Earnings Call Transcript - SW Q2 2025

Operator, Operator

Good day, and thank you for standing by. Welcome to the Smurfit Westrock 2025 Q2 Results Webcast and Conference Call. 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, Group VP, Investor Relations

Thank you, Heidi. As a reminder, statements in today's earnings release and presentation and the comments made by management during this call may be considered forward-looking statements. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in the earnings release and in our SEC filings. The company undertakes no obligation to revise any forward-looking statements. Today's remarks also refer to certain non-GAAP financial measures. Reconciliations to the most comparable GAAP measures are included in today's earnings release and in the appendix to the presentation, which are available at investors.smurfitwestrock.com. Before handing over to Tony, I would ask you to limit your questions to 2. And should you require any clarifications on what we are disclosing today, Frank and I will make ourselves available after our call. I'll now hand you over to Tony Smurfit, CEO of Smurfit Westrock.

Anthony Paul J. Smurfit, CEO

Thank you, Ciaran, and good morning, everybody. I'm joined today by Ken Bowles, our Group Executive Vice President and CFO. I am delighted to report a strong second quarter performance as we continue to deliver fully in line with our stated guidance. Ken will take you through our financial performance in greater detail. In terms of headline numbers, we are delivering adjusted EBITDA of $1,213 million, and a good adjusted EBITDA margin performance of 15.3%. Turning to our regions. We have delivered an initial yet significant improvement within our North American business, reflecting a much sharper operational and commercial focus together with identified synergy benefits. We're only getting started here and with significant scope for continued delivery. Our European business continues to perform in a challenging market. However, we are comfortable that we are close to a low. Our Latin American operations delivered an outstanding margin performance in a region that continues to present opportunities for growth. We see opportunity across each region, whether it's in terms of operating efficiency, a sharper commercial focus, or capitalizing on growth areas. We continue to optimize our system, which we expect to drive improved margin performance for Smurfit Westrock with our recently announced restructuring. Finally, and of note within the quarter, Fitch upgraded our long-term debt to BBB+ with a stable outlook, reflecting their confidence in the quality of our business and our longer-term prospects. As it is now 1 year from the conclusion of the combination between Smurfit Kappa Group and Westrock, I want to take a step back to look forward. Let me outline our key achievements and what we have found within that time frame. First, we have very successfully and seamlessly integrated 2 major businesses, combining the best elements of each organization with a strong performance-led culture. Secondly, we have identified and are delivering on at least $400 million of synergies. And as we said before, we see a much greater opportunity to deliver at least equivalent value through a much sharper commercial and operating focus. For growth and increased operating efficiency, we continue to invest in a disciplined way across our regions. We are continuing and will continue to optimize our system through the elimination of non-strategic or inefficient assets. As you know, we recently announced the permanent closure of 600,000 tons of capacity. The steps we are taking and continue to take are delivering a measurable improvement to the business performance within a relatively short time frame. We have built strong foundations with a generally well-invested asset base, excellent market positions, and above all, the excellence of our people. You have often heard us talking about our distinct operating model that has driven our outperformance. Fundamentally, it revolves around people and the culture which exists now within the new Smurfit Westrock. Culture and values are fundamental to us, and we demand the highest ethical standards. First, we devolved profit responsibility down to the individual businesses, ensuring that each manager runs their business as a fully accountable owner with responsibility for all aspects of their business with an emphasis on customer service and profitability. In order for our managers to be successful, there are a number of prerequisites such as having a complete focus on their people within their organizations, safety at work, and a relentless focus on delivering value, innovation, and quality for our customers. In order to do that, we in corporate effectively give those managers the tools to do the job, ensuring clear strategic direction and support. Naturally, we tightly and centrally control capital and ensure structures are simplified, and there is an unrelenting focus on cost takeout while at the same time eliminating unnecessary structures. Our identified synergy program is delivering at or better than planned. Importantly, though, we see very significant margin enhancement opportunities through our methodology and way of working. We've already seen the benefit. And to demonstrate this point, we've already cut our loss-making corrugated in by approximately 40% in our U.S. operations. We've always strongly believed that, as a general principle, our assets must be world class. Within our business, in our previous incarnation of Smurfit Kappa, we continued over 2 strategic plan periods to develop world-class systems, world-class assets, and businesses that have a long investable future. In the new Smurfit Westrock, as always, we will be doing the same in a disciplined and measured way. We have started that journey now in the new Smurfit Westrock with $1 billion already invested in our system, roughly equally split between paper and converting assets. We have also initiated what we call our quick win programs with an amount of almost $200 million already committed for the next 18 months to rapidly take out costs with the minimum returns exceeding 20% plus. Frankly speaking, we've been doing this for decades and seeing the opportunity in the new Smurfit Westrock is truly exciting. But of course, equipment without people is useless because anybody can buy new equipment. And if you don't have the people with superior knowledge in their marketplace, then you will just be another average company. In the first 6 months, we have demonstrated with some 39 unique awards given to us that Smurfit Westrock has some of the most powerful, innovative tools and applications that will bring our customers' packaging to another level and help them win in their own marketplaces. With over 2,000 designers worldwide, we are in the early innings of bringing all that knowledge together for the benefit of our customers, so they can reduce their own costs and drive increased revenue, giving them unique designs while sharing value. The sustainability journey, which a large portion of our customer base is committed to is another area of expertise. We are becoming the innovative and sustainable packaging partner of choice for our customers which has continually demonstrated day in and day out across our regions. And with that, I'll hand you over to Ken, who will take you through our financials.

