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Presentation

Smurfit Westrock Plc misses on earnings expectations. Reported EPS is $0.33 EPS, expectations were $0.36.

Operator: Good day, and thank you for standing by. Welcome to the Smurfit Westrock 2026 Q1 Results Webcast and Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to Ciaran Potts, Smurfit Westrock Group VP, Investor Relations. Please go ahead.

Ciaran Potts: Thanks, Evan. 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 as well as those discussed in our investor update presentation. The company undertakes no obligation to revise any forward-looking statements. Today’s remarks will 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.smurfitwestrock.com.

In addition, today’s remarks include statements about Smurfit Westrock’s medium-term financial goals and capital allocation priorities. These goals are aspirational and actual performance may differ, possibly materially, and no guarantees are made that these goals will be met. To ensure that we have time to hear from as many of you as possible, given time constraints, we’d appreciate if each analyst could limit themselves to 2 questions. I’ll now hand you over to Tony Smurfit, CEO of Smurfit Westrock.

Anthony P. J. Smurfit: Thank you, Ciaran, and thank you to all participants for joining us today. I’m joined on the call as usual by my colleague Ken Bowles, our Executive Vice President and Group CFO. Set against a challenging environment, we delivered a solid first quarter performance, essentially in line with plan with adjusted EBITDA of $1,076 million and an adjusted EBITDA margin of 14%. Our adjusted EBITDA outcome for the period was impacted by weather events that started in January and continued into February, costing approximately $65 million across the group. We continue to make progress both internally with our people, our operating model and our capital plans and externally where we continue to provide customers with the broadest offering and the widest set of tools and application.

Our recent innovation event in the Netherlands was a clear example of where Smurfit Westrock is truly differentiated from the competition. I’m particularly happy with how the integration and culture of Smurfit Westrock is progressing with excellent networking and people development, which was on display last week in Amsterdam at the aforementioned innovation event. Back in February, we were happy to launch our medium-term plan. That plan demonstrates an accelerated path to growth to 2030 and beyond. The goal of the plan is to deliver significant adjusted EBITDA growth with a CAGR of 7% and margin expansion of over 300 basis points. Consistent delivery against this plan, which is our collective focus will, we believe, realize Smurfit Westrock’s true potential.

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Our scale is a core competitive advantage for Smurfit Westrock and a key reason customers are more and more choosing to partner with us. We think global, but act local. Operating across regions allows us to support customers consistently while combining global capability with strong local execution. Our footprint enables us to serve our customers seamlessly across geographies, sharing best practice, providing security of supply, delivering consistent service levels while remaining close to local markets. Equally, our footprint gives us better visibility across markets, enables optimization of assets and capital deployments. In summary, our presence underpins how we compete and how we win, whether that be in corrugated, consumer, bag-in-box or any of our other niche businesses.

It allows us to support customers across regions, scale innovation quickly and build deeper, more durable partnerships, supporting our statement that we are the go-to packaging partner of choice locally, regionally or globally. And of course, having so many talented people across the world means better and better innovation, which in the interest of time, we will expand upon at the second quarter results. Now turning to our regions, starting with North America. The quarter delivered adjusted EBITDA of $597 million and an adjusted EBITDA margin of 13.3%. This result was heavily impacted by weather issues of approximately $55 million, which primarily occurred in February and downtime costing $74 million, of which approximately half was unplanned.

The quarter was also characterized by generally tepid demand as consumer confidence remained muted as well as experienced some logistical difficulties in Mexico as a result of local domestic security-related issues. As we begin the second quarter, we are seeing much improved demand with strengthening order books across all grades of both paper and converting products. Price increases have been announced for all containerboard grades and some specific consumer grades. We continue our progress to our owner-operator model, and we are seeing the success and benefits of our approach, both in terms of recruitment of talent and motivation within the company. During the quarter, we entered into contracts with over 600 new corrugated customers across a wide range of sectors and segments.

This has continued at a stronger pace in April. These customer wins offset in part, less economic business, and we expect to see growth during the latter part of the year as we onboard our new partners. Bringing together our global knowledge in packaging is having a material benefit as customers see the suite of our capabilities through our experience centers, which are currently being rolled out in the United States. In our consumer business, we have seen great success in our grade-agnostic approach with over 250 million converted or in the process of being converted to our SBS and CUK offering. Finally, we continue to invest in our system for growth and cost takeout with a number of new and exciting projects being implemented across the region as well as continually optimizing the system through considered capacity rationalization decisions.

