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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning. My name is Sharon, and I will be your conference operator today. I would like to welcome everyone to the WestRock First Quarter Earnings Results Call and announcement of the acquisition of KapStone Paper and Packaging.
At this time, I would like to turn the call over to Mr. James Armstrong, Vice President of Investor Relations.
Thank you, Sharon. Good morning, everybody, and thank you for joining us today. We issued two press releases this morning, one concerning the quarterly results and another announcing our agreement to acquire KapStone Paper and Packaging Corporation.
We have prepared slides to supplement our comments during today's conference call. You can find these on the Investor Relations section of our website. With me on today’s call are Steve Voorhees, WestRock's Chief Executive Officer; Ward Dickson, our Chief Financial Officer; Jeff Chalovich, our President of Corrugated Packaging; and Bob Feeser, President of our Consumer Packaging segment. The call today will be an hour long and will end at 9:30 Eastern. Following our prepared comments, we will open up the call for Q&A.
Before we begin, I'd like to point out that during the course of today's call, we will be making forward-looking statements involving our plans, expectations, estimates and beliefs related to future events. These statements may involve a number of risks and uncertainties that could cause actual results to differ materially from those we discuss 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, 2017.
Additionally, we will be referencing non-GAAP financial measures during the call. We provided reconciliations of these non-GAAP measures to the most directly comparable GAAP measures in the appendix of the slide presentation. The slide presentation is available on our website.
So with that said, I'll turn it over to you, Steve.
Thanks, James. Welcome to our team. I am pleased you have decided to join us at WestRock, and good morning, everyone. Thank you for joining us on short notice.
Before I get into the results of our first fiscal quarter and our agreement to acquire KapStone Paper and Packaging, I want to provide context for what we are doing at WestRock over the long-term.
For those of you who joined us at Investor Day you will recognize this context. First, I believe paper and packaging are very attractive businesses, where scale and differentiation matter. Second, our team at WestRock is building a paper and packaging [leader] with a differentiated strategy and capabilities to generate attractive returns over the long term. And third, margin expansion and capital investment to provide WestRock the opportunity to generate $4 billion in adjusted EBITDA by 2022.
The acquisition of KapStone fits extremely well into this context, and will accelerate the achievement of our near-term and long-term goals. Before I cover the acquisition, I want to cover our first fiscal quarter results that provide a relevant mile marker of progress towards our long-term objectives.
Fiscal 2018 is off to a good start. Our adjusted earnings per share increased 85% and adjusted segment EBITDA increased 33% compared to last year. The results were driven by outstanding performance by our corrugated packaging team. Our adjusted book tax rate for the quarter was 25%. This compares to our guidance of 32% to 33% for an $0.08 per share benefit.
We generated $374 million of adjusted operating cash flow in the seasonally low first fiscal quarter. In addition to strong operating results, we had three items in GAAP earnings that were adjusted out of our $0.87 of adjusted EPS. These items include first, a one-time tax benefit of tax benefit of $1.1 billion as a result of the reduction of our US corporate tax rate. Second, a charge of $180 million on a pre-tax basis to reflect potential future cash payments from our decision to exit a multiemployer pension plan. The majority of this liability is payable over a 20 year period. And third, $28 million of impairments in our land and development business, which were largely tied to reduced values for natural gas mineral rates.
Sales for the quarter were $3.89 billion. This was a 13% increase over the prior year quarter. Total company adjusted segment EBITDA was up $164 million to $654 million, and adjusted segment EBITDA margins increased 260 basis points to 16.8%. This was driven largely by favorable price and mix.
The corrugated packaging segment delivered outstanding results delivered by the full realization of previously published PPW domestic price increases, along with better export pricing, strong demand and favorable channel mix. Corrugated packaging adjusted segment EBITDA margins were 20.4% and were up 510 basis points year-over-year.
Supply and demand fundamentals within our North American corrugated packaging business continued to be strong. We earned a 21.4 adjusted segment EBITDA margin in our North American corrugated packaging business in this quarter. This was a 560 basis point increase over last year. Our fiscal first-quarter North American daily box shipments increased 4% on a per day basis from the prior year period, and January shipments are also up approximately 4% year-over-year.
