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spk04: good morning and welcome to the west rock third fiscal quarter 2023 earnings call all participants will be in listen only mode should you need assistance please signal 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 would press star then on your touchdown phone to withdraw from the question queue please press star then two please note that this event is being recorded I would now like to turn the conference over to Rob Cortaro, Senior Vice President of Investor Relations. Please go ahead.
spk07: Good morning, and thank you for joining our third fiscal quarter 2023 earnings call. We issued our press release this morning and posted the accompanying presentation to the Investor Relations section of our website. They can be accessed at ir.westrock.com or via a link on the application you're using to view this webcast. With me on today's call are Westrock's Chief Executive Officer, David Sewell, and our Chief Financial Officer, Alex Pease. Following our prepared comments, we'll open the call for question and answer session. During today's call we will be making forward-looking statements involving our plans, expectations, projections, targets, estimates, and beliefs related to future events. These statements involve a number of assumptions, risks, and uncertainties that could cause actual results to differ materially from those we discussed during the call. We describe these assumptions, risks, and uncertainties in our filings with the SEC, including our 10-K for the fiscal year ended September 30, 2022, and our 10-Q for the fiscal quarter ended March 31, 2023. We will also be referencing non-GAAP financial measures during the call. We have provided reconciliations of these non-GAAP measures to the most directly comparable GAAP measures in the appendix of this slide presentation. As mentioned previously, the slide presentation is available on our website. With that, I'll turn it over to you, David.
spk00: Thank you, Rob, and thank you all for joining our earnings call today. I'll begin our call with a review of our fiscal third quarter results and the progress we're making on our self-help initiatives. Following that, Alex will review our results in more detail and provide our outlook for the fourth quarter. Turning to our third quarter results on slide three. We exceeded our guidance due to strong execution, productivity gains, and moderating input costs. Net sales were $5.1 billion and consolidated adjusted EBITDA was $802 million. Adjusted EPS was 89 cents. Our strong results this quarter against a dynamic backdrop reflect the resiliency of our business and the tremendous efforts of our talented team members. As a reminder, we faced difficult comparisons with record results in the prior year quarter. While demand for corrugated packaging declined year-over-year, our North American shipments per day were sequentially stable. We've seen improvement in July with per-day shipments up mid-single digits from the third quarter and the strongest backlogs we've seen all calendar year. Consumer packaging market volumes were down during the quarter as customers and retailers reduced excess inventory, elevated inflation impacted consumer demand, and we lapped strong prior year healthcare results. Looking forward, we expect improvement in the first half of fiscal 2024 driven by inventory rebalancing, moderating inflation, and new business wins. Long-term fundamentals in our consumer packaging business remain healthy, and we are well-positioned with strong customer relationships and end markets that are growing. Over time, we expect continued organic growth due to our innovative solutions, growing demand for sustainable packaging, and our expanding machinery business. We've seen a moderation in our global paper business after a record year in fiscal 2022. To navigate the current environment, we are leveraging our scale, broad portfolio of substrates, and strategic customer relationships. Longer term, we expect our portfolio optimization strategy will enable us to prioritize our strategic customers while reducing our overall exposure to external paper sales. I'm extremely pleased at how our teams are executing and winning new business. Our commercial teams are focused on building growth pipelines and demonstrating the value of our differentiated offerings, all of which are delivering new business wins. Our cost savings progress to date has exceeded expectations, and I'm excited to report that we are on track to exit this fiscal year with more than $450 million in run rate savings. During the quarter, we achieved $66 million of cost savings and $150 million year to date, excluding downtime and inflation. We are making great progress and we see tremendous opportunities ahead. And we continue to optimize our portfolio. Earlier this week, we made the difficult decision with the announcement of the closure of our Tacoma Washington mill. We are working closely with our employees on the transition and expect to cease operations in September. Additionally, we sold our minority interest in a non-strategic joint venture and also announced the consolidation of three additional packaging converting locations, bringing our total to seven through July. I'll provide more details on our portfolio actions in just a moment. Turning to slide four, we are laser focused on unlocking value from our broad portfolio of assets and we've made tremendous progress already. We continue to target more than $1 billion in cost savings by the end of fiscal 2025 and we are well on our way. Our SG&A reductions, productivity efforts, and supply chain efficiencies are delivering significant results. As previously mentioned, we are on track to