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Good morning. My name is Marcella, and I will be your conference operator today. I'd like to welcome everyone to the WestRock Company Second Quarter Fiscal 2019 Results Call.
At this time, I'd like to turn the call over to Mr. James Armstrong, Vice President of Investor Relations.
Thank you, Marcella. Good morning, and thank you for joining our fiscal second quarter 2019 earnings call. We issued our press release this morning and posted the accompanying slide presentation to the Investor Relations section of our website. They can be accessed at ir.westrock.com or via a link on the right-side of the application you are using to view this webcast.
With me on today's call are WestRock's Chief Executive Officer, Steve Voorhees; our Chief Financial Officer, Ward Dickson; our Chief Commercial Officer and President of Corrugated Packaging, Jeff Chalovich, as well as our new President of Consumer Packaging, Patrick Lindner and Bob Feeser. Following our prepared comments, we will open up the call for a question answer session.
During the course of today's call, we will be making forward-looking statements involving our plans, expectations, estimates, and beliefs related to future events. These statements may involve a number of risks and uncertainties that could cause actual results to differ materially from those we 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, 2018.
Additionally, we will 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 the slide presentation. As mentioned previously, the slide presentation is available on our website.
With that said, I'll now turn it over to you, Steve.
Thanks, James. Good morning. Thanks for joining our call today. Our WestRock team delivered outstanding results in the second fiscal quarter of 2019. Our adjusted segment EBITDA of $757 million improved by $108 million over last year. The increase in EBITDA was primarily driven by the acquisition of KapStone and our adjusted EPS was $0.80 per share.
We are responding to changing market conditions by matching our production to our customers’ demand. During this past quarter, we reduced our containerboard and kraft paper production by nearly 300,000 tons with approximately 100,000 tons from plant maintenance and 200,000 tons from economic downtime across our system.
We are focusing on organic growth opportunities where we can create customized value-added solutions for our customers that reduce their total cost and/or grow their sales. This focus increased our packaging shipments during the quarter and increased the use of the converting assets across our system. This contributed to the realization of $68 million in productivity in the quarter.
We successfully completed the installation of the new curtain coater at the Mahrt Mill in March. This was the first of three significant projects in our Consumer Packaging Mill system and will be completed by the end of June.
In aggregate, these projects will enhance our ability to meet our customers’ developing needs and improve our cost structure. The advantages of our broad paper and packaging portfolio coupled with the multiple levers we have in our control provide me with confidence and our team’s ability to create long-term value for our customers and our stockholders.
Turning to the financial results for the quarter. We benefited from the flow through of previously published price increases for all of our major paper grades. The positive impact of price increases were offset by lower containerboard export volumes, economic downtime, mill outages and wage and other inflation. Higher wood costs were largely offset by lower recovered fiber cost. Our net leverage ratio was 2.96 times at the end of March.
Corrugated Packaging adjusted segment EBITDA of $553 million increased by 24% over last year. This represents the sixth consecutive quarter that we’ve reported North American corrugated margins of 20% or more. During the March quarter, we lowered our inventory levels by 60,000 tons and so far in April, we’ve reduced our inventories by another 30,000 tons and have taken 55,000 tons of economic downtime.
Our box shipments grew 20% year-over-year on a per-day basis. After adjusting out the volumes from the KapStone Box plants, our volumes grew organically by 2% on a per-day basis over last year. Gains in e-commerce, food service, processed food and bakery contributed to this growth.
Let’s discuss our integration rate. Our integration rate for the last twelve months has been 77% and it was 80% this past quarter. Organic growth in box volumes contributed to the increase in integration. KapStone’s complementary footprint have supported additional sales to existing WestRock customers who are now able to access our broader geographic footprint.
We’ve integrated an additional 67,000 tons in the annual box shipments through our Victory Packaging System. Also contributing to the increase in integration has been a decline in our export volumes, which during this past quarter accounted for only 10% of our total containerboard shipments. This compares to 15% in the same quarter of last year.
We saw higher year-over-year inflation, especially in wood, freight, energy, labor and benefits. These inflationary pressures was partially offset by lower recycled fiber cost. We are making progress rebuilding the Panama City Mill. We expect the mill’s two machines to build back up to normal production during the June quarter. Other repairs will be complete by the end of the calendar year.
We recorded income from this $30 million in business interruption insurance proceeds. These proceeds were not included in our guidance for the quarter. After taking these proceeds into account, the contribution to income from the Panama City Mill was approximately equal to last year’s contribution when the mill was fully operational.
Brazil’s adjusted segment EBITDA margins for the quarter declined to 22.2%, down from 26.8% last year. This decline was driven by overlapping cost as the Porto Feliz box plant ramps up and the Valinhos box plant ramps down. This will continue until Valinhos is closed this summer.
Our Consumer Packaging business performed well during the quarter with sales up approximately 2% year-over-year as we realized higher prices from previously published price increases. Adjusted segment EBITDA was ahead of last year. The outage expense related to the Mahrt curtain coater project and significantly higher wood cost especially for our Covington Mill contributed to slightly lower margin. Without these two items, adjusted segment EBITDA margins would have been 180 basis points higher than what we reported.
Our team delivered strong productivity of $41 million as a result of high operating utilization across our converting system and the benefits from the ongoing productivity program and capital investments. Commodity inflation was elevated in the quarter driven by wood costs that were $17 million higher year-over-year due to fiber supply challenges from the extended wet weather.
