Q1 2021 Westrock Co Earnings Call

Thank you for standing by and welcome to the West of our company first quarter of fiscal 2021 results conference 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.

The ask the question during the session and you will need to press star wanting of California.

If you require any further assistance please press star zero.

I would now like to hand, the conference over to your Speaker today, Mr. James Armstrong. Thank you. Please go ahead sir thank.

Thank you Justin good morning, and thank you for joining our first quarter 2021 earnings call. We issued our press release this morning and posted the accompanying slide presentation to the Investor Relations section of our website. They can be accessed at IR 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, our West Rock's, Chief Executive Officer, Steve Voorhees, Our Chief Financial Officer, where Dickson, our Chief commercial officer, and President of the corrugated packaging, Jeff <unk> 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 and Boeing 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 discuss during the call. We describe these risks and uncertainties in our filings with the SEC, including our 10-K for the fifth.

Full year ended September 32020. In addition, we may be making forward looking statements about the impact of the COVID-19 pandemic and the recent ransomware attack on our operation operational and financial performance. The extent of these impacts including the duration scope and severity 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 and the appendix of 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 Steve.

Okay. Thanks James.

Morning, and thank you for joining our call.

Going to start with an overview and update on the ransomware attack that we reported on Monday.

We are following strict protocols laid out by industry standard incident response directors because of the risks were being careful not to share of certain details around the incident. At this time. However, following is the information that I can share with you today.

On Saturday January 23rd our systems identified what we quickly determined was the ransomware attack, we immediately implemented our business continuity processes and initiated a response containment protocols.

These processes have been supported by cyber security experts and these include Dallas secure works a global instant response leader.

These actions included taking preventative measures, including shutting down certain systems out of an abundance of caution we have.

And when an act of communication with the law enforcement.

While our incident response and still ongoing we currently have no evidence that our customers or teammates data has been compromised.

In addition to our containment recovery and remediation efforts, we have taken steps to supplement the existing security monitoring scanning and the anti virus protocols already in place.

We're committed to completing a full forensic investigation and we're taking all appropriate actions in response to our findings.

<unk> maintains a broad set of insurance coverages that provide protection for the business operations and assets of the company.

Throughout this entire incident, we've been in constant communication with our customers to share with some of the impact on their business.

We've been very appreciative of their understanding and support as we work through this challenging situation.

The teammates and third party experts have literally been working day and night to respond to this attack and safely restore our systems.

The response has varied by operating location.

Most of our mills and converting locations have continued to produce and deliver.

And the locations, where we've had systems issues, we have been and are using alternative and in many cases manual methods to process and ship orders and this has limited our shipments.

The full restoration of the administrative processes of our business will take time.

And we're implementing workarounds, including manual processes.

We're doing all of that we can throughout our company to respond to our customers' needs.

We're only five days into the us and we're in the middle of our response, what I've shared with the represents for the information that we can share at this point, given where we're at and the stage of our response.

I'll provide additional detail on the impact of the attack of the appropriate time.

Now, let's turn to the quarter.

The West rock remains very well positioned for long term success as demonstrated by our strong results from the quarter.

Our markets continue to be shaped by changing customer habits and preferences that are driving increased demand for sustainable fiber based packaging the.

Trends fit well with our strategy of increasing our participation and high value added packaging solutions and away from sales of lower margin commodity paper products.

Our overall packaging volumes increased by 5% and the physical and the first fiscal quarter.

Including E Commerce volume growth of 23% on a per day basis.

North American corrugated box shipments increased more than 11% per day in December and over 8% for the quarter and.

Some of our shipments of packaging were also very strong up two 4% year over year.

We executed our strategic projects during the quarter. Despite immense challenges that the pandemic has presented for large construction projects.

Our teams that are completing the projects that are warrants and Trey small hospitals have made tremendous progress.

We successfully started up our 710000 tonne paper machine at Florence and has replaced three older obsolete paper machines.

We successfully completed a major outage at our Tres boss MAU during the quarter and will set us up to complete our major expansion project and the spring.

Okay.

Our company generates strong free cash flow over the long term.

This quarter's cash flow was exceptional.

We generated $562 million of adjusted free cash flow and the quarter.

We used the vast majority of this cash flow to reduce our net funded debt by $489 million.

Our net leverage ratio declined sequentially from three point out of three times to 286 times.

We expect that fiscal 'twenty, one will be the sixth consecutive year of strong free cash flow.

We have inquiries from the line of sight towards returning to our targeted leverage ratio of two and a quarter to two five times.

All of this performance is being delivered and very challenging circumstances by the incredibly resilient west rock team.

We recognized each one of our teammates and the quarter with the one time payment that accumulated to a total of $22 million.

Let's turn to slide five.

Sales of $4 4 billion.

Adjusted segment EBITDA of $670 million.

And adjusted EPS of <unk> 61 per share and the quarter were all in line with the prior year quarter.

Our packaging business has proven to be resilient throughout the pandemic.

Packaging volumes measured in tons were 5% higher compared to the prior year.

