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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 Christa, and I will be your conference operator today. At this time, I would like to welcome everyone to the WestRock Company Third Quarter Fiscal 2018 Results Call.
At this time, I would like to turn the call over to Mr. James Armstrong, Vice President of Investor Relations.
Thank you, Christa. Good morning, everyone, and thank you for joining us today. We issued a 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're using to view this webcast.
With me on today's call are WestRock's Chief Executive Officer, Steve Voorhees; Ward Dickson, our Chief Financial Officer; Jeff Chalovich, President of Corrugated Packaging; and Bob Feeser, President of our Consumer Packaging segment. Following our prepared comments, we will open up the call for a question-and-answer period.
I would 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 discussed during the call. We described these risks and uncertainties in our filings with the SEC, including our 10-K for the fiscal year ended September 30, 2017, and our 10-Q for the March -- for the quarter ended March 31, 2018. 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. Good morning, everyone. Thanks for joining our call today. WestRock delivered excellent financial results in the June quarter. Fundamentals are strong across all of our business. Our containerboard mills are operating at full capacity, and backlogs from the consumer mills are at or near-record levels. Year-over-year performance improved significantly. Sales increased $442 million. Adjusted segment EBITDA increased by $163 million or 27%. We generated $783 million of adjusted operating cash flow. This increased 21% from last year. We remain on track to achieve our previously communicated full year goals for adjusted EBITDA and adjusted operating cash flow. In the quarter, we achieved the $1 billion synergy and performance improvements goal that we set at the inception of WestRock just 3 years ago. When we set this goal, we developed specific targets and plans throughout the company, including for our operating locations and for functions such as procurement and logistics. Our collective focus on the $1 billion goal has been relentless. I'm proud of our team's efforts that enabled us to achieve this milestone 1 quarter early. And while we celebrate this milestone, we know we have many other opportunities to drive productivity across our company.
In addition, when we complete the KapStone acquisition, we'll set our sights on delivering the $200 million of cost synergies and performance improvements that we've previously outlined. We returned over $200 million to our stockholders in the quarter, $110 million through dividends and $101 million through share buybacks, paying less than $60 per share. This brings the total capital return to our stockholders since the creation of WestRock to approximately $2.1 billion.
As you no doubt saw last Friday, the Bureau of Economic Analysis reported that U.S. real GDP increased 4.1% in the June quarter. This report highlighted that goods grew faster than services. Should this positive trend continue, I believe demand for sustainable paper-based packaging will follow and grow at favorable rates.
Sales for the quarter were $4.1 billion. Our consolidated adjusted segment EBITDA margin of 18.4% increased by 220 basis points year-over-year. Adjusted earnings per diluted share were $1.09. This was up 47% over last year. The results of the quarter reflect significant growth in our year-over-year financial performance and the compelling momentum that we've had in our business.
You may have seen KapStone's press release and 10-Q for the quarter ending June 30. They posted outstanding results for the quarter with adjusted EBITDA of $138 million. This is 38% over the $100 million they earned last year. On a trailing 12-month basis, KapStone's adjusted EBITDA was $509 million, which is higher than the $500 million run rate we stated when we announced the planned acquisition in January. I congratulate the KapStone team for their performance. As we grow and innovate with and for our customers, WestRock has a need for talented people with experience in our business who will help our company grow. I'm looking forward to the addition of the KapStone team to WestRock.
The KapStone acquisition is subject to the approval of the KapStone stockholders at a special meeting scheduled for September 6. We continue to work through the regulatory approval processes in the United States, and we expect the acquisition to close by the end of the calendar year.
The WestRock Corrugated Packaging team delivered outstanding results in the quarter. Adjusted segment EBITDA was up 29% to $485 million. Our North American corrugated adjusted segment EBITDA margin of 23% was 420 basis points higher than the prior year quarter. I congratulate the Corrugated Packaging team on their remarkable execution and the leadership they have throughout the organization. Since the acquisition of Smurfit-Stone, we've increased our North American corrugated margins by more than 1,000 basis points. Our margins are now comparable to our public company competitors. We're maintaining our focus on margin improvement through our productivity programs, optimizing our supply chain and investing in strategic projects that reduce our cost. A great example of this type of investment is our Florence paper machine upgrade, which we believe will add between 60 and 70 basis points of margin to our North American Corrugated Packaging segment.
The corrugated industry remains attractive and growing, and we've outgrown the market for the last 15 months. We're seeing strong demand across the majority of our corrugated end markets.
