Q2 2022 Westrock Co Earnings Call
Good morning, and welcome to the Westwood Company's fiscal Q2, 2022 conference call.
All participants will be in listen only mode.
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After today's presentation there'll be an opportunity to ask questions.
So last question Jim of course, Furthermore, your telephone keypad.
It was <unk> question. Please call started too please.
Please note. This event is being recorded I would now.
I'd like to turn the conference over to Rob Quartararo Senior Vice President of Investor Relations. Please go ahead.
Good morning, and thank you for joining our second fiscal quarter 2022 earnings call. We issued our press release this morning and posted the accompanying presentation to the Investor Relations section of our website.
They can be accessed at IR dot west rock dot com or via a link on the application you are using to view this webcast.
With me on today's call are West Rock's, Chief Executive Officer, David Sewell, and our Chief Financial Officer, Alex Pease.
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, including our 10-K for the fiscal year ended September 30th 2021.
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.
With that I'll now turn it over to you David.
Thank you Rob and thank you all for joining our earnings call today.
To begin our call I'll provide a brief summary of the recent actions we've taken and provide an overview of our fiscal second quarter results.
Following that our CFO , Alex Pease will provide a deep dive into the quarterly performance for our segments and other critical financial performance <unk>.
Also provide guidance for the fiscal third quarter and the full year.
We will then move to Q&A to answer any questions you may have.
Over the past year, we've been making significant progress in our efforts to transform west rock into the very best paper and packaging company.
We have aligned our mills into one organization and updated our operating segments to provide increased transparency and better reflect how we manage our business.
We've established a global supply chain organization to reduce costs and drive efficiencies, we've launched the west rock operating system to standardize reporting and drive greater productivity.
And we've completed a strategic review of our assets, taking a first step to rationalize our portfolio and drive improved return on invested capital.
From a balance sheet and capital allocation perspective, we achieved our initial leverage target last year at the same time, we've increased our dividend, 25% and completed approximately $700 million of share repurchases over the last 12 months, while we already have a lot to be proud of we are only just beginning.
Turning to slide four today, we reported strong results with record second fiscal quarter consolidated adjusted EBITDA and adjusted EPS above the high end of our guidance I want to take just a minute to thank all of our team members at West rock for their hard work in helping us achieve this success.
Second quarter sales were a record $5.4 billion up 21% year over year.
We delivered consolidated adjusted EBITDA of $854 million up 33% year over year and adjusted earnings per share of $1 17 more than double the year ago numbers.
We achieved these outstanding results during another quarter of heavy scheduled maintenance and I'm happy to report that our maintenance projects were completed successfully.
We have already finished the majority of our planned maintenance for this fiscal year.
We continue to see robust demand and strong backlogs across our entire system. While also navigating the tight labor market and supply chain disruptions.
As the second quarter progressed, we experienced declines in COVID-19 related absenteeism and improved production levels at our converting facilities.
We exited the quarter with appropriate inventory levels as we enter the stronger demand season in the back half of the year.
We ended the quarter with net leverage of 2.34 times, while aggressively buying back stock. We've nearly completed the 500 million dollar buyback target that we spoke about last quarter and expect to finish by the end of May.
Once completed we will have repurchased approximately $700 million of our stock over the last 12 months.
Today, We also announced that our board has authorized an additional 25 million shares for repurchase representing approximately 10% of our outstanding shares.
Looking ahead, we will continue to return capital to our shareholders through a sustainable and growing dividend as well as opportunistic share repurchases.
Turning to slide five our previously published price increases have more than offset unprecedented inflation and fiber labor freight energy and chemicals, we are still implementing containerboard and box board price increases and we expect these price realizations to more than offset inflation for the foreseeable future.
Sure.
On the next slide as we've previously discussed we completed a portfolio review and have identified assets that don't meet our return thresholds or align with our strategic priorities.
In April we announced the decision to close our Panama City mill as a first step in this portfolio refinement effort.
I'm incredibly grateful for our mill employees and their contributions to building our company.
We are continuing to support our employees during this difficult transition by offering opportunities at other facilities and providing outplacement assistance.
This is never an easy decision however, given the significant capital investments required to keep the mill operational we did not see a path to achieving our rois she targets.
We are also strategically reducing our exposure to the fluff pulp market and will direct our resources towards more attractive end markets.
Our Panama City mill provided containerboard capacity of 353000 tons and pulp capacity of 292000 tons.
We expect to shift some containerboard grades to other mills within our network.
As a result of the closure, we expect approximately $450 million of one time costs of which approximately three fourths are noncash we recognized $355 million of expense in the second quarter and we expect to incur the remainder over the next several years.
Going forward, we expect ongoing EBITDA to be negatively impacted by approximately $65 million annually.
Before I turn it over to Alex to discuss the detailed results for the quarter I wanted to remind you once again about our investor day coming up next week.
We are looking forward to seeing many of you in New York, where we will outline our long term strategy and goals we.
We have a great story to share with you and you'll get a chance to hear from many members of our talented management team.
As a preview and part of our updated capital allocation strategy, one of our goals will be to reduce our leverage even further with a new net leverage target of 1.75 times to two and a quarter times, we remain committed to prudent balance sheet management, and we are maintaining our free cash flow guidance of over 1.3 Bill.
Dollars in fiscal 2022.
