Smurfit Westrock plc (SW) Q3 2026 Earnings Call Transcript

And thank you for standing by. Welcome to the Smurfit Westruck 2026 Q3 results webcast and conference call. At this time all participants are in a listen-only mode. After the speaker's presentation there will be a question and answer session. To ask a question during the session you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one and one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Kieran Potts, Smurf at Westrock Group VP Investor Relations. Please go ahead.

Thank you, Sarah. 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 filing. The company undertakes no obligation to revise any forward-looking statements. Today's remarks also refer to certain non-GAAP financial measures where applicable reconciliations to the most comparable GAAP measures are included in today's earnings release and in the appendix to the accompanying presentation, which are available at investors.smurfitwestrock.com. Before I hand you over, please note that Tony and Ken are stepping away from the board this morning and rejoining after our call. In the interest of time, I therefore request that you ask no more than two questions. I'll stay on the line should we have any technical issues in Brazil. I'll now hand you over to Tony Smurfett, CEO of Smurfett Westrock.

Thank you, Kieran. As Kieran has just said, we're hosting today's call from our Tres Barras Mill in Brazil, Latin America's largest country with a population of some 213 million people. Tres Barris, this operation is a great example of successful investments of approximately 350 million dollars over the last five years delivering superior returns. It is integrated downstream into our Latin American box system, primarily in Brazil, Argentina, and soon to be Chile, and significantly integrated upstream. As you will have seen, we have announced third quarter adjusted EBITDA of 1.205 million with an adjusted EBITDA margin of 14.8%. These results show greater than anticipated cost inflation, predominantly, but not limited to, energy and freight. To counteract these cost increases, we have, by necessity, implemented price increases across most paper grades, which are being passed on with the norm. The period was characterized by extreme heat waves in Europe and a significant contamination issue in the agricultural sector in the United States, affecting our volumes both there and in Mexico. Since the formation of Smurf at West Rock, I'm incredibly proud of the many achievements we have accomplished, especially the way we have brought the two companies together and formed one. Operating in 40 countries, we have unified the company under one banner, with the focus being the owner-operator model, which resonates and is what we have developed. the strategic plan, which we presented to you in February, that takes the company to a different level to improve efficiency and their offering to our customer base through innovation, quality, and service. Turning now to a regional overview, our North American business continues to improve in most areas, although this improvement is not that we have incurred. The third quarter showed sequentially continued and developing strong. Our people have embraced our new Smurf at West Rock And this is reflected by our improvements across all customer service metrics and our attention and retention of talent. Today, our mill system across practical lanes sold out into 2027. In our converting businesses, we are progressively getting better through continuous investments with teams of highly market. We continue to benefit from our, as a major competitive. In another business area, our natural shift towards our paper badges producer in the United States is as weak as I have experienced it in recent years. our footprint is continually being strengthened by significant cost takeout initiatives and rationalization measures. Now turning to our EMAA and APAC region, where we continue to outperform our integrated peers, help them navigate an increasingly complex regulatory environment as a given, solving a key supply chain issue for them. As in other regions, we have implemented paper prices which have been progressing. These increases are primarily a consequence that has shown no signs of abatements during the year and is reaching levels that we have rarely seen. We have made many investments in both our mill system and our quality and service KPIs, giving us further competitive advantage. Some of those investments are also targeted at continuing to reduce our cost base and drive operating efficiency, which has helped somewhat to offset some of the cost pressures we have seen this year. We have also continued to rationalize our footprint, making our asset base more efficient, which will enhance future returns. The management team in this region has a skill to both now and continue to outperform. In Latin America, while the region faces many of the same challenges experienced in other regions, our returns, and in particular adjusted EBITDA margin, remain at excellence. A well-invested, world-class asset base, together with, again, skilled and experienced operators. We continue to look for ways of CNPC during this acquisition. We'll strengthen our position in both Chile and also during the quarter in our biomass boiler in Colombia, which is helping to offset energy price increases in our right shortages feed into the market. We now expect a just a EBITDA margin of approximately $4.7 billion. We continue to experience freight and energy dollars year-on-year headwinds in 2026, materially above our earlier expectations 27 we believe the actions we've taken during the year will more than often has been done across the organization in every region reduce our costs further develop our innovative as a truly globalized geographical reach it is ultimately our

customers who benefit most from our extensive offering as we develop the company through our invent 27 and beyond and with that operate thank you if you would like to ask a question you will need to press star one and one on your telephone and wait for your name to be announced. And to withdraw your question, please press star one and one again. We will now take the first question. This is from George Staffos from Bank of America. Please go ahead.

