WestRock Q3 2023 Earnings Report

WestRock EPS Results

• Actual EPS: $0.89
• Consensus EPS: $0.50
• Beat/Miss: Beat by +$0.39
• One Year Ago EPS: $1.54

WestRock Revenue Results

• Actual Revenue: $5.12 billion
• Expected Revenue: $5.16 billion
• Beat/Miss: Missed by -$41.37 million
• YoY Revenue Growth: -7.20%

WestRock Announcement Details

• Quarter: Q3 2023
• Date: 8/3/2023
• Time: Before Market Opens
• Conference Call Date: Thursday, August 3, 2023
• Conference Call Time: 8:30AM ET

WestRock (NYSE:WRK) Company, together with its subsidiaries, provides fiber-based paper and packaging solutions in North America, South America, Europe, Asia, and Australia. It operates through four segments: Corrugated Packaging, Consumer Packaging, Global Paper, and Distribution. The Corrugated Packaging segment produces containerboards, corrugated sheets, corrugated packaging, and preprinted linerboards to consumer and industrial products manufacturers, and corrugated box manufacturers. It also provides structural and graphic design, engineering services and custom, and proprietary and standard automated packaging machines; turn-key installation, automation, line integration, and packaging solutions; machinery solution that creates pouches; and pack temporary displays, as well as lithographic laminated packaging products. The Consumer Packaging segment manufactures and sells folding cartons that are used to package food, paper, beverages, dairy products, confectionery, health and beauty, and other household consumer products, as well as express mail packages for the overnight courier industry. It also offers inserts and labels, as well as rigid packaging and other printed packaging products, such as transaction cards, brochures, product literature, marketing materials, and grower tags, and plant stakes; and paperboard packaging for over-the-counter and prescription drugs. In addition, this segment manufactures and sells solid fiber and corrugated partitions, and die-cut paperboard components. The Global Paper segment manufactures containerboard, paperboard, and specialty grades primarily to corrugated packaging, folding carton, food service, liquid packaging, tobacco, and commercial print markets. The Distribution segment distributes corrugated packaging materials and other specialty packaging products, including stretch films, void fills, carton sealing tapes, and other specialty tapes; and provides contract packing services. The company is based in Atlanta, Georgia.

WestRock Q3 2023 Earnings Call Transcript

Presentation

[Operator]

Good morning, and welcome to the WestRock Third Fiscal Quarter 2023 Earnings Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Rob Quartaro, Senior Vice President of Investor Relations.

[Operator]

Please go ahead.

[Robert Quartaro, SVP - Investor Relations at WestRock Company]

Good morning, and thank you for joining our 3rd fiscal quarter 2023 earnings call. We issued our press release this morning and posted the accompanying 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 and our Chief Financial Officer, Alex Pease. Following our prepared comments, we will open the call for question and answer session.

[Robert Quartaro, SVP - Investor Relations at WestRock Company]

During today's call, we will be making forward looking statements involving our plans, expectations, projections, targets, estimates and beliefs related to future events. These statements involve a number of assumptions, risks and uncertainties that could cause actual results to differ materially from those we discuss during the call. We describe these assumptions, risks and uncertainties in our filings with the SEC, including our 10 ks for the fiscal year ended September 30, 2022, and our 10 Q for the fiscal quarter ended March 31, 2023. We will also be referencing non GAAP financial measures during the call. We have provided reconciliations of these non GAAP measures to the most directly comparable GAAP measures In the appendix of this slide presentation.

[Robert Quartaro, SVP - Investor Relations at WestRock Company]

As mentioned previously, the slide presentation is available on our website. With that, I'll turn it over to you, David.

[David Sewell, CEO at WestRock Company]

Thank you, Rob, and thank you all for joining our earnings call today. I'll begin our call with a review of our fiscal Q3 results and the progress we're making on our self help initiatives. Following that, Alex will review our results in more detail and provide our outlook for the Q4. Turning to our Q3 results on Slide 3. We exceeded our guidance due to strong execution, productivity gains and moderating input costs.

[David Sewell, CEO at WestRock Company]

Net sales were $5,100,000,000 And consolidated adjusted EBITDA was $802,000,000 Adjusted EPS was $0.89 Our strong results this quarter against a dynamic backdrop reflect the resiliency of our business and the tremendous efforts of our talented team members. As a reminder, we faced difficult comparisons with record results in the prior year quarter. While demand for corrugated packaging declined year over year, Our North American shipments per day were sequentially stable. We've seen improvement in July with per day shipments up mid single digits from the 3rd quarter And the strongest backlogs we've seen all calendar year. Consumer Packaging market volumes were down during the quarter as Customers and retailers reduced excess inventory, elevated inflation impacted consumer demand, And we lapped strong prior year health care results.

[David Sewell, CEO at WestRock Company]

Looking forward, we expect improvement in the first half of fiscal twenty twenty four, Driven by inventory rebalancing, moderating inflation and new business wins. Long term fundamentals in our Consumer Packaging business remain healthy and we are well positioned with strong customer relationships and end markets that are growing. Over time, we expect continued organic growth Due to our innovative solutions, growing demand for sustainable packaging and our expanding machinery business, we've seen a moderation in our global paper business After a record year in fiscal 2022, to navigate the current environment, we are leveraging our scale, broad portfolio of substrates And strategic customer relationships. Longer term, we expect our portfolio optimization strategy will enable us to prioritize our strategic customers while reducing our overall exposure to external paper sales. I'm extremely pleased at how our teams are executing and winning new business.

[David Sewell, CEO at WestRock Company]

Our commercial teams are focused on building growth pipelines and trading the value of our differentiated offerings, all of which are delivering new business wins. Our cost savings progress to date has exceeded expectations, and I'm excited to report that we are on track to exit this fiscal year with more than $450,000,000 in run rate savings. During the quarter, we achieved $66,000,000 of cost savings and $150,000,000 year to date, excluding downtime and inflation. We are making great progress, and we see tremendous opportunities ahead, And we continue to optimize our portfolio. Earlier this week, we made the difficult decision with the announcement of the closure of our Koma Washington Mill.

