Q3 2022 Westrock Co Earnings Call

Good morning, and welcome to the West Rock third fiscal quarter 2022 earnings call. All participants will be in 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 to ask a question you May Press Star then one on your Touchtone phone to withdraw from the question queue. Please press Star then two please.

Please note. This event is being recorded I would now like to turn the conference over to Bob Queretaro Senior Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining our third 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 in 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'll be making forward looking statements involving our plans expectations projections estimates and beliefs related to future events. These statements involve a number of assumptions risks and uncertainties that could cause actual results to differ materially from those we discussed during the call.

We describe these assumptions risks and uncertainties in our filings with the SEC, including our 10-K for 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 the call over to you David.

Thank you Rob and thank you all for joining our earnings call today.

On our call today I'll provide an overview of our fiscal third quarter results discuss progress towards our transformation and review, our recently announced agreement to acquire the remaining stake in our Grupo Gondi joint venture.

Following that our CFO , Alex Pease, who will provide a deep dive into the quarterly results for our segments and other performance I will also provide guidance for the fiscal fourth quarter.

We will then move to Q&A to answer any questions you may have.

When we spoke at our Investor day in May we provided long term guidance for our business.

We remain committed to our goals and this quarter provides another update on our progress toward achieving our objectives. Our business is healthy and our balance sheet is strong we are committed to driving our return on invested capital higher.

Proving our margin structure and delivering above market growth through our strategic initiatives.

Turning to slide three today, we reported record results with fiscal third quarter consolidated adjusted EBITDA above our guidance and adjusted EPS at the top end our strong performance reflects the hard work of our talented team at west drop.

Third quarter sales were a record $5 $5 billion, an increase of 15% year over year and for the first time in West Rock's history consolidated adjusted EBITDA was more than $1 billion. This is an increase of 24% year over year.

Adjusted earnings per share of $1 54 increased 54% compared to the prior year.

Additionally, the company generated $628 million of adjusted free cash flow up $75 million year over year.

Results were strong across all of our segments driven by solid demand and the flow through of previously published price increases corrugated packaging adjusted EBITDA margins, excluding trade sales were 17% as fewer COVID-19 related absences and less maintenance downtime supported.

Crew productivity compared to last quarter.

Our consumer packaging segment remained strong across most end markets with industry, leading adjusted EBITDA margins well over 18%.

Our global paper segment performed extremely well with an adjusted EBITDA margin of 25% highlighting the businesses strategic value as a reminder, our packaging segments do not include the strong margins, we're seeing in our external paper business during.

During the quarter, we returned $354 million in capital to shareholders, including $290 million in share repurchases and $64 million in dividend payments.

We also maintained a net leverage ratio of 2.13 times within our target range of 1.75 times to two and a quarter times.

Looking forward economic conditions remain uncertain and some of our customers have been working to rebalance their inventories.

Fortunately, we serve a broad range of end markets that are resilient. Despite economic trends for example, paperboard beverage health care retail food remained very strong.

Additionally, our consumer backlogs remain at historically high levels.

Turning to slide four as we outlined on our Investor day, we have significant self help opportunities and we are making progress on these goals. Our recent actions include reducing our average mill costs by $4 per ton establishing.

Establishing a supply chain pilot in one of our markets centralizing production planning inventory management warehousing and logistics.

Launching a systems modernization effort, which is projected to deliver $200 million annually in savings when complete.

Announcing two strategic portfolio actions, our Grupo Gondi acquisition and closure of our Panama City Mill.

Leveraging the size and strength of west Roth to reduce costs across approximately $1 billion of indirect spend.

Increasing operating efficiencies across our mill and converting network.

And targeting actions to reduce SG&A and drive increased efficiencies.

Through these actions we are on pace to achieve approximately $250 million in annualized cost savings and we're just getting started on the $1.5 billion of self help opportunities we identified at Investor day, These opportunities along with our scale.

The range of packaging solutions, we offer and our significant cash flow generation position us well for long term growth.

Turning to slide five our previously published price increases have continued to more than offset inflation and fiber labor freight energy and chemicals.

In the quarter, we implemented a series of additional paperboard price increases in the range of $50 to $100 per ton, which will continue to flow through the fourth quarter and next fiscal year looking forward, we expect the rate of inflation to mitigate specifically and freight.

Certain raw materials and labor.

While elevated energy prices remain a challenge, we expect price realizations to more than offset overall inflation for the remainder of fiscal 2022 and into fiscal 'twenty 'twenty three.

Moving to slide six last week, we announced our entry into an agreement to acquire the remaining 68% stake of our joint venture Grupo Gondi, a leading integrated producer of corrugated and consumer packaging in Mexico.

This is a final step in a highly strategic partnership that we began in 2016 with total previous investments of approximately $425 million and we are incredibly excited about the transaction.

Grupo Gondi will complement our existing north American footprint and will increase our presence in the growing Latin American market.