Offsetting this were declines in shipments of export containerboard and specialty Sps and pulp and a total of 470000 tons and this was a decline of approximately of 180000 tons or 27% lower than last year.

The increase and sales of higher value added packaging more than offset lower corrugated pricing from previously published index reductions.

<unk> has published higher prices and multiple grades during the fiscal.

The first fiscal quarter. This includes containerboard and specialty Kraft TNK and CRB and that we expect will benefit our results during the balance of the fiscal year.

The cost inflation was driven primarily by higher OCC prices and ongoing wage and healthcare cost increases and was offset by continued productivity gains and capstone synergies.

Our free cash flow was unusually strong and the first fiscal quarter and this was aided by west Rock's pandemic action plan.

We remain focused on increasing our share of higher value added packaging and reducing our dependence on sales of paper to less attractive markets.

We made progress during the quarter.

73% of our sales for packaging sales and increase of five per song or approximately of 100000 tons compared to last year.

The growth and packaging was driven by higher E commerce demand strong industrial shipments, including our victory distribution channel as well as growth across our food and beverage beauty and health care markets with customers further utilizing our innovative solutions.

Shipments of paper declined by 10% or 180000 tons compared to last year.

This included a reduction of 125000 tons and shipments of export containerboard.

All of box demand in North America required us to shift production to sort of higher value integrated box and domestic containerboard customers.

And consumer we have similar demand trends.

Strong volumes, and our domestic food and beverage packaging and paperboard business.

And led to a production shift to those higher value markets.

The pricing environment has improved and the quarter Risi published price increases across several of our major grades, including a $50 per ton North American containerboard price increase in November and a $40 per tonne unbleached Kraft price increase and December.

And the process of implementing these published price increases and our business.

Our integrated mill, converting distribution and machinery and capabilities provide us the platform to provide our customers with value added packaging solutions.

We placed more than 100 machinery solutions and the quarter.

Bringing our total machinery placements to more than 4150.

Customer demand for our machinery solutions continues to grow as they seek ways to improve their productivity and navigate the challenges caused by the pandemic.

For instance, a number of large retailers are implementing our pack on demand and box on demand systems to grow their ship from store business.

Our vision to be the premier partner and unrivaled provider of sustainable winning solutions for our customers.

Sustainable fiber based packaging is a key component of the circular economy, we're partnering with our customers to help them achieve their sustainability goals.

We've collaborated with the home depot to develop custom packaging for plants and horticultural products.

And this example highlights our ability to solve our customers' critical challenges and enhance their ability to participate and the E Commerce channel.

Yeah.

We've collaborated with Kraft Heinz to launch the new Heinz eco friendly slave multi pack and the United Kingdom.

Replacing plastic with fully recyclable fiber based packaging Kraft Heinz will remove over 500 tonnes of plastic from supermarket shelves and reduce the <unk> footprint by 18%.

This innovative project has incorporated the cart and design paperboard science and machinery capabilities of the West Rock enterprise team.

For Titan farms, our enterprise team has developed attractive folding carton containers for peaches that provide both ventilation and product protection.

We're replacing plastic clam shells with fiber based packaging and helping our customers meet their sustainability goals.

And for General Motors, we supply them with a complete portfolio of packaging to rebrand of our AC Dow co product line, including very valuable counterfeit protection.

This is an enterprise win that Leverages, our digital platform capability to bring our customers connected packaging solutions.

The pandemic has brought many challenges and force business to operate differently and through different channels, we're well positioned to support our customers with the packaging and supply chain solutions that help them succeed and their markets.

Let's turn to slide eight.

Corrugated packaging segment delivered adjusted EBITDA of $458 million and the first quarter.

Corrugated box demand was strong across most end markets highlighted by E commerce year over year growth of 23% as well as strength and beverage and industrial and distribution through our victory packaging business.

Higher box demand has allowed us to shift our containerboard shipments away from lower margin export markets to serve our higher value box and domestic customers.

Our export shipments fell by 125000 tons compared to the prior year and.

The integration rate increased to 80% and the quarter.

Offsetting this favorable business mix was the continued flow through.

Of the total of $40 per ton of containerboard index price declines that occurred in the late 2019 and early 2020.

And as well as the $36 per ton inquiries and recycled fiber cost as compared to last year.

We've been implementing the $50 per ton containerboard and box price increase that <unk> and published in November.

Our mill system operated well with no economic downtime taken in the quarter.

We completed the Capstone acquisition, just over two years ago and of achieved our target of $200 million and annual run rate synergies. This includes our reconfiguration of the North Charleston Mill.

When we acquired Capstone and we saw that we would be able to improve their operations and fill out the geographic footprint of our north American corrugated mill and box box plant system to better serve our customers.

This has worked well.

Victory packaging or distribution business has worked out better than we anticipated due to our ability to integrate supply chain solutions and to our service offerings. This.

And this has been even more important during the pandemic.

And Brazil mill outage reduced total metal production by approximately 48000 tons.

The production sales and earnings decline was a direct result of the outage as market conditions remained strong and the region.