exit fiscal 2023 with more than $450 million in run rate savings. We are pleased with the progress we've made and we remain committed to unlocking further efficiencies in our business. We've been proactively optimizing our footprint by closing less efficient facilities and consolidating production in larger plants. Our goal is to improve our cost structure, drive efficiencies, and improve our return on invested capital. Our recent announcement to close our Tacoma mill is another example of this strategy. Similar to our previous mill closures, the Tacoma mill required significant investment to remain competitive, and we did not see a path to achieving our return targets. By closing the mill, we can shift capital toward other projects with greater returns. Additionally, with Tacoma and our previous mill closures, we are lowering our costs and improving our overall margin structure. Tacoma's annual production capacity is approximately 510,000 tons, including liner board, white top, craft paper, and pulp. With the closure, we plan to shift the majority of the mill's production, excluding pulp, to other facilities in our network. We expect to incur $345 million of restructuring charges, with the substantial majority recognized in our fourth quarter. Approximately two-thirds of these charges are expected to be non-cash. With the announcement of the Tacoma closure, our mill portfolio is substantially different than it was 15 months ago. As we evaluated our assets, we considered mill profitability, technical age of assets, ongoing capital needs, product mix, strategic fit, and our network flexibility. With our announced closures of higher cost mills and production capacity, we are reducing 1.9 million tons of capacity. These closures enable us to repurpose anticipated annual capital spending averaging approximately $120 million and exit non-core end markets. In addition, with these actions, we are decreasing our exposure to the open market and reducing our North American corrugated average mill cost by $12 per ton. Our smaller yet more efficient mill system enables us to serve our strategic end markets and customers. Through our current footprint, we are well positioned to serve these customers in 2024 and beyond. We've also been disciplined in our capital allocation and remain focused on investing in our assets to improve our return on invested capital, returning leverage within our target range of 1.75 times to 2.25 times, and returning capital to shareholders through a sustainable and growing dividend. As we work to recapitalize our assets, we are targeting a greater than 15% IRR on future return-generating projects. We expect our mill investments to drive efficiencies and enable us to further reduce our mill costs. Through our portfolio optimization and asset recapitalization strategies, we expect to improve margins and drive return on invested capital. Lastly, we continue to invest in growth. We're close to completing construction of our world-class Longview box plant, which is expected to start operations in November. This state-of-the-art facility will enable us to further consolidate converting operations in the Pacific Northwest and is expected to deliver $25 million in annual benefit once fully mature. Another example of our investments in growth is our Mexico acquisition. This transaction increased our exposure to the fast-growing Latin America market and brought us closer to many of our multinational customers. Our Mexican operations are exceeding our expectations and we are excited about future growth prospects due to economic expansion and shortening supply chains. Through these ongoing initiatives, we expect to drive significant improvement in margins and return on invested capital, increase integration, reduce volatility, and drive profitable growth. Turning to slide five. Before passing it to Alex, I'd like to highlight a recent example of how our broad portfolio and innovative solutions are helping our customers win and meet their sustainability needs. Costco recently approached us with a request to replace single-use plastic multi-pack handles with a fiber-based, sustainable solution. In response, our designers developed EnduraGrip and ClusterClip. These new solutions provide bundling for multi-packs of bottles and jars in a range of shapes, sizes, and weights. They are engineered for durability and comfort while providing a fully printable surface for crisp, vibrant graphics and eliminate the use of plastic in these handles. Our strategic machinery business is also helping drive adoption. As part of our partnership, we are working with Costco manufacturers to automate their production lines, increase packing speeds, and drive efficiencies. We're proud to partner with Costco and their manufacturers to introduce sustainable packaging solutions that help reduce single-use plastic packaging. This is just one example of many of how Westrock's unique capabilities position us for growth. Costco is one of our enterprise sales customers, and we serve them through both our corrugated and consumer segments. Enterprise relationships like this demonstrate the value that Westrock's broad portfolio and differentiated solutions provide. Through our diversified portfolio, commercial excellence, and strong customer relationships, we've achieved over $9 billion in enterprise sales. Our plastics replacement innovations continue to gain traction, and we are on pace to deliver over $400 million in revenue this year. We are targeting more than $700 million by fiscal 2025. With a global total addressable market of $50 billion for plastics replacements, we see significant opportunities ahead. I'll now turn over to Alex to discuss our segment results in more detail.