We’ve seen improvements in wood availability in April and we expect cost to moderate in the second half of the fiscal year. Backlogs remains strong across all of our major grades. In the second quarter, we experienced sales growth across our target end-markets, especially food service, retail food, beverage, beauty and cosmetics.
In beverage, our machinery solutions are enabling customers to replace printed shrink film with more sustainable paperboard multi-packs. We’ve installed more than 20 machines year-to-date including high speed machines for soft drink applications and basket wrap machines for beer to replace printed plastic film. Customer activity remains high and we have a strong machine pipeline for the second half.
Our team at Mahrt successfully executed the installation of the new curtain coater in March and the mill is now fully operational. The start-up of the machine has gone extremely well and we are seeing the productivity benefits and lower coating cost that we expected. The Covington Mill upgrade is underway as I speak, and it will be complete in May.
We are installing a new head box at the Demopolis Mill in June. The cost of the Covington and Demopolis projects will adversely impact our margins in the June quarter. In the September quarter, we will benefit from the volumes and improved quality and productivity available from all three projects, Mahrt, Covington and Demopolis.
Looking into fiscal 2020, we expect improvement in margins from the capital projects and also the additional actions that we’ll take across the segment to improve the value that we provide our customers and reduce the cost that we incur to deliver this value. We’ve owned KapStone for six months. We’ve made great progress with our integration activities.
I am pleased with the level of engagement that our new teammates have demonstrated, and we are proceeding well with the integration. We’ve accelerated the realization of the synergy and performance improvements and we are now at an annual runrate of $70 million. We expect to achieve a $90 million runrate by the end of this fiscal year.
We expect to exceed the $200 million of runrate of synergy and performance improvements by the end of fiscal 2021. We are executing well across each integration category including our mill system, our box plant system, logistics, procurement, information technology, and administration. We’ve internalized 67,000 tons of annual box shipments through our Victory Packaging System and we expect to achieve 100,000 annual tons by the end of fiscal 2019.
We are pursuing many opportunities to improve our performance and profitability in the years to come. Between our strategic capital projects and the realization of synergies from KapStone, we see runway to more than $440 million of EBITDA improvement through 2022, of which only the $70 million runrate of KapStone’s synergies has been realized.
The new Florence paper machine project is progressing well and is on track for the announced start-up in the first half of calendar 2020. As we communicated when we announced the project, the primary benefits of the investment are quality improvements, and the increased operating efficiencies gained operating one new paper machine instead of the three older machines.
In Brazil, the first pieces of equipment are already running at the Porto Feliz box plant and we expect to run higher volumes through the facility in the coming months. We’ve already broken ground at the Tres Barras Mill and a significant amount of the machinery orders have been placed. The Tres Barras Mill project is well on track to be completed in fiscal 2021.
In total, we expect to realized $80 million in runrate EBITDA in fiscal 2020 from the projects completed this year with the strategic projects adding $240 million a year in EBITDA by the end of fiscal 2022. We are delivering value to our customers by helping them lower their total cost, grow their sales, improve their sustainability and minimize their risk.
140 customers buy more than 1 million of products from both our Consumer and Corrugated segments. This accounts for $6 billion in annual sales. We are uniquely positioned to win with our customers and with our broad portfolio of paper, packaging, merchandizing, machinery and supply chain solutions.
In February, we expanded Jeff Chalovich’s role to lead our commercial efforts across WestRock. Jeff is off to a great start and accelerating our differentiated strategy in bringing added emphasis to top-line growth at WestRock.
I am delighted to report that during this past quarter, WestRock was recognized twice by third-parties for our innovation in the manufacturing of sustainable paper and packaging products. The Sustainable Packaging Coalition recognized WestRock with its Innovator award for a decision to accept wholly coated food service packaging at our 100% recycled paperboard mills in the United States.
Instead of this material going to landfill, we are able to process and recycle this fiber into new paper-based packaging. We’ve developed a recyclable and compostable paperboard prototype designed to hold hot and cold beverages. This prototype was recently named one of twelve winners of the Next-Gen Cup Challenge and we are optimistic about our ability to fully commercialize this product.
Our research and development on new more recyclable and compostable packaging designs exemplifies our commitment to working with our customers to find ways to make packaging more sustainable. Our customers are demanding even more environmentally sustainable solutions. Our broad portfolio of customized, value-added sustainable paper-based packaging solutions is well-positioned to capitalize on the shift in consumer preference and it’s especially applicable when it comes to creating packaging solutions that reduces the use of plastic.
Our solutions include the use of innovative materials, new designs, and the applications using our machinery platform. Examples of our plastic replacement products today include food service solutions like EnShield Natural Kraft that replaced plastics in bakery applications and the beverage packaging solutions such as the Cluster-Pak and the EconoClip.
We are seeing growing customer interest in solutions that make packaging more recyclable such as the non-poly coated ice cream cartons, which enable these products to enter the fiber recycling stream. We see this interest in sustainable packaging solutions continuing to grow, over the past year, we’ve generated $50 million in additional annual sales and we have the potential to increase this several times over.
A great example of how we create innovative, sustainable packaging solutions for our customers are the projects that we have underway for Diageo, the owner of Guinness. We are transitioning their packaging from plastic to paper and are eliminating their use of shrink film and plastic rings. We are providing a better billboard for their product on the shelves which will give them the opportunity to grow their sales.
This is a powerful combination and we are able to provide this turnkey solution for Diageo with the right substrate, right packaging design and our highly productive and flexible machinery that are working in concert to help Diageo achieve their environmental and financial goals.
I’ll now hand it over to Ward to discuss our outlook. Ward?