Good morning, everybody. Good afternoon. Thanks for taking the question to detail. I'm here with Reinhardt van der Waal in Europe. So I guess two questions, Tony. First of all, can you talk about the progression on volumes in North America. At one point, you expect to be up at some point in the back half. Is that still the projection? Relatedly, I think you had a profit improvement in terms of the bridge from volume, even though volumes were down in third quarter in North America. How do we reconcile that? And then second, given that energy and freight would seem to be largely a box-related expense, certainly it's going to affect both converting and production. But does the fact you're seeing so much pressure on where you had the least amount of margin headroom to begin with in converting. Does that change your philosophy in terms of how you try to push pricing and improve commercial terms over time? Thank you, and good luck in the quarter.

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

Yes, keep it simple, George. The net positive volume in North America is purchasing there.

Okay, and then on the pricing and the purchasing and converting?

Yeah, on the converting, I mean, I wouldn't say there's anything different. We are having to recognize the fact that we've got other costs than just paper, and clearly we have to recover the year either through negotiation or through making sure that we have a special tag on for us. We're continuing to develop our margins in our corrugated business. We have reduced our loss makers very considerably. I think we're less than 30 loss makers. It's a bit difficult when the paper price goes up. Obviously, there's a period of time where the corrugated operations slip backwards because they have to go into the market and get those paper prices up to see where we are right now. But overall, I think that we are making very good commercial. I'm really happy with our commercial team, and the customer wins. I'm getting pricing.

I think the North American margin quarter, and equally, you'll be setting that foundation for 27. So the actions we're doing are still on track, so no change to philosophy.

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

Understood. Enjoy the trip. See you soon.

Thank you.

Thank you. We'll take the next question today. This is from Hilary Cacanando from Deutsche Bank Securities. Please go ahead.

Hi, thank you for taking my question. Just going back to the North American converting business, last quarter you mentioned that corrugating converting margins were roughly 3% to 4%. Can you update us on where that converting margin stands today?

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

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

Hi, Hilary. It's Ken here. Yeah, essentially, in reality, you know, the plan was set up to 30, nothing within the plan was largely built on internal actions and a lot of kind of internal opportunities that we had to kind of get through, like kind of working through the unprofitable contracts and getting to positive volume growth in North America, for example. So pricing wasn't necessarily part of that kind of proposition, if you like. But clearly, I mean, but not the recovery or achievement of the target. But the 2030 target is still, I mean, it'll just be kind of a flex in between the years with how we get there.

So no change to 2030 plan. Thank you so much.

Thank you.

Thank you. We'll now take the next question. This is from Phil Ng from Jefferies.

Please go ahead. Ng from Jefferies. Your line is open. Please ask your question.

We can come back to him, Sarah.

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

Yeah, thank you, Tony, Ken, Karen, and team for taking my questions. First one I had, you know, the industry's got in about $170 per ton of price this year. Of that amount, how much do you estimate is for cost recovery versus margin for you guys in particular?

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

Yeah, and I think, Tony, in the end of July, I think up to that point, the increases to that date would have really dealt with the cost recovery piece and probably a bit of recovery on margin. That hundred would have overcome any remaining piece, but also purely margin. But as Tony just said, since then, clearly, the cost backdrop has continued to be elevated and unanticipated. So still, you know, a lot of costs.

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

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

Understood. Thank you.

Thanks, Mike. Thank you. Next question today is from Mark Weintraub from Seaport Research Partners. Please go ahead.

Great. Thanks very much. Obviously, we're in a pretty extraordinary period from a cost standpoint, and so I was just hoping if we could maybe get a little more color on some of the sensitivities and things like hedging, as well as the timing on price recovery as you roll container board through into boxes in the different regions. It was kind of a big-picture stuff.

