Q4 2020 Westrock Co Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the West Rock Fourthquarter physical Twenty-twenty results call.
At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during the session you'll need to press star one on your telephone keypad. Please be advised that today's conference is being recorded. Thank you I'd now like to hand, the conference over to your moderator for today.
James Armstrong Vice President Investor Relations. Please go ahead.
Thank you good morning, and thank you for joining our fiscal fourth quarter Twenty-twenty earnings call. We issued a press release this morning and posted the accompanying slide presentations to the Investor Relations section of our website. They can be accessed at I R. Dot West rock Dot com or via a link on the application you are using to view this webcast.
With me on today's call or West rocks, Chief Executive Officer, Steve Voorhees, Our Chief Financial Officer word Dixon, our Chief commercial officer, and President of corrugated packaging, Jeff how rich as well as our Chief Innovation Officer, and President of consumer packaging, Pat Lindner following our prepared comments, we will open up.
To 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.
Statements may involve a number of risks uncertainties that could cause actual results to differ materially from those we discussed during the call. We describe these risks and uncertainties in our filings with the SEC, including our 10-K for the fiscal year ended September 30th 2019, and our 10-Q for the quarter ended June 30th 2020.
In addition, we will be making forward looking statements about the impact of COVID-19 pandemic on our operational and financial performance.
10 of these effects, including the duration scope and severity of the pandemic is highly uncertain and and cannot be predicted with confidence at this time, we will be 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 gap measures and.
The appendix or the slide presentation as mentioned previously the slide presentation is available on our website with that said I'll now turn it over to you see okay.
Okay. Thanks, James Good morning.
What strikes fiscal fourth quarter was highlighted by record sales of packaging across our business with.
We delivered solid operating results and exceptional cashflow that enabled meaningful reductions in both the amount of our debt and our leverage ratio.
Explaining our performance during the fiscal fourth quarter begins with an incredible performance of west rock teammates around the world.
While the safety and health of our teammates has always been first and foremost the past seven months, then exceptionally challenging due to the COVID-19 pandemic and the impact it's had on all of our daily activities across the company.
These activities include the implementation of safety protocols, the rapid changes and demands from our customers and the stress, but all of us feel for the safety and wellbeing of our teammates our friends and our families.
We've accomplished many amazing things and it's just one example, I'll call out our teammates at our Demopoulos, Alabama, Mel who've worked over 1 million hours without a recordable safety youngstrom.
For those are you involved in the operations, but since that is just amazing.
And thanks to all of the West rock teammates across the company for what they've done during these challenging times.
When we formed the West rock, we created a company that differentiates itself with a broad set of products and capabilities and partners with customers to meet their needs to grow their sales.
You might make all of this happen.
We're well positioned to help our customers meet the growing demand for sustainable fiber based packaging solutions.
We're seeing increasing demand for functionality and value from our products and services, including the ingeniously designed ecommerce packaging that allows our customers products to be shipped and its own container.
This eliminates a redundant and wasteful additional box.
Demand is increasing for can collar eco a.
A superior Glu free packaging solution used by Coca Cola in Europe to replace plastic packaging that supports their initiative to create a world without waste.
The glue for a quality of Westrock scan collar offering is an important differentiator for this product as some competitors use glue that transfers to the cans.
Our sustainable solution provides a much better brand experience that's important both customers and consumers.
Our products can also help consumers feel safer about their purchases our.
Our bio pack protect folding carton solution enhances food safety by enabling restaurants to seal delivery items in the store.
This helps ensure that the product is not tampered with and transom.
Our packaging is helping connect consumers digitally to product information and promotional content.
Our recent work with dominoes to educate consumers about the recycling of pizza boxes, where they live demonstrates how digital content come enhanced the customer experience.
Our customers utilize our machinery solutions to lower their risk improve their productivity and drive cost out of their packing lines like.
By combining our machinery solutions with our associated sheet and box offerings Westrock provides a complete solution to our customers.