As many of you know we have a long successful history with Grupo Gondi, we supply the company containerboard and paperboard and partner with them on packaging solutions that leverage our patented designs and industry, leading beverage packaging machines.

Increasing integration with Grupo Gondi following the acquisition is expected to produce significant synergies in our North American business.

In addition to the strategic fit Grupo Gondi meets our financial thresholds and firmly aligns with our capital allocation strategy, we expect an ROI see greater than 10% by year, three including $60 million of synergies, which we have good line of sight to given how familiar we are.

With the assets.

These synergies are expected to include leveraging our sourcing and logistics capabilities.

Optimizing external paper sales improving operations across our mills and converting facilities and executing other cost saving measures.

We plan to close by the end of the first quarter of fiscal 2023.

Following the closing we expect to remain within our target net leverage range of 175 times to two and a quarter times and anticipate the deal to be adjusted earnings accretive and far.

Fiscal 2023.

Turning to slide seven Grupo Gondi operates four paper mills, representing 1.1 million tonnes of recycled linerboard medium and CRB capacity. The company has approximately 80% integrated operating nine corrugated packaging plants and six high graphic plants in Mexico.

Some of their high graphic plants, our hybrid facilities, providing both corrugated and consumer packaging group.

Grupo Gondi is led by a highly respected management team and its proximity to the United States will enable further integration with our existing mill system positioning us to take advantage of onshoring trends in the Americas.

This acquisition will strengthen our position in this strategically important Latin America market.

Latin America is projected to grow over 50% faster than North America, driven by economic growth and export product expansion and produce protein and industrial goods.

Grupo Gondi is assets will enable stronger relationships with many of our large multinational customers operating in the region.

It's corrugated and consumer businesses complement our existing business and enhance our service capabilities within Latin America.

Additionally, Grupo Gondi is 14 operating facilities are high quality well capitalized assets. The company recently completed an investment in its world class Monterey Mill, which makes it one of the most modern containerboard mills in Latin America <unk>.

Our Monterey is currently ramping up and operating at approximately 90% of its expected 440000 ton capacity.

We are excited about the future and we are looking forward to welcoming Grupo Gondi team members to the west rock team upon closing.

Acquisitions, such as this are just one component of the capital allocation strategy, we outlined at our Investor day.

Our priorities include organic investments, maintaining net leverage of 1.75 times to two and a quarter times, a sustainable and growing dividend tuck in acquisitions and opportunistic share repurchases I'll now turn it over to Alex to discuss our segment results in more detail.

Thanks, David.

Moving to our consolidated quarterly results on slide eight third quarter net sales increased 15% year over year to $5 5 billion.

And consolidated adjusted EBITDA increased 24% to more than $1 billion.

Consolidated adjusted EBITDA margin was 18, 2% up 140 basis points year over year.

Price and mix positively contributed approximately $750 million year over year.

Continued inflation in energy freight labor fiber and chemicals, along with other challenges partially offset these benefits.

Also please note that results include an insurance recovery of approximately $19 million related to last year's ransomware and weather events.

Turning to slide nine corrugated packaging sales were $2 4 billion, an increase of $228 million or 11% year over year.

Adjusted EBITDA increased $21 million or 6%.

We continue to focus on increasing these margins and are confident we will do so strong.

Strong pricing and mix contributed $300 million, largely offset by $218 million of inflation and $35 million from lower volumes.

We also had modest operating cost headwinds due in part to the continued labor challenges.

As previously mentioned inflation continued to impact our business with costs higher and energy, great labor fiber and chemicals during the quarter.

While COVID-19 related absenteeism improved from the second quarter, the tight labor market continues to pose challenges.

Recruitment in employee retention remain a strong focus for us to ensure that we're able to serve our customers and improve productivity.

Our Latin American business continues to perform well with Brazil margins over 35% our tests by Hot mill in Porto Feliz box plant continued to ramp up and with our announced Grupo Gondi acquisition, we have a strong foundation for long term growth in Latin America.

Turning to the consumer packaging business on slide 10 sales increased $138 million or 12% year over year to 1.2 dollars 7 billion.

Adjusted EBITDA increased $52 million or 28% and adjusted EBITDA margin was 18, 5% an increase of 230 basis points year over year.

Price and mix contributed $122 million, while higher volumes added an additional $9 million ship.

Shipment volumes increased three 4% year over year.

These benefits more than offset a negative impact of $77 million due to inflation, primarily in energy freight labor fiber and chemicals.

We continue to leverage our innovation platform to develop sustainable packaging solutions for our customers in an effort to help them reduce their environmental footprint.

Our current run rate for plastic replacements revenue is now approximately $325 million annually.

Our consumer business remains robust with strong growth in beverage health care and retail food.

We're also continuing to implement recently published price increases.

Our consumer business has an attractive growth profile, leading margin diversification benefits and cross selling opportunities. We continue to execute well and are remarkably excited about the opportunities ahead, turning to slide 11, global paper net sales increased $311 million or 24% year over year to $1 6 billion.