On Investor Day, we'll also share information about the many efforts underway across west rock to focus on high value markets enhance our margins and improve our productivity now I'll turn it over to Alex to review our results.
Thanks, David.
Moving to our consolidated quarterly results on slide seven second quarter revenue increased 21% to $5 $4 billion and consolidated adjusted EBITDA increased 33% to $854 million consolidated adjusted EBITDA margin was 15, 9% up 150 basis points year over year.
Our diverse portfolio enables us to deliver higher value solutions to our customers capturing stronger price with enhanced product mix price and mix positively contributed over $700 million year over year.
We also saw an $88 million benefit as last year, we were negatively impacted by the ransomware incident and weather. However.
However, continuing inflation headwinds in fiber labor freight energy and chemicals, along with foreign exchange and other challenges largely offset the benefits.
As David noted, we experienced significant improvement in Covid related absenteeism as the quarter progressed, but still see continuing risks in logistics and other input costs.
We successfully executed significant planned maintenance downtime during the quarter and looking ahead, we expect significantly less planned downtime through the remainder of the year turning to slide eight corrugated packaging sales were $2.2 billion, an increase of $281 million or 14% year over year, adjusted EBITDA increased $8 million.
Or 2% the adjusted EBITDA margin declined 180 basis points to 14, 7% as we continued to work through the impact of labor issues that we experienced early in the quarter.
Strong pricing and mix contributed $275 million, but was offset by $200 million of inflation and an $80 million decline in productivity productivity was negatively impacted by heavy mill maintenance and labor challenges during the quarter.
We experienced continued inflation in fiber labor, great energy and chemicals during the quarter and.
In addition, as mentioned Covid related absenteeism negatively impacted converting operations in January and February . However, we experienced significant improvement as the quarter progressed favorable comparisons to last year's weather and ransomware events also benefited adjusted EBITDA by $20 million year over year.
Her day, North American box shipments were slightly softer year over year, mainly due to labor issues early in the quarter. However, as we exited the quarter our run rate significantly improved and we're currently selling everything we can produce.
When looking at our end markets, we're seeing a shift due to reopening as the pandemic eases.
Our pure play e-commerce volumes are softer year over year, but are being more than offset by expanding omnichannel retail volume.
We are also seeing shifting buying patterns with pizza volumes declining as people return to restaurants, but growth in areas like bakery.
Geographically, our Brazil business outperformed in a challenging market producing EBITDA margins over 30% across our combined corrugated and paper segments.
Longer term, we continue to see significant opportunities in Latin America.
Overall demand throughout our corrugated business remains strong and our shipments have been limited by production capacity rather than customer demand.
This strength demonstrates the value, we provide our customers and our flexibility to serve a diverse range of end markets.
We remain optimistic for the remainder of the fiscal year. Our backlogs are healthy and demand is solid. We're also in the early stages of implementing the previously published March containerboard price increase productivity has improved and we exited the quarter with March EBITDA margins of approximately 17%.
Looking ahead, we remain relentlessly focused on improving our margins as we continue to implement the west rock operating system.
Turning to the consumer packaging business on slide nine sales increased $170 million or 16% to $1.25 billion.
Adjusted EBITDA increased $42 million or 25% and adjusted EBITDA margin was 16.5% an increase of 130 basis points year over year.
Higher volumes added $31 million and strong price and mix contributed $111 million. These.
These volumes more than offset a negative impact of $93 million due to inflation, primarily in freight energy and labor.
Plastic replacements and other transition to sustainable packaging provide continued attractive growth opportunities, our broad portfolio and product innovations enable us to provide unique solutions and help our customers reduce their environmental footprint. Our current run rate for plastic replacements revenue is now exceeding $300 million annually, we are executing well.
And we continue to implement the previously published price increases across all consumer grades we have more demand than we can meet with backlogs of six to eight weeks, we saw particular strength in beverage and retail food during the quarter.
Turning to slide 10, global paper revenue increased $407 million or 36% to $1.5 billion.
Adjusted EBITDA increased $149 million or 93% and adjusted EBITDA margin increased 600 basis points to 21%. It's important to note that the strong margin would've been reported in our corrugated and consumer segments under our prior reporting structure.
Our paper business continues to benefit from previously announced pricing realizations and higher volumes, partially offset by energy freight and other costs.
Price and mix contributed $311 million to adjusted EBITDA, while inflation negatively impacted results by $166 million.
Favorable comparisons to last year's second quarter, which had the impact of winter weather and Ransomware. Then also benefited adjusted EBITDA by $63 million year over year.
We continue to see strong demand for our paper products and both independent domestic and export markets, though logistics continued to be impacted by ongoing supply chain disruptions are global paper business is a competitive differentiator, enabling us to strategically balance our production and provide flexibility to quickly adapt to current market trends.
We remain optimistic for our paper business through the remainder of the fiscal year due to our strong backlogs and the realization of previously published price increases.
Next our distribution results are on slide 11, our distribution performance was strong with revenue increasing 29% year over year to $362 million adjusted EBITDA more than doubled to $28 million. Our impressive results were driven by robust demand and strong execution across our distribution network results also.
Fitted from fulfillment of a large health care order.
Turning to slide 12 during the quarter, we generated $213 million and adjusted free cash flow up significantly from the previous year's levels as last year was negatively impacted by the ransomware incident.
We still expect fiscal year 'twenty two to be a very strong year for cash generation with adjusted free cash flow of more than $1.3 billion for the year, making this year the seventh straight year of adjusted free cash flow above $1 billion.
