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spk00: Thank you for standing by and welcome to the WestRock Company first quarter fiscal 2021 results conference 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. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mr. James Armstrong. Thank you. Please go ahead, sir.
spk09: Thank you, Justin. Good morning, and thank you for joining our first quarter 2021 earnings call. We issued our press release this morning and posted the accompanying slide presentation to the investor relations section of our website. They can be accessed at ir.westrock.com or via a link on the application you are using to view this webcast. With me on today's call are West Rock's Chief Executive Officer, Steve Voorhees, 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 Lindner. Following our prepared comments, we will open up the call for our 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 certainties that could cause actual results to differ materially from those we discussed during the call. We describe these risks and certainties in our filings with the SEC, including our 10-K for the fiscal year ended September 30, 2020. In addition, we may be making forward-looking statements about the impact of the COVID-19 pandemic and the recent ransomware attack on our operational and financial performance. The extent of these impacts, including the duration, scope, and severity, 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 you, Steve.
spk08: Okay. Thanks, James. Good morning, and thank you for joining our call. I'm going to start with an overview and update on the ransomware attack that we reported on Monday. We're following strict protocols laid out by industry standard incident response directives. Because of this, we're being careful not to share certain details around the incident at this time. However, following is the information that I can share with you today. On Saturday, January 23rd, our systems identified what we quickly determined was a ransomware attack. We immediately implemented our business continuity processes and initiated our response containment protocols. These processes have been supported by cybersecurity experts, and these include Dell SecureWorks, a global incident response leader. These actions included taking preventative measures, including shutting down certain systems out of an abundance of caution. We've been in active communication with law enforcement. While our incident response is still ongoing, we currently have no evidence that our customers' or teammates' data has been compromised. In addition to our containment, recovery, and remediation efforts, we've taken steps to supplement the existing security monitoring, scanning, and antivirus protocols already in place. We're committed to completing a full forensics investigation, and we're taking all appropriate actions in response to our findings. Westrock maintains a broad set of insurance coverages that provide protection for the business operations and assets of the company. Throughout this entire incident, we've been in constant communication with our customers to share with them the impact on their business. We've been very appreciative of their understanding and support as we work through this challenging situation. Our teammates and third-party experts have literally been working day and night to respond to this attack and safely restore our systems. Our response has varied by operating location. Most of our mills and converting locations have continued to produce and deliver. In locations where we've had systems issues, we have been and are using alternative and in many cases manual methods to process and ship orders, and this has limited our shipments. The full restoration of the administrative processes of our business will take time, and we're implementing workarounds, including manual processes. We're doing all that we can throughout our company to respond to our customers' needs. We're only five days into this, and we're in the middle of our response. What I've shared with you represents the information that we can share at this point, given where we're at in the stage of our response. We'll provide additional detail on the impact of the attack at the appropriate time. Now let's turn to the quarter. Westrock remains very well positioned for long-term success as demonstrated by our strong results in the quarter. Our markets continue to be shaped by changing customer habits and preferences that are driving increased demand for sustainable fiber-based packaging. These trends fit well with our strategy of increasing our participation in high value added packaging solutions and away from sales of lower margin commodity paper products. Our overall packaging volumes increased by 5% in the first fiscal quarter, including e-commerce volume growth of 23% on a per day basis. North American corrugated box shipments increased more than 11% per day in December and over 8% for the quarter. Consumer shipments of packaging were also very strong, up 2.4% year over year. We executed our strategic projects during the quarter despite immense challenges that the pandemic has presented for large construction projects. Our teams that are completing the projects at our Florence and Tres Bajas mills have made tremendous progress. We successfully started up our 710,000 ton paper machine at Florence that has replaced three older obsolete paper machines. We successfully completed a major outage at our Tres Bajas mill during the quarter, and this sets us up to complete our major expansion project in the spring. Our company generates strong free cash flow over the long term. This quarter's cash flow was exceptional. We generated $562 million of adjusted free cash flow in the quarter. We used the vast majority of this cash flow to reduce our net funded debt by $489 million. Our net leverage ratio declined sequentially from 3.03 times to 2.86 times. We expect that fiscal 21 will be the sixth consecutive year of strong free cash flow. We have increasing line of sight toward returning to our targeted leverage ratio of two and a quarter to two and a half times. All of this performance is being delivered in very challenging circumstances by the incredibly resilient Westrock teams. We recognized each one of our teammates in the quarter with a one-time payment that accumulated to a total of $22 million. Let's turn to slide five. Sales of $4.4 billion, adjusted segment EBITDA of $670 million, and adjusted EPS of 61 cents per share in the quarter were all in line with the prior year quarter. where packaging business has proven to be resilient throughout the pandemic. Packaging volumes measured in tons were 5 percent higher compared to the prior year. Offsetting this were declines in shipments of export container board, especially SBS and pulp, that totaled 470,000 tons. This was a decline of approximately 180,000 tons, or 27 percent lower than last year. the increase in sales of higher value-added packaging more than offset lower corrugated pricing from previously published index reductions. RUCI has published higher prices in multiple grades during the first fiscal quarter. This includes Container Board, Specialty Craft, CNK, and CRB that we expect will benefit our results during the balance of the fiscal year. Cost inflation was driven primarily by higher OCC prices and ongoing wage and healthcare cost increases, and was offset by continued productivity gains and capstone synergies. Our free cash flow was unusually strong in the first fiscal quarter, and this was aided by Westrock's Pandemic Action Plan. We remain focused on increasing