WestRock Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
August 5, 2021

There are 15 speakers on the call.

Operator

Good day. Thank you for standing by, and welcome to WestRock Company Third Quarter Fiscal 2021 Results. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer Please be advised that today's conference is being recorded. Thank you.

Operator

I would now like to hand the conference over to your speakers today, Mr. James Armstrong, Vice President of Investor Relations. Sir, please go ahead.

Speaker 1

Good morning, and thank you for joining our 3rd fiscal quarter 2021 earnings call. We issued our press release this morning and posted the accompanying slide presentation to the Investor Relations section of our website. They can be accessed at ir.westrock.com or via a link on the application you're using to view this webcast. With me on today's call are WestRock's Chief Executive Officer, David Sewell our Chief Financial Officer, Ward Dickson as well as Pat Lindner, President, Commercial Innovation and Sustainability. Following our prepared comments, we will open the call up for a question and answer session.

Speaker 1

During the course of today's call, we will be making forward looking statements involving our plans, expectations, estimates and beliefs related to future events. These statements may involve a number of risks and uncertainties that could cause actual results to differ materially from those we discuss during the call. We describe these risks and uncertainties in our filings with the SEC, including our 10 ks for the fiscal year ended September 30, 2020. We will also be referencing non GAAP financial measures during the call. We have provided a reconciliation of these non GAAP measures to the most directly comparable GAAP measures in the Appendix of the slide presentation.

Speaker 1

As mentioned previously, the slide presentation is available on our website. With that said, I'll now turn

Speaker 2

it over to you, David. Thank you, James, and good morning. I'd like to start today with a summary of WestRock's performance in the 3rd quarter, as well as provide some perspective on our progress and the work underway since I joined the company. Then I'll turn it over to Ward, who will provide additional detail on our financial performance and outlook for the remainder

Speaker 3

of the

Speaker 2

year. We delivered very strong performance our fiscal Q3 with demand for fiber based packaging continuing to be robust, we generated record revenue $4,800,000,000 an increase of 14% year over year. Adjusted segment EBITDA was up 15% to $811,000,000 And adjusted EPS rose 32% to $1 per share. This was terrific performance in a challenging inflationary environment and positions us well for the future. We had robust sales growth across all of our businesses with packaging sales up percent during the quarter.

Speaker 2

Demand continued to be strong in the key markets we serve, including e commerce, food, Beverage and Industrial, North American per day box shipments were up 9% year over year. We are implementing the previously published price increases across our major paper grades. These pricing gains Combined with our volume growth and mix improvements, outpaced inflation and drove 15% adjusted EBITDA growth year over year and adjusted EBITDA margins of 16.8%. We continue to generate strong free cash flows that we used to strengthen our balance sheet while also investing in our business and delivering value to shareholders. Overall, net leverage at the end of Q3 3 is 2.54 times, down from 3.13 times at our peak.

Speaker 2

Last quarter, I talked about the key strategic priorities for WestRock, leveraging the power of the enterprise, leading in sustainability, Accelerating innovation and executing a disciplined capital allocation program. And I'd like to take a minute to walk through some of our progress in each of these areas and our path ahead. We've been moving quickly in my 1st 4 months on the job. During this time, I continue to visit our facilities and spend time with our customers. These visits have reinforced my belief and the unique opportunity we have to provide value through our broad portfolio of paper and packaging solutions and help our customers meet their most challenging needs for sustainable packaging solutions.

Speaker 2

We have initiated a detailed review across the business, looking at how to further enhance our focus on attractive end markets where our differentiated portfolio is rewarded. We are still in the early stages of this process, but our recently announced team realignment is a significant step forward in fully leveraging the power of our enterprise. We are strengthening our focus on commercial excellence, Innovation and sustainability across the enterprise and combining these functions. Bringing these critical activities together provides focus, integration and alignment to the disciplines We are focused on growing our packaging business and maximizing our opportunities across the portfolio. We have combined the former MPS and our food and beverage packaging business into one team, unifying these commercial teams and operations to better serve our customers and maximize the productivity of our global operations.

Speaker 2

We have also integrated the sales teams across our consumer paperboard and containerboard businesses and combined our consumer and containerboard mills into one system. During the Q3, we continued to implement our disciplined capital allocation strategy and further strengthened our balance sheet. Over the past three quarters, we've reduced adjusted net debt by $1,000,000,000 raised our dividend by 20% and completed the investments in our strategic capital projects. So what's ahead for WestRock? The WestRock team is relentlessly focused on leveraging the power of the enterprise to improve margins and returns, while continuing to deliver excellent free cash flow.

Speaker 2

We will invest in our converting systems to support growth in packaging and in our mill system to improve our overall cost structure. These investments will further enhance our packaging capabilities to serve those markets where our customers value our differentiation. This also means working to reduce our exposure to markets where we don't see this potential, such as export containerboard and low margin SBS businesses. We also remain disciplined in our capital allocation. We are working to ensure the strength and flexibility of our balance sheet as we invest to grow our business.

Speaker 2

We remain committed to maintaining our investment grade credit profile and consistently growing our dividend. We will invest in our future through capital projects and tuck in M and A opportunities that clearly align with our strategy and provide attractive returns on invested capital. And we will make opportunistic share repurchases to return value to shareholders. The significant progress we have made in reducing our leverage ratio provides additional optionality as we Our capital allocation priorities going forward. We will be balanced in our approach, always seeking to maximize returns while maintaining the financial strength and flexibility required to execute our strategy.

