Q1 2022 Westrock Co Earnings Call
Good morning, everyone and welcome to the Western Company fiscal Q1 2022 conference call.
All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
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At this time I'd like to turn the conference call over to James Armstrong, Vice President of Investor Relations.
Sir.
Please go ahead.
Good morning, and thank you for joining our first fiscal quarter 2022 earnings call. We issued our press release this morning and posted the accompanying presentation to the Investor Relations section of the website. They can be accessed at higher dot west rock dot com or via a link on the application you are using to view this webcast.
With me on today's call, our Western Chief Executive Officer, David Sewell, and our Chief Financial Officer, Alex Pease.
Following our prepared comments, we will open the call for a question 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 discuss during the call. We describe these risks and uncertainties in our filings with the SEC <unk>.
<unk>, our 10-K for the fiscal year ended September 30th 2021 we.
We will also be referencing non-GAAP financial measures during the call. We have provided a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures can be 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 thank you all for joining our earnings call today, we have a lot of new and exciting updates to communicate this quarter first I'll provide a high level overview of fiscal first quarter results. After that I'll walk through our new segment reporting structure, which went into effect this quarter and <unk>.
Blayne the rationale for this change.
Lastly, I'll update you on a broad based transformation approach, which is underway and provide examples of the significant opportunities we see to deliver a step change in performance for the business.
Following that our new CFO , Alex Pease, who will provide a deep dive into our quarterly performance for our newly organized segments and other critical financial performance.
We will then move to Q&A and answer any questions you may have.
We started our fiscal year off with a solid quarter that was in line with our expectations and within our guidance range. Despite continued supply chain disruptions higher inflation and increased absenteeism related to Covid, we executed well I want to take a moment to thank our 50000 teammates around the world.
For their dedication and hard work during the quarter for the fiscal first quarter sales were $5 billion up 13% year over year, we delivered consolidated adjusted EBITDA of $680 million up 2% over the same period and adjusted EPS came in at 65 cents per share.
Up 6.6% during the quarter. We also continued to aggressively buy back stock repurchasing roughly $100 million worth of stock, while maintaining net leverage at 2.4 times well within our desired range of two in a quarter to two and a half times.
As a reminder, the first quarter was a record maintenance quarter for west rock with a number of projects delayed from previous quarters due to Covid and the ransomware incident last year and I'm pleased to report we completed all scheduled maintenance projects safely.
Covid continues to cause disruptions impacting labor at our mills and box plants as well as further contributing to ongoing supply chain challenges. Despite these.
These challenges we are resilient and continue to execute well as demonstrated by our strong results.
Finally demand for our products across consumer corrugated machinery and other product lines remained strong and our backlogs are near record levels.
Let me now provide an update on our new reporting structure I'm on slide four.
As a reminder, western previously reported in two segments corrugated packaging and consumer packaging.
We are now reporting in four segments to provide greater visibility into the integrated performance of our packaging businesses, while we focus our merchant paper business on critical strategic markets as well as providing material for the packaging converting businesses.
This new structure will help us highlight the performance of all elements of our portfolio.
We reorganized into the following segments corrugated packaging, which includes integrated corrugated converting operations and represented 44% of first quarter sales.
Consumer packaging, which includes integrated consumer converting operations and accounted for 23% of first quarter sales.
Paper, which includes all third party paper sales and made up 27% of first quarter sales and distribution, which includes our distribution business, which is roughly 6% of sales.
As we reported in our press release, we will see clearly the benefit of vertical integration between our mills and converting businesses as well as the value of a diversified portfolio of assets.
More importantly, this new structure will further enable an enterprise sales approach to drive growth as well as greater efficiency and synergy to improve profitability I will describe this in more detail shortly.
In our press release and located within the quarterly feature section of our Investor Relations website. We have provided eight quarters of recast results to help you better model performance going forward. Let me now spend a few minutes on where west rock is today and where we are headed.
Turn to slide five.
We have been driving a comprehensive strategic review of our markets and our go to market approach in parallel we have taken a hard look at all our assets to evaluate their merits and their position in the portfolio. While also evaluating our ability to drive to a greater level of operational excellence and <unk>.
<unk> ability and we're already making progress we've made significant strides in the integration of our consumer business and have implemented productivity improvement plans across the company.
And the restructuring of our mill assets into one organization is already providing greater production flexibility across our footprint.
I will share a more fulsome perspective in the future, but suffice it to say we have significant opportunity we've not fully integrated many of the acquisitions. We have made we need to turbocharge, our digital strategy not just in the back office, but also our manufacturing and innovation, we have elements of the portfolio that are noncore.
Tour integrated strategy, and we are inefficiencies that must be addressed our profitability and our rois C are not where they need to be this is going to change as we implement our transformation plan.
Importantly, our senior leadership team is aligned and has mobilized to drive this change together. We have developed this transformation plan and have shifted into execution at a high level. Our plan includes three overarching priorities.
Second drive a step change in our margins through pricing excellence productivity mix management and cost control. We are implementing our new west rock operating system that Standardizes, our systems and utilizes our digital tools to identify options to drive efficiency and do.
Things even better.
And third generate consistent ROE I see in excess of our cost of capital through disciplined investment operational excellence and portfolio optimization, where appropriate while maintaining strong free cash flow significant balance sheet strength and prudent capital allocation.
Let me provide an update on each of our three strategic priorities.
Our growth agenda is designed to maximize the value of the complete packaging solutions only west rock can provide.
Our combination of consumer and corrugated packaging paper machinery and access to distribution is unique in the industry and a strategic differentiator.
It enables us to sell integrated solutions that are valued by our customers and partner with them to ensure that they are responsive to macro trends such as sustainable packaging.