I wouldn't normally be asking this, but, again, we're in a really volatile market, and it's hard for us on the outside to get our arms around some of the timing, in particular, around these items. yeah we we have said that that we expect to get the full uh cost recovery of the latest uh increase you know in q1 of next year and all of the paper the paper price increases as we as we deal with some of the later earlier taken orders as we get rid of those out of our system uh those will translate into much higher export prices uh you know we talked i mentioned in in our in our um in my script that, you know, we see very strong paper bag business that's growing very strongly because of some structural shifts. So all of that will start to feed through into later in this quarter, all the paper stuff later in this quarter, but really, you know, strongly into early next year. So, you know, as we go through Q1, Q2, we should start to see, you know, material increases in our numbers based upon these increases that will be passed from paper into corrugated and into export markets and into other grades of paper. And that is the normal, that it would be a normal situation for us. You know, Europe has been a little bit more volatile in up and down pricing. and so this is completely normal for the European business to have this time-like period and obviously when prices go down, that is also a benefit for the company. I've seen anything different other than the fact that if costs, as you say, markets, it's a time when all of us are dealing with these escalating costs and if they continue to escalate, we'll have to do something about it because clearly they're affecting our numbers. and we need to recover. So Q1 will be, you know, a continuing benefit from what we've seen in the announcement of the $70 and then we'll keep an eye on what we... ...sensitivities on energy are afraid.

I think when we think about energy and hedging, clearly coming into the year and where prices were, we still had a decent bit of hedging in the tank. Clearly at these levels, we've taken a different view across the year. We've stepped into the market every now and again when the price has come to a level where we think it makes sense to hedge. But not hedging at these kind of levels because, you know, in reality that can go against you if the price drops. So the energy committees in both North America and Europe and in Latin America have been smart about how they've incrementally added small hedges along the way. But we would not be at the levels where we would normally be, and that's clearly as a function of the market and where we see cost. But clearly on paper in both regions, you know, are designed to kind of take account of that situation too. But still a level of hedging, but not at the levels we'd like. And so probably the most meaningful sense is around where diesel sits with us. That's a direct impact of the business of something like $80 million. But then when you add in the downstream impact of that through the rest of the system, that's probably more like kind of $120 to $130 million in total.

Super. That's superb. And Ken, could you give us a sense of the sensitivity to that gas in Europe, either how much you're consuming or, you know, similar to like the dollar translates into X million dollars?

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

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

Appreciate it, Tyler. Thank you.

Thanks, Mark.

Thank you. Next question comes from Anthony Pettenari from Citigroup. Please go ahead.

Good morning. Hey, Anthony. Tony, hey, in North America, I think you indicated you're sold out in most consumer grades. And I'm wondering if you could give any more detail on where, you know, the consumer business is in terms of cost recovery or just sort of overall performance versus expectations. And, you know, I guess we've gotten these hikes in container board, but in consumer, we haven't necessarily seen the same kind of pricing traction. So just kind of wondering if you can comment on that.

Yeah, on consumer, I would say that it's steady. She goes on the C.U.K. market. That's carrier board market. There hasn't been any real decreases, nor has there been any real increases there. We had a look at that way back when, and it didn't seem like the right time. SBS, as you remember, went down about $100. We're in the market with increases currently, and we're sold out in that grade, so therefore we believe that it merits some increases to get more than back what we lost in the last quarter of last year as we move into next year, as we move into 2027. So that is a very strong grade for us. We have a very differentiated offering. We are a little bit in the commodity side of that business, but we tend not to try and be in all the commodity side of that business in plate stock and cut stock. And we've got some specific areas which we've grown, and indeed to see UK with customers and giving them benefit for that. So I think I feel good about the SBS market right now, the way that we're positioned at least. and then the CRB market, you know, we don't have, our mills are not the strongest in that area and we continue to be an alternative supplier for customers and our own internal usage and that's an area which we don't necessarily see. When I talk about most grades, that's the one area that we don't really see any pricing momentum and you'll know the reasons why.

I think I think as a consumer, we've seen reasonable progress in terms of volumes, Q3, that, but most pleasingly probably in our HPA section, broadly volumes up about 2% year So their position on most of the concerns are seeing progress.

Okay, that's very helpful. And then just quick follow-up on Europe and kind of your response to Mark's question. You know, given the spike in energy and freight and I'd imagine some volume pressure for the industry, are you seeing changes in industry supply demand in terms of supply coming off? Has that, I guess, has it surprised you that you haven't seen more supply come off? I'm just wondering if you can give any kind of general commentary on supply-demand situation in Europe and what's obviously kind of a stressed environment.

I think it's inevitable that it will happen. I think we've seen a lot of people taking a lot of downtime because, obviously, if you're going into the market and selling at the old prices, because you're losing a lot of money on every ton. And as this price continues to rise for energy, then you're going to see continued stress, either through downtime. As you know, Anthony, in Europe, governments don't like to see paper mills shut down, so they try and keep them open as long as possible, and they give all sorts of subsidies and help. And you'll have seen some of our competitors that announced their results and they're making zero EBITDA on brand new. How long they can continue to do that for? And, you know, I don't have an answer to that because, you know, there is often government support that keeps them going. But inevitably, if economics will trump out, then there will be some closures at these levels.