Adjusted EBITDA increased $134 million or 50% and adjusted EBITDA margin increased 440 basis points to 24, 8%.

Strong price and mix contributed almost $300 million FX.

FX and other contributed $22 million and higher volumes contributed $14 million.

Volumes were up 3% on a year over year basis.

These benefits were partially offset by continued inflation of $163 million and higher operating costs of $36 million.

Our strategic global paper business provides flexibility to navigate changing market dynamics by enabling us to optimize between internal and external sales channels as well as paper grades.

This flexibility helps to balance our supply with demand and drive overall profitability.

Our global paper segment also increases our exposure to resilient end markets and enhances diversification.

It improves financial performance and reduces earnings volatility by leveraging our geographic reach asset flexibility and channel options will continue to utilize this flexibility to navigate the changing market dynamics ahead next our distribution results are on slide 12, our.

Our distribution performance was solid with revenue, increasing 11% year over year to $358 million and adjusted EBITDA up 7% year over year strong price and mix contributed $41 million and lower operating costs contributed $9 million, largely offset by inflation of $47 million and lower.

Volumes of $2 million.

Turning to slide 13 during the quarter, we generated $628 million and adjusted free cash flow up $75 million year over year, driven by our strong results.

We expect fiscal year 2022, adjusted free cash flow to be approximately $1 2 billion for the year, making this the seventh straight year of adjusted free cash flow above a $1 billion. This represents an adjusted free cash flow yield of 11%.

Our balance sheet remains strong with net leverage at the end of the quarter of 2.13 times well within our targeted range of $1 75 to 2.25 times.

Turning to slide 14, and our financial guidance for the fourth quarter.

We remain confident in the strength of our diversified portfolio and integrated business model to deliver solid results through any economic cycle, we continue to see healthy demand trends across our paperboard grades and we are actively managing our business given uncertainty in the macroeconomic environment.

Many of our customers are working to rebalance inventories and we've experienced softer agriculture box demand due to the drought. These trends drove a deceleration in corrugated volumes through the third quarter and into Q4.

That said underlying demand remained solid and were confident that our broad portfolio will serve us well through these cycles.

We have approximately 45000 tons of scheduled downtime across our system in the fourth quarter, including 30000 tons that we shifted from our fiscal 2023 to smooth our maintenance schedule and reduce risk.

Our forecast for fourth quarter consolidated adjusted EBITDA is $900 million to $1 billion.

And adjusted earnings per share between $1 24 to $1 53.

Some assumptions behind our sequential outlook include.

First a flow through of previously published price increases.

<unk>.

Natural gas of $8 25 per M Btu.

Third slightly higher OCC costs, partially offset by lower Virgin fiber costs.

Fourth logistics cost up slightly fifth a tax.

Right between 24% and 26% and finally, approximately 257 million diluted shares outstanding.

Our updated guidance reflects current trends and our expectations for the remainder of our 2022 fiscal year, we're continuing to evaluate our 2023 fiscal year outlook and we look forward to providing guidance with our next earnings call I'll now turn it over to David to conclude before we move to Q&A David.

We remain well positioned with a resilient business model strong cash flow and broad range of packaging solutions, we are delivering industry, leading margins and growth in our consumer packaging business, our strategic global paper business and integrated machinery solutions also continued to perform exceptionally.

Really well.

And we are confident in our ability to accelerate our transformation and our corrugated business.

As we look forward, we will drive results in all of our businesses improving margins and growth in the quarters and years to come.

We are unwavering in our focus to continue unlocking the value of our broad portfolio and unique fiber based packaging solutions and we continue to see tremendous opportunity to reduce costs improve productivity and gain market share.

We remain laser focused on executing our strategy and we believe our shareholders will be greatly rewarded.

And with that Rob, let's move to Q&A.

Thanks, David Operator, we're ready for questions.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone town. If you are using a speaker. Please pick up your handset before pressing the key Tim Please Jonathan the question queue. Please press Star then two.

My first question is from Anthony Pettinari Citi. Please go ahead.

Hi, good morning.

Good morning, I was wondering if I was wondering if you could talk a little bit more about July August trends and in corrugated you mentioned deceleration potentially into fiscal <unk>. Just wondering if that was sort of consistent with what you saw in three cue in on it you know year over year basis is that you know flat down low single digits not mid single digits.

Any kind of.

Kind of finer point, you can put on that.

Yeah. Thanks, Good morning, Anthony.

To talk about.

Our Q4, and how we see that in our in our box demand I'll back up to Q3.

We feel great about our performance in Q3.

And if you break it down our consumer and paperboard business was very strong throughout the quarter and we see that continuing in Q4 with historical high backlogs in the second half of Q3, we started to really see our corrugated customers.

Impact of inventory rebalancing, obviously with the supply chain disruptions over the past.

Year, and a half two years.

