Smurfit WestRock plc Ordinary Shares

Good day and thank you for standing by. Welcome to the Smurfit West Rock 2025 Q2 Results webcast and conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1, 1 on your telephone. You will then hear an automated message advising your hand is raised. please be advised that today's conference is being recorded. I would now like to hand the conference over to Kieran Potts, Smurfit Westrock Group VP, Investor Relations. Please go ahead.

Thank you, Heidi. 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 filing. The company undertakes no obligation to revise any forwarding 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.smirfordwestrock.com. Before handing over to Tony, I would ask you to limit your questions to two, and should you require any clarifications of what we are discussing today, Frank and I will make ourselves available after our call. I'll now hand you over to Tony Smirford, CEO of Smirford Westrock.

Thank you, Ciaran, and good morning, everybody. I'm joined today by Ken Bowles, our Group Executive Vice President and CFO. I am delighted to report a strong second quarter performance as we continue to deliver fully in line with our stated guidance. Ken will take you through our financial performance in greater detail. In terms of headline numbers, we are delivering adjusted EBITDA of 1.213 million and a good adjusted EBITDA margin of 15.3%. Turning to our regions. we have delivered an initial yet significant improvement within our North American business, reflecting a much sharper operational and commercial focus, together with identified synergy benefits. We are only getting started here and with significant scope for continued delivery. Our European business continues to perform in a challenging market. However, we are comfortable that we are close to a low. Our Latin American operations delivered an outstanding margin performance in a region which continues to present opportunities for growth. We see opportunity across each region, whether it's in terms of operating efficiency, a sharper commercial focus, or capitalizing on growth areas. We continue to optimize our system, which we expect to drive improved margin performance for Smurf at Westrock with our recently announced restructurings. Finally, and of note within the quarter, Fitch upgraded our long-term debt to BBB+, with a stable outlook, reflecting their confidence in the quality of our business and our longer-term prospects. As it is now one year from the conclusion of the combination between Smurfit Kappa Group and Westrock, I want to take a step back to look forward. Let me outline our key achievements and what we have found within that timeframe. First, we have very successfully and seamlessly integrated two major businesses, combining the best elements of each organization with a strong performance-led culture. Secondly, we have identified and are delivering on at least 400 million of synergies. And as we said before, we see a much greater opportunity to deliver at least equivalent value through a much sharper commercial and operating focus. For growth and increased operating efficiency, we continue to invest in a disciplined way across our regions. We are continuing and will continue to to optimize our system through the elimination of non-strategic or inefficient assets. As you know, we recently announced the permanent closure of 600,000 tons of capacity. The steps we are taking and continue to take are delivering a measurable improvement to the business performance within a relatively short timeframe. We have built strong foundations with a generally well-invested asset base, excellent market positions, and above all, the excellence of our people. You have often heard us talking about our distinct operating model that has driven our outperformance. Fundamentally, it revolves around people and the culture which exists now within the new Smurf at Westrock. Culture and values are fundamental to us and we demand the highest ethical standards. First, we devolve profit responsibility down to the individual businesses, ensuring that each manager runs their business as a fully accountable owner with responsibility for all aspects of their business with an emphasis on customer service and profitability. In order for our managers to be successful, there are a number of prerequisites, such as having a complete focus on their people within their organizations, safety at work, and a relentless focus on delivering value, innovation, and quality for our customers. In order to do that, we in corporate effectively give those managers the tools to do the job, ensuring clear strategic direction and support. Naturally, we tightly and centrally control capital and ensure structures are simplified and there is an unrelenting focus on cost takeout while at the same time eliminating unnecessary structures. Our identified synergy program is delivering at or better than planned. Importantly though, we see very significant margin enhancement opportunities through our methodology and way of working. We've already seen the benefit And to demonstrate this point, we've already cut our loss making and corrugated by approximately 40% in our U.S. operations. We've always strongly believed that as a general principle, our assets must be world-class. Within our business, in our previous incarnation of Smurfit Kappa, we continued over two strategic plan periods to develop world-class systems, world-class assets, and businesses which have a long investable future. In the new Smurf at Westrock, as always, we will be doing the same in a disciplined and measured way. We have started that journey now in the new Smurf at Westrock with $1 billion already invested in our system, roughly equally split between paper and converting assets. We have also initiated what we call our quick win programs with an amount of almost $200 million already committed for the next 18 months to rapidly take out costs with the minimum returns exceeding 20% plus. Frankly speaking, we've been doing this for decades, and seeing the opportunity in the new Smurf at Westrock is truly exciting. But of course, equipment without people is useless, because anybody can buy new equipment, and if you don't have the people with superior knowledge in their marketplace, then you will just be another average company. In the first six months, we have demonstrated, with some 39 unique awards given to us, that Smurf at Westrock has some of the most powerful, innovative tools and applications that will bring our customers' packaging to another level and help them win in their own marketplaces. With over 2,000 designers worldwide, we are in the early innings of bringing all that knowledge together for the benefit of our customers so they can reduce their own costs and drive increased revenue, giving them unique designs at the same time sharing value. The sustainability journey which a large portion of our customer base is committed to, is another area of expertise. We are becoming the innovative and sustainable packaging partner of choice for our customers, which is continually demonstrated day in and day out across our regions. And with that, I'll hand you over to Ken, who'll take you through our financials.

