Westrock Co

NYSE:WRK

Good morning and welcome to the WestRock Third Fiscal Quarter 2023 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded.

I'd now like to turn the conference over to Rob Quartaro, Senior Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining our third fiscal quarter 2023 earnings call. We issued our press release this morning and posted the accompanying presentation to the Investor Relations section of our website. They can be accessed at ir.westrock.com or via a link on the application you're using to view this webcast.

With me on today's call are WestRock's Chief Executive Officer, David Sewell; and our Chief Financial Officer, Alex Pease. Following our prepared comments, we will open the call for question-and-answer session.

During today's call, we will be making forward-looking statements involving our plans, expectations, projections, targets, estimates, and beliefs related to future events. These statements involve a number of assumptions, risks, and uncertainties that could cause actual results to differ materially from those we discussed during the call. We describe these assumptions, risks and uncertainties in our filings with the SEC, including our 10-K for the fiscal year ended September 30th, 2022, and our 10-Q for the fiscal quarter ended March 31, 2023.

We will also be referencing non-GAAP financial measures during the call. We have provided reconciliations of these non-GAAP measures to the most directly comparable GAAP measures in the appendix of the slide presentation. As mentioned previously, the slide presentation is available on our website.

With that, I'll turn it over to you, David.

Thank you, Rob. And thank you all for joining our earnings call today. I'll be in our call with review of our fiscal third quarter results and the progress we're making on our self-help initiatives. Following that, Alex will review our results in more detail and provide our outlook for the fourth quarter.

Turning to our third quarter results on Slide three. We exceeded our guidance due to strong execution, productivity gains and moderating input costs. Net sales were $5.1 billion and consolidated adjusted EBITDA was $802 million, adjusted EPS was $0.89. Our strong results this quarter against a dynamic backdrop reflect the resiliency of our business and the tremendous efforts of our talented team members. As a reminder, we faced difficult comparisons with record results in the prior year quarter.

While demand for corrugated packaging declined year-over-year, our North American shipments per day were sequentially stable. We've seen improvement in July with per day shipments up mid-single digits from the third quarter and the strongest backlogs we've seen all calendar year. Consumer packaging market volumes were down during the quarter as customers and retailers reduced excess inventory, elevated inflation impacted consumer demand and we lapped strong prior year healthcare results. Looking forward, we expect improvement in the first half of fiscal 2024, driven by inventory rebalancing, moderating inflation and new business wins. Long-term fundamentals in our consumer packaging business remain healthy and we are well positioned with strong customer relationships and end markets that are growing.

Over time, we expect continued organic growth due to our innovative solutions, growing demand for sustainable packaging and our expanding machinery business. We've seen a moderation in our global paper business after a record year in fiscal 2022. To navigate the current environment, we are leveraging our scale, broad portfolio of substrates and strategic customer relationships. Longer term, we expect our portfolio optimization strategy will enable us to prioritize our strategic customers while reducing our overall exposure to external paper sales.

I'm extremely pleased at how our teams are executing and winning new business. Our commercial teams are focused on building growth pipelines and demonstrating the value of our differentiated offerings, all of which are delivering new business wins. Our cost savings progress to-date has exceeded expectations. And I'm excited to report that we are on track to exit this fiscal year with more than $450 million in run rate savings. During the quarter we achieve $66 million of cost savings and $150 million year-to-date, excluding downtime and inflation.

We are making great progress and we see tremendous opportunities ahead and we continue to optimize our portfolio. Earlier this week, we made the difficult decision with the announcement of the closure of our Tacoma Washington mill. We are working closely with our employees on the transition and expect to cease operations in September additionally we sold our minority interest and a non-strategic joint venture and also announced the consolidation of three additional packaging converting locations, bringing our total to seven through July. I'll provide more details on our portfolio actions in just a moment.

Turning to Slide four, we are laser focused on unlocking value from our broad portfolio of assets. And we've made tremendous progress already. We continue to target more than $1 billion in cost savings by the end of fiscal 2025 and we are well on our way. Our SG&A reductions, productivity efforts and supply chain efficiencies are delivering significant results. As previously mentioned, we are on track to exit fiscal 2023 with more than $450 million in run rate savings. We are pleased with the progress we've made and we remain committed to unlocking further efficiencies in our business.

We've been proactively optimizing our footprint by closing less efficient facilities and consolidating production and larger plants. Our goal is to improve our cost structure, drive efficiencies, and improve our return on invested capital. Our recent announcement to close our Tacoma mill is another example of this strategy. Similar to our previous mill closures, the Tacoma mill required significant investment to remain competitive, and we did not see a path to achieving our return targets. By closing the mill, we can shift capital toward other projects with greater returns. Additionally, with Tacoma and our previous mill closures, we are lowering our costs and improving our overall margin structure.