Customers are building inventory wherever they could youre seeing that rebalancing now at all at all a lot of retailers and at our customers, but the demand fundamentals are there continuously our customers continue to say that but what they're telling us is they have to rebalance their inventories.

And we see that.

Continuing into Q4, we saw that in the second half of Q3, so from a.

Percentage standpoint.

If you remember we were we had really strong comps in Q3 on corrugated were up eight 9%.

We see.

It's flattish in Q4, we see a flattish sequentially from Q3, obviously, we were down a little bit in our production rate in Q3, but how we exited Q3, we see that continuing we havent seen a drop we just see that stabilization of that.

Rebalancing from where we were and again, we see it flattish kind of growth in Q4.

Okay, that's very helpful.

And then you've had some portfolio moves with Panama City and now Gondi can you maybe remind us sort of.

What percentage of containerboard you might expect to export.

Adjusting for those portfolio moves you know, maybe where that's come from where it will go to and then just maybe more recently given domestic volumes have softened a little bit are you increasing exports or just wondering if you talk about that dynamic.

Yeah. Thanks Anthony.

<unk> really well to why we think our global paper business is so strategic for our business and how it balances out our portfolio.

If you look at container board.

Our export business.

It's less than half of our overall global paper business in containerboard.

We're probably 58% domestic 42% export, but what I would tell you is that our export business in containerboard.

Is extremely strong.

High double digits.

In the export business.

And if you look at Kraft paper, a little stronger export and domestic and Kraft paper. So that's why our model, we think works so well and as we look at the markets globally and again, 60% of our paper businesses in segments that we don't cover in our integrate.

Packaging business. So we're able to take advantage of a lot of the value, where we can maximize that for our shareholders. So that's how we see export continuing that way.

And if you recall.

Okay. That's that's very helpful I'll turn it over.

Thanks.

The next question is from George Staphos of Bank of America. Please go ahead.

Hey, guys. Good morning. Thanks.

Thanks for the detail I joined the call late so some of this may have already been covered but first just a point of clarification on your answer to Anthony's question I apologize if I missed it. So is your corrugated volume early in for Q flat with three Q and therefore.

Down or I can't imagine, it's flat with last year's <unk> I, just want to make sure that I'm clear on that.

Yes, so what we saw in Q3 was flat with our end run rate. How we ended Q3. So we had a stronger start to corrugated at the beginning of Q3.

We saw that inventory rebalancing, we did see impact from the drought and our agricultural business as well.

So how we exited Q3 and how were entering Q4, we see it as flattish okay.

Thank you David for that.

And Mike.

Two quick questions just.

One again piggybacking a bit I wanted to cover exports.

Global market seems to be slowing from what we can see certainly from that macro headlines.

Yes, you are seeing very strong demand for export paper on containerboard, you, saying it's related to craft liner.

And the version fiber where are you finding the most opportunity.

For your Virgin Linerboard, and the global market because again based on the headlines it seems.

Different than what we would've expected given what's been happening and then with Gondi.

Can you talk a bit about how the new machine in Monterrey.

Potentially.

The whole of your fleet of machines.

The trim with I know one that machine is a bit fairly customized for the Mexican market again, how would that work relative to any customers that you might be shipping into and in North America as the deal closes thanks and good luck in the quarter.

Thanks, George I appreciate the questions I'll start on the containerboard question.

Our strength in the in Q3 was on the export side.

I do agree with you that.

Is it look as we look at inventory rebalancing.

You know, you'll you'll see that.

You know re re re group itself.

With the demand our paperboard sales are.

Extremely strong we can sell more if we can make more so we feel great about paperboard, that's why we love the diversity of our of our model.

And so.

The other piece that we're watching very closely from the export markets as natural gas.

Obviously, the energy prices in Europe are very concerning.

Many times that creates opportunities for export.

Of our Virgin fiber, so we're looking in that very simply.

But we'll see how that plays out as it relates to gondi, it's a very well capitalized new machine.

It's integrated businesses into Mexico, but it fits very well with our North America.

Recycle strategy and so that will be part of our footprint optimization as we look at it with North America.

Okay.

Thank you.

Appreciate it George.

The next question is from Phil <unk> of Jefferies. Please go ahead.

Good morning, everyone strong quarter good results.

I guess, just David that last point as you kind of integrate gardening, you mentioned you'd look at your footprint optimization strategy is are there any when you look at Holistically in North America as well as now Latin America are there opportunities, where you see higher cost assets, particularly on the containerboard that you could do more work on like some of the work that you do.

In Panama City.

Well I would say it well good morning, Phil first off and thanks for the question I would say you know we're always looking at our portfolio and we talked a little bit about that at Investor day, we are going to optimize.

Our mill cost footprint.

And we've committed to a 20 dollar reduction in our cost per ton and so theres going to be a variety of everything. So first thing. We look at is to invest we get great investments like you saw in.

Lawrence and trace Baha.

But where we need to invest to get to where we want like Panama city at the return on invested capital isn't there we're.

