Good day, and thank you for standing by. Welcome to the Smurfit Kappa and WestRock Transaction Announcement Presentation Call and Webcast. At this time, all participants are in listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, please press star one and one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, you can please press star one and one again. I would now like to turn the conference over to your speakers, Tony Smurfit, CEO of Smurfit, and David Sewell, CEO of WestRock. Please go ahead, Tony.
Thank you very much, operator, and good morning or good afternoon, depending on your location, and thank you for joining this call at short notice. I'm delighted to be joined on this call by David Sewell from, CEO of WestRock, and he's joining me from Atlanta, and we're sitting here in Dublin. Before we present, I would refer you, refer you to the specific disclaimers included at the outset of this presentation. Today represents a truly defining moment within the global paper and packaging industry. We are incredibly excited to announce this combination to form Smurfit Westrock, a global leader in sustainable packaging and the go-to packaging partner of choice. As at 30th of June, on an LTM basis, Smurfit Westrock had combined LTM revenue and EBITDA of $34 billion and $5.5 billion, respectively.
While these figures are impressive, they are historic and understate the combination's true potential. It is this potential and our combined future that is so exciting for all stakeholders. Our intention is, in time, to realize this potential. The combination of Smurfit Westrock will deliver an unparalleled geographic reach, with operations in the most attractive product segments and growing markets. Our products, sustainable by their very nature, are the most effective transport and merchandising medium that exists today. The depth and range of Smurfit Westrock's sustainable product portfolio is unparalleled. Supported by an extensive network of innovation hubs, applications, and data, we believe that we will provide our customers with the industry's most compelling packaging offering. Many of you that know me understand the value I place on culture and people.
Our culture has been variously described as both performance-led or as owner-operator type culture, familial-led professional, but always grounded in what and how we deliver better for our customers day in and day out. We see that same approach within WestRock, with David and his team sharing a strong customer focus. That cultural alignment is fundamental to our combined potential and is one of the key reasons why we are here today. We're combining two highly complementary portfolios with limited geographic overlap to create a global leader in innovation and sustainable packaging on terms that we believe are highly attractive for both sets of shareholders. As you would expect, we see significant scope to deliver value across every time horizon, something that we have done before.
You've also heard me say for a number of reporting periods now that our business has never been in better shape, strategically, operationally, and financially. That strength, together with the combined operating cash flows in excess of $3.4 billion, provides Smurfit Kappa—Smurfit Westrock with significant capital allocation flexibility to continue and to accelerate the transformation journey. I don't propose to dwell on the detail of this slide, except to say that the transaction is unanimously recommended by the boards of both Smurfit Kappa and WestRock as being in the best interest of their respective shareholders. The transaction multiple is in line with Smurfit Kappa's trading multiple and significantly below comparable transactions over the last decade.
It is also worth noting Smurfit Westrock's commitment to a strong investment-grade credit rating, and equally, our intent to sustain a dividend in line with the current attractive dividend policy of Smurfit Kappa Group. There are a couple of points beyond the slide that I think are worth pointing out, some of the guiding principles for me and for Smurfit Kappa Group. I've always believed that the opportunity comes to pass and not to pause. Similarly, our philosophy has always been to do things when you can and not when you have to. These principles have guided our approach and are fundamental to our belief that this combination represents a unique point-in-time opportunity to create value for all stakeholders. I'm now really delighted to hand over to David, who'll take you to the next few slides. David?
Thank you, Tony. It's a pleasure to be with you all on the call this morning. This is really an exciting day for Smurfit Kappa and WestRock, for our shareholders, our customers, and our team. With today's announcement, we are bringing together two companies with highly complementary portfolios to create the global leader in sustainable packaging. Smurfit Kappa is the leading integrated corrugated packaging company in Europe, with a large-scale pan-regional presence in the Americas. Through its industry-leading operational excellence and innovation, they've consistently delivered best-in-class performance and returns. WestRock is a leading corrugated and consumer packaging solutions company in the United States, with strong positions in Brazil and Mexico. In addition, we have a strong international consumer packaging business as well. We pride ourselves on building deep customer relationships across diverse, growing end markets, and our reputation for driving innovation and sustainable packaging.
Together, we are creating a global leader with unparalleled scale, quality, product diversity, and geographic reach in the most attractive packaging markets. And we are thrilled to be joining forces with Smurfit Kappa through this combination. I've gotten to know Tony and his team well in the lead-up to today, and I can say with confidence that we have found a like-minded partner, one who shares our dedication to providing customers with industry-leading services and sustainable solutions. We look forward to partnering with Smurfit Kappa to build a leading global platform that leverages the strength of our combined portfolio and presents a truly comprehensive offering of packaging solutions for customers around the world. The new Smurfit Westrock will be uniquely positioned to offer a full range of sustainable solutions, including corrugated packaging, consumer packaging, machinery and automation, and paper.