Turning now to our EMEA and APAC business, which delivered a very solid quarter with an adjusted EBITDA of $421 million and an adjusted EBITDA margin of 15.2%. We are significantly outperforming our peers as our innovation platform delivers great value to our customers, whether they’re looking to grow, reduce costs or be more sustainable. With our network of 34 innovation centers across the globe, that innovation offering and sharing of best practice is something our entire global customer base is now benefiting from. We’ve just recently hosted over 200 customers at the sustainability and innovation event in Amsterdam, where we demonstrated our industry-leading suite of tools, which help customers win in their marketplace and ease the burden of compliance with regulatory issues.

Our optimal improvements continue in all businesses as we invest for cost takeout and selectively in growth regions. We also continue to optimize our system with the regrettable but necessary recent announcements of the consultations on the closure of 4 smaller converting operations in the U.K. and the Netherlands, and one paper mill operation in the U.K., which has a capacity of approximately 200,000 tons per year. While we have not been affected in the last quarter by higher energy prices, primarily as a result of our hedging policy, we expect to see the effect of energy price rises in the following quarters. As a result of this and a generally much better demand environment, we have implemented higher recycled paper prices of EUR 100 per ton as well as increases in kraftliner and some specialty grades, which we expect to result in higher prices for our converting products as we progress through this year.

Now turning to Latin American business, which again performed strongly with an adjusted EBITDA of $109 million and an adjusted EBITDA margin of over 20%. This performance once again shows the strength of our operations in LatAm, where we are the only pan-regional player. It is also important to remember that as the truly global player in paper-based packaging, our LatAm operations play a key role in supplying both our global and regional customers. During the quarter, we completed a corrugated box plant acquisition in Ecuador, in line with the objective of building on our position in the region through both organic growth and selective acquisitions. This acquisition is also beneficial beyond the region as we will integrate paper from our North American mill system.

Our business in our 2 larger countries Brazil and Colombia performed well with good volume growth and further significant growth opportunities. Business conditions remain good across the region with generally tightening markets and improved pricing. As I said at the outset, our medium-term plan sets out specific targets and performance measures through 2030. By 2030, we aim to deliver $7 billion of adjusted EBITDA and a group adjusted EBITDA margin of 19%. Over the life of the plan, we aim to generate $14 billion of discretionary free cash flow providing us with significant financial flexibility to capitalize on growth opportunities within our business, further strengthen our balance sheet and increase capital returns for our shareholders. Quite simply, our objective is to unlock the full potential of our North American business continued to outperform in EU, EMEA and APAC and continue to deliver dynamic growth and strong margins in Latin America.

Finally, before I wrap up, you would have noticed our decision to carry out a review of our listing on the London Stock Exchange. The outcome of that review may result in us delisting from the LSE. The review is focused on ensuring our listing structure reflects where our shares trade while reducing complexity and ongoing costs. We anticipate completing this work during May, and we’ll update shareholders when the review concludes. On industry outlook specifically, in February, we said that the year had begun with a generally better industry environment, although impacted by weather and more recently, global tensions. Today, we see a stronger and generally better industry outlook. Assuming these conditions prevail, we expect to deliver an adjusted EBITDA for the quarter 2 of between $1.1 billion and $1.2 billion, and I’m pleased to reaffirm our previous expectation of an adjusted EBITDA outcome for the full year 2026 between $5 billion and $5.3 billion.

And with that, operator, I will hand it over for questions.

Operator: [Operator Instructions] Our first call comes from the line of George Staphos of BofA Securities.

George Staphos: Tony, thanks for the details calling here, Reinhardt van der Walt, my colleague in Europe. I just wanted to ask some questions on demand and the interplay with pricing, Tony. So you mentioned that, and we thank you for the detail that roughly half of the outage or downtime in the quarter, North America was unplanned. Can you tell us what implications, if any, you think that means for the mill system as it exists today? And do you think that with all the need to rightly pass forward some of the cost pressures you’re seeing that it might be leading to more demand weakness than you’d otherwise like to see either you or for other players in the industry? And then I had a follow-on.

Anthony P. J. Smurfit: Okay. Well, what I would say, George, is in my experience, and unfortunately, I’m a veteran in this business. I’ve been in the business a long time. And I haven’t seen a shift in the whole business demand in a long period of time practically in my career. We have seen a very strong uptake across really all paper grades with maybe one exception in CRB, a little bit. But basically, all paper grades are in effectively sold out position right now. And that happened really quickly. I mean that happened to — we strengthened up in March, but in April, it’s become very strong indeed across everywhere. Now is there some pre-buying due to price increases announced by us and others in the marketplace that’s very possible.

But it’s not something that we see a lot of. And at some point or another, the capacity that came out of the system has — over the last 18 months or so is having an effect. And I think this is what we’re seeing right now is that globally speaking, there is strong demand. And obviously, we’re buying in Latin America. We’re buying in Europe, and we see very much stronger market in practically everything. And even surprising is how our SBS market has strengthened up in the last month. And again, we’re in a sold out position in that grade at the moment. So I think it’s changed very radically. The unplanned downtime that we had in February was a result of our volumes not picking up as we anticipated. And we had a couple of issues in our mill — in a couple of key mills for us.