We're going to have to make the tough decision. So we're continuing to look at that footprint and how we how we move forward.

With Gondi that is going to play a part of it because.

Monterey Mill is really a world class asset and we will take advantage of it.

Okay Super.

As your price increases continue to layer in in the coming quarters.

Alex mentioned that Youre, starting to see some signs that inflation is moderating a little bit do you have enough price to fully offset inflation looking out to 2023, and then pricing certainly was really strong in consumer and growth was really good I think in the past you lags were low longer on the downstream side call. It about nine months have you been able.

Sure and some of that lag dynamic just given how extended backlogs are right now.

Yeah I'll go ahead and take that one sale and then David can pile on so first off we're not we're not in a position to give guidance on 2023 at this point I I do think if you look historically.

You know price has has always off more offset or more than offset inflation and I don't see any reason why we wouldn't think that continues to be the case.

As we look into Q4, we do see the continued flow through of previously published price impact that will be more pronounced on the paperboard side than the containerboard side, just given when we rolled out various price increases are different grades, but as we think about Q4, we we.

The price realization.

In the same order as what we've seen for that for the balance of the year. So we do continue to see strong price realization and we do see it continuing to more than offset inflation anything you'd add David no just to your point on the lag effect from a price increase to implementation. Your timing is about right. That's what we're saying.

Although the comment I would say and we talked a little bit about it in an investor day is we're working really closely with our customers on pricing moving forward. So we're exploring how to how to do that.

With P P W pricing and other mechanisms as well so.

So we're continuing to be very strategic in how we approach price.

And as contracts come up.

May see that.

That lag effect alter just a bit.

Okay. Thanks, a lot guys I appreciate it thanks.

The next question is from Mark Weintraub of Seaport. Please go ahead.

Thank you just maybe one quick clarification on that last comment was that specific to the consumer packaging business. When you were talking about changing in the way the contracts are set up and length of lags.

Yeah, Mark I would say, it's actually to both we have we are our contract situation.

Or I should say, how we do contracts as it ties to Pee PW is much greater on the corrugated side of our business versus the consumer side of our business.

But we think pricing with the way the market's been over the last couple of years with inflation and the volatility we want to really stabilize that and our customers want to stabilize that so we think there's ways. We can continue to do that and that will come over time as we worked through as contracts.

Come up okay.

Okay interesting.

As we think about I'd say at a very strong.

Third fiscal third quarter results.

For the full year at the top end.

Has it come down a little bit.

If we think about sort of is that primarily a reflection of business slowing on the margin or is that the costs going higher or are there. Other how would you capture what sort of the dynamics at work there and maybe just as a part of that.

I look at your press release, and I, just look at the box shipments and it it looks like they were down about 3%. It does that get me the sort of is that can I get to the right number looking at the data you provide to sort of get a sense as to what your box shipments did in the just ended quarter.

Yeah, Mark really good question and I'll just answer very briefly but then I'll turn it over to Alex to give you a little bit more detail on it.

I think theres a couple of things that happened in first I'd say, we're still well within our range that we gave at the beginning of the year. So we feel really good about that.

We felt great about third quarter inventory rebalancing is very real and we see that as a piece.

That happened very quickly and I think youre seeing that in the in the markets in general and I think inflation, especially natural gas.

It's something that.

Well beyond our forecast and I'll turn it over to Alex to maybe provide more detail.

I think so David hit the nail on the head I think the demand trends that we saw which is related to his answer to Anthony's question. The demand trends that we're seeing are in line with where we exited the quarter. So I think we.

See that being relatively consistent on the demand side as this inventory rebalancing takes takes hold really the biggest driver our energy cost. So if you think about it.

Where we exited.

Exited last year at around $3, an M btu per gas, we've been running a really north of $6 and then if you look at the assumption we provided them.

For the for the for the fiscal Q4 were at eight in the quarter for <unk>. So just to help you dimensionalize that on an annual basis, we consume about 90 <unk>.

<unk> 90 million M N V to use natural gas. So that's a that $2 is there a meaningful difference on up on an annualized basis now Fortunately, we are able to offset that with the positive pricing that we talked about.

But that is something that we didn't anticipate going into the year. So if you were to look at our full year basis for natural gas you'd see it around call. It $6 50 versus last year full year was around $3. So that's a pretty meaningful difference OTC continues to be continues to be higher than last year. So we exited last year.

We're at around $100 a ton I think we're.

Probably around 50% higher than that in the prepared remarks, we said that's roughly 4%.

4% higher than in the quarter sequentially, Fortunately that'll be offset by some.

The modest improvement of about 2% improvement in AR and Virgin fiber and then logistics cost continued to be up slightly so really the story.

Mark is is more about inflation than it is demand. Unfortunately, given that the diversification of the portfolio and the strong pricing power that we have we're able to more than offset the effects of inflation with price.

Great that's helpful.

Just on the box shipments if I look at the press release and it looks like it's down about 3% is that accurate for your third quarter. That's right. Just just just over so three 2% I think is what we said.