With our combined capabilities, Smurfit Westrock will offer impressive breadth and depth across renewable, recyclable, and biodegradable packaging solutions. Leveraging our combined size and scale, we will have a balanced and unparalleled geographic reach across over 40 countries, with a significant presence across important markets in Europe and the Americas. The combined company will serve a diverse range of end markets, including food and beverage, industrial, e-commerce, healthcare, and beauty. Through our broad portfolio, attractive geographic footprint, and diverse end market exposure, we will become the global leader in sustainable packaging. Turning to slide 10, as you can see here, how Smurfit Westrock's strategies are strongly aligned. At WestRock, we serve many existing customers with both corrugated and consumer needs, and our differentiated machinery business enables our customers to drive efficiencies and adopt many of our innovative solutions.
With the addition of Smurfit Kappa's expansive and international corrugated customer base, state-of-the-art machinery and complementary solutions, the combined company will capture meaningful cross-selling opportunities across our businesses, creating deeper customer relationships and long-term growth opportunities. Smurfit Westrock will be the only global sustainable packaging provider with a full range of solutions, including corrugated, consumer, and packaging automation. Moreover, as large corporations continue to commit to improving their sustainability profiles, plastic replacement options are proving increasingly important for customers. Smurfit Westrock will be well-positioned to meet this demand and capitalize on the opportunity with a broad, diverse product offering and differentiated machinery and automation equipment, offering customers efficient and innovative solutions. Smurfit Kappa and WestRock have a shared ambition for a sustainable future. Together, we'll be well-positioned to drive positive change and contribute to the well-being of our planet, our stakeholders, and the communities we serve.
In today's world, sustainable business practices are more important than ever. We welcome this responsibility, and we are committed to making significant progress toward a more circular, sustainable economy. Both Smurfit Kappa and WestRock have impressive track records of helping our customers improve their environmental footprints and achieve their sustainability goals. But delivering on the promise of a sustainable future goes beyond our customer commitments. Both companies have done the work, and we hold ourselves accountable, creating our own sustainability targets and doing our part to fulfill the promise of a sustainable future. Smurfit Kappa and WestRock's complementary sustainable commitments and targets across reducing emissions, water usage, and waste, and further improving sustainable forestry, are yet another reason our companies are such a great fit. Ensuring the health and well-being of our team members and communities is critical to building a strong, sustainable future.
As a larger company with enhanced scale, Smurfit Westrock will be even better able to invest in our teams and where we work. Smurfit Kappa and WestRock both have a strong track record in developing and delivering product innovations. We have been helping our customers move away from plastics to adopt more sustainable packaging solutions. Individually, we each have a strong foundation to build on, and together, we will have unprecedented scale and an industry-leading innovation platform to drive growth with our customers, helping them meet increasing customer demand for renewable, recyclable, and biodegradable packaging. We are committed to advancing sustainability and providing the broadest set of paper-based solutions in corrugated and consumer packaging. With our innovative solutions and enhanced scale, our combined company will be uniquely positioned to capture market share and capitalize on the trend towards sustainable packaging.
I'll now turn the call back over to Tony to walk through more detail on Smurfit Westrock's operational footprint and the compelling strategic and financial rationale of the transaction. Tony?
Thank you very much, David. As you know, North America is a strategically important and very attractive market where our existing presence is de minimis. By combining with WestRock, we have now solved this. The geographic distribution of our revenue will now be 54% approximately in North America, 12% in LATAM, with Europe and other at 34%. This is a truly better balanced business. The combination creates a business of scale, of quality, and most importantly, of potential. The combination spans five continents, over 40 countries, with some 67 mills, nearly 500 converting operations, and a team of over 100,000 people. The next slide graphically illustrates the scale of this combination. Smurfit Westrock will have an LTM revenue of $34 billion.
We think enhanced scale will benefit both sets of shareholders and customers alike, creating greater and greater opportunity, as David has just mentioned. From an operational perspective, this slide outlines the geographic balance of the combination, creating a leader in sustainable packaging in North America, Europe, and Latin America. The limited geographic overlap with two highly complementary portfolios offers provide a truly compelling product offering for our customers. Again, as to the strategic and operating rationale, I don't propose to go through this slide line by line, as many of the points have already been covered. Those that know us also understand the importance we place on people and values, which include loyalty, integrity, and respect. Everybody says it, but we live it.
We believe this combination will provide a substantially broader opportunity set for all employees as we combine the best talents to unlock Smurfit Westrock's true operating potential. Smurfit Kappa Group's established track record of performance and balance sheet strength will, we believe, deliver improved operating efficiency and, in time, increased returns for the combination. In essence, we believe the combination will accelerate the journey of transformation, a familiar journey for us, which we embarked on in 2015. As I've said before, the Smurfit Kappa Group of today is quite simply a very different and very much better business. Through the operational excellence, highly effective capital allocation decisions, and above all else, the quality of our people, we have consistently delivered industry-leading performances.
