Smurfit Westrock - Q3 2023

Transcript

Operator (participant)

Hello, and welcome to Smurfit Kappa Group 2023 first nine months trading update. My name is Alicia, and I will be your coordinator for today's event. Please note, this call is being recorded, and for the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star one on your telephone keypad to reduce your question. If you require assistance at any point, please press star zero and you will be connected to an operator. I will now hand you over to Tony Smurfit to begin today's conference. Thank you.

Anthony Smurfit (President and CEO)

Yes, thank you, operator, and good morning, and thank you for taking the time to join us today. I'm joined on the call by our group CFO, Ken Bowles. Before commencing, we would refer you to the note on forward-looking statements as set out in our trading update. This also applies to our discussion today. Just to remind you, on September 12th, we announced an agreement to form Smurfit WestRock, a global leader in sustainable fiber-based packaging. We said at the time, and we are reaffirmed now, that we believe that the combination represents a unique point-in-time opportunity to create significant value. We have now had the opportunity to visit a number of their operations and to spend time with the teams and organization. I said at the time of the announcement that I'm incredibly excited by the potential of this combination, and I'm increasingly so following this interaction.

We look forward to meeting more teams from Smurfit WestRock over the coming months. Today is a Smurfit Kappa trading update, so we don't propose to take any specific questions related to the combination with WestRock, but we remain on track to complete in the second quarter of next year. Smurfit Kappa has delivered an excellent performance for the first nine months, with EBITDA of EUR 1.625 million, an EBITDA margin of 19%, a ROCE of 18%, and a leverage multiple of 1.4x. This performance reflects both our operating excellence and the effectiveness of our capital spend. Over the last number of years, we have invested to improve our operating efficiency and to strengthen the integrated model. We have also invested in our capabilities around innovation and sustainability.

We have found that our ability to innovate, advance our customers' sustainability agenda while providing secure supply, has been increasingly valued and a point of differentiation for the group. Alongside that internal investment, we've also acquired businesses that have further strengthened the integrated model or diversify our product portfolio. In summary, we have built a high quality business that continues to deliver superior performance. A business, as you've heard me say before, is quite simply unrecognizable from years past. I think it's worth putting in context both the performance for the year to date and indeed for the remainder of the year in context. We expect to deliver EBITDA of approximately EUR 2.050 million for the full year. A year which has been impacted by a negative growth environment, with corrugated demand in 2023, substantially below the longer term trend.

And yet, our expected full year 2023 outcome is essentially where we expected it to be at the beginning of this year. More than anything, this underscores the quality of both our business and our people. Of particular note is that our Americas business has performed well with our EBITDA performance in line with last year. This demonstrates the geographic diversity and strong product offering we have in the region, combined with the implemented investment programs. Quarter three demand levels for the group were approximately 2% behind 2022 levels, versus a -7% and 5% in quarters one and two, respectively. We expect this trend to continue, with Germany in particular, which has been a true laggard this year, showing improved order books in the last month or so.

We remain excited about the opportunities for paper-based packaging in a world that needs sustainable solutions. With our over 1,000 designers implementing new ideas in innovative packaging, together with the replacement of fossil fuel-based packaging, our products are well positioned for the future. As legislation changes, our customers increasingly look to us to help them in their own sustainability goals, which sets a great foundation for future growth of our business. Our capital allocation decisions over the last number of years, together with the quality of the Smurfit Kappa team, have clearly contributed to a structural change within our business, delivering a better, stronger, and higher quality business. Set against a difficult operating environment in 2023, an expected EBITDA outcome of approximately EUR 2.050 million reflects that.

With that statement, I will now hand you back to the operator and she will ask you for your questions. Thank you, operator.

Operator (participant)

Thank you. As a reminder, if you would like to ask a question or make a contribution on today's call, please press star one on your telephone keypad. To withdraw your question, please press star two. We'll take now our first question from Justin Jordan from Davy. Your line is open now. Thank you.