our share of higher value-added packaging and reducing our dependence on sales of paper to less attractive markets. We made progress during the quarter. Seventy-three percent of our sales were packaging sales, an increase of five percent or approximately 100,000 tons compared to last year. The growth in packaging was driven by higher e-commerce demand, strong industrial shipments, including our Victory distribution channel, as well as growth across our food, beverage, beauty, and healthcare markets, with customers further utilizing our innovative solutions. Shipments of paper declined by 10% or 180,000 tons compared to last year. This included a reduction of 125,000 tons in shipments of export container boards. higher box demand in north america required us to shift production to serve higher value integrated box and domestic container board customers and consumer we had similar demand trends strong volumes in our domestic food and beverage packaging and paperboard business led to a production shift to those higher value markets the pricing environment has improved In the quarter, we see published price increases across several of our major grades, including a $50 per ton North American container board price increase in November and a $40 per ton unbleached craft price increase in December. We're in the process of implementing these published price increases in our business. Our integrated mill, converting, distribution, and machinery capabilities provide us the platform to provide our customers with value-added packaging solutions. We placed more than 100 machinery solutions in the quarter, bringing our total machinery replacements to more than 4,150. Customer demand for machinery solutions continues to grow as they seek ways to improve their productivity and navigate the challenges caused by the pandemic. For instance, a number of large retailers are implementing our pack on demand and box on demand systems to grow their ship from store business. Our vision is to be the premier partner and unrivaled provider of sustainable winning solutions for our customers. Sustainable fiber-based packaging is a key component of the circular economy. We're partnering with our customers to help them achieve their sustainability goals. We've collaborated with the Home Depot to develop custom packaging for plants and horticulture products. This example highlights our ability to solve our customers' critical challenges and enhance their ability to participate in the e-commerce channel. We've collaborated with Kraft Heinz to launch the new Heinz Eco-Friendly Sleeve Multipack in the United Kingdom. By replacing plastic with fully recyclable fiber-based packaging, Kraft Heinz will remove over 500 tons of plastic from supermarket shelves and reduce their CO2 footprint by 18%. This innovative project has incorporated the carton design, paperboard science, and machinery capabilities of the Westrock Enterprise team. For Titan Farms, Our enterprise team has developed attractive folding carton containers for peaches that provide both ventilation and product protection. We're replacing plastic clamshells with fiber-based packaging and helping our customers meet their sustainability goals. And for General Motors, we've supplied them with a complete portfolio of packaging to rebrand their ACDelco product line, including very valuable counterfeit protection. This is an enterprise win, that leverages our digital platform capability to bring our customers connected packaging solutions. The pandemic has brought many challenges and forced business to operate differently and through different channels. We're well positioned to support our customers with the packaging and supply chain solutions that help them succeed in their markets. Let's turn to slide eight. corrugated packaging segment delivered adjusted EBITDA of $458 million in the first quarter. Corrugated box demand was strong across most end markets, highlighted by e-commerce year-over-year growth of 23%, as well as strength in beverage, industrial, and distribution through our victory packaging business. Higher box demand has allowed us to shift our container board shipments away from lower margin export markets to serve our higher value box and domestic customers. Our export shipments fell by 125,000 tons compared to the prior year, and our integration rate increased to 80% in the quarter. Offsetting this favorable business mix was the continued flow through of the total of $40 per ton of Container Board Index price declines that occurred in late 2019 and early 2020, as well as the $36 per ton increase in recycled fiber cost as compared to last year. We've been implementing the $50 per ton Container Board Index price increase that PPW published in November. Our mill system operated well with no economic downtime taken in the quarter. We completed the capstone acquisition just over two years ago and have achieved our target of $200 million in annual run rate synergies. This includes our reconfiguration of the North Charleston mill. When we acquired Capstone, we saw that we would be able to improve their operations and fill out the geographic footprint of our North American corrugated mill and box plant system to better serve our customers. This has worked well. Victory Packaging, our distribution business, has worked out better than we anticipated due to our ability to integrate supply chain solutions into our service offerings. This has been even more important during the pandemic. In Brazil, mill outage reduced total mill production by approximately 48,000 tons. The production, sales, and earnings decline was a direct result of the outage, as market conditions remained strong in the region. The consumer packaging segments adjusted EBITDA in the first quarter was $234 million, so a $50 million increase from the prior year. Adjusted segment EBITDA margins increased by 270 basis points to 14.7 percent compared to the prior year. Strong demand across our core food, beverage, and healthcare packaging end markets drove 2.4 percent higher converting shipments and $18 million higher EBITDA by shifting shipments away from lower margin SPS and pulp markets. Our mill and converting system ran well in the quarter. Cost reductions and efficiency improvements contributed $40 million of productivity and operational improvements in the quarter. While SPS demand in the food service and commercial print markets was lower compared to the prior year, we saw sequential improvement in both markets compared to our fiscal 2020 fourth quarter. We took 39,000 tons of economic downtime primarily in the first two months of the quarter. This compares to 87,000 tons in our fiscal 2020 fourth quarter. As we noted previously, we restarted our idled paper machine at Covington in the quarter due to increased demand. Backlogs increased in the quarter between four and six weeks across all of our consumer grades, including SBS, and inventories remained steady. We're developing alternatives to capture more value from our current assets, and we made significant progress during the quarter. In addition to running container board at the Evadale Mill, We're qualifying CNK from Evadale to serve our customers' growing CNK needs while reducing SBS production. We're still in the process of trialing the board with our customers, as well as working through the engineering needed to ramp up production. So we enter our fiscal second quarter. We see strong demand across our core packaging markets. We're implementing the PPW paperboard price increases that were published during our fiscal first quarter. Now I'll turn it over to Ward. Ward? Thanks, Steve.
