Q4 2022 Westrock Co Earnings Call
Good morning, and welcome to the Westbrook fourth fiscal quarter 2022 earnings call.
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I would now like to turn the call to Rob Arturo Senior Vice President of Investor Relations. Please go ahead.
Good morning, and thank you for joining our fourth 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'll 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.
2022 was a tremendous year for restaurants, we achieved record financial results realigned our segment reporting more in line with our long term strategy executed several portfolio optimization actions initiated self help cost improvements and set the foundation for our transformation agenda.
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On our call today I'll provide a review of our results give an update on our transformation initiatives and provide further details on our plastics replacement innovations.
Following that our CFO , Alex Pease, who will provide a deep dive into the quarterly results for our segments and other performance.
We'll provide guidance for the fiscal first quarter and full year 2023.
We will then move to Q&A to answer any questions you may have.
In fiscal 2022 we set company records for net sales consolidated adjusted EBITDA and adjusted EPS on.
On a year over year basis, net sales increased 13% to $21 3 billion consolidated adjusted EBITDA increased 15% to $3 $5 billion and adjusted earnings per share increased 40% to $4.76.
For the year, we generated $1.2 billion in adjusted free cash flow and we reduced our net leverage to 2.05 times as of September 30th well within our stated target of 1.75 times to two and a quarter times.
We also announced the planned acquisition of the remaining stake in Grupo Gondi, our joint venture in Mexico.
For the 18 months through September 30th, we repurchased $722 million of West rock shares and increased our dividend by 25% and just last month, we announced an additional 10% increase to our dividend.
Looking ahead, the global economy faces several challenges, including elevated inflation rising interest rates energy shortages supply chain disruptions and geopolitical conflict. These challenges along with continued inventory rebalancing negatively impacted our business in the fiscal fourth.
Quarter.
Still west rock remains well positioned to navigate the current environment, our broad portfolio of paper and packaging products provides tremendous value to our customers. We are unique in our ability to provide primary secondary and tertiary packaging as well as machinery that all work together.
To help our customers win in the marketplace.
Our packaging solutions enable our customers to safely and reliably ship and market their products and our machinery solutions enable customers to speed up production lines and reduce costs.
Our innovations in plastics replacement are designed to help our customers achieve their sustainability targets and contribute to the circular economy. This is a long term trend that we expect to continue.
We have a stellar balance sheet and we have generated over $1 billion in adjusted free cash flow for seven consecutive years, while we are not immune from macroeconomic challenges, we are well positioned for 2023 and beyond.
Turning to our fourth quarter results on slide four thanks to the resolve and focus of our talented west rock team members, we delivered solid results despite a challenging environment net.
Net sales increased 6% year over year to $5.4 billion and.
Sedated adjusted EBITDA increased 5% to $920 million adjusted EPS was $1 43, an increase of 16% compared to the prior year quarter and the company generated $268 million of adjusted free cash flow.
Our corrugated packaging adjusted EBITDA margins, excluding trade sales were 16.7% as strong pricing and mix continued to more than offset headwinds including cost inflation.
Consumer packaging adjusted EBITDA margins were 16.8% a decrease of 30 basis points year over year.
We remain focused on implementing previously published price increases in our consumer business, which will continue into the first half of fiscal 'twenty twenty-three.
And our global paper business, we delivered a solid 21, 4% adjusted EBITDA margin due to strong execution and a focus on margin over volume.
As I previously noted in October we increased our dividend, 10% demonstrating confidence in our outlook and our commitment to a sustainable and growing dividend as.
As we look ahead, we plan to continue to use our strong free cash flow to invest in our business and return capital to our shareholders through our dividend and opportunistic share repurchases will also continue to pursue attractive tuck in acquisitions.
While we have seen a slowdown in corrugated demand due to inventory destocking and the slowing economy, our consumer segment remains robust demonstrating the value of our diverse portfolio to navigate the current challenges.
In addition, we remain focused on our transformation initiatives and delivering on the fiscal 'twenty twenty-five goals that we outlined at our Investor day.
Turning to slide five in fiscal 2022 we made significant progress on our portfolio optimization, we are continuing to rightsize our portfolio focusing on core assets to increase and maximize return on invested capital.
In July we announced the planned purchase of the remaining stake in our Grupo Gondi joint venture this strategic acquisition positions us to take advantage of onshoring trends and capture growth in the attractive Latin American market.
The transaction remains on track and is expected to close in December 2022 we intend to use our $1 billion delayed draw term loan facility and existing liquidity to fund the transaction as a reminder, Grupo Gondi is projected calendar year 2022 EBITDA is 200 to 210 million.
And we are targeting an additional $60 million in annual synergies by year three following the closing.
In April we announced the closure of our Panama City Mill, and just last month, we announced the closure of our corrugated medium production in our St. Paul Mill. These assets required significant capital investment to maintain and improve and we did not see a path to achieving our return hurdles.
Panama City closure removed 353000 tons of linerboard capacity and 292000 tons of fluff pulp capacity, while the St. Paul closure removed 200000 tons of corrugated medium capacity.
As a result of the St. Paul closure, we expect to incur approximately $36 million of total costs and $24 million of cash costs, we recognized $15 million of total costs and $3 million of cash costs in the fourth quarter and we expect to recognize the remainder in fiscal 2020.
Three.
Our CRB machines in St. Paul remain competitive in the market and continue to operate.