With our portfolio, we have the capability to deliver full packaging solutions that are unmatched in our industry.
General Motors is a great example of this and we were just recognized as their supplier of the year with.
With G. M. We have partnered to provide options for brand security that help combat counterfeiting issues in the supply chain process.
We produced their primary parts packaging and secondary corrugated packaging using our global manufacturing footprint to ensure they have the right supply in the right place when they need it.
Innovation in plastic replacement continues to be a growth driver.
We also can anticipate customer needs and introduce new products that support enhanced sustainability.
This quarter, we announced a partnership with Grupo Gondi in Mexico to provide our can collar product to a b I, Mexico Grupo Modelo.
This expansion of can collar is an exciting development and one that demonstrates the growth potential of our sustainable products.
Our integrated one enterprise approach is driving value and we're continually working to maximize this value while minimizing our exposure to lower value markets to that end. We've completed the first phase of our portfolio analysis and I look forward to sharing more about this soon.
Let's now turn to how we were going to drive margin improvement.
Historically, our margins in corrugated had been 18% and 16% in consumer improving both as a key priority as we begin our journey of developing an enterprise wide operating system. Our first focus has been quantifying the opportunity and identifying areas to tackle and recent.
Months, we have standardized the measurement methodology in our operations and have identified significant opportunity to expand capacity without adding capital.
We've evaluated our asset footprint and see warehousing and logistic opportunities that we are optimizing.
We are also investing in our business to increase our level of integration and introduce automation predictive analytics and other cutting edge digital capabilities into our network.
To that end, we are constructing a state of the art corrugated converting plant in the Pacific northwest that will be cutting edge and efficiency and throughput.
This is just one example of many that we're excited to share.
Please now turn to slide eight.
We are aggressively focused on improving our oh I see in excess of our cost of capital.
While improving our productivity is an important part of the equation capital deployment and capital utilization are equally important to our initial diagnostic work, we have identified opportunities to expand capacity without adding capital we have looked at our portfolio and identified non core assets.
Don't meet our return thresholds and we've implemented a disciplined approach to capital deployment that directs our resources to only the highest return projects.
We are focused on ongoing efforts to drive best in class returns in our portfolio.
Lastly, our senior leadership team now has an explicit rois C component to our long term compensation program.
Additionally, we are laser focused on generating strong and consistent free cash flow and maintaining substantial financial flexibility and our balance sheet.
This strength enables us to invest in our business through all business cycles and also reward shareholders consistently.
To that end, we have aggressively paid down debt over the past several quarters and have increased the dividend twice in the past year.
Our intent is to reinforce our commitment to a stable and growing dividend, while also continuing to aggressively repurchase west rock stock.
As a reminder, in Q4 of 2021 and Q1 of 2022 we have repurchased approximately $223 million of stock as an initial down payment on this strategy.
With our very strong free cash flow generation and our current valuation level, we intend to get more aggressive on our stock buybacks and our targeting repurchases up to $500 million over the next several months. We will continue to monitor short term fundamentals that provide the best return opportunity.
These for our capital allocation.
A lot of exciting changes underway at west rock and I'm convinced about the significant value creation opportunities ahead for our company. We are committed to executing our plan to drive enhanced shareholder value and our team at West rock is motivated and enthusiastic about what is ahead.
We are focused on growing through innovation with new sustainable products and digital engagement tools that our customers and our consumers need in today's marketplace. We have a new transformation office in place that is driving rigor and all that we're doing including standardizing key operating performance metrics across the asset.
We have brought in a new supply chain leader, Peter Anderson, who is aligning our supply chain operations across the company with a focus on greater productivity and cost savings and finally I'm excited to have Alex Pease join us as CFO effective November 2021 with over 20 years of experience.
And corporate strategy M&A capital markets portfolio optimization, and broad based business transformation as well as extensive public company experience Alex has already proven to be a strong partner I'll now ask Alex to provide the detailed rundown on our performance Alex.
Thank you, David and Hello, everyone.
I'm excited to be here for my first earnings call as CFO .
Before I review first quarter results in detail I want to reiterate the diversity of opportunity that David described and reinforce the commitment to a fundamentally different level of performance.
The opportunities to drive a step change in margin as well as significant ROIC improvement are real and rarely have I seen a team is aligned behind the vision for the future as this one.
While it's early in the process I had every conviction that we'll be successful and look forward to supporting David and the team in the journey.
And with that let's cover results.
Fiscal first quarter sales were up 13% to $4 95 billion and consolidated adjusted EBITDA increased 2% year over year to $680 million.
Consolidated adjusted EBITDA margin was 13, 7%.
Price and mix positively impacted earnings by $600 million year over year.
This higher pricing was mostly offset by $520 million and higher costs, including higher fiber transportation and labor as well as the impact of the previously discussed high planned maintenance conducted in the quarter.
As a reminder.
The first fiscal quarter is the highest maintenance quarter of the year.
In addition, we faced challenges with COVID-19 related to freight and raw materials, which impacted our production output turning to slide 12 sales in corrugated packaging, excluding white top trade sales were up 11.5% year over year to $2 $1 billion adjusted.
Adjusted EBITDA declined 17% to $289 million, giving the segment and adjusted EBITDA margin of 13, 5% also excluding white top trade sales.
Price drove an additional $277 million and adjusted EBITDA year over year.
However, this was more than offset by $230 million in inflation due to labor challenges with COVID-19 related absenteeism, and logistics issues as well as $63 million of lower productivity and $43 million of lower volume.
The impact of the high level of downtime, both planned and unplanned drove much of the volume decline.