spk02: Turning to slide 10, the Pandemic Action Plan has been an important component of our ability to pay down debt. Over the past three quarters, the plan has contributed an additional $600 million in cash. we are on track to achieve our goal of approximately $1 billion in additional cash available for debt reduction through the end of calendar year 2021. We started the year with a strong first quarter. Going forward, we see opportunities to grow earnings given the strong demand for paper-based packaging, along with implementing the previously published price increases and recognizing the benefits of our strategic capital projects. We have a strong track record of generating free cash flow. Each of the past five years, we have generated more than $1 billion of adjusted free cash flow, and we have generated over $1.6 billion of adjusted free cash flow during the past 12 months. With our ability to generate strong free cash flow, we have a roadmap to return our net leverage ratio to the targeted range of 2.25 to 2.5 times. And as Steve mentioned, we continue to work on remediation and recovery from the ransomware attack. We will provide additional detail on the financial impact of the attack and provide an outlook for the quarter and the year at the appropriate time. Turning to slide 12, we've been very clear about our near-term focus on paying down debt, investing in our business, and returning capital to our stockholders through our dividend. Over the past 12 months, we've reduced our adjusted net debt by more than $1.3 billion, and our net leverage ratio has improved from 3.01 times to 2.86 times. Capital investment plans remain unchanged, and we still expect fiscal 2021 capital investments of $800 to $900 million. Our Florence paper machine started up this past quarter, and we expect the Trace Baja project to be completed during the spring and begin ramping up in the second half of the fiscal year. These strategic investments, combined with our capstone synergy realization, will contribute approximately $125 million of EBITDA in fiscal year 21 and a similar amount in fiscal year 22. longer term we expect normal capital investment levels will be be between 900 million dollars and a billion dollars our cash flows are resilient we will continue to pay a competitive and growing dividend and we also expect the potential for m a opportunities that help us grow our packaging business and our integration rate westrock continues to operate from a position of financial strength and is supported by our significant cash flow generation. We have minimal near-term debt maturities and approximately $3.4 billion of liquidity and a roadmap to return our leverage to our targeted range of two and a quarter to two and a half times. I'll turn it back over to Steve to provide some closing remarks and prepare for Q&A. Thank you, Steve. Thanks, Ward.
spk08: Well, the ransomware attack on WestRock is receiving our immediate attention and urgent response. I remain very optimistic about Westrock for the long term. Here's why. Westrock provides sustainable fiber-based packaging. It's a market that's benefited from recent trends in consumer preferences and buying behavior that we expect to continue in our favor. We're remarkably well positioned to meet our customers' needs. We see strong supply and demand conditions in almost every major grade, as well as strong demand for our converting and machinery solutions. Export markets are tightening. The need for packaging to serve the stay-at-home economy as well as sustainable fiber-based packaging to replace plastic is growing. The investments that we've made in our box plant system, our mill system, and our capabilities are benefiting our results, and we'll continue to do so as we bring our strategic projects online over the next year. We're generating very attractive free cash flows that over the near term will be used to reduce debt and our leverage ratio, and longer term will be used to return capital to our stockholders and grow our business. All of our success is due to the incredibly resilient WestRock team that has dealt with and is dealing with changing market conditions, COVID-19, and a ransomware attack. Our resilience gives me confidence in our ability to succeed and to create value for our customers, communities, and stockholders. That concludes my prepared remarks, James. We're ready for Q&A.
spk09: Thank you, Steve. As a reminder to our audience to give everybody a chance for a question, please limit your question to one with a follow-up as needed. Also, we're not able to give any further information on the ransomware attack. We'll get to as many questions as time allows. Operator, can we take our first question, please?
spk00: Your first question comes from the line of George . Your line is open. Please ask your question.