Thanks, Steve. Turning to Slide 12, we outline our key assumptions for our fiscal third quarter guidance. We expect adjusted segment EBITDA in the third quarter to be between $830 million and $870 million as compared to $757 million in our second fiscal quarter and $754 million last year.
Sequentially higher seasonal volumes across both segments should add $20 million to $40 million in EBITDA compared to our second quarter. We expect significant sequential cost deflation driven by declines in recycled fiber, seasonally lower energy cost, and some moderation in virgin fiber cost.
We do not anticipate any business interruption insurance recoveries for the Panama City Mill until the fiscal fourth quarter. We estimate slightly higher depreciation and interest expense and a tax rate of 23.5% in our fiscal third quarter.
These items impact the quarter by a negative $0.03. We are aligning our outlook to the recent changes in the containerboard market. For the full year, we now expect adjusted segment EBITDA of approximately $3.3 billion to $3.4 billion.
Turning to our balance sheet. We remain committed to returning to our long-term leverage ratio of 2.25 times to 2.5 times and expect our leverage ratio to be less than 2.9 times by fiscal year end 2019. We expect fiscal 2020 capital expenditures will decline to a level of $ 1 billion to $1.2 billion and that capital expenditures will be approximately $1 billion in fiscal 2021 as we complete our strategic capital projects.
We remain committed to a stable and growing dividend, and our primary use of free cash flow near-term will be debt reduction.
And now I will turn it back over to Steve for closing remarks.
Thanks, Ward. I am going to take a couple minutes and talk about where WestRock stands at this moment and time from an investor perspective, think of starts with markets, and I appreciate the concerns about global supply and demand. I will point out that there is other trends to consider, the most significant of which is that buyers of packaging are interested in much more than price.
Our customers are interested in reducing their total cost across their entire supply chain, growing their sales, and minimize their risk by having a supplier that performs well day in and day out. And finally, achieving their sustainability objectives.
Paper-based packaging is well situated to help customers achieve these goals. WestRock has the world’s most comprehensive portfolio of paper and packaging products and we are well positioned to help our customers succeed. We deliver value by creating customized, value-added solutions for our customers and our talented and engaged workforce is committed to delivering value for our customers and profitably growing our company.
WestRock has multiple levers to improve our results. These levers include our commercial approach that supports organic growth. Our strategic capital projects and the capture of the KapStone synergies that will lower our cost. As is the case with many companies that have grown by acquisition, we are simplifying our business with systems and processes, and along the way building our capabilities to be successful in very competitive markets.
As we do this, we are reducing our exposure to commodity markets and increasing the stability of our business by providing value-added products and services for our customers. While we are doing this, we are generating strong cash flow, and paying an attractive dividend. And we remain committed to returning our leverage to 2.25 to 2.5 times target.
Before we turn to your questions, I’d like to take a moment to thank Bob Feeser for his 32 years of service.
Today is Bob’s final day with WestRock. Bob, I appreciate your leadership and commitment to WestRock. We could not have integrated two companies into WestRock as well as we did without your presence and your passion. So, I thank you for all that you’ve done and all of us at WestRock wish you ensure the best in the next phase of your life.
And I am pleased to welcome Pat Lindner to WestRock as President of WestRock’s Consumer Packaging business. Pat’s 20 years of global business experience provides valuable perspectives to all of us at WestRock. Pat has got a proven history of being a strong driver of operational excellence, innovation and growth and we are fortunate to have him on our team.
That concludes my prepared remarks. James, we are ready for Q&A.
Thank you, Steve. As a reminder to our audience to give everyone a chance to ask a question, please limit your question to one with a follow-up as needed. We'll get to as many as time allows. Marcella, can we please take our first question?
Your first question comes from the line of Chip Dillon from Vertical Research. Your line is open.
Yes, good morning everyone. Thanks for the details and Bob, all the best to you as you move forward. It looks like the CapEx guide for 2020 and 2021 is a little lower than what I think you had said in the past and yes, you are maintaining obviously the high profile projects you went through. Could you just tell us where you are finding some savings if I am correct to that assessment?
Chip, this is Ward. Thank you. Yes, you are correct. We are just balancing our capital investments with our current view of supply and demand conditions. And we are very focused on returning to our long-term leverage target of 2.25 to 2.5 times.
We’ve talked in the past about a maintenance CapEx level of $500 million ongoing return generating capital projects of approximately $500 million. We have flexibility to defer or scrub those two categories and that’s what we are doing in the outlook. We are continuing to devote the capital required to complete the strategic capital projects on time because of the significant EBITDA generation opportunities that those represent.
Okay. And a quick follow-up. This might be for Jeff, I am not sure, but, one of your big competitor is down in Brazil announced a major, the Puma project, the major expansion in kraft linerboard and the first of those expansion projects involves just only eucalyptus-based pulping which we always understood that hardwood was not really compatible with containerboard. Maybe there is a light weightness to this or something unique about this. If you could just help us understand what you think they are doing.
Good morning, Chip. I can say that, the technologies advanced with paper science, chemicals, fiber that you can make a - these and sheet in fact in our business in Brazil we are mixing eucalyptus along with wood fibers in making tremendous paper for that market and for our exports. So, I don’t know what markets, where they are going to use the paper, but I think the science and with chemicals that the paper should be fine. I don’t really know what else they are thinking of that.
Okay. Thank you.
Sure.
Your next question comes from the line of George Staphos from Bank of America. Your line is open.
