Q2 2021 Westrock Co Earnings Call
Yeah.
Good day, and thank you for standing by and welcome to the West Rock Company second quarter fiscal 2021 results conference call.
At this time all participants are in a listen only mode.
For the speaker presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone and keep you require any further assistance. Please press star zero and would now like the hand the conference over to your Speaker today James Armstrong. Please go ahead.
Thank you good morning, and thank you for joining our second fiscal 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 for West Rocks, Chief Executive Officer, David Sewell, Our Chief Financial Officer Ward Dickson, our Chief commercial officer, and President of 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.
And for a question 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 described these risks and uncertainties and are filed.
Wings with the SEC, including our 10-K for the fiscal year ended September 30th 2000 and 'twenty.
In addition, we may be making forward looking statements about the impact of COVID-19, pandemic and the recent ransomware attack on our 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 were.
We'll also be referencing non-GAAP financial measures during the call.
We have provided reconciliation of these non-GAAP financial measures to 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 David Thank you James and good morning, it's.
It's great to be joining you all today on my first earnings call as West Rock CEO.
I've been in this role now for seven weeks and of spent that time meeting with our customers our business leaders and teammates with every interaction I'm impressed with the capability and strength of the west rock team and couldn't be more excited about our future prospects.
It's still early and this process, but what I'd like to do today is share with you my initial observations since joining and my priorities going forward.
Before doing that though let me touch briefly on our performance and the second quarter, which ward will discuss in more detail shortly.
Faced with dual issues of the ransomware incident, and a significant weather disruption the team focused executed and delivered for our customers generating revenue of $4.4 billion adjusted segment EBITDA of $641 million and adjusted EPS.
54 cents per share the ransomware and weather incidents lowered our adjusted EPS by 23 cents.
And we'll provide additional detail about our performance.
I am pleased to say the we are fully restored our I T systems with all sites up and running and we continued to make excellent progress and restoring our supply chain and customer service levels.
During the time, we were dealing with this incident, we prioritize serving our customers and incurred additional costs that impacted earnings in the quarter.
We are accelerating investments that were on our I T development timeline to further strengthen our infrastructure.
Throughout these events the west rock team demonstrated incredible resiliency and dedication and we have made a remarkable recovery.
I want to extend my sincere thanks to my West rock teammates for all day of done and continued to do for the company and our customers with all of this now behind us I'm confident and our team our markets and our path forward.
I mentioned at the start that much of my time over these first seven weeks has been spent getting to know our company.
And I've toured 12 facilities met virtually or in person with hundreds of teammates and spoken with many of our top customers.
West Rock has built a unique portfolio successfully integrating acquisitions and investing to create a differentiated set of capabilities with incredible opportunities for growth.
I've seen firsthand, how the consumer and corrugated and machinery businesses work together and believe we can do even more to maximize the performance of our platform.
We serve diversified and growing packaging and markets and the demand for fiber based paper and packaging continues to gain momentum.
Key markets that we serve such as food and beverage E Commerce and healthcare continue to grow.
For example, the demand from customers for safe and secure E. Commerce solutions has only been accelerated by the pandemic and I believe this remains a significant opportunity that west rock solutions are well positioned to address.
One of my visits was to our high quality low cost facility and Florence, South Carolina, and it was great to see the new state of the art paper machine up and running.
This slide includes the QR code you can use to view of video of the mill and the new equipment.
This machine produces high performance containerboard grades at low basis weights and replaces three machines and our system.
This mill is well positioned to serve a diverse set of customers seeking these low basis weights to drive more sustainable packaging solutions.
This investment makes forms one of the lowest cost Virgin containerboard Mills in North America.
We expect Florence to ramp up to full capacity by the end of our fiscal fourth quarter.
The Florence Mill is a great example of a strategic capital investment that improves our capabilities lowers our costs and expand margins.
Looking forward there are a few key priorities that I want to focus on west rock has a unique portfolio of sustainable fiber based packaging and great opportunities to leverage the enterprise and help our customers win and their markets.
The path to long term shareholder value creation is through a focus on attractive markets, where our differentiated portfolio and combination of products and services are valued and rewarded.
We will also focus on improving our productivity and operational excellence across the enterprise, which are both important levers to grow earnings and margins.
I believe strongly and the leadership role the west rock can play and improving the circular economy, and helping our customers and prove the sustainability of their products.
We recently refined our sustainability platform to focus on people and communities.
Bettering, the planet and innovating for our customers and their customers.
Whether it is developing new fiber based packaging solutions that enable our customers to meet their sustainability goals.
The initiatives to reduce our own environmental impact.
Or our work to improve the diversity and inclusion of our company West rock has substantial capabilities and opportunities to help drive a more sustainable future.
And a more sustainable future. It means that we must focus on innovation to develop new fiber based packaging that meets the needs of customers and consumers.
Removing plastic from packaging and developing more sustainable packaging solutions through design and material science digital and automation continued to be growth drivers and our industry.