WestRock's North American box shipments increased 4.1% on a per day basis and 5.7% on an absolute basis as compared to last year. This volume increase was driven by the contributions of our recent acquisitions as well as strong demand in the e-commerce and retail markets. Our integration level for the quarter increased from 72% to 76% year-over-year. Our system is tight due to strong demand across the majority of our end markets. Our inventories are below where we would like them to be, and this has caused some inefficiencies in our network. We're working with our customers to ensure that they have supply when they need it, and many of them are entering into long-term contracts to secure their long-term supply.
Sales of containerboard to domestic independent converters remain very important to WestRock. During the quarter, we shipped 292,000 tons to independent converters. In the past 12 months, we've shipped more than 1.1 million tons of containerboard to this market. We shipped 208,000 tons to export markets. This was a decline of 53,000 tons year-over-year and 65,000 tons sequentially.
Our Brazil team delivered exceptional results during the quarter with record adjusted segment EBITDA margins of 28.3%. This was up 150 basis points sequentially and 320 basis points over the prior year. Construction at our new Porto Feliz box plant is under way, and we expect this plant to start up in the second half of fiscal '19.
Our Consumer Packaging team increased volumes by an impressive 7% year-over-year, with approximately half of this increase from organic growth and the other half from acquisitions. There's strength in most of the consumer end markets, including health and beauty, food packaging, food service, liquid packaging and beverage. Volumes in our core food packaging business have increased over the last 3 quarters in a row. This was a significant reversal from the flat to down volumes in the center of the store that we've been seeing. We believe this signals a pickup in this market and demonstrates the success that we're having with our customers.
Our paperboard backlogs improved through the quarter and are currently between 5 and 6 weeks for SBS and CNK. At 6 weeks, CRB backlogs are some of the longest we've ever seen. Pulp & Paper Week published price increases in the March and April issues across each of our consumer grades, and we're implementing these increases across our business under contract. We're also implementing the CRB and URB price increases published by PPW in June and July.
We're winning new business in multiple market -- in multiple growing end markets, including craft beer and health care. Many of these customers are entering into multiple-year contracts as they seek to lock in long-term supply with WestRock. And they're buying products across our broad portfolio, securing contracts for cartons, partitions, labels, leaflets and machinery.
Adjusted segment EBITDA in the quarter was $272 million, up 18% year-over-year. Looking at the year-over-year bridge, we generated strong growth in volume and price. Lower recovered fiber costs helped mitigate the impact of cost inflation, but not to the same degree as in the corrugated segment. Our consumer mills used 1 million tons of recycled fiber a year, significantly less than the 4 million tons consumed by our corrugated mills. Our $37 million in productivity resulted from the benefits of our capital investments, procurement savings, the internalization of MPS paperboard volume and the results delivered by our Six Sigma and performance excellence teams. Our $37 million in productivity was an important contributor to our results in the quarter by fully offsetting increases in inflation of materials, energy and freight and offsetting the majority of our wage inflation.
That concludes my comments in the quarter. I'll now turn it over to Ward.
Thank you, Steve. We had a very successful quarter in Land and Development, closing on several large land sales, including Cabin Bluff. In the past week, we also closed on the sale of Summers Corner, the last of the large residential development projects in the portfolio. We expect to be substantially complete with the monetization of the Land and Development portfolio by the end of the calendar year 2018.
As Steve referenced, in the June quarter, we accomplished our goal of $1 billion of synergies and performance improvements. Even though we achieved this important goal, we will continue to seek performance and productivity improvements that more than offset normal inflation. Our culture is one of continuous improvement, innovation and execution, all key to driving strong future financial results.
Turning to Slide 10, we detail the key assumptions included in our fiscal fourth quarter financial guidance. We expect sequential adjusted earnings per diluted share to be higher than the $1.09 achieved in the third quarter.
First, we expect adjusted segment EBITDA to increase by $68 million to $83 million sequentially as a result of the flow-through of previously announced price increases, seasonally higher volumes, favorable mix and continued productivity gains.
Second, we expect maintenance downtime to decrease by 133,000 tons sequentially across our mill system. Lower maintenance downtime and other items will have an estimated $38 million cost benefit quarter-over-quarter.
Third, input costs are expected to be $10 million to $15 million higher than the third quarter. Recycled fiber costs have declined, and we now expect them to stay at lower levels in the near term. Based on our regional consumption mix, our average index price paid for recycled fiber in the third fiscal quarter was $78 per ton, which matches the July index price. For the quarter, we are forecasting that recycled fiber prices will decline slightly from July's levels. However, noting the volatility we've seen this year, predicting recycled fiber cost remains difficult. Fourth quarter adjusted EPS will be unfavorably impacted by the 24.5% tax rate and higher depreciation and amortization.