Justin Jordan (Analyst)

Thank you, and good morning, everyone. Tony, just a quick question on Q3 trading. Back at the interim results in August, you told us that I think July volumes were -3%. You've just reported -2% for Q3 overall. So I know I'm sort of delving into the detail here, but it would appear like or infer that maybe September volumes are something like -1% as an exit rate. Can you just give us some help on that? And thank you very much for the improving commentary on Germany, clearly the largest packaging market in Europe, it's very important to Smurfit Kappa. Can you give us any more color on different geographies in Europe and Americas, please, in terms of demand may have changed over the last three months? Thank you.

Anthony Smurfit (President and CEO)

... Thanks, Justin. I mean, you know, I think the trend is as we said in Germany, taking it specifically, our order intake is, you know, quite a bit higher than it was in the summer, you know, somewhere between 8%-10%. You know, I'm a bit reticent to say that that's a, you know, a long-term trend because we saw that in April of this year, where we did see an uptick in orders, and then it failed to materialize for the rest of the summer. But, you know, there definitely seems to be more confidence from some sectors in our business.

You know, in addition to that, I think we are winning business in Germany because of many of the things which I talked about in that script. With regard to other territories, I mean, it's a bit like the curate's egg, to be honest. I mean, there are some markets that are doing much better. Brazilian market is doing better, Mexico is stable, Colombia seems to be improving, if you take the Americas. If you go to Europe, you know, overall, I would say it's similar to what it was with some ups and some downs. So really why we wanted to highlight Germany is because, as you said a few seconds ago, it is an important market for packaging.

And it's the first, you know, real sign of life that our guys have seen for you know six months now or so. You know, I do always issue a health warning, but, you know, we try to report the facts as we see it, and that's what we see at this juncture. So hopefully it will continue, and we'll start. You know, I think the figures of yesterday, out of inflation were encouraging from the IFO, I think it was, and I think that Germany is in those lines. So I think there's at least some cause for optimism that wasn't there, I would say maybe three months ago, six months ago.

So that's why we wanted to highlight it, that order intake is good. That doesn't mean that it's gonna stay good. We can't guarantee that, but, you know, I think it's encouraging.

Justin Jordan (Analyst)

Thank you, Tony.

Anthony Smurfit (President and CEO)

Thanks, Justin.

Operator (participant)

Okay. We'll take now our next question from David O'Brien from Goodbody. Your line is open now. Thank you.

David O'Brien (Head of Research)

Good morning, guys. Thanks for taking my question. If I could start maybe just on the guidance and some of the commentary around the cost buckets. I was just trying to understand how the cost buckets have performed in the third quarter, and what your guidance assumes they do for the fourth quarter. If you could maybe give us some color on that. And then if I could follow up on Germany, just a little bit. Are you actually seeing sequential activity up month-on-month in Germany, or is it orders are getting less worse? And when you talk to Boris and the team, is it an end of destocking, or is there actual signs of improvement in the consumer? Can you just give us a bit more color on what's maybe driving the improvement as you see it?

Anthony Smurfit (President and CEO)

I'll take the second piece of that and let Ken take the first piece. I mean, you know, I think, you know, they're certainly not back to boom levels or anything like it, but, you know, I was at a customer event this week and... not last week in Germany, and there is certainly more optimism with our customers. We are winning business in the country. I think our model is showing that through innovation and through solving our customers' problems, that is helping us win business. And so there's probably some market share gains in there. In addition to that, I think that you know, you're seeing the normalization of, let's say, the Food and Drink business.

I don't think we're necessarily seeing any of the durables coming back yet, but the normalization of the Food and Drink business and FMCG business in general coming back to some more normalized levels. And as I said before, David, you know, the one thing about Germany is they have a lot of money. There's a lot of money being saved by people in Germany. So when confidence returns in any way, shape, or form, there's capital there in people's bank accounts to spend it. It's just a question of when the government gets its act together with regard to some of the policies that they've been implementing, when inflation mitigates itself, which it seems to be in Germany right now, as said yesterday. So, you know, there is...