West Rock has the capability to create new recyclable fiber based solutions that are good for our customers and the environment.
Next I'd like to share my initial thoughts on capital allocation.
I believe the disciplined balanced capital allocation is a key factor and creating sustainable shareholder value.
I'm impressed by the strength and stability of West Rock's cash flows and believe this is a positive attribute for the company and our investors.
We will invest and our business to maintain and improve our assets and investments and acquisitions and strategic capital projects will be tightly aligned to our strategy and deliver returns above our cost of capital.
We will remain committed to returning capital to our dividend and intend to steadily increase it every year.
We've already taken the first step today with the announcement of a 20% increase to our quarterly dividend.
Today's increase reflects our confidence and the outlook and cash flow generation of our business.
In addition, we will evaluate share repurchases and the future is another way to return capital to shareholders.
We remain committed to our investment grade credit profile and believe that our leverage target of tune of quarter to two and a half times is appropriate and.
And in the coming months I'll share more detail about my priorities and vision for West Rock's future and now I'll turn it over to ward to provide our financial detail about the quarter Ward.
Thanks, David.
We were able to serve our customers deliver solid earnings and continued to reduce our leverage despite the challenges and the quarter.
We generated revenue of $4.4 billion adjusted segment EBITDA of $641 million and adjusted EPS of <unk> 54 cents per share.
These results were impacted by both the ransomware incident and winter weather.
The two events negatively impacted revenue by $189 million.
Adjusted segment EBITDA by $80 million and adjusted segment EBITDA margins by approximately 110 basis points and.
Adjusted EPS was 23 cents lower as a result of these events.
In addition to the impact of the Ransomware incident that we show on the adjusted segment EBITDA Bridge, we also incurred $20 million and ransomware recovery cost.
The $20 million of recovery costs were excluded from our adjusted segment EBITDA and adjusted earnings per share we.
We estimate that the total insurance claim will be approximately $75 million and we expect to recover the claim from our cyber and business interruption insurance coverage and future periods.
It's important to look beyond the events and the quarter to see the underlying trends and our business demand is strong and we continue to focus on improving our business mix and.
In addition, we are currently implementing the published price increases across all of our paper grades and the implementation of these price increases and improved business mix drove $88 million and year over year earnings improvement, notably we had record second quarter and North American box shipments, which increased five.
5% year over year on a per day basis.
Cost inflation was driven by a $43 per ton increased and recycled fiber from Q2 of the prior year, coupled with higher chemical and energy costs, resulting from the winter storm.
Transportation costs were also higher due to tight availability across all modes.
We did not exercise the option to purchase an additional 18.7% equity interest and Grupo Gondi as a result, we recorded a charge of $22.5 million that we excluded from adjusted EPS.
As we indicated earlier in the quarter, the lagging customer invoicing from the period when our systems were down negatively impacted our working capital and Q2.
As expected our accounts receivable increased and the second quarter, and we expect receivables to normalize and the third quarter. Despite this our net funded debt declined $74 million from Q1, and our net leverage decreased to two eight times.
Due to the decisive actions, we have taken over the past year to strengthen our balance sheet, we have reduced our adjusted net debt by $1.6 billion.
Demand continues to increase for sustainable fiber based packaging and we sell into and attractive set of end markets.
Our overall packaging volumes increase by 3% and Q2, including E Commerce box volume growth of 18.4% on a per day basis.
Our paper sales represent 27% of our total revenue and the company and we are focused on reducing our participation.
And the export containerboard and specialty SBS markets.
The pricing environment has improved across our paper and packaging grades were implementing published increases across our paper and packaging businesses as expected turning to segment results. Our corrugated packaging segment reported revenue of $2.9 billion and adjusted segment EBITDA of $438 million.
North American adjusted segment, EBITDA would've been $54 million higher and margins of approximately 140 basis points higher without the events and the quarter.
The corrugated box demand is very strong across most of our end markets and we reported record per day shipments for the second quarter as I said earlier corrugated box shipments were up 5.5% per day year over year, excluding the impact of the ransomware and weather incidents per day box shipments would've increased approximately.
<unk>, 8%.
We lost approximately 121000 tons of containerboard production and revenue due to the disruptions and the quarter.
This directly impacted our external containerboard channels sales as we could have sold all of the lost production.
We highlighted the primary drivers of cost inflation earlier, higher recycled fiber and energy chemical and transportation costs. However, we offset this inflation and the quarter through higher pricing and volume excluding the impact of the events.
We also continue to implement the previously published price increases and expect the benefit of these increases to more than outweigh inflation.
Inventory levels remain low as we head into our peak mill outage quarter in Q3, with the 112000 tons of planned maintenance outage downtime.
Finally, we are making great progress on our strategic capital projects. The Florence Mill continues to increase its production and operate well as David commented earlier, we expect the mill to be at full production levels at the end of the fourth fiscal quarter.
The margins in Brazil of been lower and the past two quarters as a result of the maintenance and capital outage related to the the trace Baha <unk> expansion.