Ken Bowles, CFO

Thank you, Tony. Good morning, and good afternoon, everyone. And as always, thank you for taking the time to join us. As you can see here on Slide 9, the business delivered another strong performance in the second quarter, with net sales of over $7.9 billion, adjusted EBITDA guidance at $1,213 million, and adjusted EBITDA margin for the group of over 15% and a strong adjusted free cash flow of $387 million. This is a marked improvement compared to the combined performance of the business for the same period last year, showing mid-single-digit growth in adjusted EBITDA and a further improvement in the group margin. The performance reflects strength and resilience provided by our diversified geographic footprint and product portfolio, particularly in the challenging macroeconomic environment and the commitment and dedication of our people to delivering for our customers. The ongoing improvement is also a clear reflection of our plan to embed our unique performance at culture right across the Smurfit Westrock organization. A culture that empowers managers, places the customer at the center of decision-making, underpinned by a relentless focus on cost and operating excellence. Turning now to the reported performance of our 3 segments and starting with North America, where our operations delivered net sales of $4.8 billion with adjusted EBITDA of $752 million and an adjusted EBITDA margin of 15.8%, an excellent outcome. Compared to the combined results in the second quarter of last year, we saw a significant margin improvement predominantly due to higher selling prices, early evidence of the operating model in action and the benefits of our synergy program alongside some input cost relief from recovered fiber, which more than offset lower volumes and cost headwinds on energy, labor, and higher mill downtime. Corrugated box pricing was higher compared to the prior year, while box volumes were down 4.5% on a same-day basis, an outcome very much in line with our ongoing value over volume strategy. Third-party paper sales were 2% lower, while consumer packaging shipments, again, on a same-day basis were down 2.7%, with volumes in Mexico being lower than in our U.S. business. One year on from the combination, we are particularly pleased with the performance of our North American team with much of the heavy lifting now complete in terms of establishing our performance at culture based on empowerment and plant-level responsibility. Looking now at our EMEA and APAC segment, where we delivered net sales of $2.8 billion, adjusted EBITDA of $372 million, and an adjusted EBITDA margin of 13.4%. Despite a more challenging market backdrop in the region, our operations remained resilient with combined adjusted EBITDA modestly below the prior year. This performance reflects the scale of our local teams in managing a highly volatile cost environment and underscores the effectiveness of our operating model, which continues to deliver the most innovative and sustainable packaging solutions and industry-leading returns. Higher corrugated box prices year-on-year were more than offset by headwinds on energy, recovered fiber, and labor, while corrugated box volumes remained flat on a same-day basis. To consolidate our leadership position in the region, we have made significant investments in new converting machines, upgrades to corrugators, and significant investments in our bag and box business, resulting in a business that is primed to take advantage of the return of an improved demand environment. The LatAm segment again remained very strong in the quarter with net sales of $0.5 billion, adjusted EBITDA of $123 million, and an adjusted EBITDA margin of over 23%. Corrugated box volumes were down 1.9% on a same-day basis, with the demand picture in Argentina showing nascent yet marked improvement and strong demand growth in Colombia and Chile, among others, all while our value-over-volume strategy continues to play out in Brazil as we continue to phase out unprofitable legacy contracts. The region successfully implemented pricing initiatives that almost entirely offset a negative currency translation impact and lower box volumes to deliver this strong result. We believe that Latin America continues to be a region of high-growth retention for Smurfit Westrock and one where we are well positioned to drive long-term success. And just a reminder of our proven capital allocation framework, a framework that is flexible and returns focused at its core. In Smurfit Westrock, we see internally allocated capital backed by a management team with deep industry experience as key to the future success of the business. After conducting the near-term assessment of the capital leases business, our CapEx range of $2.2 billion to $2.4 billion for the year includes high-return quick win projects already underway, while we continue to build out broader strategic plans for the business. The dividend is also a cornerstone of the framework, delivering on our expectation of paying a dividend stream in line with legacy SKG's progressive policy, subject to the necessary board approvals and demonstrates our confidence in the cash-generatibility of the business. You will note that today, we have declared a quarterly dividend of $0.4308 per share. The balance sheet at Smurfit Westrock has significant strength and flexibility. We are committed to maintaining a strong investment-grade credit rating, and I am particularly pleased with the upgrade to our long-term issue rating from Fitch earlier this month to BBB+ with stable outlook. Given the scale of our operations and indeed our ability to generate significant free cash flow, we are targeting a long-term leverage ratio of below 2x through the cycle. We will also maintain a disciplined approach to M&A, benchmarking any growth opportunities in this area against all other capital allocation alternatives. The inclusion of other shareholder returns reflects our strong confidence in the future prospects of the business and signals our commitment to continue exploring avenues to create and deliver value for our shareholders and benchmark those opportunities against available options. Ultimately, this framework is all about creating long-term value for all shareholders. Turning now to Slide 12, and I'm pleased to confirm that our synergy program is delivering as planned. We are on track to deliver $400 million of full-year full run rate synergies exiting 2025. And moreover, we have identified a minimum $400 million of additional opportunities following from a sharper operating and commercial focus. The drivers of that medium-term target involve our long-standing value-over-volume philosophy, the consolidation of production and more efficient machines, the ongoing benefits of our decentralized operating model, and through the rollout of our unique innovation offering. Furthermore, as we noted in the release, we expect to deliver third quarter adjusted EBITDA of approximately $1.3 billion and our full year adjusted EBITDA guidance remains between $5 billion and $5.2 billion. And with that, I'll pass it back to Tony for some concluding remarks.

