This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk06: Ladies and gentlemen, thank you for standing by and welcome to the West Rock fourth quarter fiscal 2020 results call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone keypad. Please be advised that today's conference is being recorded. Thank you. I'd now like to hand the conference over to your moderator for today. James Armstrong, Vice President, Investor Relations. Please go ahead. James Armstrong, Vice President, Investor Relations. Please go ahead. James Armstrong, Vice President, Investor Relations. Please go ahead. James Armstrong, Vice President, Investor Relations. Please go ahead. James Armstrong, Vice President, Investor Relations. Please go ahead. James Armstrong, Vice President, Investor Relations. Please go ahead. James Armstrong, Vice President, Investor Relations. Please go ahead. James Armstrong, Vice President, Investor Relations. Please go ahead. James Armstrong, Vice President, Investor Relations. Please go ahead. James Armstrong, Vice President, Investor Relations. Please go ahead. James Armstrong, Vice President, Investor Relations. Please go ahead. James Armstrong, Vice President, Investor Relations. Please go ahead. James Armstrong, Vice President, Investor Relations. Please go ahead. James Armstrong, Vice President, Investor Relations. Please go ahead. James Armstrong, Vice President, Investor Relations. Please go ahead. James Armstrong, Vice President, Investor Relations. Please go ahead. our Chief Financial Officer, Ward Dixon, our Chief Commercial Officer and President of Corrugated Packaging, Jeff Chalovich, as well as our Chief Innovation Officer and President of Consumer Packaging, Pat Linder. Following our prepared comments, we will open up the call for a question and answer session. 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 discussed during the call. We describe these risks and uncertainties in our filings with the SEC, including our 10-K for the fiscal year ended September 30, 2019, and our 10-Q for the quarter ended June 30, 2020. In addition, we will be making forward-looking statements about the impact of COVID-19 pandemic on our operational and financial performance. The extent of these effects, including the duration, scope, and severity of the pandemic, is highly uncertain and cannot be predicted with confidence at this time. We will also be referencing non-GAAP financial measures during the call. We have provided reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in the appendix of the slide presentation. As mentioned previously, the slide presentation is available on our website. With that said, I'll now turn it over to Yussi
spk04: Okay, thanks, James. Good morning. Westrock's fiscal fourth quarter was highlighted by record sales of packaging across our business. We delivered solid operating results and exceptional cash flows that enabled meaningful reductions in both the amount of our debt and our leverage ratio. Explaining our performance during the fiscal fourth quarter begins with the incredible performance of Westrock teammates around the world. While the safety and health of our teammates has always been first and foremost, the past seven months have been exceptionally challenging due to the COVID-19 pandemic and the impact it's had on all of our daily activities across the company. These activities include the implementation of safety protocols, the rapid changes in demand from our customers, and the stress that all of us feel for the safety and well-being of our teammates, our friends, and our families. We've accomplished many amazing things And as just one example, I'll call out our teammates at our Demopolis, Alabama mill who've worked over 1 million hours without a recordable safety incident. For those of you involved in the operations of business, that is just amazing. And thanks to all of the West Rock teammates across the company for what they've done during these challenging times. When we formed Westrock, we created a company that differentiates itself with a broad set of products and capabilities and partners with customers to meet their needs to grow their sales, lower their total cost, meet their sustainability goals, and manage their risk. We've been very successful in doing this, especially over the past quarter. As we've said for some time, our focus has been on building our packaging business and reducing our exposure to less attractive markets. For that reason, I'm providing additional perspective on Westrock's packaging business. In fiscal 2020, Westrock's net sales were $17.6 billion. Twelve and a half billion dollars, or 71 percent of our sales, were sales of packaging to a diverse set of attractive and stable end markets. The remaining 29% are $5.1 billion for sales of paperboard and pulp. And the $5.1 billion includes $1.9 billion of sales to lower margin SPS, export container board, and pulp markets. Our packaging business is built on an outstanding platform that includes 31 mills and 230 converting facilities. Supply chain capability is critical, and our more than 200 packaging distribution sites are well located to deliver products to our customers. We support 4,000 machinery installations in our customers' locations, further enhancing our ability to provide value to them. And Westrock's 50,000 incredible teammates make all of this happen. We're well positioned to help our customers meet the growing demand for sustainable fiber-based packaging solutions. We're seeing increasing demand for functionality and value from our products and services, including the ingeniously designed e-commerce packaging that allows our customers' products to be shipped in its own container. This eliminates a redundant and wasteful additional box. Demand is increasing for CanColor Eco, a superior glue-free packaging solution used by Coca-Cola in Europe to replace plastic packaging that supports their initiative to create a world without waste. The glue-free quality of Westrock's can collar offering is an important differentiator for this product, as some competitors use glue that transfers to the cans. Our sustainable solution provides a much better brand experience that's important to both customers and consumers. Our products can also help consumers feel safer about their purchases. Our BioPak Protect folding carton solution enhances food safety by enabling restaurants to seal delivery items in the store. This helps ensure that the product is not tampered with in transit. Our packaging is helping connect consumers digitally to product information and promotional content. Our recent work with Domino's to educate consumers about the recycling of pizza boxes where they live demonstrates how digital content can enhance the customer experience. Our customers utilize our machinery solutions to lower their risk, improve their productivity, and drive cost out of their packing lines. By combining our machinery solutions with our associated sheet and box