Q3 2020 Westrock Co Earnings Call
This time I would like to welcome everyone to the West truck Company first quarter Twentytwenty earnings Conference call. At this time I would like to turn the call over to Mr., James Armstrong Vice President Investor Relations. Please go ahead.
Thank you Amy good morning, and thank you for joining our fiscal third quarter 2020 earnings call. We issued our press release. This morning and posted the accompanying slide presentation. The Investor Relations section of our website. They can be accessed IR not westrock dot com worthy link on the application you're using to view this webcast with me on today's.
Call or Westrocks, Chief Executive Officer, Steve Voorhees, or Chief Financial Officer Ward Dickson, our Chief commercial officer, and President corrugated packaging chalovich as well as our Chief Innovation Officer, and President of consumer packaging Pat Lindner. Following our prepared comments, we will open up the call for a question and answer session.
During the course of today's call, we will be making forward looking statements involving our plans expectations estimates and beliefs related to future events. These statements may involve a number of risks and certainties 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 this fiscal year ended September Thirtyth 2019, and our 10-Q for the quarter ended March 31st 2020.
In addition, we will be making forward looking statements about the impact.
The cobot 19 pandemic, when our operational and financial performance the extent of these effects, including the duration scope in severity of the pandemic is highly uncertain and cannot be predicted with confidence at this time.
We will also be referencing non-GAAP financial measures during the call. We have provided reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in the appendix of this slide presentation.
As mentioned previously the slide presentation is available on our website with that said I'll now turn over to you Steve.
Thank you James Good morning, Thanks for joining our fiscal third quarter earnings call.
I'll start by fracking, but outstanding Westrock team for their commitment focus and performance over the past several months.
The safety of our teammates is first and foremost.
Question Temp mining comprehensive precautionary measures to address the impact of cobot 19, westrock he might have reduced the frequency and severity of physical injuries across your footprint.
As a testament to the focus of our entire organization during the pandemic.
Our teammates on our operating locations are making and delivering a paper and packaging needed to ensure that supply. So the central goods, putting food Madison are delivered on time and unfold.
Our team is dedicated to providing our customers the solutions that help them win and bear markets through innovation and helps them grow their sales reduced their total cost management RASK and achieve their sustainability goals.
For customers and markets.
Had increased demand such as E commerce, food and health care. The scale of our operations has enabled us to partner with our customers to support these needs.
Oh, that's was evident in the results delivered by the outstanding Westrock team during the quarter.
And we recognize this performance with a onetime bonus for manufacturing and operations team might have was paid during the quarter.
Now, let's turn to the results in the fiscal third quarter.
For sales were $4.2 billion with adjusted segment EBITDA of $708 million.
76 cents up adjusted earnings per share.
Despite lower sequential net sales adjusted segment EBITDA margins increased sequentially.
Margins improved by 80 basis points, primarily due to cost reduction efforts productivity gains and other items.
Across our company, we moved quickly to adjust our costs our volumes changed.
Deferred outages controlled maintenance cost curtailed travel and reduced our discretionary expenses.
Our entire supply chain performed well and this dynamic environment.
In addition fiscal third quarter results reflect the benefit of nonrecurring items.
During a reduction in our annual short term incentive compensation expenses.
To balance our supply with our customers demand in the quarter, we took 154000 tons of economic downtime across our corrugated and consumer metals.
The value of our broad portfolio of products and capabilities continues to be recognized <unk> customers.
Sales to our enterprise customers rose to $75 million over the past 12 months compared to $6.8 billion a year ago. This is a 12% increase.
During the quarter, even with a pandemic replaced an additional 63 machinery situation from customer facilities, bringing our total to more than 3900 placements.
We're also made progress against our internal growth initiatives, our strategic capital projects are progressing.
We expect to start off the Florence paper machine later, this year and complete the mill upgrade at our trade Baja smell in Brazil in the first half.
2021.
We're implementing our capstone integration plan, which run rate synergies growing to $150 million, our way to over $200 million by the end of fiscal 21.
We generated $752 million of adjusted operating cash flow this quarter.
And we reduced our not backed by $455 million.
Our adjusted total funded that was lost the $9.4 billion that they ended the quarter.
And Matt.
We announced the west Roxane dynamic action plan, which I want a number of actions that will provide additional $1 billion of cash to the end of fiscal year 21 to ensure that we remain well positioned for long term success.
Just one going dollars is an addition to the cash will generate through our operations.
We're on track to generate more than $350 million from the plan. During this fiscal year with the majority of the $1 billion expected to be generated during fiscal year 21.
This will support our continued investment to sustain and improve our business, while providing additional cash to reduce debt.
Let's turn to slide four.
During the quarter or volumes were affected by carpet 19.
The strength in ecommerce food and health care and market segments was more than offset by lower sales and other market segments. These include industrial protein commercial print and high end consumer products.
The bridge on lessening following slides, our sequential which we believe is the most useful comparison now.
Even quoted the year over year bridges in the appendix.
The sequential price makes variants reflects the flow through previously published price decreases the market declines in pulp and Kraft paper pricing.
The increase in inflation was driven by the 55 dollar per ton increase and recycled fiber costs I was partially offset by lower Virgin fiber energy and freight cost.
You can see from the Brexit, we moved quickly to control expenses in the face of reduced revenue.
