Q4 2021 Westrock Co Earnings Call
Ladies and gentlemen, good morning, and thank you for standing by at this time I would like to welcome everyone to the West Rock company fourth quarter 2021.
Conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question at that time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question press the pound key.
I would now like to turn today's call over to Mr. James Armstrong. Please go ahead.
Good morning, and thank you for joining our fourth fiscal quarter 2001 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 dry dock.
Com or via a link on the application you are using to view. This webcast with me on today's call are West Rock's Chief Executive Officer, David Sewell, Our Chief Financial Officer Ward, Dickson, and Pat Linder, President commercial innovation and sustainability.
Our incoming CFO Alex Pease is also in the room with US today. Following our prepared comments, we will open the call for a question and answer session.
During 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 discussed during the call. We describe these risks and uncertainties in our filings with the SEC.
SEC, including our 10-K for the fiscal year ended September 32020.
We will also 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.
That said I will turn it over to you David.
Thank you James in a moment I'll walk you through our performance in the quarter full year and our outlook for fiscal 2022 as we currently see it.
But first I would like to make some personal observations as we approached the end of the calendar year.
It is clear that west rock is a great company with 50000 dedicated employees, who worked tremendously hard every day since.
Since I joined West Rock I've had the opportunity to dig into the business and now have a much clearer picture of both the challenges and substantial opportunities for our company.
We will outline our vision for the future in greater detail at our Investor Day on February 24, it will be taking a number of important steps between now and then to set us up for greater success in the future.
Already there are a number of things that are clear to me to start our business has been and remains very strong.
West Rock serves customers in a wide range of end markets with the broadest portfolio of packaging solutions in the industry and.
And this provides us with greater opportunity and flexibility to focus on growing markets, where our differentiation is valued.
Looking forward, we have to be more efficient we have to accelerate our innovation efforts and we have to move faster and focus on our core strategy and we are doing just that.
Now turning to the fourth quarter, we achieved record sales growth in a dynamic environment.
I want to thank our west of our teammates for their continued hard work and dedication to serving our customers.
In the quarter sales of $5 1 billion were up 14% year over year.
Adjusted segment, EBITDA also improved significantly rising to $878 million or 22% year over year and adjusted earnings per share of $1 23 increased 68% compared to prior year.
In the quarter, we realized higher volumes, along with higher pricing, which more than offset the year over year inflation.
We updated our guidance in September for the fourth quarter and achieved a bit better than we said we'd do.
Packaging sales increased by 8% year over year, driven by the implementation of price increases across our business.
Packaging volumes were down one 6% year over year with box volumes down 1%.
Labor shortages and supply chain issues caused disruption in our production and shipments to our customers. We are making all possible efforts to improve these conditions, where we can.
Paper volumes increased 13% year over year on strong demand across all grades overall inflation was higher across the industry. The widely anticipated and therefore results came in at the low end of our guidance.
This inflation was driven by increased costs for recycled fiber and Virgin fiber and natural gas.
Our corrugated adjusted segment EBITDA margins of 18, 4% increase sequentially and year over year.
The Brazil business generated 35% EBITDA margins, driven by strong demand and the positive impact of the ramp up of our trade spot Hot mill. After the completion of the expansion project.
Our consumer packaging segment performed very well with adjusted segment EBITDA margins of 15, 9% up 220 basis points from prior year and 40 basis points sequentially.
Overall West Rock adjusted segment EBITDA margins of 17, 2% were up 110 basis points versus prior year and 40 basis points sequentially.
This adjusted segment EBITDA includes $5 million of proceeds from business interruption insurance.
In the quarter, we generated adjusted free cash flow of $372 million.
As part of our balanced capital allocation strategy, we repurchased $122 million of stock and redeemed $400 million of bonds that would have matured in March 2022.
Cost inflation cost inflation increased at higher than normal levels throughout the year, our implementation of the previously published price increases more than offset inflation for fiscal 2021.
The latest August containerboard published price increase is currently being implemented.
We are also in the process of implementing published price increases and Kraft paper and realizing higher pricing in export containerboard.
Consumer price flow through throughout and across all grades will continue into fiscal 2022, including the implementation in the most recent published price increases in October.
As a result, we expect price realization to more than offset inflation to an even larger extent in fiscal 2022.
Fiscal year 2021 was a year of opportunities as well as challenges demand was very strong across across most of our end markets and our teams stepped up to meet the needs of our customers.
Net sales for the year increased to $18 7 billion.
And we reported adjusted segment EBITDA of $3 billion.
Net sales and adjusted segment EBITDA were both up an impressive 7% year over year adjusted earnings per share of $3 39 was up 23% and we generated record adjusted free cash flow of $1 5 billion.
We also hit our net leverage target of two and a quarter times to two five times ending the year at 238 times.
Looking forward, we have momentum entering fiscal 2022, we have a strong balance sheet and our strategic investments are now ramping up and are set to generate significant benefits in 2022.
Our innovation pipeline continues to grow and we have reached an annual run rate of more than $280 million of sales from plastic replacement opportunities we.
We are well positioned to help our customers with integrated packaging solutions that help them grow their sales reduce their risk and improve their sustainability.
Now turning to slide six we generated $1 5 billion and adjusted free cash flow in fiscal 2021.
The sixth straight year that west rock has generated more than $1 billion and free cash flow.
As we have shared before our core capital allocation principles are very clear.
We plan to reinvest in our business and maintain a sustainable and growing dividend.
We will opportunistically repurchase shares and consider strategic investments and acquisitions. When there is a clear line of sight to generate attractive returns on invested capital.