Within that timeframe, we reduced our leverage multiple from 2.6 to 1.4 times today, delivering a consistent EBITDA margin in the 18%-19% range and a ROCE in excess of our target of 17%. We've more than doubled our earnings, and during the timeframe, acquired 34 businesses with a proven track record of effective integration. As builders of long-term value, while we have naturally prioritized the strategic and operating rationale, the financial rationale is also compelling. Combination creates a larger listed packaging company, which we believe that the New York Stock Exchange listing will provide not just enhanced liquidity, but also a far sharper valuation benchmark.
As you would expect, we see scope to create immediate and long-term value, with the transaction being accretive on an EPS and free cash flow basis in the first full year following the completion, including synergies and increasing in years two and three. As I've said a couple of times now, the greatest scope to create significant value lies in realizing this combination's true potential. At the outset, we're targeting synergies of at least $400 million, distributed, as you will see from this slide. That target does not include many potential benefits which may accrue from complementary portfolios and the transfer of knowledge and best practices across our operations. It is worth saying again that the opportunity before us significantly outweighs any synergistic benefits. That said, hard synergies are important, and we have clearly defined them.
We fully expect to realize these benefits within the committed timeframe, as we have always done. This slide outlines some of the high-level pro forma financials. Again, these are historic numbers, which understate the combination's true potential. We think the EBITDA margin differential presents opportunity. From a credit or rating agency perspective, the combination, in fact, carries less balance sheet risk by reason of geographic scale and product diversity. We are committed to a strong investment-grade status. At 2.3 times historic, the combined balance sheet enjoys significant financial flexibility. With operating cash flow in excess of $3.4 billion, we believe we can deliver improved operating efficiency and increase returns over time through disciplined, yet effective capital allocation decisions.
The transaction multiple of 5.9x historic and 7x current is substantially below both recent and historic comparable packaging sector transactions. We combine Smurfit Kappa's leading footprint in Europe and LATAM, together with WestRock's leading presence in paper, corrugated, and consumer packaging in North America, Brazil, and Mexico. WestRock is at the beginning of its transformation journey, as evidenced by the recent closures of two high-cost mills, together with its investment plans to reduce costs and improve efficiency. Smurfit Kappa is already some way through our journey. By combining, we present a unique point-in-time opportunity to accelerate transformation and to create significant value.... When we set out our own capital plans at Smurfit Kappa Group some seven years ago, we promised all stakeholders a brighter future.
I believe we've delivered that, realizing our potential with a business today that is quite simply in the best shape it's ever been. That has never, though, been the summit of our ambitions. I hope you'll find that today's announcement to create a global leader and the go-to packaging company represents the next and most exciting chapter in the Smurfit Westrock future. With that, operator, I will hand it back to you, to take, and though David and I will be happy to take any questions, from people on the call.
Thank you, sir. As a reminder, to ask a question, you will need to press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. Once again, please press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. Please stand by while we compile the Q&A roster. This will take a few moments. We are now going to proceed with our first question. The question comes from the line of George Staphos from Bank of America. Please ask your question.
Thanks very much. Good day, everybody. David and Tony, good to speak with you and best of luck with the transaction. I wanna ask. I'll, I know you have a lot of questions. I wanna ask one two-parter and I'll turn it over. So I guess if you go to slide 15, Tony, you went through, you know, and reviewed scale, global reach, being a go-to player, things that we've certainly heard about in the past, and Smurfit, from our vantage point, even though we don't cover you directly, has employed. Having said that, when we look at sort of the left half of that bar chart, a lot of the companies that are the largest haven't necessarily been the best performing from a stock standpoint and return standpoint, whereas many of the companies on the right-hand side have.
So what do you really think is getting in the way of getting the global reach and being the go-to player to the bottom line and to the equity holder? And why will Smurfit Westrock be successful in that regard? Relatedly, in terms of the synergies, the $400 million, can you give us a bit more color on what's in integration? What are some of the more important buckets? How important is that optimization of trade flow and the export channel for both companies in that regard? Thank you very much.
Okay, and David, chime in whenever you want.
Sure.
You know, why do we think this is a great company? The amount of skill level within WestRock and Smurfit Kappa, I think is really a fantastic testament to both companies. And if you look at what... I can only speak for Smurfit Kappa, and I'd love David to speak for WestRock. But if you look at the product innovation and the amount of new products that we're coming up with day in, day out for our customers, the amount of, I suppose, cross-fertilization that we do with our own Latin American business and our European business with customers and with knowledge, it's quite phenomenal. And, you know, we know from having competed a little bit with WestRock in certain product applications, they do things very well as well.
And so we think that putting the two together, we'll get an even bigger cross-fertilization of knowledge that I think no other company can have. Now, of course, George, it's up to us to make sure that we leverage that and make sure that our customers see advantage from that. I think if you look at what we did in Smurfit Kappa, which were two individual companies in Europe, we have put those two together very well and delivered the returns. And I think we have some experience in this, and I think we've proven that we've been able to do that.