Lastly, we recently announced two divestitures, including our 65% stake in our Rts joint venture as well as three you our beam mills with these sales we will exit the non strategic industrial you are big businesses.
Net proceeds from the sales will totaled $380 million combined which we will use to maintain leverage within our target.
These divestitures further demonstrate our commitment to portfolio optimization and our focus on driving return on invested capital.
Turning to slide six we continue to execute on our transformation initiatives to improve productivity and drive long term profitability, starting with our supply chain, we've begun piloting our distribution center optimization and inventory management initiatives and one of our markets the.
The initial pilot is yielding terrific results, we've identified $10 million in expected annual run rate savings.
We believe these savings are scalable across our broader enterprise, we continue to target 150 million to $200 million from our logistics and planning projects once fully implemented.
We are also executing on our procurement initiatives and have identified approximately $45 million in estimated annual savings and we expect more to come.
We are executing additional SG&A savings, which we expect will deliver a net cost reduction of $40 million in fiscal 'twenty 'twenty three and we are currently working toward a 150 million to $200 million and productivity improvements in our mill system and converting operations with.
With our Panama City and St. Paul actions, we've reduced our north American corrugated mill costs by approximately $5 per ton.
Taken together, we are targeting more than $250 million and net productivity and cost savings by the end of fiscal 2020 three.
We are making significant progress on our 'twenty 'twenty five targets and we remain confident in the opportunities ahead.
Moving to slide seven the global trend toward plastics replacement remains an attractive long term growth driver supported by an estimated $9 billion total addressable market in North America, and $50 billion globally as.
As well documented consumers and governments continue to demand the company support the environment and sustainability.
Given our broad portfolio the breadth of paper grades we offer and our continued investment in product innovations West rock is well positioned to continue capturing a growing share of the packaging market as of today, we anticipate $345 million in annual run rate revenue from plastic.
<unk>, we are targeting to more than double that by the end of fiscal year 2025.
Some of our notable plastic replacement solutions include can color X are sustainable large format can beverage packaging ever grow our paper based produce pundits echo push our paper based plastic tubes replacement and cluster Pak packaging for multi pack canned foods our cause.
Implemented machinery also helps our customers automate their production lines and reduce labor costs.
These are just a few of the solutions, we have today and we remain committed to offering a complete portfolio of recyclable compostable or reusable packaging by 2025.
Looking ahead, we see tremendous opportunity for plastics replacement.
Many of our customers have set aggressive goals to improve their packaging sustainability by 2025, and we are working hard and alongside them to reduce or replace plastics with fiber based solutions. Our innovations in plastics replacement support continued revenue growth and contribute to the circular economy.
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 fourth quarter net sales increased 6% year over year to $5 4 billion and consolidated adjusted EBITDA increased 5% to $920 million Consol.
Consolidated adjusted EBITDA margin was 17% down slightly year over year.
Price and mix positively contributed approximately $687 million year over year.
Continued inflation in energy freight labor chemicals, and Virgin fiber along with other challenges partially offset these benefits.
Also please note that consolidated adjusted EBITDA includes year over year insurance recoveries of approximately $26 million related to last year's ransomware.
Turning to slide nine.
Corrugated packaging segment sales, excluding trade sales were $2 3 billion, an increase of $195 million or 9% year over year.
Adjusted EBITDA increased $23 million or 6% <unk>.
Adjusted EBITDA margin, excluding trade sales declined 50 basis points year over year to 16, 7%.
During the quarter North American shipments per day.
Declined four 6% as continued inventory rebalancing and softer demand drove weakness in several of our end markets.
That said, we serve a broad range of customers and several other end markets exhibited more resilient demand, including packaged food and beverage.
During the quarter, we were focused on driving margin over volume.
We also incurred economic downtime of approximately 288000 tons as we sought to balance our supply with our customers' demand.
Strong pricing and mix contributed $284 million, largely offset by $168 million of inflation $77 million from higher operating costs and $29 million from lower volumes.
We continue to navigate a difficult inflationary environment, driven by higher costs across energy freight labor chemicals, and Virgin fiber during the quarter.
In the near term, we will continue to actively manage our business for the current environment and we will focus on balancing our production with our customers' demand.
We continued to see significant opportunity to drive higher margins as we execute our transformation and deliver on our cost savings and productivity initiatives.
We also remain excited about the long term opportunity in Latin America.
We're developing a new sheet plant in Sao Paulo State that we expect to open in early 2023.
The new plant is expected to produce smaller runs and complex products to complement our part of the lease production.
Our world class assets in Brazil, and our pending Grupo Gondi acquisition are expected to drive significant growth, enabling us to take advantage of onshoring trends in the fast growing Latin American market.
Turning to the consumer packaging business on slide 10.
Segment sales increased $147 million or 13% year over year to $1 3 billion.
Adjusted EBITDA increased $21 million or 11% and adjusted EBITDA margin was 16, 8% a decrease of 30 basis points year over year.
Strong price and mix contributed $126 million, while higher volumes added an additional $14 million.
These benefits more than offset a negative impact of $84 million from inflation in energy freight labor chemicals, and Virgin fiber as well as higher operating costs.
Demand in our consumer business remains solid.
During the quarter, we saw strength in beverage retail food and health care offset by softness in foodservice and home beauty and personal care.
Our unique combination of corrugated and consumer packaging provides significant growth opportunities through the complimentary packaging solutions, we provide additional cross selling opportunities and the trend towards plastics replacements.
