Q4 2019 Earnings Call
Go ahead Sir.
Thank you Jay good morning, and thank you for joining our fiscal fourth quarter and full year 2019 earnings call. We issued a press release this morning and posted the accompanying slide presentation to the Investor Relations section of our website the release and presentation can be accessed Iris westrock dot com, where via a link on the right side of the application you are using.
Sure. This webcast with me on today's call or Chief Executive Officer, Steve Voorhees, Our Chief Financial Officer Ward Dickson, our Chief commercial officer in President corrugated packaging, Jeff calibration as well as our Chief Innovation officer in President of consumer packaging.
Following our prepared comments, we will open up the cold for a question answer session.
During the course of today.
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 FCC, including our 10-K for the fiscal year ended September 32018. Additionally, we will be referencing non-GAAP financial measures. During the call. We have provided reconciliations of these non-GAAP measures. The most directly comparable GAAP measures in the appendix of this slide presentation as well.
Mentioned previously the slide presentation is available on our website with that said with that said I'll now turn it over to you Steve.
Thanks, James Good morning.
Thanks for joining or fiscal fourth quarter 2019 earnings call.
Spend and I'm, sorry for your out West rock and I'm proud of all that our teams accomplished.
During the past fiscal year, we've completed the capstone acquisition.
We've made substantial progress on the integration in the strategic capital projects that we have under one.
We've delivered solid operating performance, including generating over $1 billion and adjusted free cash flow for the fourth consecutive years since we formed westrock.
And this morning.
We announced that we're increasing our dividend by 2.2% to $1.86 per share on an annualized basis.
The increase demonstrates our confidence in our ongoing ability to generate strong cash flow for the long term.
As many of you know Westrocks vision is to be the premier partner, an unrivaled provider of winning solutions for our customers.
Our performance in fiscal 19 advanced our progress toward achieving our vision.
We have the advantages of the industry's broadest portfolio.
Stay Annabelle fiber based packaging paper and packaging solutions combined with an organization that is becoming increasingly successful at delevering. The customized value added solutions that help our customers when in their markets.
As an example.
Since July of 28 team our sales of plastic replacement solutions have generated a run rate of more than $100 million an annual sales.
For the entire fiscal year 19, net sales of $18.3 billion were 15% higher year over year.
Excluding prior year recycling sales.
Fiscal 19 was marked by several key achievements.
We grew our north American box shipments by 18% from 80 billion square feet to 94 billion square feet.
Well most of the increase was due to the Capstone acquisition, we still grew our organic daily box shipments by 2.5% in fiscal year 2019, and this compares to the industry growth rate for the same period to a 0.5 or half of a person.
We grew our enterprise sales were customers by more than $1 million annually from each segment.
To $7.3 billion.
More than 150 customers are realizing and appreciating the value of our diverse differentiated portfolio.
We generated $2.4 billion, an adjusted operating cash flow and we use that cash flow to invest more than $1.3 billion in capital, including our strategic capital projects.
We returned more than $550 million to stockholders through dividends and share repurchases.
We've paid down $757 million in dot since the end of the first fiscal quarter and we remain focused on returning to our two on a quarter two two and a half times leverage target.
Let's turn to the fourth fiscal quarter.
Our sales were more than $4.6 billion up 13% compared to the same quarter last year also excluding prior year recycling sales.
Our adjusted segment EBITDA margins were 19%.
Our corrugated packaging adjusted segment profit dollar Mark margins of 22% remained strong despite the softer year over year market conditions.
North American corrugated packaging adjusted segment EBITDA margins were 23%.
Our consumer packaging business reported EBITDA margins of 16.1%.
Oh 100 basis points year over year.
We grew converting shipments and implemented previously published price increases for paperboard.
Our adjusted segment, EBITDA increased $89 million or 11% year over year.
The capstone acquisition lower inflation and productivity improvements contributed to this EBITDA growth, which was partially offset by lower volumes.
Pass through of previously published price changes and lower prices for Paul export containerboard and Kraft paper.
Now to our corrugated packaging segment.
Our adjusted segment EBITDA increased 14% year over year.
Adjusted segment EBITDA margins in North America of 23% represented another outstanding performance by Westrocks corrugated packaging team.
The flow through previously published price reductions for containerboard and Kraft paper.
Lower pulp prices and weakness in export prices negatively impacted EBITDA during the quarter.
However, the negative EBITDA impact from declines in volume and pricing was more than offset by the inclusion of capstone and our results as well as lower cost and productivity improvements.
Given the softer supply and demand environment for containerboard, we matched our production with our customers demand.
During the quarter, we took 97000 tons of economic downtime and an additional 34000 tons maintenance downtime.
We saw growth and many of our end markets.
Floating agriculture bakery.
Ecommerce.
Pizza.