Okay, that's very helpful. I'll turn it over.

Thanks, Anthony.

Thank you. Next question is from Andrew Jones from UBS. Please go ahead.

Hi, gents. Thanks.

Thanks for the colour.

I just wanted to ask about the situation in Europe. We've had large price hikes, obviously, driven by that cost pressure that you've mentioned. But I'm curious what your thoughts are on, as we go into the next year, some of this new capacity is coming online in Italy, and obviously that's short of a million in the UK. I mean, are you seeing pricing sort of holding if the current cost environment lasts or do you think that we'll start to see some pressure as we get into 2020 or something?

Morning Andy. I think the reality is that people who have skin in the game already if you like in terms of you've got to think about this and it wouldn't make any sense logically to be kind of trying to capture volume for a new mill on lowering price given the amount of capital that it takes either to convert these mills or at least start up a new one. So for like the shot somebody mentioned there or even the palm mill equally in the UK in the early part of next year, you'd have to assume a kind of similar logic or pattern that we've seen in the last number of years, which is around, you know, Tonya's reference, downtime, you know, prioritizing maybe downtime in the middle system over reducing price in order to kind of make sure that the returns stay reasonable. And indeed trying to find a market okay kind of demand will impact the overall return. And ultimately it comes down to, you know, to be successful. So I think we've seen in Europe, two things happened over the last number of years. One, you know, it may have predominantly going to take additional downtime in order to manage that kind of market better than it might have done before. But equally, the lack of independent players means that idea of a rogue mill trying to capture new volume on price is not really there anymore. It is a lot of systems who have a bigger game to play in the context of how they manage overall market share.

Yeah, I think, Andy, Ken just made a good point. There's two very large independents in Germany, Schumacher and Tim Group. And so the independent, so therefore independent mills that are coming into the market, Ken has mentioned, have a less and less market to go for other than they go for export. And that's not, that's a perdition really. So I think you'll find that, you know, for them to be chopping pricing, you see that already with one of the larger in their container board system. And that's before the recent price rises. So I think I worry less about that than how the energy price affects the demand outlook for our end customers. You know, we don't obviously have a crystal ball on. Because of our offering this year, we continue to see in October, you know, reasonably good growth in October. So I'm very comfortable with our own system. Energy affects Europe.

Yeah. OK, that's fine, Clay. Thanks, Pat.

Thanks, Andy.

Thank you. And the next question comes from Detlef Winkleman from JP Morgan. Please go ahead.

Morning, everyone. Maybe my first question, you did call out, I think you said something to the effect that, look, price increase has always lagged. Cost inflation has come first. That's fine. But over the next, you know, on an annualized basis, price cost is firmly positive or price will more than offset cost inflation. Just curious, I mean, is that only on the North American side or should we be thinking of the same thing in Europe as well, just after considering your kind of Kraftliner kind of mix in there and the energy efficiency, that kind of side on that as well, please? And then I've got a follow-up, please.

Hey, that was Ken and Morning. No, you should assume that for all regions. The mechanism, if you like, in terms of paper price increase into the index or indeed the freedom negotiated is probably slightly quicker in North America than Europe by a couple of months, But ultimately, it's exactly the same pattern. And indeed, in North America, I'd argue, maybe even quicker again, given it's a region that generally deals with inflation quite well. So, you know, the pattern in terms of normal time lags that we talk about, and given the level of index versus non-index is probably slightly higher in North America, you tend to get it through quicker. But overall, you end up in the same.

Cool. And then one more follow-up just on Europe. You know, we've been hearing in the last couple company releases that there's a bit of discounting downstream at the box plant level. It does seem to be isolated to certain regions. But just curious, are you seeing anything of that sort that could hurt you down the line? How do you pass on the price increase of three-to-the-box prices?

I mean, there is one player particularly that is trying to get a little bit of volume. And so that has created some noise in the market. But overall, I would say, I wouldn't say it's that much different to any of you who are struggling and trying to get some volume. And so I wouldn't say it's a particular massively different situation to what it normally is. But, you know, there are there are some players that get some volume in the downstream market. And, you know, you have to, you know, because of your quality service, I mean, when you look at the quality and service and that we bring to our customers and the the complexity we deal for them and look after for them, that, you know, we we we we expect to get paid for that. And clearly, the whole innovation offering is making a difference. And so I wouldn't worry too much.

Thank you. Next question is from Lewis Roxburgh from Goodbody. Please go ahead.