Our actions aligned with this strategy during fiscal 2021, we invested $816 million into our business through capital investments that maintained our asset and support our growth in the future.
Given our consistent cash flow generation over multiple business cycles, we increased our dividend raising it 20% in May and then again as announced in October for a total increase of 25% since February.
We further strengthened our balance sheet as we reduced adjusted net debt by $1 3 billion to.
To $7 7 billion and returned to our targeted leverage ratio.
We repurchased $122 million of stock or two 4 million shares.
As noted earlier, we completed our investments at our Florence and trades by Hot Mills in fiscal 2021, we will continue to realize increasing benefits of these investments as we move into fiscal 2022.
And as we enter the new year, we remain disciplined in our capital allocation strategy and are committed to retaining an investment grade credit profile.
Yes.
Overall demand remains strong as we have highlighted supply chain challenges negatively impacted our production and sales volumes.
Looking at our markets, our demand for food and beverage products make up almost half of our packaging volumes.
Within food and beverage retail food demand continues to be strong with COVID-19 related market gains continuing.
Foodservice trends are improving especially in quick serve and fast casual. Although these channels are experiencing ongoing labor challenges, which are impacting total consumption.
Volumes in the retail and E Commerce channel were stable year over year.
This channel makes up approximately 13% of our packaging volume and our E. Commerce remains a key driver of overall box demand.
The holiday buying season should be lengthened due to supply chain disruptions.
We anticipate total projected growth rates to be in line with our overall fiscal 2022 expectation.
Sales to the beauty and healthcare markets are 12% of our packaging volume. These markets were significantly impacted by the pandemic and they continued to recover as markets reopen.
Our broad mix of end market participation enables us to remain resilient in the face of uncertainty and our capabilities and manufacturing footprint allows us to quickly pivot to meet our customers' needs.
We will continue to grow our packaging business driven by our unique innovation portfolio and our ability to design solutions for our customers that optimize primary secondary and tertiary packaging.
Moving to slide eight one of the biggest challenges many of our consumer brand customer space is a demand for more sustainable packaging.
<unk> is helping these customers meet this demand through our innovative materials science and design capabilities.
This slide includes a few of our most recent customer partnerships, which range from designing plastic free packaging to machinery that produces shelf ready recyclable packaging that helps reduce labor costs and meet sustainability goals.
Tim Hortons recently announced our partnership to test, a recyclable and compostable hot beverage cap.
We look forward to this work with a valued customer to move the recyclability of Cups.
Sure.
And these are just a few examples that have generated our current $280 million run rate of incremental sales from plastic <unk>.
Plastics replacement.
We continue to believe this opportunity is in excess of $500 million incremental sales annually.
I'd like to highlight a few of our award winning packaging designs on slide nine the.
The paperboard packaging Council recently held our annual awards and I am pleased to share that we won the sustainability award of the year for our partnership with Coca Cola Europe, Europe Pacific partners on their use of west Rock's can color in the product packaging.
Ken caller is a durable paperboard based multi pack solution for cans and have performed incredibly well throughout the supply chain we.
We also won 12 additional awards for sustainability innovation and design. These awards are great recognition of the outstanding work of the West rock team.
Turning to slide 10, and our financial guidance for the first quarter 2022, we continue to successfully implement all previously published price increases.
We expect sequential cost inflation, driven by higher natural gas diesel and recycled and Virgin fiber costs.
This commodity cost inflation combined with our seasonal increase in healthcare cost is forecasted to be approximately $100 million higher than the fourth quarter.
However, the good news is that we expect the flow through of the price increases that we are implementing to more than offset this inflation.
And due to delays in mill maintenance earlier in fiscal 2021, along with our originally planned outages. We have approximately 200000 tons of scheduled downtime across our system that will negatively impact earnings by approximately $75 million.
We have 10 major mill maintenance outages in the first fiscal quarter.
One of the largest amount in one quarter and west Rock's history.
These assumptions combined with three fewer shipping days and the normal seasonality in our consumer business results in forecasted adjusted segment EBITDA of $660 to $700 million.
And adjusted EPS of <unk> 56 to <unk> 67 per share.
In fiscal 2022, we expect solid demand across most of our end markets and continued flow through of previously published price increases.
We expect a record first fiscal year in sales and adjusted segment EBITDA.
We anticipate some offset as a result of continued commodity input cost inflation.
We fully anticipate the implementation of previously published price increases to outpace inflation.
We also expect productivity to be unavoidably affected by ongoing supply chain challenges and higher labor costs that may persist through the fiscal year.
Our planned mill maintenance outage schedule declines throughout the fiscal year, but will still be approximately 100000 tonnes higher than in fiscal 2021.
Given these assumptions we forecast adjusted segment EBITDA to be in the range of three three to $3 $7 billion. This range is driven by varying levels of commodity inflation.
Okay.
Since the formation of West rock, we have been able to grow sales earnings and adjusted free cash flows across various business cycles and attractive compounded annual rates, we have a resilient business model, which was reinforced with record adjusted free cash flows in fiscal 2021 in the face of many.
<unk>.
Our outlook for fiscal 2022 continues through our marketable trend of growth in sales and adjusted segment EBITDA as well as strong cash flow.
With the industry's broadest portfolio of paper and packaging solutions, we can bring unique value to our customers and our shareholders.
As we turn to fiscal 2022, I've decided to update our reporting structure into three new segments packaging paper and distributions.
As we move forward with our strategy this new structure will better align our reporting to the way we will be running our company and provide clarity into the performance of each area.