One was to do with an electric — nothing to do with weather actually, but to do with an electricity outage near one of our big mills cable, and we lost power for a few days. And that obviously made us go down. So we had a couple of issues in February that were, as we say, unplanned, and they’re not going to reoccur. We do not anticipate any material downtime in Q2. As I say, we’re sold out. And I think that’s why we are taking the position we’re taking in the marketplace.

George Staphos: Quickly, it’s nice to hear about the, if you will, the mixing up of your business over time as you have new customers coming in both in March — in the first quarter and now in April, I think you said 200 customers were more, is there a way to dimensionalize what that might mean for your margin, how those customers are coming in relative to your margin expectations? Any thoughts relative to kind of your longer-term projections in North America?

Anthony P. J. Smurfit: I think that we are very comfortable with the business that we’re bringing in, George, is what I would say. I mean, obviously, every customer is different and every innovation that we bring to our customers is different and every service level that we’ll bring to our customers is different. What I look at is just generally the totality. And we’ve had each month from January, February, March, more number of new customers coming in. And April is actually — our new customer volume is actually 30% up on March’s number in volume terms. So I’m really comfortable with the way we’re going, but obviously, we still have to watch through some of the business that we lost that we have was uneconomic. That’s why at this moment in time, I’m very comfortable that in the second half, we’ll start to lap. And of course, our comparators are much easier, but we’ll certainly start to show growth against the previous year.

Operator: Our next question comes from the line of Philip Ng of Jefferies LLC.

Philip Ng: Results in Europe was certainly very impressive given the backdrop, Tony, remind us how hedged you guys are for the next 1 or 2 quarters on gas. Certainly, that’s come up quite a bit. And with the timing of the box implementation in Europe, I think, the lag 6 to 9 months, are you in a position to continue to drive earnings growth in, call it, 2Q and maybe 3Q as well and maintain your margins? Just give us some color in terms of the environment you’re in and your ability to kind of push price on the box side of things?

Anthony P. J. Smurfit: Well, let me do the second part of your question, and then I’ll hand it to Ken for the first part. Basically, we are out in the marketplace today, and you already see the more commodity side of our business as in sheet feeding, implementing the first price increases, and that’s going through in practically all markets in Europe. We are also out there raising our converted products prices to noncontractual customers. And that should — you’ll see a very minor uptick, I’d say, in Q2. And then Q3 and Q4, you’ll start to see the implementation of those increases plus some of the contracts, normally speaking, the contracts are 3 to 6 months depending on the customer. And then you’ll start to see that feeding through in quarter 3 and quarter 4.

So we’ll see full implementation of our paper prices. And frankly speaking, we and the industry need it. So therefore it’s going to happen. And so I’d say second half of the year, you’ll see the benefit of the price increases feeding through into converting products.

Ken Bowles: Philip, broadly speaking, for the second quarter, about 50% hedged and about 1/3 and 1/3 for quarter 3 and quarter 4 as we sit here today. Clearly, it’s a very active policy we run and you’re just trying to kind of find spots in the market where you do a bit more, a bit less. But equally, you don’t overhedge because that can lead to the wrong side of where pricing might go. So yes, 50% for quarter 2, 1/3 and 1/3 for 3 and 4 as we sit here now.

Philip Ng: Okay. Great color. And just sticking with Europe, a little surprised with the announcement on the potential closure in U.K., which would certainly be helpful for just the broader market, it’s oversupplied. But what does that mean for Smurfit? Are you — I mean, does that mean you’re going to have to buy paper in the open market? Are you able to kind of move some production internally? And just give us a little more perspective on the mill that you’re considering and having that contemplation is a high-cost mill and just effect of how you’re going to manage through this?

Anthony P. J. Smurfit: Yes. I mean, obviously, we don’t take decisions to close any asset without a great deal of thought. And clearly, the supply to our very good and strong U.K. and Irish business is critical to us. And that mill in the U.K. in Birmingham played a very important role in that. But it was, frankly speaking, one of our highest, if not our highest cost mill, and it operates in the U.K. and has the wrong width for the long term. So that mill always had a finite period where it could last for. And so once we sorted out the supply arrangements, which we have obviously done both internally and some externally for a period of time, we’ve then decided to conclude it. It needed investment that mill. And clearly, we invest in mills that we believe have a long-term future and will be low cost, and that’s been the mission of Smurfit — old Smurfit Kappa and will be the mission of Smurfit Westrock.