Additionally, though we aggressively repurchase shares in the quarter, our leverage ended the quarter at 2.34 times approaching our new long term targeted net leverage ratio of 175 times to 2.25 times.
Turning to slide 13, and our financial guidance for the third quarter. We continued to implement all previously published price increases we still have approximately 54000 tons of scheduled downtime across our system in the third quarter.
This is due to delays and no maintenance from earlier in fiscal 2021 along with our originally planned outages were early in the process of evaluating our 2023 maintenance schedule and we are considering shifting maintenance forward into fiscal 2022.
Our forecast for third quarter consolidated adjusted EBITDA is $930 million to $990 million and adjusted EPS of $1 36 to $1.54.
Some assumptions behind our outlook include OCC costs, roughly flat quarter over quarter natural gas costs up approximately $2 per M Btu sequentially.
Continued inflation in freight and logistics expense and a tax rate between 24 and 26%.
On slide 14, we're also updating our full year guidance, both tightening the range and raising the low end, we now expect to achieve $3 five to $3 7 billion and consolidated adjusted EBITDA and $4 75 to $5 and 35 and adjusted EPS during fiscal 2022.
Looking forward given the strength of our differentiated solutions, we're positioned well for sales earnings and free cash flow growth this year and beyond I'll now turn it back to David to conclude before we move to Q&A.
Thank you Alex due to the hard work of our teammates we had an outstanding quarter and we are well positioned for the remainder of the year and beyond I look forward to meeting many of you next week as we provide a deep dive into our long term strategy and goals and our 2022 investor day in New York I am incredibly excited about our future.
And I can't wait to share our plans with you.
Thank you and with that Rob, let's move to Q&A.
Thank you David Operator May we take our first question.
We will now begin the question answer session to ask a question with Star then one on your telephone keypad, if you're using a speakerphone. Please pick up your handset before personal keys.
To withdraw your question. Please press Star then two at this time, we will pause momentarily to somebody roster.
Right.
Our first question will come from George Staphos with Bank of America, You May now go ahead.
Hi, everyone. Good morning, Thanks for taking my questions and thanks for all the details.
Lots to cover here guys and congratulations on the performance I kind of apologize just asking kind of a shorter term question, but can you talk to provide a little bit more detail on what you're seeing early into the calendar second quarter in terms of box volumes or for that matter, our consumer volumes as well.
With that backdrop, and particularly on the carbon side of our volumes in <unk> being a bit soft.
Obviously, there were a lot of supply chain issues. What are you seeing right now and then I had a couple of quick follow ups.
Good morning, George Thanks for the question.
We are still seeing very strong demand and to break it down between consumer and corrugated.
Our corrugated demand was very strong throughout the quarter, where we were challenged as Alex mentioned in the earlier comments.
We had significant COVID-19 absenteeism actually disproportional to the rest of our business for whatever reason and our corrugated converting plants.
And so we just did not get the production out that we needed.
As the quarter went on and we say that we saw that Covid absenteeism reduce we really started seeing much better production rates to meet the demands of our customers and.
And as mentioned, we had a record run rate of the year in March we saw the better productivity the west rock operating systems was able to start generating that productivity. So.
So we saw the box production.
Much improved we saw our margins much improved about 17%.
And we are seeing that strong demand continue.
To April .
And on the consumer side. It's the same thing we are basically in a sold out environment that has not changed at all our backlogs are strong at six to eight weeks, our plastics replacement opportunities continue to expand.
So we're working very hard on the innovation side. So we feel great about the demand of our business across all of our business segments, including global paper and.
And that trend is continuing which is why we took up the midpoint of our year.
Thanks for that David.
My other two questions can you talk Directionally about command and <unk>.
Any other factors non pricing obviously related to your assumptions built into your guidance for the paper segment as we look out over the rest of the year. Both in terms of domestic third party and export what are you seeing in those markets and then I know you might not want to get too far ahead of your animal.
Next week.
But can you talk directionally about some of the opportunities that youre seeing in productivity whether it's in.
Employee bases.
SG&A any color on that ahead of the conference call excuse me at the analyst day would be helpful and good luck in the quarter.
Thanks, George So to answer your first question on our global paper business.
This is one of the reasons why we wanted to split this business out from a reporting standpoint.
Just because of how strategic we view this business for a company our ability to balance our entire portfolio.
Our ability to flex manufacturer to meet the changing market dynamics.
And what our global paper business is able to do and I'm going to stop a little short because I'm really excited about our investor day, and John O'neil, who runs our global paper business is going to talk about our strategy the segments and how we see the growth moving forward.
But just at a higher level. This business allows us to get a global overview.
The market dynamics and with the broad portfolio of products that we're able to manufacture and.
And recognizing what our packaging business needs are that business is able to really take advantage and strategically position us so we maximize value.
And we see that kantar.
Continuing to be a differentiator for us moving forward and you hear a lot more about that.
At our Investor Day next week, and Georgia, I apologize I can't remember what the second part of your question was.
Just some thoughts on what Youll talk about and productivity.
Oh, yes.
But just are you seeing growth in export or independent channels in the paper business.
Sorry about that thanks.
Yes, no that's my fault.
So our our on our global paper business, we we have seen a significant increase in <unk>.