Our packaging segment will include our converted packaging businesses that serve diverse end markets with attractive margins.
This segment is well positioned for future growth fueled by west Rock's unrivalled capabilities.
<unk> has an unmatched portfolio of sustainable packaging solutions and the ability to drive innovation that helps our customers critical challenges.
As market trends evolve in this dynamic environment West drop is uniquely positioned to adapt to these trends and our customers' changing needs.
The paper segment will be comprised of our external paper sales, we have strong customers in our attractive domestic containerboard and paperboard businesses and we will continue to partner with these customers.
And as we do this we will seek to reduce our exposure to the export containerboard and specialty SBS markets. We are focused on driving cost reductions across our newly integrated supply chain and investing to improve the competitiveness of our mill system.
And finally, the distribution segment will be made up of our victory packaging business. This differentiated service solution is an important channel for west Rock's products the.
The business provides local warehousing and distribution services that enhance efficiency and provide flexibility in serving our customers.
We believe these new segments more closely align with our strategy and the way we will run our business going forward I look forward to sharing more information on these segments. When we report in this format in the first quarter.
As we look to the future we are investing in innovation with expansion of our research and development teams to bring an enhanced focus on innovations such as improvements in materials science, converting and machinery and automation.
Growth in digital technology, and how smart packaging can drive sales and brand engagement is also an area on ongoing development at Westwood.
We are also building a sales excellence platform that leverages, our broad and differentiated portfolio that will bring all of these solutions to customers in a way that fully leverages the power of the West Rock enterprise.
The opportunities for West rock are unrivaled in the industry and I look forward to all of that is ahead.
And as I wrap up today I would like to take this opportunity to thank ward Dickson for his contributions to the success of West rock.
As CFO Ward has been instrumental in the growth and development of our company overseeing more than 20 mergers and acquisitions, including the merger of <unk> and rock Tenn, the spinoff of <unk>, the sale of our home health and beauty plastics business and the disposition of <unk>.
Our land and development business.
<unk> benefited from his assistance as I joined the company greatly and know we will all Miss him here at Westwood Ward I wish you the very best in your retirement.
At the same time I also want to welcome Alex Pease West Rock's incoming CFO, who is sitting in with US today, Alex I'll look forward to working with you as well.
We have great opportunities to grow our company and improve margins, while providing value to our customers teammates and shareholders. We are working to leverage the power of the enterprise and making the investments needed to lead in sustainability and accelerate our innovation platform.
As we do this we remain disciplined in our capital allocation strategy and we will look to use our strong cash flow to create shareholder value.
As we implement our strategy, we have multiple levers to create value and grow sales and earnings. We are excited about the opportunities ahead and look forward to further discussing our strategy and long term goals at our Investor Day in New York on February 24th.
Fiscal 2021 was a great year for West rock I want to thank our 50000 team members for dedication and effort and I look forward to the great things ahead for our company.
That concludes my prepared remarks, James we're now ready for Q&A.
David Operator May we take our first question. Please.
At this time I would like to remind everyone in order to ask a question press star followed by the number one on your telephone keypad. Your first question comes from the line of George Staphos with Bank of America. Your line is open.
Hi, Good morning, this is actually John Babcock sitting in for George Staphos.
And I guess, just starting out it'd be great. If you could provide some of the key assumptions that are driving of our upper ends of your guidance range and then I'll kind of go from there.
Hey, John This award.
I'll start with quarter Q4 to Q1, and then I'll try to walk you through some of the key assumptions for the range that we provided for.
The full fiscal year and FY 'twenty two.
So.
The key the primary key drivers for Q1, as we have the benefit and the pricing flow through from the <unk>.
Increases price does in fact outpace inflation, we are seasonally lower.
Volumes in our corrugated or consumer packaging business, we have three fewer shipping days in our corrugated packaging business. This is the largest maintenance outage quarter. Since the merger we have 200000 tonnes of maintenance outages in the quarter I think we're doing it across 10 mills and boon.
Our corrugated and consumer mill system that accounts for $75 million worth of incremental costs from Q4 to Q1.
And then we highlighted in the script that we have approximately $100 million worth of increased costs from Q4 to Q1, and thats driven by higher natural gas higher Virgin fiber because of the wet weather the increases the full quarter increases in OCC that we had.
And then we always have in our fourth calendar quarter or our fiscal first quarter seasonally higher healthcare cost because everybody's passed their deductibles and they are trying to get.
Discretionary health care and at the end of the year and then finally the supply chain challenges that we've had.
<unk> to hamper productivity, if you look at.
The impact of the outages and some of the startup costs that aren't capitalized and amortized over our outage periods, but are actually incurred in the quarter plus the challenges that we've had in moving material both around our system from our mills to our converting operations and to our customers that our productivity has been.
It will be lower in Q1 relative to Q4. So those are the primary drivers and again the quarter represents.
About 19% at the midpoint of the guidance for the quarter represents about 19% of the.
Of the total year mid four point of EBITDA last year, we generated about 21 or 22% of our full year in the first quarter. So we always have a seasonally slower start in the first half of the year relative to the second half of the year and our earnings generation now.
Now if that's okay, I will flip to the full year.
And walk you through the key elements of our guidance for the full year. So the midpoint of the guidance for the full year reflects record sales and EBITDA and strong cash flow generation and what we are assuming as the full year impact and flow through of previously published price increases and that.
Price increases will outpace inflation in fact, the biggest significant driver of the earnings growth from year to year is the price and inflation relationship.
