Q2 2023 WestRock Co Earnings Call
Okay.
Good morning, and welcome to the West Rock second fiscal quarter 2023 earnings call all participants will be in silence only mode.
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I would now like to turn the conference over to Rob Queretaro Senior Vice President of Investor Relations. Please.
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Good morning can you Hello can you hear me.
Good morning, and thank you for joining our second 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 they.
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 will open the call for a question and answer session.
During today's call, we'll be making forward looking statements involving our plans expectations projections estimates and beliefs related to future events. These statements involve a number of assumptions risks and uncertainties that could cause actual results to differ materially from those we discussed during the call.
We describe these assumptions risks and uncertainties in our filings with the SEC, including our 10-K for the fiscal year ended September 30th 2022.
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 turn it over to you David.
Thank you Rob and thank you for joining our earnings call today I'll.
I'll begin our call with some highlights from our fiscal second quarter, then provide updates on our portfolio optimization strategy and cost savings initiatives.
Following that Alex will review our results in more detail and provide our outlook for the third quarter as well as our assumptions for the full year.
Turning to our second quarter results on slide three.
During the quarter market trends were largely consistent with our first fiscal quarter.
Our corrugated packaging and global paper segments remain impacted by lower demand high inflation and shifting consumer spending.
We have seen more stability in our consumer packaging segment supported by new business wins and growing plastics replacement revenue.
While we faced difficult year over year comparisons in the quarter, we executed very well in a challenging environment. Our transformation initiatives continue to gain traction and we are accelerating our portfolio actions.
We remain on track to reach our $250 million full year target I will provide more detail on this shortly.
I'm also proud to share that West rock was recently included in Barron's, most sustainable U S companies list further recognizing our commitment to sustainability.
Net sales during the quarter were $5 $3 billion down 2% year over year and consolidated adjusted EBITDA declined 8% to $789 million.
Our results exceeded our guidance, primarily due to better than expected inflation trends strong results from our operations in Mexico and progress on our transformation and cost savings initiatives.
Adjusted EPS was <unk> 77, a decrease of 34% compared to the prior year quarter. Please note. Our adjusted EPS includes amortization of intangible assets, which was approximately $86 million or 25 cents per share for the quarter.
Given current market conditions, we incurred a noncash goodwill impairment linked to past acquisitions of $1.9 billion pre tax or $7.16 in earnings per share.
We also incurred restructuring charges of $445 million pretax or $1 32 in earnings per share primarily related to our decision to close our north Charleston paper mill.
Within these restructuring charges $347 million were noncash.
Alex will provide more details on our performance in a moment.
Before that I'd like to discuss our transformation efforts, we remain committed to executing our strategy and we are making tremendous progress our goals remain to leverage the power of Onewest rock to delivered unrivaled solutions to our customers.
With over $9 billion and enterprise sales our customers value the broad portfolio of packaging solutions, we provide.
We're also driving efficiencies from our centralized purchasing initiatives, which have delivered $50 million and year to date savings.
To invest in innovations that contribute to the circular economy and enable us to replace plastics.
We are currently targeting $400 million in revenue from plastics replacement this year.
To improve efficiency and drive margins through our cost savings initiatives, we are making significant progress and we continue to target $250 million in cost savings in fiscal 2023.
And finally to drive strong cash flows to invest in growth optimize our footprint and improve our return on invested capital.
We are focused on returning leverage towards targeted range of 1.75 times to two and a quarter times, while investing in our assets and returning capital to our shareholders through our dividend.
We are confident in our strategy and our portfolio optimization is a critical component.
Turning to slide four and our initiatives to drive efficiencies and improve our operations. We are committed to operating world class assets and focusing our portfolio on markets and segments with the most opportunity for growth.
With this work fully underway, we have widened the scope of our planned portfolio actions and have identified a number of less efficient noncore assets that don't meet our return thresholds. As a result, we are taking targeted actions to exit these assets and prioritize growth and more attractive areas.