Speaker 2

As we strive to lead in sustainability, we announced our commitment to set a science based target to reduce greenhouse gas emissions. As we work to partner with our customers to improve their sustainability, we are also focused on improving our own. Sustainable fiber based packaging is critical to realizing the full potential of the circular economy, and we are working to accelerate our innovation pipeline to help our customers meet demand for sustainable packaging. Our new Evergrow product is a great example of leveraging the power of the WestRock Enterprise with capabilities that no other packaging company can bring to the customer. This product leverages our design capability, Consumer and corrugated packaging and our machinery expertise and creates a sustainable fiber based curbside recyclable alternative to plastic produce packaging.

Speaker 2

It has great shelf appeal, protects the produce and can be recycled into new packaging. You can use the QR code on this page for a closer look at this And with that, I'll now ask Ward to provide detail about our financial performance in the Q3. Ward?

Speaker 3

Thanks, David. We executed well in the Q3 and our results reflect this. As David mentioned, we generated revenue of $4,800,000,000 Adjusted segment EBITDA of $811,000,000 and adjusted EPS of $1 per share. These results exceeded the high end of our guidance range we outlined last quarter. Demand was strong with record net sales that increased 14% compared to the prior year.

Speaker 3

Our revenue grew across all of our businesses, and we continue to focus on improving our business mix. The implementation of published Price increases and improved business mix drove $320,000,000 in year over year earnings improvement and exceeded Cost inflation by more than $100,000,000 Cost inflation was driven by higher transportation, energy, chemical and recycled fiber costs. Operating costs were higher year over year due to the nonrecurring nature of some of the cost actions taken last year as part of the pandemic action plan. In addition, Q3 was our peak maintenance outage quarter in FY 'twenty one. We generated more than $550,000,000 in adjusted free cash flow in the quarter and used the majority of that cash to reduce debt.

Speaker 3

Our net leverage is approaching the high end of our 2.25 to 2.5 times leverage target. Our packaging businesses continue to grow with sales increasing 15% year over year. This revenue increase is due to both Strong demand and the implementation of published price increases. As you can see on this slide, our packaging sales were 71% of our total sales in the 3rd quarter, while paper sales were 29% of total sales. Packaging volumes were up year over year with strong demand in food and beverage, retail, e commerce and distribution.

Speaker 3

Demand in markets such as cosmetics and spirits also improved as global economies continue to recover. External paper sales increased 10% with price increases more than offsetting lower volumes. We are focused on growing our integrated packaging, domestic containerboard and paperboard businesses. We are also working to reduce our volumes in lower margin specialty SBS and export containerboard markets. For reference, the combination Of the adjusted EBITDA margins in our lower margin specialty SBS and export containerboard markets is below 10% as compared to WestRock's 16.8 percent total company average.

Speaker 3

As we actively manage our mix, We will improve our profitability going forward. We look forward to updating you on our progress. We believe it's Important to also discuss our results on a sequential basis to highlight current trends. We reported significant improvement in earnings with revenue up 8.5 percent and adjusted segment EBITDA up 27% quarter over quarter. Increases in pricing and improved mix enabled us to outpace inflation by Approximately $100,000,000 sequentially.

Speaker 3

While we had a sequential benefit from the ransomware and weather impact in the second quarter, 3rd quarter was our peak maintenance outage period. Inventories in both of our business segments remained tight. Turning to the segment results. Our corrugated packaging segment reported revenue of $3,200,000,000 and adjusted segment EBITDA of $557,000,000 Adjusted EBITDA margins for our North American corrugated business were 19.3% and our Brazil Adjusted EBITDA margins were 23.2%. As I mentioned before, demand remained strong across a broad set of end markets.

Speaker 3

Corrugated box shipments increased 3% sequentially. Sequential cost inflation was driven by higher recycled fiber cost, which were up $22 per ton versus Q2, along with increased transportation, energy and chemical costs. Corrugated packaging pricing and mix outpaced inflation by $89,000,000 from Q2 to Q3. Inventory levels remain low as we came out of our peak mill outage quarter. We have only 11,000 tons planned maintenance outage downtime in the 4th quarter.

Speaker 3

Finally, the Florence mill continues to increase production and operate Well, and we expect the mill to be at full production levels at the end of the 4th fiscal quarter. Demand is very strong in the Brazilian market, and we expect margins improved in the 4th fiscal quarter as the Tres Bajas Mill continues to ramp up. Turning to Consumer Packaging. The segment reported revenue of $1,700,000,000 and adjusted segment EBITDA of $269,000,000 Adjusted segment EBITDA margins were 15.5% in the quarter and were up 2 10 basis points sequentially. Our sales mix continues to improve, driven by strong demand in higher margin food and beverage packaging and paperboard sales.

Speaker 3

Packaging sales increased in North America, Europe and Asia and paperboard sales were up in all substrates sequentially. Our backlogs remain very strong and are currently at 6 to 7 weeks across our grades. Our mill system performed exceptionally well with strong production and high operating rates. On price mix, we saw the benefit of the flow through of published Price increases. Our sales mix improved as we sold less pulp and had higher sales of containerboard and C and K from the reconfiguration of our Ebidel, Texas mill.

