Q1 2023 Westrock Co Earnings Call
Good morning, and welcome to the West Rock first fiscal quarter 2023 earnings call. All participants will be in listen only mode should you need assistance. Please signal 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 Rob Cortado Senior Vice President of Investor Relations. Please go ahead.
Good morning, and thank you for joining our first fiscal quarter 2023 earnings call. We issued our press release this morning and posted the accompanying presentation to the Investor Relations section of our website.
It 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 tool, 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 will 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 32022.
We will also be referencing non-GAAP financial measures during the call. We have provided reconciliations of these non-GAAP measures to the most directly comparable GAAP measures in the appendix of the slide presentation as mentioned previously the slide presentation is available on our website.
With that I'll now turn it over to you David.
You, Rob and thank you all for joining our earnings call. Today. This morning, I'll provide an overview of our fiscal first quarter results followed by a review of our strategy and progress on our transformation then I'll turn it over to Alex who will review our segment performance in more detail review our adjusted free.
Cash flow and provide our outlook for the fiscal second quarter.
We will then move to Q&A.
Turning to our first quarter results on slide three.
Net sales were comparable to prior year at $4.9 billion and consolidated adjusted EBITDA declined 4% to $652 million. Adjusted EPS was <unk> 55, a decrease of 15% compared to the prior year quarter, the company generated $30 million of.
Adjusted free cash flow.
It's important to note that consolidated adjusted EBITDA was negatively impacted by a $119 million due to economic downtime and weather disruptions.
Pension and foreign exchange rates also negatively impacted our year over year consolidated adjusted EBITDA growth by $57 million combined.
As we anticipated the first quarter operating environment saw continued inventory rebalancing elevated inflation and shifting consumer spending.
These trends primarily impacted external containerboard demand as well as our corrugated packaging segment, however, corrugated packaging improved quarter over quarter with North American packaging shipments up 2% to 373 million square feet per day.
We continue to balance our supply with our customers' demand and we incurred 356000 tons of economic downtime during the quarter.
Our consumer packaging business and external paperboard continue to see consistent demand supported by exposure to several resilient end markets and adoption of our plastics replacement solutions during the quarter, our consumer business was negatively impacted by weather disruptions and other items and several of our mills. However.
We continue to see healthy demand and backlogs.
The resiliency of our consumer business illustrates the benefit of our diversified business model and differentiates us in the market longer term and also positions us well to capture more share of wallet. As we are the only paper and packaging company able to offer a full range of packaging solutions, including machinery.
In automation.
Corrugated packaging adjusted EBITDA margins, excluding trade sales were 14.2% an increase of 70 basis points.
Consumer packaging adjusted EBITDA margins were 15.1% an increase of 20 basis points.
Both corrugated and consumer margins benefited from strong year over year pricing. We are continuing to implement previously published price increases in our consumer business, which should continue for several more months global paper margins declined 320 basis points to 14% as inventory rebalancing and <unk>.
Softer demand pressured results.
Distribution adjusted EBITDA margins increased 140 basis points to 3.4%, primarily driven by favorable selling price and mix.
We ended the quarter with net leverage of 2.35 times slightly above our targeted range of one and three quarter times to two and a quarter times, we intend to use proceeds from the expected sale of our stake in our T S and our Chattanooga mill as well as our free cash flow to return leverage to our targeted range over time.
We remain focused on executing our transformation and striving towards the goals, we outlined in our Investor day last may recognizing the uncertain macroeconomic environment.
We see significant opportunity to drive productivity increase our margins and improve our return on invested capital we.
We will continue to leverage our robust cash flow to invest in growth manage our leverage and return capital to shareholders.
Before moving to an update on our transformation initiatives I'd like to highlight that for the third consecutive year West Rock was included in the Dow Jones Sustainability, North America index in recognition of our commitment to sustainable business practices.
The index recognizes the top 20% of sustainability performance among the 600 largest U S and Canadian companies.
Sustainability is core to what we do at West rock and we're proud to be recognized for our efforts and I'd like to thank our 58000 team members for living our values in everything they do.
Turning to slide four last May we communicated the four key pillars of our transformation strategy and we continue to make progress in each of these areas.
First leveraging the power of Onewest dropped given west Rock's broad capabilities and scale, we are uniquely positioned to deliver value to our customers and serve their packaging needs.
And ongoing example of this is our relationship with Molson Coors through our partnership Molson Coors is replacing their use of plastic rings with our cluster Pak packaging and automation solution Molson Coors estimates this solution will eliminate over 1.7 million pounds of plastic waste annually.
By 2025.
The complementary relationship between our machinery business and packaging serves our customers well creates deeper relationships and drives organic growth.