spk02: Hi, everyone. Good morning. Thanks for taking my question. And congratulations to the consumer team. Very strong results versus our forecast in the event. I want to hit first really on the leverage from volume in corrugated and whether it was where you had expected it to be. Obviously, you had a lot of ongoing productivity programs, but with the very strong volume you saw on a per-workday basis in corrugated, I would have expected a bit more year-on-year improvement in EBITDA in the segment and relatedly in Brazil Even when I make the adjustments for Trace Baja from the $15 million, I think the EBITDA, guys, correct me if I'm wrong, was flat year on year. But it's been a booming market. You're getting 5% to 10% pricing in the market in cargo. It should be if the leverage that you got out of the volume there was as expected.
spk03: Hey, George. Good morning. It's Jeff. So I think the leverage in the box system in North America is what we expected. We would have liked to have more paper to ship into our domestic markets. We were down a bit in our domestic, too. And I think if we had further paper, we could have made more shipments in box and, honestly, domestic. So from the standpoint of we shipped every ton of paper we could possibly ship and every one that we made, So I think that the leverage, though, from the box system was exactly what we expected. On the Brazil side, the volume is strong. I think we got what we expected from the box. On the mill EBITDA, I'd ask Ward to comment on the EBITDA question on the flatness year over year.
spk02: George, this is Ward. The expectation that we had in Brazil is it's actually as we had planned and guided in the quarter. In fact, if I just step back and look at how the total company performed for the quarter, we were above the high end of our guidance range. As we went through the quarter, demand ended up being stronger than what we expected, and we started to get the initial flow-through of some of the PPW increases, but we also experienced higher energy and fiber costs than what we expected entering the quarter. I think the mills and box plant systems across both segments performed very well in the quarter. Okay. I mean, I get the inflation point, but I appreciate the color, and I'll follow on later, I guess. And then, Pat, a question for you. You know, it's obviously, I think, you know, good to see the strength coming across, you know, your entire box board network. But given some of the emerging trends, you know, that Steve was talking to in his remarks, what does it mean in terms of how you see your grades evolving over time? It sounds like you're considering moving more to – you know, coated or unbleached craft as opposed to bleach, but could you talk a little bit more about how you expect to roll that through your system and the related work behind that? Thank you very much.
spk07: Yeah, thanks for the question, George. This is Pat, and good morning. So we are expecting some changes in mix as we go forward, and we continue to focus on our packaging markets that tend to be much higher value and faster growth. So think of moving those products towards or the mix towards retail food and quick-serve restaurants beverage and healthcare as well. Now that takes a mix of our products across CNK, CRB, as well as SPS. And so driving those packaging volumes is extremely important to us. And as you know, SPS has been more challenged, particularly during the COVID pandemic crisis. And And commercial print, liquid packaging, and paper cup stock has been down significantly year over year. And part of our action plan there has been to reduce the amount of SPS capacity in our system. So we announced a 200,000 ton reduction of capacity in SPS at our Evadale Mill in the last quarter. And as you pointed out and Steve commented, the shift of some SBS production at Eva Dale to CNK is very important because some of the growth that we're seeing in our packaging markets is both across food and beverage. And we want to be able to support that. So over time, we'll be moving this business towards a more favorable mix and packaging in those areas that are growing. and reducing our exposure to some of those specialty SPS markets. And I think one last comment is around sustainable packaging. We have literally dozens of customers who are making claims and setting goals towards 2025 and even beyond for 100% recyclable, compostable, or reusable packaging. And fiber-based packaging has a really important component in that with some tailwinds. We've seen in some of the examples we've shared recently in beverage, food, and food service. So with those moves, we feel confident we're going to continue to improve the mix of the business.
spk10: All right. Thanks for the comments. I'll turn it over, guys.
spk00: Your next question comes from the line-up, Gabe Haji. Your line is open. Please ask your question.
spk02: Thank you. Good morning, guys, and good luck with challenges ahead. I was hoping you could maybe comment a little bit about inventories. I'm assuming just based on industry data that they're pretty well depleted and you're redirecting some container board tons from the export market domestically. But maybe just give us a sense, if you can, how the mills are running as it relates to the ransomware and how long it might take you to kind of restore a comfortable operating or inventory level?
spk03: Hey, Gabe, it's Jeff. I'll start with our inventory. So year over year, we're down about 22,000 tons. And then sequentially, we came up a bit over 50,000 tons. So we were getting back to a place on the floor, on floor inventories for the box plants that were a little more comfortable. And as far as the ransomware attack, it's too early to comment on our operations or the effect on inventories. I'll let Pat comment on his inventories.
