WRK
#Thanks, <UNK>
Good morning, everyone
Thank you for joining our call today
September marks the completion of WestRock's second full fiscal year
It's been a remarkable two years
Our team's made outstanding progress in building WestRock into the leading paper and packaging solutions company that we are today
WestRock's adjusted earnings per share were $0.87 in the quarter
This includes an adjusted tax rate of 28.4%
Full year adjusted earnings per share were $2.62. Our fiscal 2017 adjusted free cash flow exceeded our $1.2 billion target
We delivered $80 million of productivity in the September quarter, and we're delivering on our $1 billion synergy and performance improvement goal
In September, we reached a run rate of $840 million, $15 million more than our estimates going into the quarter
Our customers are seeing firsthand what our differentiated strategy means to them
Our comprehensive portfolio of paper and packaging solutions uniquely positions WestRock in the marketplace
We're combining the delivery of our products and services to address the business needs of our customers
As background, we developed an early focus on a group of 40 customers with a total of $4 billion in sales
It's remarkable that three quarters of these customers are buying significant amounts of paper and packaging from multiple business lines across both our consumer and Corrugated Packaging segments
The fact that so many of our customers by both consumer and corrugated packaging from us makes a lot of sense
Since virtually all of our consumer packaging customers buy boxes and many of our corrugated customers buy paperboard, folding cartons and displays
In 2017, this focus paid off with our closing an incremental annual run rate of more than $200 million in new business from these 40 accounts
Our success has set the stage for additional growth across our portfolio
MPS has brought a new set of solutions and is creating even more opportunities to grow our sales across WestRock
I'm confident in our ability to further broaden our relationships with many of our customers
The capabilities of our sales and design teams are key to our success in meeting the needs of our customers
I'm proud to say that two industry organizations recently recognized the outstanding performance of WestRock's sales and design teams
In September, WestRock's merchandising displays business received 18 Design of the Times Awards from the Path to Purchase Institute
In October, WestRock's folding carton businesses received 13 awards from the Paperboard Packaging Council
This recognition helps confirm my belief that WestRock is unique in our ability to design and deliver outstanding solutions across so many types of consumer and Corrugated Packaging
This capability differentiates WestRock as we help our customers succeed in their markets
We've improved our business through acquisitions
During fiscal 2017, we made five acquisitions for a total enterprise value of approximately $2.65 billion
We sold our dispensing business and received net proceeds of over $1 billion
This net investment of $1.65 billion will increase our future adjusted EBITDA by $300 million on a net basis after the full realization of synergies and after deducting the EBITDA of the sold dispensing business
This results in an effective EBITDA multiple for acquisitions during fiscal 2017 of 5.5 times
This has been a very successful transformation of our portfolio that has increased our focus on paper and packaging
Given the strength of our cash flows and the long-term outlook for our business, on Friday of last week, the WestRock Board of Directors approved a 7.5% increase in our annual dividend to $1.72 per share
WestRock pays an attractive and competitive dividend, and the board intends to increase our dividend over time as we increase our earnings and cash flow
I'm pleased with the substantial progress that we've made over the past three years and how our strategy has developed
Fiscal 2017 was an important year for us and sets us up for significant growth in sales, earnings and adjusted operating cash flows in fiscal 2018. We have attractive opportunities to grow by investing in our business and making acquisitions that improve our business
Our free cash flow and balance sheet provide us ample capacity to take advantage of these opportunities
Let's turn to the results for the quarter
Sales were over $4 billion, a 12% increase over the prior year quarter
Our sales increase was due to $495 million from acquisitions and $175 million in pricing gains, driven primarily by our containerboard price increases
This growth was partially offset by lower volume and the impact of the sale of the dispensing business
Total company adjusted EBITDA margins of 16.1% were stable year-over-year
This is impressive given the $162 million in inflation that we experienced in the quarter and the $27 million negative impact of the hurricanes
For the full year, total input cost and labor inflation was $548 million
Productivity was an important contributor to earnings, with $80 million realized in the quarter and $361 million for the full year
Our adjusted tax rate for the fourth quarter was well below our guidance, mainly due to the very favorable resolution of several items earlier than we thought heading into the quarter
Our balance sheet remains in great shape with ending leverage of 2.54 times
Our pension plans are fully funded