[David Sewell, CEO at WestRock Company]

We are working closely with our employees on the transition and expect to cease operations in September. Additionally, we sold our minority interest in a non strategic joint venture and also announced the consolidation of Three additional packaging converting locations, bringing our total to 7 through July. I'll provide more details on our portfolio actions in just a moment. Turning to Slide 4, we are laser focused on unlocking value from our broad portfolio of assets, And we've made tremendous progress already. We continue to target more than $1,000,000,000 in cost savings by the end of fiscal 2025 and we are well on our way.

[David Sewell, CEO at WestRock Company]

Our SG and A reductions, productivity efforts and supply chain efficiencies are delivering significant results. As previously mentioned, we are on track to exit fiscal 2023 with more than $450,000,000 in run rate savings. We are pleased with the progress we've made, and we remain committed to unlocking further efficiencies in our business. We've been proactively optimizing our footprint by closing less efficient facilities and consolidating production in larger plants. Our goal is to improve our cost structure, drive efficiencies and improve our return on invested capital.

[David Sewell, CEO at WestRock Company]

Our recent announcement to close our Tacoma mill is another example of this strategy. Similar to our previous mill closures, the Tacoma mill required significant investment to remain competitive, and we did not see a path to achieving our return targets. By closing the mill, we can shift capital toward other projects with greater returns. Additionally, with Tacoma and our previous mill closures, we are lowering our costs and improving our overall margin structure. Tacoma's annual production capacity is approximately 510,000 tons, including linerboard, white top, kraft paper And pulp.

[David Sewell, CEO at WestRock Company]

With the closure, we plan to shift the majority of the mill's production, excluding pulp, to other facilities in our network. We expect to incur $345,000,000 of restructuring charges with a substantial majority recognized in our 4th quarter. Approximately 2 thirds of these charges are expected to be non cash. With the announcement of the Tacoma closure, Our mill portfolio is substantially different than it was 15 months ago. As we evaluated our assets, We considered mill profitability, technical age of assets, ongoing capital needs, product mix, strategic fit And our network flexibility.

[David Sewell, CEO at WestRock Company]

With our announced closures of higher cost mills and production capacity, We are reducing 1,900,000 tons of capacity. These closures enable us To repurpose anticipated annual capital spending, averaging approximately $120,000,000 and exit non core end markets. In addition, with these actions, we are decreasing our exposure to the open market and reducing our North American corrugated average mill cost By $12 per ton, our smaller yet more efficient mill system enables us to serve our strategic end markets and customers. Through our current footprint, we are well positioned to serve these customers in 2024 and beyond. We've also been disciplined in our capital allocation And remain focused on investing in our assets to improve our return on invested capital, returning leverage within our target range of 1 point 7.5 times to 2.25 times and returning capital to shareholders through a sustainable and growing dividend.

[David Sewell, CEO at WestRock Company]

As we work to recapitalize our assets, we are targeting a greater than 15% IRR on future return generating projects. We expect our mill investments to drive efficiencies and enable us to further reduce our mill costs. Through our portfolio optimization and asset recapitalization strategies, we expect to improve margins and drive return on invested capital. Lastly, we continue to invest in growth. We're close to completing construction of our world class Longview box plant, Which is expected to start operations in November.

[David Sewell, CEO at WestRock Company]

This state of the art facility will enable us to further consolidate converting operations in the Pacific Northwest And is expected to deliver $25,000,000 in annual benefit once fully mature. Another example of our investments in growth is our Mexico acquisition. This transaction increased our exposure to the fast growing Latin America market and brought us closer to many of our multinational customers. Our Mexican operations are exceeding our expectations, and we are excited about future growth prospects Due to economic expansion and shortening supply chains. Through these ongoing initiatives, we expect to drive significant improvement in margins And return on invested capital, increase integration, reduce volatility and drive profitable growth.

[David Sewell, CEO at WestRock Company]

Turning to Slide 5. Before passing it to Alex, I'd like to highlight a recent example of how our broad portfolio and innovative solutions are helping our customers win and meet their sustainability needs. Costco recently approached us with a request To replace single use plastic multipack handles with a fiber based sustainable solution. In response, Our designers developed Endura Grip and ClusterClip. These new solutions provide bundling for multipacks of bottles and jars in a range of shapes, Sizes and weights.

[David Sewell, CEO at WestRock Company]

They are engineered for durability and comfort, while providing a fully printable surface for crisp, vibrant graphics and eliminate the use of plastic in these handles. Our strategic machinery business is also helping drive adoption. As part of our partnership, we are working with Costco manufacturers to automate their production lines, increase packing speeds and drive efficiencies. We are proud to partner with Costco and their manufacturers to introduce sustainable packaging solutions that help reduce Single use plastic packaging. This is just one example of many of how WestRock's unique capabilities position us for growth.

[David Sewell, CEO at WestRock Company]

Costco is one of our enterprise sales customers, and we serve them through both our corrugated and consumer segments. Enterprise relationships like this demonstrate the value that WestRock's broad portfolio and differentiated solutions provide. Through our diversified portfolio, commercial excellence and strong customer relationships, we've achieved over $9,000,000,000 in enterprise sales. Our plastics replacement innovations continue to gain traction, and we are on pace to deliver over $400,000,000 in revenue this year. We are targeting more than $700,000,000 by fiscal 2025.

[David Sewell, CEO at WestRock Company]

With a global total addressable Get a $50,000,000,000 for plastics replacements, we see significant opportunities ahead. I'll now turn over to Alex to discuss our segment results in more detail.

[Alexander Pease, Executive VP & CFO at WestRock Company]

Thanks, David. Moving to our consolidated quarterly results on Slide 6. 3rd quarter net sales were $5,100,000,000 down 7.2 percent and consolidated adjusted EBITDA was $802,000,000 down 20.2%. Consolidated adjusted EBITDA margin was 15.7%, a decline of 2 50 basis points year over year. This decline was primarily within our Global Paper segment, which I will discuss in a moment.

