Q3 2019 Earnings Call
At this time I would like to welcome everyone to the Westrock Company third quarter 2019 earnings Conference call. At this time I would like to turn the call over to Mr., James Armstrong Vice President of Investor Relations you May begin your conference.
Thank you Chris Good morning, and thank you for joining our third quarter 2019 earnings call. We issued our press release. This morning and posted the accompanying slide presentation to the Investor Relations section of our website to release and presentation can be accessed at IR Dot Westrock dot com for via a link on the right side of the application you are using to view. This webcast with me on today's call are Westrocks, Chief Executive Officer, Steve Vorhees, Our Chief Financial Officer Ward Dickson, Chief Commercial officer, and President of corrugated packaging, Jeff Chalovich as well as our president of consumer packaging Lindner over your 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 uncertainties that could cause actual results to differ materially from those we discuss during the call. We described these risks and uncertainties are filing with the SEC, including our 10-K for the fiscal year ended September Thirtyth 2018.
Additionally, we will be referencing non-GAAP financial measures during the call. We have provided reconciliations of these non-GAAP measures to the most directly comparable GAAP measures in the appendix of the slide presentation. As mentioned previously the slide presentation is available on our website with that said I'll now turn it over to you Steve.
Thank you James.
Westrocks net sales increased to $4.7 billion.
This was 16% over last year.
Adjusted segment EBITDA increased to $858 million.
This was 14% over last year.
The Westrock team is performing extremely well once we proactively respond to a changing industry landscape characterized by the challenges of additional new paper capacity combined with softer demand in some markets.
We see increasing opportunities for sustainable packaging ecommerce packaging and value added packaging solutions.
We generated $749 million and adjusted operating cash flow during the quarter and we deployed $351 million of this cash flow and capital investment.
This included a $181 million invested in our strategic capital projects.
We paid $117 million in dividends and we have reduced our net debt by $282 million.
Our pension plans remain fully funded.
Improving our asset base through capital investment and simplifying our business to take advantage of our scale.
Let's turn to slide four.
Adjusted segment EBITDA increased by $104 million.
Setting aside the impact of capstone volumes declined primarily due to lower containerboard and paperboard shipments.
We had favorable price and mix in both segments due to the flow through of the previously published price increases.
Our productivity improvements outpaced inflation.
Inflation of $44 million was primarily due to wage and other cost.
Higher wood and freight costs were essentially offset by the lower cost of recovered fiber.
Economic downtime scheduled consumer mall outages reduced EBITDA by $45 million.
Corrugated packaging segment sales, excluding recycling increased 32% and adjusted segment EBITDA increased 28% as compared to the third quarter of fiscal 18.
North American corrugated adjusted segment EBITDA margins improved to 23.1%.
Up 110 basis points.
This sustained strong performance as a direct result of Westrocks corrugated packaging team focused implementation of our differentiation strategy to help our customers won.
All the while investing in the capital systems processes and people to enable improvements in the quality and cost of our products across our integrated system.
We reduced containerboard and Kraft paper production by taking approximately 259000 tons of downtime.
Including 94000 tons attributable to planned maintenance and a 165000 tons of economic downtime.
Our inventories at the end of June were 123000 tons below March levels, and a 182000 tons below the peak in December .
Our inventory levels are now in our desired range of what we need to efficiently operate our system.
Our box volumes increased 20% on a per day basis over last year.
Our organic box volumes increased 2.7% due to our success in delivering customized solutions that enable our customers to win in their markets.
Corrugated sales into distribution ecommerce uses were up we saw growth in packaged food.
Agriculture shipments were down due to wet weather in the western United States.
Our containerboard integration rate was 80% for the second consecutive quarter.
You might recall on our third quarter fiscal 17 earnings call that we first articulated a goal to increase our integration to 80%.
At that time, our integration rate was 72%.
We've made substantial progress in just two years.
We are updating our integration right target to reach 90% over the next several years.
This provides us ample room to grow our box volumes, while serving our preferred domestic and export markets.