We continue to see solid demand trends and we are focused on the execution of our strategy.
Turning to slide 11.
Global paper segment sales decreased $33 million or 2% year over year to $1 4 billion adjust.
Adjusted EBITDA was relatively flat, while adjusted EBITDA margin increased 40 basis points to 21, 4%.
Strong price and mix contributed $247 million more than offset by inflation of $144 million volume of $97 million and higher operating costs of $13 million as.
As David mentioned, we focused on margin over volume in the quarter, which led to solid results in a difficult environment.
We see great value in this business going forward and continue to leverage the flexibility and diversification. It provides.
Next our distribution results are on slide 12.
Our distribution business was strong driven by execution and cost discipline segment sales increased 7% year over year to $374 million and adjusted EBITDA grew 11% year over year.
Strong price and mix contributed $44 million and lower operating costs contributed an additional $10 million.
These benefits were largely offset by inflation of $47 million and lower volumes of $4 million.
Turning to slide 13, we generated $268 million and adjusted free cash flow during the quarter.
Fiscal year 2022, adjusted free cash flow was $1 2 billion, making this the seventh straight year, delivering adjusted free cash flow above $1 billion.
This represents an adjusted free cash flow conversion of 34% for the fiscal year.
Our balance sheet remains strong with net leverage at the end of the quarter at 2.05 times well within our targeted range of 1.75 times to 225 times.
Turning to slide 14, and our financial guidance for the quarter.
As mentioned earlier, we have recently seen softer market conditions in our corrugated business and the external containerboard market driven by continued inventory destocking and macroeconomic headwinds.
However, our consumer business and the global Paperboard market remained remarkably resilient, we continue to actively manage our business to balance our supply with our customers' demand as we navigate the current economic uncertainty.
In this dynamic environment West rock is well positioned to benefit from its financial strength diverse end market exposure and the broad range of packaging solutions, we provide.
Our forecast for first quarter consolidated adjusted EBITDA is $625 million to $725 million and adjusted earnings per share is between 45 to 70 for some.
Some assumptions behind our sequential outlook include the following first.
Favorable costs, driven by two things natural gas down approximately 20% to $6 70 per M M Btu, and OCC down approximately 70% to $33 per ton.
Second unfavorable noncash pension expense of approximately $40 million year over year due to higher interest rates and market volatility.
Third four less shipping days versus fiscal year of 'twenty to Q4.
Fourth an effective tax rate between 24% and 26% and finally, approximately 257 million diluted shares outstanding.
We are planning a 150000 tons of scheduled maintenance downtime across our system in the first quarter.
Turning to slide 15, we expect continued strong price realization in fiscal year 2023, our forecast for full year consolidated adjusted EBITDA is between $3 2 billion to $3 6 billion and adjusted earnings per share is between $3.57 to $4 73.
Yes.
Notable items impacting our 2023 year over year guidance include the following first a contribution of approximately $85 million from the net impact of the pending sale of our RTL joint venture in U R. B Mills, along with our Grupo Gondi acquisition in the fast growing Latin America market. Our guidance also includes the.
Closures of our Panama City mill in corrugated medium production in St. Paul.
These benefits are partially offset by an unfavorable noncash pension expense of approximately $160 million due to higher interest rates and market volatility and.
And finally, we have a $50 million unfavorable impact from foreign exchange rates.
Despite the current macroeconomic challenges, we continued to deliver excellent operational performance our business remains well positioned and we are laser focused on delivering strong results and executing on our transformation initiatives.
I'll now turn it over to David to conclude before we move to Q&A.
Thanks, Alex fiscal 2022 was an incredible year for restaurants, we generated record results and laid a solid foundation for our transformation.
While we expect a challenging environment in the near term, we are actively managing our business and continuing to balance our supply with our customers' demand.
We are well positioned to navigate the current challenges given our strong balance sheet robust cash flows and diverse revenue streams. We serve a broad range of resilient end markets and we are uniquely positioned to serve our customers changing packaging needs, including helping them achieve their sustainability goals only.
The west rock can provide a full breadth of sustainable packaging solutions, including automation that all work together our innovation platform is robust with over 225 active projects in the pipeline.
As we look at fiscal 'twenty twenty-three, we face a challenging environment to start the year. However, we have a resilient business model and a strong cash flow engine.
We have laid a clear roadmap for long term growth in our transformation remains on track.
We continue to see tremendous opportunity to unlock value from our portfolio through cross selling new packaging innovation and executing our cost savings and productivity initiatives, our future remains bright and we look forward to providing additional updates as the year progresses. Thank.
Thank you and with that Rob, let's move to Q&A.
Thank you David operator, we're ready for questions.
We will now begin the question and answer session.
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My first question.
Will come from <unk>.
One shot with seaport.
You May now go ahead.
Good morning.
On that portfolio condition, congrats on the new the new moves and trying to understand where where you might be now in the process relative to the Investor day. When you had signaled that there were going to be a number of moves.
Do we have more to come and is there any color at this juncture that you can provide as to the magnitude of the types of moves that might yet become if there are more to come.
Yeah, Thanks, Mark and good morning.
Going back to our Investor day, as you alluded to we talked about a couple of things and I think we've demonstrated.
Our direction over the last year with some of our portfolio moves our objective is to optimize our footprint and have a portfolio that aligns to our strategy that we laid out.
And if you think about.