My question's on holding on to pricing.

So cost and energy inflation has clearly been challenging, but it will turn at some point. So I guess what degree do you believe that you'll have to give pricing back? Is Europe in particular more vulnerable to that, given the oversupplying container board and energy security, and comparatively, is the U.S. and LATAM in a better place, given the industry consolidation, tight supply, et cetera?

Yeah, I think that's a fair characterization, Lewis. I mean, if all of a sudden energy was to fall back, I think that it would put more pressure on the European container board price. But I think that, you know, I don't think that will be the case per se in Latin America or the United States or the North American market. I think, you know, the structural change that's happened in North America has been very significant. And as I say, we've been in a sold out position for the last number of months. And we have still orders to fulfill from April and May. And so, you know, I have no idea about the others, but I assume they're in the same sort of situation. And, you know, we have a window into Latin America. And while Latin American customers tend to have larger supplies, you know, prices are going up in Latin America. And that is going to feed into a better situation next year and beyond, irrespective. So unless something really bad happens in the world, I think that, you know, your statement is correct.

Yeah, that's clear. Thanks.

Thank you. Next question, we are going to retry the line for Phil Ng from Jefferies. Please go ahead. Your line is open.

Hey, guys. Sorry about that. I had some technical issues this morning. Tony, if you addressed this already, I apologize in advance. I think, Ken, you were talking about, you know, earlier at the question that in Europe, you feel pretty good that your box prices would catch up the container board price and you would offset inflation. I guess the one variable that would be helpful to kind of give us some color is net gas hedges, just because you had some hedges. So based on what you have in place in your traction you're seeing, how do you feel about that dynamic? And how should we think about that hitting your P&L and your ability to kind of be on a positive spread next year?

Hey Phil, but the price increases we announced, that net will ultimately take into account a lot of what we've done on hedging and in effect generally the hedging will be a net incremental positive to anything you do on that paper price. There's no incremental P&L hit in that sense, they're not futureed out, ultimately you're just contracting gas, a kind of standard set prices rather than spot in that sense. So everything we've done on China, particularly in Europe, takes into account where we sit in the hedging curve, generally a conservative view on where that might go is the idea that hedging plus the price increase should land you in a slightly better position overall at the end of the game. So in reality, not that the hedging doesn't necessarily matter in that sense. It always acts as a better moderator or better basis in terms of how you get through in terms of full margin recovery. But the price increases do take account of all the hedging.

I just add to that, Phil, we wouldn't hedge at these levels because, you know, if the energy price falls backwards, you're stuck at 100, you are going to be really seriously uncomfortable. We just think that it would be, and we don't believe that anyone in the industry, to any great extent, is hedging at these levels, because they're so remarkable that nobody would have actually anticipated that gas could get to this level. And now people would be very afraid, like us, that if you hedge at these levels, you could get you could get caught with your pants down. So we're not going to be in that situation, and we'll ride it. And as I say, if it stays at these levels, either there'll be a lot of downtime or there'll be further increases or there'll be closures because it just can't – you're a 10-to-1 ratio versus the United States and gas, which is just unsustainable for European industry. because you know what you're thinking about in the context where hedging sits in an integrated system like Europe, which is it's about cost certainty at the middle side, but you don't, as Tony says, get trapped on one side or the other, that kind of hedging curve.

And if you go back to kind of, you know, 122, equally would have been what we needed. So it's about, through an integrated model, it has to be a bit resectable.

Helpful call. And I guess bigger picture, Tony, you've owned the West Rock asset for some time now. In terms of your journey in terms of you know some of the goal polls that you would want to call out and things that you still want to work on as we think about 27 beyond what are some of the things you want to highlight you know it might be your customer mix in terms of you know the mix of regional versus national but anything is called just because obviously the profitability has been masked a bit by the inflation so just kind of give us some goal polls where you are and what are some of the next things we should look forward to as we look out to 27 and beyond?