I was really taken by, we'd have 100 customers at an event, and you've been to a couple of our events, and you know how engaged they are, and it was really engaging with those customers and, you know, quite optimistic, frankly. Okay. Ken, do you want to take?

Ken Bowles (Group CFO)

Morning, morning, Dave. On the cost focus, I suppose the net-net is that you can see where guidance is versus where it was half year. So no, no real material change to any of the cost lines. Small bit of ups and downs here and there. You know, things like distribution, which would have been small tailwinds, will be flat. Similarly, wood, which would be flat. I suppose the one that, you know, maybe people might have thought was continuing to Q4, be around OCC, where we've probably seen all the benefits of that. So Q4 for OCC, probably not showing either, you know, maybe broadly flat, no headwind, tailwind. But I think, you know, broadly, what we said at the half year is kind of playing out.

Clearly, still some small elements of inflation coming through, particularly around things like labor. But fundamentally, I think when you look at the progression of box pricing versus where it still remains very resilient. So as Tony said, a more positive, at least optically, demand environment, but no material change in the big cost buckets.

Anthony Smurfit (President and CEO)

The energy hedging?

Ken Bowles (Group CFO)

Energy, well, no, energy kind of broadly where we were at EUR 200 maybe EUR 250. So again, no material change.

David O'Brien (Head of Research)

If I could just follow up on one part there, you talked about Box Price resilience. I guess we're only two months from the start of 2024. Should we expect any large incremental kind of Box Price resets in the first of January, or how do you think the trajectory looks there? Maybe on a-

Anthony Smurfit (President and CEO)

I think-

David O'Brien (Head of Research)

2, 3, 4.

Anthony Smurfit (President and CEO)

I mean, as you know, our contracts you know are in different ways with different customers. So there will be some continued movement downwards in pricing as we go through this quarter and next quarter. You know, it's obviously the big move down has happened already. So it'll be incrementally lower, but you know, there will be still some movements downwards in box pricing. But you know, the interesting thing, David, is that the paper prices are really in bad shape for Recycled Paper and you know, we already see a number of projects postponed. We see a number of closures announced, as you know, so there is a lot of pain in the paper, in the free market paper industry right now.

So we'd expect to see, you know, some further either delays or closures in the future. So that will lead to another movement at some point. We obviously can't predict when that will hold or will reverse, and we'll start to see different movement at some point upwards.

David O'Brien (Head of Research)

That's great. Thanks very much, guys. Appreciate it.

Anthony Smurfit (President and CEO)

Thanks, David.

Operator (participant)

We'll take now our next question from Cole Hathorn from Jefferies. The line is open now, thank you.

Cole Hathorn (SVP, Equity Research)

Good morning, Tony. Morning, Ken. Thanks for taking the question. Maybe just a follow-up on that. I mean, on the kind of the Box Price Mix, just to give a bit of comfort into 2024, I mean, containerboard prices have been stable now for five, six months. Should we read this as in you've pretty much negotiated most of your big contracts or have good visibility of where Box Price Mix is going into 2024, all else equal for containerboard? So now it's about where volumes go from here, your efficiency programs, and kind of managing your cost base. The first question.

Anthony Smurfit (President and CEO)

Yeah, I mean, obviously, you know, we do have a good visibility. We have, for the most part, retained all of our business, that we were under contract with. Obviously, there's still... We're still negotiating with a number of customers, but, you know, that for the most part, we're done with most of our contract negotiations. With regard to, do we have visibility to where pricing is going? Basically, yes. We have, you know, I don't foresee paper pricing moving down much more. As I say, it's really pretty well at the bottom, and certainly the middle to high cost producers are losing cash at this stage, especially if they're not integrated.

So I would say that, you know, we have good visibility as to, you know, will pricing move down more? Yes, but is it gonna be significant? Probably not. You know, we'd expect that trend to reverse as soon as volume growth starts coming back into the market. But, you know, when that happens is obviously a function of a number of different macro factors that are way outside of our control. But, you know, this is an unusual scenario. We've never seen the kind of falls in corrugated box consumption, as we never saw the kind of growth that we saw in corrugated box consumption in 2021 and 2022.