Our increased visibility into demand planning production and inventory management is enabling us to optimize our converting network to drive throughput and our most efficient assets in that regard we are already in the process of closing four of our less efficient converting sites.
Across both our corrugated and consumer segments.
With these moves we are consolidating our production to other more efficient facilities and improving our throughput to enable us to better serve our customers.
Importantly, these actions are expected to have minimal impact on revenue, while driving profitability and return on invested capital.
We have additional plans underway to continue these consolidation efforts.
On the mill side last year, we closed our Panama City mill, and we eliminated corrugated medium production in St. Paul earlier.
Earlier this week, we announced the closure of our North Charleston Mill, we intend to continue these mill evaluations with a focus on driving growth with our most efficient assets.
The North Charleston Mills production capacity was approximately 550000 tons, including linerboard saturating Kraft paper and uncoated Kraft paper Sim.
Similar to our previous capacity reductions this mill would require significant investment to achieve our targeted productivity levels and we did not see a path to meeting our return on invested capital.
The majority of the mills linerboard and uncoated Kraft paper production will be transferred to other facilities in our network.
With the closure, we will exit the saturating Kraft business and reduce our long term exposure to the export market.
Clothing facilities is never easy and we are working closely with our employees and our customers to support them as we move forward with these plans.
We are also in the process of exiting your B production, which is not a strategic priority in December we closed on the sale of two U R E mails and we're in the process of selling our stake in our Rts joint venture along with our Chattanooga Mel.
We continue to expect this transaction to close in fiscal 'twenty twenty-three subject to receipt of regulatory approval by.
By exiting these less productive assets, we are able to direct our capital towards better use and invest for growth in the most attractive markets and geographies.
An example of this is our Grupo Gondi acquisition, which closed in early December .
Our integration efforts here are well underway and I am pleased to report that we expect to exceed our synergy targets. The business is performing better than our initial expectations. Despite a challenging macroeconomic environment.
Our assets in Mexico, combined with our assets in Brazil, and the rest of Latin America bring us closer to our multinational customers and position us to benefit from growing onshoring trends, we are well on our way to capturing this highly attractive growth opportunity.
Our portfolio actions are also reducing our long term exposure to external paper sales were focusing on strategic partnerships that value our differentiated portfolio value added services and innovation.
Reducing exposure to external paper sales will improve our vertical integration reduce earnings volatility and optimize our production.
Taken together these actions demonstrate our commitment to operating world class assets across our portfolio.
And we see significant opportunities ahead.
Turning to our cost initiatives on slide five we also continue to make progress on our cost savings and productivity initiatives.
We remain focused on streamlining our operations and centralizing our back office functions. We expect these planned SG&A efforts to deliver $175 million to $200 million in run rate savings by the end of the fiscal year.
And through our one one struck procurement and supply chain initiatives, we are targeting $250 million to $275 million and run rate savings by fiscal year end.
In North America, our portfolio actions have driven an $8 per ton decrease in containerboard costs. We are also investing to maintain and improve our assets and we expect to spend approximately $1 billion in capex This fiscal year.
Taken together, we are targeting approximately $1 billion in savings through the end of fiscal 2025, including $250 million this year.
No these targets exclude the impact of economic downtime and inflation.
Our portfolio actions and cost savings initiatives are creating a leaner more efficient west rock.
So current market conditions present short term challenges, we are executing very well and establishing a strong foundation to accelerate earnings power as demand improves 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 six second quarter net sales were $5 3 billion down 2% and consolidated adjusted EBITDA was $789 million down 8%.
Holidayed adjusted EBITDA margin was 14, 9% a decline of 100 basis points year over year.
Price and mix positively contributed $335 million year over year, and lower operating costs contributed $55 million.
These benefits were more than offset by lower volumes of $204 million cost inflation of $143 million in economic downtime of $58 million.
We incurred 265000 tons of economic downtime in the quarter.
Noncash pension costs also negatively impacted consolidated adjusted EBITDA year over year by $40 million.