Thank you, Tony. Good morning and good afternoon, everyone. And as always, thank you for taking the time to join us. As you can see here on slide 9, the business delivered another strong performance in the second quarter, with net sales of over $7.9 billion, adjusted EBITDA margin ahead of guidance at $1.213 billion, and adjusted EBITDA margin for the group of over 15%, and a strong adjusted free cash flow of $387 billion. This is a marked improvement compared to the combined performance of the business for the same period last year, showing mid-single-digit growth in adjusted EBITDA and a further improvement in the group margin. The performance reflects the strength and resilience provided by our diversified geographic footprint and product portfolio, particularly in a challenging macroeconomic environment, and the commitment and dedication of our people to delivering for our customers. The ongoing improvement is also a clear reflection of our plan to embed our unique performance-led culture right across the Smurfett West Rock organisation. A culture that empowers mail-in converting plant managers, places the customer at the centre of decision-making, underpinned by a relentless focus on cost, and operating excellence. Turning now to the reported performance for our three segments, and starting with North America, where our operations delivered net sales of $4.8 billion, with adjusted EBITDA of $752 million, and an adjusted EBITDA margin of 15.8%, an excellent outcome. Compared to the combined results in the second quarter of last year, we saw significant margin improvement, predominantly due to higher selling prices, early evidence of the operating model in action. and the benefits of our synergy program, alongside some input cost relief from recovered fiber, which more than offset lower volumes and caused headwinds on energy, labor, and higher mill downtime. Cargator box pricing was higher compared to the prior year, while box volumes were down 4.5% on a same-day basis, and now come very much in line with our ongoing value-over-volume strategy. Third-party paper sales were 2% lower, while consumer packaging shipments, again on a same-day basis, were down 2.7%. with volumes in Mexico being lower than in our U.S. business. One year on from the combination, we are particularly pleased with the performance of our North American team, with much of the heavy lifting now complete in terms of establishing our performance and culture based on empowerment and plant-level responsibility. Looking now at our ME and APAC segment, where we delivered net sales of $2.8 billion, adjusted EBITDA of $372 million, and an adjusted EBITDA margin of 13.4%. Despite a more challenging market backdrop in the region, our operations remained resilient, with combined adjusted EBITDA modestly below the prior year. This performance reflects the skill of our local teams in managing a highly volatile cost environment and underscores the effectiveness of our operating model, which continues to deliver the most innovative and sustainable patching solutions and industry-leading returns. Higher corrugated box prices year-on-year were more than offset by headwinds on energy, recovered fiber and labor, while corrugated box volumes remained flat on a same-day basis. To consolidate our leadership position in the region, we have made significant investments in new converting machines, upgrades to corrugators, and significant investments in our bag-and-box business, resulting in a business that is primed to take advantage of the return of an improved demand environment. Latam segment again remained very strong in the quarter, with net sales of half a billion dollars, adjusted EBITDA of $123 million, and an adjusted EBITDA margin of over 23%. Carrier-to-box volumes were down 1.9% on a same-day basis, with the demand picture in Argentina showing a nascent yet marked improvement, and strong demand growth in Colombia and Chile, among others, all while our value-over-volume strategy continues to play out in Brazil as we continue to phase out unprofitable legacy contracts. The region successfully implemented pricing initiatives that almost entirely offset a negative currency translation impact and lower box volumes to deliver this strong result. We believe that Latin America continues to be a region of high growth potential for Smurfin Westrock and one where we are well positioned to drive long-term success. And just a reminder of our proven capital allocation framework, a framework that is flexible and returns focused at its core. In Smurf or Westrock, we see internally allocated capital backed by a management team with deep industry experience as key to the future success of the business. After conducting the near-term assessments of the capital needs of the business, our capex range of $2.2 to $2.4 billion per year includes high-return quick-win projects already underway, while we continue to build out broader strategic plans for the business. The dividend is also a cornerstone of the framework, delivering on our expectation of paying a dividend stream in line with legacy SKGs' progressive policies. subject to the necessary board approvals, and demonstrates our confidence in the cash-generative ability of the business. You will note that today, we have declared a quarterly dividend of 43.08 cent per share. The balance sheet of Smurf at Westrock has significant strength and flexibility. We are committed to maintaining a strong investment-grade credit rating, and I am particularly pleased with the upgrade to our long-term issuer rating from Fitch earlier this month to Triple V Plus with stable outlook. Given the scale of our operations, and indeed our ability to generate significant free cash flow, we are targeting a long-term leverage ratio of below two times through the cycle. We will also maintain a disciplined approach to M&A, benchmarking any growth opportunities in this area against all other capital allocation alternatives. And the inclusion of other shareholder returns reflects our strong confidence in the future prospects of the business and signals our commitment to continue exploring avenues to create and deliver value for shareholders and benchmark those opportunities against available options. Ultimately, this framework is all about creating long-term value for all shareholders. Turning now to slide 12, and I'm pleased to confirm that our Synergy Program is delivering as planned. We are on track to deliver $400 million of full-year, full-runway synergies exiting 2025, and moreover, we have identified a minimum $400 million of additional opportunities, following from a sharper operating and commercial focus. The drivers of that medium-term target involve our long-standing value over volume philosophy, the consolidation of production of more efficient machines, the ongoing benefits of our decentralized operating model, and through the rollout of our unique innovation offering. Furthermore, as we noted in the release, we expect to deliver a third quarter adjusted EBITDA of approximately $1.3 billion, and our full year adjusted EBITDA guidance remains between $5 billion and $5.2 billion. And with that, I'll pass it back to Tony for some concluding remarks.