And as strong and the Brazilian market, and we expect margins to improve and the second half of the fiscal year.
Turning to consumer packaging the segment reported revenue of $1.6 billion.
And adjusted segment EBITDA of $212 million.
EBITDA would have been $26 million higher and margins of approximately 100 basis points higher without the events and the quarter.
Our sales mix is improving by shifting to higher margin food and beverage packaging sales.
Food and beverage packaging revenues were up 4.7% year over year, driven by improved mix to quick service restaurants and beverage packaging.
We lost approximately 46000 tonnes of production and corresponding revenue due to the disruptions and the quarter.
In addition, we had approximately 20000 tons of consumer paperboard shipments that were deferred into the third quarter due to these disruptions.
Backlogs of increased across all substrates and are currently at six to eight weeks.
We are in the process of implementing the previously published price increases the increased pricing improvement and our business mix and productivity more than offset inflation and the quarter.
We continue to produce containerboard at our EBITDA, Texas mill, given the strong demand and low inventory levels.
In addition, we are making progress with C and K production at the EBITDA mill and are on track to deliver 25000 tons of C and K production and FY 'twenty, one and 50000 tons of production and FY 'twenty two.
We are able to flex the C N K and containerboard capacity from Sps with no additional capital investment.
Turning to guidance.
And here's some things to consider for our fiscal third quarter, we expect adjusted segment EBITDA of $775 million to $805 million and adjusted EPS of <unk> 88 cents to <unk> 97 per share.
The primary drivers of our sequential increase include the implementation of the previously published price increases continued strength and packaging demand and the return to normal operations for the third quarter.
These items are partially offset by modest sequential inflation across recycled fiber chemicals and transportation costs.
In addition, we will take approximately of 112000 tons of scheduled maintenance downtime across our North American containerboard Mills.
Finally, we expect higher incentive accruals due to our stronger earnings outlook.
We want to share with you our current outlook for fiscal 2021.
We expect the continued flow through of the previously published price increases as well as packaging growth across our primary end markets.
As a result, we expect full year adjusted segment EBITDA to be approximately three point of <unk> $5 billion.
Given our earnings outlook and continued strong cash flows we fully expect to be within our leverage target of 2.25 to two five times by the end of the fiscal year.
We will provide additional details on our next earnings call.
And now I'll hand, it back over to David for closing remarks, David. Thanks Ward I'm excited about the future of West rock, we have great opportunities to grow our company and provide value to our customers our teammates and our shareholders.
We have a broad portfolio of products that is uniquely positioned to meet our customers' needs and we will further leverage the power of the enterprise to create value.
We intend to lead and sustainability by being a valued partner to our customers to help them achieve their sustainability goals as we work to achieve ours.
To do this we will focus on accelerating innovation, creating products that enhance the performance and sustainability of our products and services and we will continue to be disciplined and our capital allocation strategy.
We have confidence and our future evident by the increase and our dividend this quarter as recovery picks up momentum, we are well positioned with significant financial flexibility to pursue our goals.
The future is bright at West rock and I am proud to be part of the team.
That concludes my prepared remarks, James we're now ready for Q&A.
Thank you David as a reminder to our audience to give everybody a chance to ask a question. Please limit your question. The one with a follow up as needed we'll get to as many as time allows operator may we take our first question. Please.
Our first question comes from George Staphos of Bank of America. Your question. Please.
Hi, everyone. Good morning, Thanks for the details David.
Thanks for the comments and we're looking forward to working with you I guess I wanted to.
And the first question on kind of your initial comments you spent time talking with customers, you've obviously been reviewing the operations of.
And the things that you enumerated and your view.
One or two things that west rock has to get right and the next year to position itself for the future and what are customers, saying day.
Think of web.
Truck and what.
It's to get better on a going forward basis. That's question number one.
Question number two if you can comment kind of shorter term.
What kind of trends are you seeing and volumes across your businesses.
Early in the fiscal third quarter.
And will there be any lingering effect from ransomware and thank you very much.
George Thank you I appreciate the question and your comments.
I'll try to answer each one.
And of your questions and I'll start with customers.
I can't tell you how important it is to get our voice of the customer I believe and a real real outside in approach customer focused approach as we look at the business.
You know one of my first meetings actually was with one of our largest customers very strategic global accounts and we happen to win the supplier of the year Award. So hopefully all of my customer meetings co like that.
But I would say several themes emerged when talking to a variety of customers.
And I think it ties into what we need to do as a company and the first one with sustainability.
Our large strategic customers want their products to become more sustainable and they want to partner with us to find those solutions and this is really.
Especially true with plastics replacement and the opportunity we have there.
So concurrent to that I think innovation is going to play a critical role and our.
And our growth and sustainability.
But also innovation across all of our products and services.
And including our digital and our machinery businesses. So we've gotta get sustainability and innovation right to your to your point earlier and then the third thing I heard was service I think with the pandemic to your question I think across multiple industries.