offerings, Westrock provides a complete solution to our customers. We had another year of growth in machine placements. During the fiscal year, machine placements grew by more than 10% to a total of more than 4,000 machines placed. The pandemic has accelerated our customers' demand for sustainable fiber-based packaging solutions, making now an opportune time to be at Westrock working with our customers. We help customers adapt to these new markets, and we're winning business as a result. We're doing this by combining our design capabilities, our portfolio of paper substrates, our world-class converting network, and our packaging distribution and other services to create packaging solutions that help our customers win in their markets. In fact, our hot pipe one, that's business that we expect to onboard over the next 90 to 120 days, is very healthy and This indicates strong demand going into 2021. Let's turn to our results for the quarter. We delivered another quarter of solid performance in a rapidly changing environment. Westrock sales during the quarter were $4.5 billion. Adjusted segment EBITDA was $721 million. And adjusted earnings per share were 73 cents. The fourth quarter's results benefited from an increase in packaging demand across both segments with our packaging volumes at record levels, up 6.9% sequentially and 2.4% over last year. We exported less container board and incurred lower recycled fiber cost, both of which positively impacted our results. These benefits were partially offset by 87,000 tons of economic downtime taken across our SPS system, higher labor and maintenance cost, and the absence of the non-recurring benefits that we received in the third quarter. And as you all know, market conditions are changing quickly. Demand for corrugated packaging, container board, and food and beverage consumer packaging is very strong. SPS volumes remained soft due to declines in food service, commercial print, and tobacco applications. Importantly, we generated strong cash flow. In the fourth quarter, we generated more than $630 million in adjusted free cash flow, which brought our total to $1.15 billion for fiscal 2020. This is the fifth year in a row we've generated more than $1 billion in adjusted free cash flow. We reduced adjusted net debt by $578 million in the quarter and more than $800 million during the fiscal year. Let's go to slide seven. The corrugated packaging segment delivered adjusted EBITDA of $513 million in the fourth quarter. This was up $31 million compared to the third quarter. This shows the momentum in the North American corrugated packaging business as box demand increased 5.1% sequentially on a per-day basis. The adjusted EBITDA margin of 18.2% was in line with the prior quarter, and North American corrugated adjusted EBITDA margins were 19.6%. As the quarter progressed, box demand increased, and we shifted container board tons from lower margin export markets to serve higher value box and domestic customers. As a result, our export shipments fell by 109,000 tons sequentially. With our growth in box shipments, our integration rate rose to 81% in the quarter. We're now selling every ton we can produce, and we ended the quarter with tight inventories. As corrugated box demand grows, Westrock is winning new business in the marketplace. Our box volumes in September were up 4%. This was in excess of the industry volumes reported by the Fiber Box Association. Our corrugated box backlogs are at record levels, and this signals strong demand growth into the future. Our daily box shipments in October were up between 8% and 9% from the prior year. we're experiencing similar growth trends in our Victory Packaging business. Sales increased $47 million sequentially. Recovery in the moving and storage business and in auto parts sales fueled this growth, along with the growing need for distribution services for retailers and enhanced service requirements in the e-commerce channel. We're well positioned to serve this distribution market as retailers respond to e-commerce demand by shipping direct to consumers from their stores. We're pleased with the progress we're making with the further integration of Victory into our packaging business and the ability it provides us to further differentiate our product and service offerings to a broad base of consumers. As a reminder, We supply more than 250,000 tons of boxes annually to victory from our corrugated packaging system. Our specialty craft paper business is growing as the trend away from plastic bags and envelopes toward natural fiber-based packaging accelerates. In the fourth quarter, our shipments of craft paper were 35,000 tons higher than the same quarter of last year. In Brazil, we're seeing very strong demand for container board and corrugated packaging. In the quarter, our packaging shipments grew 22% sequentially. We're well positioned to capitalize on the growth in the region with the ramp up of our portal fleas box plant and the completion of the Tres Bajas project in the first half of 2021. We're realizing the benefits from the investments that we've made to make our system even more competitive and profitable. In October, we started up our new paper machine at Florence, and we're already making high-quality container board. We expect the machine to improve EBITDA by $30 million in fiscal 21, with a run rate of $55 million in EBITDA going forward. The Trace Baja Smell upgrade is on track for full startup on schedule in the first half of 2021, with the team in Brazil overcoming construction delays due to COVID restrictions in the area. I'm proud of our project teams who've maintained their focus on the execution of these important projects as they face challenges from the pandemic. Our box plant in Port-au-Flois is currently at 61% of capacity, and it's continuing to ramp up. This plant is expected to generate $20 million in EBITDA improvement in fiscal 21, with a projected full run rate of $30 million in incremental EBITDA a year. Finally, we continue to capture capstone synergies, and we expect to achieve the full $200 million in run rate synergies by the end of this fiscal year. We've sustained our momentum through our systems integration through the use of digital capabilities, including augmented reality. We're now 90% complete with our system integration. In total, we expect our opportunities to add more than $125 million in EBITDA in fiscal 21. and we expect a similar additional amount accruing to our benefit in fiscal 2022. Turning to slide 9, consumer packaging segments adjusted EBITDA in the fourth quarter was $223 million down $20 million from the third quarter due primarily to economic downtime in SBS. As many of you who follow our industry understand, demand for specialty SBS has been declining, especially for the commercial print, tobacco, plate, and cup stock markets. The declines in specialty SBS demand have accelerated with the COVID-19 pandemic. Commercial print demand continues to be down by more