We postponed maintenance outages originally scheduled in the third quarter, two the fourth quarter fiscal 2020, and the first quarter fiscal 2021.
Our cash flow performance was solid in the quarter and as we've highlighted in the past our operating cash flow generation is seasonally weighted to the second half of our fiscal year.
Now for the corrugated packaging segment.
Corrugated packaging team performed extremely well delivering adjusted segment EBITDA of $482 million adjusted segment EBITDA margins of 18.3 per song.
North American adjusted segment EBITDA margins were 19.8 per song.
And Brazil's adjusted segment EBITDA margins were 23.6%.
Box shipments were stable in the fiscal third quarter as compared to the fiscal second quarter.
Our monthly trends reflect month to month declines in April with month to month growth in both May in June.
This trend has continued in July.
With current day shipments up 1.7% from June levels, I'm, a same number of shipping days.
Our box backlogs measure our expected box shipments over the next two to three weeks.
These have increased steadily during the month of July indicating stable volumes in August.
Now for the quarter per day shipments declined 4% compared to the prior year.
The decline was due to reduced demand from distribution industrial and agricultural customers.
The exit of low margin sales of sheets to third parties like consolidation of five box plants over the previous year.
We expect demand from our distribution industrial and agricultural customers the increase as the economy recovers.
I'm confident in our team's ability to grow the corrugated packaging business over the long term as I've done this over the previous three years.
The year to year year over year volume variances, not a long term trends.
Our long term goals to further increase integrate the business and to be a differentiated supplier to customers have not changed.
The volatility an unprecedented situation on the cobot 19 virus made a life the timing when we have one we reach our growth and integration goals, but it doesn't change the destination or our ability to reach these calls.
We are delivering on our value proposition with customers and are focused on opportunities and our hot pipeline.
Our hot pipeline measures business that we will begin to on board over the next 90 days.
It's the highest it's been since the capstone acquisition.
This indicates that our relative volume should improve toward the end of this calendar year and the beginning of 2021.
Covered my team had a significant impact on corrugated packaging sales during the fiscal third quarter.
Sales for ecommerce agricultural pizza end market segments were up significantly sequentially.
Ecommerce sales increased 18% from an already strong fiscal second quarter. This market remains strong.
Other markets, such as industrial and protein declined due to our customers plant closures early your way in the quarter.
We saw these markets recovering as these operations came back online.
Export containerboard shipments declined 51000, Tom sequentially.
Over the past 12 months, approximately 55% of our exports have gone to Latin America.
25% to Europe, Middle East Africa, with the remainder going to Asia and other parts of the world.
As we integrate more containerboard tons to this end market is likely to become a smaller portion of our total corrugated packaging shutdowns.
And environment of declining demand and rising recycled fiber costs, our north American corrugated packaging businesses adjusted segment EBITDA margins improved 19.8%.
This is 80 basis points more than the second quarter.
We moved quickly to control costs and balance our supply with our customers demand.
During the quarter, we took 124000 tons of economic downtime. In addition to one to 21000 tons of maintenance downtime.
In the month of July we took only 13000 tons of economic downtime.
Our system currently as operating in balance with inventories slightly below our target levels.
The entire corrugated packaging segments supply chain performed extremely well during the quarter working to operate efficiently and control cost.
Our key operating metrics. These include waste productivity and on time delivery were exceptional.
There are credit to the focus and commitment of the corrugated packaging team.
Now, let's turn to our consumer packaging segment.
The fiscal third quarter, a $1.6 billion in sales declined compared to last year.
Adjusted segment EBITDA of $243 million increased 9% sequentially and 4% year over year.
Adjusted segment EBITDA margins of 15.6% improved 190 basis points from fiscal second quarter.
Disciplined cost management and strong execution drove the adjusted EBITDA and adjusted EBITDA margin improvement.
Demand in our food foodservice beverage and health care and market segments increased sequentially.
And our team performed well to meet increasing demand in these markets.
Increased demand in these categories was offset by significantly lower demand and commercial print and softness in the high end consumer markets. These include beauty cosmetics and high end spirits.
We've seen a pickup in these markets coincident with the reopening of the economy.
Our consumer packaging Mel system volumes, excluding commercial print were stable our system backlogs are currently between three to four weeks.
We took 31000 tons of economic downtime during the quarter, mainly in SP asked to balance our supply with our customers demand.
In July we continue to adapt to our customers demand and took 33000 tons of downtime and our SBS system.
As you may recall from last quarter, we view, our consumer packaging segment through the fall in categories.
Food foodservice and beverage.
Specialty packaging.
Specialty Sps and pulp another.
We've seen strength and food foodservice and beverage.
This category during the pandemic this represents 59% consumer packaging revenue.
Sales in our MPS business. This accounts for 27% of revenue has been mixed strengthen healthcare and softness in high end specialty packaging.
Our specialty SBS business. This represents 10% of revenue had a difficult quarter, mainly due to the sharp decline the demand for commercial prime.
Finally.
Helping other accounts for only 4% consumer packaging sales and continues to be negatively impacted by low global pulp prices.
The improved performance of the consumer packaging segment as a credit to the commitment and focus of the entire consumer packaging team.
During the quarter. This team successfully navigated very demand trends across so many consumer customer end markets and geographies that we serve that successfully served our customers adjusted supply chain and controlled their cost.
Well Kobe, that's caused many of our customers to shift priorities in the near term sustainable packaging continues to be in high demand, including the movement away from plastics and packaging.