It's certainly accentuated the stress across supply chains worldwide sales.
So reliable service and quality as critical for our customers and.
And just take this opportunity to really thank our teammates of west rock.
When we went through the ransomware attack, how well they communicated and kept our customers going and as word of alluded to we did incur some some costs to do that but.
That was something we absolutely.
Had to do to service our customers.
And I think <unk>.
One last thing that I heard from.
Our strategic customers was the the value they placed on our and our enterprise and the approach and bringing everything together.
And how that can help them be more effective so I think all of that fits exceptionally well into our future vision.
And the way I look at it is we.
We really want our customers to come to us with their biggest challenges and we want to help them be more successful and achieving their goals.
So as I as I.
Talk about what we must do.
Talked about sustainability and innovation.
And the enterprise value proposition and differentiation that we bring.
And it's not only from a customer growth standpoint, but I believe its also from an operational standpoint, leveraging our manufacturing and supply chain, our footprint and and our assets and just having a relentless drive on productivity, we're going to be really focused here to drive efficiency lower costs and improve our margins and.
And then finally the.
And the last piece would be.
And our acceleration around the discipline and our capital allocation.
And I talked about the importance of reinvesting in our business.
For safety and maintenance, but also capital projects that really drive that productivity that we talked about.
Really believe and a sustainable growing dividend and I think today was the first step.
And doing and and showing the ability to.
To drive that debt.
Increase we have a wonderful ability to generate cash and this business. So we look forward to continuing to grow our dividend.
Accelerating our leverage to our target range of two and accorded of two and a half which ward mentioned earlier, we will achieve by the end of our fiscal year and.
And we'll be opportunistic with share repurchases, we were going to.
Invest our cash we don't intend to hold onto it and we wanted to fuel growth and create value for our shareholders. So we'll continue to do that and.
And we will look at M&A as it aligns to our strategy and and those of the real priorities that we have so.
<unk>.
Captured everything and then the last piece of your question if I got it George was trends.
A couple of things we've seen through the pandemic, we've seen a huge increase and e-commerce and.
And some of our food and beverage and healthcare segments.
We fully expect e-commerce to continue to grow this is a new reality, we think of the market.
But as.
We get through the pandemic and things come back, we do believe retail brick and mortar beauty and.
Industrial will continue to come back as things open up.
And that's that's why I'm, so excited about the breadth of our portfolio because no matter, where the markets take us.
We feel confident and the products, we have and and I'd love to have Jeff just reemphasize.
Some of the the volumes we've seen in April and now that we've come out of this and just see the trends that we're seeing.
Thanks, Dave and good morning, George.
Overall, the demand and the business was strong across the broad base of end markets. The David just outlined.
So Tom and and we were up five 5% and the quarter and actually wasn't for weather and.
And cyber we would've been up almost 8% we looked and.
April was not closed yet so I don't have the final number, but we were up 12%.
And shipments year over year as we left the month, which is a record level for.
For April shipments and the demand is strong across almost all of our end market still so E. Com remained strong our distribution paper retail industrial and also our backlogs remain strong coming into May.
Our hot pipeline was up $90 million year over year of coming into the quarter, almost 22% increase and we continue to onboard new and incremental business.
Tom.
Domestic markets remained strong.
And you asked about lingering effects for us its really getting our inventories back in line and.
And with the outages this quarter is probably going to take this quarter into next to really get back to the inventories and we took the 160000 tons out of the export so getting back to some of our direct being able to fully supply some of our contract customers, we need to make up tonnage as we soon.
Difficult and reduced and our export markets even for some of our contract customers of the last two quarters. So that's been a lingering effect, but overall integration rates of up to 82% up from 78% last year, 80% and the first quarter of well demand is.
Strong and all of our segments and finally thankfully out of this last quarter, we're back to full operations and we've operated well true April.
Thank you very much.
I'll turn it over.
Thanks George.
Our next question comes from Mark Connelly of Stephens. Your question. Please.
Thanks.
David you talked a lot about cost and productivity and Florence is obviously, a major step for your system there.
And West rock has been making hard choices about which notes of support and not too.
But $850 million of sustaining Capex is a big bogey and we tend to think the big projects like Florida, or a way to help whittle that down.
Should we be expecting more big projects like that to help.
Move the system down and in a big way rather than the incrementally.
Yes, Mark Thanks, Thanks for the question the way, we look at Capex as well.
And we'll probably have a.
And investments span of about $8 million to $900 million this fiscal year.
And next year, we'll target 900 to a $1 billion and.
And when you break that down.
A portion of that just goes to core maintenance and safety that are critical.
And at least half of that is going to go to those productivity product projects.
Like for warrants driving enhanced.
The enhanced efficiencies driving down our costs.
And so that is going to be a huge focus and and you can expect.
And with investment and that $900 million to $1 billion and capex year over year.