than 20% compared to the same quarter of last year, even while election and back-to-school promotions modestly improved demand sequentially. In food service cup stock markets, sales have declined by more than 30% sequentially. As a result of this weakness, and to balance our supply with our customers' demand, we took 87,000 tons of economic downtime in the quarter. This downtime supported the sequential reduction in our inventories of 72,000 tons. In early October, we announced the removal of 200,000 tons of SPS capacity at our Evadel Mill with the shutdown of one of our three paper machines there. The Evadel shutdown was originally scheduled for the end of the calendar year. However, we're currently producing 5,000 to 10,000 tons per month of container board at Evadel to help meet the strong demand in corrugated packaging. We may need to keep this up through March. This is a short-term measure to help address the very strong demand for container board. Our plans to remove 200,000 tons of SBS capacity are unaffected by this extension. The balance between our SBS supply and our customer demand is improving. We plan to restart our idled paper machine at Covington later this month. The lower margins and challenges of the specialty SBS and pulp business have masked the attractiveness of the rest of our consumer packaging business. The attractive portion of the consumer packaging business includes sales of paper and packaging solutions to the food, food service, and beverage and specialty packaging markets. These solutions use our extensive range of paperboard substrates, and they're complemented by the broad set of value-added capabilities, including packaging design, material science, advanced printing, and machinery automation. This attractive portion of our business accounts for approximately 80% of our segment sales and the vast majority of the segment's EBITDA. The highest demand for sustainable fiber-based packaging is for the e-commerce, food, food service, and beverage markets. We made good progress during the fiscal fourth quarter by increasing our consumer packaging converting shipments by between 2 and 3 percent sequentially and compared to last year. The acceleration of the declines in demand for certain external SPS markets and the corresponding reduction to our projected future results caused the non-cash goodwill impairment charge in our consumer packaging segment. As background, the majority of our carrying values were established by the accounting for the combination of Rockton and Midwest VACO that formed WestRock. In this merger, Midwest VACO was the acquired entity, and the goodwill was assigned to the combined units. The $1.3 billion non-cash charge reduced the consumer packaging segment goodwill balance by 37%. The segment has produced strong cash flow since the merger. In fact, we've generated $3.4 billion in pre-tax cash flow from the segment. This is measured by adjusted segment EBITDA minus CapEx. As demonstrated by our actions and results, we're reducing our exposure to the less attractive 20% portion of our consumer packaging business And we're focused on growing the more attractive 80% portion of our business that's well integrated with our paperboard mill system and also well integrated with our corrugated packaging solutions offerings. Now I'll turn it over to Ward.
spk06: Ward? Thanks, Steve. Looking forward at our near-term capital allocation priorities, we are focused on investing in our business and paying down debt while continuing to return capital to our stockholders through our dividend. We expect fiscal 2021 capital investments to be in the range of $800 to $900 million. This is higher than the estimates that we incorporated into the Pandemic Action Plan due to capital investment projects that we have today to respond to specific growth needs. During fiscal 2021, we will complete our Trace Baja's mill upgrade and start to reap the benefits of our strategic capital projects in our mill and converting systems. Longer term, we anticipate a return to capital investment levels between $900 million to $1 billion each year. At this level, half will be invested in maintenance projects and the other half will be invested in return-generating projects that reduce our cost and enable us to grow with our customers. As we continue to generate cash, pay down debt, and reduce leverage towards our targeted range, we expect to return more capital to stockholders through increases in our dividend and opportunistic share buybacks. We also see the potential for M&A opportunities that are focused on our packaging businesses. We continue to use our strong cash flow to pay down debt and strengthen our balance sheet. During fiscal 2020, we reduced adjusted net debt by $813 million. As shown on slide 12, we have very little near-term debt maturities and approximately $3.6 billion of available committed liquidity and cash, solid investment-grade credit ratings, and our pension plans are overfunded. Turning to guidance, we expect first quarter adjusted segment EBITDA to be between $630 million and $660 million, with adjusted earnings per share between 46 cents and 54 cents per share. I will provide some sequential quarter guidance commentary to help you with your models. Consistent with prior years, we anticipate a sequential decline in sales and earnings from the fourth quarter of fiscal 2020 to the first quarter of fiscal 2021. In corrugated packaging, we expect continued strong box growth with higher per-day shipments, but with three less shipping days in the first quarter versus the prior quarter. We anticipate the normal seasonal sequential volume declines in many of our businesses, including merchandising displays, Victory MPS, and food and beverage. While demand remains strong in Brazil, we are executing a significant outage to support our Trace Baja's mill upgrade. This project is on track for completion during the first half of fiscal 2021. We expect higher natural gas and freight costs as we enter the winter months, along with increased health insurance costs prior to the reset of employee deductibles that occurs at the beginning of the calendar year. In addition, our short-term incentive payouts were below target for fiscal 2020 as part of our Pandemic Action Plan, and we will begin accruing fiscal 2021 at a higher targeted base level. As markets continue to change quickly due to COVID-19, we are not providing full-year revenue, adjusted EBITDA, or adjusted free cash flow guidance at this time. In fiscal 2020, we demonstrated our ability to adjust our operations to market conditions and continue to generate cash. With a backdrop of improving demand conditions, along with the completion of our strategic capital projects and the benefits of our pandemic action plan, we are confident in our ability to continue to generate strong cash flows, reduce debt, and make meaningful progress towards our leverage target. Now I'll turn it back over to Steve for closing remarks.