Export, but also I mean, if you just look at our volumes, we had strong volumes our domestic was very strong as well Central America.
A big growth lever for us, we're seeing nice growth in Europe , as well, but our domestic business is also seeing growth. So it's really across the board.
And as far as productivity that that's a point very close to home for me.
We're really starting to get momentum on our productivity programs.
We've built our global supply chain, we're now starting to get momentum around that we've developed the west rock operating system, which we'll talk more about next week, which is a really.
Important productivity driver from an operational standpoint, as well as commercial standpoint, and then on key areas like SG&A that you reference.
You know as we build the shared services and centers of excellence, which we've now got established that's going to allow us to reduce and eliminate the redundancies of having siloed organizations. So you'll continue to see reduction in SG&A.
We move forward and we will give insights in how we see.
Productivity in SG&A and the impact that's going to have on our margins.
We move forward.
Thank you very much.
Thanks Kurt.
Our next question will come from Mark Weintraub with Seaport you May now go ahead.
Thank you congrats on a great quarter and I do apologize I had a little technical difficulty right at the beginning but I'm pretty sure. This wasn't covered.
On slide five on slide five we.
We can see there's some pretty big differences in the amount of pricing you've gotten in box board versus what you've gotten in containerboard to date.
Can you provide any thoughts on on that and and and Relatedly are you seeing or have you seen an ability this cycle to get significantly more pricing into boxes van into containerboard has there been more than full pass through.
And maybe talk a little bit about that if that's the case and whether or not that's a realistic expectation to have for the current March price increase in containerboard as well.
So.
We it.
It's an interesting question, we have not seen any material difference. So as we look at our published.
Price increases.
We are executing.
Those pricing increases in totality, and where our contracts allows us to maximize.
There may be a little bit of a difference in and just volumes and how we're seeing that pricing flow through obviously there are some contractual differences between the two businesses as well, but there's no material difference as far as.
Consumer versus corrugated and our ability to get prices demand is very strong our customers understand the incredible inflationary pressure we're under.
And you know.
We've just announced.
In the marketplace that's been published.
It's been higher price increases published per se Sps at $400, a tonne versus $200 a ton and announced.
Price increase a published price increases in North American containerboard.
Yeah.
Okay, and one quick follow up.
If I and I know, we talked about this in and other.
Contacts.
But it strikes me that you guys are reported on a fiscal year basis, everybody else's on a calendar year basis, given that we've had these price increases in motion and given you know just even just looking at the trajectory of your profits. This year. It looks like you know the second half being a lot better than the first half is it fair to think that.
Your first fiscal quarter for next year or the fourth calendar quarter would likely be much stronger than that.
That that year ago period, so that if we were to think about where your calendar 'twenty two earnings and cash generation would be it would be substantially higher than the calendar of the prior year and is there any way you can if it's a fair I don't know if you've had a chance to look at it and would be willing to share our perspective.
On how significant a difference it would be if that is indeed the case.
Yes, Mark Thanks for that we actually talk quite a bit about fiscal year versus calendar year and I think your assumption is spot on.
As we think about our setup for 2023 in fiscal year 2023, and a very good start to that year and I'll have Alex speak just a little bit more about that yeah. So mark maybe the maybe the best way to answer your question as to just help you with the trajectory of pricing and the trajectory of inflation because those are going to be the big.
Kind of drivers in the model so.
As we think about sort of the back half of the year are sequentially were expecting about $130 million of incremental.
Through from previously published pricing so that gets you to about $650 million year over year and part of the answer to your prior question was also you have to remember there is about a three to six month.
Lag on containerboard pricing to flow through given the nature of the contracts and then there was about a six to nine month lag.
In the consumer business, so youll see that pricing flow through accelerate as we get to the to the back half of the year. So that's the first point on pricing, which absolutely reinforces what David said that you'll see incremental pricing as you go from you know Q4 of our fiscal year to Q4 of the calendar year and setting us up for 2020.
On inflation.
You know really all of the significant inflation, we've seen has mitigated quite dramatically still at elevated rates, but mitigated.
Dramatically. So if you think about where we're where we are year over year.
On OCC youre going to be up about 50% to $153 a tonne.
Our agenda is going to be up incrementally call it 10% year over year natural gas.
Significantly from $3 to about.
Almost $8, where we exit the year.
And then freight continues to be up about 10%. So that's what it looks like if you were to look at.
'twenty one versus 'twenty two but then if you were to look at Q2 versus Q4, it's it's largely flat and almost all of those dimensions with the exception of natural gas, which is going to be up about $2.
M M D to you and then and then freight which will continue to be too, which will continue to be up sequentially, you know call. It call it 10% or so so those significant inflationary effects that we've been battling a from a comparability standpoint over the first half of the air mitigate dramatically over the second half of the year and we will continue to mitigate them.
2023 so.
So I think just to put some numbers to what David said I think we absolutely feel as though were being set up for a continued strength in 2023 from a margin standpoint, even before we take into account the effects of the west rock operating system in all of the productivity measures that David talked about.
That's super helpful. I'll get to work trying to figure out that a lot, but one quick the freight how big is the freight bucket are approximately right now.
So freight and in rough terms about a $2 billion spend annually great. Thank you so much.
Thanks Mark.
Yeah.
Our next question will come from Queens, where Kurt with UBS you May now go ahead.
Great. Good morning, everybody. Thanks for taking the questions I have a couple and the first one was you know I think just on the on the maintenance you know you guys mentioned some.
