SMFTF - Smurfit Kappa Group Plc (SMFTF) Q3 2023 Trading Update Call Transcript

2023-11-02 11:35:05 ET

Smurfit Kappa Group Plc (SMFTF)

Q3 2023 Trading Update Call

November 01, 2023 04:00 AM ET

Company Participants

Anthony Smurfit - Group Chief Executive Officer

Ken Bowles - Group Chief Financial Officer

Conference Call Participants

Justin Jordan - Davy

David O’brien - Goodbody

Cole Hathorn - Jefferies

Kevin Fogarty - Numis

Charlie Muir-Sands - BNP Paribas

Andrew Jones - UBS

Brian Morgan - Morgan Stanley

Gaurav Jain - Barclays

Joffrey Meller - Bank of America

Presentation

Operator

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. [Operator Instructions]

I will now hand over to Tony Smurfit to begin today’s conference. Thank you.

Anthony Smurfit

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 12, we announced an agreement to form Smurfit WestRock, a global leader in sustainable fiber-based packaging. We said at the time, and we reaffirm 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.

A 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 negative 7% and 5% in quarters 1 and 2, 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 coming – 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 and 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.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We’ll take now our first question from Justin Jordan from Davy. Your line is open now. Thank you.

Justin Jordan

Thank you, and good morning, everyone. Tony, just a quick question on Q3 trading. Back in the interim results in August, you told us that, I think, July volumes were minus 3%. You just reported minus 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 or something like minus 1% is 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 is 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

Thanks, Justin. I mean, I think the trend is, as we said, in Germany, taken it specifically, our order intake is quite a bit higher than it was in the summer somewhere between 8% and 10%. I don’t – I’m a bit reticent to say that that’s a long-term trend because we saw that in April of last – of this year, where we did see an uptick in orders, and then it didn’t fail to – it failed to materialize for the rest of the summer.

But there definitely seems to be more confidence from some sectors in our business. And 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 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, 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 real sign of life that our guys have seen for six months now or so. I do always issue a health warning, but 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 – I think the figures of yesterday out of inflation were encouraging from the IPO. 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 going to stay good. We can’t guarantee that, but I think it’s encouraging.

Justin Jordan

Thank you, Tony.

Anthony Smurfit

Thanks, Justin.

Operator

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

David O’brien

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 book. Just trying to understand how the cost books have performed in the third quarter and what your guidance assumes they do for the fourth quarter. And 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 ours and the team, is this 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

I’ll take the second piece of that and let Ken take the first piece. I mean, I think they’re certainly not back to boom levels or anything like it, but I was at a customer event this week and – no, 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’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 sort of more normalized levels.

And as I’ve said before, David, 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 I said yesterday.

So there is – I was really taken by – we’ve had 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 quite optimistic, frankly.

Ken, do you want to take...

Ken Bowles

On the cost focus, I suppose, the net-net is that you can see where guidance is versus where it was at the half year. So no real material change to any of the cost lines. More bit of ups and downs here and there, things like distribution, which would have been small tailwinds, would be flat similar with wood, which would be flat.

I suppose the one that maybe people might have thought was continuing to Q4, we ran OCC, where we’ve probably seen all the benefit of that. So Q4 for OCC is probably not showing either, so maybe probably flat, no head and tailwinds. But I think 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 whereas it remains very resilient, and Tony said that, more positive, at least optically demand environment. But no material change in the big cost buckets.

Anthony Smurfit

And the energy hedging.

Ken Bowles

Energy. Well, no energy kind of broadly where we were. I think it’s [EUR 250 million], so again, no material change.

David O’brien

If I could just follow up on one part here. You talked about box price is, I guess, we’re only two months from the start to ‘24. Should we expect any large incremental kind of box price resets in the 1st of January? Or how do you think the trajectory looks there maybe on a – 2024?

Anthony Smurfit

I think, I mean as you know, our contracts 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. It’s obviously the big move down has happened already. So it will be incrementally lower. But there will be still some movements downwards in box pricing.

But the interesting thing, David, is that the paper prices are really in bad shape for recycled paper. And we already see a number of projects postponed. We see a number of closures announced, as you know. So there will – there is a lot of pain in the paper – in the free market paper industry right now. So we’d expect to see 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 movements at some point upwards.

David O’brien

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

Anthony Smurfit

Thanks, David.

Operator

We’ll take now our next question from Cole Hathorn from Jefferies. Your line is open now. Thank you.

Cole Hathorn

Well, Tony, again, 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. That’s the first question.

Anthony Smurfit

Yes. I mean, obviously, 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 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 – I don’t foresee paper pricing moving down much more. As I say, it’s at – 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 we have good visibility as to will pricing move down more? Yes, but is it going to be significant? Probably not. And then we’d expect that trend to reverse as soon as volume growth starts coming back into the market. And – but when that happens is obviously a function of a number of different macro factors that are way outside of our control. But 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 ‘21 and ‘22.

