Smurfit WestRock plc Ordinary Shares

Welcome to second quarter 2024 financial result for Smurfit Westrock conference call. My name is Alan and I will be your coordinator for today's event. Please note this call has been recorded and for the duration your lines will be on listen only. However, you will have the opportunity to ask questions at the end. This can be done by pressing star 1 on your telephone keypad. If you require assistance at any time, please press star 0

you'll be connected to an operator i'll now hand you over to karen pott head of investor relations at smurf investor please go ahead thank you alan this call will include certain forward-looking information regarding our current plans beliefs and expectations which are not guarantees of future performance and are subject to a number of risks and uncertainties and other factors that could cause actual results and events to differ materially from results and events concentrated by such forward-looking statements. These risks and uncertainties include those set out in our earnings release and our filings with the Securities and Exchange Commission. These forward-looking statements are made only as of the date indicated, and except as required by law, we undertake no obligation to update or revise any of them, whether as a result of new information, future events, or otherwise. In addition, Today's call will reference certain non-GAAP financial measures. Definitions and reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings release and our presentation, as well as in our filings with the Securities and Exchange Commission and the UK Financial Conduct Authority and our reports available on the UK National Storage Mechanism and our website. Given time constraints and demand, I would ask that you keep to two questions and hold detailed modelling questions I will now hand over to Tony Smurfett, CEO of Smurfett Westbrook.

Thank you, Ciarán, and good evening, everyone. I am delighted to be with you this evening, and I thank you for taking the time to listen to this call, which is held together with Ken Bowles, our CFO. July 5th was a truly momentous day for our company and our stakeholders when we concluded the combination of Smurfit Kappa and Westrock. And then on July 8th, when we commenced trading on the New York Stock Exchange with our primary listing, Smurfit Westrock. And in doing so, we became the largest listed packaging company in the world. Interestingly, you'll see from this slide a picture of a gigantic corrugated bill, bull, which attracted worldwide attention from everyone who saw it and posted it online. Not only is corrugated packaging highly interesting, creative, and innovative, it is of course recyclable, renewable, and biodegradable. The vision of our company is to be a globally admired business, dynamically and sustainably delivering secure and superior returns for all stakeholders. I think over the years, we have shown that we are well on our way to realizing this vision. As part of that journey, we've taken certain steps over many years. These include continuous investments, selective acquisitions, development of innovation and service for our customers, and the extensive training and development of our people. Along the way, we have had many defining moments, including the merger with Kappa Packaging in 2005, its subsequent IPO in 2007, navigating the financial crisis of 2008 and 2009, the successful defense of the unsolicited approach by International Paper, And of course, the defining moment, not only for our company, but also for the industry, by combining with Westrock, all the while delivering outstanding operational and financial performance. The combination gives Smurfett Westrock the opportunity to give our customers world-class packaging solutions across four continents and 40 countries, with unrivaled innovation and a unique footprint for our customers. Our combination to form Smurf at Westrock will be run by a management team that has a proven track record and has consistently delivered superior performance. Moreover, it is also a management team that has a track record of identifying, acquiring, and optimizing the performance of undervalued assets. In that context, it is important to note that the transaction was concluded at an optimal time, whereby both sets of stakeholders will benefit from and participate in the go-to sustainable packaging company in our industry. I would like to briefly recap on the factors that have sustained Smurfit Capital's success. While you've often heard me say that success is never a straight line, what you will see here is a structural growth story. This slide also shows the continuing benefits of our medium-term capital plan. Since 2015, we invested some $6 billion to optimize our integrated operating model. We also acquired complementary businesses with an aggregate value of $2 billion. Outperformance has generated substantial free cash flow while delivering a progressive income stream for our shareholders. Those capital allocation decisions, together with ongoing operating excellence, have, over the last eight years to the end of 2023, delivered a 100% increase in EBITDA, a 470 basis point increase in EBITDA margin, and a 520 basis point increase in ROSI. All the while, while building balance sheet strength and sustaining a highly attractive income stream. This performance has continued, where we have, again, delivered a strong set of results against the backdrop of higher recovered fiber costs and lower corrugated costs, which are now being recovered. Ken will take you through these results in greater detail in a few minutes. For those of you that don't know the company, we've been able to deliver consistently through a fundamental element of our business, and that is our TPR and our culture. The only true differentiating factor in any company is culture. And we in Smurfit Kappa have fostered a winning owner-operator culture and adherence to our core values of loyalty, integrity, respect, and safety at work. Along the way, we have provided our customers with more and more sophisticated and innovative packaging to meet the various demands of sustainability, innovation, and merchandising. Through performance, we have transferred the perception of our product away from being merely a transport medium towards being seen by customers as a vital value-added product in their supply chain. This came into sharp focus during COVID when corrugated was deemed as essential and critical to the supply chain. And while the past is no guarantee of future success, it is, however, a good guide. The Smurfit and Westrock combination marries up extremely well. We have more product ranges in sustainable packaging, we're more integrated, we have significant synergy potential, and we have a unique global footprint. Our significant project range is diverse, with high margin product areas, and we occupy number one or number two positions in most of the countries and markets in which we operate. The uniqueness of Smurfit Westrock cannot be underestimated. and the coming together of the two organizations brings incredible expertise to be harnessed with far broader opportunities for every stakeholder. Clearly, the question is, what is next for the combination? We intend to follow the model that has been successful for Smurfit Kappa across our world and operations. As I said before, the next phase of our journey will take time as we focus on the execution of putting these two excellent companies together as we develop a cohesive performance-led culture within the new Smurfit Westrock, and as we focus on putting our customers at the heart of everything that we do. What I have seen so far within the legacy Westrock business is impressive. Today, together with my colleagues, we have seen an excess of over 100 operating units and met with thousands of energized and excited employees, providing an excellent foundation from which to build. I'm also encouraged by the energy, enthusiasm, and resolve across the organization to realize the success that the combination will present for all stakeholders. Now I'll pass it over to Ken to take you through some of the financials.