Maybe thinking about shifting the maintenance schedule and pulling maintenance forward into 'twenty 'twenty. Two I think you just answered the question, but maybe I'll just say no.
I'll ask it just for clarification, if you're if you're selling everything you can produce right now why would you pull maintenance forward.
So.
Good question, we're looking at that right now and the reason why we're looking at that.
We're also anticipating as Alex said, a very strong.
First quarter in fiscal 'twenty, three which we have a very.
Heavy maintenance potential schedule and a very light Q4 schedule. So we're just trying to balance what's the best thing to do so we can ensure we're servicing our customers the best way possible. We haven't made any final decisions yet, but we just.
I wanted to put it on the radar of how we look at it because we do have such a low.
Maintenance quarter schedule them and in Q4.
And then much higher one in Q1 fiscal year 'twenty three so we're just looking at it right now so let me let me just add a little a little bit of color. So if you think about Q1 of this year, we had about 192000.
The downtime.
For Q1, which led to higher absorptions and Thats why you saw the results you did in Q1, and then Q2 was about 158000 tons of downtime in Q3 that number drops to 57000 tons and then it drops it.
It drops from there into Q4, so exactly what David mentioned part of the the effort is to more level load level load. The plants. So we don't have that that significant seasonality effect in the first part of the year. So it's really just an economic decision on how we balance delivering on demand versus.
Versus managing the downtime that we need to take.
Okay, that's clear thanks for that.
And I guess and just sort of following up on the on the margin question you Didnt reduce the margin guidance at the high end of the of the range.
And I think a lot of good discussion over the last couple of minutes about margin improvement into you know into next year I guess, if you could just give us maybe a little bit more color on what needs to happen to get back to the high end of the range and.
I don't know if you can kind of frame, what's what's achievable for for some of these new segments.
Yeah. The paper paper segment is doing very well right now I mean is that is that kind of performance achievable.
Corrugated segment and you know should we kind of expect corrugated margins to exceed paper margins over you know kind of like a more longer term time period. Thanks, very much yes, I I'll, let David pile on I'll, just help you understand a little bit about what was embedded in the assumptions behind the guidance. So.
So.
You know we did we did take up the midpoint of the range, we've tightened that and took up the midpoint and I think that reflects the continued strength, we see in our business I talked about.
Some of the inflationary trends that we're seeing.
And those will likely mitigate towards the back half of the year and then obviously, we're going to have a significant pricing advantages as we get into the back half of the year. So if I talk to kind of the results and in each one of the segments sort of first half to the back half are on on our paper.
See continued strengthening on the margin standpoint, as we get through the second half of the year largely driven by by pricing and continued volume strength.
The biggest upside in the model is really on the on the corrugated margins David mentioned, we exited.
March of Q2.
At a run rate of around 17% and we see that continuing to go north as we get to the back half of the year seasonally corrugated volume tends to be stronger in the second half of the year. They will also benefit from this lower downtime issue that we talked about and then continued flow through of pricing. They also exited David.
We're divesting some of his prior comments Bay and.
In April their daily shipment volume was the strongest we've seen a we've.
We've seen so far this year so their shipment volume has really accelerated that they've broken the back of some of these.
Some of these absenteeism and labor issues and also getting the benefits of the west rock operating system.
Consumer will also strengthened towards the back half of the air and then really the only business that will likely weekend towards the back half of the year is the distribution.
So David mentioned or maybe I mentioned in my prepared remarks, they benefited from a very large health care order.
This quarter and and so their margins will likely not weaken somewhat not not significantly but somewhat as we get to the back half of the year and David what would you add the only thing I'd add if I understood. Your question correctly, you gave us on our margins, we actually did up the mid point of our margins. We initially provided guidance of 16, 5% to 17.
5%.
Our margin range for fiscal year 'twenty, two we've tightened that now to 2017 to 17, 5%. So you will see both the mid point of our margins as well as our EBITDA increase as well.
Okay. Maybe there was just a little confusion because I think on the slides it says 16.5% to 17%.
Maybe we can take it offline and we can tighten that up okay, but yeah. Our margin, we do expect our margins to improve through the app.
Through the second half of the year.
Okay. Thanks.
Yeah.
Our next question.
I apologize on that we'll double check on those numbers you might have different numbers here.
Okay.
Our next question will come from Mike Rockefeller Trish Securities You May now go ahead.
Hi, David Alex James Congrats on the quarter.
Okay.
Just wanted to kick it off with the Panama City closure, David you mentioned shifting some containerboard grades to other mills in the network.
Does that imply that you're going to be walking away from stuff that you see you mentioned the word subs. So I'm wondering if there's some business that may not have been profitable. They usually put that you decided to walk away from.
Well I think the way I would answer that is we're going to move as much I mean, we obviously run our mills 20, $473 65, but.
But as part of our.
You know unlocking of the hidden factory, we're trying to.
Drive our productivity, where we're just driving more volume through our mills, so move in and with the environment, where we're in and basically a sold out environment. We will move as much volume as we can to other plants on the containerboard side through.
Through our productivity efforts to drive that volume.
So it's not a question of not wanting some versus.
Walking away from some of them. It's just how much we can move into production productivity at other mills.
Got it and just one quick follow up on on corrugated.
You're generating a 14, 7% margin this quarter you mentioned the exit.