Okay. Thank you.

I mean that is lapping.

A really tough comp so the comp in Q3 of last year was I think eight 9% something like that right positive.

Appreciate it.

Thanks Mark.

Is from Kyle White of Deutsche Bank. Please go ahead.

Hey, good morning, Thanks for taking the question on the Grupo Gondi acquisition are you able to give us any kind of level of what you think EPS accretion will be for that acquisition as well as the free cash flow of that business.

So we haven't we haven't provided that information publicly all sort of maybe help you help you get there.

If you think about depreciation depreciations.

Going to be in the order of $77 million the midpoint of the EBITDA.

Is.

As a $205 million and dressed call. It make your assumption drain a half percent or selling $1 billion.

And then a tax rate in line in line with us that that should help.

Help you do the math.

Obviously.

We are going to be subject to normal purchase accounting adjustments.

The biggest one of those will likely be the step up and step up in inventory, but we'll back that out of our adjusted results. So hopefully that helps you get there.

That's very helpful and then on inventories in corrugated packaging in the containerboard business can you just talk about inventory levels, and where you are versus where you would like and then also we've seen other manufacturers choosing to carry more inventory in this challenging supply chain environment is that something you're looking to do as well here.

Well, we see inventories on the corrugated side about where we want to be as we head into fourth quarter.

So we're feeling pretty good about that we don't think.

One way or the other.

Anything material, we like the position, we're at with them and I will say just to pile on a little bit.

If you were to look at the balance sheet, you'd see inventory levels a bit higher that's one of the reasons.

That the cash flow number is where it is and that's probably the predominant reason why the cash flow number is where it is.

That's actually a deliberate as you know when we go into Q.

The first calendar year quarter.

We typically that's our highest maintenance outage quarter and so we typically build inventory in anticipation of that that cycle.

Got it I'll turn it over.

Thanks Carl.

Yeah.

The next question is from Mark <unk> of <unk>.

BMO. Please go ahead.

Thanks, Good morning, David Good morning, Alex.

Morning, Mark Garner.

David I wondered just to start can you talk about any impact that you see at this point.

The strengthening of the dollar.

And I'm thinking, particularly as that would impact will export volumes in export pricing.

Yes, it's a good question and we're watching it closely and you know from a FX standpoint in Q3, it was really not material.

For us.

There's a lot going on in Europe right now.

And we're really pleasantly surprised with our European business.

It's been very resilient.

You know there's growth there.

So.

We're watching it closely in Q4, I think we have it down $11 million.

In Q4.

It does it could have a play on the export markets both ways.

So we were watching it closely but energy prices is also mitigating some of that so.

From a European manufacturing so we're.

We're not at a point, where it's materially affecting us we actually are really pleasantly surprised with how resilient our European business has been the margins of that business. So it's something we're keeping an eye on but nothing overly material maybe mark just a few points I'll make that are additive if you.

David mentioned the $11 million in Q4, if you look at that on an annualized basis. It's in the ZIP code of call. It 2000 $20 million to $25 million. So again to David's point, not not particularly material as you see offsets in the Euro you see gains or we have seen gains in the <unk> from Brazil, so sort of a.

A bit of a natural hedge at least the way currency movements are happening now the only other point I'd make which might be on People's minds is our increased exposure now to the Mexican peso I think it's important just to point out for folks on the call that about 40% of Gandhi's.

Earnings are denominated in U S dollars. So that exposure is not as significant as it might appear on the surface.

Okay, Alright, well I agree that this.

The currency impact could be significantly impacted there offset by up by what we're saying, yes, I guess the other question I had.

Worker Alex is just.

An update on kind of the asset sale process and also whether this is being delayed at all by kind of the turmoil that we've seen the debt markets.

Yes.

I don't know.

Oh I don't know that we have an update on on a dramatic portfolio action beyond what we've announced with Panama City and with Panama City, we are opportunistically pursuing.

Liquidation of those assets, where we can.

The city has been interested in purchasing the land for industrial redevelopment, obviously some of the equipment. We can we can repurpose themselves so that actually is going.

Going quite well.

On sort of the more strategic actions and David.

Can layer on here, where we're not going to comment on.

On anything that may or may not be contemplated or are in flight I will tell you that.

The market remains active so there are certain portions of the market that are.

More challenging because of.

The high yield market and everything that's going on in the high yield market, but the bank markets.

And for people with attractive credit and certainly the strategic market Theres a lot of interesting things happening strategically, but David can layer on top if he has anything no I think you answered it well.

Okay. It sounds good that's it for me.

Thanks, Mike I appreciate it.

And then if you have a question. Please press Star then one.

Question is from Adam Josephson of Keybanc. Please go ahead.

David and Alex Good morning, Thanks, very much for taking my questions.