Our footprint and our desire to have a world class mill.
Ill.
Network World class cost and focus on high margin high value.
Markets.
The moves we've made have demonstrated that we first look to to try to invest like we did in the <unk>.
For in store down in Brazil, or on a on a conversion site standpoint like our new.
Converting plant in Longview.
And if the investment doesn't meet our ROI threshold to achieve what we want to achieve on those assets. Then we look to make the tough decisions like St. Paul in Panama City.
Then we also look to to identify are there acquisitions that bolt on that help us grow in those markets or geographies, where we want to grow and that's that's where we added 94 over the last year.
So this is something that's ongoing and continuous process. So to answer your question more directly I would say, we will continue to look at our portfolio and an ongoing level that continues to optimize both our mill network and our growth aspects in the markets that we want to grow and so I.
Thank you can just see us continuing to be very strategic in how we manage our portfolio.
Okay, Great and just Simplistically I think you had at the Investor Day suggested.
When you were looking out a few years, there would be a negative impact to EBIT.
From the portfolio moves and so far given Grupo Gondi is actually positive so might there have been a shift or you know it really just comes back to that theres still more stuff in the pipeline potentially.
Well, we are we did not have gone he is at the Investor day. So if you think about Panama City and.
St Paul.
At a full run rate that is negative to EBITDA. If you look at Rts and our U R. E. Mails bad is negative to EBITDA. So that's really what we built in we didn't we will be opportunistic as we said on bolt on M&A as that are very strategic.
But we look more so at kind of how we were thinking about our footprint rationalization versus M&A that you just don't know if it's going to come to fruition until it does.
Very helpful I'll get back in queue. Thank you.
Thanks Mark.
Our next question comes from George Staphos with Bank of America.
You May now go ahead.
Thanks, everyone. Good morning can you hear me okay.
Good morning, Joe to Hey, Good morning, David I wanted to go to slide six.
And just try to hit on a couple of topics related to operation. So first of all can you comment a bit on.
What if any.
Duction and cost productivity initiatives, you have going on specifically with within the corrugated converting network.
Any sort of reorganization footprint efforts et cetera, and where that would reside within the four or five figures you have their relatedly, if I understood. The slide correctly and correct me if I'm wrong. This year within your overall guidance I think the three 2% to $3 six.
You have inclusive in that $250 million of net cost saves I wanted to make sure. That's right and then if you could tell us how those those five items feed into that $2 50 that would be very helpful.
Yeah sure George what I'll do is I'll give you kind of an overview of it and I'll certainly have Alex add.
Two it so yes, we as we laid out at our Investor day.
We are laser focused on efficiencies productivity and self help initiatives that we really believe we have to further integrate.
All of our acquisitions.
That $250 million is our target for this year.
If you look at our converting side, specifically corrugated which you highlighted we have several initiatives that are underway and several that are already paying benefits in several that we fully expect to happen throughout the year.
We have reorganized our corrugated business.
We have a terrific leader, leading that business and the way we're going to really look to run that business is when you think about all of our converting assets in corrugated.
We're really going to leverage and this is a pilot that I think Alex highlighted but we're really going to.
Leverage our scale.
And run these converting plants, a little bit differently than we've done this in the Midwest and it's paying off terrific terrific results and what that does is it's going to allow us to manage production as opposed to it at an individual plant level, it's going to be at a regional level. So we can optimize operations and.
Production planning and transportation in a region, where we have great density of converting plants. So for example in the Midwest. We have 10 converting plants in our region. We're now looking at those as one entity to truly maximize our efficiencies, where we make the product where we ship the product how we support our customers.
How we service our customers and we're seeing a lot of dollar benefits already and then we plan to fully scale that out across North America.
So those are just some of the pieces were doing theres also some low hanging fruit on supply chain with our <unk>.
Corporate purchasing on both direct and indirect fully leveraging our scale. So we believe that this self help is a better way to run our business and drive profitability I'll certainly have Alex add to some other efforts that we have underway. Yes. So thanks for the question George what we wanted to highlight.
A combination of things first of all the real progress were going to make in the in the next fiscal year, but also the traction we're making towards towards the commitments. We made on Investor day. So just said.
<unk> sort of map it back to Investor day that $40 million.
That we mentioned in SG&A, that's in year savings number that's embedded in our productivity.
Run rate for that number is around $100 million and so you'll remember back to Investor day, and the commitment we laid out was $100 million in 'twenty $350 million in 'twenty, four and another $150 million and $25 to work directly in line with what we committed to.
Investor day from an SG&A standpoint.
$150 million to $200 million and logistics and planning initiatives David.
The mechanics of that that's largely related to the work that's ongoing in the Midwest.
That we expect to scale across our entire footprint and then the additional $45 million again, that's an annual number.
Thanks.
Again, because not all of that was in flight and the beginning of the year. The exit rate is much higher so.
So those are Matt again, if you think back to our Investor day against the $500 million commitment that we made on the supply chain.
And then this.
150 to 200 million matched against the commitments that we made in the.
The combination of the mill and the operating networks. So hopefully this.
Give some of the westar has a pretty high level of confidence in the progress, we're making against the commitments we made towards that.
1 billion billion $5 of self help.
Sure.
With that I'll turn it over I know others will probably ask you on inventories in volumes. Just one question again on operation. So at the Analyst day, you talked about trying to become a little bit I'm paraphrasing here, maybe paraphrasing poorly but closer to the customer having more of a local market approach.