Protein and retail.
A broad based strength in these end markets was slightly offset by low margin business that we exited.
And also by lower year over year, external containerboard and Kraft paper shipments excluding capstone.
Our integration rate for the year it was 77%.
We're targeting a long term integration rate of 90%.
For the month from October .
Our daily box demand increased by 1.8% over last year.
During the month of October the combination of the increase in our box demand over last year.
Stronger than expected demand from domestic and export customers and our scheduled maintenance downtime.
Allowed us to operate our system with no economic downtime.
While reducing our inventories by 36000 tons.
For the entire December quarter, which scheduled 131000 tons of maintenance downtime.
This includes 65000 tons of downtime for the outage now underway at our foreign smell.
This outage is taking place while we're executing our project to replace our three older paper machine with a new modern paper machine.
After we complete the outage later this month, we won't start up one of the three older paper machines that has the capacity of 15000 tonnes a month.
We expect to startup the new paper machine in the spring of 2020.
The strength of Westrocks differentiated product portfolio shows up in our results.
We distinguish ourselves with high quality board and design and consistent delivery of value for our customers, including the value we delivered through our machinery offerings.
Our platform includes a scaled footprint with a broad portfolio of products and services.
Our platform combined with our commercial approach supports our ability to meet the needs of thousands of local regional national and global customers.
And helps to explain how we've been able to sustain above market organic growth rates and attractive EBITDA margins.
And consumer packaging adjusted segment EBITDA margins grew 100 basis points on lower revenue.
Year over year pricing improvements lower energy material on freight cost and productivity improvements were only partially offset by lower volumes lower pulp prices and wage inflation.
In addition.
Volumes were lower year over year, a slight growth in converting shipments was more than offset by lower paperboard shipments primarily due to the restoration of inventory following the strategic outages at Mark and Covington.
Currently backlogs and all of our grades.
At levels that we expect during this time of year with Sps and K and CRB backlogs in the range of three to six weeks.
We've just begun to tap the full potential of our broad freight fiber based packaging portfolio.
26 team sales from customers that by more than a million dollars per year from each segment have grown by approximately $2.5 billion or roughly 50%.
As the market realizes the value of our differentiated portfolio.
And the ability to deliver at the right fiber based solution, regardless of the sub Triton substrate, we expect further sales opportunities and growth.
We're optimizing our system to reduce costs.
We're investing in a number of strategic projects that will drive cost savings and efficiencies throughout the system.
We expect to realize more than $240 million, a year and incremental EBITDA from these initiatives.
Well I'm excited to see each of these projects come to fruition I'm, especially enthusiastic about our new box plant in Puerto Please.
I attended the opening last month this box plants, well equipped with the capacity produce about 5 billion square feet each year.
We also operate the first preprint machine in South America.
Or part of waste plant has an amazing workforce that is highly capable as the expertise to deliver high quality packaging to a wide variety of customers.
We are realizing the synergies from the Capstone acquisition.
Through the fourth quarter.
We've realized $90 million, an annualized synergies and are on schedule to achieve more than $200 million by the end of fiscal year 21.
Weve internalized 100000 tons of annualized shipments to our victory packaging system and now supply 250000 tons to victory.
Asset optimization is another lever of EBITDA improvement, so we drive cost out of our system.
In September we announced the North Charleston, no worry configuration that will reduce linerboard capacity by 288000 tons.
And once completed in the spring of 2020 will eliminate approximately $40 million of annual cost.
Now, let's talk about sustainability.
Our customers are embracing the increasing desire for sustainable packaging solutions.
There are setting aspirationally short term and long term goals for increasing their use of packaging, that's recyclable reusable and or compostable.
However, based packaging is especially well positioned because it's made from either recycled fiber or Virgin fiber, that's being sourced from sustainable forest.
Our team at Westrock as enthused about working with our customers to help them meet their sustainability goals by creating customized alternatives using west rocks differentiated portfolio corrugated packaging consumer packaging and machinery solutions.
We've been successful doing us.
And so far since July of 18, we've increased our annual run rate of sales by $100 million by replacing plastic in a wide variety of use cases.
The largest market today has been food and foodservice, where we've replaced plastic with her paperboard clamshell and folding carton solutions perfect for dynamic carry out and delivery is.
In beverage we've replaced shrink wrap our cluster pack paperboard solution and used our can collar paperboard ratings to replace plastic writings for dozens of customers.
Our machinery makes the transition to paperboard solutions easy and cost effective for our customers.
We are frequently asked what the addressable market as for plastic replacement.
While it's difficult to estimate exactly we believe the addressable market is at least $5 billion.
Importantly, the addressable market is expanding as consumers demand more sustainable packaging.
We're working with our customers to innovate to develop more fiber based packaging opportunities.