Following a strong first fiscal quarter of 2021, we experienced significant supply chain challenges in 2022, as well as cost inflation in most input costs and the higher fixed cost impact of the record planned downtime for the scheduled maintenance in our mill system.
This was further impacted by lower productivity due to high Covid absenteeism and the introduction of the inexperienced labor into our factories. We are actively working to address each of these issues and are anticipating that the business will return to more historical levels of profitability over the balance of the year with additional upside as we deploy the west rock operating system.
That David discussed.
During the quarter, our North American box shipments were 3.7% lower year over year, driven by our record mill maintenance levels Covid related slowdowns and continued disruptions in the supply chain.
However backlog for the corrugated packaging business remains very strong if we could have made more we certainly would have sold it.
Over the next two quarters, we expect additional pricing to flow through our corrugated packaging business from the previously published price increases.
As a reminder, this only includes pricing that has already been published in pulp and paper week.
Turning to the consumer packaging business on slide 13 sales were up 7% year over year to $1.1 billion, though adjusted EBITDA declined three 4% to $169 million in the quarter.
Adjusted EBITDA margins were 14, 9% for the segment.
As in corrugated.
Better price and mix added $50 million to adjusted EBITDA also improved productivity and better volume drove $14 million and $6 million of higher adjusted EBITDA, respectively. However.
However, higher fiber transportation and labor.
Cost as well as the high maintenance level negatively impacted earnings with total inflation of $76 million more than offsetting the other improvements.
Consumer backlog remains very strong at five to seven weeks and we continue to implement the previously published price increases across all consumer grades.
The production of Covid test kit packaging is contributing to the strong backlogs in consumer packaging due to the recent announcement by the U S government to offer free Covid test kits to every household in the country.
Turning to slide 14.
Revenue for our paper business came in at $1.4 billion up 24% year over year.
Adjusted EBITDA was $232 million with an adjusted EBITDA margin of 17%.
Adjusted EBITDA was up an impressive 53% year over year due to price and mix improvements with the flow through of previously published price increases.
Export markets were also very strong.
While we faced some headwinds with lower production levels and freight inflation the paper business performed very well this quarter.
Looking forward demand and profitability for our paper products remained strong both in the independent domestic and export markets highlighting the importance of certain strategic markets and the value of our diversified portfolio.
Backlogs continue to be at historically high levels and for the remainder of the year, we expect to achieve significant pricing has recently published pricing flows through our contractual business.
On slide 15, we show our distribution results.
Those sales were up 7% to $325 million adjusted EBITDA margins fell to 2% from 5.4% last year, mainly due to supply chain issues and the higher cost to service customers driven by higher fuel and labor costs demand remains strong for our distribution business and is outpacing our ability to supply customers due to <unk>.
<unk> and supply chain challenges are.
Our free cash flow for the quarter was down significantly year over year, but much of this change was due to the reversal of the pandemic action plan that we had in place during the first quarter of fiscal 2021 spin.
Specifically, we were negatively impacted by the payment of short term incentive compensation in cash versus the stock payment made in the previous year.
Compounding that pressure our strength in fiscal year 2021 led to a larger bonus payment as compared to the previous year when short term incentive compensation was paid at threshold level.
Finally, we had negative impact from the 401K match, returning to cash payments rather than stock and the required repayment of the deferred payroll tax as part of the cares Act.
So the quarter was highly impacted we still expect to generate cash flows in excess of $1.3 billion as we progress through the year.
Turning to slide 17, and our financial guidance for the second quarter of 2022, we continue to implement all previously published price increases.
We expect roughly flat sequential cost inflation as improvements in energy in OCC costs should be offset by higher freight and wage and other expenses.
So we are past the highest maintenance quarter due to delays in mill maintenance earlier in fiscal 2021, along with our originally planned outages. We still have approximately 128000 tons of scheduled downtime across our system in the coming months.
These assumptions result in forecasted consolidated adjusted EBITDA of $780 million to $830 million and adjusted earnings per share of 94 cents to $1.08 per share.
As a note. This guidance does not include any potential benefit from the $70 per ton price increase across our containerboard grades that we've communicated to our customers. Some additional assumptions behind our outlook include OCC costs down 10 to $15 per ton.
Natural gas costs down sequentially.
Labor expense up sequentially due to normal Q2 merit increases.
<unk> inflation and freight and logistics expense, a tax rate of 23% to 25% and diluted shares outstanding of approximately $267 million.
Now turn it back to David to conclude before we move to Q&A David.
Thank you Alex and closing we're in the process of transforming west rock into an industry leader that delivers consistent strong results to shareholders through all operating environments.
We are in the beginning phases of our journey to optimize our portfolio through operational efficiency footprint optimization and growth investments. We've made substantial progress on these efforts already made decisions about our path forward and continue to hire and develop key talent to help us advance our vision.
We look forward to providing a deep dive overview of west rock, our west rock operating system and long term targets at our 2022 Investor day, which was previously scheduled for February .
Given the current situation with Covid, we have decided to move this important event to Mei with the hope that we can meet in person, we'll share more details about investor day in the coming weeks and thank you for your continued interest in west rock with that let's move to Q&A.
Thank you David Operator May we take our first question. Please.
Ladies and gentlemen at this time, we'll begin the question and answer session to ask a question you May Press Star and then one using a touchtone telephone if you are using a speaker phone. We do ask you. Please pickup your handset before pressing the numbers to ensure the best sound quality.
So what's your all your questions you May press star two.
Once again that is star and then one to ask a question, we'll pause momentarily to assemble the roster.
Our first question today comes from Mark Weintraub from Seaport. Please go ahead with your question. Thank.
Thank you certainly appreciate all the details look forward to the deeper dive, we'll we'll be hearing about.
Come may or.