The consumer packaging segment's adjusted EBITDA and the first quarter was $234 million sort of.

$50 million increase from the prior year.

Adjusted segment EBITDA margins increased by 270 basis points to 14, 7% compared to the prior year.

Strong demand across our core food beverage and health care packaging end markets drove two 4% higher converting shipments and $18 million higher EBITDA by shifting shipments away from lower margin Sps and pulp markets.

Our melon converting system ran well and the quarter.

Cost reductions and efficiency improvements contributed $40 million of productivity and operational improvements and the quarter.

While the SBS demand and the foodservice and commercial print markets was lower compared to the prior year, we saw sequential improvement in both markets compared to our fiscal 2024th quarter.

We took 39000 tons of economic downtime, primarily and the first two months of the quarter.

This compares to 87000 tons and our fiscal 2024th quarter.

As we noted previously.

We restarted our idled the pay per machine at Covington and in the quarter due to increased demand.

Backlogs increased and the quarter to between four and six weeks across all of our consumer grades, including Sps and inventories remained steady.

We're developing alternatives to capture more value from our current assets and we made significant progress during the quarter.

In addition to run and containerboard at the EBIT. The Hell No. We're qualifying TNK from EBITDA down to serve our customers growing the NK needs, while reducing SBS production.

We're still in the process of Trialing, the board with our customers as well as working through the engineering needed to ramp up production.

So we and our fiscal second quarter, we see strong demand across our core packaging markets and we're implementing the PW paperboard price increases that were published during our fiscal first quarter.

Now I'll turn it over to Ward Ward, Thanks, Steve turning to slide 10, the pandemic action plan has been an important component of our ability to pay down debt.

Over the past three quarters. The plan has contributed an additional $600 million and cash.

We are on track to achieve our goal of approximately $1 billion and additional cash available for debt reduction through the end of calendar year 2021.

And we started the year with the strong first quarter going forward and we see opportunities to grow earnings given the strong demand for paper based packaging.

And with implementing the previously published price increases and.

And recognizing the benefits of our strategic capital projects.

We have a strong track record of generating free cash flow.

Each of the past five years, we have generated more than $1 billion of adjusted free cash flow and we've generated over $1 6 billion of adjusted free cash flow during the past 12 months.

With our ability to generate strong free cash flow, we have a roadmap to return our net leverage ratio to the targeted range of 2.25% to two five times.

And as Steve mentioned, we continue to work on remediation and recovery from the ransomware attack, we will provide additional detail on the financial impact of the attack and providing the outlook for the quarter and and and the year at the appropriate time.

Turning to slide 12, we have been very clear about our near term focus on paying down debt investing and our business and returning capital to our stockholders through our dividend over the past 12 months, we've reduced our adjusted net debt by more than $1 $3 billion and our net leverage ratio has improved from three point of one.

Times to 286 times.

Capital investment plans remain unchanged and we still expect fiscal 2021 capital investments of $800 million to $900 million.

Our Florence paper machine started up this past quarter and we expect the trace Baha project to be completed during the spring and begin ramping up and the second half of the fiscal year, the strategic investments combined with our capstone synergy realization will contribute approximately of $125 million of.

EBITDA in fiscal year, 'twenty, one and a similar amount in fiscal year 'twenty two.

Longer term, we expect normal capital investment levels will be between $900 million and $1 billion.

Our cash flows are resilient and we will continue to pay a competitive and growing dividend and we also expect the potential for M&A opportunities that help us grow our packaging business and our integration rate.

West Rock continues to operate from a position of financial strength and is supported by our significant cash flow generation, we have minimal near term debt maturities and approximately $3 $4 billion of liquidity and a roadmap to return our leverage to our targeted range of two and a quarter.

And the two five times.

I'll turn it I'll turn it back over to Steve to provide some closing remarks and <unk>.

Prepare for Q&A. Thank you Steve Thanks Ward.

While the ransomware attack on West rock as we're seeing our immediate attention and the urgent response.

And I remain very optimistic about <unk> for the long term.

Here's why.

Most of our I provide sustainable fiber based packaging the market that's benefited from recent trends and consumer preferences and buying behavior and we expect to continue in our favor.

And we're remarkably well positioned to meet our customers' needs.

We see strong supply and demand conditions and almost every major grade as well as strong demand for our converting and machinery solutions.

The export markets are tightening.

The need for packaging to serve the stay at home economy, as well as sustainable fiber based packaging to replace plastic is growing.

And the investments that we've made and our box plant system, our mill system and our capabilities are benefiting our results and we will continue to do so as we bring our strategic projects online over the next year.

We're generating very attractive free cash flows that over the near term will be used to reduce debt and the our leverage ratio.

And longer term will be used to return capital to our stockholders and grow our business.

All of our success is due to the incredibly resilient west rock team that has dealt with and it was dealing with changing market conditions co.

And at 19, and a ransomware attack.

Our resilience it gives me confidence and our ability to succeed and to create value for our customers communities and stockholders that concludes my prepared remarks, James we're ready for Q&A.