As a reminder, our pension plans remain overfunded.
Turning to slide seven corrugated packaging segment sales, excluding trade sales were $2 $5 billion, an increase of $308 million or 14% year over year, adjusted EBITDA increased $79 million or 24% driven largely by our Grupo Gondi acquisition <unk>.
Adjusted EBITDA margin, excluding trade sales increased 130 basis points year over year to 16%.
Pricing and mix contributed $155 million from our operating costs contributed $28 million.
These benefits were partially offset by inflation of $44 million lower volumes of $36 million and economic downtime of $30 million in connection with our Grupo Gondi acquisition. We also moved certain of our operations into the corrugated segment.
This change was not material and we therefore did not recast prior year amounts for the second quarter of fiscal 2023. These operations generated revenue of $40 million and adjusted EBITDA of $7 million.
While market conditions remain challenging we have seen improvement in April with corrugated packaging shipments per day, increasing mid single digits for March we remain focused on serving our customers and reducing costs. We are establishing a strong foundation for the coming years through our cost savings initiatives and portfolio optimization efforts.
Turning to the consumer packaging business on slide eight.
Our consumer business has performed well despite a difficult year over year comparison, including strong results from our healthcare business last year.
In the quarter segment sales increased $15 million or 1% year over year to $1 3 billion.
Adjusted EBITDA increased $13 million or 6% and adjusted EBITDA margin was 17, 3% an increase of 80 basis points year over year.
Strong price and mix contributed $122 million and lower operating costs contributed $21 million. These.
These benefits were partially offset by inflation of $58 million lower.
<unk> of $45 million and pension FX and other of $27 million as.
Mostly mentioned, we realigned certain Latin America consumer converting operations into the corrugated packaging segment in connection with the Grupo Gondi acquisition, and we did not restate our segments normalized for the realignment consumer packaging revenue grew 4% and adjusted EBITDA grew 10% year over year quarter end backlogs and our consumer.
Business remained steady while we continue to focus on capturing new business and growing our plastic replacement solutions as.
As David indicated we're now targeting over $400 million in revenue from plastic replacements in fiscal 2023, turning to slide nine.
Global paper segment sales decreased $370 million or 24% year over year to $1 $2 billion.
Adjusted EBITDA declined 39% to $187 million with adjusted EBITDA margin declining 410 basis points to 16%.
We continue to face soft demand and difficult year over year comparisons in our global paper business.
While adjusted EBITDA declined year over year, it was still 17% above the second quarter of fiscal 2021.
Price and mix contributed $63 million more than offset by lower volumes of $105 million inflation of $35 million and economic downtime of $27 million. Additionally, sales to Grupo Gondi are now eliminated from our global paper results. Following our acquisition results were also NEC.
<unk> impacted by unplanned downtime at several of our mills, we're actively addressing these issues and deploying capital to improve our reliability and productivity volume in our global paper business continues to be affected by lower market demand for our products as well as higher inventory throughout the supply chain. We're also seeing the effect of published price change.
Is flowing through our results with year over year moves in paperboard more than offsetting the negative moves in containerboard and Kraft paper.
In this environment, we're continuing to prioritize margin over volume.
Over time, our portfolio optimization strategy will enable us to better serve our strategic customers, while increasing vertical integration and reducing our exposure to external paper sales.
Despite the lower overall volumes driven by current market dynamics, we continue to win new business, where customers value our diverse portfolio and product offering.
As David outlined we're accelerating our portfolio actions and focusing on strategic customer relationships and our most attractive markets. Our goal is to increase our vertical integration and reduce volatility from external paper sales.
Next our distribution results are on slide 10.
We faced a difficult year over year comparison due to last year's large health care order in the second quarter segment sales decreased 15% year over year to $307 million and adjusted EBITDA decreased 67% to $9 million results were negatively impacted by lower volumes of $24 million.
Inflation of $3 million partially.
Offsetting by lower operating costs of $5 million and positive price and mix of $3 million normalized.