So, you know, I think we're just reverting to normality, and then the major trends of sustainability are still there. We're still continuing to see legislation moving away from fossil fuel based product packaging products towards us. And, I think that's gonna be a big long-term advantage. Obviously, in this kind of demand environment, there's a lot of noise covering that up. But, clearly, with our design tools and with our knowledge, Cole, I think we've got a really fantastic story for the future. But, you know, we need some degree of normality in the general world for that to be seen to its full effect.

Cole Hathorn (SVP, Equity Research)

Tony, then maybe on the containerboard prices, I know the higher cost producers are under pressure, and I don't think we should forget that when your operating rates are a bit lower, you know, you'll absorb much more fixed cost overheads, and we've got OCC staying at decent levels. We've got gas up a little bit into winter. You know, are you still seeing significant amounts of commercial downtime in the industry? Can you give any color of where we are kind of inventory levels-wise, and do you have any-

Anthony Smurfit (President and CEO)

Yeah, there-

Cole Hathorn (SVP, Equity Research)

Well-

Anthony Smurfit (President and CEO)

There's been a lot of downtime. We've actually taken, you know, much less downtime because of our integrated model, but we have taken downtime ourselves during Q2, less so in Q3. But you know, we'll continue to take a bit of downtime, especially around Christmas, because, you know, as you know, most of the box plants shut and mills tend to stay open. So we'll take some downtime around Christmas, as I assume the industry will. But you're right. I mean, if you're not fully integrated and you're having to find distant shores to sell your product, or you don't have product, you don't have anywhere to sell, downtime is a very expensive proposition, and...

But the reality is with demand levels across the industry, and as I think we're sorry, I know we're taking market share across Europe. So we're outperforming, so with the industry not doing that well, I think that people have no choice but to take downtime, and you know, that's putting a lot of pressure on a lot of producers. And I think we're gonna see that play itself out over the next six months, nine months, a year or so. And eventually, we will start seeing prices go up again because these levels are unsustainable.

Cole Hathorn (SVP, Equity Research)

... Then maybe on the, potentially, the trigger for those prices to go up is, you know, hopefully demand-led, but have you seen any incomings from your customers on the promotional side? I imagine, you know, some of the bigger brands, you know, do want to protect some of their market share. Will you kind of benefit from kind of mix and some volumes on that side, on the food and beverage? Thank you.

Anthony Smurfit (President and CEO)

Well, we will do, Cole, when it happens. I mean, there has been signs of it in certain of the markets. I think, you know, you'll have seen from the large FMCG producers, their margins are generally pretty good, and their volumes are pretty bad. So that's generally a trend, and when they start to want to promote to protect their brands, then obviously we would be a beneficiary of it, because we operate in all sectors of the business.

Cole Hathorn (SVP, Equity Research)

Thank you.

Anthony Smurfit (President and CEO)

Thanks, Cole.

Operator (participant)

We'll take now our next question from Kevin Fogarty from Numis. Your line is open now, thank you.

Kevin Fogarty (Director, Equity Research)

Hi, thanks very much. Morning, everyone. Just apologies to sort of get back on pricing again, but I guess when we at the interim stage, about sort of three months or so ago, there was some discussion about some industry players kind of seeking to raise prices at that point, obviously, given the dynamics they were seeing in terms of costs, et cetera. I just wondered if there was any, you know, given where containerboard prices have been in recent months, it doesn't suggest any kind of upward momentum on that front, but I just wondered if are the noises any kind of stronger now in terms of some of those independent people looking to kind of raise prices in the near term?

Or do we need to sort of get back to a kind of demand-led environment for that to take place, do you think? And just secondly, just on the Americas, you called out you know, financial delivery there, kind of in line with last year. I just wondered from a volume perspective, obviously that sort of seems to be lagging what you're seeing in Europe. Is that purely the fact that it was later into the down cycle, and therefore, kind of the volume dynamics, you know, take longer to recover there, or just lagging Europe, or is there anything else happening there?