Anthony Paul J. Smurfit, CEO

Thank you, Ken. Well, as I said at the outset, we are happy that we've come a long way in a short space of time, but clearly, there is much to play for. Our North American business has seen significant improvements in its first year of the combination. Our European business continues to be resilient with a decent margin performance despite a challenging environment. As the region recovers, we will be a major beneficiary. Our Latin American business continues to be an area of significant opportunity where we see significant growth in many of the countries in which we operate. Smurfit Westrock is about building on the strong foundation we have laid to be the go-to innovative and sustainable packaging partner of choice for our customers with an emphasis on value, quality, and service. Smurfit Westrock, which operates in 40 countries, is truly at the beginning of this journey. We believe that we have the best people in the business. We believe we have the best knowledge in our business, and we have strong market positions in practically all countries in which we operate. All senior management in the company are fully aligned with shareholders with a proven track record of delivery. As we have set out in this morning's release, our confidence and conviction on our performance and prospects in part reflects the measurable progress that we've already made within this very short time frame. I thank you for your attention. And now I will hand it back to our operator for some questions and answers.

Operator, Operator

We will take our first question and the question comes from the line of Mike Roxland from Truist Securities.

Michael Andrew Roxland, Analyst

I'm here. Can you hear me now? Sorry about that.

Anthony Paul J. Smurfit, CEO

Yes.

Michael Andrew Roxland, Analyst

Okay. Apologies. Congrats on all the progress. First question I had was, Tony, you mentioned you cut the loss-making, I believe I heard you say in North America corrugated by 40%. What metric or metrics are you referring to exactly? Just can you provide some more details around that?

Anthony Paul J. Smurfit, CEO

Yes, sure, Mike. When we first assessed the situation, we focused on improving profitability at the plant level. We've observed that around 40% of our plants have transitioned from losses to profits, leading to an overall improvement of about 40%. We've conducted a thorough review of every account, and some accounts were significantly unprofitable. Part of our volume challenges stemmed from losing business that wasn't sustainable for us. This is a systematic approach, and while we can't exit all unfavorable contracts, we are actively managing this process. The positive aspect is that by freeing up valuable machine space, we enable our sales team to fill that space with more productive accounts. Achieving breakeven with new accounts is relatively straightforward when we stop losing money on others, which substantially improves our overall performance. There is a lag time involved; if we lose a customer, it typically takes about six months to replace that with better customers, which accounts for the delay in volume recovery. However, due to our efforts in eliminating poor-performing business and starting to replace it, we are witnessing positive results that should continue. While some factories may face challenges for various reasons, most are showing favorable trends and will keep improving. The operational improvements we discussed revolve around standard practices for corrugated factories, which include achieving a reasonable return by providing value, service, and quality to our customers, and ensuring that plants operate efficiently. This process is ongoing and effective.

Michael Andrew Roxland, Analyst

Got it. I appreciate the color there, Tony. And then just 1 quick follow-up. How much of the business in North America remains in a loss position? And then quickly just on Europe, you mentioned you feel you're close to a low in Europe. But that said, it looks like pricing continues to weaken, which could potentially threaten to the back half of this year into '26. So I would love to get your sense as to why you feel you're close to a low right now in Europe as well.

Anthony Paul J. Smurfit, CEO

We still have several facilities operating at a loss, and there's a lot of work ahead of us. We have contracts with customers that are currently not profitable, and as those contracts expire, we will either need to raise prices or replace the business with more lucrative opportunities. Approximately 60% of our corrugated operations that are losing money still have the potential to become profitable, which presents a significant opportunity for us. While I don’t expect every facility to achieve this, I believe at least 40% can improve over the next year. We should also see progress from those facilities that have transitioned from losses to marginal profitability. Additionally, I am hopeful that our strategic plans will continue to yield improvements over time. In terms of the European market, there was a recent announcement about a paper mill shutting down. The current landscape indicates that third or fourth-tier paper mills in Europe without proper integration are struggling. The closure today illustrates the challenges independent paper manufacturers face with current pricing. Our business model is solid, supported by strong assets we've developed over the years and significant investments in integration. We expect corrugated pricing to increase in the second half of the year as we move forward with renewing contracts. Given the current paper pricing, it’s unsustainable for most players, which may lead to more closures in the future.