So we will have the full year impact of all these published price increases across all of our grades we have solid demand across both paper and packaging and we'll have growth in our core markets. We have the ramp up of that.
Capital investment that we made in Brazil, and its impact on volumes, both in our ability to sell external paper and to feed the ramp up of our portal Felice box plant.
Inflation really reflects the full year impact of the rapid increases that we had in fiber and energy cost during the second half of fiscal 2021, So I'm going to give you some very specific.
Assumptions that we've got in the midpoint of our guidance related to OCC and some other cost and I think everyone needs to remember OCC exited at fiscal 'twenty, one at $80 per ton higher than the average for the full year.
And so in our midpoint for OCC, we assume a $166 per ton for the full year at a $60 per ton increase from FY 'twenty, one and our quarterly profile Q1, we assume a 175 bucks a ton which is up $8 a tonne from Q4 and Q2 and Q3, we see.
Some reduction of $165 a ton and then in Q4, we see $160 a ton so the recycled fiber inflation is.
On a year over year basis is more than.
$325 million is approaching $350 million for the full year and then natural gas is a similar story with September is cost.
As we exited FY 'twenty, one there are 40% higher than the average was for the full year. So the current strips reflect a 50% increase versus FY 'twenty. One. So this is a material.
Cost inflation element on a year over year basis, and then Virgin fiber chemicals and transportation costs, all ramped up during the second half of the year and we.
We do not see any real changes to the supply chain environment until we get it.
Into our fourth quarter or towards the end of the calendar year in FY 'twenty two.
So again I think the key driver is we're going to get sales growth from price and volume price outpaces inflation supply chain disruptions continue and will impact productivity.
Investments in Brazil ran.
Our ramp up and we start to get the benefits of that and then we also get the benefit full year benefits from our investment in Florence.
And then finally I'll just really quickly talk about cash flow for the full year as well.
Operating cash flow is flat on higher EBITDA, but thats really driven by the benefits of the pandemic action plan and their contribution to operating cash flow in FY 'twenty, one I'll remind everybody that we may or payments for.
Our 401, K match, and our short term incentive where made in stock during FY 'twenty, one where they've returned back to cash and then the care cares Act payroll deferrals for which we got a deferral in FY 'twenty, one that now flips and we actually have to make those payments our first payment in FY 'twenty.
Two and then we are assuming that we're going to invest invest $1 billion in capital investments in our system and Thats what drives the.
The cash flow generation year over year.
Got you that's very helpful.
And then just kind of following up from some of the points on growth. Just overall are you expecting volume growth in both corrugated and consumer packaging to be positive in 2022, and then also if you could provide some update on how demand trends are so far in the fiscal first quarter that'd be great.
Yes, so I'll do the full year at the midpoint of our guidance assumes that we have growth.
Across both our coordinated and consumer packaging and paper volumes increase as well and that we get the benefits from the ramp up in our Brazilian business and then I'll turn it over to Pat do you want to talk about any end market trends are fairly mature and trends here. So thanks ward for that so overall, our market conditions going into the fiscal year.
There are generally stable and healthy across most segments.
Economic fundamentals are pretty solid 2002, GDP is expected to be about 4% and durable and non durable goods are also showing positive trends consumer spending is strong. So we feel pretty good about that for the for the full year as ward mentioned in the first quarter, we do have the fewer shipping days impacting especially corrugated and.
The seasonal slowdown and consumer packaging, which happens every single year.
But as we look at highlights for the full year on continued growth in e-commerce with the return of brick and mortar results is certainly a tailwind for us.
The online and e-commerce market is really becoming a little bit learn between the online and brick and mortar because you've got to buy online and pickup in store pickup at curbside and so that's kind of blurring, which one is really e-commerce versus brick and mortar, but we do see growth there we see some important colgate reopening dependent.
Trend is duty free retail and.
In the travel market with international travel will return high end spirits beauty and cosmetics Covid task it depending on how things sort out around the world with Colgate will also have an impact foodservice, we do see strength in that especially with <unk> and certainly sporting events and concerts coming back open.
Have returned cup stock to the pre pandemic levels commercial print, which was down last year has also returned to pre pandemic levels. So we feel really good about that and David mentioned in his.
In his introductory comments that the center of the store and packaged food and beverage and still holding the pre pandemic gains so up significantly over a two year trend when we look at the start to the launch.
To the first quarter here and especially in corrugated box I'll make just some brief comments.
Traditionally we see the holiday season picking up and we see we're starting to see some of that but the comps year over year are pretty difficult.
The peak last year and the labor challenges that we had talked about in August and September certainly impacted us. We think the worst is behind US there and we saw a sequential improvement as September was better than August and October is better than September operating rates across the industry are high backlogs are strong in.
While there remains some uncertainty in the supply chain issues, we've talked about we're generally positive on seeing sequential improvements in our corrugated box business in the quarter.
Okay. Thank you I'll get back in the queue.
Your next question comes from the line of Mark Wilde with Bank of Montreal. Your line is open.
Okay.
Thank you David I wondered if you could start off by just talking a little bit about kind of prospective investments across the mill system.
Highlighted wanting to drive down costs, I am, particularly interested in what you might do with both the containerboard Mills and then the bleached board mills, because that market is undergoing a lot of <unk>.
Translation.
Okay.
Yes, Thanks, Mark I would say as we look at our.
Mill system as you know earlier this year, we consolidated both our corrugated and consumer mills and do it under one leader and we're already starting to see some nice efficiencies from doing that and.
And what we're doing right now is we're really assessing all of our assets to make sure we have the best assets in the market.