You know, I can only say that the people that I've met in WestRock have been, you know, excellent people that really share a lot of the cultural values towards innovation and towards thinking for the customer that we do. And that's why, in the end, a merger is not gonna work because big goes to big. It's gonna because the integration of people works well, and that's something that I think I feel comfortable that we can do in Smurfit Kappa well, because we've done it before. So that's where the value is gonna come from. It's by being really good at what you're doing and harnessing all the innovation that both of these companies have, to make sure that our customers give us the credit for that and reward us for that.
You know, as I say, both companies have done that well, and we know how to do it. So, I think I'm pretty comfortable that the integration of these two culturally aligned companies, and we put that word in, culturally aligned, very carefully in the presentation, because that's what's gonna make the difference at the end of the day. With regard to... I don't know if you want to add anything, David?
Sure, Tony. George, as you know from a WestRock perspective, we're in the middle of a transformation with our scale, whereas, you know, there's an enormous amount of integration work we're doing, portfolio optimization, product and footprint optimization. What this does is allows us to accelerate that. But I think what you've seen is as we continue to make progress on our journey, we continue to improve our margin profile, we continue to improve our EPS growth. And we're really excited about this transaction because it's very highly complementary. There's not, you know, a lot of crossover. And when you think about the areas such as consumer in Europe, we've really gotten a lot of traction on our, you know, enterprise selling between corrugated and consumer in North America.
It's over 40% of our sales, and that's been a driver of our improvement as well, leveraging that commercial excellence. And so taking that concept to Europe, we think where plastics replacement is very, very highly regarded, it's accelerated by customers there. This is gonna allow, you know, primary, secondary, and tertiary packaging solutions with our innovative machinery business and to accelerate growth. So there is an optimization on the infrastructure, but there's a tremendous growth opportunity, and I think you're really gonna be able to see that with the scale and the solutions that we'll bring.
Yeah, thanks, David. To your second point on the integration buckets, I mean, we, as you know, have one strategic goal in our business, and we've said there are two actually, one, to be bigger in America, and the second, that we are very short of paper in the Latin American region. So we see this immediately allowing us not to go ahead and build new paper capacity in the United States, and obviously to integrate a very significant amount of tons from the WestRock organization into the new Smurfit Westrock organization. And as David said, in that integration bucket, there is a bit of carton business transfer that we see that will automatically grow.
But we're not taking any soft synergies at all for corrugated to transfer, even though we do believe from both regions, there will be very significant cross sell, but that's not in our synergy number.
Thank you, gentlemen. Good luck. I'll turn it over.
Thanks, George.
Thank you.
We are now going to proceed with our next question. The questions come from the line of Justin Jordan from Davy. Please ask your question.
Thank you. Good afternoon and good morning, everyone. I've got two quick questions. Firstly, I suppose on slide 19 of the $400 million plus synergy number by the end of year one. I believe, can you help us understand perhaps beyond the obvious kind of 1.2% or so of revenues that might represent, what is the potential, in your view, potential year three, year five synergy number? If you could share with us your longer term, medium-term thoughts on that. And just one clarification on that. I'm assuming that excludes any of the existing ongoing WestRock plans to reduce costs by $1 billion by fiscal 2025, as outlined by David on their May 2022 CMD.
And then secondly, just on a completely different topic of antitrust, given slide 16 in terms of the geographic breakdown of both businesses, it wouldn't appear to have any major antitrust issues in North America or Europe. Is there any issues in other geographies such as Mexico? Thank you.
We don't believe there's any issues anywhere, with the exception of some issues in Mexico, which we'll obviously work hard to overcome. I think with regard to the first question, you know, I don't wanna get... We're comfortable, Justin, in saying that there's $400 million of synergies. We've been through that very exhaustively prior to coming to you, but you know us a long time. You know that we don't. We're a very efficient operator, and if there's more to be had, we will have it. What the timeframe of that is, we'll wait and see. But you know, you're correct. We are not building in anything that currently WestRock is doing or we're doing, for example, in our own cost reduction programs.
This is just purely a function of us coming together, and that $400 million is where we sort of feel comfortable sitting. But, you know, you know we're a high-performing company. You know they're a high-performing company. They're already on a transformation journey, where we have been transforming, and maybe we're a little bit further along than WestRock. And so therefore, therefore, you know, there's a lot more still to go for.
Thank you both.
Thank you.
We are now going to proceed with our next question. The questions come from the line of Lars Kjellberg from Credit Suisse. Please ask your question.
Thank you. A couple of questions from me. Tony, right at the start, you talked about do things when you can. So the question is really, what is the opportunity and how did it come forward? And also maybe David and Tony, if you kind of look at the remarks that you made, accelerate the change in the WestRock system, in what respect does the transaction actually accelerate that change? How... Because it's primarily in your own system in terms of WestRock. So just curious, what the Smurfit group adds to that, that accelerates that change? That's all my questions.
David, do you want to take the second one? And I will, I'll say just briefly how this all came about. I mean-
Sure.