Turning to Slide 11. We are reaffirming our full year fiscal 2018 adjusted operating cash flow guidance of $2.45 billion as well as our guidance of more than $2.9 billion of adjusted EBITDA. We are fine-tuning our revenue guidance and now expect to see full year revenues of $16.3 billion. We expect that we will invest over $1 billion in total capital expenditures in the fiscal 2018. The $1 billion includes $150 million that we expect to invest in strategic capital projects, including the Florence paper machine, the Brazil box plant and the curtain coder project at our Mahrt mill. We are positioned to deliver record financial results for the full year and strong growth in revenue, adjusted EBITDA and adjusted operating cash flow.
With that, I'll turn it back over to Steve.
Thanks, Ward. I'd like to talk for a moment about our broad portfolio of differentiated paper and packaging solutions. We're making excellent progress integrating the sale of products from this portfolio. This is providing the opportunity for us to grow our sales with customers that value our solutions and optimize our business across our system.
To provide some perspective on this topic, we serve more than 100 customers who bought at least $1 million from each segment over the past 12 months. Our average sales to the top 100 of these customers are about $50 million per year and account for $5 billion of WestRock's annual sales. Sales to this group in the aggregate are evenly split between our Corrugated and Consumer segments. Our portfolio and capabilities provide us the opportunity to work with these and many other customers in ways that no other company can replicate. We have the ability to integrate our broad portfolio into many of our customers' most important use cases. I'll provide you a few examples.
Let's start with cereal. We can provide both the cereal carton and the corrugated box used to ship the cartons full of cereal. We can design both the carton and the box together in tandem to optimize the overall performance and the use of fiber. In many cases, we're integrating the carton and the box to produce a retail-ready package that goes directly on to the store shelf. This saves stocking cost for the retailer, provides shoppers with the ability to easily identify and purchase their favorite products. We supply beverage customers with the cartons, machinery, corrugated boxes and merchandising displays, which combine to provide a powerful combination for these customers to promote their products. We're pairing folding cartons with our retail displays to help health and beauty companies promote and deliver their products directly to consumers. With our pharmaceutical customers, we can integrate our folding carton, leaflets and inserts into an integrated packaging solution that ensures that rigorous brand, compliance and safety requirements are successfully met. Box on Demand is an important addition to our machinery portfolio, and this solution is gaining interest from many of our customers.
Across our corrugated and beverage machine platform, we installed more than 50 machines in the quarter, and this brings our total company machine placements to over 3,400. This is a number we expect to continue to grow.
So our success is coming from more than simply cross-selling across our differentiated portfolio. Our combination of consumer and corrugated packaging uniquely positions us to solve the critical challenges our customers are facing. Whether we're helping our customers grow their sales, lower their total cost, minimize their risk or improve their sustainability, we're providing the paper packaging and machinery solutions that deliver value. I'm proud of the way our teams are working together to help meet our customers' most critical challenges, and in the process, improve our business.
WestRock's vision is to be the premier partner and unrivaled provider of winning solutions for our customers. We're driving margin growth across WestRock through strong operating execution and solid business fundamentals. We expect that our fiscal 2018 consolidated adjusted EBITDA margins will increase by more than 250 basis points. Our team is committed to working together to help our customers achieve their goals using our portfolio of differentiated paper and packaging solutions. WestRock's broad offerings across our Consumer and Corrugated segments provide unique value for customers, enabling them to have one partner for their packaging needs that will help them win in the marketplace.
Through our strong execution and capital allocation, we'll continue to improve margins and grow our cash flow and use the strong cash flow to reinvest in our business and make acquisitions that support our strategy. We'll return capital to stockholders by increasing our dividend over time and opportunistically repurchasing shares within our target leverage ratio. This is a formula that provides significant opportunities for WestRock employees, customers and investors over the short and long term.
That concludes my prepared remarks. James, we are ready for Q&A.
Thank you, Steve. [Operator Instructions]
Christa, can we take our first question, please?
Your first question comes from the line of George Staphos with Bank of America.
Steve, also, congratulations on the recent award. I guess, the first question I had is on consumer. And just trying to see whether the performance in the segment was in line, perhaps a little worse, perhaps a little better with your forecast, and whether any of the outage expense that you called out was related to consumer or corrugated. And then I had a follow-on.
George, this is Ward, and I'll start, and I'll let Bob fill in. The consumer business was performed to our expectations that we embedded in the guidance leading into the quarter. And the outage, the excess outage cost that we highlighted was related to the outages that we had in our corrugated system.
So largely Florence then, Ward?