spk04: Thanks, Ward. Our fiscal 2020 presented new challenges for our company. I'm incredibly proud of how we're managing through these times, and I'm grateful to the Westrock team that's delivering for our customers each and every day. The demand environment is improving. We see this particularly in food and beverage and e-commerce markets. We have additional growth opportunities with our e-commerce platform, with innovation in fiber-based, sustainable packaging solutions. At the same time, we're committed to constantly identifying additional opportunities to improve our performance. This includes productivity improvements, capturing synergies and projects that enhance the efficiency of our operations. We're capturing the benefits of our strategic capital projects and will continue to do so as we complete the Florence and Trace Baja's projects. We exited fiscal 2020 with strong free cash flows. We're generating free cash that's certainly an ongoing priority for Westrock. As we execute our strategy, we'll reduce debt and return to our target leverage ratio. Westrock's well-positioned to take advantage of current and changing market trends with our broad portfolio of paper and packaging solutions, machinery offerings, and innovation capabilities. We're partnering with our customers to address their critical customer challenges, whether that's the need for sustainable fiber-based packaging or complex supply chain solutions that meet today's changing market demands. Westrock is the premier partner and unrivaled provider of sustainable winning solutions delivering value to our customers, our teammates, and our stockholders. That concludes my prepared remarks. James, we're ready for Q&A.
spk06: Thank you, Steve. As a reminder to our audience, to give everybody a chance to ask a question, please limit your question to one with a follow-up as needed. We'll get to as many as time allows. Operator, can we please take our first question? Certainly. Again, if you'd like to ask a question, please press star 1. George Staffos with Bank of America, your line is open. Hi, everyone. Good morning. Thanks for the details. Congratulations on the progress. Also, congratulations to Jim Porter on his retirement. I guess my first question, Steve, you talked about the hot pipeline and you offered some positive qualitative commentary there. Can you talk a bit further, either in quantified terms, you obviously gave us the shipment numbers to date in the quarter, but what you're seeing in the pipeline and how it translates to 21 relatedly, I think machinery installations were roughly up about 100 from fiscal 3Q to fiscal 4Q. You know, what, if anything, are you seeing out of COVID that's driving different types of purchases and installations versus what you were seeing previously? And then I have one follow-on.
spk04: Okay. George, Jeff's our chief commercial officer and is very well in tune with that. So I'm going to ask Jeff to respond. Sure. Morning, George.
spk00: Hey, Jeff. So I'll start with the pipeline. So we track the pipeline cold, warm, and hot. And we have a flow-through rate across the business, the entire enterprise. And so we target a certain amount in our hot pipeline, and we know that on average 80% or so that we close in the 90 to 120 days. And so that informs what we believe is coming on in business from where we are in the selling cycle. So those, like I said, are about an 80% plus close rate across the whole enterprise. So that allows us to plan ahead. both capital from the capital standpoint of what we need to add or shifts or whatever the business is coming in. So we have a good look into the quarter and then beyond. So 90 days to 120 days. On the machinery, we're continuing to see growth. And you're right. We had about 130 incremental on the machines. So we're continuing to see customers. COVID-19, Partly, I think customers are looking at, number one, labor, and then how do you separate people in the back of the shop? There's lots of shops that have people still manually packing boxes on top of one another. So it gives them opportunity to spread out and move apart. And then also as they're looking to reduce costs, gain productivity, and people are harder to get into the plants, our machine platform has given us a great opportunity to do that. And we're also seeing good opportunities in innovation with our machines. So we have our pack-on-demand business. We've come up with a new pouch system designed for packaging and we're looking at a either ship from store or we're augmenting our box on demand business and actually adding the ability to pre-make mailers and then use victory packaging that's distributed so we have a large uh customer who's one of the largest retailers in the world who's looking at moving out of plastic mailers into single-faced mailers and so we've augmented our box-on-demand corrugators to be able to store and fold tubes from Fanfold, and then we glue them, put tear tape on them, we're able to label them, and we can do that in-store. So one of the largest trends in e-com is shipped from store for our customers, and then also we're able to use our Victory packaging to help distribute.
spk06: Jeff, thanks for that. My follow-on is around the notion of how much incremental growth do you think has been created, or maybe you don't agree with that view, from COVID, from e-commerce, the question behind the question being, hey, look, you know, we're all doing things differently now than we were nine months ago, a year ago, and it might have created an embedded incremental demand rate for Target that didn't exist before. If you agree with that, you know, what would your customers say? What would you think that incremental is? And maybe you disagree. Maybe you think this is a one and done when we all get back to normal when there's a vaccine, et cetera. You know, we go back to normal growth and corrugated of, you know, I don't know, a point, whatever, and, you know, we're looking at tougher comps in the future. How would you have us think about that? Thank you, and good luck in the quarter.