Thank you, Ken. Well, as I said at the outset, we are happy that we've come a long way in a short space of time, but clearly there is much to play for. Our North American business has seen significant improvements in its first year of the combination. Our European business continues to be resilient with a decent margin performance despite a challenging environment. As the region recovers, we will be a major beneficiary. Our Latin American business continues to be an area of significant opportunity where we see significant growth in many of the countries in which we operate. Smurfit Westrock is about building on the strong foundation we have laid to be the go-to innovative and sustainable packaging partner of choice for our customers, with an emphasis on value, quality, and service. Smurfit Westrock, which operates in 40 countries, is truly at the beginning of this journey. We believe that we have the best people in the business, we believe we have the best knowledge in our business, and we have strong market positions in practically all countries in which we operate. All senior management in the company are fully aligned with shareholders with a proven track record of delivery. As we have set out in this morning's release, our confidence and conviction on our performance and prospects in part reflects the measurable progress that we've already done within this very short timeframe. I thank you for your attention, and now I will hand it back to our operator for some questions and answers. Thank you, operator.

Thank you. As a reminder, to ask a question, you will need to press star one, one on your telephone, and wait for your name to be announced. To withdraw your question, please press star one, one again. We will take our first question, and the question comes from the line of Mike Roxlett from Tourist Securities. Please go ahead. Your line is open. Mike, your line is open.

Mark, we can't hear you. Mike, sorry, we can't hear you.

Hi, I'm here. Can you hear me now?

Sorry about that. Yeah, okay.

Apologies. Yeah, thank you. Thank you for taking my questions, everyone, and congrats on all the progress. First question I had was, Tony, you mentioned you cut the loss-making, I believe I heard you say, in North America corrugated by 40%. What metric or metrics are you referring to exactly? Just provide some more details around that.

Yeah, sure. Mike, basically, you know, when we came in, we obviously put the – profitability back to plant level, and we could see that a lot of plants, and actually the numbers are pretty well the same, about 40% of our plants have moved into profit from being in loss, and about 40% improvement in the overall number. So, you know, we've basically gone through every account very systematically, and there have been some accounts that have been heavily underwater, and we have Part of the reason for our volume performance is that we have lots of business that was very uneconomic for us to run. And so, you know, that's been a systematic process. I mean, we can't get out of all contracts that we're in that are not necessarily good ones. And so we're going through that process, you know, continually in the company. And, you know, so the good news is that when you open up valuable machine space, and you give a sales team the chance to go and fill that valuable machine space. You know, if you're losing a lot of money on an account, you know, just getting break-even accounts business is not so hard, so you improve your business substantially. It does take a little bit of a lag period. So, you know, if you lose, let's say, a machine of a customer, it'll probably take you six months to refill that machine with better customers. So that's why you get this sort of lag period of getting your volume back. But overall, just by the actions that we've taken of removing poor volume and replacing some of that already, we're seeing the benefits, and we'll continue to see the benefits. There will be some factories, Mike, that will be unsavable for different reasons, but the vast majority of them are savable and will improve. And I would say to you that all that we've said about operational improvement is really continuing to do what normal corrugated factories do, which is sell at a reasonable rate of return, giving value and service and quality to the customer, and ensuring that the plant is able to continue to pull the paper through the system rather than push the paper through the system. And that's what's happened, and it's happening.

I appreciate the call there, Tony. And then just one quick follow-up. How much of the business in North America remains in a loss position? And then quickly, just on Europe, you mentioned you feel you're close to a low in Europe, but that said, you know, it looks like pricing continues to weaken, which could potentially threaten the back half of this year into the 26th. So we'd love to get your sense as to why you feel you're close to a low right now in Europe as well. Thank you.

Okay. Well, We still have a number of facilities in loss-making. Going back to the first question, we still have a lot still to do. As I said, there are companies where we have contracts that we have to continue to honor with our customers that are significantly underwater that as those contracts come up, we will either get the prices up or we will lose the business and replace it with better business. We have still, you know, as I say, about 60% of the lot makers, corrugated lot makers to move into profit. So that's a big opportunity and chance for us. I don't say all of them will get there, but I would say that at least another 40% will get there over the coming year or so. And the ones that have come from loss-making to marginal profitability, we should start to see them improve as well. And then hopefully we'll see our decent plants continue to improve over time as well. So without being too optimistic, I see a lot of opportunity in our corrugated space to improve our business. With regard to Europe, I think there was an announcement today, Mike, about a paper mill closing down. What we're saying in Europe is that at the current levels, if you're a third or fourth player paper mill, in Europe and you have no integration, you are not in good shape right now. And you saw the one closure today. That's just an indication of how difficult it is for independent paper makers right now in Europe with the current level of pricing. And, you know, so I think that our business model has proven out. We've got very good assets, which we've invested in over the years. We've got very good integration, which we continue to invest in. And we will, you know, in fact, our pricing should move up in corrugated in the second half or slightly move ahead as we push forward our contracts that will come up for renew during the second half of the year. So, you know, I think at the current level of paper, it's not sustainable for the vast majority of players and that's why you're seeing some closure and I suspect you're going to see some more. Thank you very much. That's great. Thanks, Mike.

Thank you. We will take our next question. Your next question comes from the line of Lewis Roxburgh from Goodbody. Please go ahead. Your line is open.

Hi. Thanks for taking my questions. The first is just on tariffs and consumer confidence. So, I guess Q3 would have captured some of that initial tariff impact and also the delivery was encouraging in that context. But as we move into Q3 with a little bit more visibility and certainty in policy, are you seeing any signs of improvement in consumer confidence or demand across your key markets? And the second question is just, I guess, a follow-up on European capacity rationalization. I know you mentioned weakness and non-integrated players. You've already announced some closures in Germany, but just given the scale of the U.S. reduction and the fact that sort of European market stands relatively oversupplied, do you think there's scope for further capacity closures on your side?