Since July of 2018, our sales from plastic replacement or at a run rate of more than $170 million and they're growing.
The highest demand for more sustainable fiber based packaging is for the ecommerce food food service and beverage markets.
And these markets our businesses leverage abroad value added capabilities.
Design material science advanced printing and machinery automation capabilities.
[noise] Westrock has multiple ways to innovate with our customers to convert from plastic to fiber based packaging.
Slide seven shows several of the many packaging designs and automation solutions that we offer our customers.
He's packaging designs.
Integrated with the machinery for these products position Westrock wall to grow our plastic replacement applications as the demand for sustainable packaging increases.
In addition.
We focus on carton designs that do not contain glue, which is important differentiator for our customers.
During the last quarter Masley, Anheuser Busch Inbev.
Coca Cola and others chose Westrock paperboard packaging and automation solutions to transition beverage packaging from plastic shrink wrap and plastic rings to paperboard.
In addition, we provided our cam collar to more than 40 craft root customers.
[noise] Red ball as expanding its production in the United States through the development of a greenfield location in Glendale, Arizona.
Westrock will provide the secondary and tertiary packaging for the products manufactured at the site. This includes folding cartons corrugated trays and pads and machinery as a complete packaging supply chain solution.
This builds on the strong relationship that we have with Red ball in Europe and highlights how our broad portfolio products in global operations complement one another.
Westrock has partnered with dominoes to promote the recyclability of pizza boxes.
Well, many believe that pizza boxes can't be recycled we conducted a study and demonstrated that greason cheese residuals at levels typically found on pizza boxes don't impact of recycling process, nor do they impact the quality of new packaging made with the recycled material.
Given that many people or not aware, the pizza boxes, or recyclable westrock and dominoes, our partnering to build the consumer website to provide access to instructions facts and answer questions about pizza box recycling.
This west Rock initiative is helping dominoes meat sustainability goals.
Now I'll hand, it over to war to talk about our financial position and outlook Ward. Thanks, Steve.
Our balance sheet is strong with limited near term maturities and significant liquidity in the quarter, we reduced our net debt by approximately $455 million.
S&P and Moody's reaffirmed our investment grade credit ratings in June we issued $600 million and 13 year bonds to extend our maturities.
And provide more liquidity at a very attractive long term interest rate.
Our long term committed liquidity and cash are now in excess of $3.2 billion and our U.S. pension plan is overfunded.
There are some things to consider as you build your models for the fourth quarter.
We expect our recycled fiber costs to be approximately $25 per ton lower than the average in the third fiscal quarter.
And we expect other commodity costs to be similar to the third quarter.
In the fourth quarter, we plan to take a 112000 tons of maintenance downtime, we will not have the benefit of the $29 million of nonrecurring items that we we experienced in the third quarter.
[noise] uncertainty remains due to the resurgence of cobot 19 in many markets.
We currently see modestly improving shipment volumes and have one additional shipping day in the fourth quarter.
Based on these current trends, we expect our fourth quarter fiscal fourth fiscal quarters adjusted segment EBITDA to be slightly lower than the third quarters.
We also expect an adjusted tax rate of approximately 27.5% in the quarter.
The full year adjusted tax rate to be 24.5%.
One of the pillars of our business has the ability to generate cash.
Each year since the creation of Westrock, we've produced more than $1 billion adjusted free cash flow.
Even in the pandemic, we continue to generate cash traditionally our second half of our fiscal years, our strongest period of cash flow generation.
In the third quarter, we generated more than $500 million of adjusted free cash flow, while we invested in our strategic capital projects.
With relatively stable sequential earnings as well as our focus on working capital the reduction of Capex and the other benefits of the pandemic action plan, we believed that the fourth quarter will be another quarter of strong cash flows.
And now I'll turn it back over to Steve for closing remarks.
Sure.
Thanks, again to outstanding Westrock teammates for their commitment focus and performance it's been incredible.
We're a company that values the strength that comes from our teammates.
Commenced with diverse backgrounds experiences and ideas.
Diversity encompass as many things.
Diversity of Westrock will increase over time.
We're building a more diverse an inclusive company where equity in a sensible longing are an integral part westrock culture.
I want everyone at Westrock to be welcome occurred valued and safe.
Refund advance of heightens, the necessity, an urgency of doing this and we're acting accordingly.
Westrock teammates are focused on safety customers quality cost productivity and building our company for the feature.
We have scale on leading market positions in our businesses our products markets and capabilities are well positioned to take advantage of the short term impact the pandemic and long term trends in sustainability and innovation.
Our strategy remains to partner with our customers to help them grow their sales reduced their total cost managed our RASK and help them achieve their sustainability goals.
With our broad differentiated portfolio and scale, we're well positioned for success.
When attractive company based on our strong market positions. The operating improvements that we haven't place stops that we've already taken to generate cash to sustain and prove our business well, making additional cash available to reduce debt.
James that completes our prepared remarks, we're ready for Q and I.
Thank you Steve as a reminder to our audience to give everybody a chance for a question. Please limit your questions to one with a follow up as needed we'll get to as many as time allows operator can we now take our first question.
Certainly your first question comes from the line of George Staphos with Bank of America.
George Your line is open.
Thanks, everyone. Good morning.
Thanks for the details and taking my question.
Really my primary question is around.
