WRK
#Thanks, <UNK>
Good morning, everyone
Thank you for joining our call today
WestRock had a very good quarter
We generated $0.54 of adjusted earnings per share
We executed well
We delivered year-over-year productivity improvements of $103 million
Our productivity improvements were a highlight of the quarter and were the primary contributor helping us mostly offset the exceptional increase we experienced in input cost
While these higher input cost may persist favorable market trends and the relentless execution of our strategy by the WestRock team will drive improved results and increased value for our customers and stockholders' over the short and long-term
For a comprehensive portfolio of paper and packaging solutions is helping our customers meet their goals from quality paperboard to innovative and functional design to consumer packaging to corrugated packaging to displays
WestRock provides the full range of solutions to our customers
We are successful integrating our products and services to deliver value to our customers
Here are some examples of how we're doing this
We've already closed on more than $150 million an incremental annual sales from the breadth of our portfolio
Examples of these incremental sales include customers who already buy corrugated packaging from us and have decided to use WestRock to manufacture their folding cartons
This combination provides the opportunity for WestRock to work with these customers to reduce their total cost by optimizing the total fiber required to package and deliver their products
We have folding carton customers who have decided to use WestRock to design, manufacture and assemble displays and in the process this combination provides the opportunity for us to help integrate the best aspects of both products to help grow our customer's sales
Craft breweries are another excellent example
WestRock can provide craft brew customers with the beverage carrier, the corrugated box and the machinery to assemble the packaging, reducing their cost, supporting their growth, and reducing their supply chain risk as compared to relying on multiple suppliers
We are extending our solid track record of execution
At the end of the March quarter, we achieve an annual run rate of $675 million in synergies and performance improvements were two-thirds of the way to $1 billion goal
Since the completion of the merger, we've seen $632 million flow through our income statement
We have line of sight to achieve the $1 billion productivity goal by the end of the June quarter of 2018. This is one quarter sooner them initially planned and highlights the strong performance culture we are building at WestRock
We continue to execute our disciplined capital allocation strategy
We bought back $25 million of stock during the quarter
Since the merger, we've purchased 15.3 million shares at an average price of $49 per share
In total, we've returned $1.4 billion to stockholders since the merger through dividends and share repurchases
Since forming WestRock, we focused our portfolio on our core paper and packaging business
We excited the specialty chemicals business with the spin of Ingevity
We completed the sale with the Home, Health & Beauty business and monetized a significant portion of our land and development assets
Over the same time, we've improved our portfolio
We acquired SP Fiber and we acquired Cenveo Packaging
We further developed our position in Mexico with our joint venture with Grupo Gondi, and this quarter we acquired Star Pizza which has expanded our presence in the growing market for custom short-run pizza boxes
The announced acquisition of Multi Packaging Solutions will expand our presence in healthcare and high-end customer markets
The shareholders in Multi Packaging Solutions overwhelmingly approve the transaction and have both held earlier this month and we are progressing well in our integration planning
We anticipate that we will close this transaction in the June quarter
We are excited about the opportunities we are seeing to add new capabilities for short-run and premium products and services to our platform and to integrate in even broader portfolio of solutions across our exciting business
The work we've done today is confirming MPS was outstanding strategic fit in the WestRock portfolio
After we complete the Multi Packaging Solutions acquisition, our portfolio will be balanced between consumer and corrugated packaging
This balance will provide WestRock the access and the opportunity to participate in a wide range of end markets and the ability to partner with customers across our entire portfolio
More than 80% of our business will be in North America
About $800 million of our sales will be to Central and South American markets
Another $1.2 billion will be in the European markets and yet another $0.5 billion will be to the Asia Pacific markets
The scale in foreign markets has and will provide us additional opportunities to create efficient supply chains to support our customers' growth across these markets
Now, let's turn to the details of our second quarter performance
Sales for the quarter were $3.7 billion and adjusted EBITDA was $547 million for consolidated margin of 15%
Total commodity inflation was $125 million headwind year-over-year