Tacoma’s annual production capacity is approximately 510,000 tonnes, including linerboard, white top craft paper, and pulp. With the closure, we plan to ship the majority of the mills production excluding pulp to other facilities in our network, we expect to incur $345 million of restructuring charges, with a substantial majority recognized in our fourth quarter. Approximately two-thirds of these charges are expected to be non-cash.

With the announcement of the Tacoma closure, our mill portfolio is substantially different than it was 15 months ago. As we evaluated our assets, we considered mill profitability, technical age of assets, ongoing capital needs, product mix, strategic fit, and our network flexibility. With our announced closures of higher cost mills and production capacity, we are reducing 1.9 million tons of capacity. These closures enable us to repurpose anticipated annual capital spending, averaging approximately $120 million and exit noncore end markets.

In addition, with these actions, we are decreasing our exposure to the open market and reducing our North American corrugated average mill cost by $12 per ton. Our smaller yet more efficient mill system enables us to serve our strategic and markets and customers. Through our current footprint, we are well positioned to serve these customers in 2024 and beyond. We've also been disciplined in our capital allocation and remain focused on investing in our assets to improve our return on invested capital, returning leverage within our target range of 1.75 times to 2.25 times and returning capital to shareholders through a sustainable and growing dividend. As we work to recapitalize our assets we are targeting a greater than 15% IRR on future return generating projects. We expect our mill investments to drive efficiencies and enable us to further reduce our milk costs. Through our portfolio optimization and asset recapitalization strategies we expect to improve margins and drive return on invested capital.

Lastly, we continue to invest in growth. We're close to completing construction of our world class Longview box plant, which is expected to start operations in November. This state-of-the art facility will enable us to further consolidate converting operations in the Pacific Northwest and is expected to deliver $25 million in annual benefit once fully mature. Another example of our investments in growth is our Mexico acquisition.

This transaction increased our exposure to the fast growing Latin American market and brought us closer to many of our multinational customers. Our Mexican operations are exceeding our expectations and we are excited about future growth prospects due to economic expansion and shortening supply chains. Through these ongoing initiatives, we expect to drive significant improvement in margins and return on invested capital, increase integration, reduce volatility, and drive profitable growth.

Turning to Slide five. Before passing it to Alex, I'd like to highlight a recent example of how our broad portfolio and innovative solutions are helping our customers win and meet their sustainability needs. Costco recently approached us with the request to replace single use plastic multipack handles with a fiber based sustainable solution.

In response, our designers developed EnduraGrip and Cluster-Clip. These new solutions provide bundling for multipacks of bottles and jars, and a range of shapes, sizes, and weights. They are engineered for durability and comfort, while providing a fully printable surface for crisp, vibrant graphics and eliminate the use of plastic in these handles.

Our strategic machinery business is also helping drive adoption. As part of our partnership. We are working with Costco manufacturers to automate their production lines, increased packing speeds, and drive efficiencies. We're proud to partner with Costco and their manufacturers to introduce sustainable packaging solutions that help reduce single use plastic packaging.

This is just one example of many of how WestRocks unique capabilities position us for growth. Costco is one of our enterprise sales customers, and we serve them through both our corrugated and consumer segments. Enterprise relationships like this demonstrate the value that WestRocks broad portfolio and differentiated solutions provide.

Through our diversified portfolio, commercial excellence and strong customer relationships we've achieved over $9 billion in enterprise sales. Our plastics replacement innovations continue to gain traction, and we are on pace to deliver over $400 million in revenue this year. We are targeting more than $700 million by fiscal 2025, with a global total addressable market of $50 billion for plastics replacements, we see significant opportunities ahead.

I'll now turn over to Alex to discuss our segment results in more detail.

Thanks, David. Moving to our consolidated quarterly results on Slide six. Third Quarter net sales were $5.1 billion down 7.2% and consolidated adjusted EBITDA was $802 million down 20.2%. Consolidated adjusted EBITDA margin was 15.7%, a decline of 250 basis points year-over-year. This decline was primarily within our global paper segment, which I will discuss in a moment.

Price and mix positively contributed $85 million year-over-year, lower operating costs contributed $66 million year-over-year and input cost deflation contributed $37 million. Input cost deflation was largely driven by lower OCC and energy prices in the quarter. These benefits were more than offset by lower volumes of $243 million in economic downtime of $89 million.

We incurred 359,000 tonnes of economic downtime in the quarter with 258,000 tonnes in our corrugated system, and 101,000 tonnes and consumer. Non-cash pension costs also negatively impacted consolidated adjusted EBITDA year-over-year by $39 million.