spk00: Thanks, George. So I think what we're seeing in the e-commerce channel is growth that's accelerated. If you look at what was projected for e-commerce to be part of the retail channel, so it was scheduled to be, if you look at Kantar Retail, they had 23% of the sales by 2025 to be from e-com. I see that accelerated. And that still will be the largest retail channel. So that would in retail. So we see an acceleration and that could be by 2022, 2023 at this point. And I think we'll see that continue. And it has been a positive for Boxman. Now, what percentage, it's hard to tell overall because there's puts and takes in that, right? As you go to the PSYOC packaging, you have some boxes moved to envelopes, but it's definitely added share in the coordinated space for us. And we see the trends, especially the trends I just talked about. Buy online, pick up in store is the largest growing subscription packaging. And then the ship from store, when you think about What everybody's talking about last-mile shipments, well, there's a bunch of places that are last-mile shippers. They're called retail stores. And so the retailers are now looking at how they can best serve customers, and we're uniquely set up to do that because we have a machine platform that can fit in-store, or we have a distribution network to help customers with their delivery. ship from store without having to pile up the back of their shops where they don't have a lot of room in the store. So they're moving from ship from DC into ship from store. And I think that's going to be a positive trend in corrugated, not just for boxes, but for things like the pouches and the mailers that we're making.
spk06: Thank you, Jeff. Mark Weintraub with Seaport Global. Your line is open.
spk02: Thank you. I actually wanted to follow up on George's question. It's obviously hugely important if we can sustain these. In the last two months, it was close to 4% for the industry, and you're talking about 7%, 8%, others talking really big numbers as well, to understand whether this shift is sustainable going forward. And so thanks for all the color on the e-commerce. Are there other factors that you would highlight? And again, coming back to this notion as to whether or not this is a step up and that we can sustain it at these levels and build from here, or whether or not there are maybe other things going on that would suggest being cautious about extrapolating in that fashion?
spk00: Sure. So I think that what we've seen in our, so we finished October up 8.6% per day. And so e-commerce is a large part of that, but we also had continued recovery and markets affected by COVID. So our protein business came back, our industrial markets came back, distribution, retail, processed food is still strong in our bakery business and beverage. So all of those markets have had a positive acceleration coming out of COVID. To extrapolate from that what's going to stay and what's not, you know, 8.6% to almost 9%, I don't know that I would project that. But I think from our pipelines, the new business that we have, we do see positive growth in our business. And the consumer changes to back to middle of the store, some of the frozen products, some of the fresh. Just to give you a point, a data point, the e-commerce industry buy online, pick up in store. Last year, 2019, 12% of consumers who bought online and picked up in store, that store went into the store. This year, it's up to 20% of people who buy online and pick up in store, even with COVID. So I think there's some pickup in some of the middle of the store, some of the frozen, and I think some of those trends can last. But it really depends on what happens with COVID and what new normal becomes but we're seeing positive trends and our customers who continue to innovate their products are seeing uh pick up certainly and then you have people who don't let their stores of cleaning products tissues tiles paper towels those things go back and I think our customers are changing a bit to just-in-time inventory to a more um sustained inventory level so that you keep up with some of the demand. It's hard to project beyond a quarter or two what the growth is going to be long-term, Marco.
spk02: Okay, great. And one quick follow-up as well. So the type of thing you're doing at Evadel where you're making some contain board, should we view that as purely an emergency measure given the circumstances? Or is this kind of a feasible economic strategy to swing at a mill like Evadel on a go-forward basis?
spk00: No, your first comment was it.
spk04: I'm sorry. Go ahead, Jeff.
spk00: Yeah. No, it's a short-term. It's really to help us get our inventories back to speed. The cost profile is not for the container board, so that's a short-term emergency.
spk02: Thank you.
spk06: John Ryder with Stevens. Your line is open. Thanks. This is John for Mark. So around SBS, how much in price at this point do prices have to rise for you to earn cost of capital in that business, assuming the cost side doesn't change? And can you tell us what you're assuming just for your freight expectations and your outlook?
spk01: So, John, good morning. This is Pat Lindner. So regarding price and SPS, I really can't comment on any forward-looking pricing actions and how that would impact the market. So I really can't comment on that. On the freight question, I'll turn that over to Ward, Ward, if that's okay. Sure.
spk06: So as we look into our outlooks sequentially from Q4 to Q1, we're anticipating roughly about a 2% increase in our freight costs. And then as we look out through the whole year, we see something similar to that right now because we have some pressure on short term spot rates, but we're only exposed to the spot market for less than 10% of our trucking demand. And we also have a projection of declining diesel costs. So, um, the freight expectation is not outsized as we look for the full year. Okay, thank you. That's helpful. And then with the machine closure at Evadale, what do you expect your overall paperboard and market mix to look like between carton, liquid, packaging, food service, and others? And what will you do with the extra pulp capacity at Evadale?
spk01: Yeah, so, John, this is Pat again. So we really – we don't expect the mix in – And, you know, the SBS product line has shifted significantly. We were experiencing a lot of economic downtime. As Steve shared, we took about 87,000 tons of economic downtime at Evadale or in the SBS system overall, I should say, in the quarter. And it was about 156,000 tons of economic downtime, as you can see in our shipment data in the charts that we prepared and shared with you. in addition uh last year we we produced a significant amount of pulp uh increases there year over year so the way you can really think about it is that we had a lot of economic downtime and in order to uh as well as production of pulp and so in order to match our supply with our customers demand we figured that we decided that it was the right move to take 200 000 tons of capacity sbs capacity um out of our system that's about 10 percent But the mix overall of what will serve our customers will stay relatively the same.
spk06: Okay. Thank you very much. Anthony Pettenary with Citi. Your line is open. Good morning. In container board, there's a price increase that's been announced for November. And I'm just wondering if you could talk about historically how long it's taken for the price increase to flow through on the box side. And then maybe building on some of your earlier comments, how you just sort of characterize the current market environment versus maybe previous hikes from previous years.