Okay. That's helpful and just a follow up I'm wondering how you and your team are thinking about the puts and takes of business reopening where where it might create some drags and where youre going to get the biggest bang from line yes.
And what I'll do is I'll have Pat talk about that and then and then turn it over to Jack and I can go into depth on their business.
Thanks, David and thanks for the question. This is Matt So I'll talk a little bit about consumer and what we're seeing.
We still see strong demand and even in last quarter and into this quarter and through the remainder of the year the <unk>.
And as it continues to be strong and general folding carton as well as food and beverage and <unk>.
Certainly the economy is going to shift a little bit with the preferences that people have in terms of work getting back to the office and getting back out and and being mobile again, but we still see these trends continuing fact, there was a conference here in mid February call of the consumer Analyst Group of New York Conference and and the about <unk>.
CPG companies, where they are and they project over the near and mid term about 2% to 3% growth and their businesses and so and that included kind of the end of or slowing of the stay at home pandemic. So were pretty robust and positive about that I think health care is also one and we participate and COVID-19 test kits as well as and leaf.
And in search for the vaccine the were seeing good good strength, there and I think the other driver for us.
Really not dependent at all on the pandemic of recovery is this plastics replacement opportunity that David referred to and we've talked about before we've already since July of 2018 commercialized over $200 million of plastics replacement and we're envisioning right now we are increasing our projection on that up to an incremental 300.
Over the next few years. So we think that this is going to be really economically independent and it's really the sustainability of trends that our customers have and our ability through new technology through innovation to deliver new products for those customers.
David I'll turn it back to you, Jeff and now if you want to make any comments on your business.
Sure Hey, Mark I'll, just add that.
Without having the crystal ball and don't know for sure, but I can tell you. We do believe the e-commerce trend, it's accelerated so two years of growth and and the last year and every one of our customers and retailers are either trying to figure out how to grow and that channel or how to get into the channel if theyre not and two paths.
Latest point I think we're uniquely positioned with our automation platform. So our new pack on demand machines coming out of the replacing the envelope. So good way and I wouldnt way to get into smaller packaging and curbside recycling the stay at home categories for us the remaining sticky and those people will.
<unk> to work from home, we see growth.
And process food frozen vegetables meals cooked and home.
See a fall off and some of the.
Retail or some of beaches and some of the.
The industrial that we have but overall I think we're well positioned as foodservice comes back online.
And two to serve broad markets through consumer and corrugated.
Super helpful. Thank you everybody.
Thanks Mark.
Our next question comes from Mark Wang trap of Seaport Global your question. Please.
Thank you welcome David one of the comment.
And that you made the sort of definitely catching my attention the intention to steadily increase the dividend every year.
And obviously, we saw the 20%.
This year of having cut it last year I understand and big number do you have a perspective on.
What that rate of growth Ken can be on average and is it something that you think is going to be.
Ratable, so very similar year to year, obviously, excluding this year or is it something that given this business. Historically has had some cyclicality you expect more moving up and down.
Yeah. Thanks Mark.
The way I look at it the <unk>.
Dividend is first and foremost and sure it's a sustainable and growing dividend.
And then as part of our capital allocation.
The principles is really allow for flexibility across the cyclicality of the markets that you mentioned.
So if.
If you think about at the the levers that we Poland and regards to that.
I mentioned and the Capex investments that are going to be constant.
I think the team has done a terrific job deleveraging so that gives us even more flexibility.
So with that.
We'll take a portion of of how we of that available cash that we have and.
And we will look for the best return.
It'll be and a steadily increasing dividend.
If there's opportunistic share repurchases will continue to look at that and if there is M&A that aligns to our strategy. We will look at that while remaining core to the rest of the principal so.
The increase that we announced we believe was the right amount, we're very comfortable with it we'll.
We will continue to assess it.
Year over year.
And and we give a specific number I don't think we're in the state to do that other than saying, we're committed to a sustainable growing day.
Dividend despite market conditions, because I think with the cash flow as we generate and the flexibility we have will be and a good position.
Okay, great and one follow up.
And obviously, great volumes and the box business.
We saw some of the pricing flow through a couple of the competitors had talked about how getting the containerboard increase into boxes went exceptionally fast this go around.
And you were in a bit of a different situation, given and ransomware and lots of different other issues I was curious whether your experience had been on that path through and perhaps from weighted maybe to get at it would be Jeff.
Jeff how much of the box price from the November increase is yet to be gotten.
And in the say the second quarter versus the first quarter. If that's something you could could share with US and then obviously, we got March April yet to achieve as well.
Sure Hey, Mark so the.
The November is basically done we lead the quarters.
Our normal flow through so we left the quarter over 90% equal it's complete the $50 and then the 20% and 40 that follows on and we'll follow the same type of pattern. So it's going well we have a good methodology.
To run our increases and Theres no no change and that but the $50 is basically complete.
And I don't know, if you're willing to share, but how much in terms of the average that you achieved in the fiscal quarter, how much would then carryover into <unk>.
And to this quarter from the first the increase.