And this mill, unfortunately, this didn’t have a long-term future based upon a lot of the constraints that they had, and so it wasn’t worth longer-term investing in. But we don’t have a problem to supply the mill because we’ve organized that. That’s why we didn’t announce it, frankly speaking, in February because we wanted to make sure all the t’s were crossed and i’s were dotted.

Operator: We will now take your next call. The next question comes from the line of Gabe Hajde of Wells Fargo.

Gabe Hajde: Just want to confirm on the most recent price announcement that RISI picked up for June implementation. It is kind of standard practice for you all to not embed that into your outlook until it’s reflected in the formal publication. And then, Ken, at the beginning of the year, you kind of gave us a rundown of some of the key inputs and sort of tailwind headwinds associated with those. Would you kindly give us an update on those?

Anthony P. J. Smurfit: Yes. No problem, Gabe, yes. Just on the first point, obviously, that was a relatively recent decision. So we are seeing cost increases coming into many of our grades. We’re in a sold out position. So I’m not sure that it’s necessarily fully bedded in, but then neither are all the costs fully bedded in. So I don’t think that we’re sort of saying that the $50 that we have announced to our customers a couple of days ago, is in these forecasts totally. But obviously, some of it will to be offsetting some of the very material cost increases that we’re seeing, whether that’s freight or whether that can be energy or whether it can be anything, frankly, that we’re buying today, you’ll obviously have picked up that many of our customers are coming to us with — sorry, suppliers are coming to us with necessary increases or that they’re looking for because of their own supply constraints.

One of the things, Gabe, to bear in mind is that I think for the first time in a little while that we are seeing the security supply question come back on the table. And during the whole COVID period, we and Smurfit Kappa were excellent with our customer base in ensuring that we got — gave them security of supply. And clearly, that’s something that we’re continuing to emphasize to our customer base that we are an integrated system. We have everything we — so therefore, they don’t need to worry about their boxes when they get them from us or their consumer packaging when they get them from us. But there are obviously many customers out there that are somewhat affected by some of the issues that are going on in the supply chain at the moment.

Ken Bowles: Gabe, yes, I suppose, look, really, I suppose the one moving part, as you can imagine, is the energy piece. I think back in February, if memory serves me correctly, we would have guided energy to be about $80 million higher year-on-year for the group. I think that’s probably based on everything we’ve done, probably more like between [ $270 million ] and [ $290 million ] in terms of total impact for the year. So there is kind of cost inflation that we wouldn’t have had back in February. Equally, really was an indirect impact of all of that is an increase in freight cost. I mean even within the first quarter alone, we had a decent impact from just freight. We expect that to carry through at least, probably a slight relief in terms of labor, a slight relief in terms of OCC.

But broadly, when you think about it, the big moving part is energy and really then volumes, as Tony kind of alluded to, picking up during — as we get towards the back half of the year. Pricing, as you say, to come through and be bedded in. But really, when you look at the cost inflation piece, you take the puts on the calls and all the bits and pieces, you kind of broadly end up where the range kind of sits. But really the big mover from what we said back in February, probably energy.

Gabe Hajde: All right. As expected. And then just one obviously, you talked about pivoting kind of the growth at some point in the second half given the onboarding of new customers on the corrugated side. Just maybe on more of the, I’ll call it, open market piece of the containerboard business in North America. Can you talk at all about what you’ve seen in the export markets in North America?

Anthony P. J. Smurfit: In North America, well, I would say what I’d say — what we’ve seen in Latin America because that has a direct impact, is that literally, as I said at the very outset to the first question, things have changed really quickly. Now obviously, I can’t put my hand on my heart and say they’re not going to change quickly back again. But as we sit here today, I’ve never seen the speed of change so quickly. So for example, in Latin America, they were getting paper from Europe for a period of time at very discounted prices. Now if you look for paper in Europe, you’ve been told, well, we can make it in June — sorry, July and we can ship it and so it can be with you in October — September, October. So — and by the way, we’re not — we haven’t discussed pricing.

So — and there isn’t a whole lot of paper coming out of the United States. I think the number, if I’m right, Ken, is about 30% less paper being shipped out of the U.S. to Latin America. So the market has changed very quickly. And I think if you look at it in the context, Gabe, the worldwide containerboard markets, call it [ 100 million ], just to make the math easy. The world still has been growing over the last number of years, 1%, 2%, and that’s generally speaking, needing containerboard. And there’s been a lot of capacity come out. And we haven’t seen the effect of that capacity coming out really because the economy hasn’t been strong enough in some of the North American and European markets. As there’s some degree of strengthening, then all of a sudden, you see a shortage because people have been keeping their stocks low.

And so that’s probably what’s happening in the export market. And clearly, that’s something that will be beneficial to us as we roll through the year.