[Alexander Pease, Executive VP & CFO at WestRock Company]

Price and mix Positively contributed $85,000,000 year over year, lower operating costs contributed $66,000,000 year over year And input cost deflation contributed $37,000,000 Input cost deflation was largely driven by lower OCC and energy prices in the quarter. These benefits were more than offset by lower volumes of $243,000,000 and economic downtime of $89,000,000 We incurred 359,000 tons of economic downtime in the quarter with 258,000 tons in our corrugated system and 101,000 tons in consumer. Non cash pension costs also negatively impacted consolidated adjusted EBITDA year over year by 39,000,000 As a reminder, our U. S. Pension plans remain overfunded.

[Alexander Pease, Executive VP & CFO at WestRock Company]

During the quarter, we generated 479,000,000 Quarter with net leverage of 2.51 times. We continue to prioritize debt reduction and returning our leverage to our target range of 1.75 times to 2 point to 5 times. We are now targeting $800,000,000 to $1,000,000,000 of adjusted free cash flow for fiscal year 2023. Turning to Slide 7. Corrugated Packaging segment sales excluding trade sales were $2,500,000,000 an increase of $176,000,000 or 7.7% year over year.

[Alexander Pease, Executive VP & CFO at WestRock Company]

This growth was primarily due to our Mexico acquisition and strong price and mix. Adjusted EBITDA increased $45,000,000 or 11.6%. Adjusted EBITDA margin, Excluding trade sales, increased 60 basis points year over year to 17.4%. Year over year adjusted EBITDA benefited $55,000,000 from input cost deflation, dollars 28,000,000 from lower operating costs and $25,000,000 due to favorable price and mix. These benefits were partially offset by lower volumes of $45,000,000 and economic downtime of $37,000,000 Note that our corrugated packaging results include revenue of $37,000,000 and adjusted EBITDA of $4,000,000 Related to the realignment of certain Latin American consumer converting operations in connection with our Mexico acquisition.

[Alexander Pease, Executive VP & CFO at WestRock Company]

As David indicated, Corrugated packaging shipments were stable from last quarter. As we move forward, we expect gradually improving volumes and easier year over year comparisons. We remain focused on driving commercial excellence and productivity to mitigate the impact of previously published price declines. Turning to the Consumer Packaging business on Slide 8. Segment sales were $1,300,000,000 a decline of $20,000,000 or 1.5 year over year.

[Alexander Pease, Executive VP & CFO at WestRock Company]

Adjusted EBITDA declined $5,000,000 or 2.1 percent and adjusted EBITDA margin was 18 point 4%, a decrease of 10 basis points year over year. Strong price and mix contributed $98,000,000 And lower operating costs contributed $19,000,000 These benefits were more than offset by lower volumes of $51,000,000 Inflation of $39,000,000 economic downtime of $13,000,000 as well as other items. Adjusted for the previously mentioned realignment of certain consumer converting operations, revenue increased 1.4% and adjusted EBITDA increased 1.5 Net organic sales volumes declined 6.6% year over year driven by softer market demand, Inventory reductions through the supply chain and difficult comparisons from last year's strong healthcare business. However, we are managing well and continue to gain new business. As a reminder, last year's adjusted EBITDA was up over 28% year over year.

[Alexander Pease, Executive VP & CFO at WestRock Company]

As David indicated, We expect improving conditions in the first half of fiscal year twenty twenty four due to inventory rebalancing, moderating inflation and new business wins. Longer term, we are well positioned to drive profitability due to our growing end markets, increasing demand for sustainable packaging and expanding machinery business. Turning to Slide 9. Global Paper segment sales decreased $545,000,000 or 33.8 percent year over year to $1,100,000,000 Adjusted EBITDA declined 55.6 percent to $177,000,000 with adjusted EBITDA margin declining to 16.6%. Note that since the Q3 of 2020, Our adjusted EBITDA is up 6% and margins are up 2.30 basis points.

[Alexander Pease, Executive VP & CFO at WestRock Company]

Input cost deflation contributed $27,000,000 and lower operating costs contributed $15,000,000 These were more than offset by lower volume of $142,000,000 Price and mix of $37,000,000 and economic downtime of $39,000,000 During fiscal year 2023, our external containerboard Has experienced year over year declines driven by elevated inflation, shifting consumer spending and excess inventories throughout the supply chain. Additionally, published price changes have negatively impacted our revenue and margins. We continue to believe U. S. Containerboard demand has stabilized and we expect improving volumes as Similar to our Consumer Packaging segment, we've recently experienced softer demand in our external paperboard business driven by elevated inventories And softer demand, principally in commercial print and food packaging.

[Alexander Pease, Executive VP & CFO at WestRock Company]

These conditions have continued into the 4th quarter. However, we expect improvement in fiscal 2024 given the relative stability of our end market exposure. Next, our distribution results are on Slide 10. Our sales and adjusted EBITDA were down year over year due to a decline in our moving and Business and difficult comparisons from last year's large healthcare order. We are focused on improving operations and driving cost savings to navigate the current environment.

[Alexander Pease, Executive VP & CFO at WestRock Company]

Over time, we see opportunity to grow our distribution business by leveraging our unique capabilities and driving operational excellence. Turning to guidance on Slide 11. While market conditions remain challenging with continuing realization of published price declines, We expect the impact of those conditions to be partially offset by gradually improving volumes. Our forecast for 4th Quarter consolidated adjusted EBITDA is $675,000,000 to $725,000,000 and adjusted EPS between $0.66 $0.83 a Some assumptions behind our sequential outlook include stable costs driven by slightly higher energy costs, higher costs for recycled fiber And moderately lower costs in Virgin Fiber and Chemicals. An adjusted effective tax rate of between 8% 10%.

[Alexander Pease, Executive VP & CFO at WestRock Company]

Note, this lower rate is favorably impacted by approximately $30,000,000 related to the release of uncertain tax positions, state tax credits and other discrete items. And lastly, approximately 257,000,000 diluted shares outstanding. Additionally, we're planning 32,000 tons of I'll now turn it back to David to conclude before

[Alexander Pease, Executive VP & CFO at WestRock Company]

we move to Q and A.