Speaker 3

In Q3, we produced 44,000 tons of kraftliner and 18,000 tons of C and K at Cost inflation has increased at higher than normal levels throughout the year. Many of our commodity input costs have increased significantly, including OCC, which is up July is up $77 per ton since the end of FY 2020. However, we have been successful in implementing previously published price increases across our system, which have offset this inflation. In the fiscal Q3, the spread between price and inflation turned significantly positive. The April containerboard published price increase should be fully implemented in our system at the end of August.

Speaker 3

We are also implementing published price increases in kraft paper and realizing higher pricing in export containerboard. Consumer price flow through will continue accelerating into fiscal year 2022. We generated more than $1,100,000,000 in adjusted free cash flow in the 1st 3 quarters of this fiscal year. Following the KapStone acquisition, our adjusted net debt peaked in the Q2 of fiscal 2019 at $10,500,000,000 We've made outstanding progress in reducing this debt quickly and exited the 3rd quarter with $7,900,000,000 in adjusted net debt. We are quickly approaching the high end of our 2.25x to 2.5x net leverage target.

Speaker 3

We continue to reduce debt and strengthen our balance sheet. We recently announced the redemption of $400,000,000 of our senior notes that mature in March of 2022. The redemption will occur in September using cash on hand, which will reduce our debt even further. Turning to fiscal 4th quarter guidance. We expect higher prices, stronger volumes, minimal scheduled maintenance downtime and improved productivity.

Speaker 3

This will be partially offset by sequentially higher recycled fiber, virgin fiber and energy costs. As a result, we expect adjusted segment EBITDA to be in the range of $870,000,000 to $920,000,000 and adjusted earnings share in the range of $1.15 to $1.29 And now I'll turn it back over to David.

Speaker 2

We have great opportunities to grow our company and Prove margins while providing value to our customers, teammates and shareholders. We are making rapid progress on our strategic priorities. First, we are leveraging the power of the enterprise. This quarter, we made several commercial and operational leadership changes that further align our teams to our strategy. This new structure will enhance market alignment, enable greater agility and deliver efficiencies.

Speaker 2

And we are working to determine how we grow faster in high value markets And minimize our exposure in export containerboard and low margin specialty SBS markets. 2nd, we are striving to lead in sustainability and accelerate innovation. We remain excited about the growing opportunity To partner with our customers to improve the sustainability of their packaging. As I mentioned earlier, we have committed to setting a science based target to reduce our greenhouse gas emissions and are making excellent progress on the commercialization of our plastic replacement solutions. Finally, We will be disciplined in capital allocation.

Speaker 2

As we achieve our leverage target, we have more opportunities to utilize our strong cash flows to create shareholder value. The future is bright at WestRock and I want to thank our 50,000 team members for their incredible work. This is a team that is truly committed to solving our customers' most difficult challenges. I'm confident in our ability to successfully achieve our goals. And as we provide differentiated solutions that customers value, We will continue to deliver excellent performance.

Speaker 2

With our complete and differentiated portfolio, We have multiple levers to create value and grow sales and earnings. We are excited about the opportunities ahead. With that, that concludes my prepared remarks. James, we are now ready for Q and A.

Speaker 1

Thank you, David. As a reminder to our audience, Operator, May we take our first question?

Operator

Thank you. Your first question comes from the line of Andre Benari of Citi. Your line is open.

Speaker 4

Good morning. David, do you have a timeline for when the strategic review might Largely be completed. And then as you look at the kind of people, processes, technology, is there anything that stands out to you in your 1st few months as a

Speaker 3

Couple of

Speaker 5

things to your question. I think we're in the early stages of our strategy review And you'll see announcements throughout the rest of the year and through the activities that we Do as we make progress, but we're really looking forward to announcing those. But the structure changes were the first step in supporting our strategy. And I will tell you there will be a few things to our approach, which are really important. And I think it goes to the second part of your question What's the strength that I've seen in the 4 months I've been here?

Speaker 5

And the biggest strength I see other than the people who have been tremendous is the value of our unique portfolio. How do we continue to leverage that both from a growth standpoint And an efficiency standpoint, and we have tremendous opportunity to do that. Our enterprise customers who buy both corrugated and consumer are approaching $8,000,000,000 annually and they want to partner up with us for solutions on innovation and sustainability, which is a Huge demand from our customers. So we want to continue to push that. And we're excited to have Pat lead our innovation sustainability and focusing on market growth where we can get rewarded as well as continuing To be relentless in our productivity efforts.

Speaker 5

So I guess to answer your question, I'd say the timing will be throughout the rest of the year. I think the structure was The first piece of that, the strength is really our broad portfolio with our people and executing that. And we just The opportunity that I see is further integration and synergies from the acquisitions that we made. And I think we have an opportunity to continue to take cost out of our systems. So that's where I see it so far in the 1st 4 months and I think see a lot more here throughout the rest of the

Speaker 6

year. Okay. That's very helpful.

Speaker 4

And then just in consumer, is it possible to say What you think sustainable underlying demand is in this market? Are you seeing real evidence that it's moved higher because of sustainability or I'm just asking because there's a lot of moving pieces with reopening and foodservice and comp against COVID. Just trying to understand Yes. What's the underlying growth here?

Speaker 5

Yes. We're excited about our consumer business. As you know, we've consolidated our Former MPS business with our consumer business, our food and beverage business. And that's really exciting just again from the efficiencies On the back end, but also the growth we can bring pulling those together. We're seeing retail come back obviously quite a bit.