So one quick follow up question well first of all can you give us a little bit of a sense at this juncture.
When the benefits of the actions that you're gonna be undergoing I realize it's going to be a process but.
When is that likely to start showing up on the bottom line is that something that we should think next year becomes part of the driving process or even.
Do we start to see that sooner what type of timing framework.
Good morning, Mark I appreciate the question and we have.
We have begun our journey and.
I believe you will start to see.
Benefits. This year, we are implementing a new westwater operating system.
We were challenged in the last quarter between our our heavy maintenance scheduled shutdown in really an unexpected COVID-19 related absenteeism with the supply chain, but we are already starting to see some of those benefits.
If you take out some of those unique situations, especially in our consumer business now that we've integrated.
The former <unk> business with our consumer business, we've seen a lot of productivity improvements are we're starting to see that with our one mill organization and in our global paper organization, So where we are starting to see them. The there will be we believe material benefit.
Two our profitability.
And it will just continue throughout as we move forward. So I think we'll start to see benefit this year and next year I think youll start to see more material benefit as we move forward and Mark just to add on to what David saying, If you think about the guidance. We provided we are actually as I mentioned in my remarks anticipating returned.
More normalized margins really across all the segments and a lot of that is being driven by the actions that we're taking so if you look.
On our at our full year <unk>.
Vacations, you do anticipate margins being north of where they were last year again, driven by a lot of what David David described.
Great and maybe just following up on that I do see in the Appendix you you you have the same slide on guidance for this fiscal year should we interpret that as a reiteration that despite the the COVID-19 the absenteeism and.
And in the supply chain issues that you highlighted that other things are happening ex price increases which haven't been.
Establishing P. P. W that should enable you to still be in that guidance range is that a fair interpretation, yes. So I think David explicitly said that we were reaffirming our guidance for the full year.
Just to give you some additional detail we do expect a lot of the inflationary impact to mitigate over the course of the year I think we said in the prepared remarks that we expect OCC at least sequentially for Q2 to be down between 10% to 10 to $15 a tonne.
Natural gas on a year over year basis.
It will still be up but sequentially over the course of the year will be down fairly significantly right is really the one thing that we're continuing to battle, but as.
As David mentioned, we've brought in a new head of logistics and supply chain with Peter Anderson, who is addressing that so we expect.
At least manage some of the freight impact to keep it roughly flat year over year. So so yeah. We are fairly confident in reaffirming our guidance for the full year and expect a strong print in the second quarter.
Great and just to to reach from I think there are also you you have mentioned.
That is it.
And I think it was specific for that this coming quarter or the current quarter. We're in but that it doesn't include anything from the containerboard price increase that's in motion and I assume that the statements that you made about confidence on the guidance for the full year that would be true to that it's not dependent on the $70 is that fair no.
That's exactly right and just since you mentioned pricing I will just add on a little bit we have.
Been realizing in the order of $160 per ton.
As you've seen in the published pricing and we've been successful in realizing.
Most if not all of that we do have what we've communicated to customers and we do have the impact of.
Getting improved price realization that some of the national contracts.
Our rollover and so we do expect pricing to continue to be a favorable.
<unk> tailwind as we get into the balance of the year great I appreciate the detail.
And our next question comes from George Staphos from Bank of America. Please go ahead with your question.
Thanks, very much hi, guys. Good morning, Thanks for all the details.
Good luck with the the transformation.
One minor question shorter term one when should we get I didn't see it if it was in the materials.
Additional volume disclosure as we used to have and could you comment at all on how early fiscal two Q volumes are going for you and your key businesses. I think you had said corrugated was down three in the last quarter did you have a comparison for cartons, there as well folding cartons.
Yeah, I'll I'll start and then I'll, let David comment on the velocity of the business.
As it relates to the beginning of the year that the reason we didn't provide the volume disclosures in the quarter really was just related to the new segment disclosure.
The team has been working exceptionally hard to get all of the detail and all the transparency.
That you all need to update your models and so forth and unfortunately, we just weren't able to get to that level of detail, but we we anticipate providing that in the quarters to come. So so nothing nothing to read into that and I'll, let David talk about the velocity in the business. This year. Thanks, Alex.
You know George.
As I mentioned earlier, we are seeing near record backlog levels and so we feel really good about our demand from our customer base. Our backlogs are very strong.
Really just a situation of getting product out the door. So the better we come back from some of these colgate and supply chain disruptions the better we can work down our backlog and get our.
The volumes to meet our customer demand. So we feel very good about customer demand we feel good about it how it started the year. It's just getting through some of these disruptions and to getting to a more normalized manufacturing position freight situation. So we can service our customers and get volume out the door.
Okay. So at this juncture, David I'm, taking it you'd rather not comment on how volumes are partly because it's not really comparable because the supply chain issues at a kind of a fair.
Exactly right I mean, the demand is there the backlog is there it's just.
How quickly we continue to be able to get production.
Volumes to where we need them to be to meet that demand.
Okay understood.
Two maybe bigger picture question. So Westbrook has always championed the.
The fact that it offers both.
Consumer and corrugated.
Product offerings to its customers. It has the system isn't the machinery capabilities, you've certainly over the last couple of years.
Talk about sustainability so.
That's always been part of west struck.
What should allow you to maybe get even more progress and more margin and return from that that strategy and that offering to the customer what is going to change or maybe accelerate on that front and Washington, We expect that and then specifically to the paper business. What's the goal what's the strategy for this.
Business longer term ultimately you want to improve vertical integration from what I recall.
Are you going to manage this business more for margin and so we shouldn't necessarily expect it to grow because FERC integration is hopefully going to increase how should we think about that business and what will be success as you define it for that business. Thank you and good luck in the quarter.