[David Sewell, CEO at WestRock Company]

Thanks, Alex. As you can see, we are delivering on our commitments, and I am incredibly proud of the progress we've made. As we continue our journey, I couldn't be more excited about the opportunities in front of us. In addition to our large self help opportunity, WestRock remains uniquely positioned To deliver a full range of sustainable packaging solutions to our customers.

[David Sewell, CEO at WestRock Company]

With over $9,000,000,000 in enterprise sales, Customers value our scale, diverse portfolio and the sustainable solutions we provide. Our innovation platform, growing machinery business and plastic replacement solutions continue to position WestRock extremely well I'm excited about the path ahead, and I am confident in our ability to drive growth, margins and long term shareholder value. Thank you. And with that, Rob, let's move

[David Sewell, CEO at WestRock Company]

to Q and A.

[Robert Quartaro, SVP - Investor Relations at WestRock Company]

Thanks, David. Operator, we're ready for questions.

[Operator]

We will now begin the question and answer session. Our first question will come from Mike Roxlund with Truist. You may now go ahead.

[Michael Roxland, MD - Equity Research at Truist Securities]

Thank you, David, Alex and Rob. Congrats on a very good quarter.

[David Sewell, CEO at WestRock Company]

Thanks.

[Michael Roxland, MD - Equity Research at Truist Securities]

Starting off with Cargill, can you just talk about the cadence of shipments during the quarter? And did any end markets begin to improve more notably than others?

[David Sewell, CEO at WestRock Company]

Yes, Mike.

[David Sewell, CEO at WestRock Company]

Our corrugated business was really pretty stable in the quarter From Q2 to Q3, but what's just really encouraging to us as we went into Q4 and in July, Our order rate was up mid single digits. And as I alluded to earlier, We are experiencing the strongest backlogs we've had this calendar year. So we really like the momentum Of corrugated as we move forward. As we talk about some of the segments, I think the one that really jumps out To me is we like what's going on in produce and agriculture and beverage has been really strong for us as well. And what's exciting about beverage is with our Mexico acquisition, our multinational beverage Customers are really gravitating to our ability to serve the entire Americas.

[David Sewell, CEO at WestRock Company]

So we just see that as a positive trend as we move forward.

[Michael Roxland, MD - Equity Research at Truist Securities]

Got it. Thank you for the color, David. And then just in terms of boxboard or consumer packaging, Obviously, things start to weaken like a quarter or so ago. In response, you've taken started to take some economic downtime. You mentioned though that you expect an improvement in your fiscal first half.

[Michael Roxland, MD - Equity Research at Truist Securities]

I guess what gives you the confidence that things are going to improve? Is there Any indications from customers that they're going to have to restock? I mean, what how could you say what gives you that level of certainty that things are going to get better from here sooner rather late, let's say.

[David Sewell, CEO at WestRock Company]

Mike, that's a good question because we work really closely with our customers on that. And what we saw in the last 60 days is a lot of our large customers in the consumer space took about a week off In manufacturing, just to rebalance their inventories. And as they went through that process, we were working very closely with them. And the commentary we received was this gets us reshifted to the right inventory levels. We'll work through That this quarter and then and it's really consistent across all of our customers in this space As we go into 2024, we're going to be right for growth.

[David Sewell, CEO at WestRock Company]

And they've said that to us internally as we build out our forecast For them as well as they've expressed it externally to the open market. So there's just a consistency in everything we hear. I think we'll be stable in Q4 from Q3. And then everything they're telling us, everything we're seeing is growth In 2024.

[Michael Roxland, MD - Equity Research at Truist Securities]

Got it. Thank you very much and good luck for the rest of the year.

[David Sewell, CEO at WestRock Company]

Thanks, Mike.

[Operator]

Our next question will come from George Staphos with Bank of America. You may now go ahead.

[George Staphos, Managing Director at Bank of America Merrill Lynch]

Thanks very much. Hi, everyone. Good morning. Thanks for the details. David, Alice, I wanted to talk a little bit about the mill closures that you've announced over the last year and change.

[George Staphos, Managing Director at Bank of America Merrill Lynch]

And you talk a lot about How you expect that will help your return on capital in total? When you think about when we think about the 1,900,000 tons of Passage, you've closed. What do you think that has taken off the top, lowered your EBITDA on an annualized basis from what it otherwise would have been and what do you think it's added To your incremental return on capital. Can you talk to that, just specific to that those closures that you've announced? Sure.

[Alexander Pease, Executive VP & CFO at WestRock Company]

So the easy answer is all of these mills were in the current conditions Not generating positive EBITDA. So the combination of basically avoiding The high fixed cost nature and then reallocating production to the other mills, winds up accretive both to EBITDA dollars and EBITDA margin. So it was the right decision from an overall profitability standpoint and I think it really speaks to the flexibility of our network And a lot of the great work we're doing operationally to just reduce the unplanned downtime and unlock a lot of the hidden factories that we can move Production of the strategic substrates from the mills that we're closing into the other mills. We didn't exit Certain product lines that were not strategic to us. So Durasorb would be one example, fluff All would be another example.

[Alexander Pease, Executive VP & CFO at WestRock Company]

So we did exit those markets, but again, those weren't strategic substrates Products for us and we weren't really making any money there anyway. In terms of capital, It's more than $100,000,000 of capital combined that we were able to divert from essentially Keeping these mills on life support for lack of a better term and redirecting that toward growth oriented capital. So we were basically reducing our sustainable sustaining capital needs and increasing our growth capital Availability. And as David mentioned in his prepared remarks, typically those growth capital investments are anywhere between 15% and 20% IRR. In terms of the aggregate ROIC, that part of your question, quite candidly, it would be de minimis because The denominator is such a large number.

[Alexander Pease, Executive VP & CFO at WestRock Company]

Just by way of sort of a heuristic, dollars 1,000,000,000 Of invested capital generates about 40 basis points incremental ROIC. So In total, all of these mills combined was probably in the order of $1,000,000,000 I think about $900,000,000 of invested capital. So that would be, Call it 40 basis points improvement of ROIC, but really where we get the lift is in the improved ROIC or in the improved EBITDA because That generates a much greater return for us than reducing the denominator. But David, what would you add?