And that's a smaller amount I mean, it's like I said most of it was done and it's over 90%. So there's a small amount left in the quarter and really now we're focused on the 20 and the $40.
Okay, I'm, a little confused of the 20 and the 40 I thought it was of $60 of March April and Chris Yes.
That's $20 and March and April so got it okay understood.
Thank you Scott.
Yeah.
Yeah.
Our next question comes from Mark <unk> of Bank of Montreal. Your question. Please.
Good morning, and welcome David.
Good morning, I wanted I wondered just to start off and Jeff go back on the E Commerce for a moment.
And what footprint changes might you have to make to kind of deal with the higher level of e-commerce activity going forward and and does that even ripple back to more changes in terms of what you are producing and the middle level.
Yeah.
Good morning, Mark so on the footprint I think in general what we're doing is increasing.
Some of the ball locations that we've had so we've added in the northeast.
The Texas, we're having to expand so every plant in Texas, we're investing El Paso Houston for.
At work and mesquite.
So the footprint there.
Not just e-commerce, but e-commerce is a part of that but theres, a large broad based and that area of Midwest up and Michigan are new plants.
From box on demand that we move to brown style, and we're actually going to make.
The box plant out of that plant. So we're going and it's continued to increase and invest and the Ebola platform high yield rotary die cutters, and then we're continuing to innovate and our machine business. So two point of <unk> Pak on demand to our box size of those machinery investments for <unk>.
And often we have great opportunity.
And to expand and that one we also expanded some investments and the box on demand sheet theaters, where we have.
Patents on <unk> technology on the core data, so we're actually making pouches coming off of our core gaiters that had made sampled so thats another investment that we're continuing to make as.
As far as new locations.
Moving to look at and see what we might have to do and the future and then also victory, adding the 65 distribution centers for victory has put us in a good spot to help distribute into some of the retailers and so some of the E comm business for our customers who can't.
The change their inventory or need a quick turns and distribution and that's of great way to work between the box plants and victory. So a lot of positive things for us and our footprint investments and then well victory and our machine business.
Okay, and then David as a follow on if I could share.
You talked about the discussion that you've had with customers I just like to get.
A few more thoughts on this idea of kind of selling kind of of a full range of packaging because through my career, we've heard a lot about this but.
But it seems like and reality for the most part the decisions of that.
Corrugated purchases and folding carton purchases.
Pretty much been made separate from each other so the though it seems like the the rhetoric is much better than the reality of what is your take on this.
And and I appreciate the question.
I think about it.
And how customers buy and to your point I think differ.
Different customers buy differently.
So I wouldn't make a blanket statement of 100%, but I would say that.
There are of heart, many customers that I've already talked to that really like the approach of and enterprise to help them be more efficient and you heard Jeff talk about the machine and then when you think about machinery of corrugated and consumer for some of these customers. We can really tie all of that together and theres innovation to be had when we do that.
And so when we have that ability to strategically align with our customers.
For those complete solutions, and that's where we'll focus and there will certainly be some customers that.
That separate it the way the way you mentioned and and we will treat them the way they want it.
They want to buy so it's not 100%, but there is significant value there and just as a data point I would tell you that our growth rate with enterprise customers is higher than non enterprise customers. So we see this as a as of <unk>.
Significant opportunity, it's already a multibillion dollar sales platform for us.
And then when you tie and the operational piece.
Internally to really leverage our assets.
From an enterprise standpoint, we think there's tremendous value there and that's something unique that we can bring to the market.
As we innovate and our approach and doing so.
Okay. That's helpful. Thanks, very much and good luck, thanks, Mark I appreciate it.
Our next question comes from Kyle White of Deutsche Bank. Your question. Please.
Thank you and good morning, and congrats David on the neuro. Thank you.
And I apologize if I missed this in the prepared remarks, but do you have an idea in terms of the potential proceeds.
And from insurance related to the ransomware incident or the weather impact and also the.
Timeline of when you of spectrum it is.
Yes so.
Kyle This award we estimated the total.
Claim right now for the ransomware attack to be of.
Approximately $75 million.
We are initiating the claim process as we speak so there'll be both the recovery of the one time expenses and the business interruption and loss profits, but those will be the components of that claim.
And we.
We do not have a timeline for when we're going to recover but we're confident that we're going to recover.
Substantially all of the claim we have not gone through we are evaluating the process right now too.
Assess whether we have a potential claim on the on the weather events because it impacted so many different facilities I think it impacted over 30 converting facilities and multiple mills.
And we're aggregating that analysis right now and we'll give you.
Share more with you as we learn more about that.
Got it that's helpful and then work prior to the pandemic West rock and to provide some form of cash flow guidance and you haven't here just wondering the.
Reasoning for why you chose not to is there just too much uncertainty regarding your working capital or something else.
No.
Prior to the pandemic, we were giving full year guidance rate and then during the pandemic. We went to the sequential earnings earnings guidance and so we stopped that obviously on the call in January because of the timing of the ransomware event, but so what we thought it was important to do as we exited the quarter and <unk>.