spk01: Thanks, David. Moving to our consolidated quarterly results on slide 6, third quarter net sales were $5.1 billion, down 7.2%, and consolidated adjusted EBITDA was $802 million, down 20.2%. Consolidated adjusted EBITDA margin was 15.7%, a decline of 250 basis points year-over-year. This decline was primarily within our global paper segment, which I will discuss in a moment. Price and MEX positively contributed $85 million year-over-year, lower operating costs contributed $66 million year-over-year, and input cost deflation contributed $37 million. Input cost deflation was largely driven by lower OCC and energy prices in the quarter. These benefits were more than offset by lower volumes of $243 million and economic downtime of $89 million. We incurred 359,000 tons of economic downtime in the quarter, with 258,000 tons in our corrugated system and 101,000 tons in consumer. Non-cash pension costs also negatively impacted consolidated adjusted EBITDA year-over-year by $39 million. As a reminder, our U.S. pension plans remain overfunded. During the quarter, we generated $479 million of adjusted free cash flow. We used this strong cash flow to repay $479 million of debt, and we ended the quarter with net leverage of 2.51 times. We continue to prioritize debt reduction and returning our leverage to our target range of 1.75 times to 2.25 times. We are now targeting $800 million to $1 billion of adjusted free cash flow for fiscal year 2023. Turning to slide 7, corrugated packaging segment sales excluding trade sales were $2.5 billion, an increase of $176 million, or 7.7% year-over-year. This growth was primarily due to our Mexico acquisition and strong price and mix. Adjusted EBITDA increased $45 million, or 11.6%. Adjusted EBITDA margin, excluding trade sales, increased 60 basis points year-over-year to 17.4%. Year-over-year adjusted EBITDA benefited $55 million from input cost deflation, $28 million from lower operating costs, and $25 million due to favorable price and mix. These benefits were partially offset by lower volumes of $45 million and economic downtime of $37 million. Note that our corrugated packaging results include revenue of $37 million and adjusted EBITDA of $4 million related to the realignment of certain Latin American consumer converting operations in connection with our Mexico acquisition. As David indicated, corrugated packaging shipments were stable from last quarter. As we move forward, we expect gradually improving volumes and easier year-over-year comparisons. We remain focused on driving commercial excellence and productivity to mitigate the impact of previously published price declines. Turning to the consumer packaging business on slide 8, segment sales were $1.3 billion, a decline of $20 million, or 1.5% year-over-year. Adjusted EBITDA declined $5 million or 2.1%, and adjusted EBITDA margin was 18.4%, a decrease of 10 basis points year-over-year. Strong price and mix contributed $98 million, and lower operating costs contributed $19 million. These benefits were more than offset by lower volumes of $51 million, inflation of $39 million, economic downtime of $13 million, as well as other items. Adjusted for the previously mentioned realignment of certain consumer converting operations, revenue increased 1.4% and adjusted EBITDA increased 1.5% year-over-year. Net organic sales volumes declined 6.6% year-over-year, driven by softer market demand, inventory reductions through the supply chain, and difficult comparisons from last year's strong healthcare business. However, we are managing well and continue to gain new business. As a reminder, last year's adjusted EBITDA was up over 28% year-over-year. As David indicated, we expect improving conditions in the first half of fiscal year 2024 due to inventory rebalancing, moderating inflation, and new business wins. Longer term, we are well positioned to drive profitability due to our growing end markets, increasing demand for sustainable packaging, and expanding machinery business. Turning to slide 9, global paper segment sales decreased $545 million, or 33.8% year-over-year, to $1.1 billion. Adjusted EBITDA declined 55.6% to $177 million, with adjusted EBITDA margin declining to 16.6%. Note that since the third quarter of 2020, our adjusted EBITDA is up 6% and margins are up 230 basis points. Input cost deflation contributed $27 million and lower operating costs contributed $15 million. These were more than offset by lower volume of $142 million, price and mix of $37 million, and economic downtime of $39 million. During fiscal year 2023, our external container board volume has experienced year-over-year declines driven by elevated inflation, shifting consumer spending, and excess inventories throughout the supply chain. Additionally, published price changes have negatively impacted our revenue and margins. We continue to believe U.S. Container Board demand has stabilized, and we expect improving volumes as the calendar year progresses. Similar to our consumer packaging segment, we've recently experienced softer demand in our external paperboard business, driven by elevated inventories and softer demand, principally in commercial print and food packaging. These conditions have continued into the fourth quarter. However, we expect improvement in fiscal 2024, given the relative stability of our end-market exposure. Next, our distribution results are on slide 10. Our sales and adjusted EBITDA were down year-over-year due to a decline in our moving and storage business and difficult comparisons from last year's large healthcare order. We are focused on improving operations and driving cost savings to navigate the current environment. Over time, we see opportunity to grow our distribution business by leveraging our unique capabilities and driving operational excellence. Turning to guidance on slide 11, while market conditions remain challenging with continuing realization of published price declines, we expect the impact of those conditions to be partially offset by gradually improving volumes. Our forecast for fourth quarter consolidated adjusted EBITDA is $675 million to $725 million, and adjusted EPS between 66 and 83 cents a share. Some assumptions behind our sequential outlook include stable costs driven by slightly higher energy costs, higher costs for recycled fiber, and moderately lower costs in virgin fiber and chemicals. An adjusted effective tax rate of between 8 and 10 percent. Note this lower rate is favorably impacted by approximately $30 million related to the release of uncertain tax positions, state tax credits, and other discrete items. And lastly, approximately 257 million diluted shares outstanding. Additionally, we're planning 32,000 tons of scheduled maintenance downtime across our system in the fourth quarter. I'll now turn it back to David to conclude before we move to Q&A.