Westrocks design, Paperboard science and machinery capabilities position us for continued opportunities to work with customers to develop even more sustainable fiber based packaging applications.
Many customers regular tell us that labor efficiencies and the need for improved productivity are among their biggest challenges.
Machinery solutions address these issues for all types of businesses.
We provide solutions that best fit our customers' needs.
Often when customers are just starting out with us.
We can instantly boost their productivity by supplying them with a simple case erector RK sealer.
Further we can help even the largest operations use their footprint more efficiently by designing turnkey solutions for both primary and secondary packaging and increasing throughput without additional labor our expansion cost.
Approximately 35% of our corrugated packaging sales are to customers that use westrocks machinery solutions.
Our machine replacements keep growing.
We typically have longer term contracts and stable demand from machinery customers that appreciate the service and innovative solutions that we've developed.
One new machinery solution that we've recently developed as our pack on demand out system.
Consumers have begun pushing back against single use plastics, including plastic bubble mailers.
Therapak on demand pouches, we're able to make custom sized corrugated pouches that help our customers eliminate the use of single use plastic.
The pack on demand system helps lower labor costs and reduces or eliminates board Phil.
The pouches help our customers grow their sales by improving productivity, while providing the recyclable taxing experience consumers demand.
Hi Tech on demand demonstrates how our machinery offerings helped drive supply chain efficiency, and often meets new sustainability goals for our customers.
Westrock create solution solve our customers' critical challenges, helping them lower their cost grow their sales improve their sustainability and minimize the risk.
That's great value for our customers.
The first alert packaging story is a current example of how Westrocks enterprise approach is helping our customers solve their critical challenges.
First alert started with a complex supply chain with more than 150 SK use.
And the challenge of creating a sustainable package that provides an improved customer experience.
And also needed to keep the same footprint and reduced the cost of excessive tooling changeovers.
Solving for this complexity and creating a sustainable packaging solution.
That's the type of challenge to Westrock team loves to solve.
The westrock team reduced SK use into Threeq common card sizes, and 13 common blister cards, using our natural lock paperboard.
We converted the paperboard provided to clear bluster show and provided the machines to heat seal, the new and improved package.
Westrock one of the sustainable packaging award for this package from a paperboard packaging Council.
This award highlighted the 61% reduction of plastic in the packaging, the 36% reduction and package weight.
This was one of only 13 awards from the Paperboard packaging Council that we received with the most in the industry and a very positive reflection on the performance of our highly capable team.
We are providing sustainable packaging solutions that create value for our customers every dime.
Now I'll turn over to war to discuss our full year in first quarter F. wide 20 outlook Ward.
Steve.
On slide 15, we outline our fiscal year 2020 guidance, we expect at sales to be between 18 billion an $18.5 billion.
This guidance reflects the flow through a previously published declines.
In North American containerboard, and Kraft paper index pricing in the full year impact of market pricing declines that we've experienced.
Export containerboard.
Kraft paper and market pulp.
Offsetting these declines as an additional months of capstone sales as well as forecasted growth in our corrugated box volumes in North America, and Brazil and increased volumes in our consumer packaging business.
Adjusted EBITDA is expected to be in the range of $3 billion to $3.2 billion. The key assumptions include the impact of pricing declines that I just mentioned.
And our ongoing inflation in wages benefits and other non commodity cost categories, we anticipate commodity deflation, especially in recycled fiber.
We will also experienced some operational impact in our mill system from the Florence and trace Bahasa upgrade projects.
We also expect productivity improvements during the fiscal year, a more than $200 million.
We have provided an adjusted EBITDA guidance range to reflect the potential variability of our key assumptions around volume pricing and input costs.
Our earnings pattern will reflect typical seasonality and is directly impacted by the timing of maintenance outages and our strategic capital projects. We project that approximately 45% of our adjusted EBITDA will be generated in the first half of the year and 55% in the second half of the year Wonder.
The strength of Westrock is our significant cash flow generation, we project adjusted free cash flow to be more than $1 billion for the fifth consecutive year.
Adjusted operating cash flow is expected to be greater than $2.1 billion.
We anticipate a higher cash tax rate and increased working capital usage during the year.
As we've shared previously we will invest $1.1 billion in capital expenditures to maintain and improve our mill and converting systems, including $275 million for our strategic projects in Florence and trace boss.
As we complete these projects, we anticipate that we will return to a 900 million to 1 billion dollar annual capital investment level in fiscal year 2021.
In the appendix we have provided additional details that should help you complete your models.
Turning to slide 16.
We detailed the key assumptions included in our first fiscal quarter 2020 guidance.
We expect adjusted segment EBITDA in the first quarter to be between 670 and $690 million as compared to $733 million in the first quarter fiscal 2019.
Some of the current analyst models for first quarter fiscal 2020, do not account for the earning seasonality that I mentioned earlier.