spk07: Yeah, thanks, Jeff. And I echo your last comment on too early to really comment on any of the impacts from the ransomware. Our inventories, if you recall from the last quarter, we made some very significant reductions in our inventory, especially in our SBS system. And at led to in the last quarter, or I should say fiscal year 24th quarter, led to about 87,000 tons of downtime. We continued to adjust our inventories at the beginning of our first quarter of fiscal year 21 and took about 39,000 tons of downtime to balance our supply with our demand. And we now feel that we're in good shape. And with some of the increasing demand that we're seeing across a number of our markets sequentially, We have, as a result of that, we have started up, restarted the idle paper machine and SPS at Covington. And so we feel we're pretty balanced right now, but we continue to operate, you know, at high operating rates across the system. And that's going to be critical to service our customer demand because our backlogs, as Steven indicated, across all of our substrates is operating between the four and six week area.
spk02: All right, two quick follow-ups maybe if I can. Jeff, can you comment at all if you guys are having to buy board on the outside market?
spk04: And then real quick, I guess maybe it's premature to say, but I'm assuming that any of the capital that might be required on EBITDA to shift over to CNK is within the scope of the $900 to a billion that you guys have talked about and maybe timing, Pat, on that project?
spk07: Sure. So I can start out with a comment on CNK. So the CNK is produced at Evadel. We expect this year, as far as timing is concerned, to produce about, we believe we'll produce about 25,000 tons of CNK there. We have the ability to ramp that up significantly in an as Steve indicated earlier, as we start to qualify that with customers and trial it and look at the different operations to scale that up, we'll certainly update that. But we're looking at 25,000 tons this year of CNK at Evadel.
spk03: Yeah, Gabe, I'm not going to comment on external purchases, but I will say that Evadel continues to help us on craft and will run through this quarter at least on craft for us. We expect 10,000 to 15,000 tons from Either do. A month.
spk04: Thank you. Good luck.
spk00: Your next question comes from the line of Anthony Pettinari from CD. Your line is open. Please ask your question.
spk04: Good morning, guys. This is actually Randy Tull sitting in for Anthony. I think in the slides there's a comment about over the medium term using targeted M&A to increase vertical integration for the company. And I think we've seen over the past years on the container board side at least, integration has been improving just on demand growth alone. So can you remind us about your integration rate and box board for each grade and where you would like those to move over the longer term? Thank you.
spk07: So I can certainly start on that. And so right now we are in the arena of CRB about 60% integrated, and we feel pretty good about that because it allows us to service our independent customers and access some of the local markets. CNK is about 65%, and that is highly integrated in beverage, less so in some of the food markets. And again, that allows us to really access some of the local markets through the independent converters. And And SPS, we're much lower in terms of our integration. That's really driven primarily by the open external paper board we sell through commercial print, tobacco, as well as liquid packaging. And so we feel pretty good about where we are. But, of course, we're always going to look at opportunities to, as Steve has mentioned and Ward has mentioned, to continue to look and grow those businesses both organically as well as inorganically where it makes sense to do so and where it's profitable to do so.
spk04: Understood. Thank you. And then maybe shifting gears just quickly, I think the expected EBITDA benefit from Port-au-Folies moved from $20 million to $10 million. Can you just comment on what's driving that?
spk02: I think it's really just the timing of the ramp-up. That's all it is. The full expectation is we expect the full benefits of the project.
spk00: Got it. Thank you. I'll turn it over. Your next question comes from the line of Mark Wold from Bank of Montreal. Your line is open. Please ask your question.
spk10: Yeah. Back on the ransomware, I want to be respectful of the situation, but can you give us some sense of what the mill output might be looking like at the moment or
spk02: the number of mills, which mills might not be running right now, just so that we can get some sense of how volume is moving. And then just, Ward, on capital allocation, I'm just curious about the situation with potential increase in your stake down at Gandhi and also the potential for, you know, at some point doing another machine out at Longview
spk10: Capstone had long talked about how they had excess fiber capacity out there, and they had raised the issue of potentially adding another machine at Longview. So just those potential uses of capital, if you could comment on that.
spk08: Mark, this is Steve. I think you've got three topics, and it's going to be difficult for me to comment on any of them. But I'll tell you, just on the ransomware, we're five days into this, and I'd love to be able to communicate exactly what's happening. But I just don't know if you've ever gone through a situation like this, but it's a very fluid situation. This is day six, and it's as much as I'd like to be able to report something, we're just not in a position to where we can report anything. I think our disclosure on Gandhi is we do have a 30 some odd percent interest, and we do have a relationship with them, and there's the opportunity. obviously, to change our interest over time, and I just don't have anything to report on that either. Lastly, on Longview, I will say we look at our system strategically about how we want to position it long-term, and we look at alternatives, and we continue to look at all the alternatives for our system, and I just don't have anything to report on Longview. So as much as I'd like to be able to respond to each one of the questions, that's what I can tell you, Mark. All right. Fair enough. Thanks, Steve.
spk00: Your next question comes from the line of Neil Kumar from Morgan Stanley. Your line is open. Please ask your question.
spk07: Great. Thanks for taking my question. In coordinated, your maintenance schedule shows critically heavy maintenance in the third quarter. Can you discuss what is driving that? Does that generally correspond with how you expect volumes to evolve through the year and perhaps demand trends normalize to some degree in the third quarter?