spk00: Thanks, Alex. As you can see, we are delivering on our commitments, and I am incredibly proud of the progress we've made. As we continue our journey, I couldn't be more excited about the opportunities in front of us. In addition to our large self-help opportunity, Westrock remains uniquely positioned to deliver a full range of sustainable packaging solutions to our customers. With over $9 billion in enterprise sales, customers value our scale, diverse portfolio, and the sustainable solutions we provide. Our innovation platform, growing machinery business, and plastic replacement solutions continue to position Westrock extremely well for long-term growth. I'm excited about the path ahead, and I am confident in our ability to drive growth, margins, and long-term shareholder value. Thank you. And with that, Rob, let's move to Q&A. Thanks, David.
spk07: Operator, we're ready for questions.
spk04: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then 2. Our first question will come from Mike Roxland with Truist. You may now go ahead.
spk05: Thank you, David, Alex, and Rob. Congrats on a very good quarter. Mike. Let's start off with Cargate. Can you just talk about the cadence of shipments during the quarter, and did any end markets begin to improve more notably than others?
spk00: Yeah, Mike. Our corrugated business was really pretty stable in the quarter from Q2 to Q3. But what's just really encouraging to us as we went into Q4 and in July, our order rate was up mid-single digits. And as I alluded to earlier, we are experiencing the strongest backlogs we've had this calendar year. So we really like the momentum. of corrugated as we move forward. As we talk about some of the segments, I think the one that really jumps out to me is we like what's going on in produce and agriculture and beverage has been really strong for us as well. And what's exciting about beverage is with our Mexico acquisition, Our multinational beverage customers are really gravitating to our ability to serve the entire Americas. So we just see that as a positive trend as we move forward.
spk05: Thank you for the comment, David. And then just in terms of box board or consumer packaging, obviously things started to weaken a quarter or so ago. In response, you've started to take some economic downtimes. You mentioned, though, that you expected improvement in your fiscal first half. I guess what gives you the confidence that things are going to improve? Are there any indications from customers that they're going to have to restock? I mean, how could you say – what gives you that level of certainty that things are going to get better from here sooner rather than later, let's say?
spk00: Mike, that's a good question because we work really closely with our customers on that. And what we saw in the last 60 days is a lot of our large – customers in the consumer space took about a week off in manufacturing just to rebalance their inventories. And as they went through that process, we were working very closely with them. And the commentary we received was, you know, this gets us reshifted to the right inventory levels. We'll work through that this quarter and then and it's really consistent across all of our customers in this space, is as we go into 2024, we're going to be ripe for growth. And they've said that to us internally as we build out our forecasts for them, as well as they've expressed it externally to the open market. So there's just a consistency in everything we hear. I think we'll be stable in Q4 from Q3, and then Everything they're telling us, everything we're seeing is growth in 2024.
spk05: Thank you very much, and good luck for the rest of the year.
spk00: Thanks, Mike.
spk04: Our next question will come from George Staffos with Bank of America. You may now go ahead.
spk09: Thanks very much. Hi, everyone. Good morning. Thanks for the details. David, Alice, I wanted to – talk a little bit about the mill closures that you've announced over the last year and change. And you talk a lot about how you expect that'll help your return on capital in total. When you think about, when we think about the 1.9 million tons of capacity you've closed, what do you think that has taken off the top, lowered your EBITDA on an annualized basis from what it otherwise would have been, and what do you think it's added to your incremental return on capital? Can you talk to that, just specific to those closures that you've announced?
spk03: Sure. So, the easy answer is all of these mills were, in the current conditions, not generating positive EBITDA. So, the combination of basically avoiding the high fixed cost nature and then reallocating production to the other mills, winds up accretive both to EBITDA dollars and EBITDA margin. So it was the right decision from an overall profitability standpoint, and I think it really speaks to the flexibility of our network and a lot of the great work we're doing operationally to just reduce the unplanned downtime and unlock a lot of the hidden factories so that we can move production of the strategic substrates from the mills that were closing into the other mills. We did exit certain product lines that were not strategic to us. So Durazorb would be one example. Fluff Pulp would be another example. So we did exit those markets, but again, those weren't strategic substrates or products for us, and we weren't really making any money there anyway. In terms of capital, It's more than $100 million of capital combined that we were able to divert from essentially keeping these mills on life support, for lack of a better term, and redirecting that toward growth-oriented capital. So we were basically reducing our sustaining capital needs and increasing our growth capital availability. And as David mentioned in his prepared remarks, typically those growth capital investments are anywhere between 15 and 20% IRR. In terms of the aggregate ROIC, that part of your question, you know, quite candidly, it would be de minimis because the denominator is such a large number. Just by way of sort of a heuristic, a billion dollars of of invested capital, uh, generates about 40 basis points, incremental ROIC. So in total, all of these mills combined was probably in the order of, of a billion dollars, I think about 900 million of invested capital. So that would be, uh, you know, call it 40 basis points improvement of ROIC, but really where we get the lift is in the improved ROIC or in the improved EBITDA because, uh, you know, that generates a much greater return for us than reducing the denominator. But, David, what would you add?