We now have over 5100 machines in our installed base and it continues to grow we see strong demand for our machinery solutions with backlogs of 12 months as of the end of the quarter.
Our next pillar is innovating with a focus on sustainability and growth we are investing in innovative solutions to help our customers meet their sustainability targets and displace plastic packaging with more than 225 innovation projects and development.
More than 30 of those projects are related to plastics replacements.
Our plastics replacement revenue continues to grow and is currently estimated at a $365 million run rate.
And we are targeting increasing that to more than $700 million in run rate revenue by fiscal 'twenty 'twenty five.
Our third pillar is relentless focus on margin improvement and increasing efficiency.
We are executing on our productivity initiatives and we are on track to achieve $250 million in cost savings in fiscal 2020 three.
These initiatives are driving savings through logistics and planning optimization centralized procurement SG&A reductions and efficiencies in our mill and converting network.
We continue to see significant cost saving opportunities beyond fiscal 2023, and we remain focused on unlocking these savings to expand our margins.
And finally executing disciplined capital allocation, we remain focused on using our cash flow to drive value through our disciplined capital deployment strategy.
Last year, we invested more than $860 million to maintain and improve our assets. We've increased our dividend over 37% in the last seven quarters, while also repurchasing more than $700 million of our stock.
We're also continuing to refine our portfolio to focus on the most attractive markets reduce volatility and improve our return on invested capital.
Last year, we permanently shut capacity and higher cost facilities in Panama City, and St. Paul, enabling us to redirect significant capital investment toward better use and other assets.
In December we closed on the sale of two noncore U R E mails and we continue to work toward closing on the sale of our stake in our T S and our Chattanooga mill, which remains subject to regulatory approval.
We also recently completed our Grupo Gondi acquisition, which complements our north American footprint and increases our exposure to the attractive Latin America market.
The IMF projects. This strategically important market will grow more than 50% faster than the United States, driven by economic growth and export product expansion and produce protein and industrial goods.
In addition to attractive financial returns Grupo Gondi is high quality assets bring us closer to many of our large multinational customers operating in the region grew.
Grupo Gondi is already contributing to our growth with adjusted EBITDA of $17 million since the acquisition closed in December and its full year results were inline with expectations.
The results were Grupo Gondi are included in other unallocated this quarter given the timing of the closing and we are near finalizing how we will report it longer term.
I'll now turn it over to Alex to discuss our segment results in more detail.
David moving to our consolidated quarterly results on slide five first quarter net sales were roughly flat year over year at $4 9 billion and consolidated adjusted EBITDA declined 4% to $652 million.
Consolidated adjusted EBITDA margin was 13, 2% down 50 basis points year over year.
Price and mix positively contributed approximately $454 million year over year. This benefit was offset by cost inflation lower volumes and higher operating costs.
Note consolidated adjusted EBITDA was negatively impacted by $119 million due to economic downtime and weather disruptions, which impacted our volumes and operating costs.
Pension and foreign exchange rates also negatively impacted our year over year consolidated adjusted EBITDA growth by $57 million combined.
Turning to slide six.
Corrugated packaging segment sales, excluding trade sales were $2.2 billion, an increase of $26 million or 1% year over year.
Adjusted EBITDA increased $20 million or 7%.
Adjusted EBITDA margin, excluding trade sales increased 70 basis points year over year to 14, 2%.
As David mentioned, we saw a 2% improvement quarter over quarter with per shipping day volumes of 373 million square feet.
Strong pricing and mix contributed $206 million, largely offset by $79 million of inflation $58 million from lower volumes and $39 million from higher operating costs.
Results were negatively impacted by $60 million due to economic downtime and weather disruptions during the quarter.
We are managing our business for current conditions, and we will continue to balance our production with our customers' demand.
Turning to the consumer packaging business on slide seven.
Segment sales increased $76 million or 7% year over year to $1.2 billion.
Adjusted EBITDA increased $14 million or 8% and adjusted EBITDA margin was 15.1% an increase of 20 basis points year over year.
Strong price and mix contributed $132 million, partially offset by inflation of $54 million and higher operating costs of $34 million.
Consumer packaging demand remains strong and backlogs are healthy.
This diversification from our consumer business reduces earnings volatility and provides attractive long term growth opportunities.
Turning to slide eight.
Global paper segment sales decreased $229 million or 17% year over year to $1 1 billion.
Adjusted EBITDA declined 32% to $157 million with adjusted EBITDA margin declining 320 basis points to 14%.
While adjusted EBITDA declined year over year, it was 4% above the first quarter of fiscal year 2021.
Strong price and mix contributed $115 million more than offset by volume of $114 million and inflation of $48 million.
Note that adjusted EBITDA was negatively impacted by $56 million due to economic downtime and weather disruptions.