The run rate was about 17% I think Dave you mentioned last quarter that margins historically have been 18% given where you stand today over what time do you expect to return to those types of levels. It sounds like you have a lot of momentum going into the back half you get to that 80% level.
This year and is that 80% still a target or if you look at some of your peers. They are targeting they have.
Our generation say, 20% plus EBITDA margins. So is there something hard that you're going to be reaching for given some of the benefit from price cost and also give them be the Westbrook operating model.
Yeah. So let me take a stab at it and and then I'll, let David add additional color. So I mentioned in my my answer to the prior question, we do anticipate significant strengthening in the back half of the year benefiting from really really three things improve production volume lower and lower downtime on the plant side on the milk.
Syed.
Ah you know improved.
Labor issues to improve labor productivity pricing flow through and then continued implementation of the west rock operating system. So I think you'll see us exit the year.
Much closer at a full year basis, much closer to the numbers that you're referencing as opposed to where we started the year. So that's I guess the first point the second point is.
You'll hear from Pete during our Investor day.
Next week all of the actions that we're taking within the business to improve both the local mix, which will have a significant margin impact as well as the manufacturing efficiency of the assets.
Which will get us much closer to you know to.
It's something I think more exciting from a margin standpoint.
Im stopping shy of giving you specific segment guidance because I don't think we want to go there, but hopefully directionally you can understand some.
Some of the actions that we're taking.
Thank you and good luck in the quarter.
Thanks.
Yeah.
Our next question will come from Anthony Pettinari with Citi. You May now go ahead.
Good morning.
Just following up on an earlier question on pricing you know one of your peers in consumer has made an effort to kind of move away from pulp and paper week published list prices and move more towards cost indices with automatic pass throughs. Just wondering if that's something you'd consider or pursue and then maybe just broadly as you've looked at pricing in this.
Business, you know coming from other industries and companies are you seeing other opportunities to kind of improve pricing mechanisms or how west dropped such contract terms I just wonder if you could talk about the commercial and pricing piece.
So I'll talk about it as sensitively as I can speak to it.
We are.
Relentlessly looking at how to optimize pricing and partnering with customers to provide the right.
<unk> to manage pricing moving forward on.
On the consumer business, which you referenced about 50% of our business is tied to contract pricing.
But in the environment that we're in today, where we're actively having discussions in new approaches to pricing and that dovetails into our corrugated business as well as our global paper business. So this is something that is really important to our business moving forward and we will continue to.
I'll provide updates as we make changes to our approach.
Okay. That's helpful. And then can you talk a little bit more about the decision to move the leverage target to $1 75 to two to five you know M&A has historically been a feature of the company should we think about that as maybe prioritize and maybe you can just talk about the willingness to.
Essentially go above the range or maybe below the range.
Spending on conditions.
Yeah, So we lowered our range to $1 75 to two in a quarter as we just see that as a very prudent rage and the midterm that further reduces our risk while properly using our leverage to drive value.
It doesn't mean, we're not going to continue to pursue bolt on acquisitions that fit our strategy.
That meets our.
Leverage profile in the midterm, but it really underscores our commitment to an investment grade rating and the confidence we have in the <unk>.
And the portfolio that we have today and the improvements that we can make.
Okay. That's helpful I'll turn it over.
Terrific. Thank you.
Yeah.
Our next question will come from Phil <unk> with Jefferies. You May now go ahead.
Good morning, this is actually John on for Phil.
I first want to say congrats on a solid quarter.
And just focusing on on Panama City, the $65 million annual EBITDA drag is that a net number.
Consisting of any any cost savings from that and appreciate the return focus on your on your actions, but given the EBITDA leakage and $112 million of cash to shuttered a facility I'm curious what type of capital would you have to spend to keep that to keep that facility in a good spot.
Got it.
That number was not net that was a gross number on the $65 million.
And from a capital standpoint.
Without getting into specifics I would tell you it was in the hundreds of millions of dollars.
Phil maybe just a pilot and David mentioned this in his remarks, but this is all about optimizing for ROIC and margin performance of the business. So when we when we looked at that the investment that was required.
To get that Mel sort of to our return thresholds just it just didn't make sense and as and as David mentioned, you know, it's at 645000 tons of capacity.
About 350000 tons of linerboard capacity that we think we can capture in our in our remaining footprint because of improved asset productivity and hidden factory and those sorts of things and then the pulp capacity quite quite honestly is just not not a strategic business for us to be and so this was all.
About really signaling the first move on the portfolio shaping actions that David talked about a lot.
Got it I appreciate that and thanks Tom.
Oh, sorry go ahead, yeah, sorry.
I realize that the.
The flow through on pricing in the paper segment, just because it's more open market and exports is tied to the spot.
How long should we think of the pricing to take to completely flow through maybe maybe if you can quantify kind of where you're at in terms of the price realization in that segment, given it's pretty significant compared to the other segments and there's less of a lag and then I apologize if I missed this but.
Did you have any insurance recovery in the quarter or.
The benefits from the ransomware and winter outages from last year. Those are just non repeat this year.
No.
Maybe I'll just because the pricing. Thanks tricky obviously, the only thing we talk to on pricing our previously published.
Previously published pricing and.
I mentioned again sequentially in Q3, we expect about $130 million of flow through which translates to about $650 million year over year, and that's published pricing. So then as it relates to each one of the segments.