You know, David, we have obviously looked at WestRock for a long period of time together, and we've had conversations, you know, on and off for a number of years about different ideas. David and I met in early January and discussed different ideas, and in the end, we decided that this was the best idea for long-term, short-term, and even medium-term shareholder value creation. So collectively, after you know, nearly eight months of discussions, we came to this conclusion that we've announced today. It's been a long time being discussed between companies, but different options.
As I say, this, in the end of the day, was what I think, and I don't want to speak for David, but I think I will here, but you can speak it yourself, David, that this is the best opportunity for both, both sets of shareholders.
Yeah, Tony, just, just to add on to the second part of the question. As part of our transformation, and also going back to the previous question, you know, our billion-dollar, cost, and productivity initiative is separate than the $400 of synergies. And we do believe there, there is upside to the synergies. If you look at the Gondi, acquisition, that we did, we had a $60 million synergy target. We're already tracking 30% greater than that. So we see, you know, tremendous opportunities with our ability to bring the, the companies together.
When I think about accelerating our transformation, and why this is such a good transaction for our shareholders, our customers, and our employees, is in addition to, you know, our margin focus, our leverage, our ability to deleverage the company, which is a huge focus, will be accelerated. Our ability to recapitalize our assets, which is a journey we're doing, will allow us to be accelerated. Our vertical integration, as a percent of overall sales, allows us to be significantly accelerated. Our return on invested capital allows us to be accelerated. These are just core fundamentals that we've been really focused on, and by joining forces with Smurfit Kappa, all of this gets accelerated.
So there's short-term value, and then you look at the long-term value with the solutions that the two companies bring. That's what gets us so excited about the future.
If I can just-
I share those-
Follow up.
Yeah. Go ahead, Lars.
I'm sorry, Tony. Go ahead. Okay. Just the integration bit, can you share with us the sort of amount of tons that would Smurfit currently is short, i.e., that WestRock will supply into the Smurfit system in the Americas?
Well, if you had normal growth, we would have been around the 400,000 tons, if you had normal growth. But at the moment, somewhere between 325,000 and 350,000 tons. But not all of that will necessarily go into the WestRock system because there'll be some specific grades. So you can count on somewhere between 250,000 and 300,000 tons, that without growth, will come into the system. But you know, obviously, we have been growing in Latin America, historically, quite strongly, and as have WestRock with their acquisitions in Mexico. So there's a large kraft liner growth integration opportunity as we go forward.
Gotcha. Thank you.
We are now going to proceed with our next question. The question's come from the line of Charlie Muir-Sands from BNP Paribas Exane. Please go ahead with your question.
Yeah, good afternoon, guys. Thanks for taking my questions. Firstly, I wonder, just on the non-cost synergies, the first two that you flagged were sort of commercial and the cross-sell opportunities. I wondered if you could elaborate on the kind of potential scale of the opportunities there, and perhaps what experience you've had from the markets where you have been able to implement that in the recent past. And then secondly, just in terms of the accretion, can you just clarify if there's you know, what your assumptions are on financing the cash components, any refi, your banking on, and if you're expecting any kind of change in the blended tax rate at the combined entity? Thank you.
With regard to cross synergies, Charlie, I think what we've shown in our America's business is that for some very large customers, we have generated cross-selling opportunities between them and our European business. But the common refrain from most of the large customers that we deal with in Europe is, you know, we'd like to deal with you in the United States, but we obviously we're, as I said in the script, de minimis there, so we were not able to.
So we believe that both American customers that operate in Europe and that European customers that operate in America, where we have a particular relationship with and skill set, leaving aside the crossover of cartons and the specialty business areas such as Bag-in-B ox, leave aside those, we do believe there's a large cross-sell opportunity that. But we're not building that, as I say, into our synergies because, you know, I think that we have to prove over time. And while we know it happens, and we want it to happen, and our customers want it to happen, I want to see that evidence in action. And so I just ask you to give us time on that one to prove that, but it's not in our numbers of synergies.
With regard to refi, we will not have to refi going forward. We have bank guarantees for all of the bonds, which will not be needed to be refinanced. So therefore, they're not relevant. And with regard to the $1.3 billion, we are just borrowing that at bank rates at the moment, and, you know, we'll come to refinance that when the transaction closes in the middle part or latter part of next year, but that's fully banked. So no banking issues as we sit here.
And tax?
Tax, about the same, Charlie, as far as we can see? About the same.
Any tax.
We are now going to proceed with our next question. The question comes from the line of Gabe Hajde from Wells Fargo. Please ask your question.
Tony, David, good morning.
Good morning.
I guess afternoon, afternoon as well. I wanted to ask. I appreciate that you talked about the accelerated timetable, so I guess value creation at both entities. I'm just curious from a practical standpoint, how this impacts any sort of efforts that are already underway. You know, in the meantime, between now and I guess, the second quarter of 2024, does this preclude either company from pursuing anything that may be in the pipeline already, as you know, specifically at WestRock as it relates to the $1 billion of cost out and maybe any large scale investments that you might be contemplating?