Thanks for the details. Congratulations to Bob and Pat and everyone on their new roles. And I guess the first question that I had, to the extent that you can comment, what do you think was driving the recent industry weakness in box shipments recognizing that you did better in the last quarter and if you could sort of that parlay that into what are you seeing in terms of early fiscal third quarter trends, both in terms of your shipments and what customers are saying? And then I had a follow-on.
Good morning, George. It’s Jeff.
Hey, Jeff.
So, I can speak and articulate what we are seeing in our markets. As we reported, we’re up 2% organically and 20% overall with KapStone. I think it’s important to note the year-over-year comparisons still. So if you look at this quarter, last year it was a strong comp quarter and just give you some insight, sort of put your number two question.
And what our customers are saying, they are our independent customers are saying they are flat, they may be a bit down, but they are coming off two record years and their view is bullish on the economy and what they are seeing in the marketplaces. So that’s what their tone. What we see, our ecommerce business continues to grow at double-digits.
We are strong in processed foods. Our ability to put innovation with our machinery business into multiple segments as along as to grow and I think has helped us the last 24 months grow the business because we are driving and answering critical customer challenges. That’s in omni-channel. So, these are big CPG customers.
They are looking to compete in box stores and retail stores and also in the ecommerce channels. We are uniquely positioned to provide solutions for that. And that’s a sustainability or opportunity to drive cost out of their system and with a very good graphics business in the corrugated space paired with what we can do in our Display business and our Consumer business, we can hit all of the critical customer challenges.
And that’s continued to enable us to grow the business. We are up in April slightly year-over-year. We haven’t finished yet. So, it’s up a bit and it’s another top comp. We are up 14% last year in the aggregate and over 3% on a per day basis. So, our box business remains solid and we will continue to grow organically in the business.
Okay. Thanks for the comments on that, Jeff. The related question, I think you mentioned in the prepared remarks that you had 20 machine installations in the quarter. Can you help us sort of quantify that in terms of what kind of growth you are seeing year-on-year in terms of installations?
Whether there is more of a shift towards consumer or to corrugated recognizing some cases it’s marrying both. And I know you can’t give a lot of detail on this, but is this helpful to your margin, helpful to your return or kind of average? Any thoughts on that would be great and thanks and good luck in the quarter.
Thanks, George. I am going to let Pat answer on the 20. The 20 was Consumer and then I can – I’ll let Bob on corrugated.
Okay.
Great. Thanks, George. Good morning. This is Pat.
Good morning, Pat.
Nice to join this call. Good morning. And so, yes, the 20 box shipments or machine shipments that we had really represent a nice increase over the last year. We expect that to continue into the rest of this year. What this really does is helps us add additional value to our customers at downstream, because obviously, we can not only bring our folding cartons’ capability to and our box board capability to the customers, but also design that in a custom way into their solutions.
And maybe one example of this is the one that Steve shared around Diageo, where we actually not only sold the board and helped them design the board, but we also helped install the machine and design that. And one of the reasons we won that piece of business was because that had much higher productivity than any other solution.
And it’s not clear how the outcome may have been different if we didn’t have that machinery components to our offering. So, we really think when we look at our business, innovation and especially this plastics to paper conversions from design to material science with our paperboard substrates and then machinery, we think all of that is really important to our ability to serve our customers.
And then, George I’ll comment, we had 48 installations in the quarter and our automation platform continues to drive differentiation for us in volume growth. And paired with our Consumer business, and beverage is giving us unique opportunities and I’ll give you an example. We had a large install, almost a $27 million project for a customer.
So, it wraps up $50 million in sales for us. And we drove almost $3 million in cost out of their business. So we talk about quantifying value for the customers, we are able to do that with solutions. But it also gave our Consumer group a chance that over $40 million of business that we are looking at and we are looking at the Consumer business just not making machines for beverage, but moving into other machinery.
Their platform is tremendous and so we are looking at doing a fully integrated install in this customer’s business with an opportunity for the Consumer business also. We are also looking at new innovation in our BoxSizer and Box on Demand. So we came to market with a Pack on Demand pouch that we just rolled out at ProMat.
So, it gives us an opportunity for a fully recyclable pouch and then if you look at our BoxSizer that we just acquired, we already have sold packaging into a retailer that had 15 SKUs who was looking to go to five SKUs, was looking at dim weight reductions, have been shipping to retailers but wanted to go to the direct in ecommerce.
So when you talk about sustainability platform, it’s still got all of the filler packs that this customer is using. It reduced their working capital, because their inventory went from 15 SKUs down to 5 and it drove our cost they had an automated solution. So, these are things that are continuing to drive organic growth for us and differentiating us in the marketplace to our customers and driving margins.
Okay, thanks, Jeff. I’ll turn it over.
Your next question comes from the line of Anthony Pettinari from Citi. Your line is open.
Good morning and congratulations to Bob and Pat. On containerboard, you indicated in your comments that 10% of your total shipments are now export versus, I think 15% last year. Is 10% a good way to think about where you are early in fiscal 3Q? And then, we’ve obviously seen a big deterioration of export prices, just wondering if you’ve seen any kind of stabilization into the regions that you sell into? And sort of how you would characterize levels of inventory and supply demand from an export perspective?
Good morning, Anthony. It’s Jeff. So, 10% I think is a good way. It may go up a few percent, down a few percent, but in general, 10% I think is a good way to think about our export. And then, if you break that down to the world, 60% of our 10% goes into the Latin America market which is more stable, more direct customers for us and the pricing has not been as pressured as the other areas of the world. 30% is Europe Mid East, Africa combined.