George, it's Jeff. No, it wasn't Florence. This was our largest maintenance outage quarter, so we had 125,000 tons of downtime. 9 of our mills had outages, 8 of them went very well, 1 didn't go as well. And we had some excess costs in labor, maintenance, fiber and other costs. So that was the outage.
All right. And then the other question I had, as you think about Box on Demand and the machine installations that you're getting, it's, I guess, encouraging to see the volume growth. I know it's a relatively new initiative, but is there any kind of audit so far that you could relay in terms of how sticky these sales are? Are you seeing any turnover in terms of contracts where there's been a machine installation? What kind of relative return do you get on this sort of sale versus your existing business? And what are the risks that you have to keep on top of machinery trends to keep this initiative going?
Okay. That was a lot in one there, George, so let me break them down.
Sorry about that.
So -- that's okay. Starting out, so they are performing to our expectations. We're really getting synergies between combining our automated packaging systems group with Box on Demand. So our EPS sales leads are already selling Box on Demand. We haven't seen any turnover in the contracts that we have. So the business is sticky. And just like our APS contractual business, it's typically a 5-year deal, and there's a high repeat rate with that business. Like most of our differentiated product, there is better margins associated with that business. If you take a plain brown box versus our differentiated products, it carries higher margins typically. And then like all the machine business and differentiation, you have to have innovation in the pipeline to continue to differentiate in the marketplace, so we have constant projects. Across our machine platforms, both in beverage and in corrugated, we're always looking for the next innovation and working with our customers to innovate and really meet their demands. It's critical that we don't do that in a vacuum, but it's solving specific problems for our customers. And so that's what we continue to do across our machine platform. I think I -- okay.
Your next question comes from the line of Brian Maguire with Goldman Sachs.
I was hoping you could just comment on the pace of the box price increase maybe relative to what you saw with the increase last year. And maybe you can give some data, if possible, on how much of it you realized in the third quarter, maybe the exit rate and then kind of how much you'd expect to get in the fourth quarter?
Brian, it's Jeff. Consistent with what we said on the last 2, based on our contractual business, this latest published March increase, we will recover in 2 quarters based on our contractual flow-through. So we'll leave the September quarter at a $50 run rate. Through this, the June quarter, we left over at 60%, so we had already been in the 60% -- over 60% run rate after this last quarter. And it's typical there's not a lot of difference. There's some difference in the way the contracts fall, that it happen to be before the quarter, so a little earlier, but it still basically ends in the same quarter, same run rate.
Okay, great. Just wanted to switch gears a little bit. The Newberg mill you've got in Oregon that has been in the news a little bit lately, I think we've seen a little bit of an increase in interest from Chinese buyers in U.S. assets. We've also seen some commentary around recycled pulp potentially being a solution to China's ban on mixed paper. I was just wondering if you're reevaluating opportunities there, if you would consider restarting that mill yourself to maybe make some recycled pulp or as a partnership with somebody else, given it looks like there's a -- could be a decent export market for product coming out of that mill.
Brian, this is Steve. I think -- we entered into a contract to sell the site in January, and we're unable to close because the buyer couldn't obtain financing. So we're now assessing the best use of the Newberg facility. It's going to take some time for us to determine the next steps, and we don't have an identified time frame to make that decision.
Your next question comes from the line of Mark Connelly with Stephens.
This is Ashish Gupta for Mark. First question was, just wanted to go into the strength in kraft paper markets, just more or less in reference to your comments about the strength of KapStone. Just wondering if you can provide some color on what's driving that.
Ashish, it's Jeff. So our business in kraft paper, there's multiple use in our world, I can't speak for KapStone. So ours is food service, strength in food service packaging business. There's also strength in fillers. So the e-commerce movement for some of the bag and kraft fillers has been driving some of that. So that business is robust for us, and we look forward to acquiring KapStone and being more competitive and expanding our scope across other markets.
Yes, it seems like you guys timed that well. I just wanted to follow up on some of the comments in the prepared remarks. I think this is the first time I've heard you guys speak to long-term contracts with your customers. Just wanted to explore how you're thinking about that, what the pricing mechanism works -- how the pricing mechanism would work in the contracts. Just wanted to understand more about that.
Okay. It's Jeff again. So I'll speak to what we've seen. So in containerboard and box, there's a couple of different ones. So in our long-term views of containerboard contracts, we're getting some historically longer contracts that would go over our 2 or 3 years. There are varying mechanisms to move the pricing, and I won't get into that specifically, but there's varying methods, and that's a negotiation with our individual customers. But on our customers' standpoint, it gives them secured supply. It gives us a secure look. So as we look at investing capital for customers and growing and be more competitive in the marketplace, it's good for them and it's good for us. And we're seeing that across both our containerboard space and our corrugated packaging space.