The outlook for next year, realizing that you're not in a position to guide.
When we consider the impact of tray spot.
Which will be coming on.
The middle of next year, let's say.
Florence.
Capstone the incremental synergies you'll have there.
And any additional productivity that we may see because of moves you make within the business.
Holding price constant what do you think in assuming volume trends stay the same.
I think that increment to earnings power might be all in and if you could parsing of that.
That would be great.
The second question kind of related to the first.
You showed some impressive large productivity numbers.
Both for consumer and corrugated.
In the quarter.
What was in some of those figures the larger movers and consumer or $33 million there and in corrugated for 44. Thank you guys. Good luck in the quarter.
Hey, George its ward good morning, Let me, let me start with the second question first okay.
So if you look at the cost performance in both businesses it was really remarkable.
And you can I can walk you down the piano and it was really an all cost categories that we per well.
So Steve highlighted the fact that.
The mill mill systems adapted very well to the fluctuating a demand we deferred maintenance costs maintenance outages, we controlled maintenance expenses, we had a meaningful reductions in overtime a across our systems, Steve talked about the.
Back that waste and operating performance in our converting systems in both corrugated and consumer.
Performed extremely well our discretionary expenses declined sequentially meaningfully. So a small simple example, as travel expenses declined almost $15 million from a sequentially. We also had the normal payroll.
Seasonality a payroll payroll as your our payroll expenses.
Payroll taxes are usually at their highest in the first calendar quarter. So they declined almost $10 million sequentially. So.
It is really.
The across the piano you can see a both in SGN, a and up in the.
A manufacturing portion of our RPM dollars, where the cost control to place it was true across both corrugated and consumer and even in our headquarters operations as well.
So that's the quarter, let's go forward to next year.
So remember our let me just kind of walk you through what our key strategic projects or where there was the mark curtain Coater thats been completed.
And it's performed extremely well and as we get into.
Halfway 21, it will be at its peak run rate of its.
The the cost performance that it will generate.
Quarter Felice continues to ramp up so some of the four to fleece benefits are somewhat volume dependent and dependent upon the overall market conditions down in Brazil.
The Florence paper machine will again be somewhat dependent upon the the ramp up of.
And overall demand environment that we are operating in but.
We should get.
Meaningful benefits as we go into F wide 21 or work over the course of endpoint 21.
From Florence, and then traced Bahasa again much of the benefits for trace by Haas will flow into F. wide 22.
I could see a.
The year over year benefits from the projects could easily be $75 million.
21 versus avoid 20.
But it is somewhat volume dependent and could be better or could be slowed.
By what the overall market conditions could be.
Thank you weren't I'll turn it over.
Your next question comes from the line of Anthony Pettinari with Citi. Anthony Your line is open.
Good morning.
You referenced box shipments improving from May to July August demand remaining pretty strong and I guess my question is you had some box plant closures that sort of set up a different difficult comp for you earlier. This year are those completely lapped or did that comp getting easier contributed did that contribute to the strength that you saw.
As you went through the quarter.
Good morning, I mean, it's just so no we're not left on me well planned closes.
So those that started in April from January So we still have some time till don't simply want so that's still a headwind on mode. The volumes at this point.
Okay that is that headwind, maybe less than a point or half a point or is any kind of waiting to quantify.
Sure. It's a hassle points, it's in that range Apple points, a little but directionally, that's that's where it is.
Okay. That's helpful. And then just in consumer quickly you talked about improved foodservice demand I was just wondering if it's possible to put a finer point around maybe the level of improvement that you saw sequentially from from fiscal Twoq to Threeq, you and maybe what product products or categories are doing well.
Sure. Thanks for the question. This is Pat I'd be happy to help with that so foodservice for US involves a number of different applications. We sell it open paperboard SBS into the cup and plate markets.
We also have integrated offerings for take out for curbside delivery and quick serve restaurants for example, and so if you look at each of those markets.
Stock had been holding in there through probably may.
And then actually had some softening in June and July is kind of the recovery in the opening of the market softened a little bit.
Plate stock on the other handed done quite well sequentially and so we've seen some growth there and take out and quick service restaurants. Despite the fact that there had been fewer concerts.
And sporting events, where we typically see demand.
Curbside.
Restaurants quick serve restaurants, and then pretty strong so net net we.
We've seen good sequential increases in demand for foodservice.
Yes.
Okay Thats helpful I'll turn it over.
Hi.
Question comes from the line of Mark Weintraub with Seaport Global Mark. Your line is open bank first Chris Congratulations the whole Westrock team.
Okay, Great performance in challenging times, one thing I, just wanted to drill down a little bit more of a good I'm on the maintenance on the deferring that maintenance expenses.
Can you give us a senses to how much that is and that that then have to essentially.
Show back up in a larger amount at some later date.
Yeah, Hey, Mark This award what I would tell you is that if you look at from Q3 to Q4, you saw the benefit on the bridge from Q2 to Q3. When you go from Q Q3 to Q4, I would say that it's at approximately $15 million to $20 million incremental expense in the fourth quarter relative to the third quarter.
And then as we think about this year as a whole.
We would be up where it normally would be worth its still going to be at a deferred type level.
I think it's relatively normal mark Okay Super and then Gypsys lastly.
Obviously, making great progress on that side.
And you talked about leverage ratio targets do you also have like an absolute type of target for Ford dad or net debt that we should be thinking about.