The demand environment for consumer packaging is stable. We delivered volume growth across several of our targeted end-markets, including food packaging, healthcare and personal care. These gains were offset by softness in North America mainstream beer, carbonated soft drinks and commercial print applications. Sales increased 17% and segment EBITDA increased 9% driven by the net impact from the MPS acquisition and the sale of our dispensing business.
Backlogs across our mill systems were firm. SBS and CNK system backlogs are currently about five weeks and CRV backlogs are over two weeks with strong order inflow.
I'll now turn the call over now to Ward to provide more details on the quarter and guidance. Ward?
Thanks, Steve. As you know, executing our synergy and performance improvement goals is key to achieving our long-term objectives. We exited the December quarter at an annual run rate of $910 million and expect to achieve the billion dollar goal by the end of the third fiscal quarter.
Before I discuss second-quarter guidance, let us start with the positive impact of tax reform. WestRock recognized a one-time benefit in the quarter of approximately $1.1 billion. This benefit reflected the remeasurement of the company’s deferred tax assets and liabilities, as well as the recognition of the tax liability for the mandatory deemed repatriation associated with foreign cash and earnings.
With our September fiscal year we will receive nine months of benefit of the federal rate reduction in fiscal 2018, and expect our adjusted book tax rate to be approximately 27% this year, and approximately 26% in fiscal 2019. In the second fiscal quarter, we expect the combination of volume, price and mix to be positive in the range of $50 million to $60 million sequentially. Transportation costs are being negatively impacted by winter weather, higher diesel costs and truck and rail shortages driven by strong economic conditions.
The winter weather is also driving virgin fiber costs higher by 2% to 3%. During the second fiscal quarter we expect moderate inflation in OCC prices. In total we expect total commodity inflation of $40 million to $45 million pre-tax. Winter weather may have an additional $15 million to $20 million sequential impact. To help you with your models, we have provided additional guidance on our tax rate and D&A.
When all of these items are taken into account, we expect Q2 adjusted earnings per share to be slightly lower on a sequential basis, but significantly higher than last year's second quarter adjusted EPS of $0.54. We are reaffirming our previous sales and EBITDA guidance and raising our full year adjusted operating cash flow guidance to $2.45 billion due to a $150 million benefit from tax reform.
I will turn it back over to you, Steve.
Thanks Ward. I'm pleased to be able to announce that we have signed a definitive agreement to acquire KapStone Paper and Packaging. Before I get too far, I want to express my admiration for Roger Stone and Matt Kaplan and the entire KapStone team for what they have built since 2005.
It is an incredible story. I have been able to spend more time than ever with Roger and Matt over the past few months, and it has only increased my regard for them as people and as businessmen. They are truly focused on their customers and their employees. They have delivered outstanding returns for investors.
It has now been three years since we formed WestRock, and our team has been building a leading paper and packaging company. KapStone is an outstanding fit with our business. The corrugated packaging operations will enhance WestRock’s North American corrugated packaging business and provide complementary products in geographical locations that will enable us to better serve customers across our system.
The addition of the specialty and paper products to WestRock’s portfolio further expands our comprehensive range of differentiated products into heavyweight [craft] grades that we currently do not produce. With the transaction, we also acquired Victory Packaging, a packaging solutions distribution company with more than 60 facilities in the United States, Canada and Mexico. Victory provides opportunities for WestRock to integrate our system further downstream to an expanded set of customers.
I'm looking forward to welcoming KapStone employees to WestRock to provide them opportunities to sustain and advance their careers, and I'm looking forward to working with them to help make WestRock an even more successful company. We have a track record of successfully generating efficiency and productivity that increase performance and create value.
The acquisition of KapStone is no exception as we expect, approximately $200 million in synergy and performance improvements, over half of which we think will be achieved within a year of closing. Combined with WestRock’s current business, we believe the transaction will generate significant cash, enabling us to return to our targeted leverage ratio of 2.25 to 2.5 times in fiscal 2019, while continuing to invest in our core business. We believe the economics of the transaction are compelling.
WestRock will pay $35 per share for a total enterprise value of $4.9 billion. The purchase price equates to less than 10 times KapStone’s annualized EBITDA performance over the past six months, an attractive seven times after anticipated cost synergies and productivity improvements. Importantly, the transaction is expected to be immediately accretive to adjusted earnings and cash flow. We expect the transaction to close in the quarter ending September 30, 2018.