Oh, sorry, go ahead.
I would just say ditto in the consumer space as well. We're having discussions with the customers about longer-term contracts. And again, I won't get into the mechanisms, but we have a variety of price mechanisms embedded in our contracts with our customers.
And your next question comes from the line of Mark Wilde with Bank of Montreal.
Steve, I wondered if you could just give us a little more color on sort of progress with MPS, what kind of volumes you're seeing in that business, your ability to kind of grow those kind of specialty packaging products.
MPS has performed, I think, very well according to the expectations that we had going in. I think the acquisition is working out pretty much as we planned. I think it has given us exposure to higher-grade and higher-quality markets. And particularly in health care, I think that's been -- particularly health care in Europe, it's been growing to the point where we're really pushing the constraints of capacity. And so the issue that MPS has had, had been more trying to deal with the volume and the great growth that they've had in their business since the acquisition.
Okay. And just as a follow-on, Steve. I wondered, could you talk going forward whether you think the paperboard packaging business is going to kind of shift from being kind of what's traditionally been a regional business to being more of a global business? I think if you went back 30 or 40 years ago, Smurfit talked a lot about this, but I think they were still -- essentially, it was kind of regional businesses for them.
I think it is, and I think it's more of an evolution rather than a revolution. And I think where we see it, and we've seen it in the MPS market and MPS customers, and I'll explain it in a second. But I think we're cognizant of that as we're going through the acquisition. I think for those customers that have a global buy, so I think that's one condition. And then the second condition is they have to have a strong feeling for consistent quality of their packaging around the globe. Those type of customers, there is an opportunity to supply packaging on a global basis to those customers. Let's say, if somebody is regional, then that won't be the case. If somebody is global and isn't -- has different brands or isn't concerned about the quality, it's not the case. But the global customers who care about quality, it certainly is the opportunity, and we see it today with those customers that we're able to serve those customers around the world and have consistent print quality for those customers.
Mark, this is Bob. If I could just follow up on that. So where that really plays out is in the health care markets and in the beverage markets. And as you might imagine, with pharmaceutical companies, there's more of a focus on having a consistent quality packaging system around the world. So those are the 2 end markets, in particular, that really lend themselves to more broad-based international coverage.
Okay, that's helpful. Listen, good luck in the fourth quarter, guys.
Okay, Mark, and thanks for the hooray in your note this morning.
We waited a long time for [ that just to close too ].
We have been, too, but the corrugated team has just done an amazing job.
Your next question comes from the line of Mark Weintraub with Buckingham Research.
I just wanted to clarify, if I could, when you were discussing the multiyear contracts that you're putting in place. And clearly, that would be on the supply side. So are there also differences, particularly in the corrugated, on the way the pricing mechanisms might work relative to where they have historically? And might that lead to -- or would that potentially reduce volatility as you see it?
Mark, it's Jeff. As I commented earlier, we have multiple mechanisms that trigger movement in the contracts. It's important to remember that pricing is set between buyers and sellers. So we're in the market, it's a competitive market, it always has and it always will be. So we negotiate the price and agree on the price. And then there's multiple ways to trigger movements in the contracts, and so that varies by customer and by accounts. And so the volatility is more market-related, and that could be cost-related or supply/demand inventories, there's volatility across all of the different types. It's important that we just have consensus with our customers, the way to best move that helps them and helps us, and that we have agreement. It's just a baseline for what triggers the movement. And then like I said, there's no one methodology across our systems in containerboard and boxes. And so it's a one-on-one negotiation with our customers how we move their prices.
Understood. But we shouldn't read into it that conceptually, you're trying to engage in ways to create a model which might have less volatility over time in the margin, or are you?
No, I wouldn't categorize that, that way. I think what we want is long-term contracts that our customers benefit from, that we benefit from so they can plan supply and we can plan the demand. And we also invest capital based on what our customers are doing in the future and to help them solve problems. So that just gives us a better view and less volatility in how we invest capital, how we run our plants and how they run their operations.
Okay, fair enough. And just -- Smurfit Kappa, on their call yesterday, had suggested that OCC had actually started to go up in the U.S., as I understood it. It's kind of surprising a little bit. Are you seeing that as well? And any thoughts on the wastepaper markets more generally given all the different things going on?
No. I think what we've stated is we see it flattish right now. The restrictions on -- that have been put in place in June when self-inspections are still in, as well as the CCIC, the China Certification and Inspection Group, is still doing all the inspections. And so that is causing a slowdown, almost a stop of OCC going to China. And as you've seen, the Chinese are looking for fiber in other places, and they may ban imports altogether. So in the short term, we see it flat; in the long term, who knows? It depends what China does. They can get it through containerboard. They can get it through pulp. They can get it through recycled fiber. We're well-positioned to supply. And also, the balance of our system with recycle and virgins, we're well-positioned to perform well regardless of what happens in the OCC market.