Anthony Smurfit (President and CEO)

I'll let Ken take the first part, but just on the Americas, Kevin, I think what we've seen in Americas is, you know, we operate a portfolio of businesses, and, you know, we've been making investments. So I think our performance there is, you know, to be honest with you, it looks pretty exceptional when you look at all the various businesses around the world. You know, when you're having a like-for-like, basically line ball performance, I think is an exceptional performance. We have seen volumes fall. They're not materially different. They're about 3% down in Q3 versus last year. So they're not materially different to the group overall. Europe is 1.8%, and then blended is around 2%. So you know, it's it, it's a...

So we're sort of line ball with them, but they had some countries that really grew very, very strongly during the pandemic, like Colombia in the 30s. And obviously that has come backwards. Mexico's been fine. It didn't grow as strongly as, say, a country like Colombia, but, you know, isn't falling as much as Colombia at the moment. So overall, it's the blend that works, and I wouldn't say that we're later cycle or anything like it. In fact, I think, you know, we penalized our results this year because we had too much stock, because, as you know, prior to doing WestRock, we don't have Kraftliner in that region, or not enough Kraftliner in the region.

So we had to have a lot of stock, and as we came into the downturn, you know, we've penalized a lot of our operations by having high-cost stock, and we've had to work that through the year. Clearly, that's a positive as we move into next year in a comparison basis. But you know, there is definitely signs out of the Americas that things have bottomed there and demand has picked up and that they are at the bottom in their pricing cycle, and we'd expect that to start turning in the at some point.

Kevin Fogarty (Director, Equity Research)

Great. Thank you.

Ken Bowles (Group CFO)

Hey, Kevin, on your first question, I think, no, I think you need a trigger. I think as we're kind of saying, if thematically this morning is we need that kind of bit of demand to come back before there can be any real push again for Box Price increases. I think paper prices have come down a lot, and, you know, independent box makers who are benefiting from that, there's not necessarily any incentive to seek further price increases based on that.

I think equally, you know, we have to see it in the context of our own performance, which is, you know, how resilient the Box Price has been, particularly 233, and particularly against that backdrop of paper price falling versus the good work that the teams did in getting it to the heights it got to in, like, December last year. So I suppose in short, I think you need a demand trigger before you start to see that kind of turn in box prices, and clearly the demand trigger will have a backward impact into Recovered Fiber and Paper as you get, as you move through the system.

Kevin Fogarty (Director, Equity Research)

Sure. Okay, all understood. Thanks very much for the clarity. Thanks a lot.

Ken Bowles (Group CFO)

Thank you, Kevin.

Operator (participant)

We'll take now our next question from Charlie Muir-Sands, from BNP Paribas. Your line is open now. Thank you.

Charlie Muir-Sands (Research Analyst)

Morning. Thanks. Just one question, sort of stepping away from the price and costs a bit. Obviously the EU's published sort of second draft of the proposed Packaging and Packaging Waste Regulation. Obviously, a number of legislative hurdles still to get through before it ever becomes law, but just wondered if we could share your updated views on that and whether, you know, whether the latest changes were incrementally better for you, and whether you see this as overall a headwind or a tailwind to corrugated demand over the next decade? Thank you.

Anthony Smurfit (President and CEO)

... Very early in the morning for a question like that, Charlie. I think overall, what the draft proposals are basically positive for our industry. I think that we feel good about where we've got to. Obviously, there are some wrinkles in there that we need to challenge and make sure that some of the unworkable things that come out of the PPWR are, you know, made clear to the commission, that they're quite unworkable. But overall, I would say it's a net positive for us. Any of the negatives, obviously it's not finished yet, but out of the last committee, I think we were generally happy with the overall findings and overall recommendation.