We're more focused on really the leverage target given.
The and we're clearly focused on paying down debt.
Taking the absolute level down the leverage target as highly obviously depended upon the.
EBITDA generation in the business and that also is the primary driver and source of paying down debt. So we're more focused on.
Targeted range.
Right and it gets it because the EBITDA is.
Potentially volatile I was wondering if there is kind of an absolute number.
That would be helpful and understanding what your goals are.
No I think our goal has been very consistently stated which is to quickly as quickly as we can return it to the tune a quarter, two and half times target rather than they absolutely. Okay. Thank you.
Yep.
Your next question comes from the line of Mark Connelly with Stephens. Your line is open.
Thank you can you tell us what's been happening in the display business.
The chart the last couple of years, where I live Theres no displays at all so I'm just sort of curious what's happening more broadly.
Good morning markets, Japan, so in the display business there is being just because of the pandemic awesome.
Headwinds on the.
Shelf ready some of the displays doing the store all schools, we still feel very good until performed.
We're looking at models business, our little Lan business is significantly off some of which sitting Busines E. Com. So we're looking at how the shipped more than two weeks already shelf ready kidney subscription business as the columns. So as long fully open book.
Hi, good decent quarterly now displays they've made great progress in costs and taking out costs a lot of our ounces on furloughs. Some of the the no hopes for controlling cost digital very good job well, but there's work to do I think going forward on what this market looks like how we can build a true away.
Sure So clearly we kill ready.
To cycle business versus fuel.
Displays it will end the ball.
Okay and just one more question. That's helpful. On can you give us a little bit more color on what the composition of the pandemic plan is.
A billion dollars as lot of money in a short period of time, So I'm, just wondering what kinds of costs you're targeting.
This award so we we publish the pieces of the pandemic plan and there was actually a slide in the earnings release last quarter, but I'll walk you through the walk you through the pieces I mean, there as the.
The reduction in Capex in both years.
Yes, there was the reduction of the dividend there was the use of stock for our short term incentive compensation and for one K. and then there was the.
Also the benefits related to the cares act, where we could differ.
Payroll taxes so those.
Pieces were enumerated in in that slide I, just don't have it in front of me.
But it's.
We're we're executing to that plan.
Yes, I'm, sorry, I Didnt I didn't know my question very well what I was wondering is is.
As you look at pieces and particularly the the Capex piece.
How is how is how does that breakout because you've got a lot of big Capex programs and I'm just sort of curious whether whether that is going to is going to change the timing of of your future operational changes.
So we're continuing to actual doesn't yeah I'm sorry.
We're continuing to execute the strategic.
Capital projects and in fact, as we close the.
The fourth quarter and to move into next year, we'll have less than $100 million of capex required to complete those projects. So we have protected the strategic capital projects, we protected the high.
Hi return.
Projects that we have both in our millen converting system in are very focused on doing the maintenance projects that are required to.
To sustainably run our operations.
Okay. That's helpful. Thank you.
Your next question comes in light of Mark well deal with Bank of America Bank of Montreal, Mark Your line is open.
Thanks. Good morning. My first question is really for Pat and I am I'm interested in whether you can give us some sense in consumer packaging of sort of highs and lows in terms of market segments in the quarter, how MPS is performing and then.
It seems like there's a lot of structural pressure on markets that are served by Covington and I'm wondering what you're doing to mitigate that.
Great So happy to help with that thanks for the thanks for the question. So some of the highs and lows in the quarter I'll speak really sequentially food continued to be relatively stable and we saw sequential increases would kind of center and the store and pantry restocking dynamics I mentioned about food service.
For there's parts of the market. There that are that were first of all really winning with our customers with our differentiated solutions and take out and then curbside plate stock has been strong, but it's offset by some of the cup stock dynamics, particularly in June and July that up that have softened beverage seems relatively stable right now the.
Big downside impacts are really on commercial print, which starting in April.
Versus March was down about 50% I shared that in the last earnings call and it's really stayed at those April levels ever. Since then so it's all thought.
In the 40% to 45% range both year over year end sequentially.
Turning to MPS, there's two pieces associated with that first of all NPS is is performing very well driving strong productivity and being focused on a differentiated specialty offerings to the customers healthcare has been a real bright spot with growth sequentially and year over year, that's been offset as theme as mentioned by.
Some of the beauty and cosmetics and high end spirits some of that associated with travel retail duty free travel retail that has been there has been relatively soft.
So thats a bit of an update on kind of the ups and downs as well as NPS and I think you had a third question third part of that you can remind me of that yeah. I will first of all I just I M is it possible to just get a revenue number for MTS and then the other question was really on just sort of Covington and the structural pressures I think if some of the products.
Yes, So I think if you look yes slide eight our slide six on the consumer packaging a real results you can see NPS specialty packing and packaging at 27% of the other revenue of the of the business of this segment. So you can see that reported out there.
As far as Covington is concerned so having 10, we do make some of the commercial print products that have been as I mentioned before significantly impacted by coded and so we announced in may that we will be idling one of our lines. There for at least 30 days, we've not provided an update to that externally.
So on keeping that confidential at this point, but clearly you can see in our in our results that we took.
31000 tons of economic downtime in the quarter.
And then in July that even increased to 33000 times net still reflects the softness that we haven't commercial print and as I mentioned before Sps has also been impacted by a hub stock declines in June and July which also impacts our.