As a reminder, our US pension plans remain overfunded. During the quarter, we generated $479 million of adjusted free cash flow. We use this strong cash flow to repay $479 million dollars of debt. And we ended the quarter with net leverage of 2.51 times. We continue to prioritize debt reduction and returning our leverage to our target range of 1.75 times to 2.25 times. We are now targeting $800 million to $1 billion of adjusted free cash flow for fiscal year 2023.

Turning to Slide 7, corrugated packaging segment sales excluding trade sales were $2.5 billion, an increase of $176 million or 7.7% year over year. This growth was primarily due to our Mexico acquisition and strong pricing mix. Adjusted EBITDA increased $45 million or 11.6% Adjusted EBITDA margin, excluding trade sales increased 60 basis points year-over-year to 17.4%. Year-over-year adjusted EBITDA benefited $55 million from input cost deflation $28 million from lower operating costs and $25 million due to favorable price and mix. These benefits were partially offset by lower volumes of $45 million in economic downtime of $37 million.

Note, that our corrugated packaging results include revenue of $37 million and adjusted EBITDA of $4 million related to the realignment of certain Latin American consumer converting operations in connection with our Mexico acquisition. As David indicated, corrugated packaging shipments were stable from last quarter. As we move forward, we expect gradually improving volumes and easier year-over-year comparisons. We remain focused on driving commercial excellence and productivity to mitigate the impact of previously published price declines.

Turning to the consumer packaging business on Slide eight. Segments sales were $1.3 billion, a decline of $20 million or 1.5% year-over-year. Adjusted EBITDA declined $5 million or 2.1% and adjusted EBITDA margin was 18.4%, a decrease of 10 basis points year-over-year. Strong price and mix contributed $98 million and lower operating costs contributed $19 million. These benefits were more than offset by lower volumes of $51 million, inflation of $39 million, economic downtime of $13 million as well as other items.

Adjusted for the previously mentioned realignment of certain consumer converting operations, revenue increased 1.4% and adjusted EBITDA increased 1.5% year-over-year. Net organic sales volumes declined 6.6% year-over-year, driven by softer market demand, inventory reductions through the supply chain and difficult comparisons from last year's strong healthcare business.

However, we are managing well and continue to gain new business. As a reminder last years adjusted EBITDA was up over 28% year-over-year. As David indicated, we expect improving conditions in the first half of fiscal year 2024, due to inventory rebalancing, moderating inflation and new business wins. Longer term, we are well positioned to drive profitability due to our growing end markets, increasing demand for sustainable packaging and expanding machinery business.

Turning to Slide nine. Global paper segments sales decreased $545 million or 33.8% year-over-year to $1.1 billion. Adjusted EBITDA declined 55.6% to $177 million, with adjusted EBITDA margin declining to 16.6%. Note that since the third quarter of 2020, our adjusted EBITDA is up 6% and margins are up 230 basis points. Input cost deflation contributed $27 million and lower operating costs contributed $15 million. These were more than offset by lower volume of $142 million, price and mix of $37 million and economic downtime of $39 million dollars.

During fiscal year 2023, our external containerboard volume has experienced year-over-year declines driven by elevated inflation, shifting consumer spending and excess inventories throughout the supply chain. Additionally, published price changes have negatively impacted our revenue and margins. We continue to believe U.S. containerboard demand has stabilized and we expect improving volumes as the calendar year progresses.

Similar to our consumer packaging segment, we've recently experienced softer demand and our external paperboard business driven by elevated inventories and softer demand principally in commercial print and food packaging. These conditions have continued into the fourth quarter. However, we expect improvement and fiscal 2024, given the relative stability of our end market exposure.

Next, our distribution results are on Slide 10. Our sales and adjusted EBITDA were down year-over-year, due to a decline in our moving and storage business and difficult comparisons from last year's large healthcare order. We are focused on improving operations and driving cost savings to navigate the current environment. Over time we see opportunity to grow our distribution business by leveraging our unique capabilities and driving operational excellence.

Turning to guidance on Slide 11. While market conditions remain challenging with continuing realization of published price declines, we expect the impact of those conditions to be partially offset by gradually improving volumes. Our forecast for fourth quarter consolidated adjusted EBITDA is $675 million to $725 million and adjusted EPS between $0.66 and $0.83 a share. Some assumptions behind our sequential outlook include stable costs driven by slightly higher energy costs, higher costs for recycled fiber and moderately lower costs in virgin fiber and chemicals.

An adjusted effective tax rate of between 8% and 10%. Note, this lower rate is favorably impacted by approximately $30 million related to the release of uncertain tax positions, state tax credits and other discrete items. And lastly approximately 257 million diluted shares outstanding. Additionally, we're planning 32,000 tonnes of scheduled maintenance downtime across our system in the fourth quarter.