Thanks. Yeah. I mean, we continue to look at, Lewis, our portfolio. And so, you know, at this moment, we closed the mill last year in Europe, in France, in We don't in the short term because all of our mills continue to be profitable because they're integrated. And so we're in reasonably good shape. And as I say, we're mainly first and second tier mills in our system because we've been investing in them for the last decade. If you remember, if you go back a long time, we used to have 23 mills doing 3 million tons. Now we've about 15 mills doing 5 million tons. So our footprint has become ever more efficient over time. you know, the last 15 years or so. So we're ourselves in good shape because we have people to sell to, which is ourselves. And that's the integrated model that we continue to talk about. So I suspect there are many, many mills that are in desperate trouble right now. And that was indicated by just one closure today. And I suspect that as we go forward into the third and fourth quarter, if things persist, that those will continue to happen. And the first part of your question, Ken, do you want to take the tariff?

And just clarify, Lewis, that the closures we announced in Germany last quarter are corrugated box plans, not paper mills. So generally that we were consolidating that volume across the existing footprint in Germany. So, you know, the volume remains just over the lower fixed cost overheads was better for the system. So natural benefit. In terms of tariffs, I want to remember that the 10% was already in for a lot of the paper imports into North America anyway across the So the incremental five doesn't present that much of an upward correction given what the number could have been as of the 1st of August. I think historically the consumer tends to take on about 70% of all the tariff increase. So I think we've seen some of that come through, but I think our position based on where we sit today is I don't think we will naturally see any change in flows of imports or exports of papers in or out of North America based on the tariffs as they currently sit today. yes, the margins might have eroded for the imports into North America for the European producers, it still probably presents a slightly better market than other markets for them. So I wouldn't necessarily expect any shift or change there. Clearly, you know, given our footprint in North America around paperboard probably does present an opportunity around, you know, the cost of the domestic product versus the imported product is much more attractive, I think. You would hear that yesterday from one of our peers too, so you won't be surprised by that. We've always kind of said that the real impact on the system will be what happened to consumer demand. I think you can see the volumes in the second quarter, particularly in North America, you know, market down two and a half. We were slightly more than that, but again, that was targeted around exactly what Tony spoke about there, eliminating loss makers and unprofitable volume. I think in Europe, given where Germany sits as far as that economy, you know, the settling of the tariffs shouldn't, in theory, given the size of the German economy in the context of Europe, give some impetus if Germany wants that in terms of pushing Europe forward, but we are flat volumes in the second quarter in Europe. But as we look out, nothing yet to suggest that that demand picture will change very quickly, and we're certainly not baking that into any of our forecasts. So it remains sort of a relatively, you know, volume is okay, demand is okay, but could be a whole lot better. as the tariff picture settles in, I think we'll see where consumer confidence might come back in certain areas that's been lacking, I think, you know, in the last year or so.

Yeah, the only thing I would say is that we're waiting for the seasonal demand pickup in the United States to happen. We didn't see it move forward in July, and hopefully we'll start seeing that come forward in August and September based upon the settling of the tariff situation, if that happens, because there's still a Still a lot of unanswered questions with regard to Canada, Mexico, and a lot of Latin American countries. So, you know, we'll wait and see over the next few days, and indeed including China. So we'll wait and see over the next few days what transpires in those areas. That's very helpful. Thank you. Thank you.

Thank you. We will take our next question. The question comes from the line of Phil and G from Jefferies. Please go ahead. Your line is open.

Hey, guys. Tony, you gave some great color with Roxlyn earlier. So on the loss-making contracts in North America, can you kind of give us a little more flavor in terms of how that winds down? Is that a two-year cycle waterfall? And when you think about your team, are you in a good spot to value sell, right? It's about offering the service throughout the liability and the buy-in from your sales force. Just give us a little sense on that. where they sit on that front, and then just the environment as well, because we've seen obviously a lot of capacity come out. So you've been in North America for some time. How do you think about this out here from an industry structure standpoint as well?

Okay, a lot of questions there. Are we in a good spot with regard to innovation? Yes, but as I said in my commentary, we're in the early innings. So, for example, Phil, We have just recently hired a new innovation person, when I say recently, four or five months ago now, to be our corrugated innovation person from a major brewery company. And he's been learning our business and is doing very well. I'm very happy with him. We're all happy with him. And we have a global innovation conference with our innovators in September, whereby we're going to pool the knowledge that we have across our companies. And I have to say that there's some really good innovation in the legacy Westrock business, too, that we need to make sure that we got all the information corralled, and then we have to bring it into the organizations in a controlled way. So from the point of view of where we're at, in Europe, obviously, we're we're in very good shape. In North America, we've got some very good spots of it, but we've got to corral it a bit more. And in Latin America, we're in good shape. So I think what we'll do, you'll see a big, big move over the next year in our whole innovative selling as we roll this out across a global basis, but specifically in North America. We're set up, you know, a lot of capacities come out of the market, that's for sure. You know, demand, if there's any pickup in demand, that will obviously be very good for the situation. You know, we don't envisage taking much downtime, if any, in the second half of the year, other than the normal maintenance type downtime and the odds problem that we're going to have inevitably in some of our mills. But, so, we don't envisage taking downtime. You know, we would like to see demand a little bit stronger, Philip, to be honest. You know, it's, you know, we know that we're going to replace that bad volume with you know, better volume. And every plant I go to, you can see the enthusiasm of the sales teams. And when we start to roll out this innovation, even in a greater way, then it's going to be much stronger for our team. So, with the normal lag of replacing it, I think we're going to be in good shape. But we would like to see the general market be better. We're hearing about a you know, for a week or two weeks, which obviously, you know, not what we want to hear. We want to hear about an economy that's moving forward. So that's the only, I suppose, issue that I would have right now. With regard to the first question, which was... The wind down of improper contracts. The wind down. I would say by this time next year, you know, with the exception of very few, we would suggest that they will all be gone this time next year.