Let us turn to the structure of the transaction. Under the terms of the merger agreement, KapStone stockholders will receive $35 per share in cash. KapStone stockholders will have an option to elect to receive 0.4981 shares of WestRock stock in lieu of cash. This election will in aggregate be limited to 25% of the total consideration. This option gives KapStone stockholders the opportunity to participate in the future upside that the combined business on a tax-deferred basis.
KapStone’s chairman, Roger Stone, and president and CEO, Matt Kaplan, have entered into voting agreements to vote their shares in support of the transaction. We will fund the transaction through committed acquisition financing and existing liquidity.
The combined company will have even greater capability to serve an expanded set of customers. On a combined basis, WestRock will generate nearly $20 billion in annual sales, produce over 16 million tons of paper and be a leader in the growing consumer and corrugated packaging segments with increased diversification across paper and packaging products, markets and substrates.
KapStone will be integrated into our corrugated packaging segment, which will represent almost two-thirds of our overall business. The transaction is an excellent strategic fit for WestRock. First, the acquisition of KapStone will create opportunities for approximately $200 million in cost synergies and performance improvements. We do our homework upfront. We have a strong track record of delivering on our commitments across many transactions.
Second, the acquisition strengthens WestRock’s presence in the West Coast. KapStone will help us to better compete in the growing agricultural markets in the region and will bring our value delivery model to a whole new set of customers. Third, KapStone will broaden WestRock’s portfolio of differentiated paper and packaging solutions with the addition of attractive paper grades and distribution capabilities.
The addition of KapStone’s heavyweight kraft products, which WestRock does not produce, are complementary and will further broaden our enterprisewide offerings enabling us to bring even more value to our current and prospective customers. Fourth, this transaction increases the mix of virgin fiber-based paper in WestRock’s portfolio. KapStone’s 3 million tons of paper is made using 78% virgin and 22% recovered fiber. This will bring WestRock’s overall mix of virgin fiber from 65% to 67% and allow for more flexibility.
Also the combined footprint will give us the ability to serve customers more efficiently. The transaction will enable us to bring our automated packaging solutions through [APS] and Box-On-Demand to the same expanded markets. This will benefit our customers through lower cost, increased sales, reduced risk and it will also help them meet their sustainability goals.
And again, the acquisition will be immediately accretive to our adjusted EPS and cash flow. KapStone will add four mills that complement our current geographic footprint. In addition these mills will provide opportunities to further optimize our mill production and reduce both logistics and variable operating costs. The Longview mill gives us great logistical advantages with its strategic Northwest presence while the other mills integrate well into our existing system. The Charleston, Roanoke Rapids, and Cowpens mills are in great fiber baskets that we know well.
The mills provide us with additional operational flexibility across our larger mill system. KapStone brings a complementary box plant system that enhances our national footprint. This will position WestRock to efficiently serve markets where we did not previously have a local presence and expand service to the Western agricultural market. With this extended geographic reach we believe there will be significant opportunity to realize economies in freight and logistics cost due to the integration of our West Coast box plant system with the Longview mill.
I will turn it back to Ward to talk about some of the financial aspects of the transaction. Ward?
Thank you, Steve. We believe the acquisition will create significant sub-cost synergies and performance improvements. We have multiple initiatives to reduce cost across the mill and converting network from both process and capital investments, supply chain optimization and our ability to leverage our scale.
In addition, there will be cost savings from the elimination of dual public company expenses. Finally, we will also be able to quickly integrate additional container board production into Victory’s distribution network.
We estimate total run rate synergies of approximately $200 million with approximately half of the synergies coming within the first 12 months. We have demonstrated that we can integrate acquisitions effectively and have a proven track record of delivering on the synergy and performance improvement goals.
While our near-term capital allocation focus will shift to reducing leverage the transaction will not limit us from continuing to invest in our business. We expect leverage to quickly return to our targeted range by the end of fiscal 2019.
I will turn it back to you Steve to wrap it up.
Thanks Ward. The acquisition of KapStone aligns extremely well with our strategy. The addition of KapStone strengthens our North American corrugated packaging business. It provides meaningful synergy and performance improvement opportunities and it is very attractive financially. The acquisition builds on the positive momentum that we have in our corrugated packaging business that will accelerate our ability to reach our margin improvement objectives and meet our $4 billion adjusted EBITDA goal by 2022.