And so what we’ve seen in those markets has been some higher inventories, some pricing pressure and that chimes to that definitely higher inventory, some pressure on the pricing. However, what we are seeing now is, the volumes in our export is, or as we’ve expected. So, we are seeing steady orders at least in the areas we participate.
We’ve had some areas, I’ll call out Turkey, Israel, that are trying to lock-in prices for six months. Typically, that’s a sign that they believe that the markets bottom and as they work down inventories, I would expect our business to stay stable on that market but much reduced. As you know, we’ve done a lot of work integrating into a North American box business. So that’s been part of the strategy and we’ve been executing against that.
Okay. That’s very helpful. And then just switching to the Consumer side, we’ve seen this kind of divergence within SBS freights, cup stock stronger, folding carton is seeing a small price decline and pulp and paper weak. And then the delta between SBS and CNK is kind of – in terms of different priced than it has been historically.
I was wondering, what’s driving this? If you can kind of frame how it impacts your portfolio in terms of your mix between cup stock and folding cartons? And just sort of what you are seeing in those box board end-markets?
Yes, thanks, Anthony. This is Pat. And so, the dynamics around the SBS and CNK pricing that’s mentioned, of course, we cannot comment on the forward pricing dynamics that are out there in the industry. But I certainly can give you some perspective on what’s happening in the markets. And I would like to focus most of this on CNK, because I think this is a pretty dynamic marketplace where we are seeing really strong demand for this product and it has really been driven by a number of things.
In the beverage market it’s been driven by the demand for wet and high strength applications. Beverage as well as frozen food and I think really capitalizing on the opportunity from plastics into the paper-based products. And so, we expect that demand to continue. I think, as Steve mentioned, we’ve got $50 million or so of sales into that plastics to paper conversion.
That’s certainly driving strength. In CNK, we continue to have strong backlogs there. And we expect to get $100 million of sales this year in that type of a conversion again from plastics to paper and many more – many times over that going into the future.
And I think the other thing around CNK that’s pretty interesting right now is that the brown side of CNK is viewed by consumers as environmentally friendly. And again, adding to the strength that we see there. So, we are pretty bullish on what we see in CNK and we are also excited about having the Mahrt Mill back up and running with that big investment that we have there.
And getting back to servicing our customers the highest level that we can.
Okay. That’s helpful. I’ll turn it over.
Your next question comes from the line of Mark Weintraub from Seaport Global. Your line is open.
Thank you. Just one detail question. The insurance recovery impact on EBITDA in the quarter, was that $60 million?
Mark, this is Ward. Remember there are three categories of the insurance recoveries and the claim. We’ve incurred M&R expense, just direct cost repair cost and those costs and those recoveries have been adjusted out of adjusted EBITDA and adjusted EPS.
And then, the business interruption, the lost production volume and the lost profits, that has flowed through adjusted EBITDA and adjusted EPS and the recoveries have flowed through adjusted EBITDA and adjusted EPS. And then finally, there is reimbursement for the capital investments. So, the total recovery was $60 million and that was in three buckets.
A portion of it was devoted to the capital investment we have to replace the direct cost that we exclude from adjusted EBITDA and adjusted EPS and then the business recovery for the business interruption losses. So the amount that flowed through adjusted EPS and adjusted EBITDA in the quarter was the recovery related to the business interruption claim.
Got it. And so that was the $3 million net income number?
Yes.
And so, can we assume it was roughly $40 million in terms of the EBITDA contribution?
It was $30 million of EBITDA we tax effected it to the – to get to the nine times.
Okay. Great. Super. Thank you. And how much more potentially could we be seeing from Panama City in Q4 that would flow through the EBITDA-adjusted number?
It would – we are envisioning an amount that’s not that much different than what we experienced in the first half. The other thing, as you think of Panama City, as we ramp up the full production and we look at the second half versus the first half, we are actually incurring operating losses in the first half before the business recovery – business interruption recovery.
And then, we saw those losses are reducing greatly in Q3 and then we returned to full operation as we move into Q4.
Great. Super helpful. And maybe one real quick follow through, if we were to look at KapStone pro forma, would the box shipments for the quarter still have been up for WestRock in total year-over-year?
Hi, it’s Jeff. Yes, so 2% year-over-year without KapStone.
And if we were to include KapStone, is it pretty close to that same number? Or does that actually move, I realize it’s pretty small, think of it move the dial, but does it move the dial if we looked at what KapStone did last year, add that to what WestRock did last year, and then compare it to what WestRock did in total this year. Is it still pretty close to 2%?
We are going to need an abacus for that. So I am not quite – so, we are up 20% combined. I am not clear what their box shipments in the quarter were, but I know we were up 2% organically and with KapStone included, we are up 20%.
Okay. Thank you.
Your next question comes from the line of Mark Connelly from Stephens, Inc. Your line is open.
Steve, we’ve seen WestRock and RockTenn respond to containerboard market and balances with higher exports, with plant closures and economic downtime. Can you help us understand how you think about those options with a bigger system with higher potential export potential? And with respect to downtime, has your approach to taking downtime shifted or you are thinking about it? You used to talk about your one mill as a swing mill. I am curious with the new system in with lower OCC whether that approach has changed.
I think first on the downtime, we have a larger system. So we have more flexibility. We are continuing to match our production to meet customers’ demand. Our system just gives a lot more flexibility. So, you really can’t identify one mill as a swing mill.