Performance paper machine project is well underway.
And the new machines on scheduled to start up during the first half of calendar 2020.
As a reminder.
Brazil.
Brazil's adjusted segment EBITDA margins for the quarter were 27.9%.
Our relentless box plant is largely down.
Our trace Baja small upgrade project is well underway.
Construction is on track and startup is scheduled for the first half of calendar 2020 one.
The majority of the capital investment on this project will incur will occur in fiscal 2020.
The integration of Capstone, it's progressed exceptionally well.
We're realizing our synergy and performance improvement targets ahead of schedule.
We were at an annual rate of $80 million at the end of June and we expect to exceed our $200 million target by the end of fiscal 21.
The pace of the Capstone integrations benefited from the investments we've made in our box and mill system over the past several years.
Our scaled and simplified operating systems and regional structure have accelerated our integration activities.
Multiple kapstone box plants, and the Longview mill have already transitioned to Westrock operating systems.
We've internalized 71000 tons of annualized box shipments to our victory packaging system.
And we expect to achieve 100000 annualized tons by the end of September .
With the addition of capstone to scale.
Geographic reach full range of containerboard and Kraft paper grades and box, making technologies, our corrugated packaging network enables us to reliably and efficiently serve our customers throughout North America.
Our consumer packaging business reported adjusted segment EBITDA of $233 million during a quarter in which we invested in three strategic capital projects at our mills that will improve margins and the long term performance of the business.
Our backlogs remain at four to six weeks across Sps Sankay and CRB.
The Mart outage was completed early in the quarter.
And we're exceeding our project objectives for volume quality and cost.
We replaced the head box at our Demopolis mill in June .
And this investment is also performing well.
At Covington customer qualifications are in process and have gone very well to date.
The aggregate impact of these outages.
As well as regular maintenance outages at our other mills adversely affected our financial performance in the quarter by $22 million.
The mill outages challenged our supply chain, resulting in lower paperboard sales in the quarter.
Impacting EBITDA by an additional $16 million.
What cost, particularly at our EBITDA will now remind remained elevated in the quarter due to the unusually wet weather in the region.
With the completion of these projects.
We expect our supply chain to stabilize and see margin improvement during the current quarter.
Converting shipments in consumer packaging increased 1.3% year over year.
North American converting shipments increased 2.7%, which was partially offset by declines in Europe and Asia.
Sustainable packaging and plastics replacements are generating significant market demand and interest.
We currently are working with dozens of customers on projects to replace plastics with fiber based packaging.
And we're currently at a $70 million run rate of incremental annual sales and we expect to reach a $100 million run rate by the end of this fiscal year.
We provide our customers with customized value added solutions using the industry's broadest portfolio of paper and packaging solutions.
This portfolio differentiates westrock in the marketplace.
And enables us to help our customers lower their total cost.
Grow their sales reduced their risk and achieve their sustainability goals.
144 customers are buying more than $1 million of products and services from both our consumer and corrugated segments.
Accounting for approximately $6.8 billion of sales per year.
These numbers represent more than a 40% improvement over the past three years.
We're enhancing the strength of our product and service offerings with the investments, we're making in digital technology.
To automate customer experiences simplify our processes and standardize our systems.
A couple of examples include the digital channel that many of our customers currently used to view and place orders.
And they advanced data analytics, we use to anticipate unplanned downtime.
Reduce quality issues and minimize production variability.
We operate proprietary software that combines primary secondary and tertiary packaging design to create packaging that minimizes waste and improved packaging performance for the benefit of our customers.
Want to take a few minutes to talk about the increase in Siakap packages.
CEOC is ESI omosi ships and own container.
Westrocks comprehensive portfolio uniquely positions us to partner with customers to meet today's changing sustainable packaging mandates.
Amazon will soon required that all suppliers provide items that provide items, which are 18 by 14 by eight inches or larger use packaging certified as ready to ship or face additional fees for packaging.
Using our integrated suite of products and working with our customers Weve develop solutions that create branded cyacq packages that meet these changing requirements.