Steve as a reminder to our audience to give everybody a chance for a question. Please limit your questions limit. Your question to one with a follow up as needed also were not able to give any further information on the ransomware attack will get to as many questions. As time allows operator can we take our first question. Please.

Your first question comes from the line up George Staphos. Your line is open. Please ask your question.

Hi, everyone. Good morning, Thanks for taking my question and congratulations to the consumer team very strong results versus our forecast in the event.

I wanted to hit first really on the leverage from volume and corrugated and whether it was where you had expected it to be obviously you had a lot of ongoing productivity programs, but with the very strong volume you saw on a per work day base and corrugated.

And I would've expected a bit more year on year improvement in EBITDA, and the segment and Relatedly and Brazil, even when I make the adjustments for trace Baha and the $15 million I think the EBITDA guys. Correct me if I'm wrong was flat year on year, but it's been a building and market youre getting 5% to 10% pricing and the market and cargo.

And if the leverage that you got out of the volume there was as expected.

Hey, George Good morning, It's just I think the leverage and the.

Box system and North America is what we expected.

We would have liked to have more paper to ship into our domestic markets, we were down a bit and our domestic too and I think if we had.

Further the paper, we could've made more shipments and box and honestly domestic so from the standpoint of we shipped every ton of the paper, we could possibly ship and everyone that we made.

I think that the leverage though from the box system.

It was exactly what we expected.

On the Brazil side.

The volume is strong I think we've got what we expected from the from the box on the the mill EBITDA.

And that's where the the comment on the.

The EBITDA question on the flatness year over year.

Yes.

George This award.

And the expectation that we had and Brazil, it's actually as we had planned and guided and the quarter. In fact, if I just step back and look at how the total company performed for the quarter. We were on and we were above the high end of our guidance range.

And as we went through the quarter demand ended up being stronger than what we expected, but we also and we started to get the initial flow through of some of the <unk> increases, but we also experienced higher energy and fiber cost and what we expected entering the quarter.

Think the.

Mills and box plant systems across both segments performed very well and the quarter okay.

Get the inflation point, but.

Appreciate the color and I'll follow on later I guess and then Pat a question for you.

It's obviously I think.

Good to see the strength coming across your entire box board and network, but given some of the emerging trends.

That Steve was talking to in his remarks, what does it mean in terms of how you see your.

Great.

All of and overtime it sounds like Youre, considering moving more to.

Coated or unbleached Kraft as opposed to bleach, but could you talk a little bit more about how you expect to roll that through your system and the the rule.

Weighted work behind that thank you very much.

Yes. Thanks for the question George This is Pat and good morning. So we are expecting some changes in mix as we go forward and we continue to focus on our packaging markets that tend to be.

Much higher value and faster growth, so think of moving those products towards the or the mix towards retail food and quick serve restaurants.

Average and health care as well now that takes the mix of our products across the NK CRB as well as SBS and so driving those packaging volumes is extremely important to us and and.

And as you know SBS has been more challenge of particular during the Covid pandemic crisis, and and commercial print liquid packaging and paper Cup stock has been down significantly year over year and and part of our action plan. There is to has been to reduce the amount of Sps capacity and our system. So we announced the $2.

$1000 reduction of 200000 ton reduction of capacity and Thats the asset our EBIT down the mill and the last quarter and and as you pointed out and Steve commented the shift of some SBS production at EBIT down to see NK is very important because some of the growth and we're seeing and our packaging markets as both the cross food.

And beverage and we want to be able to support that so over time, we'll be moving this business towards a more favorable net mix and packaging and those areas that are growing and and and reducing our exposure to some of those Sps specialty SBS markets and I and I think one last comment is around sustainable path.

And Jay we had literally does and customer dozens of customers who are making.

Making claims and setting goals towards 2025, and even beyond for 100% recyclable compostable or reusable packaging and and fiber based packaging has a really important component and that with some tailwind and you've seen and some of the examples we've shared recently and beverage food and foodservice.

And with those when those moves we feel confident we're going to continue to improve and the mix of the business.

Alright, thanks for the comments I'll turn it over guys.

Your next question comes from the lineup Gabe Poggi your lines open. Please ask your question.

Thank you good morning, guys and good luck with challenges ahead.

I was hoping you could maybe comment a little bit about inventories I'm, assuming just based on the industry data.

And that they're pretty well completed and redirecting.

And some containerboard tons from the export market domestically, but maybe just give us a sense if you can.

And how the mills are running as it relates to the ransomware and how long it might take you to kind of restore.

Our comfortable operating our inventory level.

Hey, David its Jeff ill start with our inventories so year over year, we're down about 22000 tons and then sequentially we came up of bids.

Over 50000 tonnes. So we're getting back to a place on the floor on Florida and tours for the box plants that were a little more comfortable and as far as the.

And the ransomware attack is too early to comment on our operations, where the effect on inventories and I'll, let Pat comment on his inventories.

Yes, Thanks, Jeff and and I Echo your last comment on too early to really comment on any of the impacts from the ransomware.