spk00: Anthony, it's Jeff. So we did communicate to our customers a $50 ton increase on container board and boxes. I expect there won't be much in this quarter. And then the flow through will happen in the first two quarters of the calendar year is typically how it will start to flow through.
spk06: Okay. And then just in terms of how you think the kind of market is positioned, maybe versus previous hikes that you've seen,
spk00: So the market, I'll say the market conditions for our box business and for Westrock is our inventories are lower than we want. Our box volumes are at record levels. We're a record Q4 record in October and heading to record shipments per day in this quarter. So for us, the It's a good position for our demand. Our supply is tighter than we want right now. So that's some of the things we're dealing with either there. The question really is the unknown of the pandemic. So we've never been in a market that had a pandemic in it, which I've never been. So it's hard to take something that's in the past and put it into the future with what's going on in the pandemic. So I can't speculate on that.
spk06: okay okay that's very helpful and then just quick follow-up on consumer it seems like you know cuk or cnk demand has been very strong and pricing has been good relative to sbs over the past you know few years is it possible or desirable to move customers from you know cnk to sbs to tighten up your system or is that you know is that possible or not possible for commercial or technical reasons
spk01: Yeah, thanks for the question. This is Pat. Good morning. So as you mentioned, C-U-K or C-N-K for Westrock has been strong, driven really by the beverage as well as the food markets for pantry restocking and pantry load up. As far as specifically your question around TNK moving to SDS, certainly there have been examples of moving across different substrates like that. But I would say that what we try to do at Westrock is we try to really understand what our end customer demand is and what they prefer and what they can use most effectively in their products. And so there are situations where our capacity, and obviously, as we've shared before, we do have some open time in SPS. So if we can do that, we're going to do that. But it really needs to meet the end customer demand, such the SPS works for their application. So certainly looking at it, but following our customer's lead.
spk06: Okay. That's helpful. I'll turn it over. Gabe Hady with Wells Fargo Securities. Your line is open. Go ahead. Yeah, good morning. I hope you and your families are well. Thanks for taking the question. I know you guys are not formally providing free cash flow guidance, but just if we can try to maybe talk about some of the moving parts. I think directionally CapEx would be down $125 million. You talked about $125 million of known EBITDA improvement stemming from capital investments. I think working capital was a pretty big drag this year. You know, I guess, is there any reason to believe that it wouldn't be up in fiscal 2021?
spk04: And then can you remind us of any other moving parts that I might be missing?
spk06: Sure, Gabe. This is Ward. So we have a lot of confidence in our ability to generate strong cash flows. And so you hit on some of the key elements. We've got at the midpoint of our CapEx cycle, guidance for the year that's, you know, $125 to $130 million reduction. We still have some of the benefits of the pandemic action plan. So, as you'll recall, the FY20 short-term incentive payments were actually paid with stock via cash, and that actually would have normally, that payment would have normally occurred in the first quarter of FY21 if it were a cash payment. I would really point also to the fact that if you just look at our, the relationship between EBITDA and adjusted operating cash flow is like 76 or 77% in FY20. And the only other item that should, we had a lower cash tax rate because we had high capital investments. We got some larger R&D credits. So, our cash tax rate was actually below 20 percent in FY20. Barring any policy changes, I would anticipate that that cash tax rate would move closer to the book tax rate in FY21. So, really, the starting point for the discussion is EBITDA. The positive drivers related to EBITDA is strong supply-demand environment. the contributions for the strategic capital projects and synergies that contribute to incremental earnings, and then lower CapEx, and we still have some of the other elements of the pandemic response plan. So we have confidence that we can generate strong cash flow during the year, despite some of the uncertainty related to what's the pandemic going to do in terms of the demand environment over the course of the full year. Thanks for that word. And then second, I guess on the C U K side, um, you know, I don't know exactly where utilization rates are for you guys there, but it, it feels like with all the at home consumption, you might be a little bit constrained. And like you said, trying to, to test some customers on, on SBS. Um, do you have any plans or, or, um, the ability to maybe eke out a little bit more capacity for that particular paper grade?
spk01: Yeah, so thanks for the question. This is Pat again. So as we mentioned before, C-U-K or for Westrock, C-N-K has been strong. Our operating rates have been in the high 90s and our backlogs are in the four to five week range. And we did notify customers of a $50 per ton price increase just recently. So good strength in that market driven by beverage as well as food. As far as changing capacity or increasing capacity, I really can't comment on a forward-looking basis around our capacity plans, but I will say that we're always looking at opportunities to meet our customers' needs with the right products. And so we have opportunities to do that as we identify, and we'll certainly try to move in that direction, but I can't share any specific plans on that at this time.
spk06: Thank you. Good luck. Thank you. Mark Wilde with BMO Capital Markets. Your line is open.
spk05: Yeah. I'd like to just come back to kind of the EBITDA look for the next couple of years. If I go back in time over the last four big deals you've done since 2011, you've pointed to cumulative EBITDA synergies and cost improvement of $1.8 billion. And this last year, you only did about $2.8 to $2.9 billion. So it seems like... There's leakage going on somewhere. And so what can you do to give people confidence that these EBITDA improvement numbers you've got out there for the next couple of years are really going to flow through?