Operator, Operator

Your next question comes from the line of Lewis Roxburgh from Goodbody.

Lewis Ian Roxburgh, Analyst

The first is just on tariffs and consumer confidence. So I guess Q2 would have captured some of that initial tariff impact. And obviously, the delivery was encouraging in that context. But as we move into Q3 with a little bit more visibility, uncertainty in policy? Are you seeing any signs of improvement in consumer confidence or demand across your key markets? And the second question is just, I guess, a follow-up on European capacity rationalization. I know you mentioned weakness in non-integrated players. You've already announced some closures in Germany, but just given the scale of the U.S. reduction and the fact that sort of European market stands relatively oversupplied, do you think there's scope for further capacity closures on your side?

Anthony Paul J. Smurfit, CEO

Yes, we are continuously evaluating our portfolio. We closed a mill in France last year, but in the short term, all of our mills remain profitable due to their integration. We are in a solid position, primarily operating first and second-tier mills, thanks to investments made over the last decade. In the past, we had 23 mills producing 3 million tonnes, but now we operate about 15 mills generating 5 million tonnes, making our operations more efficient over the past 15 years. We have a stable customer base since we sell to ourselves, which reinforces our integrated model. However, many mills are struggling, as evidenced by a recent closure. I expect that as we move into the third and fourth quarters, we may see more of these closures if current conditions persist. Ken, regarding the tariff, do you want to address that?

Ken Bowles, CFO

To clarify, the closures we announced in Germany last quarter were corrugated box plants, not paper mills. We consolidated that volume within the existing operations in Germany, maintaining volume while reducing fixed cost overhead, which benefits the system. Regarding tariffs, it's important to note that the 10% rate was already applied to many paper imports into North America. Therefore, the additional 5% does not significantly affect pricing given the situation since the beginning of August. Historically, consumers absorb about 70% of tariff increases, and we've seen some impact from that. However, we do not expect substantial changes in the flows of paper imports or exports in North America based on the current tariffs. While margins may tighten for imports into North America for European producers, the market remains relatively favorable for them. Our North American paperboard footprint offers a competitive advantage regarding the cost of domestic products compared to imports. We've always indicated that the most significant effect on the system relates to consumer demand. In the second quarter, the North American market saw a 2.5% decline in volume, which was slightly more than our performance as we focused on eliminating unprofitable volume. In Europe, despite the challenges in Germany's economy, the settling of tariffs should ideally help boost European markets. However, we experienced flat volumes in Europe during the second quarter, and there are no immediate signs that demand will improve quickly. We are incorporating this outlook into our forecasts. Overall, while volumes and demand are acceptable, there is potential for improvement. As the tariff situation stabilizes, we may see a rebound in consumer confidence in certain regions, which has been lacking over the past year.

Anthony Paul J. Smurfit, CEO

Yes. The only thing I would say is that we're waiting for the seasonal demand pickup in the United States to happen. We didn't see it move forward in July and hopefully, we'll start seeing that come forward in August and September based upon the settling of the tariff situation, if that happens because there's still a lot of unanswered questions with regard to Canada, Mexico, and a lot of Latin American countries. So we'll wait and see over the next few days and including China. So we'll wait and see over the next few days what transpires in those areas.

Operator, Operator

The question comes from the line of Phil Ng from Jefferies.

Philip H. Ng, Analyst

Tony, you gave some great color with Roxland earlier. So on the loss-making contracts in North America, can you kind of give us a little more flavor in terms of how that winds down? Is that a 2-year cycle waterfall? And when you think about your team, are you in a good spot to value sell, right? It's about offering the service through reliability and the buy-in from your sales force? Just give us a little sense on where they sit on that front? And then just the environment as well because we've seen obviously a lot of capacity come out. So you've been in North America for some time. How do you think about this up here from an industry structure standpoint as well?

Anthony Paul J. Smurfit, CEO

We have a lot of questions to address. Are we positioned well in terms of innovation? Yes, but as I mentioned earlier, we're just at the beginning stages. For instance, we recently brought on board a new person for corrugated innovation from a major brewery company, and he's been adapting well to our business. Everyone is pleased with his progress. We're also hosting a global innovation conference in September to share knowledge across our companies. There's some impressive innovation happening in the legacy Westrock business that we need to gather and integrate into our organization effectively. In Europe, we're in a strong position, and while North America has some promising areas, we need to be more organized about it. Latin America is doing well as well. Over the next year, you can expect significant advancements in our innovation efforts, especially in North America. A lot of capacity has exited the market, which is a positive development. If demand picks up, that would enhance our situation. We don’t expect to take much downtime in the second half of the year beyond regular maintenance and the occasional issues at our mills. Ideally, we would like to see stronger demand. We know we're going to improve bad volumes with better ones, and each plant I visit reflects the enthusiasm of the sales teams. As we roll out our innovations more broadly, our performance will strengthen. With the typical time lag for replacing volumes, I believe we'll be in good shape, but improvement in the overall market would be beneficial. We're hearing that many customers are taking downtime for a week or two, which is not ideal; we want to see an economy that is progressing. That's my main concern at the moment. Can you remind me of the first question?