And Mark, this is Ward. To clarify on our guidance, the sequential decline from Q3 to Q4 is between $2 and $3.
And your next question comes from the line of Adam Josephson with KeyBanc.
Ward, just -- Ward, one question on CapEx for next year, just based on what you've already talked about. I know you've talked about maintenance of about $850 million. I believe you said Mahrt and Brazil would add about $100 million next year. And then Florence, I'm thinking Florence will add about $300 million just based on the total investment of $400 million that you've talked about and that most of that would be concentrated in fiscal '19. Do any of those pieces sound particularly off to you?
No. The $850 million baseline, plus the roughly $150 million for the remaining strategic projects, and I think the view on Florence is between $250 million to $300 million next year.
Perfect. And just an update on July shipments. I know you're up 4.1% in the June quarter. Can you talk at all about what you saw in July, just given that we're through the month already?
Yes. Before the month closed, Adam, we were up 6.5% aggregate. Remember, there's 2 more shipping days, but we're up 6.5%.
And your next question comes from the line of Chip Dillon with Vertical Research.
It's interesting, we've heard pretty much from the top 8 players, except for the one private one -- one of the private ones in terms of what their needs are going to be to supply growth going forward. And I believe you all have suggested, when you announced Florence, that you didn't feel the need on the capacity front to add and that, instead, if you need more board, you would just pull it in from export. And just recognizing that you've been doing that, is that still the strategy as we look out?
Chip, it's Jeff. Well, remember, we have more capacity that we're looking to acquire with the KapStone acquisition. So that gives us some opportunity to expand in markets that we don't currently serve and to further expand with the customers that we do currently serve. So we're going to have opportunities to grow with the capacity that's in KapStone. I've also mentioned on other calls that besides pulling from export, we could invest to add capacity in our current mill system. We haven't had to do that. And with the KapStone acquisition, I don't see us having to do that in the short term. But demand remains strong. There is a need for capacity based on demand for box. And as you said, most of the folks adding it have been integrated and have downstream customers. So we are well-positioned in our system and with the acquisition of KapStone to expand.
Okay, I got you. And I think on the last -- just one quick follow-up. You had mentioned that in July, your shipments were up, and maybe I misheard you, 6%, but there were 2 more days, which would -- I just want to make sure I didn't hear this wrong, given that each day is 5%, that would suggest that per day was down considerably. Did I misunderstand that?
No, you heard right. I mean, we'll be down 3.5% per day, but there's no change in our backlogs, no change in our demand profile. July -- 4th of July is in the middle of the month, but it's still strong backlogs, nothing functionally changed in our demand. It's still very strong, and we're running full-out box plants and mills.
And your next question comes from the line of Debbie Jones with Deutsche Bank.
First, congratulations on hitting the $1 billion target early. You mentioned some opportunities going forward to improve performance. I know there's [ one ], you highlighted KapStone. Can you give us a sense of what else you're optimistic about or think there's an opportunity for going forward?
We laid out the margin improvement plans in our Investor Day presentations for both Corrugated and Consumer. So in the Corrugated business, it didn't -- we did have the benefits related to the strategic investments to improve our cost position. And in the Consumer side of the business, we talked about the -- some of the investments that we're making, increasing vertical integration, achieving the synergies from the MPS opportunities. We are driven across this organization to make sure that we drive productivity, both in the functions and in the plants that offsets the normal rate of inflation so that we have the ability to sustain and improve margins.
Okay. And I just wanted to turn to consumer. I thought your volumes were pretty impressive. I'm trying to get a sense of how sustainable that is and if this is a shift from other substrates or business wins based on some of the revenue [ synergies ] that you've highlighted.
Yes, Debbie, this is Bob. I think when you think about consumer, I think it's important to recognize that we're not just about the center of the grocery store, that over 50% of our mix is outside of this. And just as a reminder, MPS, that acquisition was important in terms of really shifting our participation in faster-growth health and beauty. And as we looked at the quarter, health care, our business was quite strong, as Steve referenced, both in North America and in the U.S. -- and in Europe. And we're also seeing strong participation in food service as well, and that being fueled by just underlying good fundamentals, but also the shift from foam and plastics to paper. And then we also highlighted the retail food area, so 3 quarters in a row where we've seen growth in that area, which was good to see. And we're seeing some return to growth in frozen food and some dry food and snack areas. We're also winning new business with smaller brands. So the center of the store decline appears to be stabilizing, and we're starting to see some demand recoveries with the overall economy. And then in beverage, we have spots where we're seeing good growth, whether it's craft brew and sparkling water area. But in North America and in Latin America, we really saw very good growth. So we feel good about the outlook. And again, the overall enterprise approach that we have with our customers is really giving us more opportunities and more touch points across our customers to grow.