Okay. That's great color. I really appreciate it. An exciting opportunity in front of you. Europe, I'm just generally less familiar with. The margins were a little lighter than expected. Can you provide some color on the headwinds in the quarter and how you kind of see that progressing in the back half of the year, especially with some of the movement you've seen on OCC and gas prices?

Yeah. I mean, I'll let Ken take that. But, I mean, you know, we're in better shape on cost in the second half than we were in the first half as a general view. But, Ken? Yeah.

Generally, Europe in the second quarter, we did do a good bit on price, a deposit in that quarter, about 3% on boxes. But that was offset by a little bit of volume lower than we thought, energy higher than we thought, but that's come down a piece since. Recovered fiber, I think, was the big headwind of about $28 million in the quarter itself versus last year. And labor, actually, about $17. They were the two big ones. So predominantly box pricing offset by, you know, some energy, recovered fiber, a little bit of labor getting through the air. But as you kind of move forward through the year, I think you see the backdrop around recovered fiber, a little bit of labor, and certainly energy get a lot better than we would have thought at the start of the year.

Okay. Thank you. Appreciate it, Colin. Thank you, Phil.

Thank you. We will take our next question. And the question comes from the line of Gabe Hyday from Wells Fargo. Please go ahead. Your line is open.

Tony, good afternoon. Tony, if you can, on the second half, maybe put a little bit more of a finer point on the underlying assumptions sort of in the 1.3, I guess sort of at the midpoint around 1.3 for the fourth quarter in terms of volume expectations across the three regions. And just more specifically in North America, we're reading some reports about some retail business moving around. And I was curious if you were expecting kind of that down 4.5-ish percent rate to accelerate in the back half or get better. I know you just kind of told us by June of next year or second quarter, things should be getting close to normalized. But any color there would be helpful.

I'll do the volume piece and hand over the assumptions to Ken. Basically, you know, I would suspect that, you know, we should start to see – normal seasonal pickup in volume. That's what we're obviously believing. That's what typically happens. At this time, we've no reason to believe it won't happen. But we're not assuming that we're, even if I think that we've won a lot of business in new places, that will probably impact us next year. I think that the second half We're assuming basically flat volumes to where we are now. We don't expect deterioration, but neither do we expect things to be materially better. So that's sort of our assumption on volumes. But, Ken, do you want to take any other assumptions?

Hey, Gabe. Taking the third quarter specifically, I think we can make it really easy for you. The third quarter, going 1.2 to 1.3 is just really two things. It's lower downtime, which is about a 50 million impact in the quarter, positively. And the rest is really around recovered fiber predominantly for the other 50. So it's really relief on cost inflation. There's no real assumptions there, as Tony says. It's that volume, not necessarily baking ending and price of the third quarter. So really, the third quarter, 1.2, 1.3 is possibly predominantly recovered fiber, and then lower maintenance downtime in the third quarter over the second quarter. For the full year, We kind of end up with the same place as we've been guided all year, as was the moving parts of being, you know, as Tony just said there, moving to fat volumes for the back half, albeit lower for the first six months, so lower on volume, but doing a bit better on price across the year than we would have initially thought, and certainly a lot better on energy. So energy where we might have guided, you know, about 350 headwind year on year is now about 250. You know, other raw materials probably doing a bit better, 50. You know, things like recover fiber itself, where we might have guided a headwind of about 154, 155 million at the start of the year. Probably see that more down the 105 to 110 space, so about 40, 50 million savings there. And across even labor, a little bit better as we get into the second half. So there's some big, chunky moving parts, and I know Kieran and Frank can take you through them in a bit more detail. But broadly, I think if you were characterizing the second half and where we are now, doing a bit better in energy, doing a bit better in labor, a bit better in recovered fiber. get better on price, volumes remain flat, and you kind of, you know, delve on all that as you end up back at the same place.

Thank you. All right, and one last one, I guess. Tony, you alluded to not being a million miles away, kind of giving us an update on the consumer packaging business. I think you talked about volumes being down. Can 2.7, if I heard you correctly, in Americas, and that includes Mexico, down a little bit more? Just curious, kind of, again, you know, another quarter under the belt and thinking about sort of the opportunity set there to be on both sides of the house in terms of consumer and corrugated. Any updates there? Thank you.

Yeah, I still feel like it's very good business to be involved in. I think we've got some very strong market positions. The cross-selling opportunities are in Europe where we're a bit more advanced on that is very strong. We're Because we're much bigger and corrugated than we are in consumer, we're introducing our consumer folks who were really very, let's say, either in health and beauty, which is more of a niche, but on the general market, they didn't really have a lot of selling tools, which we're now obviously opening up for them. So that's a big opportunity in Europe for our consumer businesses. And if you take the United States, I think generally speaking, we've got some very good businesses with great people. And, you know, we've got to think about structurally a couple of issues like SPS, our long position in SPS. But, you know, we have ideas that we'll come forward with probably towards the back end of this year or early part of next year. That's what we're doing on that.