I'll now turn it back to David to conclude before we move to Q&A.

Thanks, Alex. As you can see, we are delivering on our commitments, and I am incredibly proud of the progress we've made. As we continue our journey, I couldn't be more excited about the opportunities in front of us. In addition to our large self-help opportunity, WestRock remains uniquely positioned to deliver a full range of sustainable packaging solutions to our customers, with over $9 billion in enterprise sales, customers value our scale, diverse portfolio, and the sustainable solutions we provide.

Our innovation platform, growing machinery, business and plastic replacement solutions continue to position WestRock extremely well, for long term growth. I'm excited about the path ahead. And I'm confident in our ability to drive growth margins, and long term shareholder value.

Thank you. And with that, Rob, let's move to Q&A.

Thanks, David. Operator, we're ready for questions.

[Operator Instructions] Our first question will come from Mike Roxland with Truist. You may now go ahead.

Thank you, David, Alex and Rob, congrats on a very good quarter. Start off with corrugated, can you just talk about the cadence of shipments during the quarter. And did any end markets begin to improve more notably than others?

Hey, Mike. The -- our corrugated business was really pretty stable in the quarter, from Q2 to Q3. But what’s just really encouraging to us, as we went into Q4, and in July, our order rate was up mid-single digits. And as I alluded to earlier, we are experiencing the strongest backlogs we've had this calendar year. So we really liked the momentum of corrugated as we move forward.

As we talk about some of the segments, I think the one that that really jumps out to me is, we like what's going on and produce and agriculture. And beverage has been really strong for us as well. And what's exciting about beverage is with our Mexico acquisition, our multinational beverage customers are really gravitating to our ability to serve the entire Americas. So we just see that as a positive trend as we move forward.

Got. Thanks for the color, David. And then just in terms of boxboard or consumer packaging, obviously, things started to weaken a quarter or so ago, in response, you've taken -- started taking some economic downtime. You mentioned, though, that you expect an improvement in your fiscal first half, I guess what gives you the confidence that things are going to improve there? Are you getting indications from customers that they're going to have to restock? I mean, what -- how could you say I guess, what gives you that level of certainty that things are going to get better from here sooner rather than later today?

Mike, that's good question because we work really closely with our customers on that. And what we saw in the last 60 days is a lot of our large customers in the consumer space, took about a week off in manufacturing, just to rebalance their inventories. And as they went through that process, we were working very closely with them. And the commentary we received was, this gets us reshifted to the right inventory levels. We'll work through that this quarter.

And then -- and it's really consistent across all of our customers in the space is as we go into 2024, we're going to be ripe for growth. And they've said that to us internally as we build out our forecasts for them as well as they've expressed it externally to the open market. So there's just a consistency and everything we hear, I think will be stable in Q4 from Q3 and then everything they're telling us everything we're seeing is growth in 2024.

Thank you very much and good luck for the rest of the year.

Our next question will come from George Staphos with Bank of America. You may now go ahead.

Thanks very much. Hi, everyone. Good morning. Thanks for the details. David, I wanted to talk a little bit about the mill closures that you've announced over last year and change. And you talk a lot about how you expect that will help your return on capital in total. When you think about when we think about the 1.9 million tonnes of capacity of close, what do you think that has taken off the top, lowered your EBITDA, on an annualized basis from what it otherwise would have been? And what do you think it added to your incremental return on capital? Can you talk to that, just specific to that -- those closures that you've announced?

Sure. So, the easy answer is, all of these mills were in the current conditions, not generating positive EBITDA. So the combination of basically avoiding the high fixed costs nature and then reallocating production to the other mills, lines up accretive both to EBITDA dollars and EBITDA margin. So it was the right decision from an overall profitability standpoint, and I think it really speaks to the flexibility of our network. And a lot of the great work, we're doing operationally to just reduce the unplanned downtime and unlock a lot of the hidden factories so that we can move production of the strategic substrates from the mills that we're closing into the other mills.

We did exit certain product lines that were not strategic to us. So [indiscernible] would be one example, fluff pulp would be another example. So we did exit those markets. But again, those weren't strategic substrates or products for us, and we weren't really making any money there anyway.

In terms of capital, it's more than $100 million of capital combined, that we were able to divert from essentially keeping these mills on life support for lack of a better term and redirecting that toward growth oriented capital. So we were basically reducing our sustaining capital needs and increasing our growth capital availability. And as David mentioned in his prepared remarks, typically those growth capital investments are anywhere between 15% and 20% IRR.