Thank you, Tony, and good evening, everyone. Turning now to slide 10 on Smurfa Capital Group's second quarter 2024 results, which are reported in U.S. dollars and prepared under the U.S. gap. As outlined in the release, due to the timing of the completion of the combination of Smurfa Gap and Westrock, the gap results for the combined company of Smurfa Westrock will be reported from the third quarter of 2024. These results, another strong set, should be seen in the right context, which is against the backdrop of higher input costs, particularly OCC, but also before the expected recovery of those input costs through box price increases. As you can see, not only by the EBITDA outcome, but also the margin of 16.2%, we were in excellent shape as we entered the second half of the year. And now just some more detail on those numbers. In the second quarter, net sales were approximately $3 billion, or 3% lower compared to the same period last year, with the decrease primarily driven by lower average box pricing in our European business year and year. However, this was partially offset by an increase in group targeted volumes of 3.1%, a $28 million net positive impact from foreign currency fluctuations, and a $4 million positive impact from acquisitions. Adjusted EBITDA for the group was $480 million, with an adjusted EBITDA margin of 16.2% in the second quarter of 2024, compared to $556 million and a margin of 18.1% in the second quarter of 2023. In Europe, adjusted EBITDA decreased by $77 million year-on-year, $355 million in the second quarter. This decrease was primarily due to a $143 million reduction in net sales and increased costs for labor, distribution, and recovered fiber. However, These cost headwinds were partially offset by a decrease in energy and other raw material costs. The adjusted EBITDA margin in Europe was 16.1% in the second quarter of 2024 compared to 18.4% in the same quarter of the prior year. Conversely, our America's business saw an increase in adjusted EBITDA compared to the prior year of $6 million, reaching $146 million in the second quarter of 2024. This increase was mostly due to a $36 million rise in net sales, partially offset by higher costs for raw materials and labor. The adjusted EBITDA margin in the Americas was 19.2% in the second quarter of 2024, compared to 19.3% in the same period of the previous year. Net cash provided by operating activities increased by $33 million to $340 million in the second quarter. The increase was primarily due to a reduction in tax payments and a positive change in working capital and net cash interest, partially offset by a reduction in consolidated net income adjusted for non-cash items. including capital expenditure of $177 million in the second quarter of 2024, compared to $224 million in the same period last year, and excluding transaction costs paid associated with the Smurfit-Westrock combination, amended to $23 million, adjusted free cash flow was $186 million in the second quarter, open $83 million in the same period of last year. Net debt was $3.1 billion at the end of June, resulting in a net leverage ratio of 1.6 times compared to 1.3 times at the end of December 2023, and well within the stated leverage range of one and a half to two times for legacy Smurfit Kappa. And finally, on July 26, Smurfit Westrock's board declared a quarterly dividend of 30.25 cents per share payable in September. While not part of these results we're reporting today, we felt it might be useful, particularly for comparative purposes, to illustrate on a very simplistic basis legacy Smurfit Kappa and legacy Westrock for the first six months of the year. I don't propose to dwell on the numbers, but based on the numbers here, the legacy WestRock business delivered, on a Smurfit WestRock adjusted EBITDA basis, $669 million for the course of June. Further detail on the calculation and reconciliation can be found in the appendix to this presentation. When we announced the compensation back in September, we had aligned a synergy number of $400 million to be achieved by the end of 2025. Now that we are one organization, The detailed work in relation to those synergies has begun with teams validating that number. The teams are also beginning to scope out other areas of synergy and value creation, or indeed dive deeper on initial areas, such as Mexico, to explore further opportunities. We will update you more formally later on this year around synergies, but for now, we feel ever more comfortable about the initial estimate and excited about new areas of opportunity. Looking now at slide 13 on capital allocations. For anyone who is new to the Smurfit Capital side of the story, our capital allocation framework is well established. Returns focus at its core, both flexible and agile, it has been and will continue to be a key underpin to our success. From Tony's earlier slides, you can see the evidence of that. That framework will now be the basis of capital allocation at Smurfit Westrock. That's probably not a surprise. At Smurfit Westrock, we believe that capital allocated to internal projects will be central to our future success. Today, more than ever before, we are seeing the benefits of having well-invested asset bases with integrated mill systems and box plans sitting low on the cost curve and primed for future growth. Well-timed and well-executed capital expenditure programs were a hallmark of SKG, and we are bringing the experience and tenure of the senior management team who executed those programs to Smurford Westrock. The dividend is another cornerstone of our capital allocation strategy. As a reminder, Smurfit Westrock intends to pay a dividend in line with the progressive dividend policy of SKG. And as we seek to harmonise the different dividend streams and payment cycles for the remainder of 2024, as noted before, we are paying a dividend for this quarter of 30.25 cents. As we begin the first full year of Smurfit Westrock in 2025, we expect the base for that dividend to be indicative of the last full financial year of Smurfit Capital Group and very much in line with our progressive dividend policy, subject to the appropriate board review and approvals. In Smurfit Westrock, we plan to be disciplined with M&A and benchmark those opportunities against all other capital allocation alternatives. The combination between Smurfit Gap and Westrock, the integration of which will clearly be our focus, was undoubtedly transformative in nature, rooted in our history of discipline, and best illustrated by combining both companies on equivalent enterprise multiples to create a global leader in sustainable packaging. The balance sheet of Smurfit Westrock begins its journey with a significant strength of flexibility. A ratings upgrade from all three agencies on legacy SKG and positive outlook from two is testament to that. The track record of SKG was to deploy capital towards internal investment, be disciplined around M&A and grow the dividend over the years, while also managing to reduce our leverage. And given the strength of the balance sheet and the improved business profile through scale and reach, we do not believe our current rating would be the summit of our ambition. And the expansion of our capital allocation framework to include 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 options. Ultimately, the framework at its simplest is about creating long-term value for all stakeholders. And I'll pass you back to Tony for some concluding remarks.