Speaker 5

And what's also really exciting about the Consumer business is our ability to improve margins, which is a big focus for us. Our tie in with the machinery business allows for really unique solutions. So we think consumer has tremendous opportunities for further growth. We're seeing that growth both in the U. S.

Speaker 5

Sand in Europe. So we see this continuing as

Speaker 2

we go through the rest

Speaker 5

of the year and into 2022.

Speaker 6

Okay. That's very helpful. I'll turn it over.

Speaker 5

Thanks, Andy.

Operator

And your next question comes from the line of Phil Ng of Jefferies. Your line is open.

Speaker 7

Hey, David. The changes you're looking to accomplish Just for integrate the business and extract more synergies, it's certainly very exciting. Curious, will it acquire a noticeable amount of capital to step up from here? Do you think you have the right people to kind of execute on the goals that you're trying to implement going forward?

Speaker 5

Yes, Phil, thanks for the question. The people have been tremendous. We have the right leaders leading our businesses now. So I'm really excited about our path forward. The piece on the capital, we're really focused on Our productivity efforts and bringing as evidenced by bringing the mill systems together.

Speaker 5

And there will be additional capital spent to extract Further cost out opportunities, we've committed to $900,000,000 to $1,000,000,000 in fiscal year 'twenty two in CapEx. So we're comfortable with that number. And along with those investments and our productivity efforts, we're really confident we're going to Start seeing results in extracting value out of our operations.

Speaker 8

Got it. And then maybe

Speaker 7

a question for Ward. Certainly, It's a very inflationary backdrop. I think implicit in your Q4 guidance, price cost is still kind of the headwind. When we look The Q1 and assuming the August increase is reflected by the indexes for containerboard, do you think you're still going to be behind the price cost curve in Fiscal 1Q? And do you have enough productivity to potentially drive margin expansion year over year?

Speaker 3

Thanks, Phil. So I'm going to challenge you a little bit. I think our if you look at our price inflation trends, both sequentially

Speaker 9

and year over year, We're

Speaker 3

actually driving more price realization than we are. It's a positive relationship between price and inflation. Moving into the Q4, clearly, the largest inflationary item that we have is we've got the increase in OCC, and it's really $45 to $50 a ton Embedded in our guidance. But we also have the continued flow through and the full quarter flow through of the PPW published price increases in containerboard From April and the accelerating momentum that we have and the realization of the all of the price increases across the published price increases across The consumer business. As we head into Q1, I think if PPW does in fact Publish, we'll start to generate the benefits really in Q1 pretty quickly.

Speaker 3

We won't get much in Q4. It'll ramp up in Q1 and then move into Q2. So I think our guidance is actually are growing earnings sequentially from Q3 to Q4. And part of its volume, part of its the fact that we exited our peak maintenance outage, But it's also the price cost relationship as well. So we think we have earnings momentum as we move into next year, albeit in an environment where we have elevated transportation And cost, recycled and virgin fiber cost.

Speaker 7

Got it. Okay, that's helpful. I really appreciate it.

Operator

Your next question comes from the line of Adam Josephson of KeyBanc. Your line is open.

Speaker 9

David and Ward, good morning. Thanks very much. Ward, just one more question about the assumptions embedded in 4Q guidance. So for OCC, it was up 20 in July. So I assume that you're thinking it will be up another, Call it 25 to 30 in August, just please confirm or refute that.

Speaker 9

And then what about the insurance any insurance Proceeds you're expecting in fiscal 4Q compared to what was in your previous full year guidance and then any impact from the potential third Price increase in that guidance.

Speaker 3

Yes. So let me take the quarter first and then I'll give I'll Understood on the second half relative to the guidance that we gave you back in April. So our average OCC cost for Q3 was about $105 What's embedded in our guidance is about $145 to $150 a ton for Q4. So that implies Some sequential increases from August into September as well. But you can I've always tried to be very transparent about our OCC See assumptions, and I think I've done that here as well.

Speaker 3

What we have with price, the price realization has been very, very Consistent from what we had in the April guidance for both Q3 and for the full year. Really, the driver Of the midpoint being lower than the 3.05% full year guidance that we gave at the end of On the April call, it's simply been the elevated inflation environment. So our assumptions back then, and I think you can probably go to The transcript is we thought we would exit Q4 with OCC around $105 a ton. So it's going to be $45 to $50 higher than what we assumed back in April. And then we've had higher natural gas Costs that we thought would start to moderate and they've remained elevated and then Virgin Fiber is also a little bit higher.

Speaker 3

But we've been able to steer our way through this And still feel really good about the momentum that we have in FY 'twenty two, the cash flow generation that we have. And Adam, I have not we have filed our claim with our insurance carriers for the ransomware recovery. Because I have not embedded any recovery in the current quarter guidance related to the business interruption portion of the claim. I'm very confident that we're going to recover our claim. I just don't have clarity around the timing.

Speaker 3

As we get more clarity, I will communicate

Speaker 9

it. I appreciate that word. And David, one for you, just on the containerboard export commentary. Yes. How do you plan to sustainably reduce your exposure to that market?

Speaker 9

Is it through acquisitions of independence? Is it Through some other means, because obviously in the good times when domestic demand is booming as it is now, it's pretty easy to do. But when things go in the Opposite direction. It's that much more difficult to not be involved in export markets In some capacity. So just wondering how you're thinking about that.