Good morning. I'll start. Oh, go ahead, Tony.
I was just gonna say, David, that's a great question that I'm gonna give to you because we spent all night negotiating that, so.
Yeah. Perfect. Perfect. Gabe, I appreciate the question. We are running full steam ahead on our billion-dollar initiative on cost out and productivity. There's no change. We're moving forward with our 2023 number, which we've talked about. We're at $450 million. Moving forward with that. Next year, we're at $300 million-$400 million. There's no change in that. We feel great about the progress we're making, and we will not take our foot off the accelerator on our transformation journey on driving that productivity and cost out savings, which will be on top of the $400 million that Tony mentioned earlier.
Yeah. I mean, Gabe, our objective here is to, you know, you know, to be the best paper and packaging company in the world. And to do that, you have to have the best assets, the best people, the best market positioning, and the best plan for the future. And, you know, we've, I think, proved that we've been on that journey, and I think David and his team are on that journey as well, and the combination accelerates that from a people, knowledge, data, but and the capital point of view that we're not in any way interested in stopping. We're in totally supporting the development of improvement in the WestRock operations, as per the team have been doing in WestRock over the last 18 months or so.
Thank you, gentlemen. One last one, if I can slip it in. Appreciating that obviously, that there's a lot going on, with the macro backdrop, and both, you know, corrugated and consumer board are, I'll call them pseudo cyclical. You're basing the valuation on kind of a look back trailing 12-month number. How would you have investors, and again, just looking at consensus numbers for WestRock for next year, I know that probably, I think as a fourth-generation operator and family member, you're more worried about the next 25 years, Tony.
But, just thinking about, I mean, you know, just thinking about maybe the next 24 months, would you expect directionally the earnings capability and with the $400 million to be similar to the look back theory that you guys are basing this on? Or how would you have us think about that?
Gabe, I don't think we're allowed to go into forecasting, but let me just say that, you know, this business, over the long... This is a very unusual year. I mean, I don't think, I've been, as you say, I'm actually third generation, but, I don't think anybody who's been in this business, in their lifetime has ever seen a market shrink, like it has done in the first six months of this year, and, and latter part of last year. Equally, we'd never seen the growth that we'd seen in the previous year. So, but if you just take the overall, future for our packaging products, whether it's our carton board products or whether it's our corrugated products or some of our specialty products.
Because we're fiber-based, and because there is a very large environmental movement around the world to reduce certain substrates of fossil fuel products, you know, the future looks really, really good. You know, I can't honestly predict what's gonna happen in the next six months or 12 months, but what I can do is say to you in 25 years, as you said, but also in 10 or in five years, that this group of companies, Smurfit and WestRock together, will be in much, much better shape, will be much more efficient, will have the best people, will have the best market positioning, and will be really set up for whatever the market throws at us, good or bad.
When Smurfit Kappa, we've been through some bad years and some good years, and yet we over time, you know, I have the saying that success is never a straight line. But, you know, as long as you do the right things, and you make sure that your asset base is in good shape, and you've got the right people, then this business is a really good business. And that's why you have so many people in this business who have done this individually, are in small groups or small clusters of companies that have been very, very successful. And what we'll do in Smurfit Westrock is we will have a very big company that will do things correctly and be very successful. And that's our mission, that's our challenge, and that's what we intend to do.
So this is a great business, and an underappreciated business as one of the commentators on CNBC today said, "An unloved business." But those that work in it love it. And it's now up to us to make you all in the investment community love it too, and we do that by performance and delivery.
Thank you for that.
Thank you.
We are now going to proceed with our next question. The question has come from the line of Cole Hathorn from Jefferies. Please ask your question.
Afternoon, thanks for taking my question. Just thinking about the CapEx requirements over the next number of years. I mean, with the combination of the two businesses, does this change how you're thinking about your CapEx and plans? And, you know, would this effectively allow you to reprioritize that CapEx and effectively reduce it in an overall level, improve free cash flow? Is the first question, then I'll go on with the follow-up.
Well, looking forward is, you know, as you know, Cole, we're coming to the end, at the end of 2024, we'll be, you know, at the end of our capital investment program, to a great extent. I mean, obviously, there's always things to do. But you know, we, we would be prioritizing putting capital into the WestRock business to make sure that they continue their accelerated journey towards a better transformation. And that's what attracted David, I don't wanna put words in your mouth here, David, but attracted you and your team to the fact that we could do this in a safe and secure way to really drive the development of all of your businesses, as we have driven all the development of all of our businesses.
You know, we have most of our factories are in pristine shape now in Smurfit Kappa. We've got plenty of excess capacity because the market has actually shrunk this year and last year, and we put in capacity. So most of our businesses are in very strong position to take whatever growth comes for the next couple of years. So we can take our foot off the pedal, so to speak, in Europe and our LATAM businesses, and concentrate on the Americas to really accelerate and develop their businesses going forward.