We saw weaker demand for containerboard and more resilient demand for paperboard during the quarter export containerboard declined 65%, while domestic containerboard declined 33%.
In the current environment, we're continuing to prioritize margin over volume in our global paper segment.
Longer term demand for our external containerboard business should benefit from the limited supply of Virgin fiber globally.
I'd like to mention that we will face a difficult year over year comparison in the second quarter as global paper revenue increased 36% year over year in the second quarter of fiscal 2022.
Next our distribution results are on slide nine.
Segment sales decreased 1% year over year to $322 million and adjusted EBITDA increased 66% year over year.
Strong price and mix contributed $20 million, partially offset by inflation of $13 million and volume of $3 million.
In the quarter favorable selling price and mix contributed to the 140 basis points of margin expansion.
Looking to the second quarter, our distribution business also faces a difficult year over year comparison as distribution revenue increased almost 30% year over year in the second quarter of fiscal 2022.
Turning to slide 10.
During the quarter, we generated $30 million and adjusted free cash flow down $54 million year over year, driven by higher capital expenditures, we expect fiscal year 2023, adjusted free cash flow to be above $1 billion for the year, making this the eighth straight year of adjusted free cash flow above $1 billion.
We ended the quarter with net leverage of 2.35 times looking ahead, we're focused on returning that leverage to our targeted range of 175 times to 2.25 times.
Turning to slide 11, and our other financial guidance, we remain confident in the long term trajectory of our business west Rock's diverse portfolio of sustainable fiber based packaging and complementary machinery uniquely position us to serve our customers. We are focused on serving our customers and growing our business through cross selling packaging.
<unk> and plastics replacement solutions at the same time, we see significant opportunity to reduce costs by the following actions one leveraging our scale to capture cost savings in procurement.
Two <unk>.
Optimizing our logistics and planning three driving productivity in our mills and converting network and fourth streamlining our back office operations that said, we're not immune from macroeconomic conditions, which have created uncertainty in the near term as such we're removing our full year guidance.
Our forecast for second quarter consolidated adjusted EBITDA is $625 million to $725 million and adjusted earnings per share is between 31 cents and 61 cents.
Some assumptions behind our sequential outlook include the following favorable costs driven by natural gas down approximately 20% to $5 per M. N V to you.
OCC costs stable at $35 per ton and stable costs, and Virgin fiber chemicals and freight.
And effective tax rate between 23% and 26% and approximately 257 million diluted shares outstanding.
We are planning a 132000 tons of scheduled maintenance downtime across our system in the second quarter I'll now turn it over to David to conclude before we move to Q&A David Thanks.
Thanks, Alex while the current environment remains dynamic west Rock's diversified business model and financial strength positions us very well.
Our ability to provide corrugated packaging consumer packaging and complementary machinery solutions differentiates us in the market and uniquely positions us to deliver a complete range of sustainable packaging solutions. In addition, our distribution business provides an additional channel for our products and allows us.
To serve a broader customer base.
Our strong balance sheet and robust cash flow engine enables us to invest in our business and execute our transformation agenda in the midst of changing market conditions. We remain excited about the future and we look forward to providing you updates on our progress.
And Rob with that let's move to Q&A. Thank you David operator, we are ready to take questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw from the question queue. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from.
Kyle White from Deutsche Bank. Please go ahead.
Hey, good morning, Thanks for taking my question I guess I just wanted to touch on on the guidance and the full year outlook and the decision to remove it I guess, whereas the most uncertainty that you're seeing in kind of the rationale for this decision.
Is it on demand in corrugated and implications on pricing or are you seeing a similar level of uncertainty in consumer as well.
Yeah. Thanks, Thanks, Kyle this is David and I.
We really wanted to be very transparent with that.
The economy and where it's at so to answer your question our packaging business in both consumer and corrugated came in fully in line with our expectations. In Q1, we have full confidence in our packaging business, both corrugated and consumer and our full year forecast so even despite the soft macroeconomic.
Conditions in packaging, our sales our EBITDA and our margins were all up in Q1.
Where we see the biggest headwind is in.
In our global paper business.
Our customers.
Really experienced much higher inventory levels.
In the last quarter with a much softer demand environment than they than expected and that was particularly true in the export market.
There was no loss of business our relationships are extremely strong.
Just a uneven global macroeconomic environment.
So as we look at the full year the visibility.
It was just difficult for us to ascertain purely in global paper in this environment.
Our customers are definitely expecting more normalization in the second half of the year and we do expect sequential and steady improvement.
Focused on what we can control and manage with our cost and productivity.
We're confident that we'll get back to normalization, it's just probably going to take a little bit longer than we anticipated and our customers' anticipated and so we felt the best thing to do was to provide a quarterly forecast. So we get back to a more confidence and in the global environment.
