Smurfit Westrock Plc (SW) Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the Smurfit Westrock 2026 Q3 Results Webcast and Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to Ciaran Potts, Smurfit Westrock Group VP, Investor Relations. Please go ahead.

Thank you Sara. As a reminder, statements in today's press release and presentation and the comments made by management during this call may be considered forward-looking statements -- these statements are subject to risks and uncertainties that could cause our actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in the earnings release and in our SEC filings. The company undertakes no obligation to revise any forward-looking statements. Today's remarks also refer to certain non-GAAP financial measures where applicable Reconciliations to the most comparable GAAP measures are included in today's earnings release and in the appendix to the accompanying presentation, which are available at investors.merfitwesttock.com. Before I hand you over, please note that Tony and Ken stepping away from the Board this morning and me joining after our call in the interest of time, I therefore request that you ask no more than 2 questions. I stay on the line should we have any technical issues in Brazil. I'll now hand you over to Tony Smurfit, CEO of Smurfit WestRock.

Thank you, Ciaran. As Ciaran has just said, we're hosting today's call from our Tres Barras Mill in Brazil. Latin America's largest country with a population of some 213 million people. Tres Barras is a state-of-the-art kraftliner mill with an annual capacity of approximately 700,000 tonnes. This operation is a great example of successful investments of approximately USD 350 million over the last 5 years delivering superior returns. It is integrated downstream into our Latin American box system, primarily in Brazil, Argentina and soon to be Chile, and significantly integrated upstream into our sustainably sourced forestry operations. As you will have seen, we've announced third quarter adjusted EBITDA of $1.205 million with an adjusted EBITDA margin of 14.8%. The -- these results show great resilience in the face of unprecedented and greater-than-anticipated cost inflation, predominantly but not limited to energy and freight. To counteract these cost increases, we have, by necessity, implemented price increases across most paper grades, which are being passed on with the normal time lag. The period was characterized by a number of one-off events, such as extreme heat waves in Europe, earthquakes in Colombia and a significant contamination issue in the agriculture sector in the United States, affecting our volumes, both there and in Mexico. Since the formation of Smurfit WestRock, I'm incredibly proud of the many achievements we have accomplished, especially the way we have brought the 2 companies together and formed 1 culture. Operating in 40 countries we have unified the company under 1 banner with a focus being the owner-operator model, which resonates and is well understood both internally and externally. We have developed a strategic plan, which we presented to you in February, that takes the company to a different level through our own actions and investments to improve efficiency and are offering to our customer base. And we've refocused the company at our end customers through innovation, quality and service. Turning now to a regional overview. Our North American business continues to improve in most areas, although this improvement is masked by the amount of increased costs that we have incurred. The third quarter showed sequential improvement in our corrugated volumes with a continued and developing strong pipeline. Our people have embraced our new Smurfit WestRock performance-led an owner-operator culture and this is reflected by our improvements across all customer service metrics and our attention and retention of talent. Today, our mill system across practically all grades remain sold out, allowing for us to prioritize orders and improve our business mix. The real benefits of this will be apparent as we move into 2027. In our converting businesses, we are progressively getting better through continuous investments with teams of highly motivated people across both business areas of corrugated and consumer. As we roll out our innovation centers, we continue to benefit from our cross-selling opportunities as a major competitive advantage. In another business area, we've seen a large structural shift towards our paper bag and sack business where we are the largest producer in the United States. Finally, while demand in our Mexican business is as weak as I have experienced in recent years, our footprint is continually being strengthened by significant cost takeout initiatives and rationalization measures. Now turning to our EMEA and APAC region, where we continue to outperform our integrated peers. Our innovative offering delivers solutions to our customers that help them navigate an increasingly complex regulatory environment, especially in Europe. By partnering with Smurfit WestRock, our customers take regular compliance as a given, solving a key supply chain issue for them. As in other regions, we have implemented paper price increases to recover costs, which are being progressively passed through. These increases are primarily a consequence of the spiraling cost of energy that has shown no signs of abatements during the year and is reaching levels that we have rarely seen. Over the last number of years, we have made many investments in both our mill system and conversion operations that have considerably improved our quality and service KPIs, giving us further competitive advantage. Some of those investments are also targeted continuing to reduce our cost base and drive operating efficiency, which have helped somewhat to offset some of the cost pressures we have seen this year. We have also continued to rationalize our footprint, making our asset base more efficient, which will enhance future returns. Our experienced management team in this region has a skill to both navigate the current difficult macro environment and continue to outperform. In Latin America, while the region faces many of the same challenges experienced in other regions, our returns and, in particular, our adjusted EBITDA margin remain at excellent levels. We have strong market positions, a well-invested world-class asset base together with, again, skilled and experienced operators. We continue to look for ways to develop our offering in the region, and I was particularly happy to announce our agreement to acquire the world-class packaging assets of CMPC during the quarter. This acquisition will strengthen our position in both Chile and the wide region as well as adding further paper integration to our system. Also during the quarter, we started up our circa $100 million investment in our biomass boiler in Colombia, which is helping to offset energy price increases in that country. Paper prices are rising in the region as international shortages feed into the market. For the full year 2026, we now expect adjusted EBITDA margin of approximately $4.7 billion. This primarily reflects the unprecedented cost inflation we continue to experience across the business. Freight and freight and energy costs alone are expected to represent approximately $700 million year-on-year headwind in 2026, materially above our earlier expectations. As we move into 2027, we believe the actions we've taken during the year will more than offset these costs. What I'm most satisfied with is the great work that has been done across the organization in every region to improve efficiency, reduce our costs, further develop our innovation offering and improve our asset base. As a truly global paper and packaging company with an unparalleled product portfolio and the widest geographical reach, it is ultimately our customers who benefit most from our extensive offering. As we develop the company through our investment program and through our culture, I'm confident of the foundation we are building for 2027 and beyond. And with that, operator, we will hand it over to questions.