We had another year of growth and machine placements during the fiscal year machine placements grew by more than 10% to a total of more than 4000 machines placed.
The pandemic has accelerated our customers demand for sustainable fiber based packaging solutions.
Making now an opportune time to be at Westrock working with our customers.
We help customers adapt to these new markets and we're winning business as a result.
We're doing this by combining our design capabilities our portfolio of paper substrates are world class converting network and our packaging distribution and other services to create packaging solutions that help our customers win in their markets.
In fact.
Our hot pipeline, that's business that we expect to onboard over the next 90 to 120 days is very healthy and this indicates strong demand going into 2021.
Let's turn to our results for the quarter.
We delivered another quarter of solid performance in a rapidly changing environment.
Westrock sales during the quarter were four and a half billion dollars.
Adjusted segment EBITDA was $721 million.
And adjusted earnings per share were 73 cents.
The fourth quarter's results benefited from an increase in packaging demand across both segments with our packaging volumes at record levels up 6.9% sequentially and 2.4% over last year.
We exported less containerboard and incurred lower recycled fiber costs, both of which positively impacted our results.
These benefits were partially offset by 87000 tons of economic downtime taken across our SBS system higher.
Higher labor and maintenance costs and the absence of the nonrecurring benefits that we received in the third quarter.
And as you all know market conditions are changing quickly there.
Demand for corrugated packaging containerboard and food and beverage consumer packaging is very strong and contrast.
SBS volumes remained soft due to due to declines in foodservice commercial print and tobacco applications.
Importantly.
We generated strong cash flow in the fourth quarter, we generated more than $630 million and adjusted free cash flow, which brought our total to $1.15 billion for fiscal 2020.
This is the fifth year in a row, we generated more than $1 billion and adjusted free cash flow.
We reduced adjusted net debt by $578 million in the quarter and more than $800 million during the fiscal year.
This was in excess of the industry volumes reported by the fiber box Association.
Our corrugated box backlogs are at record levels and the signals strong demand growth into the future.
Our daily box shipments in October were up between 8% and 9% from the prior year.
We're experiencing similar growth trends in our victory packaging business.
Sales increased $47 million sequentially.
Recovery in the moving and storage business and an auto parts sales fueled this growth along.
However, we started up our new paper machine at Florence, and we're already making high quality containerboard.
We expect the machine to improve EBITDA by $30 million in fiscal 21, with a run rate of $55 million in EBITDA going forward.
The trace Baja smell upgrade is on track for full start up on schedule in the first half of 2021.
Primarily to economic downtime and that's B S.
As many of you who follow our industry understand demand for especially S. B as has been declining, especially for the commercial print tobacco plate and cup stock markets.
The declines, especially S. B Astro man to have a celebrated with the COVID-19 pandemic.
Commercial print demand continues to be down by more than 20% compared to the same quarter of last year, even while election and back to school promotions modestly improved demand sequentially.
And food service Cup stock markets sales have declined by more than 30% sequentially.
As a result of this weakness and to balance our supply with our customers demand wittrock 87000 tons of economic downtime in the quarter.
This downtime supported the sequential reduction in our inventories of 72000 tons.
In early October we announced the removal of 200000 tons of Sps capacity at or even Elmo, but the shutdown of one of our three paper machines there.
Even it'll shut down was originally scheduled for the end of the calendar here.
However, we're currently producing five to 10000 tonnes per month of containerboard. It even now to help meet the strong demand corrugated packaging.
We may need to keep us up through March.
This is a short term measure to help address the very strong demand for containerboard.
Our plans to remove 200000 pounds the best B S capacity are unaffected by this extension.
The balance between our S. B a supply in our customer demand is improving we plan to restart our idled paper machine at Covington later this month.
The lower margins and challenges of the specialty S. B as in pulp business have masked the attractiveness of the rest of our consumer packaging business.
Be attractive portion of the consumer packaging business includes sales of paper and packaging solutions to the food food service.
And beverage and specialty packaging markets. These.