Speaker 5

Yes. Appreciate the question on that, Adam. A couple of things. There is some very attractive domestic Containerboard markets that we enjoy and are good margins. We've successfully improved our integration Over the last several years from the mid-sixty percent to about 80%.

Speaker 5

And we said we want to be at about 90% From a vertical integration standpoint. And what we'll do to continue to do that is exactly what you said. We'll continue to look Bolt on acquisitions of independents that will continue to happen as we move forward. And we also have a multiyear investment plan in our operating systems. So we'll continue to invest there to optimize what the right manufacturing Print is to support the markets that we want to be in and grow.

Speaker 5

And that's part of our strategy work that's going on right now It is our desire to accelerate that and get that moving faster. And I think you'll see as a result continued margin expansion in this segment, and we think we have a great path to get there.

Speaker 10

Thanks so much, David.

Speaker 5

Thanks.

Operator

Your next question comes from the line of Clay Brooker of UBS. Your line is open.

Speaker 4

Great. Thanks very much and thanks for all the color already. I just

Speaker 5

wanted to ask a follow-up

Speaker 4

on the integration and sort of your plans for The containerboard market, I appreciate that it's a strategic focus and has been for a couple of years to improve integration. And can you tell us where it was in the quarter? And then I guess what's the timeframe For your investment plan, do you have excess capacity in the box business today Some of these changes on the sales force side are going to help improve that or is it really going to require Investments and any other type of bolt on acquisitions that we've been discussing?

Speaker 5

So we exited Thanks for that question, Steve. We exited Q3, I believe, at 81% integration in the system. And again, that's continuous Progress of where we want to be. As far as timing, that is something that We are looking at right now and we will certainly share that with you as soon as we really dial that in, but you will see continued progress and focus on that. And again, it's going to go exactly as you said, it's going to go as part of our investments in our system.

Speaker 5

It's going to be shifting Into strategic markets that we want to be in, which is with our mill system providing flexibility to where we want to play And also deemphasizing where we don't want to play. And then there'll be strategic bolt on M and As that help support that as well. So It's going to be a multifaceted approach to that. We want to accelerate this, because this is an important Part of where we want to go as a company. I'm not ready yet to give you exact timing, but we will share that with you as soon as we start dialing in The plan to do so.

Speaker 5

And Ward, I'll turn it over to you just for any other further commentary.

Speaker 3

And Cleve, what I would note is that We've invested in our box plant system. If you look over the last 5 years, we've invested almost over $750,000,000 to upgrade our system. And we've installed over 43 evals. So we've had a path that we've been on and we'll continue to do that. And then we'll supplement it with Potential of tuck in acquisitions as well for more vertical integration.

Speaker 5

Yes. So I mean, I guess, I

Speaker 4

don't know. It sounds almost like more of a sales focus at this point than an investment focus, but I guess we'll sort of stay tuned and see how it goes.

Speaker 5

Yes. I would actually say it's both. Yes. I would say it's part of I mean it's also part of just how do we optimize what we have and there will be investments On our infrastructure, towards point on what we've done in our facilities, there'll be the M and A piece and there'll be the strategic focus piece.

Speaker 4

Right. Yes, that makes sense. Thanks for that detail. I just wanted one follow-up on OCC and OCC availability. I guess sort of the one of the thematic, just sort of things that we heard throughout the first half was that recycling rates were quite a bit lower in OCC last year with sort of the shift to at home consumption.

Speaker 4

I'm just wondering if you're seeing any Increase in OCC availability within your system as sort of the reopening has played out through the middle of the year?

Speaker 3

Yes, that's a really good question because you know we operate our own we operate 18 plants of Our own recycling facilities were and many single streams facilities. And it's interesting, our generation over the last This year, it's actually up 3%. And what we've done inside of our system is we've actually made some investments in our In our single stream capabilities to ensure that we can capture some of the smaller sort packaging that we So you from the e commerce stream. So, generation in our facilities has been up and But we've made investments to make sure that we can capture the shift. And remember, we also from a fiber Security point of view, we manage more tons than we actually consume.

Speaker 3

So we have brokerage relationships With other generators of OCC to ensure that we've got fiber security into our

Operator

And your next question comes from the line of George Staphos with Bank of America. Your line is open.

Speaker 10

Hi, everyone. Hope you're doing well. Thanks for

Speaker 7

So David, I want to

Speaker 10

ask you a question. Given your past Obviously, you haven't been running WestRock for very long. But what experience do you have in Adjusting and consolidating operations and sales forces, there's frequently sensitivities around doing What do you think is key about enabling that effectively? And kind of the related point, I did not see the detail, perhaps it's in the deck and I'd missed it, on the number of accounts and combined revenue To customers who are buying over $1,000,000 of both consumer and corrugated for you, if you could Sort of update us on that in your answer. And then I had a quick question on the quarter itself coming up.

Speaker 5

Sure. Thanks George for the question. From an experience standpoint, going back to my previous life at Sherwin Williams, being part of An $11,000,000,000 acquisition of Valspar, that's exactly what we did. We fully integrated That business we segmented where appropriate. We brought teams together where we brought more value From a customer standpoint to bring solutions.

