WRK
#Good morning, everyone
Thanks for joining our call today
We're well on our way to implementing our strategic plan
We're building an industry leader that's well-positioned to profitably grow, by serving attractive paper and packaging markets
WestRock offers a unique set of product and capabilities to our customers, from corrugated boxes to folding cartons to in-store displays
These product and capabilities allow us to work with customers to provide them with differentiated paper and packaging solutions
That's what we're working toward and I'm happy to be able to say we're making progress with this strategy in the marketplace
For the past six quarters, we've transformed our portfolio in a way that's seldom seen from public companies
The merger between Rock-Tenn and MWV brought two complementary industry leaders together
We've improved our folding carton business to our acquisition of Cenveo Packaging and strengthened our corrugated packaging business with the purchase of SP Fiber
We've continued to rightsize our mill network
We integrated the Carolina Commercial Print Product line and gained a successful partner in Mexico through our joint venture with Grupo Gondi
We're moving quickly to monetize our land and development portfolio
Last spring, we spun off our specialty chemicals business into Ingevity
As you saw yesterday, we've entered into an agreement to sell our Home, Health & Beauty business to Silgan, from which we're expecting that $1 billion in proceeds after tax and after transaction fees
This cash will be used for our most recent strategic announcements, the acquisition of Multi Packaging Solutions, a leading global provider of print-based specialty packaging solutions, serving attractive markets
This portfolio news have focused and strengthened our core paper and packaging businesses
I believe that WestRock is in an outstanding position to develop our capabilities, enhance our reach, improve our margins and generate attractive returns to stockholders
Before discussing the MPS transaction, <UNK> and I will provide highlights on our first quarter performance
Sales for the quarter were $3.4 billion and adjusted EBITDA was $490 million, for a margin, 14.2%
Adjusted earnings per diluted share were $0.47 in the quarter
$50 million in higher input cost, including 20% increases to both OCC and caustic soda prices and a 30% increase in energy cost, contributed to the year-over-year EBITDA decline
Results were also unfavorably impacted by previously announced consumer-grade price reductions, Hurricane <UNK>hew and a legal settlement
These headwinds were largely offset by the favorable impact of our ongoing productivity programs in our corrugated segment which is successfully implementing a container board price increase across both domestic and export markets
The corrugated packaging team delivered solid results in the quarter that included the negative impact of prior-year price reductions, somewhat offset by recently announced price increases and meaningful inflation
Box shipments increase 2.2% per day as compared to last year, highlighting the strength from eCommerce, retail and consumer and produce and agricultural markets
North American adjusted EBITDA margins were 15.8%
The year-over-year decline resulted from higher input costs
Productivity improvements drove a $42 million benefit in the quarter from a year-ago period and the domestic container board price increase began to flow through our results, with a $14 million favorable impact in the first quarter
We expect to exit the second quarter at a quarterly run rate in excess of $50 million
Adjusted EBITDA declined by $38 million from the prior year, more than half of which was related to Hurricane <UNK>hew and the legal settlement
Excluding the 33,000 tons of lower production caused by the hurricane, our total segment shipments were above our expectations
Healthy demand in our export markets allowed us to announce a price increase which we'll begin to realize some benefits starting this month
And we managed our inventories well despite the hurricane, with levels that were largely unchanged from the fourth quarter of FY '16. We're confident in our ability to improve our results in our corrugated segment
This is a top priority for our Company
We have made and will make investments in our mill and box plant network, our processes and our people
This agenda will support our ability to serve our customers with our differentiated solutions and products to fundamentally improve our cost position, improve our integration levels, generate strong cash flows and improve our margins
Given the challenging market dynamics, our consumer packaging segment generated stable results in the quarter, with higher input costs and lower volume mostly offset by strong productivity performance
Shipments of paperboard and converted products were up slightly and the segment delivered revenues and EBITDA of $1.5 billion and $215 million, respectively
$14 million in productivity was driven by continued internalization of SBS volumes, procurement cost reductions and our ongoing performance excellence program
Our SBS and CNK backlog now stand at four weeks and CRB at two weeks
Dollar growth in the foodservice and liquid packaging markets were offset by softer demand for processed foods and tobacco
During the first 11 months of 2016, North American folding carton industry sales declined 1.3% due to lower volumes and pricing
For that same period, WestRock's folding carton organic sales in North America increased 1.4%, driven by strong volume, partially offset by lower pricing
Beverage sales were stable
Looking forward, we see a stable demand environment and continued input cost inflation
We've announced price increases to our customers for both CRB and ERB
<UNK>, I will turn it over to you for second quarter guidance
Thanks <UNK>
I'm going to shift gears and discuss our agreement to purchase Multi Packaging Solutions
Why it's such a compelling, strategic and financial transaction for WestRock
We've been interested in this business for some time now so we're delighted to have reached this agreement
Turning to slide 11, provides a summary of the strategic rationale, financial considerations pertinent to our acquisition of Multi Packaging Solutions
Since merging Rock-Tenn and MWV in 2015, we developed the most comprehensive portfolio of paper and packaging solutions in the industry
The focus is on providing customers with unmatched depth and breadth of product and services to help them win in their markets
Our agreement to purchase MPS is another step in that journey and one that greatly advances our business, both strategically and financially