These solutions use our extensive range of paperboard substrates and they're complemented by the broad set of value added capabilities, including packaging design materials science advanced printing and machinery automation.
This attractive portion of our business accounts for approximately 80% of our segment sales and the vast majority of the segments EBITDA.
To grow with our customers.
As we continue to generate cash pay down debt and reduced leverage towards our targeted range. We expect to return more capital to stockholders through increases in our dividend and opportunistic share buybacks.
We also see the potential for M&A opportunities that are focused on our packaging businesses.
We continue to use our strong cash flow to pay down debt and strengthen our balance sheet.
Carpeted base level.
[noise] as markets continue to change quickly due to COVID-19, we are not providing full year revenue adjusted EBITDA or adjusted free cashflow guidance at this time.
And fiscal Twenty-twenty, we demonstrated our ability to adjust our operations to market conditions and continue to generate cash with a backdrop of improving demand conditions, along with the completion of our strategic capital projects and the benefits of our pandemic action plan. We are confident in our ability to continue to generate strong.
Cashflows reduced that and make meaningful progress towards our leverage target.
Now I'll turn it back over to Steve for closing remarks, Thanks art.
Please press Star one George Staphos with Bank of America. Your line is open.
Hi, everyone. Good morning, Thanks for the details.
Or at least on the progress also congratulations to Jim Porter on his retirement I guess my first question, Steve you talked about the Hot pipeline. Then you offered some you know positive qualitative commentary can you talk a bit further either and quantify terms you obviously gave us the shipment numbers today.
In the quarter, but you know what you're seeing in the pipeline and how it translates to a 21 related Lee I think machinery installations were roughly up about 100 from.
Fiscal threeq to fiscal Fourq do you know.
Productivity and people are harder to get into the plants are machine platforms, given us a great opportunity to.
To do that and we're also seeing good opportunities and innovation with a machine. So we had our pack on demand business, we've come up with a new pouch design for packaging.
On when we all get back to normal when there's a vaccine et cetera.
You know we go back to normal growth and corrugated of you know I don't know a point whatever and you know we're looking at tougher comps in the future. How would you have us think about that thank you and good luck in the quarter.
Thanks, George well, so I think what we're seeing in the E. Commerce channel is growth. It's accelerated yeah. If you look at what was projected for E commerce to be part of the retail channel. So it was scheduled to be.
If you look you can't saw retail they had a 22% of the sales by 2025.
B from E com I see that accelerate it and still will be the largest retail channel. So that would in retail. So we see an acceleration and that could be by 2022 2023 at this point.
And I think you'll see that continue and it has been a positive or a box man now what percentage, it's hard to tell overall, because there's there's puts and takes in that right. As you go to the sidewalk packaging you have some boxes moved on blokes, but it's it's definitely added share in the corrugated space for us.
And we see the trends, especially if the terms are just talk about buying online pickup in store.
His largest growing subscription packaging and then the ship from store. When you think about what everybody is talking about last mile shipments well. There is a bunch in places that are last mile shippers are called retail stores and so the retailers are now looking at how they can best serve customers and we're uniquely set up to do that because we have a machine plant.
Warm that can fit in store or we have a distribution network to help customers.
AUC to speed the cost profile is not for the containerboard. So thats a short term emergency.
Thank you.
John writer with Stephens.
Your line is open.
Thanks. This is John on for Mark.
Downtime at <unk> or in the S. P. A system overall I should say in the quarter and there's about 156000 tons of economic downtime as you can see in our shipment data in the church that we prepared and and share with you. An addition last year, we we produced a significant amount of pulp.
Increases their year over year, so that way you can really think about it is that we had a lot of economic downtime and in order to as well as production on pulp and so in order to match our supply with our customers demand. We figured that we decided that it was the right move to take 200000 tons of capacity S. P. S capacity uhm out of our system that's about.
10%, but the mix overall of what will serve our customers with these ah relatively the same.
Okay. Thank you very much.
Anthony Pet Mary with City your line is open.
Good morning.