Assets that are underperforming, we're going to address it.
And we're also going to innovate and invest where we can make them better.
So I think as we announced our new structure changes, we focus on the high value packaging segments the paper markets.
That we want to focus on the domestic side, we're going to make sure we have world class assets that align to that.
The end of the markets, we want to grow.
And as we mentioned before were also looking at how do we provide more flexibility into our mill system to adapt to the broad portfolio that we have so we can take advantage of market trends.
And as you 0.2 different grades.
Where there's where there's growth and then where we can deemphasize grades where we don't want to grow. So that's how we're thinking about it and we have multiple productivity programs underway right. Now. So we really believe that this focus on driving cost out world class asset.
Higher productivity.
Driving grades.
That match the strategy of where we want to grow is going to help give us an advantage as we move forward.
Okay, and then just as a follow on could you just address any perspective.
Considering ports incentive programs, both at the operating level and at the executive level at West Rock.
I apologize Mark you cut out a little bit with your question I just wanted to confirm your question is what incentive programs, we're driving at our mill level as well as our leadership level.
Yes, I'm interested in any changes that we might see.
Under your leadership.
So.
As we go into the new year.
We're really focused on a couple of things and we're going to drive that and our compensation programs.
We are going to focus on margin expansion on EBITDA.
And EBIT growth top line growth and we also want to maintain our cash flow the strong cash flow that we generate so from a leadership level.
That's how we're going to be measured we're also going to hold ourselves accountable.
Two important goals around safety and diversity and inclusion and then at the mill level, we're going to we're really going to drive productivity and we're going to hold.
Our cost basis at each mill too.
Mill leaders and we want our sales teams to be recognized for higher margin growth organically. So we are making changes to our comp plans and theyre going to align to our strategy.
Okay very good I'll turn it over.
Thanks.
Again, if you would like to ask a question press Star one on your telephone Keypad. Your next question comes from Phil <unk> with Jefferies. Your line is open.
Hey, guys ward. Thanks for all the great help through the years and congratulations.
Thanks, Phil.
Jim.
Yeah, I guess first off a question for you David inflation and supply chain headwinds had been more pronounced than almost anyone would've expected coming into year and it's not unique to us rack to all your peers are you seeing it.
<unk> been able to get our fair value <unk> been able to get a fair amount of pricing. This year, but do you think you've got enough value for your products and services and how much more pricing neulasta.
Elasticity do you see in your business.
So if you look at what this team has been able to do on published price increases we are outpacing inflation. So we feel very good about that.
We're focused on Phil is value pricing with our customers.
To your point the World has really changed from a supply chain standpoint, and the way our customers look at supply chain.
And solutions that we can provide our.
Changing so what they want is.
Supply assurance and we have a broad portfolio.
Primary secondary tertiary.
Packaging solutions, the other thing with labor challenges the demand, we're seeing from our automation and machinery business is extremely high we were able to reduce labor for our customers, we're able to be more efficient and the other thing that we're really driving is the elimination of waste we have a great portfolio.
<unk> is sustainable.
Products.
And we highlighted them a little bit on at the beginning of the call.
The other thing that we're trying to do is with our design teams is how do we design and eliminate waste we have box on demand.
We have great solutions so.
Our customers want to partner with us more than ever.
Our supply chain assurance innovation, so they can connect with their customers, which is why we're investing and sustainability.
As well as the elimination of waste and I think our portfolio is truly unique and positions us extremely well.
To be a leader in the industry.
That's super helpful.
I guess when you think about your 2022 guide I. Appreciate you gave some color that you're expecting growth in consumer and corrugated.
But any more color around that just because the consumer segment just from a growth standpoint has been a little choppy, but you've obviously made some big strides in terms of pivoting to some of these growth areas. The helpful kind of give us a little more color on how you think about that growth opportunity any way to kind of bucket some of the gains you're seeing on the sustainability front.
So what I'll do is I'll talk very high level them and turn it over to Pat on providing a little more specificity.
Thing about the consumer business as you really dig into it is yes.
You have to look more than volumes.
It's also the solutions, we're providing in the market share. We're gaining there is a lot more customization that's going on there is a lot more smaller runs that are going on there's a lot more high value high graphics.
That works so.
We really believe we're gaining market share in this segment.
It continues to grow we've consolidated our consumer and NPS business and we're already starting to see efficiencies there and Pat maybe you can just talk a little bit about some of the wins, we're seeing especially on the plastics replacement side in the segment sure great. Thanks, David and gathered consumer business and <unk> seen some nice margin enhancement over the last.
Several quarter as David mentioned were almost 16% EBIT margins in the.
It's up about 220 basis points year over year, and 40 basis points sequentially. So good momentum there and a big part of that an important part of that and in addition to productivity and some of the changes that we've made in the footprint and the products are producing at EBITDA, but a big part of that is certainly what we're seeing on organic growth and sustainability is an important driver.
Connected packaging and digital solutions are also important in automation is critical there. So we've generated up to this point a run rate of about $280 million worth of plastics replacement alone as David said earlier thats going to be over $500 million annually annually that will get to in the next few years.
We've shared a number of those examples in the past and we're coming out with new offerings. We've got Tim Hortons Cup trial, and that's not just a paperboard solution thats actually producing hubs for us for the first time and we have 11 patents on that application so great opportunity for us to have a sustainable generic sustainable in terms of <unk>.
Long term economic value as well as the environmental benefits. We've talked about we also have launched a new at pack Expo. We just launched a new fiber base package for frozen food and this is one that I really want to highlight because it's perhaps one of our best examples coming forward of optimizing primary second.