The acquisition of MPS is highly aligned with our strategy
From MPS' market positioning, products, geographic presence, production footprint to its relationships with its customers, MPS has a strong fit with our consumer packaging business and it represents an important part of our evolution toward higher growth, higher value businesses
MPS strengthens our portfolio of differentiated value-added product offerings and enables us to serve a broad range of customers' needs for paper and packaging solutions
This further supports our enterprise sales approach as we look to build long term relationships with our customers and increase our share of their packaging needs
MPS enhances our participation in the attractive growing segments of consumer packaging where we're well positioned to compete
The segments include health care, cosmetics, confectionery and high-end spirits
The requirements of our customers across these markets is increasing
<UNK>et trends are leading to channel, product and SKU proliferation
And the corresponding need for shorter run sizes, more declaration and more differentiation to stand out in increasingly competitive markets
The combined capability of WestRock after the acquisition will be well suited to meet these requirements
We will have substantial potential to expand our customer relationships by offering MPS' solutions to WestRock's customer base and WestRock's solutions to MPS' customer base
MPS balances our revenue mix between our corrugated and consumer packaging segments and it brings $85 million of synergy and performance improvement opportunities, including converting MPS into a customer for WestRock's paperboard
The increased paperboard consumption will allow us to replace pulp production across our SBS system
This meaningful mix improvement further insulates our SBS system from demand volatility
The financials of the acquisition are compelling
We're paying $18 per share for MPS and assuming their debt for a total enterprise value of $2.28 billion
This equates to 9.6 times trailing 12-months adjusted EBITDA and 7.1 times after including full run rate synergies and performance improvements
The acquisition will be accretive to our earnings per share and cash flow from the start
This is inclusive of the impact of purchase accounting
We expect to fund the transaction through a combination of cash on hand in both the United States and Europe, approximately $1 billion from the sale of Home, Health & Beauty, when it closes and existing committed borrowing capacity
On a pro forma basis, our capitalization will remain strong, with a leverage of 2.55 times including synergies
Following the transaction, more than $1.5 billion credit capacity will remain available to us to continue executing our strategic plan
The transaction is subject to normal regulatory approvals and requires approval by MPS shareholders
While MPS has been public since October of 2015, it's majority owned by Madison Dearborn Partners and the Carlyle Group
We expect to close the transaction in our fiscal third quarter ending in June of 2017. Our business generates very robust and consistent free cash flows
This acquisition aligns very well with our balanced capital allocation approach which is focused on investing for growth, both organically and inorganically, maintaining capital expenditures and returning meaningful capital to stockholders through share repurchases and dividends
We evaluated this acquisition on a number of factors, including earnings and cash flow accretion, improving our business, providing future growth opportunities
We believe that on all of these items this acquisition delivers a superior return profile when compared to repurchasing shares
Our Management Team has a track record of solid execution
Since forming WestRock in 2015, we've achieved more than half of our goal for run rate synergies, ahead of our expectations
We've completed a number of transactions to focus our business
I am confident in our ability to deliver on a successful integration of MPS into WestRock due to the quality of the WestRock and MPS teams and the alignment of MPS' business and culture with WestRock
I've had the pleasure of getting to know both Marc Shore, MPS' Chief Executive Officer and Dennis Kaltman, President, over the last few months and developed an even greater appreciation for them as a Management Team
I can't wait to have them join our team at WestRock
Marc and Dennis have spent their entire lives in the packaging industry
Marc's family company, Shorewood, acquired Dennis' family business in 1998 and they have worked together ever since
It has been a productive partnership over this time
Marc started MPS in 2005 and Dennis joined the business the following year
Together, they have built MPS through a series of 17 acquisitions and one merger, had a proven track record of integrating packaging businesses, realizing synergies and delivering value for new packaging products and capabilities
MPS' clients are some of the largest and most demanding companies in the world, with complex needs and requirements
By combining MPS' capabilities with those that exist at WestRock today will create opportunities to further differentiate our offerings and bring another level of value to our customers
MPS is a leading provider of high value-added print-based specialty packaging serving attractive and growing end-markets
Almost all their sales are to Consumer and Healthcare markets; sectors that are expected to grow at low- to mid-single digit growth rates through 2020. In Consumer, they serve image-sensitive markets such as confectionery, cosmetics, fragrance, spirits and other high-value goods
In Healthcare, MPS is known for their ability to provide complementary packaging components, speed to market, quality control, brand security and environmental solutions
These are markets that demand innovation, customized solutions, rapid new product development and a high performance to meet regulatory requirements
Like WestRock, MPS has close and long-standing relationships with their customers
They bring expertise in branding and regulatory compliance which are critical to companies in the Consumer and Healthcare sectors
They have established a reputation for working with customers to meet the challenges of operating in these industries and delivering consistent high-quality solutions
They are a leading supplier of premium folding cartons which will integrate nicely and complement WestRock's business
They also provide products such as inserts and labels which will extend the range of capabilities we can provide to our combined customer base