Normalized for last year's large health care order revenue declined 3% and adjusted EBITDA grew 34% compared to the prior year. Looking ahead, we remain focused on driving commercial excellence and unlocking additional cost savings in our distribution business.
We generated $36 million of adjusted free cash flow during the quarter down $176 million driven by higher capital expenditures. We continue to expect fiscal year 2023, adjusted free cash flow of approximately $1 billion, driven primarily by working capital improvements and lower capital expenditures we ended <unk>.
With net leverage of 245 times looking ahead, we remain focused on returning our leverage to our targeted range of 175 times to 225 times.
Turning to guidance on slide 12, we expect the sequential volume improvement offset by the flow through of previously published price decreases.
Our forecast for third quarter consolidated adjusted EBITDA is between $650 million to $750 million and adjusted EPS is between 30 and 60 a share.
Some assumptions behind our sequential outlook include favorable costs, driven by natural gas down approximately 30% higher costs for recycled fiber moderately lower costs and Virgin fiber chemicals and freight.
And effective adjusted tax rate of between 24, and 26% and approximately 257 million diluted shares outstanding.
We're planning a 121000 tons of scheduled maintenance downtime across our system in the third quarter.
Turning to slide 13, and our full year cost assumptions for our full fiscal year 2023, and we expect a favorable year over year EBITDA benefit from lower energy prices of between 40 and $50 million primarily related to lower natural gas prices.
In terms of fiber, we expect the benefit of between $250 and $300 million.
We're expecting negative impacts of $70 million to $90 million from chemicals inflation, and 25% to $45 million from higher freight costs.
Lastly, we expect a headwind of between 450 million to 500 million from wages benefits and other inflation as well as $160 million from noncash pension expenses that we've previously discussed.
During the second quarter, we incurred a noncash goodwill impairment linked to past acquisitions, driven in part by the impact of soft demand pricing pressure and elevated inflation on our longer term forecast.
Despite this challenging macroeconomic environment, we remain focused on our transformation initiatives and are confident in our ability to deliver $1 billion in cost savings by 2025.
In the event market conditions stabilize and the relationship between price and inflation returns to more normal levels. We believe our 2025 goals remain attainable.
As you would expect should current macroeconomic conditions persist, where we see continued price degradation and significant inflationary effects the goals would be significantly under pressure.
<unk> strategy is enabling us to streamline our operations and drive growth and the most attractive markets.
Our assets in Latin America are a great example, where we are well positioned to benefit from shortening supply chains and onshoring trends take.
And our first question today comes from Anthony Pettinari from City Anthony. Please go ahead.
Hi, good morning.
Maybe at the <unk> impact and then I guess on the benefit side, you know any kind of fixed cost reduction estimate or way to think about that.
Okay. Anthony I'll, just give you a quick overview and I'm Gonna have Alex walk you through some of the financial you know, it's we're not really in a position to tell you the EBIT impact because we're gonna be transferring the linerboard and the uncoated crab paperboard to other.
Facilities in our network if you break out the the 550000 times about 280000 times relying aboard the remaining where we're really split between Uncoded craft and saturating craft.
So we think it's it's you know really immaterial to to to look at it from an EBIT standpoint endurance or was really a low margin volatile.
Segment Forest, but as you get into the financials I'll turn it over to Alex to talk about the cash cost.
Yeah sure. Thanks for the question Anthony So as David mentioned in the quarter. It was 450 million or $115 million that would all be noncash.
For the facility.
You know how containerboard versus Boxboard external sales played out or maybe regions that are still quite weak or maybe others that or maybe it look like they're bottoming or just customer inventories are just wondering if you could walk us through the market conditions and global paper as you see them.
Right now.
Sure happy to do so Anthony.
If you look at the global pay per segment, obviously, a majority of that is in containerboard versus paperboard.
And if you if you break down our containerboard the biggest drop has been an export we probably saw about a 50% drop in our containerboard export business domestic was less than that but still down double digits craft paper much.
[noise] more resilient.