Dairy and tertiary packaging, which is something that only <unk> can do nobody else has a fiber based packaging solution that can do that and specifically what we're doing as we're making a fiber based ball that sustainable recyclable and at some point composed to bowl, we're wrapping that ball and a secondary package and then we have a shelf ready.
Tertiary package corrugated.
Medium to go around all of that and this is all automated.
From the beginning until the end and so when you look at what we can do.
<unk> design materials science digitally connected solutions as well as automation machinery robotics. This is a tremendous advantage for our company overall and it's going to continue to deliver growth for the consumer segment, yes.
Pat I think you answered that perfectly well. So one other thing I would add is with travel opening up we're starting to see expansion in duty free.
And we're also starting to C&I uptick in healthcare.
<unk> as well so our consumer segments, we believe are definitely going in the right direction.
Okay.
No David will dose dynamic to have like a favorable mix impact in your consumer business and then preceding youre not looking as DSL volumes, you're selling a solution approach one of your bigger competitors on the consumer side. We've generally said our business has been historically flat flattish, but with some of these gains on the sustainability side, we see line of sight.
All it.
Low single digit growth are you guys kind of thinking about it in a similar fashion as well.
Yes, I think Thats I think Thats, well said I believe.
They were really going to win in this segment is the high value applications customers that want to partner with us.
And it's just the on slot.
I'm, saying that broadly, but the pickup in the number of customers that want innovation in plastics replacement in their portfolio.
And to partner with us to help design that and automate it where we can that's where we want to focus.
The very transactional pieces of this.
As a lower focus for us and it's the partnerships.
As high value applications.
Thanks, a lot really appreciate the color.
Thanks, a lot.
Your next question comes from the line of Adam Josephson with Keybanc. Your line is open.
Thanks, Good morning, everyone and ward congratulations on your retirement, all the best to you in a pleasure working with you.
And the same is true with you Adam Thank you very much.
Sure.
Pat I know you were asked about this earlier, but can you talk about your your shipments in October just more quantitatively a year over year percentage change in and for that matter, what youre expecting in the December quarter, just in the context of your expectation that fiscal 'twenty two shipments you expect will be up.
Yes.
For the question and so just to go back to the corrugated box shipments in the quarter we have.
We had labor challenges in August and September and supply chain challenges, we've talked about before we think that was a bottom. So the worst is over we are seeing an improvement from August to September to October.
In our seasonally stronger.
Obviously in the quarter and I cant give exactly forward looking guidance in that but we will expect to continue to see sequential improvement in the box demand going from our fiscal fourth quarter into the into the first quarter again operating remains rates remain high backlogs are strong there is always going to be especially right now some uncertainty in month two.
And how things sort out because of the supply chain and labor challenges, but overall, we are we are pretty confident we will see.
The sequential improvement and Adam one other thing I would just add would be the tough comps that we have year over year from last year. So we feel very good about the demand that we have.
If you even look at fourth quarter, while our.
Box volumes were down.
If you look at the labor challenges supply chain challenges, if we could have <unk>.
Produce what we wanted to our box volumes would have been up a couple percent. So we see that momentum carrying in we're just balancing and working through a very tough environment.
Adam This is Gautam. This award I would just reiterate that our full year guidance assumes growth on a year over year basis, 22 versus <unk> 21, and I'll remind you that in 'twenty, one we had 5% full year growth.
No.
We have the the tough.
Tough compares on the Q1 ramp, but we feel confident about the outlook for the full year.
Thanks Ward couple of other questions just on on containerboard inventories, obviously for the industry as a whole they grew quite a bit in the September quarter. I was just wondering how you would characterize your inventories are they where you'd like them to be are they lower or they hire and what are your expectations.
Along those lines in the December quarter and thereafter in other words are you trying to build are you trying to reduce are you having to carry more because of the supply chain mess that everyone's dealing with et cetera.
So the way I would describe it is we knew we had a heavy.
Outage in this first quarter with maintenance and we had to delay some of that maintenance because of.
The ransomware attack and with Covid.
Contractors into our mills etcetera, So that's kind of created the perfect storm for first quarter.
Mill with our planned outages, but if you look at the inventory builds that we wanted to do we did build inventory coming into this quarter I would say it wasn't as much as we would have liked because of the demand that we're seeing so we're probably a little behind in the inventory levels, we'd like to.
But we were able to build a little bit going into this first quarter.
Terrific.
Just one last one for you in terms of the <unk> the fiscal <unk> guidance onward can you just help frame for me.
The expected sequential improvement based on the lower maintenance based on any incremental pricing from fiscal <unk> onwards.
Kind of help me with the bridge from <unk> to the balance of the year, just given the implied <unk>.
<unk>, obviously from <unk>, you mentioned I think <unk>, you're expecting to be call. It 19% of full year EBITDA, which is below obviously, what it was this past year and I think it's below previous years as well along those lines. So if you look at FY I'm going to give you. The first half second half of FY 'twenty, one and then I'll try to do.
The same thing for you from 'twenty two so for FY 'twenty, one I think if you look at the $3 billion of EBITDA.
We generated I think about <unk>.
<unk> 43, or 44% in the first half and then the rest of it in the second half what I would I would say is although our Q1 will be lower relative to the Q1 last year versus the total year I think over the course of the first half I think we're going to be at about the 43%.
If you look at the midpoint for the full year.
So the seasonal pattern first half second half the ramp up the full ramp up of port, Puerto Felice and trace Baha us.