Yet at least outwardly when you do more of a regional approach on converting it would seem to be at least again to the outside observer, a little bit at odds with that so tell me why that works well and why it will be successful as you try to become more local marketing approach. Thanks, and good luck in the quarter.
Yes, no. Thanks, George I would say one thing that we learned is.
B Lowe the closest.
Converting site wasn't always the converting site that was closest to the customer.
So with all the acquisitions that that happened there was some historical legacy aspects of that so we're cleaning that up.
Other pieces.
And when I say regional you might be thinking of.
Three four or five states I'm talking a very dense area, that's very local same day delivery area.
We're not going to change that.
So that's the aspect and the benefit of our scale if you have.
Five or six converting sites within a six hour range that gives you a lot of flexibility. But also allows you to look at your you're converting site network can do things like long view, where it's like let's put one large facility next to the mill.
That's a highly automated.
Low cost.
And allows us to maybe consolidate a couple of other local locations. So that's that's how we think about it I don't want you to think we're getting further from the customer on the flip side of that our commercial organization on the structure. We're doing is just purely to get even closer to the customer. So you will see a commercial team that's very low.
<unk> and close to the customer.
Where are we maybe in the past took a very national approach in some cases so.
That does this is going to allow us to get closer to the customer and allow that a surety of supply and still maintaining local delivery.
Thank you very much I'll turn it over.
Thanks George.
Our next question will come from Phil <unk> with Jefferies. You May now go ahead.
Hey, guys you.
Your full year guidance and I appreciate you, giving it first of all just given how visibility.
He is pretty choppy out there.
And based on the moves that you've made on portfolio side full year guide looks pretty reasonable.
But your <unk> guide, even accounting for some of these move seems to be pretty outsized from a step down standpoint, I don't believe you called out economic downtime in <unk> can you give us a little color on what you're penciling in and how should we think about the earnings cadence progressing through 2023.
Yes, I'll start and then I'll turn it over to David to give them a little bit more of the macro context. So I think in line with I think what you've heard other commentary on the commentary in the industry side and you certainly heard in David's remarks R.
Our first.
We're still working through the inventory rebalancing issues and and that's going to drive some softness in the quarter, we expect that to.
Stabilize as we get towards the end of the calendar year or the end of our first fiscal quarter, but we do expect our first fiscal quarter to be.
Weaker given these inventory rebalancing issues prominently on the on the corrugated side of the business and possibly on the global paper side of the business. So.
As is always the case, we'll take actions to maximize our margin and to keep our our internal supply in line with our customer demand, but I think.
Do you think about the cadence going through the year. The first quarter is likely to be the weakest I'd also mentioned that there is inclusive in that guide of 40 million.
Dollar pension headwind, that's a noncash headwind related to the increase in interest expense.
And so if you if you sort of add that back you get to modestly up year over year.
But even with that you are looking basically flat to last year. The last thing I had mentioned as you know.
You do have a maintenance downtime typically the first quarter is our heaviest maintenance downtime quarter and it's in line with the maintenance downtime that we guide in Q2 last year and then you asked a question specifically on economic downtime and I think for obvious reasons, we don't comment on how we're going to manage our our production data.
Yeah, I think Phil I think Alex captured it well I would only.
Add to it maybe to your question on how we're thinking about it.
As we saw October we saw that stabilized from September on the coordinated.
The containerboard side.
And then as we look out to the future.
Our backlogs and the conversations we're having with customers we do feel like as.
As we get into second quarter, we will start to get back to a more normalized order rate from our customers as they work through that inventory and some of the softness that they have so we do feel like this first quarter will be more challenge on both sides of our business on the flip side of that.
We feel very very good about our consumer business as well as our paperboard business and global paper. That's remained very resilient as we go through this cycle and so we think we're really but the points Alex made with our Q1 when you look at the macroeconomic factors.
And some of the commentary of the industry.
We feel like this is a very strong quarter.
As we ramp back into a more normalized efforts in calendar year 2023.
Super.
Question for me on the cash flow I mean, you guys. Obviously have an excellent track record in general really steady and strong cash flow through a cycle any color on how we should think about in a choppy backdrop. How do you think about capex. We certainly some puts and takes on some of these growth ambitions and productivity ambitions.
Certainly working capital could be a little elevated to help us kind of think through how we should think about free cash flow in 2023, and then your willingness to deploy capital in this backdrop. I mean, you guys have certainly been pretty optimistic with buybacks. So kind of help us think through how we should think about cash flow next year and then your your priorities in terms of capital deployment.
Sure I'll again, I'll start with just some of the more quantitative details and then David can give some philosophical points on how we think about capex. So.
So we're sticking to the range that we committed to during Investor day. So we have $900 billion to $1 billion in sort of base Capex and then we give ourselves the flexibility to spend an additional 2% to $500 million in strategic Capex.
Couple of examples that we look to specifically are the.
The hard wood yard, we pointed to at different points in time, we pointed at Longview box plant, which is continuing to develop them.
And we're really excited about some of these and obviously, we have a number of future strategic capital projects in the works and so again one of the real benefits of our model is the fact that we do generate such strong cash flow and we can continue to invest in our business and grow our business. We obviously are continue to be committed to a sustainable in <unk>.
Dividends so over the last 12 months.
Increased the dividend, 25% and I think you probably saw we just increased it another 10% really demonstrating our confidence both in the business as well as the cash flow and our ability to sustain that.
