ken. You know I have a saying that success 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 with 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 Smurfit from its inception back in the '30s, recognizing that all capital must be paid for and that all capital invested in the business must return -- provide a return for our stakeholders. Layering 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. We 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 billion 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 our 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 anyone on the call.

Operator: [Operator Instructions] We'll now take our first question. This is from the line of Charlie Muir-Sands from BNP Paribas Exane. Please go ahead.

Charlie Muir-Sands: Good morning and good afternoon, guys. Thank you for taking my questions. Just two please. Firstly, on the full year guidance, if taken literally with no decimal places beyond what you've given, it suggests a slight reduction in EBITDA in the 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?

Tony Smurfit: Yes, Charlie, the guidance is based on -- this is the first time we've gone into December with new-co. So therefore, obviously, we tend to be a little bit conservative, but also, there is a -- 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 there's an additional $60 million hit for downtime, both for commercial downtime in 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 the $60 million hit.

Ken Bowles: I think, Charlie, as well -- I think, Charlie -- Hi, Charlie. It's Ken. I think as well, if you look at the year-on-year, you can see the progression. Quarter four versus quarter four is still quite significant in '24 over '23 for the combined non-GAAP basis. So keep that in mind as well.

Charlie Muir-Sands: Yes. We'll do. And secondly, just on the CapEx plan for next year and I guess the mid-term, historically, you guys have managed to target sort of mid- to high-teens pre-tax return on anything that could be considered beyond maintenance spend. Given what you've seen from the Westrock business, is the opportunity better there perhaps because there's more low-hanging fruit or less because of sort of more of that budget needs to go into sort of catch-up maintenance?

Tony Smurfit: 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, first on 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 taking 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 costs, we'll develop that out as we go through the year and then communicate accordingly.

Charlie Muir-Sands: Thank you.

Tony Smurfit: Thanks.

Operator: Thank you. We'll now take our next question. This is from Lars Kjellberg from Stifel. Please go ahead.

Lars Kjellberg: 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 $400 million that you've just spoken to? And then, secondly, of course, the next comment that you made about finding incremental -- meaningful incremental operational and 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?

Ken Bowles: Hi, Lars. It's Ken here. On the -- what Tony described in his script is 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 million. So as 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. So, some take longer, as you can imagine, particularly in terms of optimizing the system and integrating tons and not displacing the market. So we're very much on track in terms of what Tony describes as the hard synergies. It's very much in line with what we would have said back when we closed 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 during '26. It's probably more like an 18-month, two-year timeframe 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 in '25, which will come through fairly quickly. So it's probably slightly longer timeframe than the hard synergies, but it's not a long-term goal. It's still 12, 18 months, 24 at the max.

Tony Smurfit: 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 will -- I mean, I hate and we hate as a company to have extensive 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 you know, 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 can 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 we're giving, I feel really comfortable when I see some of the people that we've met in legacy Smurfit Westrock -- sorry, legacy Westrock that we've got a huge opportunity here.

Lars Kjellberg: One follow-up, if I may. You spoke to somewhat lower CapEx requirements, at least near term in 2025. What have you found as you toured those 85% of the mills that has potentially surprised you? You alluded to that, obviously, 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?

Tony Smurfit: Well, we are spending a bit more in legacy Westrock and 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 -- we've just closed this year a mill in France. And we tend to deal with things when we need to. So there will be always things to do in the asset base of the 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, frankly. The -- some corrugated box plants need work, but there are 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 five, 10, 20 years, but there are many that are -- I think about -- 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 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.

Lars Kjellberg: Very good. Thank you.

Operator: Thank you. We'll now take our next question. This is from the line of Gabe Hajde from Wells Fargo. Please go ahead.

Gabe Hajde: Good morning, Tony and Ken. I had a question, I guess, maybe on -- based on the information that we have in our modeling, internal model, I appreciate that, it looks like legacy kind of Smurfit was a little bit below 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?

Tony Smurfit: Yes. I think basically, our -- if you look at our European system, 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 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, it's 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 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, Gabe, 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 in line well with those comparisons versus last year, which is, I suppose, good thing, it's still not massive improvement. I think we're about 3%, 2.5% up year-on-year, but that's not on a same-day basis. We're about 1% up on a same-day basis. In Europe, overall, taking into account the weak 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.

Ken Bowles: I suppose, Gabe, just to add on Tony's, 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-odd percent year-on-year, I think sequentially Q3 over Q2, we saw a bit of improvement there too. So it's not all doom and gloom, it could be slightly better.