spk00: No, I think Alex captured it well. And I think the important thing is when you look at our productivity efforts and when you look at, as Alex mentioned, the capital we can redeploy to other facilities, Not only is it just getting the cost benefit of reducing those higher-cost mills, but we're actually getting more profitable at the mills we're running. So it's really going to be a return-generating entity for us.
spk09: Thanks for that, Ronda. That was really helpful. I guess the next question I had for you, again, in terms of Westrock's strategy I mean, you talk a lot about the enterprise sales and also machinery installations. Enterprise sales, you said, were at $9 billion or more, which I think was the figure from last quarter, recognizing $9 billion is a lot of money, a lot of revenue. Can you talk maybe more precisely about the progress you're seeing there, the progress you're seeing in machinery installations and what that's adding in terms of And then last, and I'll turn it over, just a ticky-tack question. I think in terms of the overall economic downtime, you said you took this last quarter 359,000 tons. And if I didn't mishear you, I think you said 258,000 for cargate and 101 for consumer. Did I miss something there? What was the figure for paper? Thank you, guys.
spk00: Sure, I'll start by answering the first part of your question. I'll have Alex just give you kind of a rundown on our economic downtime. George, when I think about our enterprise capability, I think we're at the point where we just have the most momentum we've had in a long time. And I alluded to it in an earlier comment about Mexico. So, for example, we had a large consumer customer that we were doing business with in the United States. They expanded a product line in Mexico that was incorporated. They came to us asking for a solution. And that handoff was just seamless. And we were able to help them coordinate all of that and come up with a very effective solution. And then what was also exciting is that same consumer customer, and it was a beverage customer, was looking for further plastics replacements. and wanted to be very efficient in their process in doing that. And then we received a large machinery order at their sites so we can help them be more efficient as they eliminate single-use plastics and move into a fiber-based solution and plastics replacement. So it's that connectivity that's really driving our excitement about enterprise sales because there's just so many customers now that are looking for solutions that crossover between corrugated and consumer, and we're just able to do that. And I think, you know, just when you look at our corrugated results alone, you can just see the benefits are working into our bottom line. So we feel great about Enterprise. We now have over 5,300 machines in place worldwide. Our backlog is incredibly strong. Uh, that is a key component is our ability to customize our machinery to our customers production lines. So with the plastics replacement, this is enormously important. And finally, you've heard a lot of e-commerce customers talk about wanting to exit, um, plastic mailers. And so that is a great opportunity for craft paper and our pack in demand. Um, machinery business, which we're just seeing a lot of excitement and energy around that as well. So combining all that, that's why we're just really excited about the future and what our portfolio is able to provide our customers. And just the Costco example alone, enterprise customers came to us asking for a solution. There was machinery. And again, we have a consumer and coordinated relationship with them as well. I'll turn it over to Alex to talk about your economic downtime question.
spk03: Yes. So, George, just a couple of facts to put out there. So, our integration rates in corrugated are between 80 and 90 percent. So, if you apply that to the 258,000 tons of downtime in the corrugated business, you'd get you know, roughly 40,000 tons were related to the corrugated business. And then if you do the same math on consumer, our integration rates in consumer are around 50%, give or take. So that would give you about 50,000 tons for the merchant business in the consumer segment. Another way to think about it is we had $124 million was the cost associated with the economic downtimes. in total on a consolidated basis. About $58 million of that was in global paper. About $49 million of that was in corrugated. About $17 million of that was in the consumer segment. So that should sort of give you the breakdown of how that falls out.
spk09: That's great, Alex. Thank you for that. I'll turn it over. Good luck in the quarter.
spk03: Thanks, George.
spk04: Our next question will come from Gabe. Heidi with Wells Fargo. You may now go ahead.
spk06: David, Alex, good morning. Thanks for taking the question. I wanted to ask about some of the strategic investments that you guys are making. So you have the box plant that you're doing up in the Pacific Northwest, and I think at the Investor Day you called out, I think, $300 million to $500 million annually kind of over the three-year period. you know, in, in return oriented projects, can you kind of talk about where you're at with that? I mean, obviously, like I said, I know the box plant, um, and then maybe, um, is there an acceleration in that? And that's part of the reason why, why cash flows is coming down a little bit, just given the EBITDA beat kind of here in third quarter and seemingly an inline fourth quarter outlook.