Thank you. And then, I mean, maybe focusing on the free cash flow side again, I mean, I know there's probably not, not that, that much you can, you can provide, but anything kind of the working capital, anything else around there? If we're just trying to think about, you know, you've given some color around the, the EBITDA accretion, but just trying to understand, you know, how free cash flow might, might develop and the, the levers on that.
Cole, again, I think we're getting into forecasting, and, I'm told I can't do that. And, you know, this... So I have to be, I have to be a little bit careful. But so, so, you know, I think we got-
I'll turn it over.
Okay, thanks.
As a reminder, once again, to ask a question, please press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. Once again, it's star one and one on your telephone and wait for your name to be announced. Thank you. We are now going to proceed with our next question. And the question's come from the line of Mark Weintraub from Seaport Research Partners. Please ask your question.
Thank you. Tony, you mentioned, you know, several times the seven-year capital program and, that that's evolved very, very well for you. Can you maybe help us understand some of the key drivers of what you think has made that so successful, that might be, and David as well, might be applicable to WestRock situation, given as, as you note, they're at a different stage in their transformation journey?
I'll jump in then, David, and then maybe you jump in. I would say-
Sure.
Everything, Mark. Everything. I mean, at the end of the day, when you put capital to work, and you empower people to make that capital pay off for us, and you motivate people accordingly, that gives a whole new vibe to a business to really develop themselves and to go after superior customer service, innovation for customers, development for them. I mean, our whole focus in the whole seven-year cycle has been a focus on our customers to make sure that they get the best quality in the business, the best service in the business.
You know, never was that more evidenced during the pandemic than during the pandemic when, you know, when everyone else was falling down, you know, Smurfit Kappa was standing tall and making sure our customers got their product when they needed it, despite all the supply chain difficulties they had. And so ensuring that you have the right equipment, ensuring you have the most up-to-date converting assets, whether they're in Bag-in-B ox or whether they're in corrugated or whether they're in cartons, gives you an edge, and it gives your people the edge to really be motivated to develop for your company. And as long as you motivate correctly, then you have a better business. So it's all intertwined.
I always say that people—listen, every CEO is gonna tell you that people are the best asset. But, you know, if you really motivate your people, and you go in the right direction, you have the right values, which I believe, you know, WestRock have the same as ours, I think we can really make a difference with the acceleration of the capital program that they're on and the developments that they're on. But, David, do you want to comment on that?
Yeah. Just to add maybe one or two things, Mark. As you well know, on our focus, and we've been very transparent in saying we wanna have world-class assets. We have some great assets. We also have some assets that have needed investment, and that's exactly part of our transformation. We're driving on those assets for returns, you know, above 15% on our return on invested capital. We've had to make some footprint rationalization moves because if the investment did not return, give us those returns, you know, we had to make the tough decision to close those assets.
But if you look at things like the Longview converting plant that we're opening in November, that is gonna be a world-class facility where we're consolidating three converting sites into one, you know, of the highest caliber, automation and equipment and service levels, and that alone will be a $25 million improvement in savings. If you think about what we're doing in what we've done in Florence and other areas. So with this merger, it's. And this is why our company's culture, as Tony talked about, is so well aligned. We're 100% aligned on investing in strategic assets, getting high returns on them, and delivering world-class assets. So you're just gonna see that continue to accelerate, and that's all part of our transformation, and that, that's not gonna slow down as we move forward.
In fact, we believe it'll accelerate, and you'll continue to see us make these, I think, step change improvements very rapidly.
So maybe just as a quick follow-up, I don't know if this is premature to ask, but so WestRock has you talked about kind of $1.2 billion-$1.5 billion likely being the capital budget in the next few years. Does that accelerate? Is that expected to be similar, or do you kind of have to have more of a discussion there before we know the answer to that?
Yeah, I would say I'd go back to Tony's, where we really can't talk too much about how we're forecasting other than to say, as we've talked about, our typical capital CapEx is about, you know, $1 billion a year. Then we look at, to your point, Mark, you know, $200 million-$500 million in strategic projects. So now with this consolidated footprint, you know, that'll be something that we continue to discuss and evaluate. But as Tony talked about, having these world-class assets are paramount to us moving forward.
Yeah, and, Mark, if I could just add one point. I mean, you know, when we launched our capital programs a number of years ago, you know, we had a lot of skeptics at the time. And, you know, I think that we have proven that this is the right strategy for this business, and you can see this all over the place with our competition that invest well in their business. Not overinvest. That's not what we intend to do. We're very, very strong guardians of capital. We think as owners, which we all are in Smurfit Kappa, as though every euro is a prisoner in our pockets, and you have to fight for it to make sure that you get it out.
You know, like, we believe strongly in good assets that follow our customers' needs. And so when we see growth with customers, we will follow them with investment to make sure that we can deliver for them and make sure that we are their primary go-to supplier. And that's why we've been successful. So, yes, there's always skepticism out about this, but it has proven to work, both not just with our company, but with other companies as well.
Appreciate the color.
Thanks, Mark.