For the purchase of the market, we are – our approach is to focus on our customers and grow organically. I think the more we can sell boxes, the better and I think that’s one of the key findings but it’s really an advantage to KapStone’s box plant system. We are able to have a broader platform to be able to do that. And I think it’s contributed to the increase in our integration.
That’s helpful. Just one more question. Working capital was a bigger use of cash than I expected. Can you help us understand why and where you think we might end up for the year on working capital?
Mark, this is Ward. So, seasonally, if you think about it, our first half versus second half, let me just step back and just talk about the total cash flow generation. If you look, there is a seasonal element of our cash flow generation. Last year, we generated approximately $1.7 billion or 69% of our full year adjusted operating cash flow in the second half, and this year is no different.
We are projecting a similar level of cash flow generation in the first – in the second half of this year. And the key drivers really are higher EBITDA in the second half. And then working capital always shifts from a use in the first half to a source in the second half. We’ve talked about the reduction in inventories. If you think about it in the first half of our year, we pay out our annual bonuses and then we start to accrue those bonuses as we go throughout the year.
So the pattern that we see in the working capital model as we project our full year cash flow generation is really fairly consistent with what we’ve seen in previous years.
Very helpful. Thank you.
Your next question comes from the line of Steve Chercover from Davidson. Your line is open.
Thanks. Good morning everyone. So, I want to start, first of all with the 6-Pack solutions, the EconoClip and Cluster-Pak, I mean, this seems to me a real trend now. And why did it suddenly become so urgent? Are you guys driving this or is it the beverage companies or the consumers?
Yes, Steve. This is Pat. And I think the short answer is it’s really a lot of the consumer and as well as in turn the consumer packaging companies. And maybe a little bit of background that I have on this, from a personal side, I’ve spent the last 20 years in the plastics industry and was in this industry in packaging in a number of different ways and as you know, there has been a lot of effort in the plastics industry around recyclability and compostability and making the products more environmentally friendly.
But efforts have changed significantly and I would say, consumer preferences have changed significantly over the last couple of years and it was really kind of a tipping point or a turning point and what they are basically saying, consumers are basically saying is that, we don’t want single-use plastics in our stream, in our consumer stream.
And a lot of that is driven by some of the images probably out on social media. You can see the single use bottles floating in ocean and plastic bags in various places. And so, that’s a big shift. And so, our customers are now coming to us asking for a solution. And we have a pretty broad array of solutions that we are bringing to them that capitalize on our capability around design, around material science.
And it’s not just the paperboard science, but also the coatings technology to make sure that these products meet the customers’ needs and the application needs. And as we’ve talked about and Jeff articulated nicely, the opportunities we have, the leverage our machinery capability there brings us – allows us to have a really – a holistic approach to this.
So, EconoClip and Cluster-Pak, these are real options and real opportunities. They are being very much driven by end-user demand.
Well, congratulations on your shift from the dark side to the right side of histories. And sticking with the G had on plastic, the little box that you show on Slide 10, the EnShield Bakery Box, so is that – the see-through window, so, is that plastic or is that like a – would it be Cellophane?
Yes, that is still plastic. And so, there is different solutions that we are looking at for that. But I would like to highlight some of those applications leverage what we call our EnShield technology. One of the challenges with replacing plastics is achieving the barrier property that they inherently have around grease and oil resistance and just general moisture resistance.
And so, we’ve developed recyclable, compostable, environmentally friendly products that are based in water, aqueous dispersions in coatings that we can put on these packages to render and achieve the same types of properties.
So, we are pretty excited about EnShield and it’s broad application really across all of our substrates. And we will continue to work with our customers wherever we can to replace plastics is driven by consumer demand.
Thanks. I have just one quick one on the box side. The 2% organic growth, is it odds with the industry stats. So, can you help us reconcile that? Are you gaining share? Or is there maybe something wrong with the statistics?
I think we have been gaining share based on our ability to differentiate in the marketplace and providing solutions for customers that really add value and the things that Steve articulated earlier. We are helping them reduce the total cost in their supply chains.
We are helping them activate brands and some more products through retail-ready, shelf-ready solutions on shelf displays, graphics in general, we have a naturally sustainable product and with the G hard you just mentioned on plastics, we are well positioned across our system to take advantage of that.
And then we have scale that helps our customers manage risk when we go into change business or install machines to do full line integrations. The risk is much lower and it’s easy to switch and it’s easy to the users across North America, Brazil, Canada, Mexico. So, I think all of those things have helped our customers win and we are winning with them.
Great. Thank you very much.
Your next question comes from the line of Mark Wilde from BMO Capital Markets. Your line is open.
Good morning and congratulations on a good quarter.
Thanks, Mark.
Thanks.
I wanted to start, Jeff, if we could talk about, what looks like a little bit of a potentially a paradigm shift in the business where the corrugated business, where you’ve got new entrants building large, converting plants and also mills that use a lot of low cost mixed waste.
And I know a lot of people in the industry have been dismissive with this in the past, but at least one of these players is just steadily marching across the country building mills and building converting plants.
I am sorry. What was the question?
How do you think about? Is this a really a paradigm shift in the industry?
I can’t say in the industry Mark. I think they have a player that they are running and what they are trying to do, I think from our standpoint what we are doing in WestRock is we are running offense in the things that we control and that we do. We have a great mix. So, one of the benefits of our system of our size, we have a good mix or recycled and virgin kraft liners - virgin kraft fiber.