The acquisition plays to our strengths and makes us a better company over the short and long-term. We remain focused on creating stockholder value. As we said before, we think about creating stockholder value as a three-step process. The first step is starting with the customer to provide a broad portfolio of paper and packaging solutions and we customize for the needs of our customers.
This transaction improves our portfolio of paper and packaging solutions. Second, we execute well. This allows us to generate significant cash. This transaction provides us the opportunity to improve performance and execute well over an expanded corrugated packaging system. Third, with this transaction we are deploying our capital back into our business. The acquisition of KapStone Paper and Packaging will improve our business, grow our business and generate significant value for customers, employees and stockholders.
James, would you now please give the instructions for opening up the line for Q&A.
Thank you Steve. [Operator Instructions] Sharon, please open the call for questions.
[Operator Instructions] Your first question comes from Mark Weintraub from Buckingham Research. Your line is open.
Thank you. Congratulations. Obviously you have been busy as always. One of the questions – it is certainly everything strategically, financially looks good, the one question people often have had on KapStone is quality of assets, and therefore longer term capital needs. We are hoping to get your perspective on that question?
Sure. I'm going to let Jeff answer that. He has been over to the mills recently with his team and has had the opportunity to review the operating records and meet with the key management. Jeff?
Good morning Mark. So, as Steve said, we have been through the mills. Went to the east recently, and have previously been through the Longview mill. So we are familiar with the asset quality, and there is really no surprises from what we have seen. We think from what we have seen we are able to manage those assets, invest appropriately through the mill system, and using performance excellence and capital allocation strategy improve the asset quality, the quality of the paper and we have a track record of being able to do that to take SP Fiber, [indiscernible] assets. We are going into a clear item. We are excited about the opportunity to integrate tons from the West Coast and really work that into our entire system. So we are excited about the opportunity. We plan to capital appropriately and we know how to do that.
And so, Jeff, if you contrast the way their assets look relative to yours, would you say they are comparable, there are areas of clear opportunity to get them up to where yours are, or does it vary from asset to asset, any color you could give?
Sure. It varies from asset to asset, but if you take the Tacoma mill in the West, it is a good mill and well integrated for us, and what we have seen is we think we have the ability to bring the assets quality up to our standards, and we have a clear path that we see to do that.
And one real quick one if I could, just on the containable price increase. Friday, IT announced KapStone also announced our unit position where you can tell us given I believe the guidance you gave on all the multiples et cetera presumably did not include another price increase.
Just wanted to clarify that. I'm sure that's the case. But is there any color you can give us on what's going on contained about pricing?
As you know, we can't comment on future pricing. What I can comment on is the strength of our business. Our backlogs are strong, our market, our shipments were up 4%, last quarter 4% in January as Steve already said. Operating rates remain strong. As MPA reported 99% operating rates. Export markets are strong.
So, and the economy, the backdrop of the economy is also strong. So, strong more can strong economy but can't comment on future pricing.
And Mark, multiples we gave were on trailing basis to annualized six months or results.
Thank you.
Your next question comes from Chip Dillon from Vertical Research. Your line is open.
Yes. Good morning and congratulations. First question is did I -- I just want to confirm that the guidance for this year does not include any incremental pricing increases in containerboard. And maybe I missed this but Steve did you say that the 2022 target EBITDA was moved up from the 3.8 because of this spill or maybe I misunderstood that?
No. the target we gave on Investor Day was $4 million, there is no change in that. I mean, what we respond.
And our the reaffirmation of our full-year guidance reflects our current view of inflationary items but only assumes pricing for previously published price increases across both our corrugated and consumer business. And so, we are our current view is that we can maintain that EBITDA guidance for the full-year.
Your next question comes from Anthony Pettinari from Citi. Your line is open.
Good morning.
Good morning.
Just following-up on Mark's question on asset quality. I think for a number of years you've had a goal of increasing your Ford integration rate. I think KapStone had a kind of a lower integration rate.
Just wondering, in terms of timeline for reaching I think the 80% target that you've laid out, how the acquisition potentially impacts that?
Hi Anthony, good morning, it's Jeff. We finished this quarter at 77% integration with the KapStone acquisition. We'll be in the low-to-mid 70 still. The integration targets' not a hard and fast number, as we said we'll continue to drive to the 80%. And that's really again the option now that we continue to address the tails of our channels and we like the optionality we have between the channels.
And we will continue to do that.
Your next question comes from George Staphos from Bank of America Merrill Lynch. Your line is open.