spk06: So, Marcus and Ward, I'll start, and then I'll see if Steve wants to add anything to it. I think one of the things you obviously have to think about every year in a manufacturing business is you've got cost inflation. We have wage and benefit inflation between – you know, two and three percent every year. And if you look at our entire cost profile, we've got commodity costs and energy costs, transportation costs, inflation each year. So we have to generate productivity, you know, around, I would say, on a normal basis, around $250 million approximately to offset the impact of inflation. So that's one of the things that you need to look at. And then clearly the other key EBITDA driver that we have is volumes and the pricing, the supply and demand conditions that we have across all of our businesses and, you know, the pricing environment that comes with it. Steve, do you want to?
spk04: Yeah, I'll just add on to Mark. Our business is a manufacturing business, and cost increase, I think customers – demand greater value. And so it's a competitive market. And so we've used the transactions and the synergies to build the platform that we have, which I think is generating and has generated very strong, consistent cash flows. And I think we've said, you know, a couple times, you know, five consecutive years of a billion dollars in free cash flow. And that's with implementing a very strong capital program to improve the performance of the business.
spk05: Okay. I'm just raising the question of, you know, if we talk about these EBITDA gains, if they're just going to be offset to some degree by inflation or other issues, you know, we need to think about them a little differently. My follow-on is that, congratulations to Jim Porter, but then I just wanted to talk about the Southern Container business, because both Jim and Jeff came over with Southern Container. I remember when you acquired it in early 2008, it had EBITDA margins on an LTM basis of about 27% or 28%, if I remember correctly. And at that preceding year, the liner price was $532 in pulp and paper week, And the OCC cost was $112. So this last year, the liner price is about $200 higher. The OCC price is $75 lower. And yet if we look at the margins, the margins for the business as a whole are down significantly from what Southern used to put up. What's the, you know, how do you explain that mismatch?
spk04: Okay, I'll try, and then I'll give Jeff an opportunity to follow up. But Southern Container is an amazing business. And in addition to Jim Porter and Jeff, Tom Stigers is with us, and they've been incredible adders to the entire Westrock management team. Now, Southern Container had Solvay, which continues to generate fantastic results. And then I think you mentioned Smurfit in 2011. I think Smurfit's margins at the time we acquired it, it was one of several million ton system and its margins were 12%, I think, the first year. And so you take 12 with a very large volume and seven containers Solvay was at the time we acquired it, I think it was about 800,000 pounds. I think it's higher than that. And so you put that together and you end up with something lower than we're making now. And the Corgade management team over the course of 2012 to now, I think has generated incredible results. And so our margins are now very competitive with the leaders in the business. And we're doing that with... A mill system that we've invested in, it's operating very well, but I think we started with a mill system that was underperforming. We've invested in the entire system, the box plant and the mill system, to, I think, have an incredible business incorporated. Now, Jeff, would you like to add anything?
spk00: I'll just add a few things. Mark, it was a Solvay was a huge part of it. We were highly integrated. We had 13 well-capitalized box plants, Eastern Regional, so close proximity to the mill, no export business, just a good domestic customer base with a strong box base that we still have today. And as Steve said, after the Smurford acquisition, our margins in the business were 12.5% or 12.7% the first year. that I came into the container business, and we've gone up to the 20% range. So it's a much different business. We were less probably 2% of the market, and now we're 24% of the market, and even the margin is close to 20%, and continuing to improve the business. So I think it's a good story overall.
spk05: Okay, fair enough. I'll turn it over, Jeff. Thank you.
spk06: Steve Cherkover with DA Davidson. Your line is open. Thanks, and good morning, everyone. I'm interested in the Evadale and Covington situation. So first of all, what's the tonnage of the Covington machine? And since Jeff has thrown cold water on Evadale's potential for container board, is it conducive to CNK? And what would that take beyond turning off the bleach line?
spk01: Yeah, so thanks for the question, Steve. This is Pat. So Covington is about half of our SBS capacity, or think about a million tons. Due to the soft conditions in commercial print, tobacco, and others, we have been taking economic downtime at Covington. We idled the C8 machine as we matched our supply with our customer demand. And as Steve mentioned in his prepared remarks, We are planning at the end of this quarter to restart C8 because we now believe that in order to meet our customer demand, our supply and demand is relatively balanced. Regarding your question at Evadale, we're always looking for opportunities that I mentioned before to utilize our assets in the most effective way. And producing liner board at Evadale on our paper machine is one example of that. yeah i really can't comment on capacity changes or capacity increase or decrease plans in our future in a future stage it's not allowed to comment on that at this time but we will continue to look for ways uh adding the dale and other other locations uh to meet our customers demand as as they continue to to increase and certainly cnk for us is one of those areas that's very strong well i appreciate that but i just wanted to know the capacity of the c8 machine and then you know
spk06: From a technological standpoint, is it feasible for the machine at Evadale to make CMK?
spk01: Yeah, so the C8 machine at Covington is about 15, maybe 20% of the capacity that is at Covington. So that maybe gives you an idea and relates to the economic downtime that we had in the year. I guess as an innovation person, innovation-oriented person, I always say that anything is possible. And so we'll look at all the different options that we have, including making different substrates at all of our mills. But exactly what that would look like from a return on investment and how we would accomplish that at this stage is just uncertain. But we'll continue to look at that and several other ways to meet our customer demand. Okay. Thank you very much. Thank you.
spk06: Paul Quinn with RBC. Your line is open.
spk03: Good morning. This is Marcus on to Paul. Maybe starting on the Brazilian box business. Brazilian box demand has clearly been quite strong. Can you talk a bit about what has been driving that demand growth? And maybe more broadly, how does that Brazilian corrugated business fit into your strategy longer term?