And just as a reminder, Kyle our global paper had an incredible year in 2022 sales were up 20% almost EBITDA was up 40%.
And going back to 2021 were still up 3%.
So we say, we see the paper business and its cyclical downturn, we have a tremendous leadership team that's actually actively managing through it.
We've all measured these turns very well in the past and I'm confident we're moving through the cycle and paper as the year progresses.
Sounds good and then on the outlook for next quarter are you able to give us a sense of how shipments have trended here in January for both the corrugated as well as the consumer business or maybe what the outlook.
Assumes for demand.
Yeah. So we were.
We've definitely seen.
Corrugated stable from Q1 into Q2.
Year over year.
Slight uptick so we feel good about where that's going and consumer is.
Truly a resilient business very strong.
Through this cyclical environment January is off to a really good start one comment I'd make on consumer.
We did have a weather impact it at seven of our mills.
In December so that did impact us a little bit, but the business is strong and resilient and I'd also say on the paperboard side in global paper.
Been resilient as well so really when you look at our.
Full year forecast and where we're at it's really just the uncertainty around.
The global paper business, particularly in the export market.
Sounds good I'll turn it over thank you.
Thanks Kyle.
Our next question comes from Mark Weintraub from Seaport. Please go ahead.
Thank you David just a quick clarification until you'd mentioned targeted.
Slight uptick year over year I assume that does that mean that the year over year comparisons are looking a little bit better I, it's still down but not quite as down as opposed to actually thing an uptick yes.
Yes, Mark out here, sorry, if I wasn't clear so so if we look at how we exited Q1 year over year, we're seeing a slight uptick over Q2 year over year.
But we do still see volume down okay. Thank you.
No.
I mean.
And also just on the global paper that I assume that's pretty much.
Containerboard is that fair to say as opposed to the consumer packaging grades.
That is correct R R.
Paperboard sales were actually up sales wise year over year.
And can you share with us at this point.
What percentage of your maybe in the prior quarter what percentage of your.
Containerboard production was going into the export market.
So if you look at.
In typical environment.
It's usually about.
In containerboard, it's about <unk>.
75% domestic.
25% export and then we just saw the dramatic softness.
More on the export side and again just to reiterate it wasn't lost business it wasn't anything other than.
It was a really tight market in 2022 as you know a lot of our global export.
Customers were getting.
Getting as much inventory as they could with a tight market. They saw a lot of softness last quarter with their customer base. So they were just.
<unk> had over inventory and when you compare our containerboard customers to our corrugated customers I would say we are.
Pretty much toward the end of inventory rebalancing.
On that side of the business, but in our <unk>.
Containerboard business, they're a little further behind so that's just where we wanted to get a little bit better visibility.
And the full year.
Okay, and then just lastly, you.
Alex I think mentioned kind a number of actions to take.
That you were looking at to improve on cost performance et cetera.
One thing I didn't hear was anything.
Any additional potential action on the footprint or are you at this point.
Satisfied where the footprint or or or might it makes sense to be looking at additional footprint actions.
Yeah, so consistent to what we said back in Investor day and interactions in 2022.
We are going to be.
Continuing to optimize our footprint.
As you know we took action last year with the closure of St. Paul in Panama City.
Sale and divestiture of our <unk> mills and in Rts stake.
And so we do want to continue to.
Improve our vertical integration will continue to optimize our footprint.
Especially where that we maximize our capex for returns.
And we will continue to do that but again.
This is a cyclical business, we think we're kind of near or at the bottom of the trough. So we think the upside and everything our customers are telling us.
We as we get through the year, it's going to continue to improve so we'll balance all of that.
Our supply with our customers' demand.
Great appreciate the details thank you.
Thanks Mark.
Our next question comes from George Staphos from Bank of America. Please go ahead.
Hi, everyone. Good morning can you hear me okay.
Yeah, Good morning, George.
Thanks for all the details.
In the commentary so I guess the first question I had for you one of the things we noted.
In this slide is it looks like your maintenance downtime schedule. The tonnage that you have out is lower than the third quarter.
And you previously had been guiding to correct me if I'm wrong in that regard, but if there is a change that's worth noting whats going on there relative to your your schedule and what's the impact in terms of earnings.
Yeah.
You know George we Theres no material change in our in our scheduled maintenance downtime.
I believe in third quarter, we have 127000 tons, which I believe is consistent with where we've been but if that's different we'll look into it.
We can follow I think youre at $1 65 in the last slide. So I was just checking if there was anything notable there that's all.
Okay.
We're anticipating about 130000 times, David David mentioned.
That's sort of in line with our normal maintenance schedule.
You'll know that.
At the end of the calendar year.
