Westrock Company

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

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.

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.