And then.
Youll start to see I mentioned, it is not material, but youll start to see some of the some sequential declines in some of the recycled fiber cost I think that's what gives us comfort and then you've got also.
<unk> got.
The flow through of the price increases that as you know.
Consumer side of the business, they take a little bit longer than the flow through and corrugated so we'll have the.
The full benefit of the implementation of the price increases as well.
Thanks, so much for all the best.
Again, if you'd like to ask a question press star followed by the number one on your telephone keypad. Your next question comes from the line of Gabe <unk> with Wells Fargo Security. Your line is open.
Okay.
Good morning, gentlemen, thanks for taking my question.
David.
I guess, that's the analyst if you're given and should take a mile. One of the things that I was thinking about that jumped out to me.
What is your discussion about becoming more efficient and.
And I'm curious if you could pinpoint for us areas, whether it's on the SG&A front I don't know if commercial organization or operations.
Mills, where where you think I guess, maybe youre not doing a good job at this point.
And then maybe a way to try to quantify I mean, I think about.
Kind of the historical context of how west Rockwood present to us.
You have I don't know $150 million to $170 million of <unk>.
Annual non material related inflation annually.
Thank you guys. It always kind of try to offset that through productivity and im assuming that might be the case going forward, but just.
Any help there.
Sure.
Thanks, Gary appreciate it good morning chip.
There is a couple of areas that we're really focused on.
And you've probably heard me say in the past the opportunities to better integrate the acquisitions that we've made over the past several years. So I'm going to highlight just a couple of areas that I believe we're going to have a material impact on our productivity.
The first is supply chain, we recently hired a new chief supply chain officer.
Peter Anderson, who came over from comments.
That we're really excited about if you.
Go back to the way we were structured before.
<unk> businesses, we had unique supply chain.
Aspects across several of them.
So the productivity opportunity to consolidate our supply chain.
Holidayed our warehousing.
Our <unk> rate with the consolidation of our mills.
Our freight spend as you know is very high so be able to look at that we see tremendous opportunity to become more efficient in our supply chain. So that's one area that we think is going to drive material savings.
The second piece is bringing together our mills together in one organization and highlighting.
Productivity initiatives across the mill so to your point on previous.
Productivity are Peter previous productivity programs with standard inflation.
We're now pushing to.
To see how do we.
Significantly improve our productivity on top of inflation and so we have multiple projects both at our mill system as well as our conversion sites.
We've identified several areas, where we can reduce our waste to get a little bit better with our digital manufacturing footprint as far as predictive analytics improve our unscheduled downtime. So we see great opportunities. There and then the last piece I will talk about is commercial so we recently in the first phase.
Consolidated our NPS and consumer business.
We've just recognized tremendous efficiencies there we had multiple customer service teams. If you look at the backroom integration opportunities as well as customer facing opportunities, where we can go as one face with complete solutions to our customers and now we will expand that.
Our customers want to buy across our portfolio with this new world that I've talked about in supply chain primary secondary tertiary packaging.
So now we'll be more efficient in how we do that and how we service them. So it really <unk>.
Transcends across really I think our whole organization.
And we are really going to drive further productivity and cost out, but we're not going to cost our way out of this we're also going to invest in innovation, we're going to invest in digital both on the customer smart packaging side that Pat talked about as well as the manufacturing side, we think there's tremendous opportunity to modernize the company. So we get really excited about.
The opportunities a lot of those projects are underway and we will look forward to sharing more detail about them with you at our Investor day.
Thank you.
Your next question comes from the line of clean record with UBS. Your line is open.
Great. Thanks, everybody thanks for taking the questions.
Just thinking a little bit strategically or maybe even its tactically next year, but your guidance is calling for falling OCC prices throughout the year.
David you called out a few times on this call are ready to rent.
Restaurants portfolio.
I'm just curious if your strategy changes at all with certain raw material prices falling and if there are any differentiated opportunities.
That environment opens up for Wesco.
So thanks for that question.
The way, we look at and I'll just use OCC as your example, we're at about 65%, 35% from Virgin recycle mix.
But as we've said in the past we have the ability to flex.
On some of what that percentage is so.
What we what we try to do though is.
Look at it from a customer perspective versus an internal perspective.
And.
Providing those solutions to your point on the breadth of our portfolio.
They may want more lightweight grades they may want more recycled grades they may want more plastics replacements. So the word that I would like to use with our capability is flexibility. So.
The resiliency of this company is and if you look at that chart from back to 2016 to 2021, you can see through all different kinds of inflationary environments capacity environments. We've grown top line very well, we've grown our EBITDA very well and I just think this flexibility and this new world of supply chain.
Sustainability.
And innovation opportunities with our customers.
I think our footprint just has us very well positioned to respond and adapt and innovate.
Where we can drive.
Great margin expansion and topline growth.
Okay. That's clear and then I just wanted to follow up quickly on.
So the opportunity for plastic replacement.
<unk> originally called out the $280 million annual run rate is what you had achieved but then subsequently.
We were discussing a $500 million annual run rate opportunity I'm, sorry, if I missed it but what's the timing on the on the $500 million sort of target or opportunity there.
Yes. So this is Pat so thanks for that.
Looking at that over the next couple of years, we think we can get to that $500 million run rate. We have a very strong portfolio of products and projects that are coming out from small ones to large larger opportunities. So that's a pretty good run rate, we started tracking that 280.
Against this 500 in July of 2018, so it.
It started out.