<unk> tends to be our <unk>.
First the.
Calendar year tends to be our heavy maintenance periods and.
And thats consistent with the way we've always done it we can follow up though if there was any any difference fair enough fair enough second question.
A two parter can you talk you said backlogs are good I don't know if you specified a number if you didnt apologies, but could you tell us what the backlogs look like and consumer across the grade.
And can you give us an update you used to provide.
The enterprise sales metric, where the number of customers or amount of revenue.
That's being generated by customers buying a million dollars of both consumer and corrugated.
Packaging from West truck look like can you give us some here's where we are here's where we've been on that.
Discussion point, so backlogs in enterprise sales sure.
I would tell you George first off on the consumer side, our backlogs are consistent with what they've been in 2022 as we head into Q2. So that's why we feel it's a very resilient business.
We feel good about where we're at with our both our consumer business as well as our paperboard business and on the enterprise piece I. Appreciate you asking that we are we feel great about it we are still tracking over $8 billion in sales of customers that buy over.
A million.
A million dollars in consumer and corrugated and what's been really encouraging is the.
The dialogue, we're having with customers now that we have gondi.
Many of those customers.
Particularly in beverage and some industrial customers have large operations in Mexico, and so we're having really good dialogue both on the corrugated and consumer side.
So we are really just really emphasizes the importance of that Gandhi acquisition.
Okay.
Last question I guess do you have any kind of growth sort of a delta the enterprise sales or number of customers something like that that would show the progress that youre getting from that versus say last year or two years ago and then my last one would it be fair to say that not getting into forward looking pricing, but the price changes that we.
<unk> seen in containerboard will likely see most of that impact and west Rock's results in fiscal <unk> and fiscal <unk> and if you could give us a cadence thanks, guys and good luck in the quarter.
Yes, sure so to start with your question on pricing obviously, we.
Don't forecast, we believe pricing is going to do but with the pricing that has been announced.
If you look at our corrugated business about 65% right now contracts are tied.
To receive pricing and the contract implementation is typically about three to six months.
If you back out Windows increases were announced and you add about three to six months.
Youll see that.
65% plus of our.
Corrugated customers you do see that pricing much more immediate in our global paper sales. Conversely last year as you saw that we got price increase very quickly on paper and there was the delay of about three to six months on now the corrugated side.
Our next question comes from Phil <unk> from Jefferies. Please go ahead.
Yeah.
Alright, Phil is your line on mute.
Okay.
Yeah.
Pardon me Phil is your line on mute.
Our next question comes from Cleve brokered from UBS. Please go ahead.
Hey, good morning, Thanks for taking my questions I, just I wanted to start kind of a big Big picture question and you just sort of following up on the Investor day, and some stuff we've talked about before can you remind us how you're thinking about margins in really in the consumer and the corrugated segment you know as I recall, we were targeting about.
20% EBITDA margin in both of those but can you give us an update on on kind of what the margin targets are and maybe on the timing and where we stand.
Yeah sure. So if you go back to our Investor day, we targeted greater than 19% margins overall for the company.
And we are laser focused on Val.
<unk> over volume driving R. R.
Our value added.
<unk> solutions in both our corrugated and consumer business.
And that ties in with that.
Our customer base, our segment of pricing discipline, but also our productivity and cost out so even.
As you look at Q1, which is historically a low margin quarter just on the cyclicality of the business.
And even in a softer economy, we were able to grow margins in both corrugated and consumer.
So we feel we're right on the right path we're committed to.
The focus of our 2025 targets for Investor Day.
Okay.
So it's fair to say that.
Margin improvement in the consumer and corrugated is kind of a focus right now that's correct, yeah, well also driving growth, but profitable growth is what I would say, where we provide great solutions for our customers.
Sure. Okay. That's understood and then yeah I don't want to.
Beat a dead horse, but just to follow up on the guidance. You know you said that Q1 was basically in line with your expectations, which if you add back the weather you sort of hit the midpoint or pretty close to it on EBITDA.
So I just wanted to understand you know where and it really when is the uncertainty and I mean does this is this about second half container export demand that it just isn't clear right now or should we take this to mean, there's a higher degree of uncertainty around the second quarter I'm just trying to.
Square those comments of sort of Q1 falling in line and then they're being more uncertain about the outlook.
I guess, let me.
Ill take a swing at it.
First of all I as David mentioned in his response to a prior question, we feel really really good about how the converting businesses performing different plumbing directly in line with our expectation.
The segment that.
That had been more challenged has been global paper driven by the issues that David mentioned around inventory.
Inventory destocking and customer demand. So that's really it's the macroeconomic environment, that's driving the uncertainty we feel really good that the team is executing well and the team is performing against everything that we can control.