We are now going to proceed with our next question. The question's come from the line of David O'Brien from Goodbody. Please go ahead with your question.
Good morning, Tony. Good morning, David. Thanks for the question. First one, please, if I could. From a Smurfit Kappa perspective, Tony, could you give us a sense of your confidence on, you know, with the 17% return hurdle rate on this investment that shareholders making, and maybe talk to what timing around that is, you know, suitable for giving the investment? And I suppose secondly, and it's probably part of that conversation as well, you called out the difference in margin between the two businesses on slide 20, and so that's a measure of the opportunity. Is there anything structurally to stop the WestRock margin from moving up towards and meeting this margin, Kappa margin?
I think it's a bit early to talk about the 17%. You know, I think we're very confident of the work that David and his team have been doing, and, you know, we'll be looking for the highest returns. But I think that, you know, I just don't wanna commit to your 17% or higher or lower at this moment in time. It's just, it's just a little bit early for me to do that, David. And again, there's a degree of forecasting in that, which I don't think any of us want to get into. With regard to the margin development, you know, if you're putting in capital and you're not improving your margins, then you're doing something wrong.
So I assume that, again, speaking for ourselves, what we've done over the years is put capital in and got the returns. And that's improved our margins over time. I suspect, again, David, I don't want to put words in your mouth here, but your investment plans are going to certainly improve your margins going forward. And then together with the synergies, together with what we can do together, I suspect that the margins will gravitate towards us. But I don't wanna put words in your mouth, David.
No, look, this is a huge focus for us, as part of our transformation. Also keep in mind, we're on US GAAP accounting, so there may be a little bit of differences there. That's why we talk about in our investments, the threshold of 15% return on invested capital is so important, because it's gotta drive the margins. If you look at what we've done, you know, in our consumer packaging and corrugated packaging businesses, we've really seen accretion in our margins, so it's going right that way. If you look at recycle pricing and how it's impacted our merchant paper business, it's very immediate. And that's why this transaction, getting us more vertically integrated, really helps mitigate some of the volatility of the margins in global paper.
So there is a very detailed plan on our margin profile improvement. And it's not all CapEx. There's productivity that we're working on. It's the $1 billion, it's the footprint optimization. So it's a multilayered plan to deliver on our margin and expansion.
Okay. Thanks, guys.
Thanks, David.
Thanks.
We're now going to proceed with our next question. The questions come from the line of Gaurav Jain from Barclays. Please ask your question.
Hi, good afternoon, Tony. Good morning, David. A couple of questions-
Good morning.
-from me. One is on potential divestitures. You know, Smurfit will now be in consumer packaging and significantly long paper, while earlier you were balanced. So would you be looking to divest some assets?
The answer to that, Gaurav, is no. But there are always portfolio optimizations looked at and done. But if you're saying, should we divest the largest opportunity of consumer packaging, I'm a strong believer that the two businesses can sit side by side, can work complementary, and will have significant synergies with each other. And I know David feels the same on that. And that business is a solid business that is really a fantastic business that we can leverage off. But there is always some portfolio optimization in our businesses that we will always look at, but there's nothing on the table as for this, as per this transaction. We'll evaluate that as we go forward.
Sure. Thank you. And, David, a question for you. And in a lot of M&A transactions, when they happen and there is a gap or a time between when the transaction is announced and when it closes, you know, the companies which are getting acquired, like yours, they actually have a very good sort of time to invest in projects which they haven't invested in for a long time, because nobody is really looking at earnings. So will you accelerate your CapEx and transformation projects because earnings won't drive WestRock's stock for the next nine months now?
Yeah, thanks for that question. I go back to the comment earlier about people, and the people in this company are just amazing when you think about the resiliency of what they've been through, you know, over the last several years. And look, this team is excited to be a part of something that's so special in this industry. And the highly complementary nature of the companies, you know, this team is gonna play a really important role, you know, especially in North America. So executing on our transformation is gonna continue as if nothing's changed. So you'll continue to see that. You know, we'll hold ourselves accountable to the numbers that we've communicated externally. The board is still completely engaged and holds our leadership team accountable to those numbers, so we don't anticipate any change.
And we're excited about delivering on our promises.
Thank you so much.
Thank you, Gaurav.
Due to time constraint, we will now end the question and answer session. I will now hand back to Tony Smurfit for closing remarks.
Yes, again, thank you all for joining us this afternoon and this morning for this call. I really appreciate David coming on with me, and we really believe that today represents a defining, a really defining moment within the packaging industry, and a really unique point-in-time opportunity to deliver improved operating efficiency and returns. As we said at the outset, we are really all of us in Smurfit Kappa and in WestRock, really excited about the combination's potential, and it is our intention and our absolute commitment to realize that potential in the years ahead. So we wanna thank you all again for taking the time to be with us, and we look forward to talking and working with many of you in the years ahead. So thank you all.
This concludes today's conference call. Thank you for participating. You may now disconnect your lines. Thank you, and have a good day.