So, we are a balanced system and it gives us great flexibility in markets good and bad. And so, we like that position and we’ve been delivered about how we’ve gone about that. We are continuing to invest in our mill system that drive our cost, to the lower side of the cost curve. We’ve built a very solid converting system and then combine our systems with our consumer display.
We are unique in our industry. So I think that, we have continued to grow our business. We continue to add margin. So, I think we are well positioned and our customers are voting with purchase orders and organic growth for us. So, I think we are very well positioned in the market.
As far as a paradigm shift in the industry, I can’t speak to the whole industry. I know what we are doing and how we are executing and we will continue to integrate through our box plants and build a system that helps customers win in their marketplaces.
Okay. And then, I just for a follow-on, I just want to turn back to this machinery issue, because, a few months ago, you had a company sold at a very high multiple that had very higher margins just turning kind of kraft paper into dunnage inside packaging - for consumer packaging.
And I am just curious, WestRock and KapStone have historically produced a lot of kraft paper. That market gets pretty rough in the down market. Just, what’s – is there an opportunity for you to kind of replicate that strategy or replicate that kind of products going forward? Because it seems like that’s where all the margin is in the business.
That’s a great question. We look at our machine platform broadly. I haven’t spent a lot of time in those markets, but it’s a great question and we will think more about that. But it’s certainly as we look at machine platforms and opportunities, we’ve looked at multiple spaces just like that.
Okay. Good enough. Good luck in the quarter.
Thanks.
Your next question comes from the line of Debbie Jones from Deutsche Bank. Your line is open.
Thanks. Good morning. The first question I had was on Covington and cup factory. I just heard Anthony asked this part of the question earlier, but, if you are looking to giving to me, is there going to be a bit of an inflection point beyond what we’ve already seen in demand for these grades, as is going to be strategic companies shift their way from these non-environmentally friendly applications?
And which is reported by some of the things that you highlighted, but I was hoping that you could talk us to what your expectations over the next couple of years and then specifically how you are positioned on that?
Yes, thanks, Debbie. This is Pat. And so, I think we are positioned really well across any one of these substrates. We are – one of the nice things about our portfolio is we are pretty agnostic as to which material or which substrate is actually used in, so across, CNK or CRB, URB, SBS.
We really look to meet the customers’ needs and they are going to be natural shifts based on what the customers are really looking for and we’ve been able to make some of those shifts over the last couple of years and we will continue to do that as it makes sense. And maybe I can ask Bob make additional comments on this perspective.
Hey, Debbie, it's Bob. Just related to cup market, specifically in food service, that continues to be a big trend. The shift away from foam, in particular and we are seeing high-single-digit growth in that part of the market and I would expect that to continue going forward, as more of those conversions happen.
And clearly the innovation that we're bringing to the market by trying to remove plastic liners in cups is going to further accelerate that as well, that's why we're so excited about the work with the next-gen cup challenge as well and feel very good about the innovation that we're bringing to that market.
Okay. Thanks. That's helpful. It just it seems like with both McDonalds and Starbucks back in life it, they are quite curious about it. But it's so little confusing to me as to what the potential uptake is from that, but that's helpful.
My second question just sticking with volumes in the Consumer segment, I think on the last call you did mention that you thought there would be an inflection at least in the volume bucket of the EBITDA bridge in the second half of the year, and I was just wondering if that's still the case.
Yes. So I think - this is Pat again, Debbie. So I think for the rest of the year, first of all, our volumes right now are about flat as you saw the top-line is up about 2%. That's really some of the price that that we are realizing from the price previously published price increases. So right now, we expect volume to be - it has been above flat. We may see some increases here.
We are thinking the market in general, all in is about 1% to 2% CAGR and we are kind of still holding with that point of view. We've got some things that are improving and increasing. We've got some strength in food service. We've certainly got some strength in healthcare with our NPS portfolio and cosmetics in the beauty segments as well.
But as you know, there is things offsetting that such as the some of the secular decline that's been going on in tobacco and to maybe a lesser extent commercial print. And so, we are probably looking at similar to what we had before. We are looking at overall probably 1% to 2% on our general volume growth for this business all in.
Yes. Hey, Debbie, it's Bob. Just a quick follow-up on that. We will see some normal seasonal strength in the second half of the year. And then also, it's important to remember to our volumes in the first half of the year have been a bit muted, because of the big strategic outages that we've taken in the mills. So in the fourth quarter, that will be behind us. The facilities will be running full. So, we should see some modest growth in the fourth quarter.
Okay, thanks. That’s helpful. Can I just squeeze in one more, I wonder if you can update on Grupo Gondi in trends in Mexico. If you could just comment on what you're seeing there and what the expectation is?
So, we continue to partner with Grupo in Mexico. Their business is solid, our exports to them and to Mexico have remained solid. So in general, the market conditions remains strong. It’s a great business. They continue to invest – the mill project is well underway.
They continue to build world-class box plants and continue to grow their business organically. And so, in general, the relationship is strong. Their business is strong. And then I think the opportunity to continue to partner with them with customers in North America is solid.
Okay, thanks, Jeff. I'll turn it over.
Sure.
Your next question comes from the line of Gabe Hajde from Wells Fargo Securities. Your line is open.
Good morning, gentlemen. Two questions. One, could you discuss what's going on in the non-containerboard pieces of the KapStone business? There is a little less visibility with respect to sort of supply demand and/or pricing trends, particularly kind of talking about the extensible kraft grades and what you are seeing with demand and pricing there?
Sure. In general, the kraft markets are a bit challenged, not significantly like a containerboard pricing is good. And then, I think the extensible markets, I'll talk specifically for us on some of the saturated. So there's kraft extents when saturated, there is large opportunities on the saturated side for us. We have opportunities to grow that market.