Your next question comes from the line of Steve Chercover with Davidson.
My question was about the KapStone integration thing. I just wanted to ask, are you able to set up a joint data room at this point so the preparation is collaborative? Or are you compelled to operate as if you're still full-blown competitors?
We're compelled to operate as we're full-blown competitors.
So what type of preparation can you do, I mean, you can't share a list and whatnot?
Just not as much as we would like to do. So we're very interested in going through the regulatory process so we can get the deal completed. We have had introductory meetings, but I think, as you had mentioned, there's a limit to how much you can do. So we're ready to move forward with the acquisition.
Okay. And then, I guess, not a follow-up, but it's a great accomplishment for you guys to close the gap between yourselves and your more virgin containerboard competitors. And I'm sure that's mainly operational, but OCC is helpful since you're a bit less virgin. Can you sustain it if OCC goes back up? Is there still more to come operationally?
Steve, it's Jeff. I think we laid out clearly in our Investor Day, we had another 200 basis points before the move of OCC or pricing, and that really came from the strategic capital investments, footprint optimization, supply chain optimization, differentiation, the sales margin growth. So we do have more, and we will continue on the track of improvements. And the business has been operating well and will continue to operate well.
And your next question comes from the line of Scott Gaffner with Barclays.
Jeff, just a follow-up on the box shipments for a minute because they did slow down a little bit from the prior quarters, 6.8% down to 4.1%, and you said July slowed, but then you also said, I think, that the order book was relatively strong. Is there anything that you're seeing that's causing the near-term slowdown in volume growth on a year-over-year basis?
Scott, so I think it's instructive, too. On the 4.1%, if you look at the FBA comparison, when you compare FBA, our shipments are actually up over 6% on a per day and 8% in the FBA comparison. So 4.1% is everything and includes sheets, Canada. But if you do just the FBA comparison, our quarter was over 6% per day and 8% overall. So that's note number one. Note number two is, no. And last July, if you look at where we were, we were up 12%. So the business continues to run full. There's no difference in any of our backlogs. July is typically a slower month. We have the 4th of July. You have customers who took downtime for maintenance. They have vacations or -- a couple of our customers have a week or 2 off. So there's nothing structurally in the business that slowed down, in our volume or our backlogs, again, we're running full out everywhere.
Okay. So you -- it sounds like maybe you're just saying more of a comparison issue than an underlying market issue. Is it fair?
I think that's fair. Yes.
Okay. And then, Steve, just moving to KapStone, back to KapStone for a second. Originally, you had said September quarter close, and I think you said at the beginning of December, and now you're saying by the end of 2018. Is there anything there around the regulatory hurdle that's further pushing this back? Or anything that you think is getting in the way of closing the KapStone deal?
No, there's really nothing new. I think when we announced the acquisition, we thought there was some probability of a second request and we received a second request. I think we're just working through that.
And your next question comes from the line of Anthony Pettinari with Citi.
In corrugated, you indicated inventories are below where you'd like them to be, and that led to some inefficiency in your system. I'm just wondering, was there a financial impact from that in the quarter that you could quantify? And then what steps are you taking to mitigate that this quarter in terms of managing inventories and supply chain?
Anthony, it's Jeff. So the impact in the quarter is small. It's really from shipping roll stock between plants or some upgrades, some side terms of -- it's $1 million or $2 million small in the sense of better to make the shipments and take the upgrades and keep customers happy. So this is -- this quarter, we have no maintenance downtime, so we're confident we'll be able to resupply the plants, get our inventories in lines and have some less of the upset, but there's not really a material effect on the margins.
Okay, that's very helpful. And then just following up on George's question. Consumer margins have been lower year-over-year, I think, for 5 quarters. From a big-picture perspective, is that just a catch-up of price cost with boxboard price increases having longer lags than corrugated? Or is that, I don't know, impact of MPS? Or is there something else that's driving that? And then in the current quarter, would you expect year-over-year margin improvement or any thoughts on kind of margin improvement moving forward?
Yes. So I'll start, and I'll -- this is Ward, and I'll have Bob tag on. So remember when you look at the consumer business, it's not getting the benefit of the deflation from OCC and has had to experience the elevated impact of higher freight and higher chemicals costs. The flow-through, the previously published price increases, as Bob highlighted earlier, is starting to contribute to the P&L, especially as we exit the fiscal year. Bob, do you want to add anything to that?