[David Sewell, CEO at WestRock Company]

No, I think Alex captured it Well, and I think the important thing is when you look at our productivity efforts and when you look at, as Alex mentioned, The capital we can redeploy to other facilities, not only is it just getting the cost benefit of reducing those higher cost mills, but we're actually getting more profitable at the mills we're running. So it's really going to be A return generating entity for us.

[George Staphos, Managing Director at Bank of America Merrill Lynch]

Thanks for that Rhonda. That was really helpful. I guess next question I had for you again in terms of WestRock's strategy Mo, I mean, we talk a lot you talk a lot about the enterprise sales and also machinery installations. Enterprise sales, you said, were at $9,000,000,000 or more, Which I think was the figure from last quarter recognizing $9,000,000,000 is a lot of money, a lot of revenue. Can you talk maybe more precisely about the progress you're seeing there, the progress you're seeing in machinery installations and what that's adding in terms of Profit.

[George Staphos, Managing Director at Bank of America Merrill Lynch]

And then last and I'll turn it over, just a ticky tack question. I think in terms of the overall economic downtime, you said you took This last quarter, 359,000 tons. And if I didn't mishear you, I think you said 258,000 for corrugated and 101 for consumer. Did I miss something there? What was the figure for paper?

[George Staphos, Managing Director at Bank of America Merrill Lynch]

Thank you, guys.

[David Sewell, CEO at WestRock Company]

Sure. I'll start by answering the first part And I'll have Alex just give you kind of a rundown on our economic downtime. George, when I Think about our enterprise capability, it's I think we're at the point where we just had the most momentum we've had in a long time. And I alluded to it in an earlier comment about Mexico. So for example, we had a large consumer customer That we were doing business with in the United States.

[David Sewell, CEO at WestRock Company]

They expanded a product line in Mexico that was in corrugated. They came to us asking for a solution and that handoff was Just seamless and we were able to help them coordinate all of that and come up with a very effective solution. And then what was also exciting is that same consumer customer and it was a beverage customer, was looking for further Plastics replacements and wanted to be very efficient in their process in doing that. And then we received a large machinery order at their sites, so we can help them be more efficient as they eliminate single use plastics and move into a fiber based solution and plastics replacement. So it's that connectivity that's really driving our excitement about enterprise sales, Because there's just so many customers now that are looking for solutions that crossover between corrugated and consumer, and we're just able to do that.

[David Sewell, CEO at WestRock Company]

And I think just when you look at our corrugated results alone, you could just see the benefits are working Into our bottom line. So we feel great about Enterprise. We now have over 5,300 machines in place Worldwide, our backlog is incredibly strong. That is a key component is our ability to customize Our machinery to our customers' production lines, so with the plastics replacement, this is enormously important. And finally, you've heard a lot of e commerce customers talk about wanting to exit Plastic mailers.

[David Sewell, CEO at WestRock Company]

And so that is a great opportunity for kraft paper and our pack in demand Machinery business, which we're just seeing a lot of excitement and energy around that as well. So combining all that, that's why we're just Really excited about the future and what our portfolio is able to provide our customers. And just the Costco example alone, Enterprise customers came to us asking for a solution. There was machinery and again we have a consumer and corrugated relationship With them as well. I'll turn it over to Alex to talk about your economic downtime question.

[Alexander Pease, Executive VP & CFO at WestRock Company]

Yes. So George, just a couple of Facts to put out there. So our integration rates in corrugated are between 80% 90%. If you apply that to the 258,000 tons of downtime in the corrugated business, you'd get roughly 40,000 tons related to the corrugated business. And then if you do the same math on consumer, our integration rates in consumer Around 50%, give or take.

[Alexander Pease, Executive VP & CFO at WestRock Company]

So that would give you about 50,000 tons for the merchant business in the consumer segment. Another way

[George Staphos, Managing Director at Bank of America Merrill Lynch]

Got it.

[Alexander Pease, Executive VP & CFO at WestRock Company]

Think about it as we add $124,000,000 was the cost associated with the economic downtime. In total, on a consolidated basis, about $58,000,000 of that was in Global Paper, about $49,000,000 of was in corrugated and about $17,000,000 of that was in the consumer segment. So that should sort of give you the breakdown of how that falls out.

[George Staphos, Managing Director at Bank of America Merrill Lynch]

That's great, Alex. Thank you for that. I'll turn it over. Good luck in the quarter.

[David Sewell, CEO at WestRock Company]

Thanks, Rich.

[Operator]

Our next question will come from Gabe Hajde with Wells Fargo. You may now go ahead.

[Gabe Hajde, Analyst at Wells Fargo]

David, Alex. Good morning. Thanks for taking the question. I wanted to ask about some of the strategic investments that you guys are making. So you have the box plant that you're doing up in the Pacific Northwest.

[Gabe Hajde, Analyst at Wells Fargo]

And I think at the Investor Day, you called out, I think, dollars 300,000,000 to $500,000,000 Annually kind of over the 3 year period in return oriented projects. Can you kind of talk about where you're at with that? I mean, obviously, like I said, I know the box plant. And then maybe Is there an acceleration in that and that's part of the reason why cash flow is coming down a little bit just given the EBITDA beat Kind of here in Q3 and same ring in line 4th quarter outlook.

[Alexander Pease, Executive VP & CFO at WestRock Company]

Yes. So I'll start, Gabe, and then I'll turn it over to David. So in terms of the overall CapEx guidance, I believe the number we gave at Investor Day was between $200,000,000 $500,000,000 On top of $1,000,000,000 of base load capital and that's still the number that we're sticking to. When we start talking about 2024, We'll have a finer view on what our 2024 CapEx outlook looks like in our longer range view. But More strategically, yes, we are, as David mentioned in his prepared remarks, we are really focused on driving a higher level of Strategic investment recapitalization in the mill network and the converting network, Which will drive higher ROICs and higher margins.