Is that possible or not possible for a commercial or technical reasons.
There any reason to believe that it wouldn't be up.
In fiscal 2021, and then can you remind us of any other moving parts that I might be missing.
Sure. Good This award so.
We have a lot of confidence in our ability to generate strong cash flows and so you hit on some of the key the key elements we've got a.
At the midpoint of our.
Capex.
Guidance for the year, that's a $125 million to $130 million reduction, we still have some of the benefits of the pandemic Act.
Action plan, so as you'll recall.
The effort.
Fly 20.
Short term incentive payments were actually paid with stock via cash and that actually occur would have normally of that payment would have normally occurred in the first quarter of why 21, if it were a cash payment.
I would really point also to the fact that if you just look at our.
The relationship between.
EBITDA and adjusted operating cash flow is like 76 or 77% in F y.
In in F y 20.
Do you have any plans or or.
The ability to maybe eke out a little bit more capacity for that particular paper grade.
Yeah. So thanks for the question. This is this is Pat again, so on it as as we mentioned before see UK or for Westrock see NK has has been stronger operating rates have been in the high Ninetys and our backlogs are in the four to five week range. So.
And we did notify customers in a $50 per ton price increase just recently so good strength in that market driven by beverage as well as food as far as changing capacity I are increasing capacity I really can't comment on a forward looking basis around our capacity.
So that's one of the things that you you need to look at and then clearly the other key EBITDA driver that we have is volumes in the pricing the supply and demand conditions that we have across all of our businesses and you know the pricing environment that comes with it <unk> do you want to just have uhm.
<unk>, Mark our our business as a manufacturing business and cost increase online customers demand greater value and so it's a it's a competitive market and so we've used the transactions in the center of days to build a platform that we have which I think is generating and has generated very strong.
Consistent cashflows and I think we saw a couple of times five consecutive years of a billion dollars in free cashflow and that's <unk>.
Implementing a very strong capital program to improve the performance of the business.
Okay I'm I'm just raising the question of you know if we talk about these EBITDA gains if they're just gonna be all set to some degree by inflation or other issues, we need to think about it a little differently than my follow on his congratulations to Jim Porter, but then I just wanted to talk about the southern container business, because both Jim and Jeff came over.
Southern container I remember when you acquired it in early Oh wait.
It had EBITDA margins in a sort of fun and L. T on basis of about 27 or 28% if I remember correctly.
And at that preceding year, the liner price was 532 in pulp and paper week.
Then the OCC costs was 112. So this last year the liner prices about $200 higher the O C. C price is 75 costs $75 lower and yet if we look at the margins the margins for the business as a whole are down significantly from what southern used to put up what's the you know how.
Do you explain that that mismatch.
Okay, I'll try and then I'll give Jeff Jeff I have an opportunity to follow up with southern containers are amazing business. Thank in addition to Jim Porter and Jas non Tom starters isn't with us and.
They've been incredible hatters to the entire west rock.
West Rock management team now southern container was.
Had solvay, which is continues to generate fantastic results.
And then I think you mentioned smurfit in 2005, and I think smurf its margins at the time, we acquired it. It was wanted so I was several millington.
System, and its margins, where 12% and I think the first year and so you take 12, what's a very large volume in southern containers.
Solve I was was at the time, we acquired I I think it was about 800000 pounds and it gets higher than that and say.
Put that together and he ended up with something lower than we're making now and the corrugated management team over the course of.
2012 to now I think has generated incredible results and so our margins are now very competitive.
What's the leaders in the business and we're doing that with.
Ah mail system that we've invested in its operating very well, but I think we start with a mail system that was underperforming we've invested in the entire system. The box plant and in the mail system too I think I have a incredible mess business and corrugated now Jeff.
Like to add anything.
I'll just add a few things market was.
Solve it was a huge part of that we were highly integrated we had 13, well capitalised box lamps eastern regional so close proximity to the mill no export business.