Ken Bowles, CFO

The wind down of unprofitable contracts.

Anthony Paul J. Smurfit, CEO

The wind down, I would say by this time next year, with the exception of very few, we would suggest that they will all be gone this time next year.

Operator, Operator

Okay. That's great color. Really appreciate it and exciting opportunity in front of you. Europe, I'm just generally less familiar with. The margins were a little lighter than expected. Can you provide some color on some of the headwinds in the quarter and how you kind of see that progressing in the back half of the year, especially with some of the movement you've seen on OCC and gas prices?

Anthony Paul J. Smurfit, CEO

Yes. I mean I'll let Ken take that. But I mean, we're in better shape on costs in the second half than we were in the first half as a general view. But Ken?

Ken Bowles, CFO

Yes. Phil, in January, Europe in the second quarter we did do a good bit on price as deposit in that quarter, a 3% on boxes, but that was offset by a little bit of volume lower than we would have thought. Energy higher than we thought, but that's come down a piece since. Recovered fiber, I think, was a big headwind of about $28 million in the quarter itself versus last year. And labor, actually about $17 million. There are the 2 big ones. So predominantly box pricing offset by, call it, some energy, recovered fiber, a little bit of labor, getting square the air. But as you kind of move forward through the year, I think you see the backdrop around recovered fiber, a little bit of labor and certainly energy get a lot better than we would have thought at the start of the year.

Operator, Operator

And The question comes from the line of Gabe Hajde from Wells Fargo.

Gabrial Shane Hajde, Analyst

Tony, if you can on the second half, maybe put a little bit more of a finer point on some of the underlying assumptions sort of in the 1.3 and I guess sort of at the midpoint, around 1.3 for the fourth quarter in terms of volume expectations across the 3 regions. And just more specifically in North America, we're reading some reports about some retail business moving around and I was curious if you were expecting kind of that down 4.5-ish percent rate to accelerate in the back half or get better? I know you just kind of told us by June of next year or second quarter things should be getting close to normalized. But any color there would be helpful.

Anthony Paul J. Smurfit, CEO

I will address the volume aspect and then pass the assumptions to Ken. Essentially, we anticipate a typical seasonal increase in volumes. That's what we believe will occur, as it usually does. Currently, we have no reason to think otherwise. However, even though I've observed that we've secured significant business in new areas, that may not have an impact until next year. For the second half, we are predicting volumes to remain roughly flat compared to where they are now. We don't foresee any decline, but we also don't expect significant improvement. That summarizes our volume assumptions. Ken, would you like to discuss any other assumptions?

Ken Bowles, CFO

Gabe, taking the third quarter specifically, I think we can make it really easy for you. The third quarter going from 1.2 to 1.3 is just really 2 things. It's lower downtime, which is about a $50 million impact in the quarter positively. And the rest is really around recovered fiber predominantly for the other $50 million. So it's really relief on cost inflation. There's no real assumptions there, as Tony said, it's flat volume, not necessarily baking anything in price for the third quarter. So really, the third quarter, 1.2 to 1.3 is cost relief predominantly recovered fiber and then lower maintenance downtime in the third quarter over the second quarter. For the full year, we kind of end up at the same place as we guided all year. I suppose the moving parts are being, as Tony just said there, moving to flat volumes for the back half, albeit lower for the first 6 months. So lower on volume but doing a bit better on price across the year than we would have initially thought and certainly a lot better in energy. So energy, where we might have guided about $350 million headwind year-on-year is now about $250 million. Other raw materials probably doing a little bit better at $50 million. Things like recovered fiber itself, where we might have guided a headwind of about $154 million, $155 million at the start of the year, probably see that more down in the $105 million, $110 million space, about $40 million, $50 million saving there. And across even labor is a little bit better as we get into the second half. So there's some big chunky moving parts and I know Ciaran and Frank can take you through in a bit more detail. But broadly, I think if you were characterized in the second half from where we are now, doing a bit better in energy, doing a bit better on labor, a bit better on recovered fiber, a bit better on price, volumes remaining flat, and you kind of dealt on all that as you end up back at the same place.

Gabrial Shane Hajde, Analyst

All right. And one last one. I guess, Tony, you alluded to not being a million miles away, kind of giving us an update on the Consumer Packaging business. I think you talked about volumes being down Ken, 2.7%, if I heard you correctly, in Americas and that includes Mexico down a little bit more. Just curious, kind of, again, another quarter under the belt and thinking about sort of the opportunity set there to be on both sides of the house in terms of consumer and corrugated. Any updates there?