Speaker 5

And then on the infrastructure side, we brought operations into under one leader to really drive those efficiencies. And I'm really proud of the work I was a part of with that team To really drive a lot of value. So there's a playbook that I use when bringing on Acquisitions to ensure that you just don't do a bolt on, you do it for How do you drive more growth, bring more value to customers where they get excited about it and then also drive the synergies on the infrastructure. And I think that's really important and It's been a lot of what I've done throughout my career, and I'm excited about the opportunities here. There's just Really good opportunities for us to continue to further integrate this business and bring value.

Speaker 5

As far as the enterprise piece, we will approach on a yearly basis about $8,000,000,000 in sales of customers that buy over $1,000,000 in consumer and over $1,000,000 in corrugated. So there is obviously with that data tells us there is value in customers wanting to come to us with Solutions for all of our products. And I thought Evergrow, which we highlighted, is a great example of that. When you tie in our machinery business and even you look at our Victory Packaging distribution business with e commerce. So where we're focused is We know our customers want innovation and sustainability.

Speaker 5

They're looking for us to help them achieve their sustainability goals. Those enterprise Customers are the ones pushing us the hardest. And when we can combine our complete solutions, we're seeing a lot of value in that and we're getting rewarded for that. And Pat, maybe I'll turn it over to you just to extract a little bit about what we're doing on enterprise and the excitement we have there.

Speaker 11

Sure. Thanks for that, David, and good morning. So as David mentioned, we are making good progress in increasing our sales across the Enterprise and up to almost $8,000,000,000 from about $5,000,000,000 at the time of the merger. So that's a really good progress. I think as we go forward, We're going to put even more focus on those top strategic accounts.

Speaker 11

I was with a very important customer earlier this week and they were commenting on the importance of WestRock Providing unique solutions, particularly to optimize primary, secondary and tertiary packaging. And we're the only ones that can do that. I mean, we have a unique capability to put all of those together, mix it in with machinery, drive the automation, our digital Capability. We don't often talk about the displays business, but that's a really important part of it too, because every time you have a display in retail, which is gaining some strength now, You have a carton, a folding carton in that. So there's opportunities for us all the way throughout the value chain to optimize Primary, secondary, tertiary packaging.

Speaker 11

And from a commercial standpoint, sustainability, innovation, we are going to put a More focus on those top accounts and we certainly look forward to sharing many of those examples with you where we've been successful As we've done in the past, but share even more examples in the future.

Speaker 10

Pat, thanks for that. I just prices are going up, so $8,000,000,000 is great Relative to the $7,500,000,000 you're at in the prior quarter. Just can you talk about number of accounts? You were at 169 last quarter. Have you added accounts here?

Speaker 10

And then my follow-up just on the quarter. Can you talk about how volumes are shaping up so far early in fiscal 4Q and what the maintenance step down adds to your earnings? Thank you. Good luck in the quarter.

Speaker 11

Yes. So just on the from the 169, we're up to 178. So we continue to add customers. So it's a number of customers as well as the revenue that continues to climb and that's just really important to us not only in cross selling Leveraging the overall power of the enterprise. I think if I understand your second question, it was really around how the quarter, the current quarter is starting off.

Speaker 11

Quarter is starting off. And I'll just comment right now. Yes. Okay. Ward, do you want to handle that one?

Speaker 11

Yes. So We have remember in the

Speaker 3

earnings the sequential earnings, I think we have one more shipping day sequentially. So that's a part of the driver of volumes. There is volume contribution to earnings sequentially. The comparisons the year over year comparisons obviously get harder As we go into the end of the calendar year when everything started to reopen and demand started to strengthen Across both of our businesses. Your maintenance downtime question, it's down almost 110,000 tons sequentially.

Speaker 3

George, I'd say that's $15,000,000 to $20,000,000 of earnings contribution sequentially.

Speaker 10

Thank you very much Ward. Thank you guys. Thanks, George.

Operator

Your next question comes from the line of Mark Weintraub of Seaport Research Partners, your line is open.

Speaker 8

Thank you. First one big picture question. As you're looking at the 2 businesses, Containerboard and Consumer Packaging. For a long time, you've been getting pretty substantially higher margins in the Cargated business then the consumer business, I think it's like 400 basis points right now. When you think about these businesses and their capital intensity and other various ingredients, Is there a reason for there to be on an average basis that sustained spread in the margins in those businesses?

Speaker 8

Or is that something that you think Will equalize more over time.

Speaker 5

Mark, thanks for that question. I want to make sure I understand it. Are you talking about The consumer business margins matching our corrugated business margins?

Speaker 8

Yes, comparing those 2, yes, EBITDA margins.

Speaker 5

Yes. So our goal is to continue to drive our packaging margins to a much, Much more attractive level to where we're at. We have further to go in consumer, as you well know. But I'm really pleased with the progress we're making. I'm not sure we'll get all the way to where we think Our corrugated margins can get to, but we want to get very close to that.

Speaker 5

I think our EBITDA margins in the quarter have improved sequentially over 200 basis points on consumer And we expect that to continue. The other thing about that is we are reporting our paperboard sales in there. So if you Extract the lower margin external SBS, our margins are even more attractive. So that's why that focus of Reducing our exposure to the external market in SBS, combining our former NPS business with the consumer business With that opportunity plus the plastics replacement opportunity, we really believe that is going to enhance Continued acceleration of our margin expansion.

Speaker 8

Great. That's helpful. And then, and I apologize if you had some technical difficulties earlier, but I've picked up some indications there's going to be a little bit more capital to achieve the various goals. Can you give us kind of a general View as to what average CapEx might be in the next couple of years?