On on containerboard versus box Board, you know with the Gondi acquisition, perhaps there's a drought can you help me with what your pro forma sales or EBITDA exposure is now containerboard versus box board and just given your commentary about your record backlogs in consumer versus the deceleration.

<unk> that youre seeing in corrugated.

I would think that.

Your view on consumer it might be more favorable than that on containerboard, but by your actions. It seems that that's not necessarily the case. So can you tell me, how you're thinking about those two businesses.

As distinct from each other as one more attractive to you than the other and if not why not.

Maybe I'll I'll jump in first and then Alex couple of things to keep in mind on Gondi Gondi does have CRB, so keep that in mind.

If you look at Gondi is profile.

It's only a little bit over 50% that's in the corrugated space. So there's a diverse diversification in Mexico and the way the customers work.

We've got great exposure to them over the past several years with our relationship there is a I mean, when we talk about connectivity and enterprise between corrugated and consumer high graphics, which is how it's kind of referred to in Mexico that connectivity is huge and so that is one of the other reasons why.

An attractive market it goes to our diversification.

And the other the other thing that Gondi does which fits very well, how we think about things and optimizing our assets.

Several of their plants, our hybrid plants will they'll do corrugated and consumer and the same plan that lowers our cost basis.

Services customers very well.

So there is a great diversification in gondi.

And so that's why we think it fits so well into our portfolio a couple maybe just a couple of other things.

On the land the first is.

I think somebody asked this question earlier, so gondi is around 80% to 85% integrated so.

So it does help with that the level of vertical integration I think also David mentioned, the Monterey Mel I think it's important to point out that's about a 440000 ton.

Mel with cost below $300 a ton so it's really.

A world class asset and then it does enable us to take other actions on further optimizing the portfolio.

To the extent, we have no rapid R&R at those levels in the North American footprint. So there is an addition to that David mentioned in Latin America, Theres enormous synergy in North America as well.

And I appreciate Yeah go ahead I'm sorry.

Go ahead I apologize go right ahead.

Yes.

Sorry to interrupt.

Just a related question is just again it seems like consumer is going from strength to strength for you and for the industry right now where backlogs are at historically high levels, you're experiencing demand growth there.

Corrugated is quite a bit different and everyone knows about the weakness that that is happening domestically and globally.

Historically, Kraft paper or containerboard box board have move roughly in line with one another with one another just look at the historical price chart. As an example, and it seems as though there is a major divergence happening now in the sense that containerboard and Kraft paper are weakening with the economy, yet box board.

It isn't somehow would you expect that divergence to persist if the economy gets weaker or are how do you think about the relationship among those grades in a recession or in any economic environment for that matter.

Adam I think it's a good point in the first thing I would say is what's why we love our model, we really liked the cautious side of our business. In addition to the consumer side and as market conditions change and different cycles come on we're able to pull a lot of different levers.

Take advantage globally of what's happening in the market.

I would say if you look historically that consumer.

Volume trends tend to follow corrugated, but I think theres a couple of dynamics happening.

Plastics replacement is very real Alex mentioned earlier in prepared remarks, our continued growth in plastics replacement.

The other piece is we're really seeing customers value our enterprise sales aspects of our business. So I think thats why youre seeing that and that's why corrugated is really an important part of what's happening.

And I think once this inventory rebalancing kind of comes to fruition and stabilizes.

We feel great about the corrugated business and the model that we have between both consumer and corrugated and on Kraft paper again plastics replacement.

Continues on the Kraft paper side and.

That market, we see is very fruitful in the future as well.

Thanks, a lot David Thank you.

The next question is from Cleve Rueckert of UBS. Please go ahead.

Hey, good morning, everybody. Thanks for taking my questions.

Just a couple of follow ups really for me.

There's been a lot of discussion about about gondi in a bed integration I'm. Just wondering if you could tell us what level of integration you'll have as you know.

At the corporate level. After that is closed and then just sort of I guess building on that given the strength you're seeing in the paper segment. Yeah. I think it's it's quite impressive to all of us on the call.

Is.

As increasing integration still kind of a is it a strategic priority at this point.

Really really good question I appreciate it I would answer the first part of your question.

With Gondi, our vertical integration on the corrugated side of our business will be at about 80%, obviously, we've talked about on the consumer side closer to 50%.

And I think because the way we've pulled out our global paper business to the second part of your question. We just love the flexibility in our mills in the global paper business to balance.

Where we can bring the most value and we saw that in Q3.

So how we think about it is we're going to actively manage the business to take advantage of the market conditions.

We absolutely do not want to be 100% vertically integrated we think that limits us and we think we can bring more value.

Being diverse and being open to the merchant market customers truly value that we have all of the substrates.

That we can provide them for their solutions and so our ability to flex.

Manufacturer ability to flex where the growth in the markets are allows us to maximize the return for the shareholder.

Now, having said that if we see things on the horizon.

Where we want to tighten our integration.

We can do that we've made a couple of moves we did the Panama City mill, we were doing a greenfield on long view that that'll tightened some of it. So we're going to continue to run our business that maximizes the most value for our shareholders.