Good morning, everybody. Welcome, James. Good luck with the transaction. Thanks for all the details. My question is a little bit of a two-part question. In total, Jeff and Steve, what how will maybe you know KapStone impact the way you run the business. Specifically, what key process and systems and data opportunities you would in KapStone, that's obviously been a big piece of the WestRock story over the last number of years.
And then, in that regard and in terms of how you evaluate business and run your business, does the potential KapStone acquisition change at all, how you'd look at the algorithm for pricing at containerboard, not trying to get into future pricing but if the market and all the other things that go into the algorithm are as they are, would KapStone affect that all your choices for future pricing? Thank you.
Hi George, this is Jeff. To start with your first question, the way we run the business is the same. We're at much different corrugated business today than when we acquired some more from Stone. The KapStone assets fit nicely into the regions that we already have established.
So, our management teams have come through the Smurfit acquisition, they've done multiple integrations. Their operating platform is a mixture of QIWI and Ametek. Those are the systems we run. We'll fully implement the QIWI system through the plans that we same thing we did in the Smurfit assets. We have a good way to do that, a good data management system.
Our performance excellence programs, commercial excellence programs be rolled out through the plans the same way we do. In the regions as they fit today, East Central in West regions. So, we have the management teams in the areas already set up. We have to scale to integrate these quickly and integrate them well.
And a very good training program with technical resources to be able to implement the systems and processes. So, we won't change the way we go to market and the way we manage the business. And the acquisition also provides a great growth area for us where we don’t compete in some of the local markets in the West.
So, we like the mix of business that's really regional and local. And it gives us some scale on the West where we don’t currently compete and puts us in the new markets. It also gives us some opportunity to scale our automation platform.
So, our "Box on Demand" recent acquisition on our APS programs, we really have a new area in markets to be able to leverage that platform which will continue to do in the Northwest, their AG platform is very solid. So, that gives us a chance to integrate our machinery business through the markets.
And then, there is good synergies where we have complementary markets in areas that we need to be able to grow that we were capacity constrained. These assets give us a tremendous opportunity to grow where we haven’t with the systems and processes we already have in place.
On the second point. I'm going to comment, it's been a long time. So, I can't really speak to algorithms and the pricing and make forward comments on the pricing. I know you want to get into the pricing discussion, George.
Your next question comes from Adam Josephson from KeyBanc. Your line is open.
Hey Ward, John, congratulations and best of luck on the transaction. Steve, one question comparing these assets and this business to Smurfit. How would you compare the quality of the assets of KapStone to Smurfit as well as how you expect the integration to be similar or different? Thank you.
That is a totally different situation. If we recall, I mean, Rock-Tenn at the time was a $3 billion company and Smurfit took us to $10 billion. And it, I'll just tell you it was a challenge to take all that on and we did it. And if you recall that frankly retain the Smurfit management team for about a year.
And then we changed management teams in the corrugated packaging business to the current management team which is led by Jeff Chalovich and Tom Stigers and I think a very talented group of people. And over the past five or six years, I think they have very deliberately developed a just an outstanding business.
We have installed QIWI virtually across the entire system. We have installed a new management system that allow us to manage the processes. And so, in that context, I think Jeff went through how KapStone fits into our business and where they really fits very snugly into our business.
So, the integration challenges, the asset quality challenges, and all of the challenges are much easier to address than Smurfit. I think it's just two different situations.
Your next question comes from Mark Connelly from Stephens. Your line is open.
Steve, the containerboard now are going to be more than 2/3rds of the business. Do you think it's important to continue to expand the consumer to make that more relevant or are you comfortable letting consumer contribution continue to drop?
And so, consumers contributions' the same as it was last week. And on consumer we've got a great business which is very complementary to our entire business. And we're going to continue to look at opportunities across our entire business. Part of the reason for the merger was to create long-term opportunities for us to invest and then build our business.
And that remains as true today, last week.
Your next question comes from Steve Chercover from Davidson. Your line is open.
Thanks, good morning everyone. First, it seems like Victory was an opportunity to place boxes for KapStone but their geographic fit and maybe their financial effects inevitably didn’t allow them to really leverage it. Does your footprint allow you to fill that really rapidly?
It does, I'll let Jeff expand on that.