spk03: So the maintenance we schedule, it's based on requirements for boilers. It's not unusual for our maintenance schedule. Our volumes, we continue to have strong volume, strong backbone. So through the year, we expect our volumes to remain strong. And I'm sorry, I didn't hear the last part of your question.
spk07: always wondering if uh the maintenance schedule kind of corresponds with you know perhaps demand trends normalizing to some degree in the third quarter uh but it seems like it's actually more about just timing of your uh that's absolutely right that's that's right now it's that's absolutely right And then just in terms of, you know, your outlook for a dividend in 2021, just given the deleveraging that's been done so far and the likely higher probability this year, is there scope to raise the dividend back to where it was earlier in 2020?
spk02: So I think we've been pretty clear that our capital allocation priority is reducing debt and getting a leverage back into our targeted range. I think we've been we've talked about the fact that from a dividend strategy and the discussions that we've had with the board is that we'll want to have a competitive and growing dividend. We're not in a position right now to talk about what the size and timing of that dividend increase is going to be because we're our immediate focus right now is returning to the targeted leverage range. I will say that Steve has been pretty consistent that said that, again, we reduced the dividend. We didn't say we were going to return the dividend to the previous level. So we will, our dividend policy will take in a lot of considerations, which includes payout levels and our capital allocation alternatives. And again, when we will articulate the strategy, I think it will incorporate a competitive and growing dividend. All right. Thank you.
spk00: Your next question comes from the line of Kyle White from Deutsche Bank. Your line is open. Please ask your question.
spk06: Hey, good morning. Hope everyone's doing well. I just wanted to focus in on box demand and kind of see what you guys are expecting here or what you're seeing here in January. We're hearing some talks and maybe a slowing of the pace of the recovery. And kind of just curious if you're seeing that with any of your customers in your system, maybe particularly on the industrial side as well. Thanks.
spk03: Hey, Kyle. Good morning. It's Jeff. So through 13 days in January, we were up over 11%. So our demand has remained strong, including in industrial, e-commerce, most of our end-use segments remain strong. And so through the first 13 days, we were up over a little over 11%. And our backlogs remain strong through the same time period.
spk06: Sounds good. And then just focusing on inflation, it was a little bit, a touch higher than we were expecting. Sounds like it was a little bit higher than you were expecting as well on the OCC and maybe energy costs. Just curious what you expect for the year here. Do you expect these kind of continued bubbles throughout the year? Are you going to be able to offset it with productivity or do you need the kind of pricing benefits to start rolling through to offset it?
spk02: This is Ward. I'll take this one. So I think we've been – when we look at – we are seeing a return of inflation in our business, and I think a key component of it is recycled fiber costs. You know, when you look back at FY20, we actually had a decline in recycled fiber on a year-over-year basis. So we actually had cost deflation from that component of our costs. What we're seeing is – You know, a normal level of cost inflation for us, if you just go back all the way back to the acquisition, it's about $225 million a year. We're expecting higher inflation this year because of the increase in recycled fiber costs. In fact, our outlook right now is that recycled fiber costs will potentially increase $15 to $20 sequentially from Q1 to Q2, and then maybe another $5 per quarter as we go out into Q3 and Q4. So that would be a meaningful increase on a year-over-year basis driving cost inflation for that component of our business. We are in the short term. We're seeing pressure and freight costs, and it's really been as a result of the pandemic. And then we have our normal wage and health care inflation. Now, what we have going for us is we've had strong demand. We have an improved pricing environment. We have the benefits of the strategic capital investments starting to come into the year. And then we have our ongoing productivity initiatives.
spk06: Thank you. Good luck in the year. Thanks.
spk00: Your next question comes from the line of Peel Nang. Your line is open. Please ask your question.
spk01: The inflection in price mix was very encouraging. Consumer, you know, Pat, was that largely mixed from some of the stuff that you're doing to shift to packaging? And is this level... sustainable as we kind of think about it. And then on top of that, any color on how we should think about the recent box board increases flowing through your P&L, appreciating there's a lag.
spk07: Yeah, I appreciate that, Phil. So this is Pat. So yes, the majority of the increase that we saw, which was mixed price reported in our, if you look at the bridge on slide 17, the majority of that was in fact mixed because of the higher packaging volumes associated with food, food service, and beverage as well as healthcare. So you can think of that primarily as mixed. And I'm not really able to share the impact on the price increases that have been announced through PPW on a forward-looking basis, but we are obviously working with customers to implement those as quickly as we can, both in terms of those that have been announced with PPW as well as those that through our other pricing mechanisms allow us to capture additional price.
spk01: Got it. But you feel pretty good about the mixed dynamic being pretty sticky in the coming quarters, right, Pat?
spk07: We do. And, you know, sustainable packaging trends certainly help that. And, you know, the COVID stay-at-home economy is driving some tailwinds there. And, of course, health care is strong as well. So we feel good about the order pattern that we see. Our backlogs are strong, and we feel pretty good about demand.
