Westrock Company

good morning everyone and welcome to the west rock company fiscal q1 2022 conference call all participants will be in a listen-only mode should you need assistance please send to a conference specialist by pressing the star key followed by zero after today's presentation there will be an opportunity to ask questions to ask a question you may press star and then one to join the question queue to withdraw your questions you may press star and two Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to James Armstrong, Vice President of Investor Relations. Sir, please go ahead.

Good morning, and thank you for joining our first fiscal quarter 2022 earnings call. We issued our press release this morning and posted the accompanying presentation to the investor relations section of the website. They can be accessed at ir.westrock.com or via a link on the application you're using to view this webcast. With me on today's call are Westrock Chief Executive Officer David Sewell and our Chief Financial Officer Alex Pease. Following our prepared comments, we will open the call for a question and answer session. During 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, 2021. We will also be referencing non-GAAP financial measures during the call. We have provided a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in the appendix of the slide presentation. As mentioned previously, the slide presentation is available on our website. With that said, I'll now turn it over to you, David.

Thank you, James, and thank you all for joining our earnings call today. We have a lot of new and exciting updates to communicate this quarter. First, I'll provide a high-level overview of fiscal first quarter results. After that, I'll walk through our new segment reporting structure, which went into effect this quarter, and explain the rationale for this change. Lastly, I'll update you on our broad-based transformation approach, which is underway and provide examples of the significant opportunities we see to deliver a step change in performance for the business. Following that, our new CFO, Alex Pease, will provide a deep dive into our quarterly performance for our newly organized segments and other critical financial performance. We will then move to Q&A and answer any questions you may have. We started our fiscal year off with a solid quarter that was in line with our expectations and within our guidance range. Despite continued supply chain disruptions, higher inflation, and increased absenteeism related to COVID, we executed well. I want to take a moment to thank our 50,000 teammates around the world for their dedication and hard work during the quarter. For the fiscal first quarter, sales were $5 billion, up 13% year-over-year. We delivered consolidated adjusted EBITDA of $680 million, up 2% over the same period, and adjusted EPS came in at 65 cents per share, up 6.6%. During the quarter, we also continued to aggressively buy back stock, repurchasing roughly $100 million worth of stock, while maintaining net leverage of 2.4 times, well within our desired range of 2.25 to 2.5 times. As a reminder, the first quarter was a record maintenance quarter for Westrock. We had a number of projects delayed from previous quarters due to COVID and the ransomware incident last year, and I'm pleased to report we completed all scheduled maintenance projects safely. COVID continues to cause disruptions, impacting labor at our mills and box plants as well as further contributing to ongoing supply chain challenges. Despite these challenges, we are resilient and continue to execute well as demonstrated by our strong results. Finally, demand for our products across consumer, corrugated, machinery, and other product lines remains strong and our backlogs are near record levels. Let me now provide an update on our new reporting structure. I'm on slide four. As a reminder, Westrock previously reported in two segments, corrugated packaging and consumer packaging. We are now reporting in four segments to provide greater visibility into the integrated performance of our packaging businesses while we focus our merchant paper business on critical strategic markets as well as providing material for the packaging converting businesses. This new structure will help us highlight the performance of all elements of our portfolio. We reorganized into the following segments. Corrugated packaging, which includes integrated corrugated converting operations and represented 44% of first quarter sales. Consumer packaging, which includes integrated consumer converting operations and accounted for 23% of first quarter sales. Paper. which includes all third-party paper sales and made up 27% of first quarter sales, and distribution, which includes our distribution business, which is roughly 6% of sales. As we reported in our press release, we will see clearly the benefit of vertical integration between our mills and converting businesses, as well as the value of a diversified portfolio of assets. Perhaps more importantly, this new structure will further enable an enterprise sales approach to drive growth as well as greater efficiency and synergy to improve profitability. I will describe this in more detail shortly. In our press release and located within the quarterly feature section of our investor relations website, we have provided eight quarters of recast results to help you better model performance going forward. Let me now spend a few minutes on where Westrock is today and where we are headed. Please turn to slide five. We have been driving a comprehensive strategic review of our markets and our go-to-market approach. In parallel, we have taken a hard look at all our assets to evaluate their merits and their position in the portfolio, while also evaluating our ability to drive to a greater level of operational excellence and profitability. And we're already making progress. We've made significant strides in the integration of our consumer business and have implemented productivity improvement plans across the company. And the restructuring of our mill assets into one organization is already providing greater production flexibility across our footprint. I will share a more fulsome perspective in the future, but suffice it to say, we have significant opportunity. We have not fully integrated many of the acquisitions we have made. We need to turbocharge our digital strategy, not just in the back office, but also in manufacturing and innovation. We have elements of the portfolio that are non-core to our integrated strategy, and we have inefficiencies that must be addressed. Our profitability and our ROIC are not where they need to be. This is going to