Anthony Paul J. Smurfit, CEO

Yes, it still feels like it's a very good business to be involved in. I think we've got some strong market positions. The cross-selling opportunities in Europe, where we're more advanced, are very strong. Since we're larger in corrugated than in consumer, we're introducing our consumer team members who are primarily in health and beauty, which is more niche. In the general markets, they didn't have many selling tools, which we are now providing. This creates a significant opportunity in Europe for our consumer operations. In the United States, we generally have solid businesses with great people. We need to address a couple of structural issues like our long position in SBS, but we have plans that we will share towards the end of this year or early next year regarding that.

Ken Bowles, CFO

And Gabe, just to help you that the consumer volumes, yes, 2.7% down for the quarter, including Mexico. If you exclude Mexico, it's probably more like 2% down.

Operator, Operator

We will take our next question, and the question comes from the line of Charlie Muir-Sands from BNP Paribas Exane.

Charlie Muir-Sands, Analyst

Just a couple of follow-ups on the topics that have already been covered. Just firstly, on the loss-making box contracts. Obviously, you said you're sort of 40% through. Is there any possibility of putting any kind of dollar numbers around the level of losses you think that on a fully costed basis, that business was dragging profits historically? And then secondly, you're talking about some of the assumptions into the second half and talked about flat volumes. I just wanted to clarify. Are you talking half-on-half or year-on-year? The reason I somewhat ask is that the last 2 years on a pro forma basis, there's been a bit of a historic dip in profits, particularly in the North America business in Q4. I don't know whether there's sort of a reshuffle of the phasing of maintenance, which means that, that won't recur this year, but I'm just trying to get some understanding so we don't get caught out because obviously, the implied fourth quarter guide range is now quite wide.

Anthony Paul J. Smurfit, CEO

I'll let Ken take the second question, Ken?

Ken Bowles, CFO

I believe the range exists to account for that situation. If we consider our position, the key factor in the second half is where demand may go. The first two quarters have likely underperformed, and for the second half, we aren't assuming much of an increase except for the seasonal effects Tony mentioned. Thus, the range we established has significant potential for both upside and slight moderation on the downside, but it isn't a large shift in either direction. Historically, our volume isn't the best predictor; it's really about our pricing strategy. In that regard, we are performing better on pricing than we initially expected as we approach the next six months.

Anthony Paul J. Smurfit, CEO

Charlie, regarding the box plants, let me explain. They have over 100 box plants, so it's clear that some are profitable. However, if you look at a box plant system that was losing a significant amount of money, I won't specify last year's figures. In a box plant system that generates approximately $1 billion in sales, you would expect a margin between 8% and 12%. Therefore, for a system with $10 billion in sales, the expected profit from the box plant system would range from $800 million to $1.2 billion, but it incurred losses last year. Clearly, we have not reached that level yet, but achieving this will be our objective over the next five years.

Ken Bowles, CFO

And sorry, Charlie, I skipped your fundamental question I gave you the long answer. It's flat volumes half 2 versus half 1.

Operator, Operator

The next question comes from the line of Detlef Winckelmann from JPMorgan.

Detlef Winckelmann, Analyst

I've got 2. So the very first one comes back to your EBITDA bridge into Q3. I understood from the earlier question that it's $50 million maintenance, $40 million to $50 million in lower OCC or recovered fiber costs. I'm a bit surprised that there's no price in there. I mean my understanding was that the linerboard price increases we saw in the U.S. as well as in Europe wouldn't have been fully implemented by Q2. Can you just touch on that? And then I'll come back to my second.

Ken Bowles, CFO

Yes. But I suppose that's to be played out during the quarter. Like in the reality, the big building blocks of 1.2 and 1.3 are the $50 million for downtime and the $50 million for other cost books. You also have to remember that within that, we're not baking in any assumptions where volume might go in the third quarter either. So there's a bit of moderation there in terms of conservatism around price and volume. So as we sit here today, 1.3 there thereabouts seems right in our heads in to where we'll end up.

Detlef Winckelmann, Analyst

Okay. Perfect. And then a very technical 1 or maybe a stupid question. But I mean, when I look at your synergies here, you've given us, I think it was Q1 synergies of $80 million. Q2 implied is about $100 million. And then the full year, we've got about $350 million. So that implies that we're going to go backwards at some point in Q3, Q4? Does that make sense? Or am I just misreading that?

Ken Bowles, CFO

I don't think it's going backwards. It's about how you achieve them and when you achieve them. Look, they all come in at different times depending on if it's in purchasing when you get those purchasing contracts through if it's around whatever it might be consolidation of volume on more efficient machines, they all just happen at different paces. I think with synergies, you're not necessarily looking for a constant run rate in terms of the quarter itself, but the ultimate run rate in terms of where the synergies go. So the achievement in the quarter is something, but ultimately, I don't think we think of it as going backwards. I think we think about hitting the synergy number and exiting '25 with that full $400 million in our pockets.

Operator, Operator

The next question comes from the line of Lars Kjellberg from Stifel.