A terrific example of our effort to develop Cyacq solutions as our work with Colgate Palmolive.
And collaboration with Colgate, we created the Smilebox.
With corrugated packaging manufactured in our once in Salem facility.
The Smilebox has been very successful for Colgate. We're currently partnering with them on 2000 other skews for this type of packaging solution.
As consumers push for more sustainable packaging.
Ones that are recyclable renewable and minimize material use westrocks comprehensive portfolio of fiber based packaging solutions enables us to meet these needs for our customers.
Branded cyacq.
Packaging provides our customers with an opportunity to further build their brand loyalty and recognition and improve their customer experience.
Our partnership with customers extends to helping them build a sustainable supply chain.
We're working with our customers, including U.S. autoparts on installing or box on demand machines, great custom size boxes for their products.
This rightsizing and packaging lowers packaging materials and shipping cost.
Our packaging solutions lower our customer's total cost and help them meet the changing e-commerce and market requirements.
Now I'll turn it over to Ward Ward. Thank you Steve.
This compares to adjusted segment EBITDA of $858 million in our third fiscal fourth quarter and $802 million in last year's fourth fiscal quarter.
Sequentially higher seasonal volumes across both segments should more than offset should be more than offset by the flow through the previously published containerboard and Kraft paper price declines.
We expect sequential cost deflation driven by declines in Virgin fiber costs freight costs recycled fiber and seasonally lower energy costs.
In addition, we expect to see material sequential gains due to lower scheduled mill outages in seasonal productivity improvements in the fourth quarter.
We anticipate consumer packaging margins will improve over third quarter levels.
Depreciation amortization and other items should be approximately two cents per share higher quarter over quarter and our tax rate in the fourth quarter should be consistent with our third quarter rate.
We received $15 million in business interruption proceeds from the Panama City insurance claim in the third quarter and we expect to receive a similar amount in the fourth quarter.
Turning to our balance sheet, we remain committed to returning our long term leverage ratio and generating significant free cash flow.
We expect fiscal 2020 capital expenditures will decline to a level of approximately $1.1 billion $300 million less than this year.
We also anticipate that capital expenditures will decrease $900 million to a $1 billion in fiscal 2021.
As we complete our strategic capital projects, we remain committed to a stable and growing dividends and our primary use of free cash flow in the near term will be debt reduction.
I'll now turn it back over to Steve for closing remarks.
Thanks Ward.
Westrock team is performing extremely well as we proactively respond to a changing industry environment characterized by the challenges of additional new paper capacity combined with softer demand in some markets.
We see increasing opportunities for sustainable packaging ecommerce packaging and value added packaging solutions.
We're growing organically by creating customized value added solutions for our customers that support their needs to grow other sales reduce their total costs and risks.
All while helping them achieve their sustainability goals.
We're investing in our business for the long term to sustain and expand our competitive advantage.
And we are building our systems and processes to take advantage of the scale of our platform.
We're moving from a period of growth by acquisition investment in large strategic projects.
To a period of increased focus on organic growth.
Innovation.
Productivity and free cash flow generation.
A combination that will create value for our customers stockholders and teammates for the long term.
James that completes my prepared remarks, we're ready for Kiana. Thank you, Steve as a reminder to our audience to give everyone. A chance to ask a question. Please limit yourself to one question and return to the queue, we'll get to as many as time allows operator can we please take our first question.
Certainly your first question comes from the line of George Staphos with Bank of America Merrill Lynch. Your line is open.
Lauren as Akshay jump back on line for George.
Just starting out I was wondering if you could talk about well first of all the early fiscal Fourq volume trends and then earlier you also referenced getting your integration rate to 90% and want to get a little bit more color on how you expect to get there and can provide a little bit more detail on timeline of the great but.
Sure Good morning, John It's Jeff deleverage.
So.
Quarter to date sorted on July our shipments are up about 5.4%.