Thank you, Ken. Just to remind everybody, as I said, the new Smurfit Westrock is a company that has a global leadership position in sustainable paper-based packaging products. As you can see from this slide, we cover every area that any customer, large or small, would require, complemented by the best R&D and innovative tools in the industry, with a world-class R&D center in Virginia and 36 innovation centers or experience centers solely focused on giving customers optimum packaging solutions. As you will have seen from the Smurfit Capital results, we have delivered another excellent performance with the market now turning in our favor as we look forward. The current quarter looks like a low point with plenty of scope for both cyclical and structural growth as we recover and improve pricing and as we invest in the business in our usual disciplined way. As we conclude the Smurfit Kappa journey and embark on the next and exciting phase of our journey, I would like to thank our shareholders for the support they have given us through those many defining moments which I mentioned earlier. To remind you what has made us the success that we are, we will continue to optimize our integrated model. We will continue to put customers at the center of every commercial decision. We will foster a broad-based performance-led culture that is decentralized in its nature, simplifying the business with quick decision-making and making every manager responsible for their own P&Ls, treating capital as their own. As always, we will be measured, disciplined, and returns focused in our capital allocation decisions while keeping sustainability leadership at our core. As we drive this forward in the new Smurfit WestRock through a performance-led culture, but never at the expense of our core values of loyalty, integrity, and respect, and of course, safety at work. These values have delivered and will continue to do so on a much bigger platform. Smurfit Westrock has the right market positions, the right products at the right time, and most importantly, the right people. 2024, through the creation of the global leader in sustainable packaging, marks the next and most exciting phase in our journey. Thanks for taking the time to listen to this, and now we will turn it over to you to ask any questions that you have. Thank you, operator.

Thank you. If you'd like to ask a question or make a contribution on today's call, please press star 1 on your telephone keypad. To withdraw your question, please press star 2. You'll be advised when to ask your question. We will take our first question from Charlie Millsense, BNB Paribas XA. Your line is open. Please go ahead.