[Alexander Pease, Executive VP & CFO at WestRock Company]

And the Longview Box Plan is a perfect example of that. That's going Exceedingly well. It's going to allow some other footprint actions that we're planning And it allows us to operate much more efficiently. We're planning on order of 5 more of those types of investments Really around the country to really optimize our converting network. We're looking at some opportunities within our mill footprint to The flexibility of our mill assets and all that work is going on kind of as we speak.

[Alexander Pease, Executive VP & CFO at WestRock Company]

So we're not prepared to talk about any of it Today, but we will as we start talking about 2024 and beyond. But I think it's a really exciting time for the company as we think about Investing in our business and really driving higher returns. In terms of the cash flow guide of 800 To $1,000,000,000 There's a couple of things that are behind that. Obviously, our EBITDA is Slightly below our expectations when we started the year. But look, I mean, I think we're delivering exceptionally good results In a really challenging environment, we've been able to invest around $1,000,000,000 in our business, which is more than we invested last year.

[Alexander Pease, Executive VP & CFO at WestRock Company]

We're catching up from some of the Bottlenecks and capital deployment during COVID. So all of this is frankly really positive and candidly even at the low end of that range To deliver $800,000,000 in this operating environment is I think a pretty exceptional testament to the strength of our business and the amount of cash flow Yes.

[David Sewell, CEO at WestRock Company]

The only other thing I would add Gabe just as you to your question on the strategy overall, I would blanket it Kind of this way as Alex alluded to, redeploying the capital at our mills that we Had to make the difficult decision to shut down because of the higher costs. We are going to make those mills exceptionally More efficient and profitable with the additional CapEx we're able to redeploy. So our mill network is going to be more efficient. And then as Alex talked about on our converting assets, as we do these consolidations, there's CapEx Potentially involved as we make these converting assets much more efficient, larger, more output per site. And so that's going to also drive more profitability and combined will give us a higher ROIC.

[David Sewell, CEO at WestRock Company]

So That's how we kind of think about it overall and then tying that into our commercial strategy, what are the segments that we're really focused on that are higher growth, Higher margin, we have a great solution and right to win that consolidates everything together as we look at our overall strategy.

[Gabe Hajde, Analyst at Wells Fargo]

Thank you both for that. And then one hopefully quick one point of clarification more near term focused. David, I think you said in your prepared remarks, up mid single digit, maybe year over year in the corrugated business. And then I think in response to a question, it was up mid singles on a sequential basis. So just maybe a point of clarification, are you Again, I think you talked about stable and corrugated.

[Gabe Hajde, Analyst at Wells Fargo]

So just, what you were inferring there?

[David Sewell, CEO at WestRock Company]

Yes. So for Clarification, it was up mid single digits from Q3. So sequentially, we're up mid single digits and our backlog With the strongest it's been in the calendar year. So we're seeing that improvement as we move forward In Q4 and we just expect that to continue as we get into 2024. So we really feel like we have Come out of the bottom of the down cycle and we are now on the upswing and that's how we look at for Q4 and 2024 as we move forward.

[Gabe Hajde, Analyst at Wells Fargo]

Thank you both and good luck.

[David Sewell, CEO at WestRock Company]

Thanks Gabe.

[Operator]

Our next question will come from Mark Weintraub with Seaport Research Partners. You may now go ahead.

[Mark Weintraub, Senior Analyst and Head of Business Development at Seaport Research Partners]

Thank you. So you mentioned redeploying some of The capital that otherwise would have been going to some of the facilities you're closing to increase efficiency at The remaining mills, etcetera. Is this likely going to be incremental projects or is it going to make The most sense to be doing Florence type projects at some point?

[David Sewell, CEO at WestRock Company]

Mark, it's a really good question. It's going to be a combination of both. We look at all of our assets. We look at where we want the company to be And what drives the highest returns. So if there is another type Florence investment that we need for our footprint, That's the direction we're going to go in addition to some of these incremental projects.

[David Sewell, CEO at WestRock Company]

So I think as Alex talked about that $200,000,000 to $500,000,000 When you get into that strategic investment, you're going to see a combination of both. And as we go get closer to 2024 Fiscal year, we'll give you much more detail and color around it.

[Mark Weintraub, Senior Analyst and Head of Business Development at Seaport Research Partners]

Okay, great. Thank you. Then second, just Kind of focusing still on the self help. I believe the $1,000,000,000 profit improvement program was going to Target about $250,000,000 in fiscal 2023. So if you can just sort of let us know, I know you talked about exit rates, but Order of magnitude, what you think you will have accomplished in fiscal 2023?

[Mark Weintraub, Senior Analyst and Head of Business Development at Seaport Research Partners]

And then how much would be likely on the docket for fiscal 2024? I think there probably would be a Step up, I just wanted to clarify.

[Alexander Pease, Executive VP & CFO at WestRock Company]

Yes, I think the way we've bridged it is 250 In 'twenty three, around $350,000,000 in 'twenty four and then the remainder In 2025. Actually though, Mark, we're well ahead of that. So as we mentioned, we're exiting the year at around 4 The run rate, our in year savings, we're anticipating being north of the $250,000,000 that we committed to Because the team is just making great progress. And the balance of what we're talking about at this stage The game is really around SG and A savings and supply chain related savings, roughly fifty-fifty each. But as we've talked about with some of these asset closures and plant consolidations, we're really starting to get the flywheel moving A lot of the operational improvements, which will really drive a reduction in unplanned downtime and unlock of hidden factory, lower waste rates.

[Alexander Pease, Executive VP & CFO at WestRock Company]

And so you should see those numbers begin to accelerate. So we feel really good about what we're doing on the productivity and cost savings side.

[Mark Weintraub, Senior Analyst and Head of Business Development at Seaport Research Partners]

Okay. And recognizing it's a very dynamic process, are we still thinking there's 350,000,000 Order of magnitude incremental in fiscal 2024 and keeping it separate if possible from The actions you did on the facility closures where I have another follow-up question just to if possible.