Film that's organic if you take capstone in there we're up a little bit over 23%. So part of the 5% came from early in the month Prime day in some of our E. Commerce shipments. So that's about a point of that 5.4, and then our victory shipments contributed about 20% to that overall, our backlogs are strong they ticked down a little bit from the first half, but they are in line with what we saw in both May and June months, and we finished 2.2% up in May and 4.4 in June so I'm, not expecting a 5%, but our volumes and backlogs still strong.
Through this month.
The the strong markets, we continue to see strong market certainly in ecommerce bakeries snack foods AG started a little slow as we mentioned, but were seeing pick up now with the better weather in the west and some of the northwest Cherry season was decent in NOL Apple we're waiting we see some some pickup there.
Of our business grown with Steve mentioned based on our differentiation and so the solutions, we're providing and supply chain optimization automation. Some of the box on demand that you saw solving problems and dim weight, taking cost out we have some great examples of wins in the period in the quarter that really show the benefit of solution selling through the corrugated segment, but also the breadth of products, we bring across the enterprise and I'll point out a few with a large bakery customer.
With our new links acquisition, we added.
A million dollars of machinery based on our Palletizing opportunity. So thats the flock size or we had our first two sales of boxes or we have about 40.
That those breakfast foods bags that go into a folding carton and those foreign corns go into a box that was our first sale machinery, there about $3 million in machinery, and an $11 million of folding carton in boxes, and then victory had their first machine sales through our Hps group, we added $1 million in sales from machine a million dollars in corrugated packaging and half a million.
In the consumables for five year, we're also seeing great lift in our retail ready shelf ready packaging through our graphics business. So all those things combined will help us to keep to grow continually and then on the other side of the house for our machinery business, we have great things going on with the consumer and plastic replacements and shrink that is just augmenting and helping us growing let's say Pat if you want to comment on that piece Jerry Thanks, Jeff appreciate that well first of all a little bit on the quarter and how we're seeing the original question around the fourth quarter demand our volume trends, we still see pretty strong demand I think year over year, we're probably flat up slightly but sequentially, we expect to be on track and up a little bit we are ramping up you'll see in our results from our ours.
Three strategic outages in our in our mill system, we see strength in food in foodservice as well as in beverage and you'll also see from our results that are converting.
Assets were up about 2.7% in North America again, that's driven by foodservice and beverage largely and that that continues into this quarter.
What Jeff was mentioning around some of the plastics replacements and we may get into this later, but this is a tremendous opportunity for our business and for our entire company, it's rare to see and an industry. This type of what I'll call nodding kind substitution, we're replacing material like plastic with paper and we're seeing this really ramp up it's hit a tipping point for our for our industry and this is this is really exciting a couple of the examples there may be one I'll just share right now as I and we talked about this last quarter briefly as an introduction, but we won some sniffing a business with the IPO, where they are replacing their plastic shrink shrink wrap with a paper based solution at our cluster Pacs solution and to Jeff's earlier point around machinery, a key part of US winning this is our value proposition that we bring around machinery, and now and producing in designing and producing a machine that operate at much faster rates in the competitions and along with that comes the carton business. That's based on our CN K product our high strength.
Hi, wet strength as the NK products. So that's a great example, and there are others as well that we have but that's a great example, overtaken machinery combining it with our design around materials and and just in this quarter or the quarter reporting on here in the third quarter, we picked up.
Your next question comes from the line of Brian Maguire with Goldman Sachs. Your line is open.
Hi, good morning, everyone.
In April to like 1 billion to 1.2 billion.
In 2020, maybe 1 billion in 2021, it now looks like you're taking it down again.
Two 1.1 next year 900 to 1 billion in 2021, if I heard you right just wondering.
What are the moving pieces there does that imply maybe that you don't think there will be as much growth in the industry and you don't need to spend on projects.
Or are you may be just finding more savings and efficiencies in the projects and the spending that you're doing today, and then just sort of tied into that the comment around improving the integration to 90%.
Let's see it sort of seems to imply some investment is needed in the downstream converting assets.