Good evening. Good afternoon, guys. Congratulations, first of all, for closing the deal and lifting. I had two questions, or I had plenty, but I'll limit myself to two. The first question is, apologies for the short-termism, but Tony, in your remarks, you said you thought that the current quarter looks like a thick or low point. I just wanted to clarify, were you talking now about Q3 or Q2? Q2, Charlie. We really expect...

We expect price rises to be following through in Q3 and Q4, and those box prices to be moving forward in Q3 and Q4 and into next year. And so clearly, with the paper price increases that are already in the marketplace, on the assumption that nothing bad happens in the world, I would say that that seems to be the low point. There is one question mark that we have to just continue to look at, is some of the maintenance downtime that is in new Westrock, sorry, in old Westrock, I should say, legacy Westrock, is substantial in the second half, but we still think that that should be dealable as we look forward.

Ben, just looking a little bit further forward, at this stage, what would you envisage could be the combined run rate for CapEx for the new business, particularly as we think into the full year 2025?

It's a little bit early for us to button that down, Charlie. I mean, you know, as we've said before, there is some things to be done in legacy Westrock. I mean, Smurfit Capa is in very good shape, although we do have some expansion projects and things like our bag-in-box business, which is doing very well. We are going through Legacy Westrock now as we're starting to get into the weeds a little bit. But, you know, as I've said, I think to you, we've been very happy with many of the things that have already occurred in Legacy Westrock. There are still some things to do, and we just need to check those out over the next quarter or so before we'd be definitive. But, you know, it won't be a million miles away from the model. Probably it's a bit less than the year one. And as, you know, a couple of projects we're still looking at over as to whether or not they make sense. But overall, I would say, you know, very happy with the asset base that we've seen. You know, some things to fix, but, you know, Westrock had already done quite a bit of it, especially in some of the converting areas. Many thanks.

We will take our next question from Justin Jordan. Davey, your line is open. Please go ahead.

Thank you. Good afternoon, gentlemen. Again, well done, clearly, on the merger. Many decades in the planning and well done on the execution thus far. I've got, I guess, two slightly related questions. Firstly, Ken, you talked about, you know, old Smurfit Kappa having a sort of target leverage ratio of 1.5 to 2 times net GDPR. Can you give us any early thoughts on what target net GDPR we should be thinking about for Smurfit Westrock going forward? And secondly, related to, I suppose, Charlie's question on CapEx, I just want to clarify that the old Smurfi Kappa had capex guidance for calendar 24 of about 900 million euros or approaching a billion US dollars. And Old West Rock, as it were, had capex guidance of 1.2 billion to 2.5 billion. So that would imply a pro forma capex of something in the neighborhood of 2.2 to 2.5 billion dollars. Is that the sort of zip code, shall we say, we should be thinking about? Or is there anything... in particular, you want to call out positively or negatively within that range?

No, I think to take the second one first, and I think you're probably right, certainly for the remainder of 24 to kind of keep with that kind of run rate. As you know, we're coming to the end of our kind of four-year capital programme. Westrack, as Tony said, has done a lot of good work. Our normal cycle would be through October, November, we start to look at budgets for 25, and then in February 25, we give you a very clear sight of what we think the CapEx requirements would be for 25 and then beyond if we think that's relevant. But for now, I think you're not going to be a million miles away if you kind of stick to that kind of zip code in terms of numbers to keep it really simple. On the first one, I suppose, look, you know, on a kind of simple performance basis, we start off about two and a half times. I don't think that's necessarily reflective of the enhanced business profile or reach. I think it's, you know, in the rating agency world, Smurf and Westrock, while both being investment-grade companies, is a new issue in that sense. So I think that if you like, the ambition is to be below where we currently are, but again, all in the fullness and times in terms of when we sit back and look at that kind of broader plan. But I think if you like out of the box, you know, strong investment, great credit rating, but clearly the ambition to be north of that. And that clearly that means sub, sub where we are now, if you like out of the box, just two and a half times. But again, should be able to the year end, give you better clarity and more target on that.

Thank you, Ken.

Thanks, Justin.

We will take our next question from George Stafford, Bank of America Securities. Your line is open. Please go ahead.