Operator: Our next question comes from the line of Mike Roxland of Truist Securities.

Michael Roxland: Congrats on all the progress. First question, just you mentioned, Tony, seeing much improved demand and strength in order books. And it seems like you sold out of most paper grades. What do you think is driving that, given that the consumer is further stretched due to higher cost and given the fact that some of these CPGs are likely to input price increases to cover their costs? And relatedly, can you talk about the monthly volume progression in 1Q in North America and what volumes have done thus far in April?

Anthony P. J. Smurfit: Okay. That’s quite granular, Mike. I mean basically, we have been — we’re down — as you saw, we were down 8.5% or so during Q4. We’re down 7-odd percent this quarter. As we sit here today, we’re down 4% in April versus last year. And we’re — we didn’t lose a whole lot of business in Q1 and Q2 last year. So we’re lapping higher comparators than we would have. What I would say is that we are seeing, as I say, significantly new customer wins as — and more importantly, Mike, we’re seeing good people coming to work with Smurfit Westrock. And we talk about our model and empowering our people and having the right culture. And for me, that’s critical to longer-term success. And I think that’s what we’re starting to see the benefits of that as people are coming into the company and realizing it’s a good place to work and has got the right values and the right culture.

So I think — and I hope you experienced a little bit of that yourself when you were in Amsterdam recently. So I think I would say that we’re moving in the right direction. I mean it’s never as quick as you want it to be. Let’s be honest. I mean, I would love it to be snapping my fingers and getting 600 customers, new customers a month, that’s not reality. You lose a big piece of business, it takes a while to get a number of smaller pieces of business in and remodel. I’ll give you a very good example. When we acquired — sorry, when we combined with Westrock, we had a large facility in one of our Latin American countries. And they were doing about 350 million square meters, and they were losing about $20 million a year. They’re now doing 280 million square meters, and they’re making $15 million a year.

So that kind of turnaround is done, but we’ve lost volume, but we’re making much more money. And that’s the kind of model that we want to get to with all of our facilities. Some of that requires some investments. Some of them require people change, some requires a total mix change. But we’re on the path, and we’d like it to be quicker, but the reality is you can only do things at the pace that the organization and people are able to go with. The first part of your question was…

Ken Bowles: I suppose the drivers of improved demand. I suppose that Tony kind of alluded to earlier on, some of that could potentially be a bit of prebuying given what’s coming. But I think also, like I think we all experience it in our day-to-day lives. I mean ultimately, shelves do need to be refilled at some point, there is only so far I can push things like buffer stocks and every other stock. So I think some of that is just the supply chain where it can begin to normalize given the volatility of the world outside. I mean people have — one of the things that has come back on to our radar as a kind of key strength of Smurfit Westrock in this environment, is security of supply. I mean, that’s something that our customers are beginning to not only push for, but value more in this kind of environment.

So we’ve seen it equally through the areas that maybe had been lagging for a while. Home improvements, white goods, those kind of areas are strong indicators and green shoots of demand, too. So there could be an element here of confidence, could be an element here of the world begin to understand the volatility and try and find normalcy kind of through that.

Anthony P. J. Smurfit: Yes. And the only other thing to add to that, Mike, would be that we are in a seasonally busier period. So we are April through, let’s say, November is a busier period. So we should expect to see some pickup. And if people have low stocks and those pick up, then there’s naturally a bump in that. So it’s probably — it’s a combination of all things. But I do agree with you that it is kind of a little counterintuitive given everything that we read in the news every day. But hey, I’ll take it.

Michael Roxland: Got it. That’s really great color. And then just for my follow-up, realizing some of the incremental costs that you’re currently experiencing may be transitory, Ken you pointed out the energy. What levers do you have available to you internally to offset those higher costs. Are there cost takeout programs. I believe you have to offset inflation. Is there any way to accelerate those programs? And this is all — obviously from announcing further price increases, which you just did.

Ken Bowles: Yes. Michael, I think you would have seen, again, at the event last week, you’ve seen a lot of programs and plans in innovation where we are designed specifically to take costs out, not just for us but for our customers. I think the short answer is yes. I mean as an organization, we take the view that when you wake up on January 1, general wage inflation means you’re already behind for the year that you just had. So we always have a very active cost takeout program plant by plant, which is part of our budget process to primarily at offsetting inflation. I think when you get areas of volatility like this in energy, I think some projects that might have been slightly underwhelming probably become much more valuable around cost takeout for headcount reduction, those kind of underlying projects, some projects in mills, which have a direct impact on energy consumption and those kind of things we try and bring through, they don’t come through quickly, but some we will have started 2, 3 years ago.