Thanks, George I'll take your questions one at a time and first I'll start with the corrugated and consumer business together.
You know there are.
There has been obviously thoughts of should is it better to be sweater together and I would tell you that I have never been more convinced than I am now that we are significantly better together.
And I mean that from a customer facing standpoint from our solutions that we can provide our customers I think the general Motors is a great example, and that goes on and on but what I think in getting to the crux of your question is I think the other value that we have which is the journey that we're on.
Where you're going to see the benefit.
And margins and return on invested capital is the work we're doing on our new operating system. As we are going to really drive significantly better productivity and efficiencies with the scale and flexibility that we have in our in our model.
This is something that's truly unique and from a strategic standpoint, where we can provide differentiation that customers value and that we can drive a better operating efficiency because of it.
I think that is something that we want to continue to double down on and we will continue to see that that margin and ROIC improvement.
As we continue to drive on the infrastructure and we're already seeing it.
Just in the in the short time that we brought the former NPS and consumer business together, it's amazing what we've done with with some of that lower margin business driving driving the productivity driving productivity at our mills now neither one mill so you'll continue to see that.
And then to your second question I think that ties right in is we really like.
Managing our paper is one business that is aligned to our mill system.
What that does is.
Provide you that the transparency that demonstrates our profitability we liked the profile it gives us with the flexibility.
To serve our growing packaging business, but also served very attractive paper markets and that market demand is growing especially is sustainability being a key driver.
So.
We do and I've said in the past, we do want to reduce our exposure to the more volatile areas.
Of the paper segment that we do externally.
So you will start to see us trim.
You know the market segments. We go after that are more volatile, but by and large we are a market leader in paper and so once we trimmed that is which which we went through as part of our strategic and portfolio review.
We like splitting this business out to we can demonstrate to you how.
How profitable this business can be the flexibility allows us and our mill footprint.
We have embedded flexibility in Longview.
Longview, Dublin, Roanoke Rapids mills to flex between containerboard and Kraft paper markets.
And amongst our Charleston plants, we can flex so we have great flexibility in a changing market dynamic situation, where we can optimize our profitability.
And just as one example, 10 states have banned plastic shopping bags in supermarkets.
So the demand for Kraft paper over the last couple of years has really been extensive.
We have a leading position in Kraft paper and our ability to flex mills to drive better profitability.
Is really an advantage for us so that's why we like to do this that's why we think there's tremendous value in paper.
And tremendous value in the new structure that we announced.
Thank you very much.
Thanks George.
And our next question comes from Gabe <unk> from Wells Fargo Securities. Please go ahead with your question.
Thank you good morning, David Welcome Alex.
I wanted to dig in or or get a little clarity on what I thought I heard was maybe capacity debottlenecking and it wasn't clear to me in the past at least that there had been kind of availability issues.
My question is if you could maybe give a little bit of detail. There. If it's if you're more talking about on the mill side or on the converting side and then you also made some comments about warehousing.
And logistics optimization.
And I think what I hear from that is maybe.
Better.
Velocity through the system and an impact on profitability, but potentially sort of a working capital need or build to enable that so just maybe if you could expand on that.
Sure. Thanks, Gary I appreciate the question I'll start with your first question.
I was really referring to our our conversion plants versus our mills as where we think we have untapped or unlock capacity opportunities.
As we introduce this new west rock operating systems, getting very detailed metrics and continuous improvement identification opportunities.
We have found especially in a very high demand market like we're in today that we can operate our assets much more efficiently. So we're going through.
Very detailed.
Operational excellence program to drive better productivity better throughput.
Better quite frankly, better manufacturing planning.
Better asset utilization, that's really going to drive.
More volume through our current assets and get better operational efficiencies. So that that's what I was referring to more so versus the mills.
The second part of your question on warehousing and logistics.
This is part of the I believe the value of <unk>.
Untapped potential for <unk>.
Consumer and corrugated being together.
So if you were to go back we were running our consumer and corrugated businesses separately and we had separate supply chain.
So now with Peter Anderson coming and we've now created one common supply chain. So we can leverage now warehousing for both corrugated and consumer we can leverage logistics for corrugated consumer and a one mill system as well because the mills were separated as well so that's part of what I'm talking.
The value creation that we believe we have that we're going to drive.
And so.
That's that's that's kind of how we think about it that way and then as far as our inventories.
You know I think our.
Tori position.
It's kind of hard I wouldn't even use first quarter as a metric because we just had trouble getting freight we had trouble getting rail we had trouble getting it out the door from our mills, especially in December .
So and then you throw COVID-19 happened absenteeism and at some of our box plants to unload. So it was just kind of a perfect storm.
No Theres no extra working capital that we see we actually see this as a benefit for working capital Yeah, just maybe just to layer on a little bit on the inventory point. So we did actually deliberately build about 96000 tons of inventory in anticipation of the mill outages that we anticipated.
So that was a deliberate step if you think about <unk>.
Containerboard inventory, it's basically at the healthy.
Healthy level.
<unk> has been running a little bit low. So so now we're back to I think more normalized level Sps inventory was flat.
And then we brought down.
Some of the CN K inventory as we dealt with the transportation issues that David mentioned, so just to reiterate David's point I think our inventory levels are healthy and and that is about where we will maintain going forward.
Okay, No that's a great segue to the next question I'll try to keep it brief can you talk about velocity through the system.
And maybe to the extent that you might be carrying a little bit of I'll call. It safety stock.
Given these these known delays are you embedding.
Number one I'm sorry are you embedding an improvement in availability as the year progresses, and then number two.
Would you be willing to provide or quantify kind of backlogs and the consumer business.
At this juncture.