Gabe Hajde: 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 2465 is directionally what we're coming up with. Trying to think about kind of calendar '25, and 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 $250 million, $300 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 you would point us to would be helpful as well.

Tony Smurfit: I'm definitely giving that one over to Ken.

Ken Bowles: I can see myself and Tony visually kind of say, no, you take it, no, you take it. I suppose, Gabe, the first thing to say is, we haven't produced the budget for '25 yet, and we haven't taken to our Board. But I suppose, in the round, I don't think your direction of travel is off what we see because I think if you look sequentially through 2024, you see improvement in Q2 on one as a combined, three on two, and indeed, four on three, and four on four last year. So, I don't where your starting point is, and as Ciaran and Frank said, they can -- clarifications, they can help you with anyway. But we haven't put the -- we haven't kind of finished and finalized on the budget for '25 yet. But I don't think your thought process is that off the mark either.

Tony Smurfit: And I wouldn't disagree. So we're agreeing.

Gabe Hajde: Thank you, gentlemen.

Tony Smurfit: Okay, thanks.

Operator: Thank you. We'll now take our next question. This is from the line of Anthony Pettinari from Citi. Please go ahead.

Anthony Pettinari: Hi, good morning.

Tony Smurfit: Hi, Anthony.

Anthony Pettinari: 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 the Smurfit business?

Tony Smurfit: 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 -- had businesses. And so my overall impression of the consumer business is, it's a very good business, very well run, good equipment, 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 plant-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 a company -- 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 and 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 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, make sure that -- and we have the right person leading that. 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.

Anthony Pettinari: Okay. That's very helpful. And then with your approach to the box business or the carton 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 in 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 --

Tony Smurfit: No, it's not -- it's -- basically, Anthony, if you have a bad business, if you have salespeople who can't replace bad business with slightly better business, then you don't have good salespeople. So obviously, we believe that all the poor business that we will lose or could lose over time will be replaced with better business because we will -- there's -- 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 salespeople 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.

Anthony Pettinari: Okay. Understood. Yes, understood. That's very helpful. I'll turn it over.

Tony Smurfit: Thanks, Anthony.

Operator: Thank you. We'll take our next question. This is from the line of Matthew McKellar from RBC Capital Markets. Please go ahead.

Matthew McKellar: 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?

Tony Smurfit: Matt, I mean, at the end of the day, we believe in delivering on time in full at 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 a PPM under 300 and an OTIF around 98%. And you've got to have -- 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 500 PPM.

Matthew McKellar: Thank you. And maybe just one for Ken. In terms of timing, are you 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.

Ken Bowles: Most of the -- Matt, most of the head count reduction in '24, we trapped in '24. There'd be very little bleed over into '25 in that sense.

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

Matthew McKellar: Okay, thanks very much. I'll turn it back.

Tony Smurfit: Thank you.

Operator: Thank you. We'll take our next question. This is from Patrick Mann from Bank of America. Please go ahead.

Patrick Mann: Hi. Good day. Thanks very much for taking the question and for the presentation. I think as a bit of a follow-up question, just on the value-over-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 bad 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.

Tony Smurfit: Patrick, thank you. It's a lot of everything there 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 -- 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 for -- just for a 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 different pain. Some is in their 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 because each individual customer has a different requirements. And there are hundreds of thousands of customers. It's not just -- it's not just the big customers that we all know and love. It's -- there's many, many small manufacturers around the place, many small businesses that require TLC and help in how to package their products 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 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.

Patrick Mann: Got it. Thank you.

Tony Smurfit: Thank you very much.

Operator: Thank you. We'll take our next question. This is from the line of Mark Weintraub from Seaport Research Partners. Please go ahead.

Mark Weintraub: Thank you. So there look -- 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 happening, 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?

Tony Smurfit: Yes, there's new capacity, and it tends to be lumpy. But at the moment, you saw last week, Mark, the announced bankruptcy of a independent paper maker. It's pretty well the same kind of structure in Europe as it is in the U.S. 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 downtime. And we saw that last year. And honestly, with the amount of independents 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 had to, and there just won't be a market for it. And they -- most of the new capacity, Mark, 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 capacities have been introduced or exported out to rest of the world, which is, generally speaking, Asia are some of the Middle East and other areas.

Ken Bowles: I think the other thing with those -- this, Mark, is just remember that they tend to have a rose-colored view on machines starting up at Jan 1 and running full for the year. So it tends to -- the tons never really come on in the way that they're listed on those sheets.

Mark Weintraub: Yes, appreciate the color.