Yeah, I think, Phil, that's a really great question. I mean, I'm sitting in the Trades Barras mill down in Brazil, so just to take it by region. I take our Latin American region. This is one of the world's great management team and continuing to grow. So if I look around our Latin American business, really strong, great. The West Rock combination between the two. I'll give you a very good example because I was here yesterday. You know, they used to have a huge side reel issue in this mill that they would sell at heavily discounted prices. Because of the combination, we now no longer have a side reel issue in this mill. So we're able to run full out and get full contribution for all of the paper that we make. And it's made this mill much more profitable. And that's just one small example. In our European business, the combination, there was no corrugated assets, but the consumer business has improved and is really set for a very strong growth together with our corrugated business as we move to the owner-operator model and has been a really successful combination. And then when you look to the North American market, what I would say the most pleasing thing for me has been how the management team have really adopted what we talk about as being the owner-operator model. They are very enthusiastic. We're seeing customer wins in the corrugated area. Our consumer business, our end market consumer margins are not where we want them to be, but we will get there because the plants are in very good shape. The teams are very well organized, and so we will progressively move that margin up without anything to do with the underlying paper pricing in the future. If you take our mill system, what I would say is we have some really great mills. And we have some mills that continue to need work. And once we fix those mills that need work, then the mill system will be, you know, as good as any that we have anywhere else in the world. So our mill system, you know, is progressing. We've got a whole new management team there that is really moving things forward in a positive way. We've recruited some great people into the business. So our people aspect of North America has really progressed very strongly. And so if you say, why am I excited? Because I can see the potential of this business. But, of course, I'm really frustrated by the fact that we're making all this progress and it's not easy for anyone to see because when you get $700 million of unexpected costs, you're scratching your head a little bit to say, okay, we need to recover that. And we do, but it's pushing the game forward, which is, you know, never where we want to be. We want to be winning from the front rather than trying to catch up. But we are where we are because we don't have control of things outside of our control. But, you know, I am very, very excited about the future of this company and the combination of this company because, you know, it's going to be very powerful in the years ahead.

Okay. Appreciate the call. Thank you so much.

Thank you very much, Phil.

Thank you. And the final question today comes from Pallav Mittal from Barclays. Please go ahead.

Hi, thanks for taking my question, a couple of them. Firstly, clearly energy and trade costs are much higher than what we were expecting three months ago. And you have said hedging levels are low for very obvious reasons. If we assume our spot rates and things say this way, how much of an increase our energy and freight costs expected to be in 27 versus 26?

Back to, you know, we haven't got near a budget yet. I think we have to kind of see that in the round around where we think all those forward curves are. But I wouldn't, given if you like, my forecasting and energy and freight for this year has been kind of changeable as we got through the year, I'm not sure I'd sit here yet and forecast engine freight for next year i think our opening assumption would be at some point that cost backdrop has to abate slightly um but for the moment i couldn't give you a view on fraser energy for 20s sure and then if i could just uh check on capex it seems that you've lowered your guidance by 115 million or so for 26 can you just help us understand what has changed there and does it mean that 27 capex goes up slightly no no not really we we we decided to just slow back a

little bit because uh you know the the when we took our number down for for uh last quarter we said we'll we'll just get the money back in in in our capex but you know our plans are still the same though it will probably mean that 20 2031 will have 150 million more or 2032 but i wouldn't we haven't stopped anything that we need to do. It's just that we've delayed a couple of projects by a number of months. There's nothing of interest there.

Sure. And if I can just squeeze one on Europe, a quick one. You said the growth has been good in October. Can you just help us understand how your order books are looking for the near future?

Well, for the very near future, You know, we're actually OK. I mean, as I said, in North America this month, you know, as in October, we will be lineballed with last year. I don't want to predict that that's going to be the same in November and December, but November feels OK. But we have a large election happening in November, so we'll have to see how that plays out to demand in North America. and i think that uh europe you know we expect to have a we're we're a couple of percent up on the same day basis during the month of october so you know we hope that trend continues for the rest of the quarter and but we don't expect anything for it not to and latin america you know we have seen weakness in brazil actually um during during the last couple of months as the uncertainty of the election down here fed into the marketplace and you know it hasn't hurt our profitability but you know the demand levels were not where we would have expected in the last three months in Brazil but still as I say it hasn't affected our profitability and we're still very well positioned in the country amazing thank you thank you and there are no further questions so I will now hand back to Tony Smurfett for any closing comments thank you operator as I mentioned on the call, you know, I remain incredibly excited about the future of this company. We've done a lot during the last couple of years, you know, and obviously we're not happy with the fact that we've absorbed so much cost so quickly during the last three months and into the next two months. So obviously that has affected our results, but, you know, we are in the process of recovering those costs and we look forward to 2027 with great confidence and and we appreciate your support and we appreciate the time you've given us today so thank you all for being with us and we look forward to catching up with you either in person or on the next conference call and if we don't speak to you before your end we wish you a new year i know it sounds a little bit early to be saying that but uh nonetheless good luck in case i don't speak to you thank you this concludes today's conference call.

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