In terms of the aggregate ROID, that part of your question. Quite candidly, it would be deminimis because the denominator is such a large number. Just by way of sort of a heuristic of $1 billion of invested capital generates about 40 basis points incremental ROIC. So, in total, all of these mills combined was probably in the order of a $1 billion, I think about $900 million of invested capital. So that would be call it 40 basis points improvement of ROIC, but really where we get the lift is in the improved ROI -- in the improved EBITDA because, you know, that generates a much greater return for us than reducing the denominator. But David, what would you add?

No, I think Alex captured it well. And I think the important thing is, when you look at our productivity efforts, and when you look at, as Alex mentioned, the capital we redeploy to other facilities. Not only is it just getting the cost benefit of reducing those higher cost mills, but we're actually getting more profitable at the mills we're running. So it's really going to be a return generating entity for us.

Thanks, everyone. That was really helpful. I guess, next question I had for you again, in terms of WestRocks strategy, I mean, we talk a lot --- you talk a lot about the enterprise sales and also machinery installations. Enterprise sales, you said were at $9 billion or more, which I think was the figure from last quarter, recognizing $9 billion is a lot of money, a lot of revenue. Can you talk maybe more precisely about the progress you're seeing there?

The progress you're seeing machinery installations, and what that adding in terms of profit? And then last and I'll turn it over just a ticky tack question. I think in terms of the overall economic downtime, you said you took this last quarter 259,000 tonnes, and if I didn't miss hear you I think you said 258,000 for corrugated one-o-one for consumer. Did I miss something there? What was the figure for paper? Thank you guys.

Sure. I'll start by answering the first part of your question, and then I'll have Alex, just give you kind of a rundown on our economic downtime. George, when I think about our enterprise capability, it's -- I think we're at the point where we've just had the most momentum we've had in a long time. And I alluded to it in an earlier comment about Mexico.

So, for example, we had a large consumer customer, that we were doing business with the United States, they expanded a product line in Mexico, that was in corrugated, they came to us asking for a solution. And that handoff was just seamless and we were able to help them coordinate all of that and come up with a very effective solution.

And then what was also exciting is that same consumer customer, and it was a beverage customer was looking for further plastics replacements, and wanted to be very efficient in their process of doing that. And then we received a large machinery order at their sites. So we can help them be more efficient as they eliminate single use plastics and move into a fiber based solution and plastics replacement.

So it's that connectivity, that's really driving our excitement about enterprise sales, because there's just so many customers now that are looking for solutions, that crossover between corrugated and consumer, and we're just able to do that.

And I think, just when you look at our coordinated results alone, you can just see the benefits are working into our bottom line. So, we feel great about enterprise, we now have over 5300 machines in place worldwide, our backlog is incredibly strong. That is a key component is our ability to customize our machinery to our customer’s production lines. So with the plastics replacement, this is enormously important.

And finally, you've heard a lot of ecommerce customer's talk about wanting to exit plastic mailers. And so that is a great opportunity for craft paper and our packing demand, machinery business, which we're just seeing a lot of excitement and energy around that as well. So combining all that that's why we're just really excited about the future and what our portfolio is able to provide our customers. And just the Costco example alone, enterprise customers came to us asking for a solution. There was machinery and again, we have a consumer and corrugated relationship with them as well.

I'll turn it over to Alex to talk about your economic downtime question.

Yes. George, just a couple of facts to put out there. So our integration rates in corrugated are between 80% and 90%. So if you apply that to the 258,000 tonnes of downtime in the corrugated business, you'd get roughly 40,000 tonnes related the corrugated business. And then if you do the same math on consumer -- integration rates in consumer around 50%, give or take, so that will give you about 50,000 tonnes for the merchant business in the consumer segment.

Another way to think about it is we had $124 million was the cost associated with economic downtime, in total on a consolidated basis, about $58 million of that was in global paper, about $49 million of that was in corrugated and about $17 million of that was in the consumer segment. So that should sort of give you the breakdown of how that falls out.

That’s great, Alex. Thank you for that. I'll turn it over. Good luck in the quarter.

Our next question will come from Gabe Hajde with Wells Fargo. You may now go ahead.

David, Alex, good morning. Thanks for taking the question. I wanted to ask about some of the strategic investments that you guys are making. You have the boxplant that you're doing up in the Pacific Northwest. And I think at the Investor Day, you'd called out, I think $300 million to $500 million annually kind of over the three-year period in return oriented projects.

Can you kind of talk about where you're at with that? I mean, obviously like I said, I know the boxplant. And then maybe is there an acceleration in that and that's part of the reason why like cash flows is coming down a little bit just given the EBITDA beat kind of here in third quarter and seemingly in line, fourth quarter outlook.