This was the result of significant increases across most of our input costs including a $75 million or $66 per ton increase in the cost of recovered fiber and a $23 million or $1.23 per MMBtu increased in the cost of natural gas
On a percentage basis, our cost of recovered fiber increased by 81% and the cost of natural gas increased by 59%
The corrugated packaging team executed well in the quarter and included the benefits of the $40 per ton price increase published in October as well as increased volumes and productivity gains
These benefits were offset by the previous year's PPW published price reductions and significant inflation
North American corrugated second shipments were up 76,000 tons a total of 3.7% compared to the same quarter of last year
Box shipments per day increased 1.1% as compared to last year with strength in consumer, eCommerce, and select food markets
The corrugated segment continues to focus on our differentiated strategy and growth in the segments and markets where we can best position ourselves to drive value for our customers and for WestRock
Over the coming months, we will be integrating the 25,000 annual tons containerboard converted by Star Pizza
Last fall's $40 per ton domestic containerboard price increase that we communicated to our customers has been fully implemented, so we are now at a full run rate
Currently, we are in the process of implementing our $50 per ton domestic price increase that we announced to our customers in March and was recognized in Pulp & Paper Week this past Friday night
Healthy demand in our export markets continues in part driven by the strong South American growing season both sequentially and year-over-year
Export pricing in March was up significantly from our low point of last year with increases in effect in all of the markets
We fulfilled all backlog export orders from the fall in early winter
Remember, that Hurricane <UNK>hew disrupted our ability to fulfill export demand in the first quarter of fiscal 2017 effectively pushing that volume into the March quarter
We are currently shipping at a more nominal run rate of approximately 300,000 tons per quarter
North American adjusted EBITDA margins were 15.9%
Commodity inflation was $91 million
We achieved productivity improvements of $36 million as compared to the year-ago period
This prevalence is the direct result of our entire organizations focused on performance excellence that is supported by our continuing capital investments to improve our integrated corrugated packaging system
We managed our inventory as well with inventories declining by 148,000 tons from last year
We took 78,000 tons of maintenance downtime in the quarter in line with our expectations and we took no containerboard economic downtime
Our joint venture with Grupo Gondi is progressing very well
Gondi reported sales of $192 million and EBITDA margins in excess of 20%
The Mexican packaging markets remain attractive and the business is very well positioned
In fact, additional investments are in process that will enable Gondi to continue to meet the needs of its customers well into the future
Our Brazil team continued to perform well with 16.5% total growth in box shipments, up more than triple that of the industry
We have an outstanding business and team in Brazil and see the potential to make incremental investments in this area that can provide attractive growth in returns
During the quarter, we recorded $2.8 million of legal reserves, which unfavorably impacted our EBITDA margins at 270 basis points
Our corrugated customers are seeking to meet their growing demand for greater performance and more high-end packaging that appeals to today's consumers
We're partnering with our customers to innovate in the space, create packaging solutions that protect our products and enhanced our brands
We have and will continue to invest in our corrugated platform to meet our customers changing needs and improve our cost position
This work will enable us to generate strong cash flows and improve our margins in our corrugated segment
The Consumer Packaging team operated extremely well and generated excellent results
Adjusted EBITDA was $235 million or 15.1% of revenue, an increase of 100 basis points year-over-year
Shipments of paperboard and converted products increased 0.9%, driven by growth in foodservice, liquid packaging and folding carton
This was offset by weaker beverage volume
Revenue declined year-over-year as a result of lower pulp volume and last year's published PPW price reductions
We expect this pricing trend to slow and then reverse for us as we implement price increases across every grade
Our SBS backlogs improved in the quarter and are currently a healthy six weeks, driven by demand and foodservice and liquid packaging
CNK backlogs also improved in the quarter and are now at six weeks
CRB backlogs are now at two weeks, which is our normal operating level
Consumer Packaging generated outstanding productivity, $72 million in the March quarter
We operated extremely well by implementing a broad range of improvement projects across the segment, which include ongoing converting footprint optimization, sourcing and capital investments
We continue to benefit from the integration of the volume we brought into the system from the acquisition of the Carolina product line, the Cenveo Packaging acquisition and internalization of the volume from the merger