[Alexander Pease, Executive VP & CFO at WestRock Company]

Yes. So just to make the math easy, let's say we're going to do between $250,000,000 $300,000,000 In 'twenty three, just take the top end of that. So say it's $300,000,000 and we're $450,000,000 exit rate that would put you at $150,000,000 just Going into as a rollover into 'twenty four and then to get our $350,000,000 number, you would say there's going to be $200,000,000 incremental In 2024. We're still building the operating plans for 2024, but I think that's Frankly, I think that number is conservative.

[Mark Weintraub, Senior Analyst and Head of Business Development at Seaport Research Partners]

Okay, super. And then just if we just focus on the 2 mills that are in the process of being closed And related converting plan actions, you talked about this being EBITDA incremental. And could you sort of give us a sense as to magnitude, Again, recognizing there are a bunch of moving parts. And then also kind of what's the net cash closure costs, Which obviously are one time, but what's the net closure, cash closure costs related to the actions?

[Alexander Pease, Executive VP & CFO at WestRock Company]

So It's a little hard to answer your incremental EBITDA question because a lot of it depends on volumes. And in this volume environment where things are so dynamic, It's just a tricky question to answer. But to give you a sense, the Tacoma Mill That we just closed. The cash cost per ton is around $900 a ton based on the number that I'm looking at. The mills that we would reallocate capacity to and I'm just going to use generalities are Around $200 to $400 a ton cheaper than the mill we closed.

[Alexander Pease, Executive VP & CFO at WestRock Company]

So that would give you a sense of sort of the incremental contribution that we would get from reallocating some of the that we would get from reallocating some of the capacity to those other mills. In terms of the cash cost for the When we just recently closed, the total was around $345,000,000 about 2 thirds of that was non cash, so about a third of that Was cash related and the bulk of the cash comes in year 12 and then it's offset by an assumption around the land sale coming in the latter part of year 2.

[David Sewell, CEO at WestRock Company]

And the only other thing I would add is I'm sorry, just to answer your question. If you look at the converting sites, they are not as dependent on volumes as the mills. So you would see EBITDA of about $35,000,000 to date And then as we continue to optimize that footprint that will just continue to escalate. And then to Alex's point on the mills, it is volume dependent. So you would just see a range depending on volumes.

[David Sewell, CEO at WestRock Company]

So to Alex's point, you can just kind of do the math of Where we are currently and what we would do, I mean, you could see a range of from everything we've done from You know, low double digits to even higher on improvement.

[Mark Weintraub, Senior Analyst and Head of Business Development at Seaport Research Partners]

Okay.

[Mark Weintraub, Senior Analyst and Head of Business Development at Seaport Research Partners]

And just to clarify that, that $900 per ton, that was the total cost I assume or did

[Mark Weintraub, Senior Analyst and Head of Business Development at Seaport Research Partners]

you say cash costs for

[Alexander Pease, Executive VP & CFO at WestRock Company]

Cash costs.

[Mark Weintraub, Senior Analyst and Head of Business Development at Seaport Research Partners]

Okay.

[Alexander Pease, Executive VP & CFO at WestRock Company]

That was cash cost.

[Mark Weintraub, Senior Analyst and Head of Business Development at Seaport Research Partners]

All

[Mark Weintraub, Senior Analyst and Head of Business Development at Seaport Research Partners]

right. Appreciate it.

[Operator]

Our next question will come from Clive. Thanks, Clive. Our next question will come from Clive Rueckert with UBS.

[Operator]

You may now go ahead.

[Cleveland Rueckert, ED - Equity Research Analyst at UBS Group]

Great. Thank you for taking the questions. Thanks for all the good color on the call. I just had a couple of quick Follow ups. I was just looking at the positive price mix and particularly in the corrugated packaging segment.

[Cleveland Rueckert, ED - Equity Research Analyst at UBS Group]

And I'm wondering if there are any index price lags that you expect to flow through that business over the next sort of couple of quarters or whether that price mix is just remaining positive Because of the strategic actions that you've made and the mix improvements that's resulted from them.

[David Sewell, CEO at WestRock Company]

So Cleave, as we look at our corrugated business With all of the resi pricing that's been announced, as we go into this quarter, $70 of the $90 will hit our contractual customers. So you'll see continued Price pressure through this quarter. And then coming out of this quarter from the May increase That $20 will come into play toward the end of the year and then be offset by the increasing volumes. About 75% of our customers are tied to that RECE contract pricing. So that's kind of how we look at The pricing.

[David Sewell, CEO at WestRock Company]

And then from a consumer side, just the recent announcements, We won't probably see those hit our consumer business till the end of the year. And then conversely, we see Both on the containerboard side and paperboard side, we see those within 30 days on our global paper business, Which is why you've seen a lot of the pressure throughout the year, but then we'll cycle around that as we get into 2024.

[Cleveland Rueckert, ED - Equity Research Analyst at UBS Group]

Right. Yes. So there's just a lot more lag in those integrated.

[David Sewell, CEO at WestRock Company]

Yes.

[Cleveland Rueckert, ED - Equity Research Analyst at UBS Group]

Yes. Okay. That's clear. And then just sort of following up on integration. And thanks for the Appreciate the color on the integration rates between corrugated and consumer.

[Cleveland Rueckert, ED - Equity Research Analyst at UBS Group]

I'd just be curious, given the actions that you're taking Sort of throughout the footprint, do you have an integration target for those businesses looking ahead? I think Probably running a little higher than maybe we thought in corrugated. I'd just be curious if you sort of strategically thought about where you want to get to at this point or if that's So part of the planning you're doing?

[David Sewell, CEO at WestRock Company]

So as we think about our integration rates with the 1,900,000 tons that we've taken and If you go back to say a 2021 volume environment, our containerboard Integration rates are really tracking in the high 80s. And as we get into that 90% range, We feel really pretty good about that because it allows flexibility through the cycles. We have really good strategic partners on the global paper side that are not on the commodity side of that, buying multiple grades, Long term relationships, there's a lot of innovations that we're working on with them. So as we look at the mill footprints Actions that we've taken and we look forward to 2024, I mean, we're really in a great position in our supply demand balance, Because as we've talked about, we want to match our supply to our customers' demand. So the excitement that you hear about 2024 with the actions we've Taken in the productivity, we feel really good about how we're entering the year.