Good morning, Steve. And you have a good question. It does. We're a supplier currently to Victory. We have been for over 20 years, we know their business well. And it's a chance for us to forward integrate across the larger platform. When we had the plants in the same areas, I think KapStone was a little bit of a disadvantage for their plant locations.
We will quickly integrate business across the platform for Victory.
Your next question comes from Scott Gaffner from Barclays. Your line is open.
Thanks. Good morning and congratulations.
Thank you.
My question was just is really strictly around the timing of the acquisition and sort of what drove the decision making process sort of what line out, because if I look at it, right, it's a 35% premium to last night’s close but 60% premium to where the stock traded over the last seven months of 2017.
So, was there some strategic push that made it now that the best time or maybe you can help us out with that a little bit? Thanks.
Thanks for the question. I've been really visiting and so we announced the merger three years ago. We spun off in jeopardy, we sold HHB and made a handful of acquisitions last year, including MPS.
I'm sorry, think just now is a good time from that standpoint. I think corrugated packaging business has been improving and specifically our corrugated packaging business has been improving. I think we have the capability to take those on in a way organizationally that we just didn’t have even six months or a year ago.
Your next question comes from Lars Kjellberg from Credit Suisse. Your line is open.
Thank you. Just a question on capital allocation. Ward, you mentioned that the focus will shift towards deleveraging. How should we put that into context of this one position and if you can put any color on the incremental CapEx need required to capture those 200 million in synergies.
And if you take delaying any that the major CapEx projects to be able to capture this 200 million versus the prior scenario?
Thanks, Lars. I believe this fits quite well into our capital allocation priorities. So, depending upon the timing of the close, our initial leverage will be above three times. But with the ongoing cash flow generation of both our business and the KapStone business and the achievement of the initial synergies, we believe that we will fall back into our targeted range by the end of fiscal 2019.
The capital that we are planning is roughly a $140 million to a $150 million a year CapEx. That's their base CapEx plus any return generating capital that we need to include to capture the synergies. And we will, as we said, we will focus our short-term capital allocation priorities to return leverage in our targeted range but it will not prevent us from proceeding on the strategic capital projects that we've already announced.
And it's a testament to the strong cash flow generation that we have across our business.
Your next question comes from Mark Wilde from BMO Capital Markets. Your line is open.
Good morning. I think you guys are pretty familiar with that long view mill. You spend a lot of talk over time about potentially leveraging a lot of excess kind of holding capacity of that mill. Can you just talk about the potential for that and whether these recent changes and the tax code might make that more attractive over the next few years?
Hey Mark, good morning, it's Jeff. So, we are familiar with the mill. I think it's too early to say what we'll do with the assets completely. We're familiar with the capacity for the pulping. It's not, I don’t think it's a simple change. But it's too early to say categorically what the opportunity is there.
Your next question comes from Chris Manuel from Wells Fargo Security. Your line is open.
Good morning, gentlemen and congratulations on this accomplishment. Quite significant, I think it'd be quite helpful. A couple, one question for every couple of parts to you. First, can you talk to us a little bit about expectations through the first half of the year or how you see some OCC stuff playing out in the market?
And then, the second part was by our math, if we continue to grow at and you talked about 4% in the first half of the year, I'm sorry, 4% through January for corrugated. The market can be pretty tight and it seems to us as coming into this being a large export player, that's going to have to get throttled back quite a bit.
How do you balance that at least through the first half of the year between pulling back into next board and you still think you'll have enough to serve some of your strategic customers down, example Mexico and that kind of stuff?
Sure. Hey Chris, this is Jeff. So, I'll start with the OCC. As you probably read, there has been 1.1 million licenses issued recently. So, it's we see it's been down a bit and if you look at our forecast hasn’t changed considerably. There'll be tons hitting China here in the future.
So, it's early to call what will happen with the quality requirements still at 0.5% and the license is being issued. So, we're not clear that it's going to stay so good through the first half of the year.
On the second part, tell me your second part of the question again, please, go on.
It was on the export.
The export. So, we have pulled packaging now as we continue to manage the tails of our business. We are supplying our strategic customers. And again, we have optionality to the tails. So, if we have opportunities in domestic, we'll export that seem better than the box channel.
We'll take those opportunities and we've done that. So, we'll continue to service our strategic customers and we'll continue to manage the tails. Where we can make the most money on our products, we'll sell them into those channels.
Your next question comes from Brian Maguire from Goldman Sachs. Your line is open.