And, Gabe, just to help you out, and that's the consumer volumes. Yep, 2.7 down for the quarter, including Mexico. If you exclude Mexico, it's probably more like 2% down.

Thank you, and good luck.

Thank you very much. Thank you. We will take our next question, and the question comes from the line of Charlie Muir-Sands from BNP Paribas. Please go ahead. Your line is open.

Good afternoon, guys. Thanks for taking the questions. Just a couple of follow-ups on the topics that have already been covered. Firstly, on the loss-making box contracts, obviously you said you're 40% through. Is there any possibility of putting any kind of dollar numbers around the level of losses you think that, on a fully costed basis, that business was dragging profits historically? And then secondly, you know, you're talking about some of the assumptions into the second half and talks about flat volumes. I just want to clarify, are you talking half on half or year on year? The reason I somewhat ask is that the last two years on a pro forma basis, there's been a bit of a historic dip in assumptions. in profits, particularly in North America business in Q4. I don't know whether there's a reshuffle of the facing of maintenance, which means that that won't recur this year, but I'm just trying to get some understanding so we don't get caught out, because obviously the implied fourth quarter guide range is now quite wide.

Thanks. Let Ken take the second question.

Ken? I suppose the reason the range is there is hardly to take account of that fact. I suppose, look, if we think about where we sit, the two big calls in the second half, or one big call really, is where does demand go? Currently, the first two quarters are probably underwhelmed in terms of where it ended up. And the second half, we're not really baking in much in terms of assumptions of an upper tick, other than, as Tony talked about, seasonality and everything else. So I think with the range you put in place, there's a lot to play for there, both on the upside, but slightly moderating to the downside. But we're not talking about a big number either side of this either way. And as you know, given our history, volume is not really the real predictor of where we'll end up. It's what we do on price. And certainly in that sense, we're doing a bit better on price than we might have thought as we go into the six months.

Charlie, on the box plans, let me just try and articulate it. I mean, you know, they have over 100 box plans. So obviously some are profitable. But, you know, if you take a box plan system that was losing relatively significant money. I don't want to break it out last year. And if you take a box plan system that's, call it a billion in sales or so, you know, you know, you should be, sorry, you should be making about somewhere between 8% and 12% margin in your box plan system. So on the 10 billion sales system, you know, you should be making somewhere between $800 million and $1.2 billion on a box plan system, and it was loss-making last year. So obviously we're not there yet, but that will be our goal over the next five years to get there. And that's a material improvement and obviously a long way ahead of where, you know, when we talk about synergies, it's a lot more than the synergies we can get if we get to that point.

Sorry, Charlie, I skipped your fundamental question. I think you did a long answer. It's that volume, half two versus half one.

Great. Thank you.

Thank you.

Thank you. We will take our next question. The next question comes from the line of Detlef Winkelmann from J.P. Morgan. Please go ahead. Your line is open.

Hi there. Thanks for taking my questions. I've got two. So the very first one comes back to your EVA dot bridge into Q3. I understood from the earlier question that it's $50 million in maintenance, $42 million, $50 million in lower OCC or recovered fiber costs. I'm a bit surprised that there's no price in there. I mean, my understanding was that the line of award price increases we saw in the U.S. as well as in Europe wouldn't have been fully implemented by Q2. Can you just touch on that, and then I'll come back for my second?

Okay, definitely. Yeah, but I suppose that's to be played out during the quarter. Like, in reality, the big building, Broxley 1.2 and 1.3, are the $50 million for downtime and the $50 million for other cost buckets. You also have to remember that within that, we're not making any assumptions where our volume might go in the third quarter either. So there's a bit of moderation there in terms of conservatism around price and volume. So as we sit here today, 1.3, there, thereabouts, seems right in our heads as to where we'll end up.

Okay, perfect. Thank you. And then a very technical one, or maybe a stupid question, but I mean, when I look at your synergies here, you've given us, I think it was Q1 synergies of 80, Q2 implied is about $100 million. And then for the full year, we've got about 350. So that implies that we're going to go backwards at some point in Q3, Q4. Does that make sense, or am I just misreading that?

I don't think it's going backwards. It's about how you achieve them and when you achieve them. They all come in at different times depending on if it's in purchasing, when you get those purchasing contracts through, if it's around whatever it might be, consolidation of volume on more efficient machines. They all just happen at different pace. I think with synergies, you're not necessarily looking for a constant run rate in terms of the quarter itself, but the ultimate run rate in terms of where the synergies go. So the achievement in the quarter is something. But ultimately, I don't think we think about it as going backwards. I think we think about hitting the synergy number and exiting 25 with that full 400 in our pocket.

Okay, thanks very much.

Thank you. We will take our next question. The next question comes from the line of Lars at Kauberg. From Sky South, please go ahead. Your line is open.

Thank you for taking my question. Tony, you just alluded to a number of 800 to a billion in the box system. And of course, you have spoken to the operational commercial improvement opportunities of at least 400 million, i.e. equal to the synergies. Two questions on that. I mean, you highlighted that potentially a much larger number. The second question is, where are we on this now? Are we starting to see any of that equal to at least the synergies coming through in the current year, or is that starting to come through in 26 and build over the years to come?