Our inventories if you recall from the last quarter, we made some very significant reductions and our inventory, especially in our SBS system and that led to in the last quarter or I should say fiscal year, 2004th quarter led to about 87000 tons of downtime, we continue into and adjust our inventories at the begin.

And of our first quarter of fiscal year, 'twenty, one and took about 39000 tons of downtime to balance to balance our supply with our demand and we now feel that we're in good shape and with some of the increasing demand that we're seeing across the number of our markets sequentially.

As a result of that we have started up restarted the idle paper machine and Sps at Covington, and so we feel we're pretty balanced right now, but we continue to operate.

At high operating rates across the system and and that's going to be critical and service our customer dam demand because of our backlogs as Steven indicated across all of our substrates of the operating between the four and six week.

The area.

Alright, two quick follow up for me if I can Jeff can you comment at all of you guys are having to buy board on the outside of market and then real quick I guess from a maybe it's premature to say, but I'm, assuming that any of the capital that might be required don't even able to shift over to C. N K is within the.

Scope of the 902 of 1 billion that you guys have talked about and and.

And the timing Pat on that project.

Sure. So I can start out with the comment on C. N K, so the Sia and K as is.

Has produced the EBITDA, we expect this year as far as the timing is concerned the produce about we believe will produce about 25000 tons of TNK. There, we have the ability to ramp that up significantly and and as Steve indicated earlier as we start to qualify that with customers and trial it and look at the different operations to scale that up.

And we'll certainly update that but we're looking at 25000 tons. This year of TNK at EBITDA.

Yes, Jim I'm, making the comment on external purchases, but I will say that EBITDA continues to help us on Kraft and will run through this quarter at least on craft for us. So we expect 10 to 15000 tons from.

And you have a deal a month.

Thank you good luck.

Your next question comes from the lineup and can eat Pettinari kind of Citi. Your line is open for you to ask that question.

Good morning, guys. This is actually for Andy Cole sitting in for Anthony.

I think in the slides of the comment about over the medium term using targeted M&A the increased vertical integration for the company.

And I think we've seen over the past here on the containerboard side at least integrate and has been improving and demand growth alone. So can you remind us about your integration rate and backboard for each grade and where you'd like those some of them over the longer term. Thank you.

So I can certainly start on that and so right now we are in the arena.

CRB about 60% integrated and we feel pretty good about that because it allows us to service our independent customers and access some of the local markets TNK is about 65% and that is highly integrated and beverage less so and some of the food markets and again that allows us to really access some of the local markets through the independent converters and.

And and Sps are much lower in terms of our integration that's really driven.

Primarily by the open and external of paperboard, we sell through the tumor through commercial print tobacco as well as liquid packaging and so we feel pretty good about where we are but of course, we're always going to look at opportunities too.

As Steve has mentioned the award as mentioned.

Look and grow those businesses, both organically as well as inorganically.

And where it makes sense and do so and where it's profitable to do so.

Understood. Thank you and then maybe shifting gears just quickly I think for an expected EBITDA benefit from port of Hawaii's moved from $20 million the $10 million.

And just comment on what's driving that.

I think it's really just the timing of the ramp up that's all of those.

Okay.

The full expectation is.

We expect the full benefits of the project.

Got it understood. Thank you I'll turn it over.

Your next question comes from the lineup of Mark Wilde from Bank of Montreal. Your lines open. Please ask your question.

Yeah.

Yeah.

Back on the rents and where are you don't want to be respectful of the situation, but can you give us some sense of what the what the middle of output might be looking like at the moment or the the number of mills, which mills might not be running right now just sort of we can get some sense of how volume.

Is is moving and then just ward and capital allocation I'm just curious.

About the situation with the potential increase in your stake down at Gondi.

And also the potential for it.

Some point doing another machine out of long view kind of capstone had long talked about how they had excess fiber capacity out there and they have raised the issue of potentially adding a another machine at Longview sort of just those potential uses of capital if you could comment on that.

Mark This is Steve I think you've got three topics and it can be difficult for me to comment on any of them.

And I'll tell you I'm, just trying and the ransomware for five days into the us and I'd love to be able to communicate exactly what's happening but.

And I, just don't know if you've ever gone through a situation like this but it's a.

It's a very fluid situation and this was day six.

And as much as I'd like to be able to report top line. We're just not in a position where we can report on line.

I think our disclosure on Gondi is.

But we do have 30.

<unk> 30, some odd percent.

Interest and we do have a relationship with all of them and there is the opportunity.

Obviously, the change of our interest cover Tom and I, just don't have anything to report on that either of them on.

Lastly on long view I will say, we look at our system strategically about how we want a position of long term and we look at alternatives and we continue to look at all of the alternatives for our system and then.

And just don't have anything to report on Longview, So as much of that I'd like to be able to respond to each one of the questions. That's that's what I can tell you from arc.

Alright fair enough. Thanks, Dave.

Yes.

Your next question comes from the lineup Neel Kumar from Morgan Stanley. Your line is open. Please ask your question.