Put these events behind US we wanted to give you clarity for earnings for Q3, and then we gave you.
A reference point for the full year.
For earnings, but I'll shift to cash flow and I'll talk about the strength of the cash flow. So clearly we had a really good first quarter from a cash flow point of view of Q2 was negatively impacted by the ransomware as we had and we had talked about during the quarter and we're going to start to recover from that and Q3 and Q4 seasonally we always drive a large.
Portion of our cash flow and the second half of the year I will just give you some reference points and led to demonstrate to you the power of the cash flow generation. So if you look over the last two years, if you take our adjusted EBITDA, we convert 75% of that roughly two adjusted operating cash flow you take that with the the midpoint of the Capex.
Guidance that we've given you and you see very very strong cash flow generation for the full year and our ability to delever very quickly from where we are right now.
Got it and I'll turn it over.
Our next question comes from Phil <unk> of Jefferies. Your question. Please.
Hey, David looking forward to working with you and congratulations and thanks to all the quarter.
And under your watch going forward are you going to use of different land in terms of metrics and methodology in terms of capital deployment and any changes in terms of of how you're going to structure incentive comp and once again and metrics that youre going to be looking at.
Yeah. So.
So.
As you would expect I'm looking at everything so we would I do believe aligning our metrics to our strategy is critically important and we will absolutely do that.
And we will look at it across the company and.
And our cabinet cap projects cap cap allocation as well as you know.
Our incentive plans, so we're going to look at all of that.
Okay. That's it for Apple and then I guess question for Ward within your guide can you give us a little more color of how youre thinking about inflation for the full year.
Certainly very elevated right now.
On the quarter and <unk>. It seems like inflation was a bit more outsized for corrugated versus consumer any.
Any color on what's driving that spread share. It's the the impact of the recycled fiber. So we talked about and the prepared remarks, I think we said recycled fiber was up.
Almost 43 Bucks a ton I think.
<unk> year over year. So as you think going forward remember the comparison of recycled fiber, especially in Q2 is off of very low levels during FY 'twenty.
So my guidance as we as we think about Q3 and Q4 for and inflation from where we are from where we are today.
We're estimating that risk.
Recycled fiber will be up approximately $15 from Q2 to Q3 Q2 to Q3 and then another five bucks.
From Q3 to Q4, if you look at the single biggest driver of inflation for us and I've been signaling. This all year long was going to be recycled fiber recycled fiber on a year over year basis for the full year to be approximately $150 million based on the the.
And the consumption of fiber that we have across our system than the other elements have been elevated energy costs off of last year's lows and then.
We've talked about the tightening freight markets I gave guidance earlier in the year that I thought freight for the full year would be 3% to 5% on a year over year basis for the full year. We are on the high end of that range now and then given the events that occurred and.
And Texas related to the winter weather that has had some impact on some of our chemicals. So.
Historically I have said that if you look at the average inflation for this business since the.
The inception of the West rock, it's averaged about 225.
And $225 million of year, it's going to be elevated this year simply because of the.
Elevated energy and recycled fiber and really.
And the embedded those and our guidance.
The sequential inflation outlook that I just talked about was included in our guidance for Q3, and then for the full year and it just reinforces our need to drive productivity and across the business.
Super helpful guys. Thank you.
Our next question comes from Anthony Pettinari of Citi. Your question. Please.
Good morning, and welcome David Thank you.
Just piggybacking on some previous questions on capital allocation I think you could argue M&A has been pretty integral to west Rock's DNA, maybe rock tenn, and before that and obviously not asking you about anything sort of near term of specific but just longer term do you view consolidation and paper based packaging is an opportunity how do you think about.
The criteria and strategic importance of the acquisitions and when you looked at the company's history of acquisitions coming from from an outsider perspective, what were your sort of lessons learned.
Yes, so I think.
I think we'll certainly be open to M&A and it'll be part of our.
Sure.
Inorganic growth platform moving forward, but we're going to be really disciplined and our approach.
It's got to align to our strategy.
It's got to meet our expectations for returns.
And the piece on the multiple integrations and the acquisitions, we've made to your question Mike.
And my observation is.
It is critical that we extract all of the value from bringing these businesses together. So I think about it how do you make one plus one equal three so it's driving the productivity, it's ensuring a return on assets.
And it's leveraging the scale that we have and ensuring we get the return for the investments. We've made so that's that's why I mentioned earlier that that critical importance of driving that productivity and optimization from our past acquisitions and on future <unk>.
Acquisitions as they fit the strategy and they fit our return criteria.
It will certainly be a part of our process.
Okay. That's very helpful. And then just maybe a follow up for for you or maybe Jeff on ecommerce and corrugated as you increase your mix in the E. Commerce should we think about that as sort of margin accretive is it margin neutral versus non e-commerce customers and understanding it's hard to tell and the.