Speaker 5

Well, we've come out with a CapEx of $900,000,000 to $1,000,000,000 for fiscal year 2022. I would Expect us to maintain that range moving forward. We'll look at opportunities with our capital allocation though. So with the strong cash generation, we're going to look at with the excess cash we have, where do we provide the best return. So, if there's great return with further CapEx to drive out costs, we'll look at that.

Speaker 5

We'll continue to look at other opportunities for bolt on M and As and we'll look at opportunities in share repurchases. So From a capital allocation standpoint, we want to be very disciplined in where we go with our CapEx, With our sustainable and growing dividend and then with the excess cash and where we are with our debt levels, We're excited about the opportunities that brings for flexibility.

Speaker 8

Great. Appreciate it. I'll hand it over. Thank you.

Speaker 5

Thanks, Mark.

Operator

Your next question comes from the line of Mark Wilde of Seaport. Your line is open.

Speaker 12

Good morning, David. Different firm, but you get the idea. When you talk about these investments in the mill and converting businesses, is it possible to give us Some examples of what you're thinking about in both cases. I mean, there has been a fair amount of money, as Ward mentioned, It's gone into the converting business over the last 5 years. And really, if we go back over the last 8 or 10 years, there were a number of mill projects at At Hopewell and then most recently at Florence.

Speaker 12

So trying to get a sense of what those projects might look like going forward, they might be different.

Speaker 5

Yes. Thanks, Mark. Appreciate the question. I'll start and then I'll turn it over to Ward With any additional commentary. As Pat alluded to earlier, we continue to invest in e balls at our conversion plants.

Speaker 5

We think there's They really bring a great return for us. We look to do things like Florence. We obviously had The investment in Brazil as well, Tres Barras was, I believe, a $345,000,000 investment. Florence was $400,000,000 investment. So we made some really large investments in our mill systems and we continue to make investments in our conversion One of the things that we really are looking at too is flexibility in our mill systems.

Speaker 5

So if You recall at Evidel, we converted SBS to C and K. That provided us an ability to get into higher margin businesses and again get into the strategy of exiting Lower margin SPS business. So with that, there was no capital needed to do that. But as we look at our footprint, now that we have 1 mill system, We're going to continue to look at those flexibility options. Some of them may require CapEx, but if we can invest And flexibility in what we want to produce depending on demand, which provides the best return for us in those high margin growth segments, we'll continue to do that.

Speaker 5

Ward, I'll certainly turn over to you as well. Yes.

Speaker 3

I mean, Mark, again, I'll kind of reiterate some of the key themes of That we've made in the container system, the EVOL deployment, the corrugator upgrades, we actually did build 1 greenfield box plant A couple of years ago in Sioux Land. And then on the mill side, there's continued opportunities for woodyard upgrades, Other debottlenecking projects and numerous projects that are focused on reducing costs.

Speaker 12

Yes, that's helpful. David, and for my follow-up, I just wondered, you've been in the saddle for 4 or 5 months now, just any thoughts on potential changes in terms of How you'd like to set up incentive comp structures at WestRock?

Speaker 5

Yes, Mark, that's a really good question, because for me, it's really important To reward our sales team with where we want to grow. So part of That is revamping and reinvigorating our sales incentive plans to reward the behaviors that we want To do. So as we go into fiscal year 'twenty two, that's a high priority for us and it's something we're working with the teams on right now.

Speaker 12

Okay, very good. I'll turn it over. Thanks, David. Thanks, Mark.

Operator

Your next question comes from the line of Mark Connelly Stephens, your line is open.

Speaker 13

David, now that the teams are

Speaker 3

in place, can you give us

Speaker 13

a little more insight into benefits you're expecting to get from combining containerboard and paperboard mill operations. In containerboard, it's been more common to tightly align the mills with the box And that was the strategy of some of the companies that WestRock acquired. Does this new approach put more separation between your board manufacturing and your converting operations?

Speaker 5

Actually, what we hope is to allow and we will allow our mill to be 100% focused on being as efficient as possible and supporting our converting systems The most effective way possible. So with allowing this structure and again talking about Some of the flexibility, optimizing our supply chain, understanding the with the strong demand we have, How do we ensure we have the most efficient supply chain as well? This structure allows us to do that. I just really believe in focus And segmentation and as the mill systems wake up every day, they're going to be thinking about safety, quality, Cost and service. And that's going to benefit both our customers and our shareholders.

Speaker 13

Okay. Now second question, following up on Mark Weintraub's question, you have a lot more Cycle in your containerboard system than some of your competitors do. Does that significantly reduce your ongoing CapEx requirements at those mills? And is it a goal to introduce more recycled fiber as you reinvest in that system? I'm really wondering about the systems

Speaker 3

Yes. So Mark, this is Ward. Our fiber mix is approximately 65% virgin, 35% recycled. And you're right, the virgin I mean, the CapEx load For a recycled fiber mill is lower than it is for the Virgin Mills. We've always liked the balance that we have in the system Because ultimately, we have a very broad offering to our customers in terms of Lightweight, heavyweight, virgin and recycled liners and mediums.