The transaction further diversifies WestRock's geographic presence, allowing us to better support our customers with the solutions that they need where they need them
MPS will further strengthen WestRock's position in North America and expand our presence as the industry leading provider of folding cartons in Europe
At the same time, MPS' operation in Asia will establish a platform for WestRock to leverage growth opportunities in that region, enhancing its already strong combined position in emerging markets
Turning to slide 14, MPS has a superb and highly diversified roster of long-standing world-class customers
Highly customized, short run, premium packaging and labeling is increasingly complex and valued by these customers
The ability for customers to effectively market their product with unique graphics is something they offer to customers within the Consumer and Healthcare industries
Bundling, folding cartons, leaflets and labels is a service that sets MPS apart from competitors
We will be able to bundles these capabilities with our products such as corrugated and displays and create an even more powerful customer offering
I will now turn it over to <UNK>, who will walk through some of the financial aspects of the transaction
Thanks <UNK>
We're excited about the MPS transaction
MPS will make WestRock a better Company
MPS will add to WestRock's already comprehensive suite of packaging solutions and increase our capabilities in healthcare, cosmetics, spirits and confectionery packaging, while further diversifying our product offering with labels and inserts
And, we will gain additional access to international high-growth consumer end-markets
The acquisition of MPS will further WestRock's vision to be the premier partner and unrivaled provider of winning solutions for our customers
As we're successful, we will be able to create value for our customers, employees and our stockholders
We look forward to sharing more information as we move forward
That concludes my prepared remarks
<UNK>, we're ready for questions
First of all, you've got the rationale for MPS spot on
I think you have also identified opportunities in corrugated
I don't view that as being a choice
I think that's our strategy for the Business is to be paper and packaging solutions provider, providing both corrugated and consumer
So we've been doing, I think, a very good job at meeting needs in both consumer and corrugated packaging markets
I could see additional activity, both organic and inorganic, on the corrugated side along the lines you've described
Sure
Marc Shore will report to me and will work closely with <UNK> <UNK> to ---+ as part of the corrugated packaging segment ---+ I'm sorry, as part of the consumer packaging segment
MPS has been very successful in bundling, say, leaflets and labels with their folding carton business
We're also having success on our side as well, combining our products
And I'm going to ask <UNK> <UNK> to talk about what we're doing in that area in corrugated
We think we're a customer-focused packaging company now
We also operate mills well
I have been delighted to be able to spend time with Marc Shore and Dennis for the past several months
I think it's a great fit
I think both of our organizations are going to be a lot better because of the combination
So I look at this as entirely opportunity for us
I think Shorewood was owned by another organization
That was before I came into the business
I came into the business a long time ago
So it was just a different business, different time
So I really can't comment on that very effectively
What I can comment on is I think we've been very clear on our strategy and very clear on what we want to do with respect to markets
MPS adds better markets to us
It expands our service and product offerings
We've got opportunities to add synergies and performance improvements
I think we're the best buyer and the best owner for the company
I think MPS can bring a great deal to us and vice versa
So I just think it makes sense for us
I think with respect to the uneven performance, I think we've had ---+ there has been volatility in the markets
I think if you look at this on a long term basis, maybe like, say, a year or two, three years, it's just going to make us a better Company
The latter, the market is moving that way
We want to move with the market
I wasn't at either one of the companies when they bought them, so I really can't comment from knowledge based on what they did
I can comment on what MPS does and WestRock does
I think we're very well aligned
We do at very similar times, our businesses complement one another
I take your point on wanting to align the incentive systems
And I think we've done that very effectively at WestRock across a number of businesses
I will also point out that on the ---+ one of the businesses that you identified, I think we had made on Home, Health & Beauty, that management team had performed outstandingly well over the past three years
In fact, I was recognized on the call yesterday
So I have a high degree of confidence in our ability to integrate and in large part because of my knowledge of the people at WestRock and the knowledge that I have of the way MPS operates their business
Okay
I'm going to let <UNK> handle that since he responded to the prior CRB question
I think it is improving it
MPS on markets, the healthcare and consumer markets, are growing faster than the rest of our markets
It is additive to our overall opportunity of growing the Business
No, I think it's adding to our core business; we look at our core business as being paper and packaging, serving both consumer and corrugated markets
This fits very nicely with and adds to, what we have
So I think it's entirely consistent with what we have been doing
Yes, of course
That has been part of what has made MPS successful and that's going to continue to be an opportunity for us
The regulatory approvals we think we need at this point are U.S
, Mexico, European Union, Canada and China
It's early for us to comment on the outlook for that
That is correct
That is difficult for me to comment on an overall industry basis
I think for this particular transaction, to me, the core reason for the transaction is MPS's position and the packaging business
I've told several people this in the process
Look at this as cake and icing
The core business and the packaging business is the cake
The integration is a nice addition
It is the icing to the transaction
Whether that holds true for the rest of the business and the industry, I can't speak to it
All I can say, this is a fantastic transaction for us and I am very much looking forward to getting it closed and working with the MPS management team