Yes, so I'll start Gabe, and then I'll turn it over to David. So in terms of the overall CapEx guidance, I believe the number we gave on Investor Day was between $200 million and $500 million on top of the $1 billion of baseload capital. And that's still the number that we're sticking to. When we start talking about 2024, we'll have a finer view on what our 2024 CapEx outlook looks like and our longer range view but. More strategically, yes, we are, as David mentioned in his prepared remarks, we are really focused on driving a higher level of strategic investment recapitalization in the middle network, and that converting network which will drive higher ROICs and higher margins, and the Longview boxplant is a perfect example of that. That's going exceedingly well, it's going to allow some other footprint actions that we're planning, and it allows us to operate much more efficiently.

We're planning on order of five more of those types of investments, really around the country to really optimize our converting network. We're looking at some opportunities within our mill footprint to increase the flexibility of our mill assets. And all that work is going on kind of as we speak, so we're not prepared to talk about any of it today, but we will, as we start talking about 2024 and beyond. But I think it's a really exciting time for the company, as we think about investing in our business and really driving higher returns.

In terms of the cash flow guide of $800 million to a $1 billion, there's a couple things that are behind that. Obviously our EBITDAs is slightly below our expectations when we started the year. But look, I mean, I think we're delivering exceptionally good results in a really challenging environment, we've been able to invest around a $1 billion in our business, which is more than we invested last year, we're catching up from some of the bottlenecks and capital deployment during COVID. So all of this is, is frankly, really positive. And candidly, even at the low end of that range to deliver $800 million in this operating environment is I think, a pretty exceptional testament to the strength of our business and the amount of cash flow we generate.

Yes, the only other thing I would add Gabe, just as you to your question on, the strategy overall, I would blanket it kind of this way, as Alex alluded to. Redeploying the capital at our mills that we had to make the difficult decision to shut down because the higher costs, we are going to make those mills exceptionally more efficient and profitable with the additional CapEx we're able to redeploy.

So our mill network is going to be more efficient. And then as Alex talked about, on our converting assets, as we do these consolidations, there's CapEx potentially involved as we make these converting assets much more efficient, larger, more output per site. And so that's going to also drive more profitability and combined will give us a higher ROIC. So that's how we kind of think about it overall. And then tying that into our commercial strategy. What are the segments that we're really focused on that are higher growth higher margin, where you have a great solution and right to win that consolidates everything together as we look at our overall strategy?

Thank you, both for that. And then one, hopefully, quick one point of clarification more near term focus. David, I think you said in your prepared remarks, up mid-single digit, maybe year over year in the corrugated business. And then I think in response to a question, it was up mid singles on a sequential basis. So just maybe a point of clarification, are you could -- I think you talked about stable in corrugated. So just what you are intending there?

Yes, so for clarification, it was up mid-single digits from Q3. So sequentially we're up mid-single digits, and our backlog was the strongest it's been in the calendar year. So we're seeing that improvement as we move forward in Q4, and we just expect that to continue as we get into 2024. So we really feel like we have come out of the bottom of the down cycle and we are now on the upswing. And that's how we look at our Q4 and 2024 as we move forward.

Thank you both and good luck.

Our next question will come from Mark Weintraub with Seaport Research Partners. You may now go ahead.

Thank you. So you mentioned redeploying some of the capital that otherwise would have been going to some of the facilities you're closing, to increase the efficiency at the remaining mills, et cetera? Is this likely going to be incremental projects? Or is it going to make the most sense to be doing Florence type projects at some point?

Mark, really good question. It's going to be a combination of both. We look at all of our assets, we look at where we want to the company to be, and what drives the highest returns. So if there is another type Florence investment that we need for our footprint, that's the direction we're going to go, in addition to some of these incremental projects. So I think, as Alex talked about that $200 million to $500 million, when you get into that strategic investment, you're going to see a combination of both. And as we go -- get closer to 2024 fiscal year, will give you much more detail and color around it.

Okay, great, thank you. Then second, just kind of focusing still on the self-help. I believe that $1 billion profit Improvement program was going to target about $250 million in fiscal ‘23. So if you could just sort of let us know, I know you talked about exit rates, but just an order of magnitude, what do you think you will have accomplished in fiscal ‘23? And then how much would be likely on the docket for fiscal ‘24? I think there probably would be a step up, but just wanted to clarify.

Yes, I think the way we've bridged it is $250 million in ‘23, around $350 million in ‘24, and then the remainder in ‘25. Actually, though, Mark, we're well ahead of that. So as we mentioned, we're exiting the year at around $450 million run rates are in year savings, we're anticipating being north of the $250 million that we committed to, because the team is just making great progress. And, the balance of what we're talking about at this stage of the game is really around SG&A savings, and supply chain related savings, roughly 50-50 each.

But as we've talked about, with some of these asset closures and plant consolidations, we're really starting to get the flywheel moving on a lot of the operational improvements, which will really drive a reduction in unplanned downtime and unlock of hidden factory, lower waste rates. And so you should see those numbers begin to accelerate. So we feel really good about what we're doing on the productivity and cost savings side.