Dividend, we are opportunistic on share buybacks and I think you see we've bought back more than $700 million of shares and we will continue to be opportunistic as market conditions support that and then David talked a bit about.
Our M&A and looking at M&A strategically.
Strategically certainly.
As we've talked about transformational M&A is probably off that they are definitely off the table, but incremental.
Incremental bolt on technology Adjacencies.
Things like that are certainly things, we evaluate on an ongoing basis. Obviously, we've got work ahead of us with the <unk> acquisition to integrate that and exceed our $60 million synergy target.
As that gets weaved into the portfolio will continue to look at exciting opportunities to grow the business.
Bolt ons.
I would just add Phil that our debt.
We do have authorization to purchase 29 million shares we will be opportunistic as those opportunities come up we.
We think that's a good use of our cash Capex, we do fully anticipate to maintain the run rate. We talked about we think that's really important for our desire to have world class assets and cost basis.
And be close to our customers, where we need to be in that regard as well. So we fully anticipate to run down that path. The only caveat I would say is we.
We're going to manage our business if market conditions change dramatically, we who knows what happens in Ukraine geopolitical issues that are out there.
I think I think the entire industry was was maybe.
Surprised a little bit about the sharp drop last quarter and the inventory rebalancing.
So we're going to continue to watch it there if theres anything that happens there with all of these macroeconomic issues, but from everything we see this is the direction that we're going and we believe we've actually even taken a conservative look at and how we see the year as well.
Okay.
Thank you really appreciate the color.
Thanks.
Yeah.
Yeah.
Our next question will come from Mark will be with bank of Montreal, You May now go ahead.
Thanks, Good morning, David.
Good morning.
I Wonder just to get started can you give us a little bit more color on the.
The big drop in outside paper and board sales.
Yes, it was about.
25% ish and given that it was your highest margin segment in the quarter, just trying to understand exactly what youre doing.
Yes, Mark Thanks for the question because I think it's an important one because we're really running our paper business much differently than we have in the past and taken a very strategic outlook and.
And the message I would give you is its value over volume we have very strategic partnerships.
That that we have with customers.
We are really the only ones that have the full array of products in our portfolio.
Whether it's substrates like Sps for containerboard lightweight heavyweight so customers that truly value that.
And long term relationships that we continue to have so having said that.
We're being very strategic in the market and our biggest drop to get specific answer to your question and our global paper business.
It was an export containerboard.
We saw very significant drop.
In the fourth quarter in that regard so it was down high double mid double digits.
So that was.
<unk> talked to our customers around the world.
We're through the supply chain challenges throughout the year, they were buying as much containerboard as they could to make sure. They had inventory because things were so tight.
As things slow down and the outside.
World.
High inventory levels and they are working those down.
The good news on that is with all the conversations we're seeing in some of the backlogs were saying, we expect them to start working through that by the end of this quarter and as we get into Q2, we expect that to come back we did not chase volume in this scenario, we stuck with our high value mantra.
On the positive side of that.
On export and Kraft was actually up <unk>.
And our paperboard sales were up double digits. So we love how we're managing the business and the fact that we saw EBITDA margin increase through a challenging year and we feel like as.
As we get through Q4, and Q1 here, which will be we think the bottom of the market. This gives us great opportunity because we kept the relationships we've kept our share.
We've been focusing on.
The high value products to keep our margins. So this is why we think this business really helps us manage our overall.
Portfolio.
Okay. That's really helpful. Just one follow on from a capital deployment standpoint, David.
I wondered if you could talk about any further thinking on repositioning the two biggest bleached board mills.
The mill at Covington, and the mill down at EBA, Dale I think you've been doing containerboard and some other things that are at EBITDA sale, but I think Covington remains a great Big question Mark in my mind in terms of how you reposition that asset.
Yeah. Thanks.
There are two terrific assets.
Especially for SBS as you know.
And what we're essentially and I talked about our paperboard sales.
We're basically sold out on Sps.
So these mills are just tremendous assets.
And what we're talking about with customers, which is why we really like the breadth of our portfolio, we have a lot of.
Customers, both domestically and export through global paper.
That not only want to Sps, but they want other products as well so we like having these breath of portfolios to have true solutions for our customers that no. One else can bring we think that's a differentiator for us in the market.
So the only thing we we really look at right now.
Similar to what we did at <unk> is how do we continue to.
Analyzed flex manufacturing into other grades so where can we flex from one grade to another grade depending on where we see growth in the market, especially in plastics replacement, where Sps play such as huge roles TNK placement.
So we are looking at investments in those mills for.
More flex manufacturing capabilities to go to different substrates.
To make them more flexible so that's kind of how we think about it because if you look at at <unk>.
Where that is today versus that no very well Mark where that mill was three years ago, It's really night and day and that team has just done a tremendous job.
Okay. That's helpful I'll turn it over thanks, David.
Thanks Mark.
Our next question will come from Mike <unk> with <unk> Securities You May now go ahead.
Thanks, David.
Fourth quarter.
A quick update on the work stoppage as Mark.
Where that stands now relative to a couple of months ago.
No. It does represent over 90% of your seating capacity. We're also hearing about the potential for some other.
I don't know so I'm, just wondering how the company addressing both Martin and potential other issues and other of your site.
Yeah. Thanks, Mike I mean for obvious reasons I don't think it's appropriate for me to comment on on any labor negotiations other than to say.