Walking through the year over year bridge, we expect higher volumes to add $40 million to $50 million of adjusted segment EBITDA. As we include a full quarter of capstone in our results given the November close in the first quarter of fiscal year 2019.
We expect pricing mix to negatively impact results by approximately $110 million. The pass through a previously published containerboard pricing lower export and Kraft paper prices will be partially offset by the benefit of the previously published index price increases in our consumer packaging business.
Paul prices are down globally, and we anticipate a negative year over year impact of approximately $30 million to $35 million.
Finally, we expect a 42 to 47 million dollar improvement over the prior year quarter as lower commodity cost productivity improvements more than offset higher scheduled maintenance outages of 170000 tons. This is 103000 tons higher than the prior year quarter.
And as you would expect this also includes a higher year over year wage and health care costs.
We have provided additional items to assist you with completing your models.
For the first quarter and now I'll turn it back to Steve for closing remarks.
Thanks word.
Westrock teams performing well as we proactively respond to a changing industry environment.
We're saying increasing opportunities in the market for sustainable packaging e-commerce and value added packaging solutions.
We are taking advantage of these opportunities in several ways.
We are growing organically by creating customized value added solutions for our customers that support there need to grow their sales reduce their total caution risk all while helping them achieve their sustainability goals.
We're investing in our business and in our people for the long term system to sustain and expand our competitive advantage.
We're building our systems and processes to take advantage of the scale of our platform.
We're using digital technology to enhance our customer experience improve our operating efficiency and better engage our teammates.
We're moving from a period of growth by acquisition and investment in March strategic projects to a period of increased focus on organic growth sustainability innovation productivity and free cash flow generation, a combination that will create value for our customers stockholders.
Teammates for the long term.
That concludes my prepared remarks, James we're ready for Q or not.
Thank you Steve as a reminder to our audience to give everyone a chance to ask a question. Please limit yourself to one question, we'll get to it as many as time allows operator can we please take our first question.
Thank you.
Our first question comes from Mark Weintraub with Seaport Global.
Thank you.
Hoping just too.
I understand the to walk through to the free cash flow.
Number and perhaps it's the fact that you're saying, it's a billion plus and that gives us plenty of scope as to what the plus could be but if we look at the EBITDA, we back out on the Capex and we know the cash tax rates at 21%.
I come up with something North of 1.3 billion on the free cash flow, which would seem to be providing quite a bit of room for either working capital build or something else going on in any color along those lines would be great.
Hey, Mark This award so you're right you read the key components of the guidance correctly. So.
The midpoint of our adjusted EBITDA range is 3.1 billion cash interest will be around $400 million cash tax rates.
Rises from 17% to 21% we did say in my comments that we expected a modest increase in working capital. So there'll be some normal seasonal fluctuations as we go through our maintenance outages and execute.
Strategic capital projects.
In addition, part of the strong performance that we haven't Q4, there was some.
Timing of we had a very strong cash collections quarter. In Q4, there was some amount of that that was timing Q4 versus Q1 and then we also mentioned that we're rebuilding our inventory levels and consumer as we came out of the.
Strategic outages, we will be focused on driving.
Free cash flow generation.
We did say more than $1 billion and we'll be focused on inventory reductions as as we go through the year and also on expanding our.
Supply chain financing and.
Payables to balance the.
Balance the exposure that we have with our customers as they push for extended terms. So we feel very confident in this guidance and we said more than $1 billion. There is implied a small working capital build.
And we are going to a.
Strive to minimize that.
Okay, great. Thank you and just one other quick one if I could.
I previously you talked about the strategic investments.
Entering about 50 million of EBITDA. The year just ended at an additional 65 million in fiscal 20 on an additional 70 and 21, an additional 90 in 22 are those still the types of numbers that are embedded in.
The guidance you provided for 20 and you did also mentioned that there would be some.
Some costs related for instance to Florence et cetera.
It.
Could you give a sense as to transitional costs that may be would be in 20 offsetting some of the benefits that we got from the from the projects.
So again, Mark you've you read my comments correctly the.
Achievement of the.
Returns from the strategic capital projects is still in line with.
What we previously disclosed what we've said with the major outage that we'll have increased by Hossein as we get prepared for the.
For the transition in Florence.
The negative impact of those those two items will be between 35 and $50 million and year. So.
It in the in this year it offsets some of the benefits as we prepare to complete those projects.
Thank you very helpful.
Thank you.
Our next question or comment comes from chip Dillon with vertical.
Yes, good morning.
Thanks for all the details.
A question has to do with.
You mentioned about 35% of sales nail, maybe 40% or to customers that buy both folding cartons in paperboard and containerboard and box is and if you could talk about where you're finding synergies or those customers are finding synergies other than say just pricing is there. Another reason you're seeing sets overlap.