change as we implement our transformation plan. Importantly, our senior leadership team is aligned and is mobilized to drive this change. Together, we have developed this transformation plan and have shifted into execution. At a high level, our plan includes three overarching priorities. Second, drive a step change in our margins through pricing excellence, productivity, mix management, and cost control. We are implementing our new Westrock operating system that standardizes our systems and utilizes our digital tools to identify options to drive efficiency and do things even better. And third, generate consistent ROIC in excess of our cost of capital through disciplined investment, operational excellence, and portfolio optimization where appropriate while maintaining strong free cash flow, significant balance sheet strength, and prudent capital allocation. Let me provide an update on each of our three strategic priorities. Our growth agenda is designed to maximize the value of the complete packaging solutions only Westrock can provide. Our combination of consumer and corrugated packaging, paper, machinery, and access to distribution is unique in the industry and a strategic differentiator. It enables us to sell integrated solutions that are valued by our customers and partner with them to ensure that they are responsive to macro trends such as sustainable packaging. With our portfolio, we have the capability to deliver full packaging solutions that are unmatched in our industry. General Motors is a great example of this, and we were just recognized as our supplier of the year. With GM, we have partnered to provide options for brand security that help combat counterfeiting issues in the supply chain process. We produce their primary parts packaging and secondary corrugated packaging using our global manufacturing footprint to ensure they have the right supply in the right place when they need it. Innovation in plastic replacement continues to be a growth driver. We also can anticipate customer needs and introduce new products that support enhanced sustainability. This quarter we announced a partnership with Grupo Gandhi in Mexico to provide our canned-collar product to ABI Mexico Grupo Modelo. This expansion of canned-collar is an exciting development and one that demonstrates the growth potential of our sustainable products. Our integrated one enterprise approach is driving value, and we are continually working to maximize this value while minimizing our exposure to lower value markets. To that end, we've completed the first phase of our portfolio analysis, and I look forward to sharing more about this soon. Let's now turn to how we are going to drive margin improvement. Historically, our margins in corrugated have been 18% and 16% in consumer. Improving both is a key priority. As we begin our journey of developing an enterprise-wide operating system, our first focus has been quantifying the opportunity and identifying areas to tackle. In recent months, we have standardized the measurement methodology in our operations and have identified significant opportunity to expand capacity without adding capital. We've evaluated our asset footprint and see warehousing and logistic opportunities that we are optimizing. We are also investing in our business to increase our level of integration and introduce automation, predictive analytics, and other cutting edge digital capabilities into our network. To that end, we are constructing a state-of-the-art corrugated converting plant in the Pacific Northwest that will be cutting edge in efficiency and throughput. This is just one example of many that we are excited to share. Please now turn to slide 8. We are aggressively focused on improving our ROIC in excess of our cost of capital. While improving our productivity is an important part of the equation, capital deployment and capital utilization are equally important. Through our initial diagnostic work, we have identified opportunities to expand capacity without adding capital. We have looked at our portfolio and identified non-core assets that don't meet our return thresholds, and we have implemented a disciplined approach to capital deployment that directs our resources to only the highest return projects. We are focused on ongoing efforts to drive best-in-class returns on our portfolio. And lastly, our senior leadership team now has an explicit ROIC component to our long-term compensation program. Additionally, we are laser-focused on generating strong and consistent free cash flow and maintaining substantial financial flexibility in our balance sheet. This strength enables us to invest in our business through all business cycles and also reward shareholders consistently. To that end, we have aggressively paid down debt over the past several quarters and have increased the dividend twice in the past year. Our intent is to reinforce our commitment to a stable and growing dividend while also continuing to aggressively repurchase Westrock stock. As a reminder, in Q4 of 2021 and Q1 of 2022, we have repurchased approximately $223 million of stock as an initial down payment on this strategy. With our very strong free cash flow generation and our current valuation level, we intend to get more aggressive on our stock buybacks and are targeting repurchases up to $500 million over the next several months. We will continue to monitor short-term fundamentals that provide the best return opportunities for our capital allocation. A lot of exciting change is underway at Westrock and I'm convinced about the significant value creation opportunities ahead for our company. We are committed to executing our plan to drive enhanced shareholder value and our team at Westrock is motivated and enthusiastic about what is ahead. We are focused on growing through innovation with new sustainable products and digital engagement tools that our customers and our consumers need in today's marketplace. We have a new transformation office in place that is driving rigor in all that we are doing, including standardizing key operating and performance metrics across the asset base. We have brought in a new supply chain leader, Peter Anderson, who is aligning our supply chain operations across the company with a focus on greater productivity and cost savings. And finally, I'm excited to have Alex Pease join us as CFO, effective November 2021. With over 20 years of experience in corporate strategy, M&A, capital markets, portfolio optimization, and broad-based business transformation, as well as extensive public company experience, Alex has already proven to be a strong partner. I'll now ask Alex to provide the detailed rundown on our performance. Alex?