Albeit that there are some areas that, you know, just don't make any sense, and we will be working hard to make sure that, you know, our product is still used in those areas where they're trying to make you reuse in some of the durables, which doesn't make, as I say, a lot of sense. So we'll work hard to make it all positive towards our business, but it is generally speaking our people are very comfortable with where the outcome has got to.

Ken Bowles (Group CFO)

I think, Charlie, too, to keep in mind that, you know, we have to be conscious of the kind of the law of unintended consequences. I mean, while reuse is a wonderful idea, as Tony said, it's brought some problems and some of those issues around the incremental carbon necessary for cleaning and the production of those goods that could be reused, particularly I think in the fossil-based alternatives. So as you know, it's gotta be kind of thought through from the entire supply chain, rather than just the end product.

Charlie Muir-Sands (Research Analyst)

Yeah, absolutely. Thank you.

Anthony Smurfit (President and CEO)

Thanks, Charlie.

Operator (participant)

We'll take now our next question from Andy Jones from UBS. Your line is open now.

Andy Jones (Executive Director, Head of Steel Research, and EMEA Paper & Packaging)

Hi, gents. Just on the modeling. Just for the third quarter, can you just tell us what the quarter-on-quarter and year-on-year change in pricing was for the group? And just give us an idea of your expectations for the fourth quarter, if that's okay. And just stepping back on the buckets and so forth, should we broadly be thinking costs flat into 4Q, and that decline that you're guiding towards sort of implied EUR 425, that decline all comes basically from price. Is that a fair statement?

Ken Bowles (Group CFO)

I think, Andy, on the second one, it's the absence equally of a kind of a tailwind in OCC, as you move to the fourth quarter, is probably a big impact there. But broadly, what you're seeing in the bridge, like Q3 to Q4, probably all is price driven at this point, given that most of the buckets have remained fairly stable since the half year. In terms of pricing itself, I suppose context is equally as important here. And if you think about, you know, the Box Price raise in December last year, which is in the order of something like 50%, as we sit at the nine months, the nine months on nine months Box Price move has been -4%, negligible.

The quarter-on-quarter move is close to the kind of -11%. I think as you move to the fourth quarter, then your math would probably tell you there's another maybe 2% or 3% there, to kind of get you towards the EUR 425.

Andy Jones (Executive Director, Head of Steel Research, and EMEA Paper & Packaging)

Hmm, so 2%-3% lower quarter-on-quarter is the sort of price-

Ken Bowles (Group CFO)

Yeah.

Andy Jones (Executive Director, Head of Steel Research, and EMEA Paper & Packaging)

-difference?

Ken Bowles (Group CFO)

Yeah. Exactly, Andy.

Andy Jones (Executive Director, Head of Steel Research, and EMEA Paper & Packaging)

Yeah, yeah. Okay. And in the third quarter, we're down, I guess, somewhere around 6%, something like that. Is that fair? Quarter-on-quarter.

Ken Bowles (Group CFO)

Quarter-on-quarter, first quarter 2023 on 2023 or 2024 on 2023, Andy?

Andy Jones (Executive Director, Head of Steel Research, and EMEA Paper & Packaging)

That was a third quarter of 2023 on the second quarter. It was probably down about 6%, is that fair?

Ken Bowles (Group CFO)

Yes. Sorry. Yeah. Yeah.

Andy Jones (Executive Director, Head of Steel Research, and EMEA Paper & Packaging)

Yeah.

Ken Bowles (Group CFO)

Sorry.

Andy Jones (Executive Director, Head of Steel Research, and EMEA Paper & Packaging)

Okay. Cool. And I think the rounds were bad when you mentioned the energy tailwind for this year. Did you say somewhere around EUR 250 for the year overall or something like that?

Ken Bowles (Group CFO)

Yeah. Broadly, yeah. Yeah, about EUR 250.

Andy Jones (Executive Director, Head of Steel Research, and EMEA Paper & Packaging)

Yeah.

Ken Bowles (Group CFO)

And that in context also includes a kind of negative impact from hedging year-on-year, which you would have had the benefit of last year, so.