Hi, chip good morning, it's Jeff.
We are seeing value and our customers are finding value in the broad portfolio of offerings simplicity of doing business with one group we have enterprise account leads.
With our top accounts and if you look at our top 200 or 210 customers, we do about $10 billion and those and some of those we have we mentioned 150 through them.
We do over a million each and then some of them are large customers. We don't have quite over a million each but theres about $15 billion of fiber based packaging and those 210 customers and we think about eight or nine of that is addressable for us in our space and we built account teams account plans.
Looking to grow that business organically by solving those critical customer challenges through the supply chain. If you look at our surveys from our customers our customers whether consumer or on the corrugated saw total us help us with the supply chain optimization. So thats total cost take out and we can best do that across the platform.
With the folding consumer corrugated business and then automation with machines. The second to sustainability. When you saw we presented today. So we have a sustainable product, we pair that with process and automation that takes out fiber and optimizes. The packaging together they are asking for channel help brand help and so what.
Our capabilities across the business in one place to go for that we're finding synergies for our customers that they value thats, helping fuel our growth.
Okay. That's very helpful. And then just one quick follow up I think you May think word mentioned 30 to 50 million.
Dart up costs I'll call them for all the projects that startup in fiscal 2000 do those largely go away in fiscal 2001, or how should we see those vinci dissipate.
Hey, Chip. This award yes, so we will largely be through the strategic capital projects will have just a small tail with trays trace bahasa as we move into fiscal 2021, and then the benefits from all of the projects will start to ramp up as we.
We complete fiscal 2000 and get into 21.
So said differently you are not only going to get a benefit in 21, and 22 from Florence, which I think you've said was somewhere around 70 million, but on top of that you'll have a reversal of these costs.
Right that's right.
Thank you all right that's very helpful. Thank you.
Thank you. Our next question or comment comes from George Staphos from Bank of America.
Hi, everyone. Good morning, Thanks, all the details as always.
I wanted to continue on on the questioning on systems and cross selling and machinery and maybe kind of a quick first one and then a longer follow on.
Jeff can you comment how many machine installation do you have currently at customers periodically you give us that figure just would be helpful. I remember the last number being somewhere in the range of 3000, but if you could give us a quick update on that that'd be great.
Good morning, Yes, I tuned up sort so we have about 30 675, roughly so between 3600.
The 3700 deployed across the system in customers.
And the Hps sales this year were up about 40%. So strong you are helping us grow organically and differentiating us to our customers helping them solve those critical challenges.
Across our platform and were up 12% as the system across the whole machine platform and consumer in corrugated.
Okay, Jeff that's that's great My other question.
Taking a step back.
You talk about and you're seeing it in total.
Benefit from cross selling between corrugated and consumer.
And you also talk about.
The benefits that you're getting from sustainability across the platform.
It strikes me, though just looking at the volume numbers that target it might be getting a bigger lift from from both a said differently said consumer was volume was only up slightly on a converted basis, but given the cross sell uptake from corrugated given the benefit that you should be getting for sustainability.
Should we be seeing perhaps a stronger volume growth number and consumer on a converted basis.
If so what what's been the headwind if you will there. Thank you and good luck in the quarter.
Yes. Thanks for the question this is Pat Lindner, yes.
Good good good morning. So this so the consumer volumes of the noted in the quarter were down overall in.
That converting.
Volumes were up and they were up actually year over year.
Quite significantly and.
On the 4% to 5% range. The challenge we had in the fourth quarter around volumes really wasn't related to cross selling it really was related to.
What Steve mentioned, it more mentioned around restoring our inventory levels, primarily in SBS as well as NCM Inc., hey from the strategic outages and just to give you an idea that when you look at fiscal year 19.
Overall production across all of our paperboard grades was about 60000 tons less than in fiscal year 18, and that was really because of our strategic outages. So.
We.
Obviously now coming out of that in the first quarter here, our fiscal first quarter. We're building our inventories back. So we can capture some of that growth, but we see tremendous demanding consumer and in corrugated across the whole enterprise, we see tremendous demand driven by sustainability and plastics replacement and we're going to continue to capture that.
As our ability to supply our re stores to normal levels.
Okay. Thanks, that's very clear I thought you had said converted was up slightly but that explains it. Thank you very much.
Just to remind everybody we'd like to limit ourselves to one question. So we can get to as many questions as possible operator can we get our next question.
Thank you. Our next question comes from Steve Chercover with D.A. Davidson.
Thanks, Good morning, everyone.
So a few quarters to go the hot topic was Amazon Rightsizing packaging I think the referred to it as frustration free but have you really felt and impact on volumes I mean I assume this is very good for pack on demand, but how have your overall system.