spk03: Yeah. So, um, I'll, I'll start Gabe and then I'll turn it over to David. Um, So in terms of the overall CapEx guidance, I believe the number we gave in Investor Day was between $200 and $500 million on top of $1 billion of baseload capital, and that's still the number that we're sticking to. When we start talking about 2024, we'll have a finer view on what our 2024 CapEx outlook looks like in our longer-range view. But more strategically, yes, we are, as David mentioned in his prepared remarks, we are – really focused on driving a higher level of strategic investment recapitalization in the mill network and the converting network, which will drive higher ROICs and higher margins. And the Longview Box Plan is a perfect example of that. That's going exceedingly well. It's going to allow some other footprint actions that we're planning. And it allows us to operate much more efficiently. We're planning on order of five more of those types of investments really around the country to really optimize our converting network. We're looking at some opportunities within our mill footprint to increase the flexibility of our mill assets. And all that work is going on kind of as we speak. So we're not prepared to talk about any of it. today, but we will as we start talking about 2024 and beyond. But I think it's a really exciting time for the company as we think about investing in our business and really driving higher returns. In terms of the cash flow guide of $800 to $1 billion, there's a couple things that are behind that. Obviously, our EBITDA is slightly below our expectations when we started the year. But look, I mean, I think we're delivering exceptionally good results in a really challenging environment. We've been able to invest around a billion dollars in our business, which is more than we invested last year. We're catching up from some of the bottlenecks in capital deployment during COVID. So all of this is, frankly, really positive. And candidly, even at the low end of that range, to deliver $800 million in this operating environment is, I think, a pretty exceptional testament to the strength of our business and the amount of cash flow we generate.
spk00: Yeah, the only other thing I would add, Gabe, just to your question on the strategy overall, I would blanket it kind of this way, as Alex alluded to. Redeploying the capital at our mills that we had to make the difficult decision to shut down because of the higher cost, we are going to make those mills exceptionally more efficient and profitable with the additional CapEx we're able to redeploy. So our mill network is going to be more efficient. And then, as Alex talked about on our converting assets, as we do these consolidations, there's cap backs potentially involved as we make these converting assets much more efficient, larger, more output per site. And so that's going to also drive more profitability and combined will give us a higher ROIC. So that's how we kind of think about it overall. And then tying that into our commercial strategy, what are the segments that we're really focused on, that are higher growth, higher margin, where you have a great solution and right to win, that consolidates everything together as we look at our overall strategy.
spk06: Thank you both for that. And then one, hopefully quick one, point of clarification, more near-term focus. David, I think you said in your prepared remarks, up mid-single digit, maybe year over year in the corrugated business, and then I think in response to a question, it was up mid-singles on a sequential basis. So just maybe a point of clarification. Again, I think you talked about stable and corrugated. So just what you were inferring there.
spk00: Yeah. So for clarification, it was up mid-single digits from Q3. So sequentially, we were up mid-single digits. And our backlog was the strongest it's been in the calendar year. So We're seeing that improvement as we move forward in Q4, and we just expect that to continue as we get into 2024. So we really feel like we have come out of the bottom of the down cycle, and we are now on the upswing, and that's how we look at our Q4 in 2024 as we move forward.
spk06: Thank you both, and good luck.
spk00: Thanks, Gabe.
spk04: Our next question will come from Mark Weintraub with Seaport Research Partners. You may now go ahead.
spk10: Thank you. So you mentioned redeploying some of the capital that otherwise would have been going to some of the facilities you're closing to increase efficiency at the remaining mills, etc. Is this likely going to be incremental projects or is it going to make the most sense to be doing Florence-type projects at some point?
spk00: Mark, really good question. It's going to be a combination of both. We look at all of our assets. We look at where we want the company to be and what drives the highest returns. So if there is another type Florence investment that we need for our footprint, that's the direction we're going to go. in addition to some of these incremental projects. So I think, as Alex talked about, that $200 million to $500 million, when you get into that strategic investment, you're going to see a combination of both. And as we get closer to 2024 fiscal year, we'll give you much more detail and color around it.
spk10: Okay, great. Thank you. Then second, just kind of focusing still on the self-help, I believe the billion-dollar profit improvement program was going to target about $250 million in fiscal 23. So if you can just sort of let us know, I know you talked about exit rates, but order of magnitude, what you think you will have accomplished in fiscal 23, and then how much would be likely on the docket for fiscal 24? I think there probably would be a step up, but just wanted to clarify.
spk03: Yeah, I think the way we've bridged it is $250 million and and, uh, in 23, around three 50 and, uh, in 24. And then the Brit, the remainder in 25, actually though, Mark, we're, we're well ahead of that. So as we mentioned, we're, you know, exiting the year at, at around four 50, uh, run rate, our in-year savings, you know, we're anticipating being North of the two 50 that we committed to, uh, because the team's just making great progress and, um, you know, the balance of what we're talking about at this stage of the game is really around SG&A savings and supply chain related savings, roughly 50-50 each. But as we've talked about with some of these asset closures and plant consolidations, we're really starting to get the flywheel moving on a lot of the operational improvements, which will really drive reduction in unplanned downtime and unlock of hidden factory lower waste rates and so you know you should see those numbers begin to accelerate so we feel you know really good about what we're doing on the productivity and cost savings side okay and recognizing it's a very dynamic process are we still thinking there's 350 million order of magnitude incremental in fiscal 24 and
spk10: And keeping it separate, if possible, from the actions you did on the facility closures, where I have another follow-up question just to – if possible.