Thanks so much, everyone. Good evening, and congratulations again on the transaction. Two-part question, Tony and Ken. Recognizing it's early days, as you look at the legacy cargated and consumer businesses of Westrock, recognizing that a lot of good work had already been done by David and Alex and the prior management team. Which of those two businesses is already more closely aligned to the Smurfit model? Which of those businesses has maybe more opportunity to track to the Smurfit model over time to create opportunity? Relatedly, how do you feel about the systems and information that you're getting from regarding Westrock. Are you getting the data, the analytics that you need? You know, it wasn't that long ago that Westrock had had some issues in terms of its information systems or ransomware. How do you feel about the state of systems there? Thanks so much and good luck in the next period.

Well, thank you, George. I'll take the first one. I think, you know, there are elements of both businesses that are very similar or will track with our businesses. I mean, if you take The CUK business is fully integrated or practically fully integrated and is a very good business. And that's, you know, the thinking and the mindset is similar to ours. Much of their corrugated business is in line with us. And, you know, obviously some of the synergies that we're going to get is going to make it an even more integrated business. There's still some work to do, George, in some of the legacy corrugated box plants in legacy Westrock due to some of the takeovers they've done. So there's some work to do in the corrugated business there still. With regard to one of the things that is an open question is SBS. Ford, because they don't really integrate Ford fully in that business. And we need to figure out over the course of the next little while is how to do that. If it's possible to do that, what is our market positioning in that? As you know, there's a lot of movements in that space with regard to a couple of acquisitions that have just been made. by others in the space. So that's something that, you know, is a little bit away from where we sit in our legacy corrugated businesses and our specialty businesses. So that's something that we're going to have to take a look at. But, you know, they do have reasonably good or good assets in that area. So I just need to analyze that over the next period of time. So and to figure out where that market is going, frankly.

Hey, George, on the IT systems one, I think first you mentioned the cyber attack that Westrock had a couple of years ago. I think it's fair to say that the team in Westrock responded fairly strongly to that in terms of the security architecture that they put around the organization following that. And the simplest evidence of that is that we both get third party assurance on our security frameworks and both of us have a NIST score, which is well above the average for paper packaging and quite well set. From that perspective, they've clearly invested in the security architecture. From a broader systems perspective, I suppose there is a bit of work to be done simply because Smurfa Kappa has had an SAP ERP environment since 1998 in reality, whereas Westrock was really only beginning that journey in terms of one ERP system, and they had chosen SAP For HANA as that system, as had Smurfa Kappa for the next phase of it. there are no burning platforms in terms of accounting systems or data systems within WestRock. I think it's as much what Tony talked about, the decentralized model, and if you like, aligning the kind of rollout and transition to those IT systems following the operational model so it can support it best. But in the interim, access to data, the rollup of data, the aggregation data, not an issue given the current systems in WestRock, but clearly as we begin to kind of redefine and define that operating model, the IT systems that fall behind will make that process easier more efficient. But a lot of commonality of systems, which is a great starting point, and clearly two projects around the next version of SAP S4 HANA, which means that certainly there's a lot of good work already done on both sides of the organization in terms of the next phase of IT deployment.

Thanks very much. Thanks, George.

We will take our next question from Lars Gelberg. Stefan, your line is open. Please go ahead.

Thank you. And thank you for taking the questions. So coming back to what you just said, Ken, about decentralized operating model, which is obviously something that's been very successful at Smurfit Kappa and a few years ago, Westrock did the opposite, centralizing that. What sort of actions are you taking to roll out your business model into the legacy Westrock system? And what sort of timeframe would you Have us think about that. And also on the metrics of value-based pricing on your commercial success in boxes in Europe. What are the opportunities you see in the U.S. to get to that same stage where you in a way sort of take away the strong link between container board and corrugated in the U.S. business as you have to a degree at least in the European side?

Let me take the second question there, Lars. I mean, I would say that we have a very strong link between container board and corrugated. That's why the integrated model works for us. What we intend to do is have a very clear focus on unit profitability and empowering people to ensure that they are able to make their own decisions. But overlaying that with some centralization, I mean, there is no question that we in Europe and they were in the Smurf at Westrock will always have some centralized functions that are important to support the local businesses. And that could be in areas of purchasing. It can be in areas of pan-European or pan-American or global accounts. There is legal accounting. There are things that are very, very important to give to local management. But at the end of the day, at the heart of it is to empower local management to develop businesses in their own area, to deal with their own issues in their own area, and become profit centers. And that's what has worked for us through decades. And frankly speaking, when I, the number of facilities I've been to in legacy Westrock are very excited by this because that's where a number of the operations came from, whether it's Southern container, uh, Midwest, they go, uh, people, you know, Gandhi, those operations were very focused on central or decentralized profitability. And I think that's, that's going to be a very good thing for the organization and very good thing for profitability. And ultimately, yes, that does bring higher margins and higher profitability because you go after more local accounts and you look after local accounts rather than just centralized big accounts. And that unleashes entrepreneurialism, which we intend to do. We won't get it right in every factory. Not every manager is going to be able to make the transition. But, you know, as I say, what I detect so far is huge enthusiasm for everybody for this kind of model.