The P. G W pricing, but we we feel good that we've kinda or at the bottom of the the trough of of the containerboard domestic and export market.
M C sequential improvement moving forward, but still down year over year, if you move over to to paperboard.
Mostly domestic market smaller percentage in the export market, probably about 10% to 12% of our paperboard sales go into the export market.
In the export market was was down and paperboard in the domestic market with softer but in the single digit range. So nothing nearly as material as we've seen in containerboard. So if you break it down that's kind of how we see our global paper business and.
Margins, how old it at the 16% range well down over 400 basis points. The team has done a really good job managing really an unprecedented downturn in this segment that we now fully believable sequentially improve as we move forward.
Thanks Anthony.
And our next question comes from Gabe Heidi from Wells Fargo. Gabe. Please go ahead.
Good morning, David Alex.
I had a question about just the I guess, what we've heard from several of our company was that January started off pretty good and then sort of deteriorated as the quarter progressed.
Being down or excuse me.
<unk> mid single digit up from from March I guess, that's still apply down mid single digit year over year. So maybe just a little bit of context around.
Sure I got it and I enjoy it just for clarification I'm, assuming you're talking about the corrugated trends.
Yes.
Yeah, Okay. So if you look at our quarter.
January was definitely our strongest month, we saw it gets softer February and March and February March.
It was pretty stable.
We exited March we saw mid single digits growth in April and you know everything customers are telling us everything we're seeing in our backlogs is will continue to see that that sequential improvement you quarter over quarter and then of course.
Horse down year over year, and then one thing to remember in in your modeling and it goes into our forecast for Q3 is we see about three to six month lag in our contracts on the corrugated side. So with the P. P. W pricing decline will start to see that here.
As we go through the quarter and and then the third quarter, but.
Volumes, we see sequentially, improving so that'll be the balance as we move forward.
Okay.
And I I guess to make sure that I'm interpreting this correctly the slide five here effectively I think you're telling us the the prior 1 billion and a half.
Of targeted savings that you guys had communicated I know a portion of that was sort of capital contingent and it doesn't look like you're kind of spending that $3 million to $500 million of capital this year.
I don't know what next year looks like but uhm, that's the piece that you're kind of taken off the table in terms of the.
The bridge to get you to a billion and a half so think about a billion today and I guess if that is in fact, the case you know.
I think Alex said, maybe the the 4 billion might be achievable still so how do you.
I guess, what's the.
And then a couple of font.
This year, where we're already at 400 million and we continue to expect that to expand and when you look at our innovation pipeline of new business.
Our customers are ones that are partners with us we've had long term relationships they value what what we brought to them during a really challenging time over the last couple of years from Covid and and supply chain Titus <unk>.
And it is related to historical acquisitions as as.
You also are you interested in getting although some unplanned downtime at several middle and that you're working to improve overall you know place no reliability can just provide some more color what happened that those mills, if you can share, which mosley work and you'll if the impact is ongoing and impacting your physical <unk>.
And so we're really looking hard at what are the root causes of these unplanned downtime of dance and how do we and how do we address those through the strategic deployment of capital and in cases, where the the deployment of that capital is not going to meet our returned threshold. Then we'll look at closures just like we did in Panama.
City and in Charleston, but an example that we've talked about a lot is our ongoing winder investment program were really up upgrading our winders across the.
Across the entire fleet that drives better reliability of the of the males and and brings us.
To a different position on the cost curve. So that's how we're.
That's that's what the issues are and where it manifests in the network and then how we're thinking about addressing those issues as we drive towards that $1 billion in 2025 and beyond David What would you ask yeah. The only other thing I would add on that is what we're really interested in in investing and is looking at predictive analytics.
<unk> this is an opportunity for us to.
Ensure that you know we understand you know if there is you know heavy vibrations on a machine we can capture it early fix it before there's any an unplanned downtime as a result of that so we're also as we look at capital investments. We're also looking at digital investments and we're piloting some pretty neat.