To kind of get there just wondering if do you think we'll just we might see some growth investment in that part of the business as some of the mill.
Investment winds down thanks.
Okay. Brian This award I'll start and then I'll have Jeff chime in on the converting investments.
So you're right this year.
We lowered our our guidance.
To a billion for embedded in that billion for this was the peak year of our capital investments in our strategic projects, one vest over $500 million in the strategic projects.
Next year as we move from.
We have just over.
$250 million between 250 and $275 million.
Thats targeted for the strategic capital projects next year. So the decline year over year is really being driven by the decline in the.
Strategic projects, I will say and as we've gotten into the.
Remember that we had set.
And ongoing capex level to support capstone at approximately $150 million.
We believe now with a better understanding of the assets that.
That those investments are lower so that's why we're confident in the.
That we can.
Both complete the strategic capital investments and continue to make investments inside of our system.
To generate productivity and differentiation as you know we have invested substantially into our over the last three to five years into our.
Container network through the evolve deployments.
And so we've been modernizing that system and we're generating the benefits from those investments Jeff do you want to.
Add anything to that sure Hey, Brian So a tag wants Woodward said one of the things we found as we looked at the.
Projects in the capstone to for capital over three and five year period. They were heavy in these next five years on container on their converting assets and they have between 30 and $60 million in Greenfields coming up based on the scale of our system, we don't need to do that we've invested well as we're just said in the container system. So we've built the capability over the last five years to grow organically and so one on any capital rate. We continue to do that and we've been able to reallocate capital based on what we've seen in the capstone, but would also show that we have the ability to create a list of high return projects on assets or we're going to continue to look through that through the system, but this year and into the next year. Some of the capital that needed for new box plants, we don't need to do that and we're able to reduce the capital expense because of that.
Okay, Great just one follow up on consumer if I could.
Pat just any.
Any change to your pricing terms and in one of your big peers talked about shortening some of the lags and implant implementing pricing.
Not sure if that was.
Much of a priority for you or you're seeing any change in those terms going forward.
Yeah. Thanks, Brian for the question when it comes to pricing of course, we can't comment any forward looking dynamics in the marketplace or plans that we might have but when we look at the pricing in this specific question around lagging capture of previously published price increases. We we look at it in terms of a number of different mechanisms that we have and as you know we have a wide cross section of different customers and markets and so we have.
Pricing or contract that and in terms of pricing that link pricing to PPW as well as open contracts then our cost base indexes. So it's a little bit difficult to give you just one answer because of the complication associated with that because it does vary so much it across the customers in the markets, but I think as you can see from our results over over the last nine months, we realized about 100 million actually a little over $100 million of flow through from those previously published price increases and in the third quarter alone. It was $30 million $38 million year over year. So we're confident in our ability to capture the gains associated with those.
With those previously published price increases, but it's a little bit complicated to give you an exact number because of the different mechanisms that we have.
Okay. Thanks very much.
Your next question comes from the line of Chip Dillon with vertical research partners. Your line is open.
Yes, good good morning, and thanks for all the details.
If I look at your Capex Guide just a quick question on this for the fiscal year that starts in three months Im sorry, a year from three months from now the fiscal 21.
And I assume your your DNA stays at 1.53 billion that would suggest you would generate two in a quarter of free cash flow. If you earn zero, which is 6% of your stock price, which means your free cash flow yield zero earnings will be higher than almost all the rigid flexible packaging stocks.
Could you just make sure my math is right and also could you do you have a thought as to whether that 959 million $100 million 1 billion is sort of a sustainable level of capex that reflects modest growth projects. In addition to maintenance.
So.
Chip This award.
To be clear, we will generate a lot of free cash flow in the in this business and that one of the levers that we have as we've been investing.
In these strategic projects, we will invest over a billion dollars in these projects and they're going to generate.
Approximately $240 million worth of incremental EBITDA.
That will flow through.
To both earnings and cash flow generation for us. So we are comfortable that the ongoing level of strategic.
Base Capex is going to be.