Yeah, Let me I'll take a shot at it and I'm sure David will want to want to add on just to reiterate I think.
We view our inventories at healthy levels. So I think that's the headline we have seen congestion in the system related to the freight issues that David described largely that's in.
<unk> stock.
Being able to convert that to finished product and so as we are.
Deploy the west rock operating system, and we get greater velocity through the system, we'll consume that inventory.
And basically deliver on the demand I think your point on.
On backlogs or your question on backlogs backlogs are at a record level, we're not breaking it out by individual segment I don't believe but.
But backlogs are extremely healthy and we can sell anything that we get through the system. So that's one of the drivers behind I think the optimistic outlook for the year.
So I'll, let David add on anything he wants to.
Wants to add yeah. Thanks, just just yeah, we as far as consumer.
Sure we were close to record levels at five to seven weeks.
That's growing our corrugated backlogs.
Our higher year over year, so we still see strength there so.
The backlogs continue to be healthy and.
And we don't see that slowing down.
Thank you.
And our next question comes from Anthony Pettinari from Citi. Please go ahead with your question.
Good morning.
David you talked about your strategic vision for the paper business, which is very helpful and I'm wondering if you could share maybe some thoughts on the distribution business. How you would judge the performance of that business and you know there have been a few large paper and packaging companies that are spun off distribution arms over the past decade kind of what what does distribution add to.
In the restaurant.
Yes.
Andy I appreciate the question with our distribution business one of the things that struck me is in this new world of supply chain disruption is the changing viewpoints of our customers on.
<unk> inventories and supplies with their suppliers.
And so we are really seeing customers wanting predictable supply security of local inventory and delivery.
And so there is I think an enhanced value to distribution. Maybe then then there wasn't in the past from a customer viewpoint.
And the pull through is incredibly strong within our business, it's a great.
Pull through.
And just having that proximity to the customer is really critical to everything we do.
To the second part of your question.
Our expectations is for a much greater margin expansion and so we have undergone multiple projects to expand those margins to get them to higher levels of where we believe that distribution could be so you'll continue to see margin expansion, but we like the proximity.
<unk> of the proximity of being close to our customer.
One just just.
Add on.
We're focused on ROIC and I think one of the interesting things about our distribution business, obviously, the margins aren't where we would like them today and we're going to improve the margin profile, but ROIC is still just under 10%, which is well in excess of our cost of capital. So I do think even with a narrow margin given the lower capital intensity.
It's not a bad business for us to be in so I would just add that to David's comments.
Okay, that's very helpful.
And then you mentioned the Pacific Northwest box plant as I think an example of maybe a high return investment I'm just wondering if theres any kind of finer point you can put on that in terms of Capex investment.
It did return or maybe timeline and then as you look across your box plant network. You know understanding you have a great position at long view do you see similar opportunities.
Cross across the network to maybe.
Instruct the larger greenfield box plants or consolidate box plant operations, just any any thoughts there.
Yeah.
We do and we've talked about also vertical integration. So long view does several things for us.
It's going to be are really a showcase and efficiency and automation and digital manufacturing.
It's 400000 square feet, it's going to be located.
On a site near our mill.
Which is right there so it takes cost out of transportation.
So you will see.
It's a very strong market for us right, now, which which is growing.
So.
But long view does is it's going to be a very high efficient.
Manufacturing site.
It's going to be close to our mail, which we like because it reduces our transportation.
And it will be able to be a larger side to produce more volume.
To get us to get that efficiency that we talked about.
So as you look at our footprint around the rest of the North America side of our business.
We will continue to look at those opportunities.
Especially on large metro areas, where we can drive a very good return on internal investment.
To be world class in our manufacturing to be close to our mill footprint and be closer to our customer.
Okay. That's helpful I'll turn it over.
Our next question comes from so Ling from Jefferies. Please go ahead with your question.
Hey, good morning, guys.
David Great to see the man is quite strong at least underlying backlogs are really robust how do you kind of see these bottlenecks that are limiting your production level is performing do you see that improving sequentially and what do you see that kind of normalizing over the course of the year.
Yes, good morning, we do see that improving sequentially.
I will tell you, especially in our corrugated plants.
Just got hit really hard with Covid absenteeism.
And then you throw in our our record maintenance schedule that we had in the first quarter. So I think youll start to see that improve sequentially. We've already seen improvement in our Colgate absenteeism as we progressed through January so our expectation is continuing to get that our labor force back to kindred.
To improve our labor productivity continuing to get the productivity at our mills.
Our uptime being higher we think that will all flow through sequentially throughout the year, Yeah, and just to give you a sense I mean, historically Q1 is is sort of our seasonal low and so.
I think <unk> got a bit of a perfect storm, you've got a seasonal low you've got all the absenteeism issues that David's mentioning the supply chain issues that Dave was mentioning and.
And then just really in the opening earnings the West Rock operating system. So if you think about the outlook for the year, we've baked in.
Sequential improvement really over that over the duration of the year. So you should you should expect to see both volumes and margins improve as we get get into the balance of the year.
Yeah, that's great I mean, just given the absenteeism I thought your fiscal <unk> guide was pretty solid.
Guys are operating quite well in this tough environment.
David just given with the new segments in places, you're kind of embarking efforts to better integrate consumer and corrugated how's that process stacked up relative to your expectations and when we think longer term or even medium term what are some of the big buckets, where you see performance improving how the operations right anything that that stands out that's a low hanging fruit.
Tony.
Well to answer the first part of your question I'm, probably one of the more impatient people you'll ever meet so.
I want everything tomorrow, so, but this is a journey.
And so when I when I look at opportunities.
You mentioned at all I think.
We just.
We've really we really I really feel like we have a great footprint.