Technologies, they're giving us really good insights into our equipment and into our reliability and I think you can expect us to continue down that pathway.
Great. Thanks, very much good luck in the corner.
Thanks I appreciate it.
And our next question comes from Mike line drop from C point Mark. Please go ahead.
Thank you Uhm wanted to ask as you're going through this process of identifying the assets to be reinvesting in and obviously in Panama City Charleston, the decision to close.
Are you seeing that there is a real wide discrepancy in in the choice set that there are mills in assets in your system that are well capitalised and highly profitable and then there are mills in your system that are at the very far end of the scale and so then.
You have to kind of choose among that subset or is it more than it sort of more even across and you've got to make decisions. On this is the best places in difficult difficult decision to make but these are the ones that we choose to go forward with <unk> and <unk> are there.
Made me just start with that please.
Yeah, No. That's it's a good question and I think it goes to the inquisitive nature of that the company history has and when you make these acquisitions you you do get a variety of of of assets that maybe have been under capitalized versus overcapitalized and the strategy of of the company that.
That made those acquisitions.
And so to answer your question directly I would say, we do see a wider range of assets that are well capitalized versus you know may be under under invested and they they sit differently on our cost curve as we look at it from a cost per tonne basis. So what we want to make sure. We do is.
<unk> you know, we would never want to make sure we underinvest in our strategic high quality assets. So we make sure we keep those at a at a great level and maybe some of those at the other end of the spectrum. We that's the decisions that we make is this is the investment we need to get to the asset quality.
That we want does it give us the return that we won't expect from that investment.
And if it does will always look to invest and if it doesn't we we have to make the hard decisions.
Like we made an a Panama city or north Charleston.
And they can help me with your questions. It does obviously more.
More precision over time, just said it would be incredibly helpful and now for instance, just understanding with with North Charleston, What is the finance how do you see the financial impact in [laughter], but.
Presumably you you have a sense of the costs takeout and much of that as you've mentioned much of that production you think you're gonna be able to <unk>. Yeah. So that's really a cough take out, but we're gonna lose whatever.
I might've been affiliated with <unk> so.
Presumably that that would be something we we could get something of a sense of as we try to figure out the kind of the thought process behind making that move.
Sure. So let let me let me take a take a run at at Martha and I think that the challenge with answering your question just to be very candidates is obviously, we're not going to talk about specific mills before any decision has been made for a lot of reasons that I think should be obvious, but as as David mentioned, there's a very sort of.
Balanced scorecard that we look at in terms of you know what are the grades that the milk producers and how strategic are those are those grades and substrates.
What is the source of fiber in the fiber supply and is that competitive when you start thinking about recycle mills there.
About a third that the ongoing capital diet as a as a virgin milk and so that's obviously you know something that we evaluate and then what markets to does the mail serve and and what's the EBITDA less capex contribution of those mills.
So that's really the the the criteria and we cheer each one of the males in a tier one tier two tier three tier four framework, which I've described for this group before and and we're always looking at you know if a male can't move between those tears, how do we adjust our capital accordingly.
As it relates to the Charleston question, which was your specific.
Question, It's an interesting case, because we're able and I think David mentioned this in a prior question, we're able to basically move.
A lot of the production of that mail to other males. In the system again through the great work that the team's doing and unlocking.
The hidden factory and and then for the nonstrategic highly volatile doors or product. That's Ah a product line that were you know not strategic for us and we'll we'll accept that and work with our customers that over time, but in aggregate there is essentially no EBITDA.
Impact from the closure of that melon, there's a significant benefit in terms of our capital efficiency, because we can redeploy that capital into our higher performing assets and so that's so that's how we thought about it and that's the same candidly.
Candidly the same framework, we used for Panama City, and it's the same framework will use for for ongoing decisions.
Okay that that is helpful shifting gears and one thing I notice is you have a lot less maintenance downtime in the the fourth quarter your fourth fiscal quarter how.
How big benefit all else equal would that typically provide us were thinking sequentially from the physical to the fourth quarter.