Tony Smurfit: I think we've had new capacity in Europe. I mean, I've been in the business now for nearly 40 years, and there'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 non-integrated mills suffering, and will continue to suffer if they don't have the integrated strategy, which we and others have.

Mark Weintraub: Thank you very much. And then just you had mentioned smaller machines in folding boxboard in North America. That's a reference to coated recycled board, I assume. That's not SBS, correct? Is that coated recycled board?

Tony Smurfit: That's coated recycled, yes.

Mark Weintraub: Okay. Appreciate it.

Tony Smurfit: And there are some that are very niche orientated, Mark. So they're not -- they're in areas that are fully integrated and that doesn't really cause us any particular long-term problem. So there's some that we'll just have to continue to look at, do they have the quality? It's not really do they have the price because we have almost no invested capital in those businesses, but do they have the quality that 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.

Mark Weintraub: Thanks very much.

Tony Smurfit: Thank you.

Operator: Thank you. We'll now take our next question. This is from the line of Gaurav Jain from Barclays. Please go ahead.

Gaurav Jain: Hi, good afternoon, Tony and Ken. So a couple of questions from me. One is on free cash flow and net debt. 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 swing happening and Q4 will be a much better free cash flow quarter than what we had? So that was my question number one. And secondly, you have touched about -- upon U.S. containerboard, European containerboard, U.S. consumer board separately. But could you just talk about what you are seeing in the near term because some of your peers have been founding concerns, especially on the European containerboard side?

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

Tony Smurfit: Yes, as a result of lower waste paper prices.

Ken Bowles: Yes, so on the back of recovered fiber prices dropping also. So I think that's probably where we see it. 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. So there's a small -- bigger creditor outflow than we might have thought, but also sequentially box prices were up. So -- and you get the adverse effect of that, which is a slightly more investment in working capital. I think you're probably slightly higher at 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 some of those creditor items versus investment in working capital as a result of box price increases are probably two big sides of -- inventory tends to be in good shape. So -- but beyond that, they're really the only moving parts.

Gaurav Jain: Thank you so much.

Operator: Thank you. We'll now take the next question. This from the line of Philip Ng from Jefferies. Please go ahead.

Philip Ng: Hi, guys. Now that you've had some time to look at your assets, what are some of the areas where you want to put capital to work, whether it's on the mill net level or box side of things? The $2.2 billion 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 long term, but that market is very oversupplied. Is that something you plan to tackle in making sure supply-demand is in a better spot, call it, in the medium term?

Tony Smurfit: Hi, Philip. Yes, I mean, just on the SBS side, I mean, we're still analyzing that business. We're into it three months now. And there 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 FBB 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 -- 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 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 --

Ken Bowles: Where we put the money.

Tony Smurfit: Where we put the money, I mean, we have some work to do 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. So we've got some work to do, not necessarily on the consumer side, but more on the corrugated side, but not in a -- not in a massive way. It's just some of our facilities, we need to continue to upgrade -- some -- upgrade some of our corrugators. 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 sit in the $2.2 billion to $2.4 billion 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 -- in 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 -- sorry, last week of the Board for some quick wins where -- 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, as the returns get worse, we'll look at that.

Philip Ng: And then, I was really impressed by your comment earlier that on the commercial front, you could see another $400 million and potentially unlock that, call it, in the next 18 to 24 months. So my question really is, do you have the ability to kind of do the Smurfit kind of things in terms of being decentralized, empowering the people, having the KPIs aligned? Your biggest competitor in the U.S. on the containerboard side, they're taking a much more rigorous approach on the commercial side. They're expecting significant disruption on the box side of things. Like how are you going to manage that process, call it, in the next 18 to 24 months? It sounds like it might be less choppy, but give us some perspective, that would be helpful.

Tony Smurfit: I think it's already happening, Philip. We're already empowering we -- our operations. We've already taken 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're already -- 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 as you've seen that we have already taken out some central staff, 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 1934, we have had local plant responsibility, and that's what we're going to continue.

Philip Ng: Any thoughts on the disruption in the next few years as you kind of transition to this or fairly smooth?

Tony Smurfit: Listen, there will always be some, Philip, but I don't envisage -- I mean, the interesting thing about the Westrock 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 RockTenn companies that were folding carton, 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 rocket science for many of them. For some of them, it will be different, and we'll have to adjust as we move forward. But I wouldn't say it would be massively disrupted.

Philip Ng: Okay. Appreciate all the great color, guys. Thank you.

Tony Smurfit: 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. Really appreciate your time. And we look forward to reporting again at the end of the year 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.

Operator: Thank you. This concludes today's conference call. Thank you for participating, and you may now disconnect.