In that 900 to a billion dollar range. There is a small tail of the traced by Haas mill on in fiscal 21, we have about 50 to.
$60 million of capital that remains in effect 21, and then the rest of it is our base Capex that we're we're comfortable with.
We do believe that the dividend yield in the free cash flow yield.
Some of our of Westrock is one of the.
Compelling points of our valuation.
Okay, and just a quick follow up.
When you look at the.
You were talking about the e-commerce impact of Siachen. You gave an example of the Smilebox. How do you think of some of the initiatives of making for frustration free packaging that say Amazon is leading and others.
How will the net impact of that be on both yourselves and the industry. I know there are a lot of moving parts, but are you seeing a reduction in corrugated demand because of this or is it slower growth or is it actually helping.
Hey, chip its Jeff we just said, it's there's a lot of moving parts were doing a considerable amount of testing for our customers for side. Our packaging, we have seen no degradation in our demand because of sidewalk. It's I don't know if it will be a plus or minus but right now it hasn't degraded at all we've seen more fall out in the smaller box stuff from some of the envelopes and we're coming out with fiber based on blow ups from our consumer business.
And testing those as we speak in this quarter and we're looking at what we can do with our paper business also in some of the pouches. We also came out with.
A new machine that is making pouches.
Auto fan full so our pack on demand will pack small.
In the markets.
Just as a reminder, please limit yourself to one question operator can we have our next question. Please.
Certainly your next question comes from the line of Mark Connelly with Stephens. Your line is open.
So our question is if you could just give us an update on the Kraft paper business and if you expect pressure on plastics to have a material impact on that business over the next few years.
And just in terms of that if you could just give us a sense of which Kraft paper markets are doing better than others.
Sure.
So I'll start at the high point of the Kraft paper, it's our doors storm, so saturated kraft demand is strong.
In that market and we can make it we can sell it the demand on the Kraft paper, an aggregate is a bit down matching containerboard I think there's been more pressure lately on the the craft bag markets. The extensible markets more challenged and that was really because seed cements fertilizer in the Midwest our customers producing for those were affected by the floods. So thats off a bit now along with the craft bag, but not it's not substantial so few thousand tons from what we expected and overall I would say that if you looked at.
Inventories and stock, where we've seen destocking in the containerboard space. The craft bag space is a bit different right now and we see inventories higher in a bit of a slower destocking in our craft sack business and the extensible is where we've seen more than our regular bag in the long term I think yes that we have opportunities through our customers now with plastic replacements and opportunities in the sustainability Ram and as I said, we're looking at pouches on blogs and other things we can use in our craft space.
Your next question comes from the line of Mark Weintraub with Seaport Global Your line is open.
Thank you.
First just wanted to.
Clarify, Jeff when you were talking about July .
Business.
That's a bit of a pick up more.
Even without the prime and Goodrich a bit of a pickup if you look through the last quarter into this quarter its a pickup.
Okay, Great and then.
I think that previously you told us a roughly 20% of your corrugated sales, we're now going through machinery tight systems.
Can you update us to what that might be be now and where do you think that could potentially go over any defined period of time.
Sure. We're over 30 now more getting towards 40 with associations, so our machinery to our packaging and as we continue to expand the machine business.
That pool ratio will continue to also grow so as we look at driving our differentiation higher that's a major pillar in our differentiation strategy and solving major challenges for our customers. So there is not a customer today, we don't talk to this not having labor challenges efficiency challenges trying to streamline their operations and Sol supply chain issues. So with our ability of innovation design and then to marry that with our automation platform across our our whole enterprise.
We expect sales lift from that.
Okay. Thanks for that sounds like a really big increase is that a big reason why you think you've been.
Very successful and gaining share in the last year or two.
Yes, that's that's part of it I think the other part is the design that goes with that the innovation.
And just the solution set we are providing solutions for customers across a broad array and we're able to do that now with our folding carton business MPS is another one so I'll give you a great example of we just said they are in a horticulture space and.