The fourth quarter.
Yeah like the fourth quarter is usually always our lowest maintenance downtime scheduled as we look at it. This year. It is you know I think we have about 19000 tonnes scheduled for impact.
It will look in it we did this last year will look as we look to balance.
Should we can we pulling some Q1, depending on where the market conditions are for 2024 in the fourth quarter, but that's just typically how it happens historically, it's always been that way, but well, we'll continue to balance it and.
You know if if market conditions you know you.
Continue with the way they are we can maybe pull some some scheduled maintenance in Q1 2024 in the queue for but you know as we as we've mentioned we do believe sequentially will continue to see volume improvements and that's going right into our planning is how we see the market and may be marked as to help with the math a little that I think we mentioned.
On the call. We did we did take 265000 tons of economic downtime and slow back that cost the company about $58 million.
So you can sort of do the math to figure out how much you know the downtime cost us.
When we take it and that's obviously economic downtown not maintenance downtime, but I think it's a relatively good heuristic.
Okay cause sometimes maintenance downtime is often a lot more expensive than economic cause you're you're actually spending money and in the course of the maintenance so and that that sort of what I was just trying to get a bit more clarity. If there was yep helps you could give us.
Oh, Yeah, I mean, it's a it's a fair it's a fair point although.
You know there there's incremental costs associated with economic downtime as well as it relates to the inefficient usage of machinery inefficient usage of labor and that sort of thing a lot of the incremental costs associated with maintenance downtime is capitalized over overtime. So again I think it's a it's a it's a fair heuristic to use without getting in.
Specifics of of what the maintenance downtime process you know maybe one last comment I'd add on that is we also have the.
The ability can we get the you know the equipment that we ordered that we may have scheduled for our maintenance downtime backlogs are coming down on equipment, but they really got stretched out over the last year or two so you know some we've got to make sure. We plan are are scheduled maintenance as we can.
Can get the equipment and so we can do the proper work.
Okay Super I'm <unk>, one last one just on the <unk> on the energy if I look at the Delta you're expecting for the full year and yeah. I think you buy like 80 590 M. M. B T U of Natgas and so that's a pretty low number do you have a fairly significant hedging program in place that is kind of minimizing the the <unk>.
Benefit for this year that we potentially can be seeing next year, if <unk> stayed where where they aren't yeah a couple.
Couple of things for me to.
To sort of clarify on on the bridge to your specific question on hedging about 50 per cent of our natural gas is tied to Nymex and you know we do hedge a portion of that through basically a dollar cost averaging approach over time and so our Ah realise nymex prices is slightly.
Above what you'll see in the.
If you were to look at the the Nymex strips currently but then we're reaping a benefit of that over time, it's natural gas comes back to more normal levels. The remaining 50 per cent is tied to local contracts and so there that tends to.
Be pretty variable depending on you know transportation Premia local market dynamics, you know contract structure all of those sorts of things. So that's why are our natural gas deliver.
Delivered natural gas is not.
Directly comparable to Nymex Nymex spot the other thing and the number that we provided that includes it's not just natural gas and includes electricity and coal as well as well as you know other things like diesel and feel so it's it's a bit of a bucket of total energy cost not just natural gas.
So hopefully that helps okay super thank you.
Thanks.
We have a question from Cleve broker from you B S. Please. Please go ahead.
Hey, good morning, everybody thinks we're speaking me and at the end here.
Typically.
Just a couple of quick follow ups, because I think there's been a lot of good color. Yeah first of all David how cause I'm wondering if you could just give us some.
Some color on what's giving you confidence in the Troughing demand that you're talking about you know it's been a subject of debate for the last couple of months. Yeah. I'm. Just wondering if you could give us some color on that what you're saying.
Yeah, I'd I'd start on the containerboard side I think you know just as we look at April orders over March up mid single digits. I think we're on the domestic side I think we're getting through most of the the destocking that that needs to occur.
And just how customers talk about the second half of the year, which is just a little bit more.