And as they come online this year, they have a better impact. But I think we’ve always taken a view that if you’re looking at earnings, you got to look right down to P&L. There’s no point just stopping at sales and the margin. Every piece of cost that goes into mill is something that or box plant that you need to kind of look at and take a view on. But no cost [ incurred ] is kind of a basic principle for everybody in the organization because quite frankly, if you think about beyond these years of inflation before that, we were dealing with low inflation environments where we’re trying to get price increases, too. And the only way you can manage that cost base and grow margins is by taking cost out fundamentally.

Operator: Our next question comes from the line of Anthony Pettinari of Citi.

Anthony Pettinari: Good morning. In North America, I’m wondering if you can talk about when you would expect to see the most recently realized price hike, the $50 a ton net from Pulp and Paper Week in April. Like when should that flow through for you? And then the $50 a ton that you’ve just announced, I believe it’s for June, assuming that, that would be fully implemented, like what month or in terms of quarterly cadence, when should we expect to see that in the results?

Anthony P. J. Smurfit: Well, the first $50, you should fully see it implemented by July 1. So practically speaking, there might be 1 or 2 that don’t happen. But by and large, the first $50, I should say, the minus 20 plus 70, it should be fully implemented by July 1, but they’ll be progressive through May and June. And then the second $50, if it’s to be successful, we will wait and see. I mean, obviously, that’s early days. I would suspect that by the end of the — by September, it will be fully implemented. If it goes through.

Anthony Pettinari: Yes. Yes. No, that’s helpful. And then in North America, there’s a comment around the substrate agnostic approach delivering for you. Can you just talk a little bit about your consumer business and how that is performing relative to your expectations around profitability CRB, SBS kind of substitution dynamics. Just wondering if you could talk kind of how that business is performing.

Anthony P. J. Smurfit: Yes, it’s interesting. I mean, I think when you talk about that business, you have to go through the very different substrates of the business. I mean, SBS, as you will all know, has been a very challenged business. But as I mentioned, we are now in a sold-out position in SBS because we’ve won a lot of customer wins and the — a lot of our projects have come through. So we’re in a good position, except obviously, our pricing isn’t as good as it was a couple of years back. So demand has picked up, and we are selectively pushing prices up in certain areas of SBS. And in our CUK business, that’s a solid business. It’s a system business and continues to do well, and we’re comfortable and strong about that business, and we’re investing behind it.

And in our CRB business, obviously, our mills are little bit older in that area, and we are actively moving from some CRB products into CUK and SBS and giving the same performance for — better performance for our customers. And that’s working very well and is obviously beneficial to us as well as a company. So overall, I think we are with perhaps the exception of CRB, we’re in a very good space. I would say that — if you ask me about the results, I don’t think we make enough return on some of our assets in that. And that’s something that is work in progress. And some of it’s to do with our own planning. And so we have some work to do still. But it’s fundamentally a very good business with very, very good people, and I have been incredibly impressed with some of the assets that we have and some of the people that we have in that business.

So there’s no reason why we can’t be very, very successful in that business for the long term. But work to do on our CRB mills. Some facilities, we still have work to do and reliability. But our positioning is very strong, and we have really good people.

Operator: Our next question comes from the line of Mark Weintraub of Seaport Research Partners.

Mark Weintraub: First, I think during the Investor Day, you talked about maybe getting about half of the business back in corrugated by the end of next year, maybe like the fourth quarter. And as you said, you were down high single digits or close to 10% in the fourth quarter. Does that mean you could potentially be up 5% in the fourth quarter? And are you I mean it sounds like you’re doing really well in regaining business. Are you on the trajectory that you hoped you had been on?

Anthony P. J. Smurfit: I think I would say — I don’t know about sticking to a 5% number, but there is a lot — a little bit of that will depend on what the market is. But I think I am really happy with the trajectory of our sales team and sales organizations and how we’re moving — not all our plants are perfect yet, Mark. We have still some work to do. We still have some investments to make. We still have some people to bring in. So it’s still working — I’m sorry, it will always be work in progress. I mean, corrugated box plants are their own organism, so to speak, that they actually — each one is its own business. And they don’t all act the same and perform the same. But overall, the direction of travel with the people that we have is really strong.

And as I say, I’m really encouraged by the quality of people we’re bringing into our organization. I mean, we’re doing a, I won’t say, management training course, that’s the wrong word, but we’re doing a — we’re bringing every single manager from North America into a — this is how to operate type course. And everybody seems to like it and likes the direction that we’re taking the company internally. But that doesn’t mean to say I can wave a magic wand and everything will change automatically. It won’t. It just takes a little bit of time. But we have some standout performers and standout managers and we just need to have everybody to be a standout performer and standout manager. And that’s what’s behind the drive. As I’ve said, to go from 0 or negative in our corrugated system to margins of between 8% and 12%.