They are horticulture tags, we're going to be replaced with labels. They needed an automated solution to label the Flowerpots and so in 90 days, we designed a machine with a supplier partner produced the machine we kept the labels. We've got the labels their digital so a person can scan on the label without having the horticultural tag and sold four machines immediately and there's great upside for that so that type of ability in our system across the whole enterprise is a great way to differentiate and grow our sales.
Thank you.
Your next question comes from the line of Ki 10, Mamtora with BMO capital markets. Your line is open.
Good morning.
Can you remind us what does your integration level in consumer packaging and has your view changed at all on kind of what level you need to be there in consumer packaging.
Yes, thanks very much for the question. This is Pat so our integration level overall as we consider to be about 60%.
Let me describe a little bit of a how that breaks down in an SBS were a little little bit over 50% integrated as a whole about 20% of that goes through our folding carton business internally, so our internal conversion, but that's a little bit understated, because we had specialty applications such as tobacco commercial Pratt.
And in a couple of other applications.
Like liquid packaging, where we consider those to be integrated because effectively were specified and most of those downstream. So when you put all of that together, we're actually in SBS about 55%.
In terms of the C and K were higher than that we're at 70% and CRB is about 60% a smaller part of our portfolio and you are b.
The uncoated recycle board is down around 30, so overall net net the weighted average of that is about 60% as a as an overall company as far as your second question around are we happy with that and where it is we continue to look at this on an ongoing basis and our main priority right now is to as we drive integration and move that further toward and in an integrated system. It's really all about organic growth for the plastics replacement opportunity inorganic growth in general, but we see that as an opportunity to think about how do we strategic play in our markets and how we best serve our customers in those markets with our paper based solutions led again plastics replacements being one great opportunity, that's not to say that selectively explore inorganic inorganic opportunities, but I think as you probably know there is other multiples in this space are still pretty high and we've got to be very selective on deals that would look attractive to us and so our focus right now is to drive organic growth as.
As we look to in certain places to integrate our two increase our integration levels.
Thank you.
Your next question comes from the line of Steve Chercover with D.A. Davidson. Your line is open.
Thanks, Good morning, everyone.
Good morning so.
First of all on the capital allocation priorities with respect to debt.
I know you're still with a touch above your target leverage ratio, but following the debt repayment in Q2.
Are you approaching a point where.
Repurchasing stock like move up the pecking order in the capital allocation framework, considering you've got a 5%.
Dividend Thats probably.
Up there.
Commensurate with some of your the coupons on your debt.
That's a great question I think that's something we look at.
No periodically.
Just as the trade off of that I think this past quarter, we chose to pay down debt, but well continue to.
What kind of over time, if you look at us over time, we've done both.
And I think you've cited.
A couple of aspects I would Mike share repurchase relatively more attractive, but I think this past quarter were very comfortable paying down that because I'm from our enterprise value standpoint, our stockholders, we got the benefit of that.
Almost dollar for dollar.
Yeah, I agree, but I guess at some stage. If you think that your your equity is undervalued and it also makes sense to front end loaded.
And just a quick one on the capstone synergies are continuing to accrue ahead of schedule I know that you said, you'll do better than 200 million, which was the initial target is there a point, where you're going to quantify how much more than 200, you might be able to achieve.
I think there will be a point I think art.
Well get to 200, and then we'll figure out how far will get passed 200.
Okay. Thanks, Steve.
Your next question comes from the line of Edlain Rodriguez with CBS . Your line is open.
Thank you and good morning, guys.
One quick one on consumer package and what's your outlook on the SBS market to know which has been in a hasn't been as strong as the auto grades.
And also in terms of sustainability like are you seeing similar trends in the U.S. as you are seeing in Europe in terms of.
Shifting from an awesome plastics to Paypal base package.
Yes. So thanks very much for the question. This is Pat so on the SBS market, we actually see areas of pretty good growth and as you know SBS is a pretty complicated one because of the broad markets that it serves a unlike some of the others, which are a little bit more focused in their market. So.