[Operator Instructions]. We will take our first question. This is from George Staphos from Bank of America.

I am here with Reinhardt van der Walt in Europe. So I guess 2 questions, Tony. First of all, can you talk about the progression on volumes in North America at 1 point you expect to be up at some point in the back half. Is that still the projection relatedly, I think you had a profit improvement in terms of the bridge from volume, even though volumes were down in the third quarter in North America, how do we reconcile that? And then second, given that energy and freight would seem to be largely a box related expense. Certainly, it's going to affect both converting and production. But does the fact that you're seeing so much pressure on where you had the most -- the least amount of margin headroom to begin with in converting, does that change your philosophy in terms of how you try to push pricing and improve commercial terms over time?

Thank you very much, George. With regard to progression, as I said that we expected either in the third or the fourth quarter, that we would start to be there or thereabouts with the previous year. Obviously, the third quarter has been very heavily impacted by this silo. I have to remember the name of it, Spiro and the E-coli situation that affected our agricultural region very significantly -- and I think from the good news point of view is -- and 1 swallow doesn't make a summer, but for October, we are line ball with last year. And it looks like our order books are reasonably good for November at this stage. So I mean, again, as I said, once wallet doesn't make a summer, but I do think that we have our progress each quarter has been a bit better. And as we see the volumes that we gave up last year come out of our business and the comparison is becoming easier, we would say that we are going to be there or thereabouts in Q4 with -- unless something happens with regard to the market that we don't expect. So I think the progression is as we expected. What I'm very encouraged about, honestly, George, is when I see the wind customer wins we're having. They're smaller in number in the -- sorry, smaller in size than when you lose one of the big ones, but it takes a lot of them to replace a big one. But they are -- our quality and service levels are being -- have improved very significantly our attitude because of the owner-operator model is very well liked by our customers and liked by our internal people. And our innovation offering as we start to roll that out is really a very big positive. So I see us getting going where we want to go to, maybe sometimes a little bit slow because the underlying market is not as strong as we would have liked. But overall, I think it's going exactly as we would have anticipated. With regard to your bridges, I'll hand it over to Ken.

Yes, keep a simple, George, the net positive volume in North America is -- remember, we have a lot of third-party sales. So the positive growth you see there is on third-party paper sales.

Okay. And then on the pricing and the pressure seeing and converting?

Yes. On the converting, I mean, I wouldn't say there's anything different that we are having to go to our customers and sort of recognize the fact that we've got other costs than just paper. And clearly, we have to recover those as we go through the year and either through negotiation or through making sure that we have a special tag on for certain customers. So there's nothing -- we're continuing to develop our margins in our corrugated business. We have reduced our loss makers very considerably. I think we're less than 30 loss makers some of them -- it's a bit difficult when the paper price goes up, obviously, there's a period of time where the corrugated operations flip backwards because they have to go into the market and get those paper prices up to see where we are right now. But overall, I think that we are making very good commercial progress across the business, and I'm really happy with our commercial team and the customer wins, they're winning and getting pricing going forward.