Yeah, I think, Lars, a lot of both questions are wrapped up in there. I think it's about, you know, full income statement responsibility rather than the idea that, you know, your purpose is to kind of cost push into the box plan. But it's not a model that's, you know, new to Legacy Westrock. I mean, it's the model they had in place. So the journey to kind of total decentralization is not that long and not fully complete in a lot of areas. So it's not that the model is not understood. There's lots of people who will remember it. But it's about, as Tony said, it's getting around the place and pushing that down and getting access to the data. And if you like, understanding that the role of the central function is to support around capital allocation and take away, if you like, take away the pain of governance compliance and those things in the operations allow the operations to do what they should be doing, which is making paper consumer packaging and boxes. In terms of the second one, I think Tony wraps it up there too, which is that price over volume. In reality, you know the journey we went on there around, if you like, proving to our customers where we could add value to the chain. But we have to demonstrate that. And I think it's around innovation. I think it's around the ever-increasing push for sustainability and where we can kind of fit into our customers' pictures around all those things. I think they're relatively new in the U.S. context, particularly I think around ESG and where that sits. I think particularly within that scope through emissions and where we can really play a part, particularly in the FMCG space. So I think, you know, the pattern and journey is not going to be that dissimilar from what we've seen in Europe. I think a lot of it, though, is around, again, like we have to do with the European model, is prove it out in terms of the tools, technology, data, experience centers, innovation centers, which RedRock also have, and showing that value to our customers. And by that, you know, coming through margin as we've made it come through in Smurfit Kappa.

Thank you.

We will take our next question from Phillip Jeffries. Your line is open. Please go ahead.

Hey, guys. Looking forward to working with you going forward. A lot of opportunity here. Tony and team, you guys talked about how you want to run it locally, empower local box managers. To kind of help us contextualize how that ramp will happen, call it the next few years, appreciating the ERP system, there's work to be done on the harmonization. Those things are usually a little bumpy out of the gate. So is there any disruption that we should be mindful in terms of the P&L impact? What kind of investments do you have to make on the box side? And then from a people standpoint, this is a big cultural shift. you know, is there a big step up investment from the sales force in kind of relying the KPIs? So a lot to unpack, but just kind of help us contextualize and think through how this ramp in integration is going to progress next year.

I think, as I said, there's already a lot of enthusiasm and a lot of the legacy people within the companies are attuned to what we're doing and excited about what we're doing. So So I don't think it's going to be as big a cultural shift as you are mentioning there. I think, as I said, we've seen over 100 operations now, and there's a degree of really big enthusiasm for what we're doing and what we're going to do. And we've already started some of the dismantling of some of the issues that are centralized and pushing them back to the divisions first and then ultimately down to the local level. So this is not going to be a massive shift. cultural change for a lot of people for some it will and some people will get on the journey and some people won't and that's just the the fact of the way we're going to run the business. I think with regard to the investment that will be needed, the investments are already in there, so to speak. Obviously, there'll be some more investments to be made, but they'll be based upon where we can get the best returns and the best opportunities for developing the business on a local and integrated way. And that's what we've always done, Philip, and that's what we'll continue to do. So I don't think it's... A lot of it's a very exciting journey for these people.

Yeah, I think, Philip, as well, just on the disturbance point, having spent many years and many roles on the SKG side implementing IT systems, I think the one thing that you always need to be mindful of is not disturbing the business. Because the reality is, as my colleagues remind me, our job is to sell boxes. It's not to put in IT systems. what we will do is to follow and support the business with as little disruption as possible. That may mean it takes slightly longer than we might like, but it's about making sure that the business does what the business has to do because that's the most important thing. And kind of like I was saying earlier, there's no burning platforms in Westrock. So those systems can run quite happily and we can manage with them for a good period of time. But I think ultimately the idea of this is these programs and projects, which are bumpy or dead right, should happen with as little noise and disturbance to the online business as possible. That's always the goal.

Gotcha. You guys mentioned there's work to be done in certain pockets of the legacy of WestRock and Harmonize, Smurfin, and WestRock collectively. What are some of the areas that you see the best opportunities to really, really unlock values? On the mill side, is it in the box side? Just give us a little more perspective in terms of the opportunities there, and then the 400 million synergies, what are the big buckets and how that kind of phases in?