Speaker 3

And we think that ultimately positions us to support A wide range of customers. And so David, I'll ask you to see a comment about whether you think that mix is Appropriate, but it gives a we have balance in the system, and we've always felt comfortable with the balance. And again, Mark, I think another thing to Remember, as we've got some fiber flexibility across our mills to be able to take advantage of introducing more recycled fiber mix into our virgin system and vice versa as market conditions for those critical input costs change.

Speaker 5

Yes. Ward, I think you hit it right on. And I think there's a theme here of, I think we're In a great position from a flexibility standpoint. And that's the benefit of our broad portfolio is we can pivot and shift to provide the best returns and service to our customers as needed throughout our system. So I think Ward, you covered that well.

Speaker 13

Very helpful. Thank you.

Operator

Your next question comes from the line of Gabe Hajde of Wells Fargo. Your line is open.

Speaker 8

David, Ward, good morning. Good morning.

Speaker 14

I was curious, just have you guys put any thought into revisiting your leverage target? I mean, I spent some time kind of beyond the upper bound for a while. Obviously, you guys were doing some acquisition activity, but it just and I appreciate it. Seems like you guys are committed to an investment grade rating. But to afford you the flexibility to do things you'd like to do, Seems like a pretty tight window.

Speaker 14

I'm just curious if you guys have thought about that.

Speaker 3

We talk about it a lot. We talk about it with the Board. And investors have I've had some investors ask us to consider expanding the range and others To talk about tightening the range and lowering it. Frankly, you helped answer part of the question. We like the flexibility that Target provides us.

Speaker 3

We do like the investment grade credit profile and the discipline that, that brings into our organization in Capital allocation. And I think we've talked about in the past and we've had a track record of saying if the right opportunity exists For us to lever up for a short period of time above the target to generate synergies and then pay down debt to get back Within the target, we're not prohibited from doing that. So I've always felt that This gives us the strong balance sheet that we need to be able to execute our strategy and also to have the flexibility in a business that has Some variability in input costs and supply demand conditions from period to period. David, do you want to add anything to that?

Speaker 5

Well, I would just say as we talked about our capital allocation approach, Where we want to put our cash is where we can get the best return. So

Speaker 1

part of that

Speaker 5

The must haves are growing and sustainable dividend, reinvesting in our business, investment grade profile And with the again, the available cash we'll look at, how should we look at that? How should we look at share repurchases or even invest Additional investments. So I think that flexibility is really important. And as Ward mentioned earlier, calling the bond in 2022 to pay in the 4th quarter, with our available cash was a good use of our cash, but we still have Opportunities to look at other areas of investment, so we'll continue to do that.

Speaker 14

Okay. Thank you. And one last one, I appreciate it's challenging sometimes on An open format like this. But in terms of the strategy, is there anything that's off the Table or can you give us a couple of ideas of things you might look at? I mean, could it include things up to divesting certain Mills or product lines or something like that?

Speaker 14

Or is it everything you feel like you have, you're going to keep and it's more about investing and figuring out the Way to maximize returns.

Speaker 5

Yes, I appreciate that follow-up question. My approach always when you go into strategy is everything's on the table. You have to evaluate everything. We have to evaluate our businesses, our footprint, the markets that We're going after our structure that supports the strategy. So to answer your question, Abe, I would tell you we're looking at everything In fairness, and we will continue to communicate with you throughout the year You know what that means, but the ultimate goal results of our strategy will be organic profitable growth, Margin expansion and improved return on invested capital.

Speaker 4

Understood. Thank you. Thank you.

Operator

Your next question comes from the line of Mark Weintraub of Seaport Research Partners. Your line is open.

Speaker 8

Thank you. Just a quick follow-up if I could. As you have on that Page 13, you've got a lot of published price Increases recognized in the consumer packaging grades and I think most of us have a pretty good understanding of how the containerboard flows through etcetera. Can you just remind us how the consumer packaging price increases tend to flow through And the degree to which there might be cost tied elements that also flow through into pricing?

Speaker 11

Yes, great. Thanks very much. This is Pat. So let me try to handle that from a commercial standpoint. So as you mentioned, containerboard is a pretty good understanding of that and Majority of the corrugated box and containerboard is linked to PPW and passes through in 3 to 4 months As we've indicated in the past, consumer is a bit more complicated because of the number of substrates and the different routes to market, our different integration levels Across those different substrates.

Speaker 11

And so we use a number of different value capture and pricing mechanisms in the consumer segment. And In aggregate, I can say about half of that is tied to PPW. And those flow through in different time periods. The other models, pricing models are based on cost and also a fair amount Open market, which gives us quite a bit of flexibility. And so, the way we think about pricing overall is that that's just the price and the lag Again, the type of model that we have is just part of the overall value capture and negotiation and discussion with the customer.

Speaker 11

As we start flowing through and you can see some of this starting in the Q3 and more in the Q4 and as Ward It is accelerating into fiscal year 'twenty two. We start to see that right away. It will ramp up and it's really based on a Previously published price increase, it's usually about 6 to 9 months for that all to flow through. But again, it doesn't wait for the 6 to 9 months. It's flowing through and it will continue in our case with the published price increases to date, it will continue to flow through into fiscal year 'twenty

Operator

And there are no further questions at this time. I would like to turn it back to Mr. James Armstrong for the closing remarks.

Speaker 1

Thank you, operator, and thank you for joining our call today. If you have any further questions, please don't hesitate to reach out, and have a great day.

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Earnings Conference Call
WestRock Q3 2021
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