Our our the need to match our supply with their customers demand and the increased economic downtime in July.
Okay again, just one more on this MPS is impossible to get a year over year on the sales.
Oh I don't have that right in front of me right now, but we can certainly get back you can follow up with that Super Thanks, Pat I'll turn it over thank you.
Your next question comes from the line as Debbie Jones with Deutsche Bank Debbie Your line is open.
Good morning, Thanks for taking my question.
Wanted to say.
He had the export shipments they know that you're integrating tender that more but I just wanted understand.
What your strategy there over the next.
A couple of quarters here, especially with the dollar we still would you expect that number to continue to come down or eat. It would you expect that export sales might increase a bad thing, what's the demand level that you're seeing out there.
Oh, Debbie so they were down sequentially.
This quarter versus Q2, we were flat basically year over year.
As we stated before our goals to integrate further our box business.
The least well profitable channels export so as we look to integrate further into the box channels I would expect long ultimately to come all the export and which.
Clauses that we're going to decrease that.
That channels as we move forward.
Okay I.
I know you're highlighting some of the.
Substitution to paper products, such as plastic and I'm curious if there is there something that you have the capability to do.
There that you think your questions are fully appreciating let me just trying to get a sense of what kind of coming or whats available out there because it does obviously seems to be a big shift away from plastic.
Yes, Debbie said well all of this is Pat I'll I'll try to answer that and Jeff can add is.
As a property for corrugated but I think this is a place where we're really differentiate and have great capabilities around design allow material science with our coding solutions and coating chemistries, our packaging and converting capability as well as machinery, which is really important then and Steve on slide seven.
And showed a couple of examples the add to an example of we shared a couple of earnings to go around Diageo, where we are through our automation platform through our design have multiple solutions and beverage where we can convert customers.
Two from plastic into paper and those cases shrink wrap and high calling range, but it extends well beyond that the applications for us and plastics replacements comes certainly in beverages, I mentioned, but foodservice when clamshells. Our bio pack solution is very well received there we're seeing a lot of different applications and.
Food E Commerce, Nailers foam and plastic trains, which really leverages, our coatings capability barrier coatings capability.
Personal goods like razors and.
Deodorant eco tubes has been profiled in the marketplace and and so I think there are a number of different examples again going back to.
Going back to our design capability, our coatings capability.
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Printing converting capability as well as automation and Jeff maybe you want to add a little bit on machinery and automation to add to how we bring value to our customers.
Sure. So Doug I think the only thing I'd add is our customers or starting to see as we roll out some of the machinery applications combined with our differentiated substrates, whether that's in consumer or corrugated in past highlighted one of them well. We had me one of our largely Tom's customers in Q.
On fiber based.
Those versus the classic males and that started off as a small trial will 30000 to long term, it's up to 800000 monkey growing we also rolled out our pack on demand some customers looking at replacing some of these other mailers, we're using single things or just a paper solution for some of the envelopes.
And as customer focus more on replacing lawsuits will follow based packaging, our automation platform and a broad portfolio products is gaining traction in the marketplace and with our customers.
Thanks, that's very interesting I'll turn it over.
Your next question comes from the line of Brian Maguire with Goldman Sachs. Brian Your line is open.
Hey, good morning, guys. Thanks for the details just to make sound like a strange question, but I'm sort of wondering as you guys. It had a couple of months now into though the locked down to the pandemic.
Yes, Hi, how are you see it impacting your corrugated demand and.
A question is really just trying to get a sense of it if we were to see an end to the lockdowns or the vaccine or some sort of a relief from the the trends we've seen and you do you think that would be sort of positive or negative for corrugated volumes from here, I guess and sort of referencing.
In the appendix shows your ecommerce percentage of the mixes has come up quite a bit from some of the past lies and obviously that's been a business that seems like has benefited a little bit from that.
Oh, the locked down so yes, there's a lot of moving pieces to what's going on this year, but as you look at your corrugated volumes overall, probably not too far off from where we would have thought otherwise.
So is there any way to kind of.
Say, how you kind of fees.
The entire locked down situation kind of impacting volumes at this point.
Sure, Brian It's Jeff So those who each we major end use segments that has been highly affected by the longwall I'll start with our distribution and our paper business in the paper is really our sheet feeder business. So some of that is just we decided to walk away from some of the low margin.
Segment of that business together for these really the independence.
Through supply.
Hi, mom essential single plants that have been well disproportionately affected by the walk on the other party does distribution gross the effect of that is really mostly our victory business in moving and storage and as we lost down stores open up we even seen in July some moderating abandoned will pick up and.
In that space. So I think the opening up the economy will hope that business that segment.
Come back online.
A large part of the other part of this is industrial so if you look at our industrial much more on a large part of the 4% year over years. So starts with distribution paper next biggest sport is industrial and that's really been affected lump all the locked down and as we've said as soon as open up we expect that to come back.
Online than the last Florida's really haggen produce zeal towards segments so sequentially.
The ruble quarter, we've seen starting to open back up installed on parts were was last year and that's really due to a food service side of the commercial piece restaurants. In other places that are showed me a plant is not agricultural products. Like you guys were real strong some decline in the open back up that will also be mothers.
So it's really those three segments that had been Disproportionally attempted to us during the long we expect out to gradually increase as we've seen into June July as things start to open a rack up we've seen that marlboro's starts to increase.