[Cleveland Rueckert, ED - Equity Research Analyst at UBS Group]

Okay. I'll turn it over. Thanks, guys.

[David Sewell, CEO at WestRock Company]

Thanks.

[Operator]

Our next question will come from Phil Ng with Jefferies. You may now go ahead.

[Analyst]

Good morning. This is actually John on for Phil. I hope you guys are doing well and congrats on a good quarter. I just wanted to go back to the footprint. You guys have taken a lot of actions, particularly on the containerboard side over the past, Say, 15 to 18 months.

[Analyst]

I guess, could you give us some perspective on how you're thinking about your footprint now? And Do you see the actions taken already announced being enough? Or do you think there may be more to come, whether That'd be WestRock or generally the broader industry more importantly. And then just to follow on that, how should we think about Tacoma, which is expected to shut by the end of the fiscal year, how should we think about the earnings leakage, Whether it be in this fiscal Q4 or going into 2024, I think you touched on it being positive, but just want Yes, maybe get a little bit more clarity on the flow through.

[David Sewell, CEO at WestRock Company]

Sure, John. I'll answer the first part of your questions And then I'll have Alex go through Tacoma with a little more depth. So as we look at our footprint, What we've always focused on is our customers' demand with our supply footprint. We know there's all kinds of puts and takes going on in the industry, but our relationships with our customers are very Strategic, very connected. A lot of our contracts are long term contracts.

[David Sewell, CEO at WestRock Company]

So as I've kind of alluded to a little bit With Cleave, where we see 2024, I mean, right now, we're this has been an unprecedented year as far as the down cycle. We've made all the footprint actions. And as we see 2024 and 2025 with the Connectivity we have with our customers and how they're projecting volumes, we really see a nice balance right now. And we've got again, it's virgin fiber, it's recycled, it's paperboard. So having all of those substrates is really important.

[David Sewell, CEO at WestRock Company]

So as we think about our footprint, we always evaluate it. We continue to evaluate it. But as far as a major short term action, I don't anticipate that with everything that we're seeing as we head into 2024 with the demand environment we see with The current supply environment that we have. I'll turn it over to Alex to talk about Tacoma.

[Alexander Pease, Executive VP & CFO at WestRock Company]

Yes. Let me I'll try to just The headline that everybody should hear on the call is that the mills that we've closed, we're going to reallocate the Strategic substrates to other mills in the network. So there won't be any EBITDA leakage associated with that. It will actually be EBITDA and ROIC accretive. On Tacoma specifically, just the breakdown, it's 510,000 tons Of total capacity, about 105,000 tons of that's linerboard, about 275,000 tons of that is white top, 60,000 tons is kraft paper and about 70,000 tons is pulp.

[Alexander Pease, Executive VP & CFO at WestRock Company]

So with the exception of the pulp, all of that other capacity will We reallocated around the network again, so it will be net margin and EBITDA dollar accretive. In terms of Just it's not earnings leakage, but cash flow leakage. You will see about 2 or about 1 third of the 345 Dollars of closure costs, that the cash cost associated with that is about a third of that number. And that will happen in years 1 year 2, offset in the back half of year 2 with a land sale.

[Analyst]

Got it. Okay. Appreciate that. And then just going back quickly, David, on the capacity, Do you think the industry as a whole needs to take out more? It still seems like operating rates are Relatively below where they should be.

[Analyst]

I mean, I know your Tacoma still has yet to come out, but just thinking about 2024, The industry as a whole, do you see more actions needed to kind of stabilize price? Or do you see the demand inflection, at least from the customer conversations that you're having being enough to stabilize prices going into next year?

[David Sewell, CEO at WestRock Company]

Yes. The way I would think about it, John, is we are laser focused with our Segments in our customer base and so we're just matching our supply to their demand. As I think about the industry and obviously there's Capacity coming online. The customers that we're focused on, we just think are going to be different than where this new capacity is. So We'll let that sort itself out, but we're focused on do we have the right supply and the right footprint with the demand where we want to grow For value selling, solution selling and with the 1,900,000 tons that we have with the demand forecast we see as we go into 'twenty four And into 2025, I mean, we feel pretty good about where we're at and we like the Improvements we're making in our cost structure and our productivity.

[David Sewell, CEO at WestRock Company]

So we'll continue to evaluate it. But right now, how we see Supply and demand is we go into 2024 is balanced.

[Analyst]

Okay. I appreciate that. And then if I could just squeeze One more small one in here. If we could get an update on the RTS in Chattanooga, our URB Mills, If they've already closed for those sales and if you can just remind us where the Those are reported in which particular segment?

[David Sewell, CEO at WestRock Company]

Yes.

[Analyst]

Appreciate it.

[David Sewell, CEO at WestRock Company]

So that the RTS Sale is not complete. We hope to have that complete in September as we move forward in the business. And as again, just a reminder, It was a $375,000,000

[David Sewell, CEO at WestRock Company]

sale.

[Analyst]

Okay. And what segment was that in?

[Alexander Pease, Executive VP & CFO at WestRock Company]

RTS would have been within the consumer segment. It's not our consumer segment. It's the partitions business basically.

[Analyst]

Okay. Thank you very much. I'll turn it over.

[Alexander Pease, Executive VP & CFO at WestRock Company]

All right. Thank you.

[Operator]

This concludes our question and answer session. I would like to turn the conference back over to Rob Quartaro for closing remarks.

[Robert Quartaro, SVP - Investor Relations at WestRock Company]

Thank you everybody for joining our call today. We are available if you have any other follow-up questions and we look forward to updating you again next quarter. Thank you.

Participants

Executives

• Robert Quartaro, SVP - Investor Relations
• David Sewell, CEO
• Alexander Pease, Executive VP & CFO

Analysts

• Michael Roxland, MD - Equity Research at Truist Securities
• George Staphos, Managing Director at Bank of America Merrill Lynch
• Gabe Hajde, Analyst at Wells Fargo
• Mark Weintraub, Senior Analyst and Head of Business Development at Seaport Research Partners
• Cleveland Rueckert, ED - Equity Research Analyst at UBS Group
• Analyst