Great. Thanks for taking my question.

And in corrugated your maintenance schedule shows critically heavy maintenance and the third quarter, our pages and discuss what is driving that and that generally of correspond with how you expect volumes to evolve for the year and practice demand trends normalize and some of the green the third quarter.

So the the maintenance, we schedule and it's based on requirements for boilers.

And it's not unusual for our maintenance schedule and our volume so.

We continue to have strong volume and strong backlog and so through the year, we expect our volumes to remain strong and I'm sorry, I didn't hear the last part of your question.

And just wondering if the maintenance schedule kind of corresponds with perhaps demand trends normalizing and some degree and the third quarter, but it seems like it's actually more about your timing of your.

And that's absolutely right that's.

That's right and that's absolutely true.

And then just in terms of your outlook for the dividend in 2021, just given the deleveraging that and done so far and the light likely higher profitability. This year is there scope of the regular dividend back to where it was earlier in 2020.

So I think we've been pretty clear that our capital allocation priority is.

Reducing debt and getting the leverage back into our targeted range I think we've been we've talked about the fact that from a dividend strategy and the discussions that we've had with the board is that we will want to have a competitive and growing dividend.

We're not in a position right now the talk about what the size and timing of that dividend increase is going to be because we're our immediate focus right now is returning to the targeted leverage range.

And we'll say that Steve has been pretty consistent and it said that.

And then.

We reduced the dividend we didn't say we were going to return the dividend to the previous level. So we will our dividend policy, we will taken a lot of considerations, which.

Includes.

No payout levels and our capital allocation alternatives and again, what we will we will when we will articulate the strategy I think it will incorporate a competitive and growing dividend.

Alright, thank you.

Your next question comes from the lineup tile White from Deutsche Bank. Your line is open. Please ask your question.

Hey, good morning, hope everyone's doing well I just wanted to focus and on box demand and kind of see what you guys are expecting here or what youre seeing here in January we're hearing some talk of maybe a slowing of the pace of the recovery and kind of just curious if you've seen that with any of your customers and your system, maybe particularly on the industrial side as well.

Hey, good morning, Jeff So true 13 days in January and we were up over 11%. So our demand has remained strong including and industrial no E. Commerce. Most of our end use segments remains strong and.

So through the first 13 days, we were up over a little over 11% and our backlogs remained strong through the same time period.

It sounds good and then and just spoke to on the inflation is a little bit of a touch higher than we were expecting it sounds like it was a little higher than you expected and as well and the OCC and maybe energy costs.

And just curious of what you expect for the year here or do you expect these kind of continued levels throughout the year.

And to be able to offset it with productivity or do you need the kind of pricing benefits and start rolling through the offset it.

This award I'll I'll take this one so I think we've been.

When we when we look at we are seeing a return of inflation and our business and I think a key component of it is recycled fiber cost.

When you look back at FY.

'twenty, we actually had a decline and recycled fiber.

On a year over year basis, So we actually had.

Cost deflation from that component of our cost what were seeing is.

A normal level of cost inflation for us if you just go back all the way back to the acquisition, it's about $225 million of year, we're expecting higher inflation. This year because of the increase of recycled fiber costs in fact, our outlook right now is that.

Recycled fiber costs will potentially increase 15 to $20 sequentially from Q1, the Q2, and then maybe another $5 per quarter as we go out into Q3 and Q4, so that would be a <unk>.

Meaningful increase on a year over year basis, driving cost inflation for that component of our business. We are and the short term, we're seeing pressure and freight cost.

And it's really been as a result of the of the.

Pandemic and then we have our normal wage and.

Health and health care inflation now, what we have going for us.

And as we've had strong demand, we have and improve pricing environment, we of the benefits of the.

Strategic capital investments starting to come into the year and then we have our ongoing productivity initiatives.

Thank you good luck in the year.

Yes.

Your next question comes from the line of Appeal Nang. Your line is open. Please ask your question.

The inflection and price mix was very encouraging consumer Pat was that largely mix from some of the stuff that you're doing to shift to packaging and is this level.

Sustainable as we kind of think about it and then and on top of that any color on how we should think about the recent box board of increases flow through the P&L of appreciating there's a lag.

Yeah, and I appreciate that sales. So this is Pat so yes. The the majority of the increase that we saw which was.

Mixed price reported in our if you look at the bridge on Slide 17. The majority of that was in fact mix because of the higher packaging volumes associated with the food foodservice and beverage as well as health care and so you can think of that primarily as mix and I'm not really able to share the impact on and the price increases.

And I've been acknowledged through P. P W.

And a forward looking basis, but we are of obviously working with customers to implement those as quickly as we can both in terms of those that have been announced and P. P. W. As long as well as those debt.

Through our other pricing mechanisms allowed us to capture additional price.

But you feel pretty good about the mixed dynamic being pretty sticky and coming quarters range, and we do and sustainable packaging trends certainly helped that and the COVID-19 stay at home. The economy is driving some some tailwind there and of course health care and strong as well. So we feel good about the and the order pattern that we see our backlog.