It's about a three to six month lag in containerboard to flow through in the contractual side of the business and then that's about six to nine months lag in the consumer business. So I think I think with the data that's out there externally you can sort of do the math to figure out how that's how.
How that's going to translate through to the P&L.
You know, we obviously demand continues to be strong and so this is something that we evaluate you know on a on a regular basis, but obviously, we're not going to talk about any any forward pricing.
Yes, just to clarify I was looking more on the on the paper segment given that that's open market how much quicker that's flowing through and maybe how quickly we can expect the realization.
<unk> in that particular segment, yes, John it's a good question.
Al you hit you got the most.
The important part is we get pricing first and paper.
Typically however.
We have as you would imagine some very large global contracts with customers where they.
Immediate pricing doesn't always take shape. So it's a little bit of a balance where you know a majority of our business, we get that pricing right away, but we do have large strategic customers. We're contractually we worked through the contract so that would continue to flow through.
So you will see a little bit more flow through on pricing, but at a much smaller level than you would see on consumer and corrugated.
Then on your other question on the Ransomware business interruption insurance, we did receive $5 million in insurance money in the quarter.
Great. Thank you very much thank you.
Our next question will come from Kyle White with Deutsche Bank You May now go ahead.
Hey, good morning, Thanks for taking the question.
Wanted to focus on some of the costs and what's embedded in the guidance on transportation. We are starting to see some of the truck spot rates declined even when you factor in the surcharge from diesel I guess are you starting to see any benefits starting to flow through to your contract rates do you expect any moderation in the second half.
Yeah. So I think I mentioned, we do expect freight to continue at.
Inflated rates year over year, so call it in the in the mid teens year over year, but but we do expect that to mitigate as we get to the back half of the year.
And then for all the reasons that you're talking about there is improved driver availability and prove lane a better mode all of those sorts of things.
Got it and I wasn't sure if that mitigate was just a year over year comp thing.
Sequentially sequence, Alex if I could.
Okay.
Sequentially, sorry, if it wasn't clear I'm talking sequentially not year over year.
Got it no that's probably my fault and then on Nat gas I. Appreciate the sensitivity that you guys have the appendix, but curious about the kind of the overall purchasing strategy do you have any forward contracts that protect you from near term volatility going into the next quarter and what does your outlook assume for Nat gas prices going forward.
Yeah. So so.
So obviously this is a very inter.
Interesting time in the natural gas markets and as you might imagine we're.
Actively evaluating what our forward buying strategy should be historically, we've not participated in large sort of either derivatives or forward buys and so have been more exposed to spot our outlook for the back half of the year does that anticipate roughly $2 an M btu inflation from where we were.
We're exiting the quarter, so really almost 100% up year over year. So we are I think being appropriately.
Well aware of the market conditions, if I can say it that way just to help you with a sensitivity so what.
We're on Q4, we're anticipating ending in call. It the 750 <unk> ZIP code I think yesterday, we were north of $8 an M. N V to you to help you model at 25 cents per <unk> is worth about $23 million of EBITDA. So you can sort of I think do your own math on how that will transfer.
Right through to the P&L.
Got it thank you I'll hand it over.
Thank you.
Our next question will come from Mark Wilde with BMO you May now go ahead.
Good morning, David Good morning, Alex good.
Good morning Martin.
I Wonder just coming back to Panama City, one more time, you you said that the.
Prospective capital items were in the hundreds of millions.
Just curious you know over the next three to five years are there other mills, where you expect to be kind of facing kind of similar decisions I'm not asking you to predict whether theyre going to be other closures or anything but just you know whether there are other mills, where you're going to have to take a good hard look at these very.
Lumpy capital items.
Yes, Mark so the best way I can answer that is.
We look very deep at all of our assets as part of our strategic process in Panama City was part of an ongoing.
Elaborate and methodical transformation process to improve our return on invested capital.
We go through this.
With every one of our assets and we take rate sensitivity to it.
Have.
Employees that have been 30 to 35 year.
Employees are the west rock family. So we're very sensitive to any commentary on future actions other than to say our preference is always to invest in the assets, we have to deliver the returns and improve the asset base and where those assets require an investment.
That don't generate the returns that are needed for the company as where we then look at taking strategic actions.
Okay. That's fair enough and then I wonder just toggling over to the reduction in the leverage targets that 175 to two and a quarter puts you well below other peers, particularly other packaging companies, who are typically up in the three times range any thoughts on that.
Is it just a reflection of a little more cyclicality.
In the paper packaging business or you know how did you think about that yeah. So mark I'll, David David took a stab at it so I'll take a stab at it.
Look this is this is a I think a signaling of a couple of things. The first is our extreme level of confidence in the cash flow generation power of the business and you know in the earnings the earnings power and so you know obviously that the choice when we have that strong.
Strong sort of value creation algorithm is the first priority is obviously investing in the business to high ROIC projects and growth projects and then we start thinking about how do we want to return capital to shareholders through a sustainable and growing dividend and opportunistic share buybacks and then obviously managing the balance sheet. So I think thats probably in <unk>.
Important headline the second important headline is the conviction that David mentioned.
To really maintain a very prudent balance sheet.
And it really doesn't have anything to do with us.
Have you on where we are in the cycle as much as just signaling our conviction to maintain a prudent balance sheet and not not pursue large scale transformational M&A and we think in a 175 to two and a quarter range that we can continue to pursue strategic tuck in bolt on acquisitions.