Just looking at a couple of those segments. When you look at foodservice as an example, foodservice is pretty strong right now and and that's driven by sustainability, but I think it's also driven by just the trends in consumers today. There is a lot more interest in takeout and snacks and smaller meals, rather than eating out with big meals and so a lot of our customers and retailers right. Now we're looking to take advantage of that and offer packaging that helps service those those needs in that demand and many of those applications are moving towards to the extent they weren't plastics, they're moving towards paper more and more that is a trend in North America. There is no question about that.
Now as far as other markets certainly tobacco for SBS, certainly tobacco and commercial print continue to be in a secular decline so that offset some of those increases.
Now we're also pretty excited about what's happening in some of the plate us markets as well as cup stock the sustainability thing and this is one that is in Europe , but also in Europe North America tier two years. Other question. Your second question is that SBS demand, we think in the future could well be driven by some of the trends around sustainability around cup stock replacement and today.
Those comps for example, at Starbucks and others are poly coated so plastic coated on the inside now at Westrock, we can recycle that all the way through our entire system, our recycle system, but that's not true of many other recyclers in the industry and so one of the things that we're doing there is that we are developing a fully recyclable coding and we recently won an award for that next Gen Cup Challenge.
We won that and that supported by a number of different companies like Starbucks and and Coca Cola and others and so we're excited about that when we are in the process of customer trials, we're scaling that up where we think if that turns and really if we can commercialize that there was a there is over 650 billion Cups, a paper cups used in the world and so we think there is an opportunity there obviously to drive some SBS demand, but thats still a piece that's very much in development and just closing out on your North America versus Europe in terms of sustainability I'd say Europe has been in the lead in some areas certainly on the beverage side I mentioned, Diageo example, where we picked up some nice business around shrink wrap replacement and theres, others happening as well with other other big retailers and other big brands.
North America has been a bit more focused on that foodservice side, we think beverage will come but around a plastics and different types of packaging. When you look at aluminum cans in particular, North America has a pretty eclectic and diverse you.
Selection of different packages that are used that will happen, but that one's a little bit behind the trend in Europe , specifically on beverage.
Okay. Thank you very much.
Your next question comes from the line of Mark Weintraub with Seaport Global Your line is open.
Thank you.
Question on the Florence facility.
For next year.
How much given that a lot of that I assume is just going to be improved productivity and lower costs. How much is that project deliver just on that so forgetting the small incremental capacity, but if we just focused on the.
Improved.
Cost position et cetera can you give us a sense as to how big an impact that can be.
Sure I think what we've said previously it's in the $60 million range.
Okay.
Thank you.
Your next question comes from the line of George Staphos with Bank of America Merrill Lynch. Your line is open.
Actually I actually just wanted to quickly follow up on the SBS I was just wondering if you can talk a little bit about I mean, so basically we had read about some supply changes and box, Florida, particularly in Sps and so essentially want to get a sense for whether you're seeing an increase in demand associated with that.
Yes, so SBS overall, there has been a lot of changes in that market in.
And.
Can't comment other than some of the previously announced changes in addition, and subtraction to the capacity that you've all seen I think going back to my earlier comments plastics replacements gives us an opportunity to drive some increased SBS demand I think its long term.
Direction is going to be dependent on ability to capture some of those wins and plastics replacement the tobacco as well as the commercial print are offsets to that so it's a little bit difficult to tell how all that's going to sort out but right now what we see is we still have long backlogs in SBS. There are four to six weeks and maybe even on the upper end of that we're ramping up from some of our production right now from the strategic outages to capture as much as that as we can so right now in the in the immediate term and right in the near term.
It's really still pretty strong and pretty robust the long term I think depends on capturing some of these new and innovative solutions that helps us solve some of the sustainability challenges, particularly in the food service space.
Yes.
Again, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
There are no further questions at this time I turn the call back over to James Armstrong.
Thank you, Chris and thank you to our audience for joining our call today as always reach out to us. If you have any questions. We're always happy to help have a great day.
This concludes today's conference call you may now disconnect.