The compound annual growth rate is pegged to be between 5% and 7%. So we think there is opportunities to expand in that market where there is not a lot of players across the globe. The segment for us has been steady. Again, there is some challenge in the pricing.
But we have locked up some of our large customers and longer-term contracts. And then the extensible market, that's not much different than our kraft market. So, in general, that's that business is fine.
Okay. And shifting gears a little bit, historically, I think the industry and at least WestRock has talked about box is performing to a spec as opposed to the specific linerboard or medium that goes into on whether it's a recycled or kraft content. Given where recycled fiber costs are, have you had any sort of influx of customers asking for more recycled boxes or anything like that just on the margin?
No, Gabe, I think you articulated well upfront. So what we have basically across our box customers is a request for performance-based specs. So they want us to build a box that suited for how they use it and the conditions that go into DCs and warehouses. So we are building a box to the spec. The quality of our paper products across our mill system.
Whether that's recycled or virgin, we are using liners that are recycled or virgin and applications that meet our customers’ demands. So, we could do that with a 42-pound virgin kraft liner or 42-pound recycled liner same thing with high performance liner. So, either ECT values or performance-based specs or what our customers are moving to and we are well positioned to meet that demand.
Thank you.
Your last question comes from the line of Scott Gaffner from Barclays. Your line is open.
Thanks, good morning and congrats Bob and Pat on the changes.
Thanks.
I just wanted to talk a minute, go back to the some of these new products that you mentioned, Cluster-pak and EconoClip. I was hoping, maybe you could help us out a little bit with the addressable market there, just given the fact that a lot of the market as you mentioned is in plastic rings today.
I know there is some customers that are agnostic to price especially some of the premium customers you mentioned, but how should we think about the addressable market there for, say paper versus plastic on those types of applications?
Yes, thanks Scott. This is Pat for the question, really appreciate it. I think there are a lot of markets that could really capitalize on this. And maybe I'll start with Europe. The plastics challenges that have been out there were – I think they are probably most acute and most are first really recognized in Europe and so we have seen a number of customers come to us and ask for solutions and as quickly as we can deliver them.
And that's particularly in the beverage market, but also in the healthcare market - there is this, as well as cosmetics and beauty there is this initiative that P&G is very involved we call it Ecopush, which is another example on a very different market beauty and cosmetics where they are trying to get rid of any type of container that is environmentally unfriendly and so plastic certainly fit into that.
And so, when you specifically think about the addressable market, it's really hard to put an exact figure on. We've kind of thought that - as we said, we've got maybe $100 million worth of sales into that conversion expected this year. We are certainly well on track for that. As far as where is it goes from here, we've talked about and I think talked in the past about maybe $400 million of sales.
But we are not sure that that's represents the entire market as we go global with this conversion. So, somewhere in the neighborhood of north of 50,000 tons, could be 70,000 tons, somewhere in that neighborhood is kind of what we're – it’s kind of what we are projecting. But we are really bullish on it. We are really excited about it and the number of applications that we have continue to increase.
Understandably, thanks for the detail there. Jeff, if we just look at the box shipments in 1Q, I mean, you mentioned the tough comps. But we did know about the tough comps maybe coming into the quarter. Clearly, things downshifted a little bit in 1Q.
Is there anything outside of weather that you are seeing, whether it's the KapStone business in the Pacific Northwest, where they are shipping not just actual containerboard, but shipping boxes to customers in the region where you've seen a slowdown, or anything regionally or end market-wise that you could point to outside of the weather for the slowdown in 1Q box shipments relative to expectations?
So from our standpoint, we are not – we are up. So I'll start with that. If you are talking about what we are seeing industry-wise, but we are not, we are up 2% organically and 20% total. So our shipments continue to grow. There are some regional challenges. The West Coast is challenged in Ag. It's off to a slower start, but we see a pickup there.
I think the sheet feeder business in the country has had some weakness. But in general, I think the biggest industry-wide one is Ag. That's been slower start. That's been really weather and then of course you had a bunch of weather events in Q1 that was hurting the overall shipments I think.
Okay, fair enough. Just lastly, $150 million EBITDA reduction at the midpoint of the guidance then, if volumes are kind of as expected. Is it more just external shipments whether that's export pricing, et cetera, if you could just sort of bridge the old to the new, what were the buckets that really moved? appreciate it and good luck in the quarter.
Hey, Scott, this is Ward. So, our current guidance range reflects potentially lower volumes to our both domestic and export containerboard and lower volumes relative to our previous expectations on the kraft side as well. We've also flowed through the impact of the $10 per ton published price decrease for the balance of the year.
Now, we have had some benefits and lower recycled fiber. But as we talked about, we had elevated virgin fiber and energy costs in Q2. Although, we are seeing moderation in second half, it's moderating from a higher point. And then we've taken, we've highlighted the downtime that we've taken in the month of April.
Our full-year outlook for the Consumer business is really largely unchanged. So the primary drivers have been a reflection of the supply demand conditions that we've seen in Corrugated. And beside all of that, we are still focused on all the things that are in our control. We are executing the strategic capital projects. We are focused on capturing the synergies and completing the integration of KapStone. So, we feel good about how we are performing in these conditions.
Thanks, Ward.
Thank you and thank you to our audience for joining our call today. As always, reach out to us if you have any questions. We are always happy to help. Have a great day.
This concludes today's conference call. You may now disconnect.