<unk>, which we will describe in more depth next week.
But it gives us sufficient flexibility.
While optimizing our cost of capital and obviously, if we get below the 175 times and then we have choices to make around opportunistic share repurchases or dividend or whatnot.
Okay, Alright, that's fine and then just one other real quick one is it possible Alex to get some sense like down at the converting plant level about what how much you're having to move labor rates just to both attract and retain people at this point I know mill level wages tend to be much higher so I assume you have less of an issue there.
But you know like bounded corrugated plant or a carton.
Ballpark, so I can give you on a on an aggregate basis.
You know, it's it's actually not as material as you might think so if you think year over year, our aggregate labor costs are up call. It 3% on a full year basis year over year, that's what's embedded in the assumptions that we provided I think it.
The.
It varies as you get into specific geographies and specific mills and so what we're trying to do and Pete and Vicki and the team is working very hard on making sure. We're you know we're competitive to unique local market conditions. Both both in terms of wage rates over time, those sorts of things when we.
Talk about labor issues actually what's the bigger issue is not the wage rate as much as it is just how hard that people are working because the demand environment has been so strong and we've been pushing overtime as hard as we've been pushing over time people just.
Havent Havent wanted to work those hours and so we've been really trying to add.
Add labor to address the overtime issues and as you bring new people on board you, obviously have to train them and you have productivity issues. So the labor issues that we've talked to are really more related to.
Two attrition overtime related attrition as opposed to paying below market wages, but 3% year over year would be I think in line with historical rates.
And that would be across the company.
Correct.
Okay very good I'll turn it over.
Thanks Mark.
Okay.
Our next question will come from Adam Josephson with Keybanc you May now go ahead.
David Alex Good morning, Thanks, very much for taking my questions.
Alex one more or David for that matter just one more on the leverage target that Mark was asking about and had theyre not had the previous management not had a leverage target out there Mike.
You've just.
Just is there a particular reason for it other words why not just let the chips fall where they may if your stock is particularly undervalued or there's a really attractive deal out. There. Then you can proceed accordingly, but why the need for any range.
So as you.
You know I'm I'm I'm, new to the company and so I'll I'll take it as the new CFO and then David has been here a little longer than he can he can add has sort of points of view.
I think given where the company sets and some of our some of what we've observed in the market. It's very important for us to be as transparent as we possibly can be and at and show as much conviction behind our strategy.
Quantitatively as we possibly can and I think this is one way for us to show absolute conviction to the desire to focus internally on driving the west rock operating system, improving margins improving ROIC.
And not pursuing.
<unk>, a large scale transformational deal that forces us to lever up.
I I don't know how to say it more simplistically than that no.
The only area I'm, sorry come again.
I think your point is valid I'm, sorry, I didn't mean to speak however, you guys want to.
No no no.
[laughter] I'm going to let you finish Adam and then I'll and then I'll go.
Well I was just going to need it.
This transformational obviously there've been some transformational deals in the company's history that Didnt go as perhaps everyone would've hoped, but I I don't know why that should affect your thinking about hey, if something comes along that's really attractive.
Why not pursue it what is the previous management teams experience have anything to do with it.
Well I think.
I would answer it two ways. The first one is the.
The internal opportunities we have are so significant to the point you just made that we made all of these transformational acquisitions and we haven't seen the value out of them.
So, let's get the value out of them.
And the target range, we're saying is not for perpetuity, it's you're saying in the short term we're going to <unk>.
Relentlessly focus on extracting the tremendous and unlock value of these assets that we have acquired.
And so there's a little bit of messaging on okay over the next.
Short term period.
We are going to get in trouble right, you're going to see the value from these acquisitions, we've made and if these incredible opportunities come up that fit within our you know.
Our strategic priorities, we'll have that discussion, but you know to your.
I think you've kind of answered the point Adam is.
I think we're seeing as hey.
Strategy of let's let's do a lot of M&A.
Lever the company.
And focus on free cash flow, where we're now pivoting to we're going to get return on invested capital we're going to drive margin expansion, we're going to take out some SG&A, we're going to drive productivity and so I think thats kind of part of the messaging here.
I appreciate that and just one more one last one for me if you don't mind.
You were asked about box demand and what you're seeing in April and and I presume that those questions were getting asked because there are numerous economic indicators that are pointing in shall we say the wrong direction and historically at least.
<unk> demand has been very economically sensitive box board less so we saw that in <unk> nine.
How would you frame the economic sensitivity of these two businesses just from your perspective.
Well this is what the.
The beauty of our model is.
Is our incredible flexibility across changing market dynamics, we serve more end markets more.
Geographical touches.
Across more substrates than any other.
Producer and so what that allows us to do is if there is one or two.
Market dynamics that are soft softening certain segments, we can pivot and flex.
To grow in those other segments and that's why we're so confident in our future with the reduced cyclicality without we're able to provide with our model and so we're very confident.
Thanks, So much David look forward to seeing and I appreciate it.
Thanks, and look forward to senior.
Yeah.
This concludes our question and answer session I would like to turn the conference back over to Robert Kohtaro Tu for any closing remarks.
Great.
Thank you everybody for joining our call today as a reminder, James and I are available for any other questions you have.
And we look forward to updating everybody next week with more details on our long term strategy and goals at our Investor day. So thank you very much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.