Got it.

And then David just following up on a comment you made earlier.

Talking about paper Board. He said he liked paperboard and I think if I if I caught it correctly you said you could sell more if you could make more.

I'm just wondering if you could expand on that a little bit and maybe give us a.

That focus on on certain grades certain markets certain regions.

Appreciate a little bit more color there if you could yeah the.

The answer is yes, we're seeing it across.

We're seeing across all of our substrates. We just have a very strong backlog and I would just go back because I think the.

The historic thinking of just tip.

Typical core growth in this segment has the fundamentals have changed.

The growth we're getting in plastics replacement is significant our new product innovation.

Backlog is significant and plastics replacement, you tie that with our machinery and automation business.

I think we're growing the market size in this segment.

Got it I appreciate it. Thank you very much thank you.

The next question is from Gabe <unk> of Wells Fargo. Please go ahead.

David Alex Good morning, Thanks for taking the question.

I wanted to dial in a little bit on on free cash flow.

Obviously, you guys kind of trend a little bit I guess.

The top line.

Can you maybe quantify for us what the working capital.

Drag might be this year and does it in any way.

Relate to some of the accelerated I guess maintenance downtime that you talked about.

Fiscal Q4, and then I guess, if we were to hold things constant, which we know is not realistic would you say that next year, you would anticipate a another working capital build or should it be more neutral to cash flow.

No. So so I'll just sort of help help bridge it for a year over year.

The biggest driver of the free cash flow.

The free cash flow headwind is is really that.

The inventory that I mentioned, so we had the build in inventory in Q3 that that really is what explains that there was also slightly higher.

Cash taxes are so.

Those were really the two kind of the two biggest things that you shouldnt expect that to be.

A continued headwind I think we normally have those that sort of working capital volatility we talked last quarter about some.

Some underperformance on the.

On the accounts receivable side linked linked to a lot of the pricing actions and customers' response to a lot of the pricing actions a lot of that is behind US now so R. R.

Our performance is.

It's pretty good our AP performance is pretty good so just.

To dimensionalize it for that for the quarter that.

The combination of cash tax in inventory.

Planes about about $140 million headwind against about $194 million at Taylor.

Tailwind and.

Higher results, so that kind of kind of gets you there obviously.

EBITDA is the biggest driver of where cash flow lands and you'll you'll see I don't know if we said it in the remarks, but we did.

<unk>.

Our capex forecast for the year is in the order now of about $900 million. So.

Does that help.

It does that was actually going to be my follow up on on Capex. It looked like it was tracking a little bit behind that I suspect maybe some of that.

Supply chain related does that kind of pushing the 23 or are those projects maybe being.

Reconsidered at this point.

No you hit the nail and had a lot of the Capex.

Issues are related to the basically the deployment of the capital because you know what.

It's taking longer to get crews, it's taken longer to get machines all of those sorts of sorts.

Sorts of things, we do expect 2023 and again, we're not guiding to 2023, but we do.

Expect to stay within our the diet that we articulated at Investor day of between 900, and a $1 billion.

What kind of base level, capex with an incremental $200 million to $500 million of strategic opportunity.

Okay. Thank you Alex if I can squeeze one last one and this is really kind of presentation semantics, but when I look at your.

Kind of year over year bridges.

And you present price mix inflation and op costs.

Given the fact that you guys are going to be delivering a lot of this $1 5 billion in terms of productivity savings shall.

Should we expect to see kind of a discrete line item for that so we can kind of hold.

Hold you accountable and guests.

All of that kind of simply show up in op costs, where we've got non material inflation offset by this this productivity bucket.

Thank you yeah. So.

So yes.

We'll be as transparent as you know as we can around how that how the performance transformation is developing and I think we started that today, when we pointed to that $250 million.

Sort of opportunities that were already already actioning against the $1 5 billion of cell count where.

Where you would find that in the bridges is within that operating cost.

Chuck.

Don't think we're going to undertake to say.

X percent of that is procurement related Y percent of that is SG&A related we're not going to get to that level of granularity, but you certainly should.

Be able to track it through the productivity.

Productivity and operating expense bridges, yeah, and the only the only.

Other thing I would add to that is you will also see the benefits of that in.

In an overall segment margin so as we brought consumer and NPS together.

There was a lot of optimization from an SG&A standpoint.

On our mills on our productivity you see a lot of that in our paper margins and that's why we feel really good about the direction, where we're going on our margin enhancements.

Probably a little further along on consumer in the mills and corrugated.

We feel really good about the transformation opportunities there that are going to be coming and we will share those with you as we continue quarter over quarter.

Yeah.

Thank you again.

Thanks.

This concludes our question and answer session I would like to turn the conference back over to Rob Queretaro for closing remarks.

Great. Thank you very much. Thank you everybody for joining the call today as usual James and I will be available. If you have any additional questions and we look forward to updating you again next quarter.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.