The market and you had ransomware and some other stuff, but do you think youre growing faster than the market or faster than your peers and the E Commerce category.
And if so why.
Alright, good morning, it's hard to tell.
And just head to head of E Commerce growth I think we're.
Continuing to grow the business and broad based.
And the margins if you look at our margins.
The packaging margins are the best channel, we have so not comparing E com to other it's how you run the business, we set up our manufacturing facilities to be highly efficient to run whatever product, we're putting through the plants as revenue per machine hour and contribution from machine hours.
Quipped, our plants to be able to maximize whatever product, we want and through those and I think we will continue to do that and keep in mind as we look at our 90% integration.
Right the.
The tons that we move into packaging are considerably better than export it at any price.
And the cycle. So we'll continue to do that and it will be overall of the volume and and the packaging, whether it's ecommerce or anything else will be accretive for us.
Okay. That's very helpful I'll turn it over.
Okay.
Our next question comes from the Cleve Rueckert of UBS. Your question. Please.
Great. Good morning, everybody. Thanks for taking my questions.
And just wanted to follow up on the on recycled fiber.
Appreciate the inflation, there, but just curious to understand what youre seeing in terms of recycled fiber supply and the domestic U S market I mean, we've been hearing reports that the the residential channel of recycling rates are much lower than commercial.
So I was wondering what youre seeing on that side of the business and if you expect it to change with the sort of.
Reopening of playing out.
Hopefully the it's Jeff.
So on the the supply demand the generation.
Generation and the typical large.
Grocery stores the box stores has been good there is less collection and the residential well the recycling centers or investing to be able to capture more of that as the coming up I think what's really driving the demand now with some of the startups the robustness of the business the startups of some of the research.
Michael Mills sort of getting up upward pressure on that and then.
Export into the Asia, India area, not China, but it's all the places around China were also strong and robust because of the global.
The economy and for the.
Packaging paper right now with some strong everywhere. So that's really what's putting some of the upward pressure on the pricing.
Okay. That's clear and then I just wanted to follow up and something from the earlier on in the prepared remarks, and you mentioned the customers and containerboard are seeking low basis weight products.
And wondering if you could give us a sense of it.
Some color on who those customers are and what maybe besides sustainability is driving that shift.
Sure, It's launched just low basis weight, it's really well.
Lower basis weight split with the strength properties.
And that's what the Florence investment and do so you have better strength of news out of lower basis weight, so less fiber definitely lower costs of sustainability pledge, but its really performance. Thereafter, so we do expect to performance and it depends on the end use market so below the lower basis weight.
And you can put and some of the e-commerce markets. Some of the less industrial and then we have a great portfolio of diverse products and so when you look at our.
Protein or produce Theyre looking at 100% version of heavier weights semi chem mediums that are heavily weighted so it's really about the full complement of products across the basis weighted and we're really well suited across our system to be able to supply whatever our customers need.
Got it that's clear thanks, very much and good luck this quarter.
Thank you.
Our final question comes from Adam Josephson of Keybanc. Your question. Please.
Thanks, and David Best of luck and your new role and look forward of working with you as well. Thank you Adam.
So just two on to partner on cap allocation one as of.
Others have asked about M&A and the Companys M&A history. So as a result, you have boxes folding cartons distribution you are be Brazil, and I'm. Just wondering how you think about the necessity of of all of these businesses. If there are areas of pruning or do you think that the company as <unk>.
Currently constructed as the REIT business back and then Relatedly, if a big Act.
Acquisition opportunity were to come up would you pursue it or are you really.
Would you much preferred it to be more balanced in terms of buying back stock every so often.
Creasing the dividend and then select of perhaps bolt on M&A.
Instead of large scale M&A has and has been the case and in recent years of the company.
Okay. Thanks, Adam.
Look at it a couple of ways.
The first one is ensuring that we are really dialed in on our strategy and.
And our portfolio and going through that process now.
The assess what our strategy and portfolio looks like as it relates to our products our markets our infrastructure and our footprint.
Really.
How do we best serve our customers how do we provide the most value for our shareholders, but also there's an opportunity to truly be differentiated from our competitors. So bringing that all together is extremely important so I'll probably be able to be in a better position over the next.
Coming months.
The share a lot more detail on that.
And when we come out of that we will be extremely well aligned as an organization what our path forward as to our strategic.
<unk> Foundation, and then from there and we will just be relentlessly focused on executing to our strategy.
And then as far as M&A.
Goes.
It would tie right into the strategy so.
I think award and the team have done a phenomenal job deleveraging. So our balance sheet is strong and if the right opportunity came up that met our strategy that met our return criteria. We will look at it but we're going to dial in and not shift from our strategic platform.
Makes a lot of Dave.
Thank you.
And ladies and gentlemen, this concludes today's with rock company second quarter of fiscal 2021 results Conference call. Thank you for participating you may now disconnect.
Okay.
[music].
Okay.
[music].
Yes.
Yes.
[music].
Yes.
[music].