Yes. I think, as expected, the margins improved in the third quarter and I think are more in line with historical levels. We saw about 120 basis point improvement over the quarter. And as we go into the fourth quarter, we would expect to see further improvement in margins. Demand is good, we are heading into our seasonally strong quarter. We had a good productivity quarter in the third quarter, and we're expecting to have good productivity in the fourth quarter as well. And that -- I think, as Ward talked about, just as a reminder, the consumer margins have definitely been impacted by the significantly higher freight and chemical costs that weren't fully offset by the lower OCC cost.
And your next question comes from the line of Gail Glazerman with Roe Equity Research.
Going back to consumer demand, you talked about the shift away from foam. I'm wondering, are you starting to hear from customers in other areas where they're interested in replacing plastic with paper-based alternatives?
Gail, it's Bob. Yes, as you know, this has really become a top-of-mind issue with consumers, retailers, CPGs and regulators. So we're talking to a number of customers about either reducing plastic packaging or eliminating it in total. And really, for us, it's across 4 areas. In food service, which is really ground zero for the shift to -- from plastic and film to paper, there, we're offering high-quality paperboard for hot drink and cold drink cups. We've got a variety of packages for takeout containers, including E-flute corrugated clamshells to replace foam, and then also paperboard containers to replace aluminum sandwich wraps, and as Jeff talked about, kraft paper to replace plastic bags. Then in beverage, we're seeing more of a renewed interest in shifting from printed shell multipacks to paperboard. And there, we have a variety of solutions, including machinery to help customers, including CanCollar, which replaces the plastic ring for multipacks. And then in food, our focus there has really been on providing materials that are more recyclable. And we're seeing good interest in our barrier paperboard solution that we call EnShield. This provides a grease and oil and moisture barrier without extruding the plastic in food and ice cream applications, and there's a lot of interest in that. And finally, in e-commerce, a big focus, and I think Jeff touched on this, is eliminating void fill in packaging. And we have solutions like our Meta e as well as Box on Demand that also help reduce overall void fill in e-commerce.
Okay, that's great. Really helpful. And then just broadly speaking, probably more on the corrugated side. Are you hearing any concerns from customers about the mounting trade pressure going on? There's been some talk of protein stacking up in freezers. Are you starting to hear that as a concern about this that might impact demand over the next few quarters?
Gail, it's Jeff. So we're hearing from customers that they're watching it closely. We haven't had a large effect that we've seen yet in actuality, but everybody is aware of it. They're watching their business, and they'll react accordingly when they see factually what happens.
And your next question comes from the line of George Staphos with Bank of America.
Quickly, the revenue refinement, the guidance refinement for this year, what's behind that? Is that a little bit of FX? Is that the truckers' strike in Brazil? By the way, very good performance in Brazil considering that. And then the other question I had, just in terms of capital allocation. You clearly outlined what you're doing and consistent on what you said in the past. But given the way the peers' stocks and the way your stock has performed in the last few months, has return to value may be even further improved in terms of its ranking on the priority list?
George, this is Ward. I'll take both of them. The revenue guidance really just reflects our performance through Q3 and then the pinpoint forecast that we had for Q4, so it's really nothing more than that. Shifting to capital allocation, as you know, with the completion -- successful completion of the KapStone acquisition will be just over 3x, above our leverage target of 2.25x to 2.5x. So clearly, we will be focused in FY '19 on paying down debt and returning back inside our leverage target. We did buy back stock this quarter, and we have -- we do have some flexibility to do that going forward. But again, our priority will be focused on debt repayment.
And your next question comes from the line of Mark Connelly with Stephens.
Since you announced the KapStone deal, I feel like there's been a fair amount of movement, whether it's OCC, kraft and export pricing as well as the containerboard price increase and a lot more to be excited about, I guess, I would say. I just wanted to -- wondering if you could kind of maybe walk through some of those things that -- since you've had a few months, I know you're not under the hood yet, but just broader market environment, what you're excited about.
Mark, it's Jeff. So we look at the business over the long term. And the containerboard packaging, paper packaging biz is exciting in general. We think it's a great business. And so when we did the acquisition, we believe that would make us more competitive, would serve broader markets and markets that we weren't currently in and give us a chance to serve current customers in broader markets and enhance our offerings to them. And so these market conditions make that as appealing or more, but we were bullish on it when we announced it, and we're pleased that we're moving forward and can't wait to get it done, actually.
And this concludes today's conference call. You may now disconnect.
Thank you very much. And to our audience during the call, always reach out if you have any questions. We're happy to help, and everyone, have a great day.