So 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 products – packaging products towards us. And I think that’s going to be a big long-term advantage, obviously, in this kind of demand environment.

There’s a lot of noise covering that up. But clearly, the – with our design tools and with our knowledge, Cole, I think we’ve got a really fantastic story for the future, but we need some degree of normality in the general world for that to be seen to the full effect.

Cole Hathorn

Tony, and then maybe on the containerboard prices, I know that 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 absorb much more fixed cost overheads, and we’ve got OCC staying decent levels. We’ve got gas up a little bit into winter. Are you still seeing a significant amount of commercial downtime in the industry? Can you give any color of where we are kind of inventory levels, whys and – do you have any reason that will...

Anthony Smurfit

There’s been a lot of downtime thing. We’ve actually taken much less downtime because of our integrated model, but we have taken downtime ourselves during Q2, less so in Q3. But – and we’ll continue to take a bit of down, especially around Christmas because 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 products – 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 – 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 that’s putting a lot of pressure on a lot of producers. And I think we’re going to 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

And then maybe on the – potentially the trigger for those prices to go up is hopefully demand-led. But have you seen any incomings from your customers on the promotional side? I imagine some of the bigger brands 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?

Anthony Smurfit

Well, we will do, Cole, when it happens. I mean there has been signs of it in certain of the markets. I think you’ll have seen from the large FMCG producers, their margins are generally pretty good, and the 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

Thank you.

Anthony Smurfit

Thanks, Cole.

Operator

We’ll take now our next question from Kevin Fogarty from Numis. Your line is open now. Thank you.

Kevin Fogarty

Hi. Thanks very much. Good morning, everyone. Just apologies to sort of get back on pricing again. But I guess when we – at the interim stage by 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 that we’re seeing in terms of costs, et cetera. I just wondered if there was any – 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 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 downcycle and, therefore, kind of the volume dynamics take longer to recover there or just lagging Europe? Or is there anything else happening there?

Anthony Smurfit

I’ll let Ken take the first part. But just on the Americas, Kevin, I think what we’ve seen in Americas is we operate a portfolio of businesses, and we’ve been making investments. So I think our performance there is – to be honest with you, it looks pretty exceptional when you look at all the various businesses around the world. When they’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 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 has been fine, not – didn’t grow as strongly as, say, a country like Colombia, but 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 we penalized our results this year because we had too much stock because we’re – 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, we’ve penalized a lot of our operations by having high-cost stock, and we’ve had to work that through the year.

So clearly, that’s a positive as we move into next year in a comparison basis. But 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 would expect that to start turning in the – at some point.

Ken Bowles

Okay. Now on your first question. I think – no, I think you need a trigger. I think as we’re kind of saying 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. Independent box makers will be benefiting from that. There’s not necessarily any incentive to seek further price increases based on that.

I think equally, we have to see it in the context of our own performance, which is how much – how resilient the box price has been, particularly 2023 and particularly against that backdrop of paper price falling versus the good work that the teams did in getting it to the heights they got to 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 the recovered fiber and paper again, as you get to – as you move through the system.

Kevin Fogarty

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

Ken Bowles

Thank you, Kevin.

Operator

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

Charlie Muir-Sands

Good morning. Thanks. Just one question sort of stepping away from the price and cost a bit. Obviously, the EU’s published sort of a 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 you could share your updated views on that and 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

Very early in the morning for a question like that, Charlie. I think overall, 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 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 just don’t make any sense, and we will be working hard to make sure that 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

And I think, Charlie, too to keep in mind that we have to be conscious of the kind of the law and unintended consequences. I mean while reuse is a wonderful idea, as Tony said, it’s some problems in 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 got to be kind of thought through from the entire supply chain rather than just the end product.

Charlie Muir-Sands

Yes, absolutely. Thank you.

Anthony Smurfit

Thanks, Charlie.

Operator

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

Andrew Jones

Hi, James. 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? 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 some of that decline that you’re guiding towards sort of implied EUR 425 million, that decline all comes basically from price? Is that a fair spend?

Ken Bowles

I think, Andy, on the second one is the absence equally of kind of a tailwind in OCC as you move through the fourth quarter is probably a big impact there. But broadly, what you’re seeing in the bridge is like Q3 to Q4, probably all is price-driven at this point, given that most of the book has remained fairly stable since the half year.

In terms of pricing itself, I suppose context equally is important here. And if you think about the box price raise in December last year, which is in the order of something like 50%, as we said at the nine months, the nine months on nine months box price moved at the negative 1%, negligible. The quarter-on-quarter move is close to the kind of minus 11%. And I think as you move to the fourth quarter, then your math would probably tell there’s maybe another 2% or 3% there to kind of get towards the [EUR 425 million].

Andrew Jones

So 2% to 3% lower quarter-on-quarter is sort of price the difference?

Ken Bowles

Exactly, Andy.