Lars F. Kjellberg, Analyst

Tony, you just alluded to a number of $800 million to $1 billion in the box system and of course, you have spoken to the operational and commercial improvement opportunities of at least $400 million, i.e., equal to the synergies. 2 questions on that. I mean you highlighted that potentially a much larger number the second real question is, where are we on this now? Are we starting to see any of that equal to at least the synergies coming through in the current year? Or is that starting to come through in '26 and build over the years to come?

Anthony Paul J. Smurfit, CEO

No, we're definitely starting to see some of that. We have continued to see improvement in our box system, and some of that improvement is already reflected in our numbers. We still have a long way to go, but there has been significant improvement in the first half of our corrugated system compared to last year. I'm very pleased with how that system is progressing and how the team is responding. If you look at the company's performance, you can see that our margins in the United States have grown, mainly due to synergies and enhancements in our corrugated box system. However, we have faced challenges in Europe, where we previously had margins of 18% to 19%, but now we are down to the mid- to low-teens. This decline reflects the current market conditions, which I believe are nearing the bottom and will eventually improve. The key question is when the demand environment will recover enough to advance that improvement. It could be in 2026 or in the first half of 2027; we are uncertain. Generally, Europe is not too bad aside from one or two markets, and one of the troubled markets is Germany, the largest one, which is dragging down the performance of Europe.

Lars F. Kjellberg, Analyst

And just coming back to what you just said about some of that is in your numbers now cutting the losses and the real benefit where it really started to move into the revenue line and EBITDA, that's still to come. Just a clarity on that. And then Ken...

Anthony Paul J. Smurfit, CEO

No, go ahead. Go ahead. No, I'm going to say you're right. Just agreeing with you.

Ken Bowles, CFO

The rating upgrade, does that mean anything to you from a financing point of view? Not really, Lars. To be honest with you, from an economic point of view, it's very little. It did give us a small decrease in our revolver and some of our commercial paper programs. But actually, when you look at our bonds and how they price, we probably price already at BBB+ to be honest with you. So we presented the BBB+ credit, which we would have done out of the box with all the agencies from an economics perspective. So small savings but not material in the round.

Operator, Operator

The next question comes from the line of Mark Weintraub from Seaport Research Partners.

Mark Adam Weintraub, Analyst

Thanks for the very comprehensive review. So far, I mean, 1 thing I haven't heard is currency very much. And we've obviously had a very big move in the euro relative to the dollar over the course of this year. Can you explain to us a little bit how that's impacted results and sort of sensitivities in the way we should be thinking about it as we model forward?

Ken Bowles, CFO

Mark, the reason you haven't heard much about it is that it didn't have a significant impact. Any changes in the dollar in Europe were offset by movements in Latin America. Overall, if I recall correctly, the total currency impact on EBITDA year-on-year was around $8 million, which is negligible. In terms of sensitivities, generally, every $0.01 movement in the dollar would result in an impact of plus or minus $12 million in Europe. Similarly, a $0.01 change in the euro would also have an impact of about $12 million, and on the debt side, that equates to approximately $30 million.

Mark Adam Weintraub, Analyst

Okay. And that captures the translation of...

Ken Bowles, CFO

Yes, broadly. As you can imagine, it's a rough crude calculation based on what we see and what we know over time. But broadly, what we see is if you take your euro earnings on a translation basis, every $0.01 will be plus or minus $12 million.

Mark Adam Weintraub, Analyst

Okay. Great. Looking at the big picture, several factors have turned out better than we initially expected, which is excellent, and you've mentioned several of these. You've also maintained your previous guidance. Is the main reason for this being cautious due to the uncertainty around volume? What has prevented you from being a bit more optimistic about the year's results?

Anthony Paul J. Smurfit, CEO

I think it's clear that there's a lot of uncertainty out there, whether due to tariffs, the overall economy, or consumer confidence. Each individual economy faces its own unique challenges. In the United States, we haven't observed an increase in volume yet, and if that were to happen, it would give us greater confidence. However, until we see that improvement, we will remain cautious. There are some significant markets for us, like Germany, where we haven't noticed any substantial progress. The United States is currently in a transition phase as we seek new volumes while phasing out less profitable ones. This situation exists alongside the broader economic context that we all follow closely. If volumes increase, conditions will certainly improve.

Mark Adam Weintraub, Analyst

Fair enough. And maybe this is related to all of this and maybe I remember wrong, but I thought we had like $100 million negative from maintenance in the second quarter. And you're talking about getting $50 million back, but running pretty full. So I'm just trying to understand that dynamic.

Ken Bowles, CFO

Yes. But remember, also, we begin to see the impact of the closure of Forney in that quarter too. So the need to take less downtime comes into view too. Clearly, market, it's an estimate as we start the quarter. If the demand picture deteriorates to any significant impact, it doesn't change much. We can flex that. It's not. It's just currently where we sit the demand picture, the order book, everything else would suggest that the less downtime in the third quarter over the second quarter. And some of that is the impact of the closure of Forney helping that.

Operator, Operator

The next question comes from the line of Anthony Pettinari from Citi.