Andy Jones (Executive Director, Head of Steel Research, and EMEA Paper & Packaging)

Mm-hmm.

Anthony Smurfit (President and CEO)

Still, a net tailwind of about EUR 250.

Andy Jones (Executive Director, Head of Steel Research, and EMEA Paper & Packaging)

Yeah. Okay, great. Cool. Okay, that sounds good. Thank you.

Anthony Smurfit (President and CEO)

Thanks very much.

Operator (participant)

We'll take now our next question from Brian Morgan, from Morgan Stanley. The line is open now.

Brian Morgan (First VP, Wealth Management)

Morning, James. Just following up on that one. Are you able to give us any steer on energy costs into 2024 yet?

Ken Bowles (Group CFO)

Only to say that we're very much in line with our policy. We're probably about 30% hedged for the year, which would be normal at this point of the year. Listen, energy is clearly the open position, what kind of drives the price. But we're not, at this point, I'd probably say to you, there's no material impact year on year from energy, as we sit here today, 2024 over 2023.

Anthony Smurfit (President and CEO)

But it is kind of volatile, Brian. I mean, you know, yesterday it went down 20%. Over the last month, it's been up 30%, so it's kind of a very volatile situation, as you can imagine.

Brian Morgan (First VP, Wealth Management)

Of course. Thank you very much.

Anthony Smurfit (President and CEO)

Pleasure.

Operator (participant)

We'll take our next question from Gaurav Jain, from Barclays. Your line is open now.

Gaurav Jain (Head of EU SMID, EU packaging, and Global Tobacco and Cannabis)

Hi. Good morning. Thank you for taking the questions. A couple from me. One is that, you know, Q4 EBITDA is EUR 425 million, and I heard that Q1 2024 pricing could also be down over Q4 2023. Does it mean that Q1 2024 EBITDA will see another step down, or are there offsetting cost factors or fixed cost absorption factors which will drive EBITDA sequentially?

Ken Bowles (Group CFO)

That, that's quite, that's quite a detailed question, Gaurav. I think, I think each of the detailed modeling questions are probably better dealt with the guys. But I think it's important to remember when you think about Q4 over Q3, you do have December there, which is generally a shorter working month. So there's, there's many, many impacts. I think, I think the better way to think about it is the way you kind of characterize it. If you think about the year as we sit now, at EUR 1.625 million, an outcome of EUR 2.050 million, we've given you the big cost buckets, and we've given you the directional travel on, on, on box pricing. That's... Anything beyond that... I'd suggest maybe for more detailed stuff, go to Ciarán and Frank as they can-

Anthony Smurfit (President and CEO)

I think, Jane, it's important to remember what I said in my summary that, you know, at the start of the year, we were sort of forecasting around EUR 2 billion. And, you know, we haven't had anything to say other than, you know, we're gonna be around EUR 2 billion. And, you know, we do what we say, and I think that is, you know, one of the things, the hallmarks of this company, is that we try and make sure that we take any surprises out of the situation. So, you know, obviously, as Ken said, December is always a funny month. It's a very short month. At this moment in time, profitability comes from the corrugated division.

As I've always said, we have a seesaw type of business. Sometimes you make more money in paper, sometimes you make more money in corrugated. When you make more money in paper, in December, you have basically a full month of profitability. When you make your money in corrugated, which is where we're at the moment, you've only a half a month of profitability. So that affects your month during that month of December. You know, at different points of the cycle, you'll have better Decembers, and this year we'll have a worse December than we would, you know, normally have.

Gaurav Jain (Head of EU SMID, EU packaging, and Global Tobacco and Cannabis)

Okay, sure. And, just if I could ask one more question. Hopefully, this is not a detailed modeling question, but this is on net debt. And, you know, it is slightly worse than what I thought it will be, because I thought that working capital would start becoming a benefit in 2H, especially as input prices have come down. So is that a benefit which would majorly happen in Q4 of this year?