They are strong and and we feel pretty good about demand, okay, that's great and shifting gears to your corrugated business demand.

And obviously still very very strong to start the year.

Inventory has gotten a little better, but the previous quarter, yet for the limitation and meeting the demand. So I'm just trying to get a better sense, how you're situated.

And your ability to kind of meet that demand on the board side.

And when you kind of expect lead times to get back to more normalized levels.

I'll start with the back part of the question, it's hard to determine where when lead times will go back to normal levels, depending on what happens and the economy.

And I was mentioned sequentially, we came up to a better position.

For our inventory. So we felt we were almost where we wanted to be not quite so we felt good about our ability internally and then going forward and it's about what we can produce and <unk>.

And on some of the floor and also and our domestic and some of our.

Export customers are direct customers, we want to make sure that we maintain our relationships and can ship.

Going forward.

Okay. It sounds like you and a much better spot this quarter and you have a little more ability to kind of service all of your customers is that fair Jeff.

I think that's fair yeah before the malware attack and we're trying to.

Sort of it out where we will be going forward, but yes that will spur up until the 13th day of the month of and soon got it I appreciate it guys.

Your next question from from the lineup Mark Weintraub from Seaport Global Your line is open and please ask your question.

Can you give us the census to how much TNK you think abbeydale could eventually go to.

Yes. So this is Pat so thanks for the question so as I mentioned, we're probably and we.

We believe we can get about 25000 tons. This year, depending on our customer trials go and a ramp up there. We expect next year that that could be potentially and the for the fiscal year and the range of 50000 tons.

And we theoretically have the ability to potentially move between the up to 150000 and that neighborhood, but it's a little bit too early to really commit to that we believe that's possible.

We have a lot more work to do there and and of course and other factor here is that how we choose to use that.

The paper machine at EBITDA, how we choose to move that the between SBS and TNK because there certainly are some some high margin and attractive business and Sps there that we'll want to bring into that mix. So hopefully that helps give you a little bit of colors of that.

That is perfect and then ward.

You mentioned freight also having picked up a bit can you can you scale for us the type of impact that you see that how.

And being this year and then just one just clarification.

On the the Ransomware you had mentioned that you were in the middle of the response and the five or six days into it.

Whom I shouldn't read into that the that means you're thinking it's like a two week type thing. It's the I assume the middle of the response was just more kind of it's not the start and it is not the and it's somewhere in the metal and I just want it or can we think about this as likely being a you think at this point of two where two week type of process.

Yeah.

Hi, Margaret for Steve, It's it's difficult for us to say.

And much more than what we've already said.

And and.

I'll just repeat it.

The.

Unusual circumstance, we're working around the clock to.

Restore every time for.

And Tim that we have I think is just doing a phenomenal job and.

And responding and.

Every day and adventure and we're really focused on taking care of our customers and it is unbelievable the work that we have and our company.

Company to make sure our customers get what they what they need and Hum.

That's really all of the consignment understood and and.

I'll just go out and one account and when it's appropriate when we can say something will.

Go out and will inform and I really want to provide accurate information, but just we're at a point, where it's just very difficult to do so and but we will do so at one and two.

Appropriate.

And I appreciate that more and if you're on the freight and if you cancel some.

Mark you know we.

We.

Spend almost $2 billion of year.

And moving material around our own system, delivering it to customers and warehousing yet.

And of course, the portion of that cost is our warehousing cost if I if I look at the kind of the line freight were.

We're looking at inflation right now I think for the full year and Thats probably.

3% to 5%.

Okay.

Thank you so much.

Your next question comes from the lineup and NGL Pinson.

And from Keybanc. Your line is open please ask your question.

Yeah. Thanks, good morning, everyone.

Or just come from a couple of more on inflation you mentioned your OCC price expectations or you think prices could potentially go up as much as 15% to 20 Bucks.

A ton sequentially and fiscal <unk>, and maybe five bucks per quarter beyond that can you just talk about why youre expecting that I mean, theres a shortage of ocean containers, which presumably is affecting exports, you're obviously dealing with the ransomware incident. So can you just in light of those factors why do you think OCC could go up as much as your ears.

Saying it could and why would you think that strength would be sustainable thereafter.

Yes.

And what I'm Gonna do is I'm going to ask Jeff to start and and then I'll tag of onshore. Thank you.

Yeah.

As Jeff there.

Sure.

Hey, Adam it's just hit the button.

So the demand for OCC.

And the domestic market with strong generation of strong but demand was also very strong we saw Asia of pulp producers and India. Both increased purchases from the U S. And then the overall recycled fiber supply domestically was adequate.

But as you mentioned earlier too there is the three issues on container freight so all of those things, we see driving up pricing and we don't see really a big difference and that well over the course of the the next quarter or so.

And so.

Adam We're just I mean, I'm I'm, just giving you a marker of what we think right right and.