Andrew Jones

Yes, yes. Okay. And in the third quarter, we’re down, I guess, somewhere around 6% in that. Is that fair, quarter-on-quarter?

Ken Bowles

Quarter-on-quarter – quarter – fourth quarter ‘23 on ‘23 or ‘24 on ‘23, Andy?

Andrew Jones

Third quarter of ‘23 on the second quarter is probably down about 6%. Is that fair?

Ken Bowles

Yes. Sorry, yes.

Andrew Jones

Okay. Cool. And I think the line was a bit bad when you mentioned the energy tailwind for this year. Do you say somewhere around [EUR 250 million] for the year overall, something like that?

Ken Bowles

Yes, broadly, yes. Yes, about [EUR 250 million]. And that’s – in context, that also includes the kind of a negative impact from hedging year-on-year, which would have the benefit of last year. So still, a net tailwind of about EUR 250 million.

Andrew Jones

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

Ken Bowles

Thank you very much.

Operator

We’ll take now our next question from Brian Morgan from Morgan Stanley. Your line is open now.

Brian Morgan

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

Ken Bowles

Only to say that we’re kind of – we’re very much in line with our policy. We’re probably about 30% hedged for the year, which will be normal at this point of the year. Listen, energy is clearly the open position, we kind of drive it a piece, but we’re not. At this point, I’d probably say there’s no material impact to year-on-year from energy as we sit here today, ‘24 over ‘23.

Anthony Smurfit

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

Brian Morgan

Of course. Thank you very much.

Anthony Smurfit

Pleasure.

Operator

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

Gaurav Jain

Hi. Good morning. Thank you for taking the questions. A couple from me. So one is that Q4 EBITDA is EUR 425 million. And I heard that Q1 ‘24, pricing could also be down over Q4 ‘23. So does it mean that Q1 ‘24 EBITDA will see another step-down? Or are there offsetting cost factors or fixed cost absorption factors which will drive EBITDA sequentially?

Ken Bowles

That’s quite a detailed question. I think each of the detailed modeling questions is probably better dealt with, with a guide. But I think it’s important to remember when you think about Q4 over Q3, you do have December there, which tenders shorter work in the month. So there’s many, many impacts.

I think the better way to think about it is the way we kind of characterize it. If you think about the year, as we sit now at EUR 1.625 billion, an outcome of EUR 2.050 billion, we give you the big cost buckets, and we’ve given you the directional travel on box pricing. That’s – anything beyond that, I’d suggest, maybe for more details, to approach to Ciarán or Frank, and they’ll...

Anthony Smurfit

I think, Jain, it’s important to remember what I said in my summary that at the start of the year, we’re sort of forecasting around the EUR 2 billion mark, and we haven’t had anything to say other than we’re going to be around the EUR 2 billion mark, and we do what we say. And I think that is one of the things – the hallmark of this company is that we try and make sure that we take any surprises out of the situation.

So obviously, as Ken has said, December is always a funny month. It’s a very short month. At this moment in time, profitability comes from the corrugated division. And 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.

And 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, at the moment, you’ve only half a month of profitability. So that affects your month during that month of December.

So at different points of the cycle, you’ll have better Decembers. And this year, we’ll have a worse December than we would normally have.

Gaurav Jain

Okay, sure. And just if I could ask one more question. Hopefully, this is not a detailed modeling question, but this was on net debt. And 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

You will get an incremental benefit from – I think most people would have probably thought that the bigger month to remove the box pricing was Q3. So you probably would have expected a slightly larger working capital. And so you will get some of that in Q4.

Now I think equally, as box prices have remained more resilient, paper equally remain down, you’re probably not getting as much as unlock the working capital, as you might ordinarily think because in reality, you’re not going to get any creditor relief here. It’s all going to be debtor relief, which would get your box price decreases.

So we’d see some of that come through quarter four. But beyond that, we continue on the capital spend. All the guidance line items for free cash flow remain as they would have been as we would have guided at the half year.

So – but there’s nothing – nothing is like fundamental within that kind of 9-month free cash flow, 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 moves. But as we get towards the end of the year, we’re probably back where we though we would be.

Gaurav Jain

Thank you so much.

Anthony Smurfit

Thanks, Jain.

Operator

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

Joffrey Meller

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 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

Yes. Well, basically, the answer to your first question is, yes, we would expect 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, 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 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 all the projects are on track, where 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.

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 and when wages go up, it makes a lot of the projects to – invest in equipment to reduce headcount much more – much better payback.

So clearly, that’s an area which we’ll be focusing on. But overall, I think 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 capital allocation and where we put it.

Joffrey Meller

Fantastic. Thank you very much.

Anthony Smurfit

Thank you, Joffrey.

Operator

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

Anthony Smurfit

Thank you all for joining us. We very much appreciate your time being with us and especially the questions.

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 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

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

For further details see:

Smurfit Kappa Group Plc (SMFTF) Q3 2023 Trading Update Call Transcript