And thank you. And my congratulations on the deal. And welcome James to the team. Just a question on the synergies. The target there, it looks like it's a little over 6% of KapStone sales. Actually a little bit high based on some of the recent deals you've done. Just, I know you guys have done your homework on it but just wondering what gives you some confidence that you can exceed a little bit of a higher synergy target than you have on some of the prior yield.
This is Ward. I think Jeff has articulated how it just fits extremely well into our network. So, a large component of the synergies is our ability to optimize the supply chain and improve the pairings between mills and external customers and box plans and external customers and our internal supply chain.
We also have seen that we have opportunities to leverage WestRock's scale from procurement point-of-view. Fiber procurement and other commodity procurement. So, this deal, every deal is unique in terms of its complementary nature to our existing network and this fits so well into our both our mill and converting systems that it gives us tremendous confidence that we can achieve the targets.
Your next question comes from George Staphos from Bank of America Merrill Lynch. Your line is open.
Hi, just a quick one to finish up. Thanks for taking my follow-on. I just want to verify the synergy targets that you provided both the end goal of 200 million including performance improvements and the half by the end of fiscal '19. Those are run-rate targets, correct?
And then, as we look at the slices of the pie, and I think its slide 18. Can you give us a little bit more color in terms of what you're doing on the mill side, both in terms of the process improvement and network optimization as well as the performance improvements? Thank you.
George, I'll take the first piece of that and then I'll have Jeff add to it. So, it is run rate, run the $200 million goal is a run-rate goal and the achievement of half of it in the first full fiscal year, is again our root run-rate goal. I'll reiterate some of the comments that I just made about the ability to for us to optimize the supply chain to reduce logistics cost as we match mills and box plans with customer pairings and optimize the supply chain and to the straight logistics.
I'll have Jeff talk about the further opportunities in the mill and converting network.
Hi, George. So, the blue part of the charts are made up of fiber procurement opportunities. So, optimizing fiber purchasing. Energy cost improvements across the system. There's a large opportunity to implement our ePay and maintenance system. So, we see great opportunities across the mill system to do that.
General productivity improvements to our Lean Six Sigma technicians and then also some CapEx related projects that we see opportunities for. So, that's the major part of that, slice of the pi.
So George, I'm on a --.
Thank you.
So George, it's just one of the great things about Smurfit is their system was there most of them was relatively complex from a papermaking standpoint including trauma mixed delays. And so, we took it on ourselves to invest in technology that allows us to dispatch our mill system in an extremely efficient way.
And we've been able to use that to pro forma the KapStone mill system. That gives us a lot of confidence in the, I'm going to say the word "Justifiable supply chain integration" and that portion of these synergies and the forms and bring them.
Thank you, very much. Good luck.
Your next question that comes from Paul Quinn from RBC Capital Markets. Your line is open.
Thanks very much and congratulations, I like the fit. Just a question on we talked about containerboard, we talked about Victory, just on kraft paper, KapStone has got about a million tons. How do you like that business and especially around the export market and what are you going to do different than KapStone's in there?
Hi Paul, it's Jeff. So, we do like that business, it's complementary to what we have. So, the heavier weight Multiwall and also kraft bag puts us in to markets where we don’t have. And with the kraft bag market, in favor as you look at plastics being banned, we think that's a good opportunity for us.
And so, we're going to, we'll learn more and more about it as we get into it certainly, since we're just signed last night. But overall we like that market in that segment. And it's complementary to a one we already have.
Excellent. Thanks a lot.
Thank you.
Your next question comes from Scott Gaffner from Barclays. Your line is open.
Taking a follow-up. Just two quick ones. One, on the synergies. When I look at the number, actually looks relatively conservative to me because if I look back just when you did Smurfit-stone, you significantly overachieved your initial goal and even the initial goal was as a percentage of revenue was higher than what you've outlined here.
So, can you maybe talk about your view on conservatism verses aggressiveness on the synergies? And then just, one thing that hasn’t been hid on here on the call is just the regulatory hurdles. Can you talk about any approval that you might need outside of the U.S. thanks.
Okay. So, just we have $200 million, that's the number we're presenting. And we'll comment on whether it's conservative or not after we have $200 million. We think it's a great opportunity, we have complementary businesses. With respect to regulatory clearance and addition to the U.S. we'll need it in Mexico, Austria and Germany.