Hi, Yes. This is Jeff so we've seen no degradation from that I think this gives us an opportunity again to help solve critical challenges. So the frustration free package is really the package experience of the opening and then the as you mentioned the the pack on demand our box in London.
And our box size or our automation platform in general helped to rightsize. The package. So that you take out ways number one it can reduce the fiber. So if you think of a mandrell formed carton you can take up to 30% of the fiber out good sustainable solution and you can run multiple packages on the machine, which is the tooling change.
Right size or that we just invested in helps multiple footprints and you can right size the packaging get rid of all the internal.
Peanuts plastics, although things that you have to throw away and can be recycled.
And then as you mentioned our pack on demand gives us opportunity to get rid of some of these plastic.
Envelopes that are not recyclable when we've put out machine. We just introduced it PM in mind sold two we had one built as a beta machine. We sold two off the floor because of the appeal of number one the optionality of size in that it's 100% curbside recycling. So we're not seeing a degradation we see this.
This is an opportunity to solve problems for customers and their supply chain in the ecommerce channel including for folks Logans.
And this is related I know the in consumer your key competitor does have machinery, but I don't think your other competitors in corrugated really talking about the machinery like you.
As you knowledge do they have these capabilities.
Well, we're the only corrugated manufacturer that builds machinery I think some motors can place they may make agreements with outside vendors.
But we have a full machine business were rebuild we work with OEM suppliers. So our platform was very well established and it is different than our other competitors yes.
Thank you.
Thank you.
Our next question.
Comes from Anthony Pettinari with Citi. Please go ahead Sir.
Hi, good morning.
I was wondering if you could provide any more detail on backlogs for the three boxboard grades I think you cited three to six weeks, which is somewhat wide range and then just maybe following up on George's question, you you've articulated in integration target for the corrugated business Im just wondering if you had a similar target for consumer or any of the three grades within consumer.
Given you seem to have a lot of the sustainability opportunities on a consumer side as well.
Yes. Thanks, Anthony this is Pat good morning.
So let me talk about the backlogs versus your first question. So as you've seen in some of the published industry statistics. Some of the backlogs have come down and and listened seasonal softness as is typical of what's happened over the last three or four years. So CRB is is down now around three and SBS might be around.
On three or four weeks of backlog.
See NK isn't published and we think those are really in the normal typical range across the industry. So we see typical activity now our situation as I mentioned into in the one of my prior answers situation is little bit dish different primarily around SBS, So CRB and CNK care in the normal ranges for us.
Kind of three to four weeks at that lower end, what we shared Sps is a little bit different it's the higher end and that's generally in the area four to six weeks. The reason for that is really attributable to the strategic outages that we had that I mentioned before and reduced availability of a of capacity in volume to sell in some of our.
Some of our market so our SBS.
Backlog continue to be longer or a little bit longer than what the industry is publishing we expect to catch up on some of that although in the first quarter. We do have a high number of maintenance outages that we were not able to complete in fiscal year 19, and so well continue through this fiscal quarter to continue to restore all those inventories and.
Naturally want to serve our customers to the best of our ability and bring those backlogs down. So we can so we can serve them and the shortest at time possible when they place the demand.
Relating to your second question around integration.
We think about integration and really two different parts number one is around specialty applications and.
This is really around three primary market segments of tobacco commercial and liquid packaging. These are all SBS product our markets, we serve those with SBS and in each one of those were specified downstream in there really to the end user and that's about 40% of our total SBS that that we sell so.
So we consider that to be integrated through those specialty applications. When you look at food foodservice beverage in health care and some of the other areas where were integrated by converting the paperboard and are converting facilities SBS sits at about 20% CN K 70, and CRB at about 60% and our view.
You have integration really hasn't changed that much we generally view integration as a as a positive, especially as we get close to our end user customers and sustainability and sustainable packaging and plastics replacement. So it's generally a positive and we'll continue to look for ways and attractive attractive ways.
To increase our integration levels, but at the same time, our open market paperboard sales in those segments is very important to us many of our customer service local regional markets. There are assets in our salesforce is or not as adept at surveying our capable of serving so we see this nice mix of integration where.
We will continue to look to improve and increase our integration level combined with accessing the open market paperboard sales as a really healthy a nice combination.
Okay. That's extremely helpful. And then just a quick one on corrugated if I could.
One of your large competitors has talked about stabilization or maybe even a little inflection and kraftliner export market.
Conditions and in October I think specifically Europe , which has been pretty weak all year. Just wondering if that's something that you're seeing or any kind of general comments on kraft liner export markets.
Sure we did see some stabilization.
In the quarter and then the second half of October coming to November .
The backlogs are.
Stable and a little bit up actually.
In the containerboard space, China is still challenged with demand in their inventories well Europe is much more stable in their inventories coming back into balance and then were most of our shipments go 60% is that Latin America area, and we've seen that stabilize.