And it certainly increasingly we kind of see that we're at the early stage of the growth that we'll probably see over the next several years, but in the next couple of years, we expect to get to the 500.
Okay. Thanks for the questions guys appreciate it.
Your next question comes from the line of Paul Quinn with RBC capital markets. Your line is open.
Yes, thanks very much good morning, guys you outlined at $1 billion in Capex, maybe you can just give us some details that some of the big buckets of spending.
Hey, Paul This award.
Historically, when you strip away the.
Strategic capital investments and you look at the ongoing run rate, it's about half of it.
Maintenance replacement environmental and regulatory and then half of it is the ongoing return generating projects that we have both in our mill and converting systems.
Look.
Broadly I would say.
60% of it is in the mill system about 35% of its in the converting system and then we're going to be making some investments in it.
Systems to modernize our platform.
Okay.
Okay. Thanks for that and then.
One area that was surprisingly good for.
I thought it would be a pickup was Brazil corrugated that was.
Empire than we expected just wondering how sustainable.
That achievement is and what do you expect going forward.
Full year 2002.
So it's a meaningful growth driver and it's because of the investments that we made in both our mill.
And Greenfield box plant that we made at port of fleece. So.
As we go through FY 'twenty, two I think Alex is going to be reporting to you that this is the most highest margin portion of our business and it's a meaningful contributor and we will continue to get better.
As we as we go into FY 'twenty two it's one of the growth drivers when we talked about the fact that we'll get.
$125 million worth of incremental EBITDA next year from our strategic capital projects.
The biggest driver.
Okay, and then just lastly in an environment of supply chain constraints.
The main benefit.
Owning distribution.
Well I think it's proving to be very beneficial to our customers because they are looking for redundancy in supply chain.
And.
What we're able to do is we have 65 plus distribution warehouses, we have our own fleet of trucks.
And so we're able to support our customers with that assurance of supply with quick delivery.
I've talked a little bit about a lot more customization as well as.
You heard Pat talk about a lot more brick and mortar e-commerce that needs local support so.
It's really proving to be a nice business for us with a nice value proposition.
That's growing and.
We're really incur.
Encouraged by the.
The opportunity with our customers that are looking for the ability to supply the way, we always worry, but also have the ability with local distribution with our own platform.
Alright, that's it thanks.
Thanks Keith.
Your next question comes from the line of Mike Rockland Rock Slimmed was true security Your line is open.
Thanks, very much thanks for taking my questions and congrats on the retirement thank.
Thank you.
Alex Congrats on your new role.
Thank you.
Most of my questions have already been asked.
Just two quick ones you mentioned, David that E. Commerce remains an overall driver on box and then do you mind, telling us how much ecommerce and that increased in the quarter and for the full year and what youre seeing with respect to e-commerce.
Yes.
Yes, so I'm just going to give a broad e-commerce comment, but I'm going to have Pat just walk you through some of the details on exactly on how we're looking at that.
But as we look at ecommerce.
Think it's there's a new normal.
We're continuing to see growth abroad above pre COVID-19 levels, I think consumer buying habits have changed its not an either or I think it's an and and it's both.
And so I think we're the we're seeing a nice growth is and the omnichannel piece, where theres those brick and mortars that are trying to get into more of an E Commerce channel.
And what I love about our business is our ability to differentiate.
No.
Well youll see ecommerce, sometimes those boxes that have a lot of additional aerospace in the packaging.
Really working with them on design with our automation equipment to be more efficient eliminate waste.
And Pat wanted to turn it over to you to talk about specific growth trends, we're seeing in the segment, yes. Thanks for that David So just a specific answer to your question around fiscal year 'twenty, one volume and he Congress in E. Commerce, we are up about 15% versus fiscal year 2000. So we saw good growth in that in that area.
Certainly with the supply chain disruptions and we've talked about before we saw some flattening that in the fourth quarter, but we expect ongoing growth into next year.
Congress.
Huge spike obviously in fiscal year 'twenty with the stay at home economy, but we do expect it to continue to grow in that mid teens range out into the future off of a much higher base than it was two years ago and as David mentioned, it's a very dynamic marketplace weighted on all of the different omnichannel aspect and kind.
Just to wrap up we have corrugated solutions a whole host of folding carton solutions Paperboard solutions Kraft paper, they've got digital and physical displays whether it's in the store through the ecommerce channel distribution and machinery and automation box on demand and other solutions that we then introduced Theyre really however, this market evolves in terms of the.
The mix across the Omnichannel I really believe and we really believe that we have the opportunity to provide unique solutions in this industry. So we will continue to be very important to us in the future and where we're well poised.
Great. Thanks, guys. Just one quick follow up documents and definitely David you mentioned that you updated the guidance and you stated that you expect it to be.
To be near the low end of your fiscal <unk> range.
Wound up being in the middle So I'm wondering what happened what typically occur during the last few weeks of September that caused the company to outperform relative to what you said Mr. Campbell.
Well I'll take it this award okay.
The low end of our guidance was.
$670 million EBITDA range, we did get $5 million worth of business interruption recoveries for the ransomware claim that we didn't anticipate and then the lower the.
The stronger EPS was a lower tax rate and we have some state tax planning efforts that.
It came through in the quarter that we.
That we closed out at the end of the quarter. So those are the two drivers.
Got it thank you very much ward.
Okay.
So there are no further questions at this time I would like to turn the call back over to Mr. James Armstrong.
I appreciate everyone joining the call today do you have any questions. Please reach out and thank you and have a great day.
Ladies and gentlemen, thank you for participating. This concludes today's conference call you may now disconnect.
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