Your next question comes from Mark Wilde from BMO Capital Markets. Your line is open.
I'm just curious, KapStone has had a pretty bumpy last four five quarters. They seem to have done a whole lot better based on the guidance this morning in the fourth calendar quarter. But what gives you guy's confidence that these issues are really behind them at this point?
Hi, Mark. Aside from what we've seen the past that they've laid out, is solid. I think they have been executing better and what I have comprehended is our ability to manage that system based on our history and our results of running the business.
So, what I'm confident of mostly is our management team and how we can execute and how this fits well into our system in the upside we have with managing the KapStone system.
Your next question comes from Chip Dillon from Vertical Research. Your line is open.
Yes. Thanks for taking my follow-up. This is more for Ward. What kind of step-up would be a good number to use? I know Smurfit, I'm sorry, KapStone's DD&A was around 180. And with 220 bigger place to go and just a cut to the chase, it seems like if we assume about a 4% interest rate and that so right depreciation, I'm getting like $0.25 accretion without synergies and $0.85 with synergy.
As we get closer to the close with there are -- they're run rated as you said of DD&A's about between a $185 million and a $190 million. We estimated right now that it's going to be our initial estimates a $100 million higher than that.
Okay, that's helpful. Thank you.
Your next question comes from Chris Manuel from Wells Fargo Security. Your line is open.
Good morning. Just two quick follow-ups. First to go back to the OCC environment. What you had an old assumption at your Analyst Day and the primary service it was about 140, 150. What is the new assumption for this year? And then I'd have a second follow-up.
This is Ward. What we did provide was a 140 average for the full-year and right now our current estimate is approximately $10 below that for the full-year.
Okay. So, that's is what's based in the rest of your guidance. That's perfect, thank you. And then in the second follow-up. The follow-up question is with regards to the KapStone transaction, walk us through a little bit of the process here. So, is there do you anticipate any regulatory issues maybe with a look at mills on the West Coast, since there is a little bit concentration and that type of stuff.
Is there any sort of a provision that either you can walk if there are material divestitures or things to that nature. What's the or can anything there you can tell us would be helpful.
And we'll be making a regulatory filings shortly. We don’t believe the transaction rates is any serious concerns and add the jurisdictions for which we need to receive regulatory clearance. Like our businesses are very complementary, owing that enhances our presence on the West Coast and the heavy weight kraft paper products.
They produce the products that we don’t produce. And importantly, the acquisition will expand and improve the efficiencies of our mill and box plant system and we quantify that with the $200 million and cost synergies and performs improvements.
Okay, thank you.
[Operator Instructions] Your next question comes from Adam Josephson from KeyBanc. Your line is open.
Thanks. Steve, just one on your grade mix. So, obviously with the Mead merger, you got much bigger in box board and you got bigger yet in box board last year with multi-packaging. And now you're going back toward containerboard is getting into kraft paper to a significant extent.
So, is there any kind of strategic comparative to be bigger in one particular grade and if so, why?
There's not a strategic imperative be bigger in one particular grade. We're a paper and packaging company and I think the a lot of people look at the business between consumer and corrugated. But algorithm is highly related and complementary and one enhances the other.
We have many customers that buy both from a manufacturing standpoint. Paper mill doesn't much certainly know what grades its making. It take fiber and turn into paper and our converting process have great commonality as well. So, IPO is also a paper and packaging company and will continue to look at opportunities across our business, across our grades as we've been doing for the past several years.
Nice, Steve.
Your next question comes from Mark Weintraub from Buckingham Research. Your line is open.
Thank you. I just wanted to make sure on the tax rate for KapStone, is there any reason why we wouldn’t be expecting to see similar types of decline versus what's been seen historically as to what you've laid out for yourself from 10% or 11% decline in the effective tax rate. Is that a good starting point?
I will let KapStone publish their disclosure for the end of the year to clarify that for you. But the clearly their business even as compares to ours has a higher U.S. mix. So, in terms of earnings mix across the globe. So, they will clearly have meaningful benefits with the rate production -- the several rate production.
Great, thank you.
At this time, we have no further questions.
Thank you, Sherrin. And thank you to our audience for your time this morning. We appreciate your interest in WestRock. If you have any questions following this call, the Investor Relations team is happy to help you. You can find our contact on today's earnings release.
Thank you, for listening and have a great day.
This concludes today's conference call. You may now disconnect.