Taking cost out of the back office work driving operational efficiencies.
We're managing the.
Slowdown in the economy through a prudent use of downtime and so we're controlling everything we can control as David mentioned.
Still saw margin expansion, even in the converting business.
So the real uncertainty comes from.
It comes from global paper, and just not knowing when that business.
Begins to rebound, but again.
We feel good that that it will strengthen as we get to the back half of the year.
Okay.
Given the level of uncertainty, we just felt as though it was prudent to shift to a quarterly cadence as opposed to an annual cadence, which I don't think that uncommon for cyclical industries like ours.
Okay. Thanks, Alex.
Our next question comes from Phil <unk> from Jefferies. Please go ahead.
Hey, guys can you hear me now.
Yes, good morning, Phil.
Sorry about that.
Hey, guys quick question on your consumer business, if I'm looking at it right. Your volumes were down about 4% was that mostly what it related anything else that's driving that Debbie.
Debbie commented, how backlogs have been pretty strong.
Do you expect demand and consumer business to be flat to up this year for the most part.
Yeah. So there.
There was a couple of things weather certainly played a role in December we also have some really large national accounts.
As it got to the end of the year.
They just wanted to reduce their inventory levels.
Then how January started we feel like we're back to where we were in 2002 levels. So if you look overall.
Far as a dollar basis, which I know is also common that way to look at it it's flat.
Which is similar to.
How the industry looks at this when you take out FX and pricing. So we continue to see strength in our consumer business.
Yeah.
And where we're at.
There was just.
Weather related and just some inventory relations with some large customers at the end of the year.
You talked about you talked about how your export business was a little weaker in containerboard are you seeing any of that on your box Board Tyramine believe Sps, you've probably explored a little bit.
Yeah, so because of the weather, we actually could have sold a little bit more.
But because of the weather that happened in December .
As I mentioned, our sales were still up in paperboard.
So you know we were.
We're not saying, we're not seeing paperboard.
It's a trend similar to containerboard at all.
Okay Super helpful and inflation standpoint, Alex really appreciate the color you provided for fiscal <unk>, but how do you think about it more holistically on a full year basis and to be made.
Major inputs.
On the Nat gas side, certainly it's pulled back quite a bit lately can you remind us how much of its hedge because I think you started implementing a hedging program more recently.
Yes so.
So we're probably hedged in the sort of 40% to 50% Zip code.
What we've done is our assumption on natural gas for the second quarter is around $5 per MD to use so that's contributing about $25 million.
Tailwind to EBITDA when you think sequentially when you think about the full year.
The full year outlook for natural gas, we expect it to stay relatively stable.
So on a year over year basis down about call it 25%.
The other areas.
Where we are seeing favorability.
Again sequentially versus and also year over year, our <unk> right now.
So fiber OCC sequentially, we anticipate being roughly flat up about 3% to call.
Call it $36 a ton and then continuing to strengthen as we get through the balance of the year, but that's offset by Virgin.
Which is down about 8% so that becomes about a $20 million.
Dollar good guy to EBIT.
Sequentially from Q4, and then freight has mitigated as well so sequentially, we anticipate that being down about 1%.
The area, where we're seeing some inflationary effect.
Offsetting the good guys that I, just mentioned are both wages and chemicals.
Which are both up about 4%, so that's about a $75 million headwind.
Sequentially and that will persist likely through the balance of the year and then just while we're talking about.
End of guidance and the outlook important to point out Gandhi.
It's going to add about $12 million incremental depreciation for the quarter and about $47 million of interest so.
Getting our models tweak don't forget those two inputs.
And on your hedged exposure in that gas can you remind us where you're hedged at the dollar value.
Well, what we do is we dollar cost average yet over the course of.
Every month, we make a purchase and we are in the market dollar cost averaging it so like I said the blended the blended number that we can share is $5, Brent and btu over our overall portfolio.
Got you Super helpful. And then from a cash flow standpoint pretty impressive despite the uncertainty youre able to reiterate your free cash flow guidance.
Any offsets that you're seeing that's helping you sustain that level of free cash flow and in this current environment, David any thoughts on how you want to deploy that capital.
Maybe I'll take the cash flow comment and then David can talk about where he's going to spend it.
So.
So look at the biggest delta in the quarter was on.
Was on Capex. So if you look.
Sort of.
It was about $100 million.
Higher year over year from Capex, a lot of that's driven at the end of the supply chain constraints that we had last year, we were accelerating purchases to get the orders in the system and now were.
We're deploying that capital.
Into the system. So we do.
So there is some.
Opportunity to manage that as we get through the balance of the year. The other area, where I think we can see some improvement in working capital. So as we came into the end of the year. We did see several of our large customers basically just managing their cash flow across that.