We are fully operating the mahrt mill.
And in fact, we're actually ahead of our planned contingency production rates at Mark and there has been no impact and service to our customers.
We hope to come to a resolution in the very near term with our team.
But I really want to thank the west rack employees that are there for the great working really continuing our operations seamlessly for our customers.
In regards to the other negotiations all of our other mills or on a master agreement.
Mark is the outlier that that's just not on that Master agreement. So we do have <unk>.
Discussions coming with several other of our mills outside of the core economics of our master agreements.
So it would not be appropriate for me to comment on those.
Got you and I appreciate the color there David.
Just one quick follow up on <unk>.
Consumer packaging.
Packaging.
So it looks like Youre module contracted sequentially, despite higher prices and despite moderating input lots of despite the fact that it seems like more is ahead of plan. So wondering if there's anything that impact you in the quarter such that your margins decline sequentially.
Yes, that's a good catch Mike and the answer is yes, we had some unscheduled downtime.
At our mill in EBITDA, we also have large LIFO.
You take out the LIFO and the <unk>.
Unscheduled downtime.
It brought our margins and to probably around 17, 3% range and then if you add if you will.
Wanted to if you wanted to add paperboard sales through our global paper business, then that really brings it up even higher to probably closer to 18%.
Got you and just one quick follow up.
But I think last quarter, you had an 80% type margins. So is there anything was there any.
I think actually 18, 5% if im looking right now so.
It sounds like you would be still down sequentially.
Is that just a seasonality issue a little bit versus just wondering because that was certainly a very positive quarter last quarter somewhat if there's anything else. In addition to what you mentioned it a bit.
Maybe a little bit weaker in the fiscal fourth.
No.
When we put it.
When we looked at it youre talking about for Q4, Mike.
Yes, 68 versus the $18 five you had in fiscal <unk>.
Yeah, we had a terrific really a terrific quarter in Q3 and margins at.
All time high and we're running to a 20% margin target in consumer and I think the team is doing all the right things there to make that happen.
I would.
I agree with you that there will be some fluctuation quarter to quarter because of product mix and seasonality, but really if you. If you just take out maybe the unscheduled downtime that we had.
With the LIFO hit that we took and there's also FX in there.
With with our European business, which is a nice piece of it.
Our business in consumer there's nothing there that.
Gives us any pause that we're going to continue to grow this business.
The dollar volume growth was 7% in this business we.
We expect margins to continue the backlog is continues to be strong. So this is a great aspect of our portfolio, that's very resilient and maybe Mike just to just to help point out the mix point.
We did see some incremental softness on the home beauty and health I think we mentioned that in our in our prepared remarks.
Tends to carry with it higher margins.
Food and Bev actually offset that so as David mentioned, the overall volume growth was great.
7%, we continue to grow but there was a mix shift between those two primary segments, but again that that business continues to perform extremely well. We have continued strong price flow through great utilization and obviously there are some seasonal fluctuations, but nothing really to be concerned about.
Got it.
And good luck with fiscal quickly.
Thank you.
Our next question will come from Kyle White with Deutsche Bank.
We'll now go ahead.
Yes, Thank you and good morning, just going back to to box shipments any early thoughts on how October looked inherence in November are you seeing larger impact from the inventory correction that you called out or are you seeing gradual improvement on that and maybe able to give us a sense of what youre, assuming in the quarterly guidance for shipments in fiscal <unk>.
Yeah. So if you look at our October shipment.
Shipment rates, they've stabilized from where we came out and.
September .
So we do see that continuing through the quarter, we don't see it continuing to go negative we do see it stabilizing kind of how we exited Q4, having said that.
When we talk to customers when we look at the backlog we are starting to see a little bit of an uptick for where we come in in Q2. So that's what gives us confidence that we feel like as we get through this.
<unk> Q4.
This is kind of the bottom of the trough and.
And.
That's that's kind of the momentum we're seeing on the consumer side.
It continues to be strong.
To help offset.
Set that as well, but as far as box shipments.
Yeah, I would say it's stable from from how we exited Q4 call. The only other point I'd add is and I mentioned in my prepared remarks, we do have.
About 188000 tons of.
The planned downtime in the system seasonally when you think about it or are <unk>.
Q1 tends to be sensitive that lighter and so I think.
It would be logical to assume that our box shipments in Q1.
<unk> to be continued to be a bit a bit soft strengthening towards the year, but as David mentioned it does feel as though it's stabilized quite a bit from where it was last couple of months.
If I can just follow up are you are you guys breaking out what your September shipments were on a per day basis year over year.
You mean September on its own.
Yes.
So the run rate that youre talking to them now supported we just reported on accordingly level in North America, we were down four 6% keep in mind in Brazil, we were positive low single digits and box shipments. So when you combine the Brazil business with with the U S business, our box shipments were only down about <unk>.
Four 1%.
This is why we're so excited about Gandhi because now we'll have an even stronger presence in Latin America, Latin America is definitely growing faster than the United States.
So we feel like this is just fits extremely well into our into our strategy I would say, though that on a per day basis in the in the appendix of the prepared materials, we were in the 360 fives.
Millions of square feet per day range that that's in.
In line with where we're trending currently so that's maybe a bit of a finer answer to your question yes.
I appreciate it and then just a point of clarity on the outlook for the fiscal year outlook.