spk03: Yeah, so just to make the math easy, let's say we're going to do between 250 and 300 in – in 23, just take the top end of that. So say it's 300 and we're 450 exit rate, that would put you at 150 just going into as a rollover into 24. And then to get our 350 number, you would say there's going to be 200 incremental in 24. We're still building the operating plans for 24, but I think that's, frankly, I think that number is conservative.
spk10: Okay, super. And then if we just focus on the the two mills that are in the process of being closed and related converting plant actions. You talked about this being EBITDA incremental. And could you sort of give us a sense as to magnitude, again, recognizing there are a bunch of moving parts, and then also kind of what's the net cash closure costs which obviously are one time, but what's the net cash closure cost related to the actions?
spk03: So it's a little hard to answer your incremental EBITDA question because a lot of it depends on volumes. And in this volume environment where things are so dynamic, it's just a tricky question to answer. But to give you a sense – The Tacoma mill that we just closed, the cash cost per ton is around $900 a ton, based on the number that I'm looking at. The mills that we would reallocate capacity to, and I'm just going to use generalities, are around $200 to $400 a ton cheaper than Tacoma. the mill we closed. So that would give you a sense of sort of the incremental contribution that we would get from reallocating some of the capacity to those other mills. In terms of the cash cost for the one we just recently closed, the total was around $345 million. About two-thirds of that was non-cash. So about a third of that was cash-related. And the bulk of the cash comes in year one and two, and then it's offset by an assumption around the land sale coming in the latter part of year two.
spk00: And the only other thing I would add is, I'm sorry, just to answer your question, if you look at the converting sites, they are not as dependent on volumes as the mills. So you would see EBITDA of about $35 million to date. And then as we continue to optimize that footprint, that'll just continue to escalate. And then to Alex's point on the mills, it is volume dependent. So you would just see a range depending on volumes. So, you know, to Alex's point, you can just kind of do the math of, you know, where we are currently and what we would do. I mean, you could see a range from everything we've done from, you know, low double digits to even higher on improvement.
spk10: Okay. And just to clarify, that $900 per ton, that was that total cost, I assume, or did you say cash cost for?
spk03: Cash cost. Okay. That was cash cost.
spk10: All right. Appreciate it.
spk04: Our next question will come from Cleve. Sorry. Our next question will come from Cleve Rueckert with UBS. You may now go ahead.
spk08: Great. Thank you for taking the questions. Thanks for all the good color on the call. I said a couple of quick follow-ups. I was just looking at the positive price mix, particularly in the corrugated packaging segment. And I'm wondering if there are any index price lags that you expect to flow through that business, you know, over the next sort of couple of quarters. or whether that price mix is just remaining positive because of the strategic actions that you've made and the mix improvements that's resulted from them.
spk00: So, Cleve, as we look at our corrugated business, with all of the receipt pricing that's been announced, as we go into this quarter, $70 of the $90 will hit our contractual customers. So you'll see continued growth. price pressure through this quarter. And then coming out of this quarter, you know, from the May increase, that $20, you know, will come into play toward the end of the year and then, you know, be offset by the increasing volumes. About 75% of our customers are tied to that receipt contract pricing. So that's kind of how we look at the pricing. And then from a consumer side, just you know, the recent announcements, we won't probably see those hit our consumer business till the end of the year. And then conversely, you know, we see both on the container board side and paper board side, you know, we see those, you know, within 30 days on our global paper business, which is why you've seen a lot of the pressure throughout the year. But then we'll cycle around that as we get into 2024. Right. Yeah. So there's just a lot more lag in those, in those integrated.
spk08: Yeah. Yeah. Okay. That's clear. And then just sort of following up on integration and, you know, thanks for the, appreciate the color on, on, you know, the integration rates between corrugated and consumer. I'd just be curious, you know, given the actions that you're taking, you know, sort of, sort of throughout the footprint, do you have an integration target for those businesses? You know, look at looking ahead, I think it's probably running a little higher than maybe we thought. And, You know, I'd just be curious if you sort of strategically thought about where you want to get to at this point, or if that's still part of the planning you're doing.
spk00: So as we think about our integration rates, you know, with the 1.9 million tons that we've taken, and if you go back to, say, a 2021 volume environment, you know, our container board integration rates are really tracking in the high 80s. As we get into that 90% range, we feel really pretty good about that because it allows flexibility through the cycles. We have really good strategic partners on the global paper side that are not on the commodity side of that, buying multiple grades, long-term relationships. There's a lot of innovations that we're working on with them. As we look at the mill footprints actions that we've taken and we look forward to 2024, I mean, we're really in a great position in our supply-demand balance because, as we've talked about, we want to match our supply to our customers' demand. So, you know, the excitement that you hear about 2024 with the actions we've taken and the productivity, we feel really good about how we're entering the year. Okay, I'll turn it over. Thanks, guys. Thanks.