Just a little bit more optimism.
The the the piece that I would also say, though is it's it's still gonna be down year over year, and we still have some pricing headwinds with our contracts into the second half of the year, but we do believe volume sequentially will will continue to improve.
I mean, we're all talking to our customers everyday on this we're working with them every day.
But it'll be you know it'll be a slower ramp up but we do see it sequentially get better.
Quarter over quarter.
On the consumer side, you know, we we as we talk to our customers and again, it's it's different by segment.
Our backlogs you know remain at a at about six weeks, which is you know a solid backlog for us where we can continue to provide the service levels. We have we are seeing some some segments that have been softer.
And then we're seeing some segments like like health and beauty that had been a little bit more resilient. So you know as we talked to those customers I think they're feeling you know.
Optimistic on the second half of the year, but I think some segments are definitely a little softer and summer are are a little bit more.
<unk> from this standpoint, and then as we move forward you know continuing that trend on the paperboard side as we mentioned, we've seen a little bit more softness.
Domestically and we'll watch that trend in our global paper business and see how that continues as we move forward sequentially as well.
But you know, it's it's really been for us on the global pay per side on the containerboard side and will continue to hopefully see that sequential improvement that our customers are talking about and we'll just have to balance the P. P. W pricing deflation that's occurred.
Got it and thanks for the color of their and you know sorry, if I missed it earlier, but I I didn't hear any real detail on what drove the outperformance vs guidance in the quarter I think I appreciate natural gas was lower than than plan, but.
Cause you have to need any detail in there what was different than the guidance and then maybe some sources of of very.
Variability that we can track into you know into the next quarter.
Yeah. So you know really it's there to to primary drivers Gandhi continues to really perform.
Perform well and so where again just highlighting how excited we are about that acquisition the growth opportunities that it unlocks and the quality of those assets and so that was you know a business that I think exceeded our expectations in the corner and and.
Given the newness of the acquisition you know just.
A little bit trickier, it up for us to forecast and then we did have quite a bit of benefit from inflation that exceeded our expectations. So those are really the two.
We know it's a challenging market so we've really been driving.
A lot of work on the cost side to take cost out we pointed to you know run rate savings.
And SG&A in the order of $200 million this year.
We pointed to procurement and supply chain savings for the year on a run rate basis in between $250 million to $275 million. So again, just really driving towards that billion dollars of cost savings by 2025 with with great execution.
And I would just add <unk>, even with the the terrific performance in Latin America, which I think is really important as you look at our portfolio.
You've got Mexico, which has been you know estimated to grow at 50 per cent faster than North America, you've got Latin.
In America, where we have just wonderful assets <unk> terrific leadership, and our Latin American business.
So that's really helping drive differentiation, but then if you just look at North America the.
The performance of the North America team has been really I think very very strong.
R. R R Ebert up.
Was basically flat.
As you look at just North America, so that just talks to the productivity and cost savings improvement that are going on.
Or North America margins actually went up 50 basis points in this challenging environment now that will certainly get pressure with with some of the pricing, but it. It I think illustrates all the efforts are really starting to have an impact on our bottom line.
Yeah, Yeah, well I hope you can appreciate from our side, we're trying to gauge whether you know whether there was any.
Survey that assumption and the.
Q3 guidance.
How much of that well what kind of activity that you're talking about I can carry through but we can follow up on that offline. Alex just one one really quick follow up I I don't Wanna take up too much more time do you have an expectation for OCC prices for next quarter.
If you can share.
Well, let me get back to your prior question I know you said, we can take it online, but we we when we guide we guide with our our best assumptions that we had an appointment time and we focus on execution and.
And the fact that we were able to deliver a very strong quarter and the fake face of a really challenging macroeconomic environment just points to really really great execution and all the progress that we're making on you know.
Transforming the company and we talked about that at length as it relates to in David's mentioned, it several times, but as it relates to the back half of the year, we do anticipate that the that the price impact that we've seen through the global paper business will flow through the converting fitness because of the nature of.