And George, and I think you can see that, George, a little bit. If you look at the North American margin quarter 1, 2 and 3, you see progression on the margin build there. And equally, while we're dealing with a normal time lag, you can see progression in pricing also, right? So sequentially, quarter 2 into quarter 3, North America pricing up about 5%. And then Europe equally, pricing will be 2% quarter 2 to quarter 3. So the impact of the price increases from paper to box is beginning to take hold, as Tony said in his prepared remarks, really setting that foundation of '27. So the actions we're doing are still on track. So no change to philosophy in that.

George, we would love it to be quicker, but the reality is that we're being waxed by these massive cost increases in energy that we are going to get back. And as you know, we announced EUR 100 a ton increase. The publication recognized EUR 70 of that. And obviously, from our perspective, we would have expected to get 100%, but we'll wait and see what happens going forward.

Understood. Enjoy the trip.

We'll take the next question today. This is from Hillary Cacanando from Deutsche Bank Securities.

Just going back to the North American converting business. Last quarter, you mentioned that corrugating converting margins were roughly 3% to 4%. Can you update us on where that converting margins stand today?

It's a little bit lower than that now, Hillary, because we take in the paper price into our converting business we transfer at the market price. So therefore, it will be a little bit less than the 2% number now because we have to then go to the market and get that increase into our boxes, but the underlying trend of margin improvement within our corrugated business is quite significant. And you'll see that as we go into Q1 and Q2 of next year as we pass through this latest paper price increase.

Got it. And then as a follow-up, with 2026 EBITDA now expected at roughly $4.7 billion. How should we think about that lower starting point relative to the medium-term plan? Is the shortfall predominantly timing around price cost recovery, such that the underlying 2030 earnings opportunity is largely unchanged. How should we think about that relative to the 2030 plan?

Hillary, it's Ken here. Yes, essentially, it's timing. In reality, the plan was set up to bring us from, call it, '26 to 2030 nothing within the plan from a structural perspective has changed. And if you recall, when we talked to you in February, that plan was largely built on internal actions and a lot of kind of internal opportunities that we have to kind of get through like kind of working through the unprofitable contracts and get into positive volume growth in North America, for example. So pricing wasn't necessarily part of that kind of proposition, if you like. But clearly, the backdrop in costs for 2026 is going to impact the timing but not the recovery or achievement of the targets, but only the timing in terms of when we get there. But the 2020 target is to bang on in terms of timing. It will just be kind of a flex in between the years but how we get there.

Great. So no change to 2030 plan.

We'll now take the next question. This is from Philip Ng from Jefferies.

We can come back to him, Sarah.

Sure. Let's move on to the next question. This is from Mike Roxland from Truist Securities.

First one I had, the industry has gotten about $170 per ton of price this year. Of that amount, how much do you estimate is for cost recovery versus margin for you guys in particular?

I would say that the first 100 is really just basically recovering the cost. I mean, obviously, Mike, the cost thing is a moving target as you have seen from our numbers because when we were here in 3 months ago, we did not expect TTF gas to be at 97% or 98% as it is this morning. Nor did we expect diesel to be where it is or some of these other energy costs. So we would have thought that the first 1 would have had some margin improvement in it. But clearly, I'd say the vast majority of that has been done in these current high prices. As we translate the other increases through the more recent increases that would probably be all margin enhancements, I would say, broadly speaking.

Yes. And I think Tony kind of referenced it there. The July increase is that the $100 a ton we put back into July. I think to that point, the increases to that date would have really done with the cost of for repeat and probably a better recovery of margin, that 100 would have overcome any remaining fees, but also purely margin. But as Tony just said, since then, the cost backdrop has continued to be elevated and unanticipated. So still a lot of costs but a bit of margin there, but probably again pushing out the timing slightly in terms of 27% versus where it might have been, but still on track.

Got it. Very clear. And just one -- when you think about '27, given -- in terms of EBITDA, given the lower stepping off point? Can you provide us with an initial peak at what you're expecting in terms of either demand, maybe some of the larger buckets or guidepost around what's going to drive EBITDA next year?

Mike, we haven't done our budgets yet. So I just -- I do know that our guys are very comfortable and confident that our numbers will be significantly better based upon the run rate that we're going to come out of last year, but we haven't actually got to do our budgets yet. We're doing those next week. But I would say that we still the early view is that we are very comfortable and confident that next year will be a very good year for us if everything stays relatively where it is today. I mean, clearly, there's still a lot of uncertainty in the world. And if we have some relief on costs, then that will be very positive to us. But equally, if we don't have relief on costs, we will have to look again as to what actions we might take to mitigate those costs as we go into Q1, Q2 next year.