Period, and that had a negative impact as well so so.
So we think both of those are strong levers we can pull.
One of the things I'd point out we said it in the prepared remarks for the last eight years, we've generated more than one.
$1 billion of free cash flow.
You all have slipped through the cycles of the last eight years, including Covid and so I think we continue to be extremely confident in our ability to generate strong cash regardless of the uncertainty around that.
Stability in the revenue growth David you are talking about the deployment yeah, I think it's consistent with what we've demonstrated over the last year year and a half as we'll continue to get our leverage in the range.
That we've targeted between one and three quarters and two in a quarter and with Gondi comes out came up.
We will get that paid down fairly.
Fairly quickly and then what the cash flow generation will continue.
With a growing and sustainable dividend and we will be opportunistic in our share repurchases. When we think our stock is undervalued.
Okay Super Thanks, a lot guys really appreciate it.
Again, if you have a question. Please press Star then one.
Our next question comes from Gabe Haiti from Wells Fargo. Please go ahead.
David Alex Good morning.
I apologize if this was announced.
Join us immediately.
I wanted to ask about this disclosure as it relates to economic downtime and you called it out in your corrugated operations, which I think historically speaking we would have associated economic downtime with mill activity I thought with the new reporting structure.
What have been segregated.
Was this related to corrugated operations that we're we're also taking downtime or.
Maybe there is a transfer.
I don't know how to think about that.
Yes, let me, let me take that one gig so so economic downtime.
Is directly related to the mill operations as we go through our process.
Dividing up profitability between our corrugated segment and our global paper segment.
We basically do that following the transactions. So a portion of the economic impact of that downtime will fall in the corrugated segment packaging segment and another portion of that will fall into the global paper segments. So that's why.
Perhaps it's a little confusing.
Previously when we did that historically at all would have been blended within the corrugated pack.
Packaging, because that's where it all where it all SAP, but it did impact our.
It did impact our corrugated business as David mentioned, our consumer business remains strong both on the consumer packaging as well as.
On the consumer side of global paper, So Thats really just as we're showing you the fully integrated margins by the segment, that's where you see the split out.
Does that help at all.
It does it does.
And then again I apologize if it was addressed but as you look across the system in terms of inventories.
Are we on the outside World, we're trying to understand.
You are at and I know, the destocking terminals and thrown around quite a bit.
Just where you're at with inventories going into the heavy maintenance outage period.
And your corrugated system specifically.
Maybe I'll take that the internal inventory question and then David.
Well I think comment on how the market looks so from an internal standpoint, I think we feel as though our inventory.
Levels are looking quite good we did take some higher inventory at Mark on the consumer side of the business as we were anticipating some potential disruption related to the labor issues that we have.
We've talked about.
And then we also tend to take inventory.
As we're planning for the maintenance downtime. So we did have inventory that were perhaps elevated but not elevated beyond what our expectations were.
David you want to comment on the market conditions I do I, maybe just one other comment.
Alex mentioned.
And I didn't want to let you know that the contract was ratified yesterday. So our employees will be back to work as soon as administratively possible. So we feel great about that.
That will certainly help us as we move forward on our productivity issues.
And just the team has just done a great job ensuring that there.
There was no disruption in our customer service as.
As far as overall customer inventories I think destocking at our corrugated customers is largely behind us I think it's getting back to normalized levels.
You hear there.
We're maybe a little bit elevated.
But as I mentioned earlier, it's really global paper, specifically, even more so in the export market or are they still have elevated inventory levels.
I go back to last year. When it was tight I think there was a lot of ordering to make sure that they kept their customers.
Secured with with.
With product and so.
With a little bit of softness in the global.
Economy, I think their customer orders were softer than anticipated so they're still sitting on some elevated inventory levels, but they are working through that and that's why as Alex mentioned as we get towards the second half of the year I think will be.
I have more confidence in.
Normalization of where we're at.
Yeah.
Thank you.
Our next question comes from Anthony Pettinari from Citi. Please go ahead.
Hi, good morning.
I did just just following up on that last point when you look at your global paper export customers and you think about the inventory situation would you draw any differentiation between Europe Latin America.
Asia, maybe a bit smaller for you.
And when you talk about normalization in the second half is that calendar.
Second half calendar 'twenty, three or is that your fiscal second half.
Yeah, Anthony Thanks for that.
Pretty consistent you hit it I mean, we export Latin America, Europe and to a smaller extent in Asia Pacific.
It's pretty consistent across all of those as far as.
Kind of at the levels of inventory that our customers are saying.
So I think.
I don't think I could really classify one regions ahead of another it's just it's just been pretty consistent.
I think our customers are telling us we were just really worried last year when the market was so tight.
And then they just experienced a little bit of softness.