We're definitely starting to see some of that, Lars. We have continued to see improvement in our box system, as I mentioned. Some of that improvement is already in our numbers and we have a long way to go in our box system, but there's already an improvement in the first half in our corrugated system versus last year in a considerable way. I'm very happy with how that system is moving and how the team are responding. If you look at the performance of the company and you can see that our margins have grown in the United States, it's basically synergies and improvement in our corrugated box system. And then you look at where our company has had difficulty, has been in Europe, where we have had 18%, 19% margins in the past, and we're down in the mid to low teens at the moment. And that's a reflection on the market, which, as I said, I think is at the bottom. are close to the bottom and will improve. The question is, when will the demand environment improve to really pull that thing forward? And that's, you know, is it 2026 or the second half, first half, 2027? We don't know. But, you know, Europe itself is not too bad with the exception of one or two markets. And unfortunately, one of those markets is Germany, which is the biggest, and that pulls Europe down.

And just coming back to what you just said about some of that is all in your numbers. You spoke to, of course, what value or volume is making progress, but at the same time, you said it will take a bit of time to fill those machines. So basically, without the numbers now cutting the losses and the real benefit for it really starting to move into the revenue line and EBITDA that's still to come. Just to carry on that. And I can, you know, sorry again.

Go ahead.

You're right.

I'm just agreeing with you.

Good. Very good. The rating upgrade, does that mean anything to you from a financing point of view?

Not really, Lars. To be honest with you, from an economic point of view, it's very little. It did give us a small decrease in our revolver and some of our commercial paper programs. But actually, when you look at our bonds and how they price, We probably priced already at triple B plus, to be honest with you. So we presented the triple B plus credit, which we would have done out of the box with all the agencies from an economics perspective. So small savings, but not material in the round.

All right, very well. Thank you, and good luck. Thank you.

Thank you. We will take our next question. The next question comes from the line of Mark Weintraub from Seaport Research Partners. Please go ahead. Your line is open.

Thank you. Thanks for the very comprehensive review. I mean, one thing I haven't heard is currency very much, and we've obviously had a very big move in the euro relative to the dollar over the course of this year. Can you explain to us a little bit how that's impacted results and sort of sensitivities in the way we should be thinking about it as we model forward?

Hey, Mark. Actually, the reason you haven't heard it, it didn't actually have much of an impact, to be honest with you. Any of the moves in the dollar in Europe, for example, were compensated or offset by moves in Latin America. So I think net, if memory serves me, I think it was about $8 million in total was the currency impact on EBITDA year and year, I think. So that was it. It's a square root of really nothing. In terms of sensitivities, broadly, every one cent move in the dollar would be plus or minus $12 million. It's a simple thing. Okay. If you take a Euro number and move it by a cent, you get an impact of about $12 million broadly. And on the debt side, that's about $30 million.

Okay. And that captures the translation of... Yeah, broadly.

As you can imagine, it's a rough, crude calculation based on what we see and what we know over time. But broadly, what we see is if you take our Euro earnings on a translation basis, every one cent will be plus or minus $12 million. Okay.

Okay, super. And then just this last sort of big picture, as I was hearing it, a number of things have played out a bit favorably relative to initial expectations, which is great. And you kind of listed a bunch of them. And you sort of kept guidance to where it was. Is that primarily the volume situation, the uncertainty on the volume situation? Or what has sort of held you back from you know, this leading to perhaps a little bit more optimism on the outcome for the year?

I think it's, I mean, you read the same newspapers that we all read, and there's obviously a lot of uncertainty out there, whether it's tariffs or whether it's the general economy or the consumer confidence. So, you know, I think that each individual economy has its own different challenges, but when you We don't see – we haven't seen volume picking up yet in the United States. And clearly, if volume picked up in the United States, that would give us more confidence. But we haven't seen that yet. And until we see that, then we're going to hold our fire because, you know, it's – you know, there are a couple of markets that are pretty important to us. Germany is one. And, you know, we don't see any – major improvements in that market at this juncture. And the United States, as I say, we're going through this transition period where we are, you know, looking for newer volumes and phasing out some volumes where we're not able to make any money on it. So that's outside the whole economic environment, which is, as I say, you know, we all read the same newspapers. Well, maybe we don't read them. We look at them online anymore. I think if you see volumes pick up, then clearly things will be much better. Fair enough.

And maybe this is related to all of this. And maybe I remember wrong, but I thought we had like 100 million negative from maintenance in the second quarter. And you're talking about getting 50 million back but running pretty full. So I'm just trying to understand that dynamic. Okay.

Yeah, but remember also we begin to see the impact of the closure of Forney in that quarter too, so the need to take less downtime comes into view too. Clearly, Mark, it's an estimate as we start the quarter. If the demand picture deteriorates to any significant impact and doesn't change much, we can flex that. It's just currently where we fit the demand picture, the order book, everything else would suggest that less downtime in the third quarter over the second quarter. And some of that is the impact of the closure of Forney helping that.

All right. Thank you.

Thank you. We will take our next question. The next question comes from the line of Anthony Pettinari from Citi. Please go ahead. Your line is open.

Good morning. Good morning. Hey, with some of the actions that you've taken in North America, can you remind us what your integration rate is in corrugated and consumer? And then, you know, broadly as you kind of execute the operational improvements, in your box system. I'm wondering how you kind of compare the, you know, the carton converting system in terms of sort of opportunity, quality, and where you are versus where you want to be.