Okay and then just a question following up on on what some others have already asked.
On the Sps market obviously.
People have talked about some of the weakness in commercial print.
Content in particular and the amount of economic downtime you said you've taken in July others in the industry like graphic packaging talked about thinking a lot of Sps downtown in in July as well just wondering to what you guys would would need to see before you'd make more permanent decisions around capacity in the industry and if you think that some capacity does need to come out.
Across the industry in that.
If you can agree.
Yes. Thanks for the question this is Pat and I'm not able to comment on anything.
That might look out into the future considering plans out in the future.
As you saw in the quarter as well as in July we did share the economic downtime that we've taken an inflection of our matching our supply with our customers demands.
Okay. Thanks again guys.
Next question comes from the line of Steve Chercover with D.A. Davidson steep your line is open.
Thank you.
Little late in the session. So I hope this doesn't come across as Nit picky, but if your north American corrugated EBITDA margins were 19.8 in Brazil was three points higher how does the entire segment come out lower at 18.3 is that going to do with India.
The primary driver as our distribution business called victory.
So.
Got you okay well.
Okay, I know victory, how big is India and are you doing well there.
We're generating positive EBITDA the Indian businesses.
Approximately $50 million revenue a year at times so.
Got it so.
Real Pipsqueak, Okay, and then on consumer packaging it did better than we thought I know it seems to be source of consternation, but so.
Do you think something's getting fix there do you have a mid cycle EBITDA target for the consumer side.
Yeah. So this is pat thanks for recognizing the improvement there, we're really proud of that.
Work that the team did as Steve mentioned in his prepared comments 150 base basis points improvement in EBITDA margin year over year in 190 basis points sequentially and so we're driving a lot of innovation, we're winning with our customers plastics replacement as a piece of that leveraging the enterprise solutions capability. You saw the example, rebel either all really.
Positive, but thanks for consumers so driving the commercial side of it and at the same time, managing our cost effectively.
Well, we did that well in the third quarter, and we're going to continue or look for options to make sure as well as productive as possible as far as looking forward.
Ward and Steve share, we can't were not sharing guidance right now because things are too uncertain in terms of how things are going on pool, but as you can see throughout this fiscal year. We've made good progress and we think we have.
Plans to continue to improve the consumer business going forward.
Terrific, Thanks, and good luck.
Thank you.
Your next question comes from the line, if Neel Kumar with Morgan Stanley Neil Your line is open.
Hi, Thanks for taking my question.
Corrugated business can you just talk about how box demand as time getting a Brazilian business.
What do you just seems so fourth quarter and had a trend commodity less.
Sure so.
So assuming the same is we're seeing with some of them on essential businesses Baby doll.
We were flat in the quarter, which was still outperformed the industry in Brazil, which was down little bit over 3%.
I think there we're seeing the same things we're sitting here with the virus one central businesses are being shutdown and as they open up the C.
Progress, but overall that business.
Performs well in his outperformed the market over time.
Thanks, and just one on customer inventory levels I mean, how would you characterize.
Inventory levels are your customers in both businesses are you generally seeing them keep lower levels and require quick quicker turnaround times this environment.
Kind of any kind of color on the customer ordering patterns will be helpful. Thanks.
Oh Stuart's.
I'll just pick up so if you're if you're talking about.
Thanks last summer's I think they're keeping their inventories.
Filled as they possibly coming to meet the demands that has has shown and so on searching.
Oh, we softening de stocking so I think our customers are trying to keep their bops.
Inventory at levels, where they can be.
The demand that they've seen in there and news and their segments.
We can our domestic customer base for containerboard mill same thing keeping their inventory levels to the extent of taking some clonal there were box plants their individual converting plants, almost even going tighter than they typically does.
They want to be able to take advantage of any spikes that happen. So from our standpoint, we don't see.
Unusually low groups or smaller inventories when they would typically keep.
Yeah, and Jeff maybe I'll, just add to that and I consumer side I think what we're seeing is similar to what you shared as their customers, especially in food and foodservice want to keep their inventories sufficient to meet the changing customer demand now things are are changing rapidly. So that does lead to some lumpiness and how.
We plan, our our manufacturing and supply our customers I would say that there is also maybe a trend to simplify the portfolio our customers ever desired are really keep it as simple as they can and streamline.
For productivity and so minimizing the number of SK use and of course, we have the ability to work with them with our design capability, our automation capability, we can help them reduce there.
There there complexity in their supply chain and that's really important for them to supply their end customers as well as reduce and manage their overall cost.
Great. Thanks.
Your next question comes from the line of Adam Josephson with Keybanc, Adam Your line is open.
Good morning, everyone. Thanks for fitting me in here.
Jeff just on on demand you talked about box backlogs, having steadily increased during the month of July indicating stable Alliance in August we just talked about what that implies year over year in both.
July and August compared to the down for into Q.
So July right now add them with 21 days out of the 22.
In the aggregate were up about 2.5% and there's an extra day, so we're down about 2%.
Year over year in July.
Yes, it's too hard it's I don't know that flow through August as were coming in but I can say the backlogs have steadily increase when we go into August with the strong backlogs that we saw in July and that's really a functional some of the opening up in the economy. So those three segments did I called out sequentially month over month or improving.
We see some opening in the economy now that's subject to change based on what happens without breaching the economy, but that's for US what we're seeing so foreign losses in this last year, we were up 5.4% in July. So it's a tough comp also but were were up year over year down a bit in Canada.