I mean, we're not giving obviously, we're not giving all of the components of our guidance for the full year because of the current situation and when we do that we'll all be able to update you on all of the the key assumptions, but I just I just wanted to put that marker out there, which says that this year. In contrast, the last year, we're seeing a return to.

And inflation for some components of our cost when last year it was actually deflationary.

And I totally understand and just one last one on that or at the sequentially. So you talked about OCC can you give us any sense of what you're expecting sequential and Chile on freight chemicals, just the other components of your Cogs.

Roughly I appreciate on a per ton basis, I'd, just add yes, youre production. Let me tell you. The first thing that I want to make sure you think about when you think about our models from Q4.

From our fiscal Q1 of the fiscal Q2, as we always have and our wage and salary and the majority of our wage and salary increases occur.

<unk> first and so that that's a meaningful.

Quarter of sequential quarterly expense. The other thing that we have is we have the payroll tax reset that always occurs and the first quarter. So one of the key inflationary items just sequentially and the timing from Q Q1 to Q2 are those normal ongoing wage and benefit costs that we.

Half of each and every year.

I mean I gave you the the assumption on on recycled fiber and you can just apply that to our.

Sure you can apply that to kind of of our to our run rate, but let me see what else.

And do I have that would be.

And I don't really have anything other meaningfully.

To highlight.

For Q1 to Q2, okay.

Okay. Thank you.

Your next question comes from the line of Paul Quinn from RBC. Your line is open please ask.

The question.

Yeah. Thanks, so much a solid start for this fiscal year, just just wanted to get back to capital allocation and I appreciate that the timing.

Of where you're at right now versus the leverage target you've got but how should we think about the sustainable payout of the competitive dividend and then.

And then that changed your thinking around what that's it.

And the level of it.

I'm, sorry, I didn't hear the second half of the half of the question and demand changed for content.

I mean the.

I think what we feel.

We feel very comfortable with is the two and a quarter to two five times leverage target that we've started the.

As we do the overlay to what our capital allocation priorities are and we've been very consistent about what we believe the ongoing capex needs of this business are which is the.

800.

I mean, it's the $900 million for a $1 billion on an ongoing basis and then we start to look at the.

And the dividend and when I say I think competitive from a from a yield point of view.

And then also we're going to just look at that side by side with the other opportunities that we have to invest and our business which include strategic capital projects that have attractive returns and then targeted M&A and Steve I don't know if you want to add anything to that.

I think you've covered it well.

Okay, and then maybe just a follow up and hurdle of vertical integration and similar opportunities and the containerboard side of the consumer packaging.

Doug.

It's hard to make a judgment about.

Matt I think theirs.

Attribute of our business there are a lot of independent.

<unk> out there and.

And each one has its own.

Story and.

I think there is opportunities on both sides of the business and I think it's very consistent with what would do like the long term and moved the business to higher value added packaging and that means integration and.

I think as we put on the slide medium term and the permanent.

M&A and to improve our integration and I'm anxious.

That's what we want to do going forward.

Alright, that's all I had best of luck.

Your next question comes from the line of George Staphos from Bank of America. Your line is open. Please ask your question hi, Thanks for taking the follow on.

Jeff I, just wanted to make sure I understood something and I'm, probably the only person on this call who didn't quite get the the volume relative to the EBITDA leverage. So obviously you make more money with the converted ton.

Versus third party.

And you were up eight or 11%, depending on whether I think per work day or actual.

And you also had built you said some inventory so you got back to a better position from an inventory standpoint. So we were able to generate paper to have some stock going into the year recognizing of outages coming up now. So again, just if you could help me understand how the volume.

Very strong volume growth didn't really net to a lot of EBITDA year on year of that would be helpful. Thanks, guys and good luck in the quarter.

Hey, George So I think the from our volume what we expected and.

What we forecast for our business was spot on.

So the book.

The inventories remember you have on floor and transit so a lot of that stuff was showing up through the through the months and as I said the other pieces of the business, where we could have shipped more.

Like our domestic market, we weren't able to ship more into that segment, which would have helped and there was some.

The price mix, a bit down, but not really material. So our mix of overall was very positive and so I think you would've seen the bigger deficit and our price mix had we not shipped as much into the box segment, it's really about the overall being able to ship more volume I think into our domestic and honestly and so the boxes because.

We literally shipped everything we could get on the floor to of corrugator and make and also to the domestic customer, but from the standpoint of our business and what I expected, we did exactly what we expected and the in the quarter.

Hey, George This award and I guess I'm going to just reiterate a couple of things we highlighted the decline and the export shipments on a on a year over year basis, we talked about the fact that we when you look at the year over year bridge.

And also had the.

Year to year comparison of the flow through of the previously published price reductions.

And that occurred and then you have the impact of the higher OCC. So those to me right or the other.

Other elements of.

Of the of the margin margin change on a year over year basis for corrugated yes, no word I get that but that would show up and a different portion of the waterfall that wouldn't I would think right that wouldn't be and the vol.

And the volume component of EBITDA, but I do appreciate these comments and I'll turn it over and we'll follow up afterwards, but thanks guys. Good luck in the quarter.

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