More so than they anticipated so that that will.
I think come back and Anthony I apologize, but the second part of your question was.
When you said second half could be the timeline for normalization is that calendar or fiscal.
Yeah, and I think that goes part two the transparency in our guidance as we are on its fiscal year. So obviously we end.
End of September and so our customers are talking calendar year, and that's where I think it's just we just wanted to be certain so I think thats just a <unk>.
A subtle difference with our fiscal year versus the way our customers think about calendar year, and which is why we just felt like let's go to quarter until we get that stabilization in the second half of the year, whether we understand it's our fiscal Q4 versus you know.
2000 for Q1.
And I think we'll get visibility to that as we get closer.
Okay. That's helpful. And then just on <unk> I mean, you gave the earnings contribution in calendar 'twenty two.
Understanding you're not giving full year guidance for 'twenty, three but I'm just wondering if theres any kind of finer point.
In terms of maybe expected contribution for <unk> or just maybe more broadly.
That business and maybe the Mexican market is performing maybe maybe relative to expectations three months ago.
So let me let me talk about the outlook and then.
David was down in Mexico recently, so I'll talk about the Mexican market.
You are right, we did disclosed in the <unk> and.
And the other unallocated.
And of the business, we did disclosed omni contributed $17 million that was for one one months.
The other point, we made was finished the year on a trailing 12 month basis in line.
In line with our expectations now, where we're not going to give guidance for <unk>.
There are a lot of reasons, but.
But I think from a modeling standpoint, it's fair Ted.
Either annualize the December results or take our comments on it performing in line with expectations as a reasonable.
Pro forma for what it will contribute next year.
Yeah, no nothing more to add other than that I mean, if you look at <unk>.
<unk>, Mexico sales they came in line and as we mentioned in the IMF predicting that Mexico will grow faster than the U S and we saw their packaging sales higher than our North American sales.
Okay. That's very helpful I'll turn it over.
Our next question comes from Adam Josephson from.
<unk>. Please go ahead.
David and Alex Good morning, Thanks, very much Alex just on clarification on that your free cash flow guidance can you put a finer point on what youre expecting to spend on capex as well as any source from working capital that you might be expecting this year.
Yes so.
So our Capex guide is in line with $1 billion.
That's consistent with what we've communicated previously and then working capital I think.
It's fair to take a look at what.
Did in the <unk>.
We ended the year and anticipate that we'll be working on that significantly I sort of anticipate call. It.
Four four.
Four days of improvement in our in our cash conversion and that'll get you back to your $1 billion or north of $1 billion.
Okay, perfect and in terms of your total cost expectations for fiscal 'twenty three some of it is inflationary whether it's.
You mentioned labor and chemicals, specifically, but then you've got OCC gas other costs that will be significantly deflationary in fiscal 'twenty. Three so just overall can you give us a sense for what do you expect total deflation flattish total costs may be slight inflation any thoughts there.
Sure.
Sure So let me.
Got it.
I'm going to avoid giving guidance.
Thanks, Brian .
And where we're headed so I think I mentioned in my prior comments, we do anticipate.
Gas.
Right now in Q2 at around $5 and <unk>, we see that as relatively steady through the back half of the year.
OCC.
It is right now at around 35, $36 a ton we do see that strengthening.
As we get to the year, so probably exiting.
In Q4, maybe a little bit between where it was in Q3 and Q4 of fiscal 'twenty two.
Virgin probably staying fairly consistent with where it's been.
Where it's where it exited last year call. It in the 45 to $46 a tonne zone right mitigating so frank being stable and really the largest headwind.
I mentioned being the chemical on the wage, which is 4% and that'll that'll persist through the balance of the year.
Got it okay. Thanks, Alethia and David just on the topic of providing full year guidance.
No youre doing it just to help investors get a sense for what.
What your full year expectations are but obviously during COVID-19 the company withdrew guidance.
And now again, you've chosen to withdraw guidance. So just on a longer term basis do you think it's appropriate to continue providing.
Full year profit guidance, just given how frequently you have had to withdraw it and look you have no control over the macro currency commodity costs et cetera. So is it really worth it to try to give.
Give investors a sense for what you expect when that there just so much over which you have no control.
Yes, Adam I appreciate your comments and thank you for them you know your points are all valid and we'll continue to evaluate it as.
As we continue to move forward.
But you're right there are a lot of <unk>.
Moving pieces that are out of our control versus you know we are in a cyclical market and so we'll continue to evaluate it but.
No.
I don't think we have a firm answer one way or the other right now.
Yeah. Thanks, so much David I appreciate it thank you.
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 everybody for joining our call today as usual we are available after the call for any additional questions that you have and we look forward to updating you again next quarter. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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