In the last three three weeks or so here also.
Okay, that's really helpful I'll turn it over.
Okay.
Thank you.
We have a question from gay painting with Wells Fargo Securities.
Yes, good morning I was.
Looking at Slide 11, and annual cost reduction of 40 million from closing the machine and Charles and I was curious if this was part of that the 200 in synergies you guys have already identified or if it's a separate above and beyond and then talk about how the integration is coming along and what drove the decision to close this machine.
And then I know that though the remaining two machines there have.
Ample flexibility can you increased productivity or production of linerboard at those machines, if you chose to.
Hi, so that was not a parts of the original 200 and 200 million of synergies. So that was not contemplated when we looked at the synergies originally the machines do have flexibility machine number one had had run previously doors. So we're moving back door absorbs a machine.
Number one.
In crop pack to number two we are reducing the containerboard, we could swing them. It gives us flexibility to swing if we wanted to.
But we're looking at the door assortment kraftpak.
Moving those and then running 288000 tons less of our containerboard that that mill.
It was that was an opportunity that move because of the cost structure, so really reduce the cost and that that's why we really did it they gave us an opportunity to further match supply and demand reduce our cost structure of that that that mill and that's why we made the decision.
Thank you.
Thank you.
Our next question comes from Brian Maguire with Goldman Sachs.
Hi, good morning, guys.
Just a quick question on the.
The trend and box shipments I think last quarter, Jeff you talked about it July starting off pretty strong at five four looks like it decelerated a little bit through the quarter to average at a two to sort of thinking kind of caught inter quarter trends there and similarly, as we look at one Q in October starting out at one eight would you expect sort of a similar deceleration or.
Maybe destocking into year end any any signs their expectation of that and then.
The last part of it just as you look out the 2020 and it's like the the revenue EBITDA guidance is calling for 1% to 2%.
Shipment growth any is that it had a westrock specific comment or are you expecting the industry to kind of grow at that level and if so yes. The reason why you would expect it to kind of accelerate from the flat trajectory. It's been on for most of this year.
So I'll start with the July comment so we did see some deceleration in that quarter, but that was atypical if you look at.
September for us.
Last year, we were up over 5% per day.
And so there was a bit of deceleration, but we'd come back.
It was 2.2 for the quarter, which was a good quarter comparatively to the industry again.
And if you look at last year at the same quarter typically we were at 1.7%.
And then we want to 2.4 and 5.8, so I expect because of the ecommerce in the build us to look at more of an acceleration through the quarter than a deceleration and our comments of 1% to 2% we've grown 2.2% this year and 4% respectively. The two years prior.
But the business to continue to grow positively.
And so it's a comment for for Westrock not the industry I think it was we continue to differentiate ourselves in the marketplace, we will grow.
This business and we feel confident in our.
Our projections.
Okay. Just a quick related follow up just the corrugated integration rate, that's I guess, it dipped a little bit below 80% again any reason for that or is it just timing or seasonality and some of the business seasonality. There were some more of the exports less of our integrated too.
Partners, Grupo Gondi, which is seasonal that's that's so not uncommon in the quarter over 77% for the year trailing 12 months.
Okay. Thanks very much.
Thank you.
Our next question comes from our clients with BMO capital markets.
Good morning, Steven Jeff in particular to say this corrugated business has come a long way since 2011.
But on this on the business itself just the margins remain at the high end of the industry norms, and we're seeing a lot of new capital flow into the business on both the mill and converting side I wondered if if either or both of you can talk about two or three key initiatives to maintain the current high level of margins and returns at.
Westrock.
Sorry.
Jeff.
Hey, Mark.
So we're continuing number one to satisfy customers.
We have a outward focus on our customers on I think that we're solving customer problems and focusing on their critical challenges will help us grow this business profitably and differentiated well second we continue to.
Invest in our system, both in the mills and the box plants and across our automation platform to reduce our costs so cost control productivity.
Process control all of those things doing a good manufacturing process and sites, we're going to continue to do to manage our costs grow organically and we're going to work on growing the enterprise. We think the combination of the broad portfolio of products. Our solutions package is going to give us an opportunity to deferred.
Great and maintain our margin profile.
Mark I'll add onto what Jeff said is I think our I think we've been very transparent about what we're trying to do.
I think when you look at a project like we're undertaking a charleston.
There's not a textbook that allows you to just have that come out as we answer.
So the people we have.
Looking at our mill system looking at our box system operator.
As efficiently and come up with opportunities to invest capital to get even more out of what we have I couldn't be more proud of people we have in that business and it shows up in the results and I think you went back to 2000 Loveland. If you look at the.
The way people talk about the assets that we've acquired we've made.
I think tremendous use of the assets on both the converting side and mills and companies that will.