And that’s where we will get to. The question is when. And obviously, we’re trying to drive it as quickly as possible.

Mark Weintraub: And then just as the second question. So you talked about how in the consumer business still tough in SBS from a profitability standpoint. So I’m kind of curious, you’re sold out. You’re not making enough money in that business relative to what you think you should be. You’ve announced price increases broadly in a number of the other grades. And you did mention — you mentioned you’ve done some in SBS. Maybe if you could just clarify, is that just in the extruded grades? Or is that more broadly? And if not more broadly, what is it that we need to wait for until we can start seeing the SBS business making a lot more money and hopefully lifting up CUK or at least protecting CUK and CRB as well?

Anthony P. J. Smurfit: I mean I don’t think I should be really talking about forward pricing. But I mean, obviously, as I said, what we’ve done is selectively increased some SBS pricing — or announced increases of some SBS pricing. And we’ll just have to wait and see, Mark, when we believe our — maybe the market will believe it’s up to — it’s not just up to us, it’s when we believe the time is right. I mean it’s a relatively new phenomenon that we’ve got sold out. I mean, if you were — when we were together in February, we wouldn’t have imagined that we will be in this position, and we are in this position as we go into May. So on the assumption that, that position stays stronger and on the assumption that stayed the same and on the assumption that we’re not comfortable with our profitability. That’s something that we will obviously keep a weather eye on as a company and then take it from there.

Operator: Our next question comes from the line of Detlef Winckelmann from JPMorgan.

Detlef Winckelmann: Maybe my first one would be, I mean, we know Q2 is obviously going to have a lot of cost. We’ve seen that through the Middle East inflation coming through. But at the same time, we’ve seen a raft of price increases both in Europe and the U.S., 30 in the U.S. so far since the run started and, let’s say, about 100 cumulative in Europe. I would just love your thoughts in terms of price-cost where you think we’ve kind of landed at the end of this, assuming you don’t get the other $50 per ton price increase that you just announced, my sense is that you probably recovered more than cost inflation in Europe and maybe matched it in the U.S., so far. Is that a fair statement? Or any color on that would be great.

Ken Bowles: Detlef, it’s Ken here. It’s a tricky one because we tend not to go into the segments for quarter-on-quarter. But broadly, I think when you look at price — I mean remember, price increase in Europe for paper in the last number of weeks. It takes a bit of time to work through the system, particularly given the level of integration we have. So — but I think you’re seeing probably a couple of impacts, and you rightly point out. Energy continues to be — as we go into the second quarter is when it begins to kind of hit a little bit. So may be slightly higher for the group in the second quarter. Recovered fiber is definitely higher for the group in the second quarter, probably around $20-odd million. I think you referenced slightly earlier on, like freight is one of those things has an indirect impact of the cost of energy, it is showing some increases again in the second quarter, probably another $10 million.

I think the big delta we have from a credit perspective, if you like, on the bridge second quarter is around downtime. Fundamentally downtime in the second quarter last year, was a lot heavier than the second quarter this year. In fact, that was quarter 1 this year. And so quarter-on-quarter, you’re probably getting the benefit of that, call it, $40 million lower downtime year-on-year, so — or quarter-on-quarter. So I think between the jigs and the reels, the quote an Irish phrase, you probably end up back at if you can get to a bit better volume, if it is better on price then it comes through a piece, but the underlying cost movements are being broadly offset by the impact of lower downtime quarter-on-quarter.

Anthony P. J. Smurfit: Yes. And I’ll just add to that, Detlef. We did not follow any price increases that were announced by the industry in October and neither in February because we didn’t think the conditions were viable for that. I’m talking Europe here for a second, I did not think that conditions were correct for that. And at that point and you only have to look at results of our competition, you’ll see that how terribly underwater everybody is in the business. And we’re still doing reasonably well. But now the demand has picked up and now that our order books are good and they’re good in Europe, too. And I can tell you that we’ve won a lot of new business, not only out of the initiatives that we’re doing on innovation.

But because of our service and our quality and our long-term position in this business, and I would say somewhat our stability in this business that we won a lot of new business that’s coming through as we go into the second half and even into next year. So there was an absolute necessity to recover something by the industry because everybody was dying. And now that there is a bit of momentum, a bit of demand, then clearly, we’ve seen the — that’s the time that we would push in, as I say, just to use my anecdote about Latin America, there was paper available from Europe basically at any price 3 months ago, and now you can’t get it until September, if you’re lucky. And I don’t even know the price.

Operator: Our next question comes from the line of Andrew Jones of UBS.