spk01: Okay, that's great. And shifting gears to your corrugated business, you know, Demand obviously still very, very strong to start the year. You know, inventory has gone a little better, but the previous quarter you had some limitation in meeting that demand. So I'm just trying to get a better sense how you're situated and your ability to kind of meet that demand on the board side and when you kind of expect lead times to get back to more normalized levels.
spk03: I'll start with the back part of the question. It's hard to determine where when lead times will go back to normal leverage, depending on what happens in the economy. As I mentioned, sequentially, we came up to a better position for our inventory. So we felt we were almost where we wanted to be, not quite. So we felt good about our ability internally. And then going forward, it's about what we can produce and get onto the floor and also in our domestic. And some of our... export customers, our direct customers, we want to make sure that we maintain our relationships and can ship going forward.
spk01: Okay. It sounds like you're in a much better spot this quarter and you have a little more ability to kind of service all your customers. Is that fair, Jeff?
spk03: I think that's fair. Yeah. Before the malware attack and we're trying to figure it out where we'll be going forward. But yes, that was fair up until the 13th day of the month, I'd say. Got it. Appreciate it, guys.
spk00: Your next question comes from the line of Mark Weintraub from Seaport Global. Your line is open. Please ask your question.
spk05: Can you give us a sense as to how much CNK you think Everdell could eventually go to?
spk07: Yeah, so this is Pat. So thanks for the question. So as I mentioned, we're probably going to and we believe we get about 25,000 tons this year, depending on how customer trials go and our ramp up there. We expect next year that that could be potentially in for the fiscal year in the range of 50,000 tons. We theoretically have the ability to potentially move up to 150,000 in that neighborhood, but it's a little bit too early to really commit to that. We believe that's possible, but we have a lot more work to do there. And of course, another factor here is that how we choose to use that paper machine at Evadale, how we choose to move that between SBS and CNK, because they're There's certainly some high margin and attractive business in SPS there that we'll want to bring into that mix. So hopefully that helps give you a little bit of color to that.
spk05: That is perfect. And then, Ward, you mentioned Freight also having picked up a bit. Can you scale for us the type of impact that you see that happening? happening this year. And then just one clarification. On the ransomware, you had mentioned that you're in the middle of the response and you're five or six days into it. I assume I shouldn't read into that, but that means you're thinking it's like a two-week type thing. I assume the middle of the response was just more kind of, it's not the start and it's not the end. It's somewhere in the middle. Or can we think about this as likely being, you think at this point, a two-week type of process?
spk08: Mark and Steve, it's difficult for us to say really much more than what we've already said. And I'll just repeat, it's an unusual circumstance. We're working around the clock to restore everything. The team that we have, I think, is just doing a phenomenal job and and responding. And it's like every day is an adventure. And we're really focused on taking care of our customers. And it is unbelievable the work that we have in our company to make sure our customers get what they what they need. And that's really all I can say more. Understood. And yeah, and I'll just go out when it comes when it's appropriate, when we can say something, we'll go out and we'll inform. And I really want to provide accurate information, but just we're at a point where it's just very difficult to do so. But we will do so when it's appropriate. I appreciate that.
spk02: Ward, if I'm afraid, if you can. So, Mark, you know, we spend almost $2 billion a year and moving material around our own system, delivering it to customers and warehousing it. And, of course, a portion of that cost is our warehousing cost. If I look at kind of the line freight, we're looking at inflation right now, I think for the full year, that's probably, you know, 3% to 5%. Okay. Thank you so much. Yep.
spk00: Your next question comes from the line of Adam Jobinson from KeyBank. Your line is open. Please ask your question.
spk02: Thanks. Good morning, everyone. Ward, just a couple more on inflation. You mentioned your OCC price expectations. Do you think prices could potentially go up as much as $15 to $20 today? consequentially in fiscal 2Q and maybe $5 per quarter beyond that. Can you just talk about why you're expecting that? I mean, there's a shortage of ocean containers, which presumably is affecting exports. You're obviously dealing with your ransomware incident. So can you just, in light of those factors, why do you think OCC could go up as much as you're saying it could? And why would you think that strength would be sustainable thereafter? Yeah, I mean, what I'm going to do is I'm going to ask Jeff to start, and then I'll tag on.
spk10: Sure. Thank you.
spk02: Is Jeff there?
spk03: Sorry. Hey, Adam, it's Jeff. We hit the wrong mute button. So, yeah, the demand for OCC and the domestic market was strong. Generation was strong, but demand was also very strong. We saw Asia pulp producers in India both increase purchases from the U.S., and then overall recycled fiber supply domestically was adequate. But as you mentioned earlier, too, there is freight issues on container freight. So all of those things we see driving up pricing, and we don't see really a big difference in that over the course of the next quarter or so.