Ken Bowles (Group CFO)

You will get an incremental benefit from... I think most people would have probably thought that the bigger month for moves box pricing was Q3, so you probably would have expected a slightly larger working capital then. So you will get some of that in Q4. Now, I think equally, you know, as Box Price have remained more resilient and paper have deeply remained down, you're probably not getting as much as the unlocked working capital as you might ordinarily think. Because in reality, you're not gonna get any credit relief here. It's all gonna be debt relief, which you'll get through Box Price decreases. So we'll see some of that coming through quarter four. But beyond that, we continue on the capital spend.

All the guidance line items for free cash will remain as they would have been, as we would have guided the half year. So, but there's nothing. Nothing is like fundamental within that kind of nine months free cash flow to a free cash or either longer cash flow to get to where net debt is at the end of the year. It's probably just a little bit of inter quarter kind of, you know, moves. But as we get towards the end of the year, we're probably back where we thought we would be.

Gaurav Jain (Head of EU SMID, EU packaging, and Global Tobacco and Cannabis)

Good. Thank you so much.

Anthony Smurfit (President and CEO)

Thanks, Jay.

Operator (participant)

We'll take now our last question from Joffrey Bellicha from Bank of America. You can go ahead now. Thank you.

Joffrey Bellicha (VP, Equity Research)

Yes, thank you very much. Good morning, gentlemen. My question is regarding the CapEx contribution into 2024 and how you're thinking about it. Should we still think about 20% return on invested capital there for the CapEx that you've spent, I guess, in 2022 and some of it in 2023? And if you can remind us what projects are kind of coming in line. What sort of projects are coming in line? Is it more cost or more volumes? Thank you.

Anthony Smurfit (President and CEO)

Yeah, well, obviously, just, you know, basically, the answer to your first question is yes, we would expect all our projects to pay off. Obviously, some of them will be a bit delayed because the volume hasn't been there to deliver the benefit on some of the converting machines we put in. Some of the bigger Paper Mill projects, you know, as volume comes back, they will return, and they will give us the returns as promised. And we've still got some projects like the one in Mexico, which has been delayed by about a year, because of equipment delays. Nothing to do with us, but. And that will bring, you know, extra tonnage into Mexico, which we are very short of tonnage in Mexico.

That will come in really 2025. So the benefit there will be 2025 rather than 2024. So, you know, all the projects are on track. We're obviously growth projects are no longer order of the day, Joffrey, because we don't have a lot of growth around the place. We do have some segments of growth and some areas of growth. You know, we're potentially building a new plant in a European country where we see operations continuing to grow in that segment. We're looking at building a new factory in Eastern Europe for a particular product area. We're investing strongly in our Bag-in-Box business because we continue to see growth in that business and opportunity.

So there are segments of growth, but any capital approvals generally now are for cost reduction. And we still have, paradoxically, as wages go up, it makes a lot of the projects to invest in equipment to reduce headcount much more, much more, much better payback. So clearly that's an area which we will be focusing on. But overall, I think, you know, we're coming to the end of the big approvals that we said we would do this year. And so 2025 will be pretty clear with regard to, you know, capital allocation and where we put it.

Joffrey Bellicha (VP, Equity Research)

Fantastic. Thank you very much.

Anthony Smurfit (President and CEO)

Thank you, Joffrey.

Operator (participant)

There are no further questions, so I will hand you back to Tony to conclude today's conference. Thank you.

Anthony Smurfit (President and CEO)

Thank you all for joining us. We very much appreciate your time being with us, and especially the questions. You know, we remain very proud of the performance of the Smurfit Kappa organization. I believe these are excellent results, in the context of the year that we've had. I think that we go forward with continued confidence in this business and continued confidence in our business model. And we look forward to continuing to develop the business into now and into the future. So, thank you all for joining us, and we look forward to seeing you in person or talking to you in person over the coming days. And, have a good rest of the day. God bless.

Operator (participant)

Thank you for joining today's call. You may now disconnect.