Next question today is from Mark Weintraub from Seaport Research Partners.

Great. Obviously, we're in a pretty extraordinary period from a cost standpoint. And so I was just hoping if we could maybe get a little more color on some of the sensitivities and things like hedging as well as the timing on price recovery as you roll containerboard through into boxes in the different regions. So it was kind of a big picture stuff. -- wouldn't normally be asking this. But again, we're in a really volatile market, and it's hard for us on the outside to get our arms around some of the timing, in particular, around these items.

Yes. We have said that we expect to get the full cost recovery of the latest increase in Q1 of next year. And all of the paper the paper price increases as we deal with some of the later -- earlier taken orders as we get rid of those out of our system, those will translate into much higher export prices -- we talked -- I mentioned in my script that we see very strong paper bag business that's growing very strongly because of some structural shifts -- so all of that will start to feed through into later in this quarter, all the paper stuff later in this quarter, but really strongly into early next year. So as we go through Q1, Q2, we should start to see material increases in our numbers based upon these increases that will be passed from from corrugated into -- sorry, from paper into corrugated and into export markets and into other grades of paper. And that is the normal -- that it would be a normal situation for us. Europe has been a little bit more volatile in up and down pricing. And so this is completely normal for the European business to have this time lag period. And obviously, when prices go down, that is also a benefit for the company holding on to margin. So we're not seeing anything different other than the the fact that if costs, as you say, markets, it's a time when all of us are dealing with these escalating costs. And if they continue to escalate, we'll have to do something about it because clearly, they're affecting our numbers, and we need to recover. So Q1 will be a continuing benefit from what we've seen in the announcement of the $70 and then -- and then we'll keep an eye on what we have to do baseball costs.

Mark, it's Ken here. I think overcomplicating either sensitivities on energy or freight, I think when we think about energy and hedging, clearly, coming into the year and where prices were. We still have a decent bit of hedging in the tank. Clearly, at these levels, we've taken a different view across the year. We've stepped into the market every we and again when the prices come to a level where we think it makes sense to hedge, but not hedging at these kind of levels because in reality, that can go against you if the price drops. So the energy committees in both North America and Europe and Latin America have been smart about how they incrementally added small hedges along the way, but we would not be at the level where it would normally be, and that's clearly a function of the market and where we see cost with there, that's why the price increase we've announced on paper in both regions, net 170 North America, Net140 in Europe are designed to kind of take account of that situation, too, but still a level of hedging, but not not at levels we'd like and the ranges would be by wide in terms of the spot prices for that. So -- and we look at the forward curves equally, you wouldn't be stepping into this market given where the forward curves or energy are I think on the freight side, probably the most meaningful sensitivity for you is around where diesel fiscal. So we kind of estimate that, call it, every dollar on diesel probably has a direct impact to the business of something like $80 million, but then when you add in the downstream impact of that through the rest of the system, that's probably more like kind of $120 million to $130 million in total impact for the year for a North American system. That's probably the most meaningful sensitivity for that region versus, say, energy for Europe.

Super. That's too far. And Ken, just could you give us a sense of the sensitivity to nat gas in Europe, either how much you're consuming or similar to like the dollar translates into it million. What it would...

The trickier proposition, given the fact that we do a lot of our own internal through and on kind of take off. It's a much stickier. What I'll do is Mark, I think we'll deal with that 1 separately because it's a much deeper modeling question given you can't take the total energy piece and kind of model it out it has a lot of kind of moving parts around internal energy where we use renewables, how we step into renewables, the CHP and the corrugated systems, it's quite a different, more detailed answer, if that's okay.

I think, Mark, it's very interesting, like at the current levels, just put into an American context, the TTF is about $30 per BTU for natural gas in Europe and in North America is, call it, $3. So it's a 10:1 ratio for the European industry. And like the reason why we're getting paper price increases in Europe is not because of the capacity situation. There's a lot of people that actually can't afford to run the mills. And that's why the prices are absolutely necessary. And if this continues, we obviously have to be other actions, either by closures or other pricing actions because there's just no way that at these cost levels that -- our European industry in paper, but also many European industries will be able to continue to operate in any way profitably. So obviously, from our perspective, we have our kraftliner mills, which don't use as much gas and generate themselves. So that's -- it's making them very profitable. And as we get these box paper price increases, we have to pass on through the box system, which we will be doing and are doing and you already see the prices moving up in Europe. Step by step, and we'll start to see a big benefit of that in Q1 as we go into -- as we pass through the contractual price increases that we have.

Next question comes from Anthony Pettinari from Citigroup.