spk04: Let me start with Brazil has been a fantastic business for us for a long period of time. We've been there since the 1950s. It's an integrated corrugated packaging business, and it's worked extremely well for us. It fits because it's in a very low-cost environment. fiber-based region of the world. And it fits because the business is the same as the business that we have in North America. And culturally, it's a big adder for us. We're able to exchange ideas with both customers and culturally within our organization to improve the overall performance of the business. Jeff, I don't know if you have any color on the increase in demand. The market's been exceptionally strong, I think, with COVID recovery. But do you have anything to add?
spk00: Sure, Steve. The protein business is extremely strong, going very well. And then it's really in the food, beverage, retail. There's not really an e-commerce business in Brazil at this point. So it's really the other typical business. consumer non-durable businesses that are really strong and, again, tight market positions there also.
spk03: All right. Thanks. That's helpful. And then maybe on inventories, they appear to be quite lean right now. How do your container board and SBS inventories compare to normal levels?
spk04: I think Jeff said our container board inventories were very tight. And then, Pat, and I think we've been reducing our SPS inventories and our paperboard inventories. I think you might have seen in the prepared comments, we reduced them pretty significantly this past quarter. So, we're reducing them to levels that we think are appropriate for our operations. Adam Josephson All right.
spk03: Thanks.
spk06: Adam Josephson Adam Josephson with KeyBank. Your line is open. Adam Josephson Thanks. Good morning, everyone. Jeff or Steve, in terms of the price, the container board price increase, can you talk about how much of your container board and box business is tied to changes in the published RECI index? And can you talk about whether you want to increase or reduce that percentage anytime soon?
spk00: Hi, Adam. It's Jeff. So the contracts that we have differ. There are indexed customers who are tied to the indexes. And that's the majority. It's north of 50% for us. We have customers that we're working with, some of our large customers that are more cost model, but they still have index pricing to a certain extent. It varies by customer. And then I think the overall view is what we work customer by customer on, what's the fairest way to create value for our customers and for us with price movements, value added. So it's not a – we're not pinning with a broad brush. We do that really as a customer by customer exercise.
spk06: Thanks, Jeff. Broadly, you've talked about the benefits of being a one-stop shop for your customers for both boxes and folding cartons. And just in the context of how well the corrugated business is doing and the extent to which the consumer business is struggling, How would you characterize how successful that strategy has been? With the benefit of 2020, would you have gone about building the portfolio any differently? Any thoughts there? I'd appreciate it.
spk04: Okay. Thanks for the question. I wouldn't have done anything differently. I think we're performing exceptionally well. I think it's, frankly, from a communication standpoint, the way we've – communicated about both Corgat and Consumer, I think, has gotten in the way. It literally has masked the success that we have because Corgat is somewhat diluted by the sales we make of lower margin export container board. And as we've seen in Consumer, and I'd invite you to go through our prepared comments because the progress we're making on the packaging side of Consumer Packaging has really been quite good. And the margins If you take out the specialty SPS and pulp are actually quite good. But we end up reporting each quarter the 13 to 14 percent EBITDA margins when, in fact, the packaging side of the business is performing very well relative to just about any measure. So I think one of the reasons we included the packaging results is we want to communicate to investors that as a packaging business, we've got an unrivaled platform from which to work with our customers. And we're doing it. And there's example after example across the company of how our teammates are working together on behalf of the customer. I'll just tell you my experience because I I'll tell you, 10, 15 years ago, we were organized by business. And I'll tell you, we had some internal tension between, is this my customer or that customer? And right now, I get surprised by what our commercial teams are doing across the enterprise of working with customers. with our customers on behalf of the customer. And so we are able to integrate our offerings, whether it's consumer-corrugated machinery. We have some nice digital capabilities, and that's working to our benefit, and it's showing up in the results this quarter. Now, I'm going to stop, and I think Jeff's led a lot of this activity. I just invite Jeff to add anything to that.
spk00: I think, Steve, you covered it well. We continue to see success in the packaging spaces combining our businesses, and that's with innovation and our machine. I'll give one good example of the enterprise. In the last quarter, we have a large – oatmeal producer. So the packet of oatmeal is from paper from our Longview Mill to a customer. We have the folding carton box that it goes in is ours and the corrugated wrap that goes around is ours. And that's a five-year deal set with machinery and all of our products that we make. And it probably is over $40 million roughly in the five years for us. So I think to Steve's point, if you highlight the packaging, we have a strong platform and we'll continue to grow in both.
spk06: Thanks to both of you. Appreciate it. That's all the time we have for questions today. It is now my pleasure to turn it back over to the West rock team for final remarks.
spk04: Okay. Yeah. I'll just make a George and Mark talked about Jim Porter and Jim Porter's retiring and he's just had a very accomplished career and he's been an amazing friend and amazing partner. And He's brought passion to what he does. And it's just been an incredible contributor to the management team. And I'm excited. He's staying with us as an advisor to the company and staying involved with Gandhi and He's a friend that will be available by phone. So I look forward to finding a friend when we have issues to go forward. So I appreciate the questions, people's engagement in the call, and look forward to our next call. And I guess it will be in January.
spk06: Okay?
spk04: So thanks, everybody.
spk06: Thank you.
spk04: This concludes today's call. We thank you for your participation. You may now disconnect.
Disclaimer