Okay, and recognizing it's a very dynamic process. Are we still thinking there's $350 million order of magnitude incremental in fiscal ‘24, and keeping it separate if possible, from the actions you did on the facility closures where I have another follow-up question just to -- if possible.

Yes. So just to make the math easy, let's say we're going to do between $250 million and $300 million in ‘23, just take the top end of that. So say its $300 million and with 450 exit rate that would put you at 150, just going into as a rollover into ‘24. And then to get our 350 number, you would say there's going to be 200 incremental in ‘24. We're still building the operating plans for ‘24. But I think that's, frankly, I think that number is conservative.

Okay, super. And then just if we just focus on the two mills that are in the process of being closed and related converting plan actions. You talked about this being EBITDA incremental, and could you sort of give us a sense as to magnitude, again recognizing there are a bunch of moving parts. And then also kind of what's the net cash closure costs, which obviously are one-time, but what's the net closure -- cash closure costs related to the actions?

So, it's a little hard to answer your incremental EBITDA question, because a lot of it depends on volumes and in this volume environment where things are so dynamic, it's just a tricky question to answer. But to give you a sense, the Tacoma mill that we just closed, the cash cost per tonne is around $900 a tonne, based on the number that I'm looking at. The mills that we would reallocate capacity to and I'm just going to use generalities, are around $200 to $400 a tonne cheaper than the mill we closed. So that will give you a sense of sort of the incremental contribution that we would get from reallocating some of the capacity to those other mills.

In terms of the cash cost for the one we just recently closed, the total was around $345 million, about two-thirds of that was non-cash, so about a third of that was cash related. And the bulk of the cash comes in year one and two, and then it's offset by an assumption around the land sale coming in the latter part of year two.

The only other thing I would add is, I'm sorry, just answer your question. If you look at the converting sites, they are not as dependent on volumes as the mills. So you would see EBITDA about $35 million to-date. And then as we continue to optimize that footprint, that'll just continue to escalate. And then to Alex's point on the mills, it is volume dependent. So you would just see a range, depending on volumes. So to Alex's point, you can just kind of do the math of, where we are currently and what we would do, I mean, you could you could see a range of from everything we've done from low double digits to even higher on improvement.

Okay. And just to clarify that that $900 per tonne that was that total cost sites, did you say cash costs for…

Cash costs.

Okay, that was cash costs. All right. Appreciate it.

Our next question from Cleve Rueckert with UBS, you may now go ahead.

Great. Thank you for taking the questions. And thanks for all the good color on the call. I just had a couple of quick follow ups. Just looking at the positive price mix and the particularly in the corrugated packaging segment. And I'm wondering if there are any index price lags that you expect to flow through that business over the next sort of couple of quarters, or whether that that price mix is just remaining positive because of the strategic actions that you've made and the mix improvements that's resulted from them.

So Cleve, as we look at our corrugated business, with all of the receipt pricing that's been announced as we go into this quarter $70 of the $90 will hit our contractual customers. So you'll see continued price pressure through this quarter. And then coming out of this quarter, from the May increase that $20 will come into play toward the end of the year, and then be offset by the increasing volumes. About 75% of our customers are tied to that we see contract pricing. So that's kind of how we look at the pricing. And then from a consumer side, just the recent announcements, we won't probably see those hit our consumer business till the end of the year. And then conversely, we see both on the containerboard side and paperboard side. We see those within 30 days on our global paper business, which is why you've seen a lot of the pressure throughout the year, but then we’ll cycle around that as we get into 2024.

Right. So there's just a lot more lag in this integrated.

Yes.

Yes. Okay, that's clear. And then just sort of following up on integration. And thanks for -- appreciate the color on the integration rates between corrugated and consumer. I just be curious, given the actions that you're taking, sort of sort of throughout the footprint, do you have an integration target for those businesses looking ahead. Again, I think it's probably running a little higher than maybe we thought and in corrugated. I just be curious if you've sort of strategically thought about where you want to get to at this point, or if that's still part of the planning, you're doing?

So as we think about our integration rates, with the 1.9 million tonnes that we've taken and if you go back to say a 2021 volume environment, our containerboard integration rates are really tracking in the high 80s. And as we get into that 90% range, we feel really pretty good about that, because it allows flexibility through the cycles, we have really good strategic partners on the global paper side that are not on the commodity side of that, buying multiple grades, long term relationships, there's a lot of innovations that we're working on with them.

So, as we look at the middle footprints actions that we've taken, and we look forward to 2024, I mean, we're really in a great position in our supply demand balance. Because as we've talked about, we want to match our supply to our customer’s demand. So the excitement that you hear about 2024 with the actions we've taken in the productivity, we feel really good about how we're entering the year.