The strategy to take care of our customers I think thats producing the results and I expect we're going to be able to continue to do that going forward.
Operator, thank you. Thank you.
Our next question comes from Mark Connelly with Stephens, Inc.
Thank you.
Following on the integration issue in containerboard, 77% you want to get to 90, usually that means going out and buying independence, but we're seeing more and more new box plants getting built cheaters getting built and then we're also seeing a lot of de bottlenecking going on so how do you think about getting there when there's fewer independents to buy.
Good morning, Mark So what we think about it is we believe we can growth that 2% rate over the next five years, which puts us.
With the tonnage we need to get to approximately that 90%. So that's really organic growth.
Bolt on opportunities in the future that makes sense for us, we'll certainly look at those but we believe we have the system.
The processes and capabilities to grow this business organically over the next five years and that will put us toward that 90% range.
And within your existing capital spend or are there a lot of debottlenecking projects, you're going have to do to get there.
We have as you know if you look back from 2013 through today, we have built.
An outstanding system in the container plants and the mill by the investments we've done and we continue to.
Two.
De bottleneck, our plants and look at elevating the constraints and our typical capital investments have taken care of that so I believe in our normal capital investments that we have we can continue to grow at that rate with nothing exceptional in the capital.
Expenditures.
That's great just one clarification pat's comments about.
Consumer packaging were helpful but.
What I'm noticing is that the revenue per ton in that business has actually gone up very nicely even as the volumes have gone down so was there a significant mix shift.
Yes. So thank you for the question. This is Pat so one of the things that I'm really proud of our team is how we've managed the available customer demand in this in this year through our strategic outages. So.
If you just look at our margins even on lower volume and what we just reported in the fourth quarter in 2019 was 16% at the 100 basis points over the prior year fourth quarter of 18 and that really reflects.
Even with our reduced volumes and those volumes being tempered.
We still we're able to go after the most attractive business and service that consistent with our market segmentation and and and customer segmentation principles and so we're really proud of the team for doing that so the answer is yes to your question the quality of the business the mix of the business that we are continuing to serve is as as is improving and increasing and we're really.
Please to see that.
That's impressive thank you.
Thank you.
Next question comes from Adam Jonas Josephson with Keybanc capital.
Thanks, Good morning, everyone. Just two questions Jeff one back so I think Brian's question about your box shipment forecast so you're forecasting.
Up one to two this year, you're up to and a half last year is the lower rate of growth you're expecting just the economy slowing down ecommerce slowing down can you just give me a little sense as to what's what you're thinking there and then do you expect to continue to outgrow the industry next year as part of that 1% to 2% growth forecast.
So I wouldn't say, we're looking at decelerating I think that we're looking at yes, we.
Look to outperform the market in general.
And what Weve, what we planned as you've seen is.
1% to 2% and we started off the year almost 2% were two and a half. So we look at the higher end of that when we're planning and when we're going to market. So the expectation again to get them. The 90% integration is that we can grow this business reliably at about that rates and thats, how we build the system and that's how we.
We think about it and if the market slowdown, we still expect to outperform but I don't have a crystal ball that says what it's going to do exactly in the finite.
Yes, Thanks, and then just for one on working capital can you just could you give us just a rough sense of what you're working capital expectation as in terms of that drag on cap I think you said modest but can you just given that the bridge was getting to one three and you talked about a billion plus just can you give us any sense of.
How much of that Delta is working cap.
It's approximately $250 million.
Great. Thank you work.
You're welcome.
Thank you.
Our final question comes from George Staphos from Bank of America.
Hi, guys just a couple of quick cleanups, one could you really what your assumption is for recovered paper pricing will hover fiber pricing relative to what you're budgeting for next year and then just a clarification the insurance receipt in the quarter I assume that was in the receivable and.
Working capital in the cash flow for the quarter. Thank you guys and again good luck in the quarter.
Hey, George This award.
So the.
Lucier recycled fiber assumption for next year is that cost remained fairly constant with the current levels through the first half of the year and then ace a modest increased in the second half.
The average for the year as down approximately $15 a ton over the whole year versus fiscal 2019.
For the insurance I will remind everybody in our guidance for the fourth quarter, we assume that we would get $10 million of business interruption or $15 million of business interruption, we only received 10.
The total.
The total recovery was.
Did flow through cash flow in the quarter. It was expected as we were working with our insurance provider and.
We've recovered.
$180 million during the fiscal year, we ultimately believed the claim will be in excess of $200 million.
Okay. Thank you very much.
Thank you Jay.
I think that ends our call. Thank you to our audience for joining our call today as always reach out to us. If you have any questions. We're always happy to help thanks and have a great deck.
Thank you, Sir and that now conclude the call ladies and gentlemen, you may now disconnect.