And our position, but we just have not fully integrated the business and I've just been around a lot of acquisitions were.
Once you fully integrate and capture the value of the scale and the.
The operational efficiency the supply chain efficiency it is remarkable.
The margin expansion that that can create as well as starting to improve your ROIC.
On the investments that you make so.
I just believe you know and we've developed what we call. This west rock operating system that Standardizes. The critical metrics that we believe are just so important to run our business that immediately identifies area areas for improvement and then we put rigor and process and tools.
To execute that so we're going to be highly operationally focused now that all these assets are in place and I think that's going to create a lot of value.
Phil.
My favorite slide and the slide document as slide seven where we walk through the details of what the transformation agenda looks like and.
These are all real this isn't just words on the page we're going to go through this in depth, when we get into our Investor day, but I.
I think that.
The headline here is that we've got a very broad based deep transformation agenda across all the levers of the P&L and that's what we're going to be driving as we as we push towards fundamentally different margin profile. Okay.
Okay Super Thanks, a lot guys. Thanks have a good day.
Our next question comes from Mark Wilde from Bank of Montreal. Please go ahead with your question.
Good morning, David Good morning, Alex.
Good morning.
I wondered just to start and following on the discussion around long you can you just share some thoughts with us on the level and direction of capital spending over the next two or three years, where you see the biggest opportunities to put capital to work to improve returns.
So.
Typically our capital diet is in the order of $1 billion. So I think we provided guidance of 902 1 billion. This year I think one of the things that both David and I have a lot of passion around us making sure we're deploying.
For sake of round numbers deploying that $1 billion to the highest return projects.
And really focusing the company on ROIC. So of course, there is that the.
The basic sustaining and health and safety investments that we have to make but then there's these growth investments and I think as we think about growth and productivity investments. The Longview plant is a perfect example, where we're going to build a factory of the future leveraging all of the.
World Class automation digital technologies, we had another investment that we didn't talk about in the script around.
Preprint capacity.
Bringing digital and to pre print to reduce the setup times and allows shorter runs and really deliver on what our.
Customers are asking us for so as we think about capital deployment going forward, it's going to be all about how do we deploy our $1 billion of capital to the highest return projects and how do we look at the portfolio and what are those things that arent delivering on on the return threshold consider.
Alternative.
Alternative.
Uses or alternative disposition of those assets so.
Obviously this is extra.
Extremely capital intensive business and I think there's work that we can do to make sure. We're getting the best return on the investments that we're making and David can talk more about the strategy for that yeah, well I think long music Mark to your point is a great example of that I mean, the easy thing would have been two okay. Because there is there an independent box plant in the Pacific Northwest, we can buy to help.
With our increasing.
Capacity needs.
That would have been a lower return much lower than building. This 400000 square foot box plant the way we want to build it in the exact geography that we want to build it lowers our cost.
Sets us up for exactly how we want to run a incredibly efficient box plant.
And be close to our customers at the same time, so the ROIC or the return on that is going to be much higher than if we were just to make an acquisition in the Pacific northwest. So that's kind of how we're thinking about it.
Okay. That's helpful. I guess for follow on I'm, just curious David you've been at West rack for about 10 or 11 months now.
Any.
Thoughts on potential changes in how you manage integration or holiday.
How the industry handles things like like National accounts, which are often.
In the area of debate within the sector.
Yes.
Smiling Marc.
It's been interesting coming in to this.
This industry, obviously I came from a different industry.
I think there's opportunities.
Especially as we continue with innovation and sustainability.
Our machinery business and everything we can provide.
Especially on the National account platform.
That value solutions, and I think theres opportunities, how we commercially look at value selling.
Which which gets us out of some of the.
The cyclicality of of margins. So we're gonna look very hard at that.
How we partner with customers to.
To look at that to reduce our cyclicality.
If I look at the integration piece of it.
I may have mentioned this before but I always believed when you make acquisitions.
You have to make one plus one equal three.
If you do it for a reason and it's to be significantly better and to bring better shareholder value and better customer value.
And so we bought all of these acquisitions together, but.
But we hadn't fully integrated them. So we're not quite at one plus one equals three.
Which is why the.
All the efforts, we're doing which we are confident we're going to be able to execute.
We're going to get to three and that's going to be helping our not just our growth, but our margin and ROIC profile.
Alright, very good good luck through the balance of the year I will turn it over thank.
Thank you Mark.
Our next question comes from Laura Shelburne from Credit Suisse. Please go ahead with your question.
Hey, good morning, I, just wanted to turn back to.
You mentioned quite frequently sustainable packaging solutions.
And.
Curious to see if there has been a relatively low growth business in the past sustainable packaging may be pathway to accelerate growth similar to e-commerce .
No. If you can comment on how you see your pipeline building in that business.
And how you view that potential opportunity and the right to what you've seen in E. Commerce, you should have to compare the two.
And.
What you need to do if anything to capture that potential growth.
Yeah. Thanks, Thanks, so much for that question.
I think the sustainability piece is something that is one of the most exciting things about this industry.
Because of the environmentally friendly sustainable solutions that we provide.
Our run rate on and we measure our plastics replacement opportunities are run rate every quarter continues to improve on business that we capture.
And.
In plastics replacement and really sustainable solutions is the way I would say it as well.
So we as we started measuring this even last year, we had a run rate of about $250 million.
Then a couple of quarters later or run rate improved to 280.
And right now, we're just below $300 million I mean, it just sequentially continues to grow.
And then you throw in the paper side of it that's just on the packaging and paper with Kraft papers I mentioned earlier with.
10 states banning plastic.
<unk> bags.
We mentioned last quarter I believe the Tim Hortons.
Program, we Havent, Canada for completely sustainable Cup, which could translate across multiple applications in foodservice.