Terrific, Thanks, Jeff and Steve on the dividend.
Is your priority to get down to the to the two and a half level before restoring the dividend to where it was before or are there other criteria involved.
We're going to look at the overall context of our business.
I think we do want to get our debt down a little better, but Tom as fines.
Develop and we have more visibility into where the market's going over time will.
Obviously about where dividends.
Thank you.
Your next question comes from the line of George Staphos with Bank of America. What's your line is open.
Hi, Thanks for taking the follow on I'll try to be brief.
As you look to the bids that are doing well.
The businesses that have some challenges right now.
We expect looking to fiscal 21 fiscal 22.
Some additional moves some additional commentary from Westrock in terms of.
You'll be doing to adjust those businesses address those businesses and Directionally is there anyway to quantify what benefit again, you might see from.
Adjusting these businesses fixing their performance and so on a you know in terms of the outlook. That's question number one Pat question number two just on the consumer segment.
As I thought you said that health care was actually relatively good in the quarter.
Yes the.
Sure.
Percentage of Pie health care represented in the quarter was down from the last chart foodservice sounds like it was stable, but it was down from last quarter's charts. So should we read on that last point that cup stock and whatever else was sufficiently negative so as its percentage of total of consumer was that was.
Impacted negatively thanks, and good luck in the quarter.
Thanks, So so first of all healthcare I'll answer the second one of the maybe Steve around our award on the overall portfolio, but on your second question as it relates to Npis healthcare performed well and we've seen increasing demand for that I think you might be referring to slide six where NPS specialty packaging.
Also shows in there are some of the health and our some of the beauty and cosmetics and high end spirits that had been negatively impacted so that may impact some of your your mix and then food foodservice and beverage of course is a mixture of a number of different applications and foodservice as we meant as weve talked about.
About already the Cup stock was was negatively impacted that was offset by a number of other areas in foodservice, including our integrated offerings that have that have improved.
Throughout well Q3 versus Q2.
Hi, Thanks, George just some first question.
We're going to continue to look at our business.
Maximize the value of the business, we've got fantastic.
Integrated packaging businesses, we have a okay, great portfolio of portfolio of portfolio of paper that we.
But we solved.
I'll leave it open market customers, how we do have areas and I think Jeff mentioned export.
Containerboard Pat's mentioned some of the paperboard on our consumer business.
Spect over time will reduce our emphasis on those lower margin businesses and how that evolves.
Stay tuned Atlanta Saul.
Venture out there in the marketplace to see what's happening and I really couldn't be more pleased about.
The way we've executed over the past several months, we went and trying to be as flexible as we could and both adjust our cost structure.
And our operations to supply our customers on we've done extremely well this on the past several months I'm I'm excited to see how we're going out.
Oh, no embraced the future.
As our all if we I guess, thanks very much for the color guys. Good luck.
Your final question comes from who might have Mark will deal with bank of Montreal, Mark Your line is open.
Thanks, Ed just two quick follow us one I wondered if there are any changes you foresee us we're heading toward the a 2020 holiday season, whether it's in Splays prestige goods et cetera, and then the other one is just if you could comment on a on Gandhi and performance there, particularly in light of the brewery situation and mix.
To go in the second quarter and also the ramp up of that new paper machine in any impact it might have on your transfer paper down into Mexico.
Okay.
Jeff for Pat can I will come on Gandhi, but after you comment on holiday season, if you have any comments on that.
Sure. So I'll start on the holiday season market. Thanks.
Depending on what happens.
Purchasing as we get into that October November December typically lose a large opt to driven a lot by the holiday season in the E Commerce.
So it remains to be suits, it's too hard the so called right now what that will look like especially with the if well funded in sort of overlaps. The one loan book the holiday season, It's just too hard to tell what that may be.
And as I've said before and same thing on.
Displays it's hard to tell based on what's going on with the opening in the economy what.
Marketing budgets folks are going to spend on.
Typically that's not too far out but in this environment a month is a year in this environment. So it's too hard to tell at this point.
Hi, good probably.
Go ahead Mark.
I'm sorry, Steve. This is this is Pat I was going to add I would I would echo that on consumer is just too hard to tell in terms of when things open up when the economy opens up and social distancing the impact so much of the beverage and food and food service market. For example, so just echoing jeffs comments on corrugated certainly apply to consumers.
As well.
Hi, Thanks, Pat I'm, just on Gandhi Mark would you have the paper machine coming on gold.
Start Tom, Yes, making paper and September potentially I cover they have been they have been impacted.
I don't have a specific number for demand we are a paper supplier.
We supply version to the agricultural markets.
We're.
Oh, that's some paper that Tom provides song gone the ability to predict on those markets.
So Steve Steve that would not that would not change for the new paper machine because that's a recycled machines. So you're you're at congressional Chris backward. Okay. Okay. That's helpful. Okay.
I am on.
Ward has an answer to your MPS scores from.
Hey, Mark This award the MPS declined sales decline year over year was approximately 8% compared to approximately 6% for the whole segment.
Okay. That's super Thanks, Good luck guys.
Just because our question answer session I will now turn the call back over to James Armstrong for closing remarks.
Just want to say thank you for your interest in Westrock and have a great day.
Ladies and gentlemen, this concludes our call you may now disconnect.
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