Okay, I'll take the second one. I mean, you know, we're – I have to say that I've been very impressed with the carton. Most of the carton plants which I've seen and the operations that we have, we – We obviously have some very strong market positions with very big customers, and as you will have seen, a lot of our larger customers have some volume issues themselves in the consumer business. Their profitability is effectively being held up by price, and that's great, but it's not great for volumes. We would expect that situation to change as we see more promotional activity going forward into the second half and next year as these bigger customers look for market share gains or market share back. But with the one or two exceptions, I think in fairness to Legacy Westrock, they did a very good job in the carton board system in rationalizing their carton board operations over a number of years. I think I'm guessing from memories about 15 closures that they've made, nearer 20 closures they've made, including Europe, over the last number of years in the cardboard system. So they have a very good system, and I think that it potentially is a very good business for us to continue to invest in and grow, and that's what we've been doing. very good systems business, very good business in health and beauty, very good business in consumer, but, you know, obviously somewhat impacted by demand. And then when you look around the globe at our business, whether it's in Europe, Mexico, or indeed in Asia, and I think we've got, you know, strong market positions with strong businesses that, you know, are investable in. So that's where we sit on the consumer business.

Hey, Anthony, in terms of integration levels on the container board and cart grade side, it's about 90% now after the closure. And on the consumer side, on the consumer side, it's about 60% if you take all grades in. Got it. Got it.

On cart grades, yeah. On cart grades. Yeah. Great. Great. That's very helpful. And then just one really quick follow-up. You mentioned Mexico and I think volumes underperforming. consumer there. I assume that's tariff-related uncertainty, but can you just tell us what your customers are telling you in Mexico and what that volume number was?

The Mexican business actually is like the Brazilian business. One or two very large customers have either underperformed due to tariffs or due to changes in habits And then we've also taken a very strong view on some legacy business of Westrock that has been really, really, really poor business that we have exited. So that's why it's a little bit of our own making in the sense that we've chosen to move. I'll give you a good example. One of our factories on the border was supplying a large customer and we couldn't make any money on it and it was a plant that was losing half a million a month. And as soon as we exited that customer, it was making half a million a month. So it was a big customer, so it was taking up a lot of machine time. And that's the kind of action that we continue to look to take. And that's why the Mexican volumes are so poor. You know, not like anything we've seen before. We'll get back to growth in Mexico. We've got a fabulous business there, fabulous market position, and generally speaking, great people that are really enthusiastic with, you know, a strong share in the business. So I think I'm – absent the tariff issue, I would be incredibly optimistic about our business in Mexico to continue to grow. Okay. That's very helpful. I'll turn it over. Okay. Thanks very much, Anthony.

Thank you. We will take our final question, and the final question comes from the line of Reinhard van der Walt from Bank of America. Please go ahead. Your line is open.

Morning, folks. Thanks for taking my question. Without laboring the point too much on the loss-making contract, I just wanted to check. The ones that you've cut, are we referring here to EBITDA loss-making contracts, or are you also looking at this from an EBIT lens? I guess what I'm looking for here is, you know, do you have the visibility from an ERP point of view at the moment to be able to push ROIC optimization?

I'll certainly give the second part of that question to Ken. But on the first part, yes, they were even dialed off. I mean, there is no way that you would run – the businesses that we have walked away from, there is no way that you would – as an independent owner of your business, which is what I go back to, that we are asking our management to be independent owner-operators responsible for their own P&L responsibilities. And, you know, if you had that business, if it was your own plant, you would not be running it because you're using up valuable machine time to lose money. And that's not a very sensible way to run a business. So we have... exited that kind of business and we will, you know, replace it with, it doesn't even have to be good business, it has to be average business or, you know, even poor business and it's better than what we had.

Hey, Reinhardt. Yeah, we do have full visibility on the income statement side now. A lot of heavy work done by the team here and the team in Atlanta to achieve that in a very short space of time. So full visibility on an individual entity basis across their full P&L, which really feeds directly into the point Tony's making there around responsibility. You can really only have responsibility for something if you have it in your hand and then can own it. In terms of the balance sheet, that is the next phase of the exercise. We're currently breaking those balance sheets out first The segment level is there clearly. Then into the division level of mills, stock plants, and indeed consumer. And then we go beyond that into the entity level as we get there. But we still have a reasonable view, if you like, of where Roy comes out or Rocky comes out simply because we do have the balance sheets of the segment itself and we do understand where the capital goes and how we allocate the returns associated. So not necessarily vital to have it at the plant level, but will be at the plant level in a relatively short space of time.

Got it. That's very helpful. Thank you. It sounds like it's going well. And maybe just a second question just on the CapEx outlook. I think, Tony, you've mentioned before that FY26 CapEx is going to depend on the market environment. But just as things are today, any steer on just directionally how we should think about CapEx into next year?

Not yet, Reinhard. As you know, we're developing a strategic plan for the new Smurf at Westrock and We will give you full guidance on that in February of next year and probably some earlier guidance on CapEx towards the end of this year so you have a feel for at least next year's view. Clearly, we see tremendous opportunity for cost reduction and some growth in certain markets. So that's all going to be baked into our thinking as we go forward over the next five years. And as I say, we'll bring that forward. a five-year view in February, and then we'll bring it forward for next year. We'll probably give you a bit of steer for next year earlier. But the key for us as a company that has always been and will always be to be agile, we're not a company that's going to be doing any grandiose plans of billion-dollar capexes and that sort of stuff. We're in improve mode, develop mode, cost takeout mode, growth mode, but nothing that's going to get us too far ahead of our skis.

Brilliant. Thanks a lot.

Okay. Okay, everybody. Thank you for joining the call today. I really appreciate you joining the call. I know it's been a busy earning season for you, and we look forward to continuing to work hard to try and ensure that we get to our stated goals in the years ahead. Thank you all for joining and have a good morning or good afternoon wherever you are.

This concludes today's conference call. Thank you for participating. You may now disconnect.