Well, I think on the, I'll leave Ken to talk about the synergies, but on the operating side, there's a bit of both, to be honest. I mean, you know, we are going to continue to look at the mill system and make sure that we optimize that mill system with regard to the supply chain, make sure that the the mills run the grades that suit them like we do in Europe, make sure that the whole organization is focused on ensuring the lowest costs to the box plans from the integrated mill system. And obviously, with the synergies that we're bringing in the mill system, I think that's going to allow us to do that even better as we go into the second half and into the next year. With regard to the box system there's just a few legacy box plants that really I would say that we just need to develop out to make sure that they are either going to be efficient box plants or they won't be existing so we just need to figure out which ones those are but as I say The legacy Westrock business has already been doing quite a bit of that, and we're going to continue on doing some of that, maybe with a little bit more speed as we move forward.

Ben, on the synergy number, if you track back to the presentation back in September, I feel like you have a lot of detail, but broadly one of the biggest focus there was around paper integration. If you remember that Smurfa Kappa was short about 400,000 or 500,000 tons, particularly in our Latin American business. And we bought some of that paper from Westrock, but not all of it. So a good chunk around paper integration. A lot of the other synergies, and they're all, remember, cost synergies. There's no real revenue synergies in there. A lot around logistics and distribution, you know, particularly around the overlap and cross between both organizations. Simple things, you know, where Westrock would have shipped paper to Europe and held in external warehouses. We clearly take that into our own locations now and kind of save the cost there, which can be quite significant. So the presentation back in September gives you glorious detail, but suffice to say that of those books, the biggest one is integration of paper, which was always our strategic priority in the region anyway. And just to remind you that the run rate of those is to be done by the end of 2025.

We will take our next question from Gabe Haight. Wells Fargo, your line is open. Please go ahead.

Tony, Ken, good afternoon. Thanks for taking the question. Wanted to start, I guess, with global paper and similar line of questioning as Mr. Staffos. As you evaluate that segment, I'm assuming that a portion of that is what you're talking about here in terms of forward integration. But maybe the decision tree and how you think about increasing vertical integration across the corrugated system or coming to a conclusion that maybe a mill is better served or more valuable for someone else versus yourself?

Yeah. Hi, Gabe. I think when we look at it, you know, I don't see a particular forward problem going forward with corrugated papers and corrugated paper for corrugated. So I think if you take craft liners and white tops and mediums out of it, You know, I think then we then look at some of the consumer grades and specifically SPS. And that's something we just need a little bit of time to evaluate. You know, I think there's a very good market for SPS. The question is, how good is it going to be? And that's something that we need some time to evaluate. I think that... Others are betting on the space and some are not betting on the space. And as I say, we'll look at it and decide over the next little period of time. But, you know, it has been a very good business for Legacy Westrock in the past and highly profitable and something that, you know, obviously if we can see a way to integrate forward more and develop it, then we will. And if it isn't in that scenario, we'll reevaluate and look at it. But at the moment, I would say that it's It's part of the team and we'll continue to look at it as we get to know the business a bit better.

Appreciate it. Thank you. And I guess for the second question, your key learnings in running your North American system, there's a lot of shakeup right now in terms of maybe how corrugated businesses are managed and run. When you look at maybe the food value chain specifically or food and beverage value chain, over in Europe relative to the United States. There's a little bit closer linkage, I think, for merchandisers over in Europe versus the U.S. Do you see that as maybe an impediment to executing kind of some of this decentralized approach or value-based selling to your customers or more as an opportunity?

No, I think, Gabe, I think it's a huge opportunity. I think when you look at the innovations that we've brought to our customers who are many of the same customers in Europe as they are in the United States. And you look at the innovations that we brought to them in Europe, a lot of them want the same innovations in the United States. And that's something that we will... It's not a magic wand. We can't just come over and sprinkle some dust in the United States and everybody's going to change their way. But we are going to bring our tools and our innovation to our sales force. And over time, we will sell... much more on innovation and value than, you know, going after a transactional type business. And, you know, like others in the space, I mean, it is funny how other people have been copying what we are doing. Like others in the space, we will be looking to make sure that we extract value from everything that we do. I mean, the last thing I want to be doing is putting in new machines and running lousy workovers. Because that's just a way, just a fool's errand. So we have always in Smurfit Kappa looked at profitability of accounts and ensuring that we are able to make money on them. Or if we don't make money on them initially, if we can't turn it into making money on it, we leave those accounts because, you know, then you're just being busy fools. So that has been the way. That's why our margins have grown over time. We make sure that we offer value for our customers. We make sure we give them innovation. But if we don't get paid for it, we then don't do it. And that's what we've been doing for a long period of time in our history. And that's what Westrock will do. So that's a very clear strategy of ours and will be to make sure that we get paid for what the great work that we do.