Andrew Jones: I just wanted to just go back to the bridge for this year. I mean, you mentioned that obviously, freight will be — or we saw like nearly $50 million in the first quarter. What’s the overall number you’re kind of seeing at sort of spot rates for this year? And then I think you said some labor cost relief so with the cost takeout on labor side, you’re expecting that to be a tailwind. Was that correct? And also, can you just drill into some of the — sort of cost related moving parts, specifically things like chemicals, where we probably have a bit less clarity on? And also, could you give us some sensitivity around the gas prices move significantly from where we are on the spot today, like maybe a rule of thumb with the hedging taking into account for how much of that energy cost estimate could move with like a EUR 10 move in TTF or the dollar move in Henry Hub something like that. Can you help on that side?

Ken Bowles: That will be — that’s complicated mathematics on gas prices, Andy. I think I’ll leave that to Ciaran, Darren and Frank to take you through the mechanics. It’s not as simple as given the size of the system and then how we purchase and buy and given the level of hedging, it’s really not as simple to say if TTF goes up by 10, that equates to X, Y, or Z because that involves where you produce, when you produce, how you produce. The system is much more delicate and balanced around that than a straight input output gas price. I just missed the first part of the bridge you’re looking for there, Andy, was on which element?

Andrew Jones: First of all, freight, but also things like chemicals and just clarify on the labor what you were saying around the year-over-year impact.

Ken Bowles: Yes, yes. Get you now. No, the — on labor, it was less a comment that it’s been a tailwind as we go through the year, less of a headwind as we work through the year simply because of either projects we implemented, some of those quick win projects we talked about before or generally good work done around things like CLAs and wage negotiations and some — and quite frankly, some of the rationalizations too. So I think broadly, where back in February, we might have seen labor be [ $100 million ] of a headwind. It’s probably more like [ $50 million ] as sit here now, for example, things like chemicals and starches and all that kind of stuff really as a bundle, it’s not a meaningful driver for the business, though and we don’t tend to break them out.

It’s quite low level in terms of the overall cost. Big drivers for us tend to be energy, OCC, labor and freight, as you say, that’s going to enter the picture, but simply as a kind of indirect impact from what’s happening on energy. So fiber, broadly, it will be slightly better, probably flat where we said in February so tailwind of 50 is still there. On freight, though, freight probably, given what we’ve seen in the first quarter to extrapolate that, freight’s probably a $50 million headwind as we get through the year based on where we sit now, that can clearly change. But they’re really the big buckets. And as I said just to Detlef there, probably the big delta quarter 1 to quarter 2 was around downtime of lower downtime, call it, $40 million.

But I think the guys would be happy to take more detailed questions on energy. As I will be happy for them to take more detailed questions on energy offline.

Andrew Jones: Yes. No, that’s fine. So do you say $50 million headwind for the year on freight so basically, we’ve seen that in 1Q.

Ken Bowles: Yes, because it’s really — really the impact there is where you see gas prices. And clearly, as you work through the year, you’ve got a bit more hedging on price changes would be. So that’s kind of where we see it now. But look, at the half year, we’ll update that for you anyway, Andy.

Operator: Our next question comes from the line of Lewis Roxburgh of Goodbody.

Lewis Roxburgh: I think most of the main questions have been asked, I think. It’s just a follow-up on the North American box system. You previously talked about around 60% of those box plants, loss making box plants still to work through. Another 40% is seen as a realistic improvement target over the next few years. So I just get a sense of progression of uplift that might be to EBITDA margins as the next phase is delivered or whether that’s changed given the current cost outlook.

Anthony P. J. Smurfit: No. Lewis, it’s Tony. I would say that what we said was that we had got to about 30 or 29 loss makers instead of 60 or 70 at the beginning. And now we’ve got it down to 29. And obviously, that’s continued work in progress. That is very little to do with the cost side of things is to do with the operating side of things, and that’s something that we’re working on all the time. And so we’ll probably always have some that are loss making for one reason or another, but I would certainly hope that we would get that into — through the cycle in single digits.

Operator: There are no further questions. Speakers, please continue.

Anthony P. J. Smurfit: Okay. Well, thank you all for spending the time with us this afternoon or this morning. It was a challenging quarter, Q1, weather-related and somewhat demand-related. But we’re out of that now. And when we look forward, we see a lot more optimism than we’ve seen for a long period of time. Obviously, we’re cautiously optimistic rather than aggressively optimistic, but what we see is pretty good right now, and we’re hoping that continues as we go through the second quarter and into the rest of the year. Clearly, the world is a little bit of a challenging place, and we all hope that everyone on this call and everywhere stay safe and look after themselves. So thanks a lot for joining us, and we look forward to seeing many of you in the coming months.

Operator: Thank you. This concludes today’s conference call. Thank you for participating. You may now disconnect.

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