The merger has also provided WestRock the opportunity to market our innovative paperboard products through our existing folding carton network
These innovative products include a paperboard called EnShield
EnShield has been designed for applications, such as frozen food and foodservice where the customer needs an excellent grease barrier without the use of poly coatings
By eliminating the use of poly coatings the package is fully recyclable, which enables our customers to meet their sustainability objectives
Several of our customers are successfully using this product and we are growing interest in EnShield throughout our customer base
<UNK>, I'll turn it over to you
Thanks <UNK>
We've made substantial progress over the past two years focusing our portfolio and growing a leader in paper and packaging
We are well positioned to improve our margins, grow our cash and help our customers to achieve their goals for our comprehensive portfolio the paper and packaging solutions combined with our strong execution
We will use our consistent and growing cash flow to reimbursement our business and make acquisitions that improve our business
We expect to return capital to stockholders by increasing our dividend over time and repurchasing shares
I believe this is a formula that will provide significant opportunities for WestRock employees, customers and investors over the short-term and long-term
That concludes my prepared remarks
<UNK>, we are ready for questions
<UNK> I appreciate the question
Jeff <UNK> is close to that, so I'm going to let Jeff respond
<UNK>, I'm going to let Jeff handle the first question and let <UNK> handle the second part of the question
Our recycling business that the - I guess the primary goal to recycling business is to make sure we have high quality fiber to - for a mills
We do operate a couple dozen plants
We do have a very well developed brokerage operation and they operated extremely successful and they were able to fiber mills and I think to - they also market waste from our converting operations
So they just had a - I think they performed up standard way well during the quarter
Thanks, Chris
Good morning, Debbie
Let me Jim <UNK> leads our Brazil operations now, so now like Jim respond to that question
What we showed you was the EBITDA that remember when we recorded the held for sale we did not depreciate
We had lower depreciation in the quarter is normally the D&A in that business was about $3 to $3.5 million a month
So there was also the benefit in the in Q2 which we backed out of adjusted EPS held for sale impact on the lower D&A
So the sequential improvement from an EPS point of view would have reflected not only that we don't have the EBITDA contribution, but then you don't have that benefit that you have from the lower D&A
EPS is the net of the two
Good morning, <UNK>
Sure
Again the biggest individual driver that contributes to the acceleration of productivity on a year-over-year basis has been the internalization efforts that we've had since the merger
As we move into the second half of this fiscal year as Bob said, we are lapping those benefits
So it's the integration of the Carolina tons, the integration of the Legacy RockTenn folding carton tons, the integration of the Cenveo tons
Those are large contributors to the benefits
We've had procurement savings like we do across the whole system
And we also have footprint actions that we have been talking about both in our beverage business
We've actually took some footprint actions in our displays business as well, so it's a combination of all of those
I think on a year-over-year basis, as we look at this fiscal year, I would anticipate that this quarter would be the peak quarter in terms of productivity on a year-over-year basis because we do start to lap the benefits of the internalization efforts that really hit full speed as we went into the second half of fiscal 2016.
Thanks <UNK>
Good morning, <UNK>
Sure, I'm going to let Jeff to handle that
What I would look at is I would just refer you to their historical public filings and look at their unleveled free cash flow generation
We will have more details when we actually closed the transaction and then have a forecast of how it's embedded and along with our integration plans, but at this point I would point you to their historical public filings
Good morning, Chip
Chip, I just go on from there, when we - the idea of the merger was to build the paper and packaging leader and consumer and corrugated packaging
I go back and look at what we saw it periodically in the time we announce merger and we're just spot on what we intended to do
So we've got leadership positions in the businesses we operate
We've integrated to outstanding organizations
We're focused on customers who are larger more balanced in our Company
And we have I think a terrific slate of investment opportunities both internally and potentially be acquisition
But just kind of put us in a great position going forward
I just want to add that to your question, since you brought up the merger
We haven't put out this specific numbers on that
I think the purchase price here in the zone of what it was and I think we haven't announced a multiple, but it's a very attractive multiple for us particularly when you put in the 20,000 tons of annual containerboard integration
I'm sorry, what are changing? I didn't hear with you
Good morning
Good morning