Thank you.

Thank you.

We will take our next question from Gaurav Jain, Barclays. Your line is open. Please go ahead.

Hi. Good afternoon or good evening. So two questions from me. One is that if I look at your last 12-month event, that's $4.5 billion. I think if I combine the peak EBITDA of both the companies, it was around 5.5. Now we had a long-term plan laid out by one of your key competitors, which is talking about doubling EBITDA over the medium term. So can you frame the long-term opportunity here? And I'm not asking for guidance, but how high can this 4.5 billion EBITDA go in the medium term, assuming sort of normal macro conditions?

Hey, Gaurav. Well, that's a question for nearly 11 o'clock at night in Europe. Look, I think the long-term ambition has kind of been wrapped up in a lot of what we said today. You know, I think as we start this journey, we start off with two organizations that have had quite different paths where we get to, in the sense that, you know, we're coming probably to the end of our last capital cycle. And like Seth, the Westrock team are coming through their capital cycle, a lot of good work done. But also fundamentally, I think, at a point in the cycle, I feel like, from where we sit, at joining together, you can consider one of the lower points in terms of where pricing is. I think even if you look back from when we did the deal to where we sit now in terms of, you know, we talked about it and Tony specifically talked about it at the year end and quarter one, around the unsustainable levels of paper pricing, for example, in Europe and where companies have got to over the last couple of years. And since then, we've seen not only a kind of push on paper prices both sides of the Atlantic, but clearly... a significant step up in OCC as well. So the backdrop conditions as we begin the second half of this year and further on are clearly better. Clearly also, you know, the backdrop for recovery of those through box pricing is better through the second half and indeed what that clearly means for 25 and beyond. But I think, you know, we haven't even begun really to knit together what the total long-term opportunity of Smurfer Westrock is. I think though, you know, you've got two companies that are culturally aligned in terms of how they go to the market commercially. I think you've got two companies who are innovative at their nature and two companies who traditionally have kind of brought their best stuff to their customers. I think it's about unpacking that on a global scale to be what we are, which is the largest and the most sustainable packaging partner on the planet. But that also will take time, as Tony has said. But it's clear from our interactions over the soft interactions over the last nine months plus the excitement and energy and enthusiasm that we feel as we go around the organization post-close, that there's a willingness, if you like, from a Smurfit side and a Westbrook side to make sure the thing is nothing but a roaring success. And that clearly is backed up by the disciplines around capital allocation, internal investment and the returns focus it brings, but the attention, too, in terms of the end customer and what they need. And that's not just, if you like, day-to-day, but clearly the longer-term opportunity, because we do exist in an industry that is sectorally in a good shape, But a product, as Tony says, the right place, right time is what the world needs. I think that's only ever going to grow because the consumer continues to desire ever more sustainable products. And in reality, where corrugated or consumer packaging can replace the less sustainable substrate, it's clearly still making that shift. So I think in time, we probably frame that longer term opportunity a lot better. But I think it's fair to say that we start off in a great place and a reality with the backdrop of an industry that's also in a great place.

Sure, thank you so much. And my second question is that, so we'll get the first quarter next time for the combined company. So what would be the metrics on which you would guide on a quarterly basis or you would not guide at all or would it be something like an adjusted EBITDA number or free cash flow or EPS? What is going to be the key metric?

We haven't kind of settled on what, the key metrics are probably the ones you see In this release, in reality, you know, we've tended to focus on the Smurfa Kappa on EBITDA clearly the margin quite specifically. And indeed, you know, both organizations traditionally have been strong free cash flow generators. I think, you know, whether we guide on a quarterly basis or annual is to be decided. I think, you know, generally we've always guided annually because I think it gives you a better feel for the year and you stop getting trapped into the weeds of a kind of quarter-to-quarter analysis and allows you to focus on much more on the longer term and much more on the thematic drivers of an industry rather than getting caught up on the kind of minutiae. But all three decided and played out.

Thank you so much.

That is all the time we have for question and answer session for today. So I will hand you back to Tony Smurfit for closing remarks.

Thank you, Operator, and thank you all for joining us today. I think we have put together an incredible company. This is going to be a company that will deliver great results as we go forward, and this is a company that is going to be a company that is a leader in its field. It's a company that has got really great people. It'll have great assets, and it'll be incredibly uniquely positioned. to deliver superior returns along with our vision as we go forward. So I thank you all. I thank you for your support. It was a momentous day this July 8th, or July 5th, I should say, and we look forward to continuing to deliver for this company going forward. Thank you all for joining.

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