I assume youre, assuming flat pricing for all paper grades in that outlook and then secondly.
Really appreciate the the commodity cost sensitivity that you provided in the appendix, but are you assuming any kind of deflation on some of your commodities through the year.
And that fiscal outlook.
Sure so.
Obviously, we're not going to talk about about forward pricing, we never do.
We'll say that included in our guidance is continued continued strong price flow through.
Based on the actions that we've taken this year and we continue to assume that the price inflation mix holds so that's on that on sort of the pricing trend as you know well OCC has come down quite dramatically. So it's at $33 a ton versus where it was a year ago, we expect that to creep up.
Towards the back half of the year.
As that market gets to more normal conditions.
Gas continues to be elevated we expect that to mitigate so when you look at it all told we do have.
A fairly significant inflation year over year, just under about call. It $400 million. The vast majority of that is tied to wages.
With around.
Call. It 25, 30 million tied to energy materials and freight.
Good news is we do have.
The inflationary effects that we've seen over the course of the last year mitigating somewhat we have to offset continued tightness in the labor market, but we do have as we mentioned earlier in the call $250 million of productivity.
Baked in there and we think.
We think our guidance.
Given one of the earlier comments on the level of sort of macroeconomic uncertainty the situation in Ukraine in Europe going on some of the inventory rebalancing that we've talked about we did take up.
A very conservative approach to our guidance and to the extent you know.
The year begins to normalize more quickly than what we're anticipating I think we will.
Hopefully be at the upper end of that range.
Sounds good I appreciate all the details I'll turn it over.
Thanks Carl.
Our next question, Adam Josephson with Keybanc.
Now does it.
David and Alex Good morning, Thanks, very much for taking my questions. Alex just one follow up on that guidance question. You mentioned, you're taking a very conservative approach to it can you talk about what your volume and price to commodity cost assumptions are within that range. Obviously, you gave us some other year over year drivers on slide four.
<unk> I think it is but anything you can tell us in terms of volume and price to commodity costs based on the flow through of the.
The box board price increases from this past year and and also why not why no. It doesn't seem like you gave free cash flow guidance as you normally do any any reason for that.
No no reason for not giving free cash flow free cash flow.
<unk> I will say that.
We do.
As I as I mentioned, our ongoing assumption is that we have continued price flow through from the actions that we've that we've taken this year.
We do expect that are the benefits of our pricing actions at.
At least offset any inflationary effects, we do anticipate the inflationary effects mitigating over the course of the year from a volume standpoint, I think for obvious reasons, we're not gonna be explicit around our volume assumptions we do.
We do have embedded in our guidance as David mentioned this continued inventory rebalancing effects. So I think we do anticipate the bulk of that happening through our fiscal our fiscal Q1 and stabilizing as we get into early fiscal Q2. So if you think about that.
<unk> <unk> of earnings through the year.
Reasonable to expect Q1 to be to be quite light and then that strengthening as we get towards the back half of the year.
As you think about the portfolio and how the portfolio interacts together I think it's reasonable to assume that the bulk of the weakness is probably split between the global paper business predominantly in the export channel.
And then the.
Continued challenges that we're seeing in containerboard offset by.
The strength that we're seeing in consumer, which I think highlights the benefits of adding this diversified portfolio on some of the defensive characteristics for consumer business relative to container business.
I think David what did I Miss Adam I think the only other thing I'd say is.
If we start to as we get to our next quarter and as anticipated you know the normalization comes back in corrugated our containerboard business on the export side as well as domestic continues to get back to normalized we'll give an updated.
Shoot.
Order guidance, but with just the general macro uncertainty.
We wanted to take approach.
This early to give our fiscal year guidance that a reliable number that depending on.
No matter, what happens with Ukraine, or the geopolitical issues.
We we came out with it.
Our guidance that was appropriate.
No I appreciate that David and just one last one for me on <unk>, you've mentioned plastic replacement.
Many times on this call and obviously some of your competitors have as well in one of your competitors announced a pretty major capacity addition, SBS capacity addition in the U S. This morning, because of those plastic replacement theme and I'm. Just wondering I just think back to what happened in containerboard whereby E. Commerce got many companies excited a lot of <unk>.
Capacity came in now.
There's an oversupply and I'm just wondering why what you think the risk is that the same thing happens in the box board market because of enthusiasm about plastic replacement in other words, how much capacity growth Ken this plastic replacement realistically accommodate in your view. Thank you very much.
Yes, Thanks Adam.
An exciting time for the industry with plastics replacement, because it's totally incremental to the total market. That's here today. So this is just new business.
And the pull that we're getting is just really exciting.
So if you think about the $9 billion market just in North America.
And the run rates that we have we're currently at $345 million, we expect that and hopefully hope that to double by 2025.
And you think about our current backlogs and situation right now.
<unk> have a way of balancing themselves out, we're continuing to invest and the substrates and grades that our customers want from plastics replacement.
Think this is only going to grow in addition to the core markets of consumer when you think about food and beverage.
This is a market that's going to continue to follow growth healthcare continues to grow for us So I think.
This is totally different thing than containerboard because.
This is a significant amount of new applications that are coming to market.
Thank you David.
Thanks.
This concludes our question and answer session I would like to turn the conference back over to Rob Quartararo for closing remarks.
Thank you everybody for joining our call today.
As usual, we will be available.
For any follow up questions that you have and we look forward to updating you again next quarter. Thank you.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.