spk04: Our next question will come from Phil Eng with Jefferies. You may now go ahead.
spk02: Good morning. This is actually John on for Phil. I hope you guys are doing well and congrats on the good quarter. I just wanted to go back to the footprint. You guys have taken a lot of action, particularly on the container board side over the past, say, 15 to 18 months, I guess, could you give us some perspective on how you're thinking about your footprint now? And do you see the actions taking already announced being enough? Or do you think there may be more to come, whether that be Westrock or generally the broader industry, more importantly? And then just to follow on that, how should we think about Tacoma, which is expected to shut by the end of the fiscal year? How should we think about the earnings leakage, whether it be in this fiscal fourth quarter or going into 2024? I think you touched on it being positive, but just wanted to maybe get a little bit more clarity on the flow through.
spk00: Sure, John. I'll answer the first part of your questions, and then I'll have Alex go through Tacoma with a little more depth. So as we look at our footprint, what we've always focused on is our customers' demand with our supply footprint. So we know there's all kinds of puts and takes going on in the industry, but our relationships with our customers are very strategic, very connected. A lot of our contracts are long-term contracts. So as I've alluded to a little bit with Cleave, Where we see 2024, I mean, right now, you know, this has been an unprecedented year as far as the down cycle. We've made all the footprint actions. And as we see 2024 and 2025 with the connectivity we have with our customers and how they're projecting volumes, you know, we really see a nice balance right now. And, you know, we've got, again, you know, it's virgin fiber. It's recycled fiber. It's paperboard. So, you know, having all of those substrates is really important. So as we think about our footprint, we always evaluate it. We continue to evaluate it. But, you know, as far as a major short-term action, I don't anticipate that with everything that we're seeing as we head into 2024 with the demand environment we see with the current supply environment that we have. I'll turn it over to Alex to talk about Tacoma.
spk03: Yeah, let me, I'll try to just, the headline that everybody should hear on the call is that, you know, the mills that we've closed, we're going to reallocate the strategic substrates to other mills in the network. So there won't be any EBITDA leakage associated with that. It'll actually be EBITDA and ROIC accretive. On Tacoma specifically, just the breakdown, it's 510,000 tons of total capacity, about 105,000 tons of that's liner board, about 275,000 tons of that is white top, 60,000 tons is craft paper, and about 70,000 tons is pulp. So with the exception of the pulp, all of that other capacity will be reallocated around the network again. So it'll be net margin and EBITDA dollar accretive. In terms of just it's not earnings leakage, but cash flow leakage, you will see about one-third of the $345,000 of closure costs. The cash cost associated with that is about a third of that number, and that will happen in years one and year two, offset in the back half of year two with a land sale.
spk02: Got it. Okay. Appreciate that. And then just going back quickly, David, on the capacity, do you think the industry as a whole needs to take out more? It still seems like operating rates are relatively below where they should be? I mean, I know your Tacoma still has yet to come out, but just thinking about 2024, the industry as a whole, do you see more actions needed to kind of stabilize price, or do you see the demand inflection, at least from the customer conversations that you're having, being enough to stabilize prices going into next year?
spk00: Yeah, the way I would think about it, John, is... We are laser-focused with our segments and our customer base, and so we're just matching our supply to their demand. As I think about the industry, and obviously there's capacity coming online, the customers that we're focused on we just think are going to be different than where this new capacity is. So we'll let that sort itself out, but we're focused on do we have the right supply and the right footprint with the demand where we want to grow for value selling, solution selling. And with the 1.9 million tons that we have, with the demand forecast we see as we go into 24 and into 25, I mean, we feel pretty good about where we're at. And we like the improvements we're making in our cost structure and our productivity. So we'll continue to evaluate it. But right now, how we see supply and demand as we go into 2024 is balanced.
spk02: Okay. I appreciate that. And then if I could just squeeze one more small one in here. If we could get an update on the RTS and Chattanooga URB mills, you know, if they've already closed for those sales, and if you could just remind us where those are reported and in which particular segment. Yeah. I appreciate it.
spk00: So the RTS sale is not complete. We hope to have that complete in September as we move forward in the business. And as again, just a reminder, it was a $375 million sale. Okay.
spk02: And what segment was that in?
spk03: RTS would have been within the consumer segment. It's the partitions business, basically.
spk02: Okay. Thank you very much. I'll turn it over.
spk04: All right.
spk03: Thank you.
spk04: This concludes our question and answer session. This concludes our question and answer session. I would like to turn the conference back over to Rob Cortaro for closing remarks.
spk07: Thank you, everybody, for joining our call today. We are available if you have any other follow-up questions, and we look forward to updating you again next quarter. Thank you.
spk04: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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