Anthony James Pettinari, Analyst

With some of the actions that you've taken in North America, can you remind us what your integration rate is in corrugated and consumer? And then broadly, as you kind of execute the operational improvement in your box system, I'm wondering how you kind of compare the carton converting system in terms of sort of opportunity, quality, and where you are versus where you want to be?

Anthony Paul J. Smurfit, CEO

I'll address the second question. I'm really impressed with most of the carton plants I've observed and the operations we have. We hold strong market positions with large customers, many of whom are currently facing volume challenges in their consumer sectors. While their profitability is being supported by pricing, this situation isn't favorable for volumes. We anticipate a change as promotional activities increase in the second half of this year and into next year, as these larger customers aim to regain or grow their market share. Aside from a couple of exceptions, I believe that legacy Westrock has successfully rationalized its cartonboard operations over the years, with nearly 20 closures across Europe and beyond. They've established a strong operational system, which represents a great opportunity for us to invest in and develop further. We have a solid systems business, a strong presence in health and beauty, and a commendable consumer segment, though we are somewhat affected by demand.

Ken Bowles, CFO

Okay. Anthony, regarding integration levels on the containerboard target side, it's about 90% now after the closure of Forney. On the consumer side, it's around 60% when we consider all grades.

Anthony Paul J. Smurfit, CEO

On corrugated and papers.

Anthony James Pettinari, Analyst

Great, that's very helpful. One quick follow-up: you mentioned Mexico and the underperformance in consumer volumes. Is that related to tariff uncertainty? Can you share what your customers are saying in Mexico and what the volume figure was?

Anthony Paul J. Smurfit, CEO

The Mexican business, similar to the Brazilian business, has been affected by one or two very large customers who have either not performed well due to tariffs or changes in consumer habits. Additionally, we've made a decisive choice to exit some legacy Westrock business that was performing poorly. For instance, one of our factories on the border was servicing a large customer, and despite its significant size, it was losing $0.5 million a month. After we severed ties with that customer, the plant became profitable, generating $0.5 million a month. This situation consumed a considerable amount of machine time. We are committed to making similar strategic decisions, which is why volumes in Mexico are currently down. This is unlike anything we've previously encountered, but I believe we will return to growth in Mexico. We have a strong business and a solid market position there, along with a committed team that is enthusiastic about our prospects. Without the tariff issue, I would be very optimistic about our growth potential in Mexico.

Operator, Operator

We will take our final question, and the final question comes from the line of Reinhardt van der Walt from Bank of America.

Reinhardt van der Walt, Analyst

Without laboring the point too much on the loss-making contracts, I just wanted to check, the ones that you've cut, are we referring here to EBITDA loss-making contracts? Or are you also looking at this from an EBIT length? I guess what I'm looking for here is, do you have the visibility from an ERP point of view at the moment to be able to push ROIC optimization?

Anthony Paul J. Smurfit, CEO

I'll let Ken address the second part of your question. Regarding the first part, yes, those contracts were generating EBITDA losses. There wouldn't be any reason to continue operating businesses that we have decided to exit. As independent owners, our management teams are responsible for their own profit and loss. If you owned that business, you wouldn't keep it running because it would be a waste of valuable machine time to incur losses. That's not a sensible approach to managing a business. We have moved away from that type of business, and we will replace it with something that, even if it is just average or below average, will be an improvement over what we previously had. Ken?

Ken Bowles, CFO

Yes, we now have complete visibility on the income statement side. The team here and the Atlanta team have worked diligently to achieve this in a short time. We can see individual entities' full P&L, which directly relates to the responsibility Tony mentioned. You can only be accountable for something if you have control over it. The next step involves breaking down the balance sheets. We're starting at the segment level, moving down to the division level for mills, box plants, and consumer operations, and then we will get to the entity level in due course. However, we have a clear understanding of where ROIC and ROCE are, as we have the segment balance sheet and know how capital is allocated and returns are generated. While it's not essential to have this at the plant level now, we will reach that level of detail shortly.

Reinhardt van der Walt, Analyst

Got it. That's very helpful. It sounds like it's going well. And maybe just a second question just on the CapEx outlook. I think, Tony, you've mentioned before that FY '26 CapEx is going to depend on the market environment. But just as things are today, any steer on just directionally how we should think about CapEx into next year?

Anthony Paul J. Smurfit, CEO

Not yet, Reinhardt. As you know, we are developing a strategic plan for the new Smurfit Westrock, and we will provide full guidance on that in February of next year. We will likely offer some earlier guidance on CapEx toward the end of this year so you can get a sense of next year's outlook. We see significant opportunities for cost reduction and some growth in specific markets, which will be incorporated into our planning over the next five years. We’ll present a five-year outlook in February, and we aim to share some insights for next year earlier. The key for us as a company has always been and will continue to be agility. We are not a company that will embark on overly ambitious plans involving $1 billion in CapEx. Instead, we focus on improvement, development, cost reduction, and growth without overextending ourselves. Thank you all for joining the call today. I truly appreciate your participation during this busy earnings season, and we look forward to working hard to achieve our stated goals in the coming years. Thank you, and have a good morning or afternoon, depending on your location.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.