Just a good domestic customer base with a strong box base that we still have today and as you said well you know after those smart but acquisition our margins in the business work 12, 45, or 12.7% the first year, but I came into the container business and we're going up to the 20% range.
So it's a much different business, we were less probably 2% of the market and now we're 24% of the market in EBITDA margins close to 20% and continuing to improve the business. So.
I think it's I think it's a good story overall, okay fair enough I'll turn it over Jeff. Thank you.
Steve Check-over with da Davidson Your line is open.
Thanks, and good morning, everyone.
I'm interested in the evidence or even nail in Covington situations. So first of all what's the tonnage of the Covington machine and since Jeff is thrown cold water on ebay sales potential for containerboard is it conducive to C N K and what would that take beyond turning off the bleach line.
Yeah.
Yeah. So so thanks for the question Steve. This is Pat So Covington is about half of our SBS capacity or think about about a million times. We do this off conditions and commercial print tobacco and others. We we have been taking economic downtime. It Covington, we idled to see eight machine as we masdar supply with our.
[noise] customer demand and as Steve mentioned in his prepared remarks prepared remarks, we have our we are planning at the end of this quarter to restart C. Eight because we now believe that our our in order to meet our customer demand or supply and demand is relatively balanced <unk> regarding your question. It EBITDA <unk> <unk>.
He's looking for opportunities I mentioned before to utilize our assets in the most effective way I'm producing linerboard 80 of Adele on our paper machine is one example of that yeah, I really can't comment on capacity changes or capacity increase or decrease plans and our future and a feature stay and just not allowed to comment on that at this.
Time, but we will continue to look for ways add even dale and other other locations to meet our customers demand as as they continue to to increase in certainly C. N. K for US is one of those areas, it's very strong.
Well I appreciate that but I just wanted to know the capacity of C. Eight machine in and then you know.
Some technological standpoint is it feasible.
For the machine it <unk>.
To make <unk>.
C N K.
Yeah. So the the C. Eight machine. It Covington is is about 15, maybe 20 per cent of the capacity that is at Covington, I say that maybe gives you an idea and relate to the economic downtime that we had and and the year and I guess from and as an innovation person innovation oriented person I always say that sounds anything is possible.
And so we'll look at all the different options that we have including making different some streets at all of our meals, but exactly what that will look like from a return on that investment and how we would accomplish that at this stage is just it's just uncertain, but we'll continue to look at it that and and several other ways to meet our customer demand.
Okay. Thank you very much thank you.
Paul Quinn with a B C. Your line is open.
Good morning, this is marcus on to call.
Maybe starting on the Brazilian box business.
Really inbox demand has clearly been quite strong can you talked a bit about what has been driving that demand growth and maybe more broadly how does that Brazilian corrugated business fit into your strategy longer term.
Let me start with Brazil has been a fantastic business for us for a long period of time like we've been there since the 19 fifties, it's an integrated corrugated packaging business and it's work extremely well for us.
<unk>.
That's because it's in a very low cost.
Fibre base region of the world and it trips because of the business is the same as the both of them. So we have in North America and culturally it's a big add her for US we're able to exchange.
Ideas with both customers.
And yeah culturally within our organization to improve the overall performance of the business.
Jeff I don't know if you have any color on the increase in demand the market's been exceptionally strong I think with Covid recovery, but do you have anything to add.
<unk> sure Steve it it it's the pros or the protein businesses extremely strong going very well and then it's really in the food beverage retail, there's not really an E commerce business.
Business in Brazil at this point, so it's really the other typical.
Consumer law adorable businesses that are really strong and.
Again tight market positions that are also.
Alright. Thanks, that's helpful. And then maybe an inventory as they appear to be quite lean right now out of your containerboard and S. B S inventories compared to normal levels.
Hi, Jeff how darkens mood board inventories were very tight.
I'm I'm, Pat and I. Thank God, we've we've been reducing or S. B S. I'm indoors and our paperboard inventories John I think <unk> sorry, you may have seen in the prepared comments, we're gonna do some pretty significant one this past quarter. So we're reducing them to levels that we think are appropriate for our operations.