spk02: Adam, I'm just giving you a marker of what we think. Obviously, we're not giving all the components of our guidance for the full year because of the current situation. And when we do that, I'll be able to update you on all the key assumptions. But I just wanted to put that marker out there, which says that This year, in contrast to last year, we're seeing a return to inflation for some components of our costs when last year it was actually deflationary. Yeah, I totally understand. Just one last one on that, Ward. So sequentially, you talked about OCC. Can you give us any sense of what you're expecting sequentially on freight, chemicals, just the other components of your costs? Roughly. I appreciate it. Let me tell you the first thing that I want to make sure you think about when you think about our models from our fiscal Q1 to fiscal Q2 is we always have our wage and salary. The majority of our wage and salary increases occur January 1st. And so that, you know, that's a meaningful quarter, a sequential quarterly expense. The other thing that we have is we have the payroll tax reset that always occurs in the first quarter. So, you know, one of the key inflationary items just sequentially in the timing from Q1 to Q2 are those normal ongoing wage and benefit costs that we have each and every year. I mean, I gave you the assumption on recycled fiber, and you can just apply that to our run rate. But let me see, what else do I have that would be? I don't really have anything other meaningfully to highlight for Q1 to Q2. Okay. Thank you.
spk00: Your next question comes from the line of Paul Queen from RBC. Your line is open. Please ask your question.
spk10: Yeah, thanks very much. Solid start to the fiscal year. Just wanted to get back to capital allocation, and I appreciate the timing of where you're at right now versus the leverage target you've got. But how should we think about the sustainable payout of the competitive dividend? And then has pandemic changed your thinking around what that sustainable level is?
spk02: I'm sorry, I didn't hear the second half of the question. I think what we feel very comfortable with is the two and a quarter to two and a half times leverage target that we've started as we do the overlay to what our capital allocation priorities are. We've been very consistent about what we believe the ongoing CapEx needs of this business are, which is the 800, you know, I mean, it's the 900 million to a billion on an ongoing basis. And then we start to look at the, you know, the dividend. And when I say I think competitive from a yield point of view, and then also we're going to just look at that side by side with the other opportunities that we have to invest in our business, which include strategic capital projects that have attractive returns. and then targeted M&A. And, Steve, I don't know if you want to add anything to that.
spk08: I think you've covered it well.
spk10: Okay, then maybe just a follow-up on vertical integration. Do you see more opportunities on the container board side or the consumer packaging side?
spk08: I think it's hard to make a judgment about that. um that i think there's uh a attribute of our business there are a lot of independent uh converters out there and each one has its own story and i think there's uh opportunities on both sides of the business and i think it's it's very consistent with what we'd do like to do long term is move the business to higher value added packaging and that means integration and i think as we've put on the slide medium term independent uh M&A to improve our integration, I think, just fits with what we want to do going forward.
spk10: All right. That's all I have. That's all.
spk00: Thanks. Your next question comes from the line of George Stafford from Bank of America. Your line is open. Please ask your question.
spk02: Hi. Thanks for taking the follow-on. Hey, Jeff. I just wanted to make sure I understood something, and I'm probably the only person on this call who, you know, didn't quite get the volume relative to the EBITDA leverage. So, obviously you make more money with a converted ton versus third party. And you were up, you know, 8% or 11%, depending on whether I think per workday or actual. And you also had built, you said, some inventory, so you got back to a better position from an inventory standpoint. So you were able to generate paper to have some stock going into the year, recognizing you have outages coming up now. So, again, just if you could help me understand how the volume, very strong volume growth, didn't really net to a lot of EBIT year-on-year, that would be helpful. Thanks, guys, and good luck in the quarter.
spk03: Hey, George. So I think that from our volume, what we expected – And what we forecast for our business was spot on. So the inventories, remember, you have on floor, in transit. So a lot of that stuff was showing up through the month. And as I said, the other pieces of the business where we could have shipped more like our domestic market we weren't able to ship more into that segment which would have helped and there was some uh price mix a bit down but not really material so our mix overall was very positive And so I think you would have seen a bigger deficit in our price mix had we not shipped as much into the box segment. It's really about the overall being able to ship more volume, I think, into our domestic and, honestly, into the box system because we literally shipped everything we could get on the floor to a corrugator and make and also to a domestic customer. But from the standpoint of our business and what I expected, we did exactly what we expected in the quarter.
spk02: Hey, George, this is Ward. And I guess I'm going to just reiterate a couple of things. We highlighted the decline in the export shipments on a year-over-year basis. We talked about the fact that when you look at the year-over-year bridge, you also had the year-to-year comparison of the flow-through of the previously published price reductions. that occurred, and then you have the impact of the higher OCC. So those, to me, are the other elements of the margin change on a year-over-year basis for corrugated. Yeah, no, Ward, I get that, but that would show up in a different portion of the waterfall, I would think, right? That wouldn't be in the volume component of EBITDA. But I do appreciate these comments, and I'll turn it over, and we'll follow up afterwards. But thanks, guys. Good luck in the quarter.
spk00: There are no further questions at this time. You may continue.
spk09: Thank you for joining our call today. If you have any follow-up questions, please don't hesitate to reach out and have a great day.
spk00: This concludes today's conference call. Thank you for participating. You may now disconnect.
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