It's just an incredibly exciting opportunity and as we see the available I mean, the plastics market overall is well over $50 billion, we've broken it down to what is the attractive market that we believe we have a very good solution for and we see that at about 6% to $7 billion.
Got it.
And do you need to change and you're trying to capture that opportunity.
Yes sure.
Yeah.
Right.
We're really doing is investing in our innovation and R&D labs, we are finalizing the expansion of our pilot plant in Richmond, Virginia to pilot all of these programs with customers that were partnering with to develop solutions.
Because we have a ton of products, we are hiring a lot of a lot more on the R&D side on barrier properties, because we think barrier properties is really.
A key to packaging.
Innovation for sustainability. So we are investing in this.
And Youll continue to see expansion of that investment as our as our opportunities continue to grow.
And then the just a question you had about how do you view that relative to what he Congress has to divert from zero to 15% of the business. What do you see that potentially being in five to 10 years from now.
Hi.
I apologize sorry, so I'm not sure I heard your question you said e-commerce .
If you compare this opportunity to what he cost cash converting.
E Commerce is an interesting.
Market for Us I mean, it's an important market.
It's definitely.
Significantly higher than it was pre pandemic levels, but I think youre starting to see a little bit of a plateau in e-commerce .
From some of the major players and the reason for that I think is also because the work we're doing with too.
Get the right package size, we have things like pack on demand, where we where theres not a lot of waste of aerospace in the packaging, so theres less packaging, but.
If you think about the Omnichannel and the number of people that are getting into to ecommerce that just continues to grow but I think theres innovation opportunities in ecommerce too when we think about smart packaging and the connectivity, we have of our packaging and supply chains and the interaction with customers. So we're also looking at and innovation side.
In that regard so e-commerce is.
A really important growth market for us.
Is it as high as plastics replacement.
Aye.
It's hard to say.
I get excited about both of them.
Got it thank you and good luck.
Thank you.
Our next question comes from Mike <unk> from Truest. Please go ahead with your question.
Great. Thanks, very much congrats David Alex James.
Great.
Transformation that youre proceeding with thanks.
Thanks, Mike.
Just a quick question David on the transformation plan and I know Alex referenced the slide seven.
The key slide.
Highlighting the various phases of that kind of that you are pursuing really realizing that you won improvement as soon as possible can you give us a rough sense of timing to complete this plan.
Is it one year out two years out how should we think about those various pieces that you've highlighted your timing to completing each one.
Well.
So really good question because.
There is there is so much we believe theres so much opportunity so theres projects we've.
Completed.
That will start to see the benefit for this year there were some big projects that we probably won't see the material value till next year.
But we are measuring it and at our Investor day will kind of walk through each bucket as Alex talked about what we see the value of the timing of that but our expectation is to make continuous progress sequentially.
Some of the bigger projects might take a year year and a half, but there was a lot of low hanging fruit that we're going to take advantage of starting this year.
Got you so completely.
If some of those larger projects do take a year year and a half the plant itself.
At this point should be completed by fiscal 2024.
I guess the way Mike I might tackle the question is.
As with any continuous improvement journey there is.
Never a completion right so.
We're going to continuously optimize the company and we're going to drive a fundamentally different culture around continuous improvement focus on ROIC focus on margin extremely disciplined capital allocation. So I think that's part of that the change that David is driving.
When we get to Investor day, I think we're going to be prepared to lay out.
Get to 2025, and we're not going to wait until 2025 to unveil what the improvement that theres going to be as I mentioned in the guidance. There is going to be improvements sequentially over the course of the year, where we get to more historical margins and as we get into next.
And next year and beyond we're going to close the gap on our on our competitors were going to divest aspects of the portfolio that arent meeting our return thresholds. So I think.
We're going to lay out for you a very clear vision for what the next call. It three years looks like with very tangible.
Milestones that you can hold us accountable for and there's going to be near term and long term and then once we get there we're not going to stop.
Got it no I totally understand appreciate the additional color just one last question. Realizing that you are going to provide these details later at the Investor day in May is there any.
Incremental color you can provide around this westwood's operating system, even at a very high level speak off with a couple of times during the call I Wonder if David you mentioned you said he is truly unique and it really does differentiate west rock from others. So just anything any color at a really high level.
After this operating system and what is unique about it and how it allows restaurants to operate differently than it had and certainly versus peers.
Yeah. Thanks, Mike.
It really starts at the foundational level.
Measuring the right things and measuring them the right way across the company.
So our vision of growth margins return on invested capital investing in our people and their training growth and safety. So what are the right metrics for that to drive what we're trying to drive.
So we've established that and and now once we have that established we immediately identified gaps to what what is world class and how to Alex's point, how do we continually continuously approved across all of these.
Metrics that we've now identified so we have as we mentioned the transformation team in place we have rigor around we've identified the projects that are going to drive that value and we've put rigor processes and tools to execute it and we measure it we review it we changed compensation plans on it.
And that's going to that's going to drive our transformation will share more detail about our new operating system at our Investor day.
But it's probably more operationally focused than we've been before.
And it also has a commercial.
Excellence focus to it so we're excited to implement it.
And it's going to really help drive.
The vision that we have for the future.
Thank you good luck for the rest of the year.
Thank you.
And ladies and gentlemen, with that we're going to close today's Q&A session I'd like to turn the floor back over to the management team for any closing remarks.
Thank you for joining our call today, if you have any questions. Please give me James Armstrong a call or shoot me an e-mail look forward to talking to you next quarter.
Thank you.
And ladies and gentlemen, with that we'll conclude today's conference call. We do thank you for joining today's presentation. You may now disconnect your lines.
Okay.