Alright. Thanks.
Adam Josephson with Keybanc Your line is open.
Thanks, Good morning, everyone at <unk>.
Jefferson <unk> in terms of the the price of containerboard price increase can you talk about how much of your containerboard in box business is tied to changes in the in the published.
Index and can you talk about whether you want to increase or reduce that percentage anytime soon.
Alright have and stuff so the the the.
The contracts that we have therefore, there are index index customers replied to the indexes.
And that's that's most of the majority of its north of 50% for US we have customers that we're working with some of our large customers that are.
More cost model, but they still have index pricing.
Certain extent it varies by customer.
And then I think the overall view is what's we work customer by customer on what's the service where to create value for our customers and for us with price movements value added. So it's it's not a will not painting with a broad brush, we do that really just sort of customer about customer of exercise.
<unk> and Steve just broadly yeah, you you've talked about the benefits of being a one stop shop for your customers for both boxes and folding cartons and just in the context of how well the corrugated business is doing in the extent to which the consumer business is struggling.
How would you characterize how successful that strategy has been or with a benefit of 2020 or would you have gone about.
Building the portfolio any differently any thoughts there I'd appreciate it.
Thanks for the question I wouldn't have done anything differently I think were performing exceptionally well I think it's Frank like from a communications standpoint, why are we farm communicated about both corrugate on consumer I think has gotten in the way it literally as mask the success that we have.
Because corrugated somewhat diluted by the sales were make of lower margin export containerboard and as we've seen in consumer M.
I'd invite you to go through our prepared comments because the.
The progress, we're making on the packaging side of consumer packaging has really been quite good in the margins.
If you take out the cough, especially S. P. As in Paul are actually quite good in on but we ended up reporting each quarter 13, 14% EBITDA margins when in fact, the pack and inside of the business is performing.
Performing I'm very well relative just about any measure so I think one of the reasons. We included the packaging results as we want to communicate to investors that as a packaging business. We've got an unrivaled platform from which to work through work with our customers and we're.
Doing it and there is example, after example across the company of how our.
How are teammates are working together on behalf of the customer I'll just tell you my experience cause.
I'll tell ya.
10, 15 years ago were organized by.
Bedroom House and I'll tell you we had some internal pension between is this my customer or that customer and right now I get surprised by what our commercial teams are doing across the enterprise of working with.
With our customers on behalf of the customer and so we are able to integrate our offerings, whether it's a consumer corrugated machinery, we have some nice digital capabilities and that's working to our benefit and it's showing up in the results of this quarter now I'm Gonna stop and I think Jeff's led a lot of this activity I just.
<unk> job to add anything to that.
I think you covered it well we can continue to see success and the packaging spaces, combining our businesses and that's with innovation in our machine I'll I'll give one good example.
Of the enterprise in the last quarter, we have a large.
Oh no producer so the packet of oatmeal is from paper from our Longview mill to a customer we have a the folding carton box that it goes in as ours and the corrugated wrap that goes along so that's all that's all five year deal set with machinery and all of our products that room mates and it probably is over.
$40 million roughly in the five years for us. So I was like Oh six point, if you highlight the packaging with a strong black woman will continue to grow in both.
Thanks to both of you appreciate it.
That's all the time, we have for questions. Today does now my pleasure to turn it back over to the West rock team for final remarks, Okay. Yeah, I'll, just make a George and Mark talked about Jim Porter, and Jim Porters retiring and he's just had a very accomplished career and he's been an amazing friend amazing.
Partner and he's brought passion to what he does and it's just been an incredible contributor to the management team and.
Excited he's staying.
With us as an adviser to the comprehend stay involved with Gandhi and he's a friend that will be available by phone. So I look forward to finding a friend when we have issues to go forward from I. Appreciate the questions people encouragement them a call and look forward to our next call and.
I guess it will be in January.
So thanks, everyone. Thank you.
This concludes today's call. We thank you for your participation you may now disconnect.