Okay, I'll turn it over. Thanks, guys.

Our next question will come from Phil Ng with Jefferies. You may now go ahead.

Good morning. This is actually John on Phil. Hope you guys are doing well. And congrats on the good quarter. I just want to go back to the footprint. I mean you guys have taken a lot of actions, particularly on the containerboard side over the past, say 15 to 18 months. I guess -- could you give us some perspective on how you're thinking about your footprint now? And do you see the actions taking already announced being enough? Or do you think there may be more to come whether that the WestRock or generally the broader industry more importantly.

And then just to follow on that? How should we think about Tacoma, which is expected to shut by the end of the fiscal year? How should we think about the earnings leakage, whether it be in this fiscal fourth quarter or going into 2024? I think you touched on it being positive, but just want to maybe get a little bit more clarity on the flow through?

Sure. John. I'll answer the first part of your questions and then I'll have Alex go through Tacoma with a little more depth. So as we look at our footprint, what we've always focused on is our customers demand with our supply footprint. So, we know there's all kinds of puts and takes going on in the industry. But our relationships with our customers are very strategic, very connected, a lot of our contracts are long-term contracts.

So, as I've kind of alluded to a little bit, with Cleve. Where we see 2024 -- I mean, right now, we're this has been an unprecedented year, as far as the down cycle, we've made all the footprint actions. And as we see 2024 and 2025 with the connectivity we have with our customers and how they're projecting volumes, we really see a nice balance right now. And, we've got again, it's virgin fiber, it's recycled through its paperboard.

So, having all of those substrates is really important. So, as we think about our footprint, we always evaluate it, we continue to evaluate it. But, as far as a major short term action, I don't anticipate that with everything that we're seeing as we head into 2024, with demand environment we see with the current supply environment that we have. I'll turn it over to Alex to talk about Tacoma.

Yes, let me -- I'll try to just. The headline that everybody should hear on the call is that, the mills that we've closed, we're going to reallocate the strategic substrates to other mills in the network, so there won't be any EBITDA leakage associated with that. It'll actually be EBITDA and ROIC accretive. On Tacoma, specifically, just the breakdown it's 510,000 tonnes of total capacity about 105,000 tonnes of that linerboard, 275,000 tonnes of that is white top, 60,000 tonnes is paper and about 70,000 tonnes is pulp.

So with the exception of the pulp, all of that other capacity will be reallocated around the network again, so it'll be net margin and EBITDA dollar accretive.

In terms of just the -- it's not earnings leakage but cash flow leakage. You will see about one-third of the $345,000 of closure costs. That the cash costs associated with that is about a third of that that number. And that will happen in year one and year two offset in the back half of year two with a land sale.

Got it. Okay. Appreciate that. And then just going back quickly, David on the capacity. Do you think the industry as a whole need to take out more, it still seems like operating rates are relatively below where they should be? I mean, I know your Tacoma yet to come out. But just thinking about 2024 the industry as a whole, co you see more actions needed to kind of stabilize price? Or do you see the demand inflection at least from the customer conversations that you're having being enough to stabilize prices going into next year?

Yes, the way I would think about John is, we are laser focused with our segments and our customer base. And so we're just matching our supply to their demand. As I think about the industry, and obviously, there's capacity coming online, the customers that we're focused on, we just think are going to be different than where this new capacity is.

So we'll let that sort itself out. But we're focused on do we have the right supply and the right footprint, with the demand where we want to grow from value selling solution selling. And, with the 1.9 million times that we have, with the demand forecasts, we see as we go into ‘24 and into ’25, I mean, we feel pretty good about where we're at, and we like the improvements we're making in our cost structure and productivity. So, we'll continue to evaluate it, but right now, how we see supply and demand is we go into 2024 is balanced.

Okay, I appreciate that. And then if I could just squeeze one more small one in here the -- if you could get an update on the RTS and Chattanooga RT URB Mills, if they've already closed for those sales and if you could just remind us where the -- those are reported in which particular segment? Appreciate it.

So, that the RTS sale is not complete. We hope to have that complete in September as we move forward in the business. And as again, just reminder, it was a $375 million sale.

Okay. And what segment was that in?

RTS would have been would have been within the consumer segment. It's the partitions business basically.

Okay, thank you very much. I'll turn it over.

This concludes our question and answer session. I would like to turn the call back over to Robert Quartaro, for closing remarks.

Thank you, everybody, for joining our call today. We are available if you have any other follow up questions, and we look forward to updating you again next quarter. Thank you.

The conference has now concluded. Thanks for attending today's presentation. You may now disconnect.