Turning to the Corrugated Packaging segment
WestRock team delivered strong results in the quarter even after considering the impacts of the hurricanes and high recovered fiber cost
The fundamentals of supply and demand within our North American Corrugated business are very strong
Global demand for virgin containerboard is growing, and export market pricing has been increasing
During the quarter, WestRock's North American Corrugated Packaging segment sales were $1.95 billion and adjusted EBITDA was $359 million
Our adjusted EBITDA margin was 19.2%
This is an increase of 100 basis points over the prior year quarter
Our fourth quarter North American daily box shipments increased 7.5% year-over-year due to gains in e-commerce, pizza, dairy, bakery and industrial markets, as well as the three acquisitions we made during the year
October daily box shipments have increased by 4.3% from the prior year period
We are improving our channel mix
Our integration rate for North American Corrugated Packaging business for the quarter was 75%
This represents an increase of 700 basis points from last year and represents substantial progress toward our target of being 80% integrated
With our strong domestic box demand, we sold 213,000 tons to export markets
This was 34% less than the prior year quarter
This was the lowest quarterly amount we've sold to export markets in over four years
While our export volume declined, our export pricing increased
Average pricing across all export containerboard markets increased by more than $100 per ton year-over-year and more than $30 per ton sequentially
Hurricanes Harvey, Irma and Maria resulted in a loss of 30,000 tons of mill production and a pretax reduction in income of $15 million
We incurred $7 million in incremental cost from the consolidation of two older box plants into a single state-of-the-art plant in Sioux City, Iowa, and the consolidation of our acquired Island Container plant into our Deer Park, New York plant
On a year-over-year basis, recycled fiber cost increased $60 per head per ton with a $66 million unfavorable impact to segment results
Total inflation across the corrugated segment was $116 million
As we prepare for our winter maintenance outages, we're building our inventory and expect containerboard inventory to increase by 106,000 tons sequentially and reach a peak in our first quarter
We expect our inventory to decline over the balance of the year, ending fiscal 2018 at approximately 60,000 tons higher than the end of fiscal 2017. We shipped 54,000 tons of virgin containerboard to the Grupo Gondi joint venture during the quarter, and we expect shipments to increase as Gondi grows its business
Gondi's new lightweight recycled linerboard mill, with a projected investment of $300 million, will be built in Monterrey, Mexico, and will bring its annual production to more than 1 million tons
In October, WestRock increased our investment in the attractive Mexican market with an additional $108 million equity investment
This brings our ownership in the joint venture to 32.3%
We performed well in Brazil with box line growth of almost 8%, ahead of market growth of 6%
We incurred $6 million of one-time pretax items in the quarter, adversely affecting adjusted EBITDA margins by 500 basis points
We currently operate an older box plant in the state of Sao Paulo, Brazil
This plant produces nearly 2 billion square feet of Corrugated Packaging
We've considered many alternatives and concluded that our best alternative is to replace our old box plant with a new, exceptionally well-equipped box plant at a new site also in the state of Sao Paulo
When fully operational, this new plant will produce over 4 billion square feet of Corrugated Packaging
This investment will provide multiple benefits to us
First, we'll improve our cost structure and improve our already attractive margins from operating a much more efficiency box line
Second, we build the capacity to serve the growing Brazilian market
Third, we'll integrate over 100,000 tons of our own high-quality virgin containerboard production from our trades Varkaus Mill
Lastly, we'll fund the project entirely from the cash flow we generate from our existing operations in Brazil
The net cost of the project will be approximately $125 million, and we expect that the plant will be operational by the end of fiscal year 2019. The WestRock Consumer Packaging team delivered improved sales and adjusted EBITDA in the quarter
<UNK>ets remain mixed would strength in liquid packaging, food service, health and beauty and the strength balance by weaker demand in tobacco and commercial print applications
Overall demand within food packaging and beverage end markets has been relatively stable, with some pockets of strong growth in the U.S
craft brew, Latin American and Asian Pacific beer and emerging brands in food
Backlogs across our systems are normal for this time of year
Our SBS and CNK system backlogs are about five weeks and CRV backlogs are over two weeks
Net sales were $1.87 billion
Adjusted EBITDA was $280 million, and adjusted EBITDA margins were 15%
Segment shipments, excluding pulp, increased 6% and were helped by the NPF and Hannapak acquisitions
Pricing and mix were favorable as we realized PPW published price increases, and we shifted pulp production to higher-value paperboard production
The impact of Hurricanes Harvey and Irma reduced our production by 22,000 tons and reduced our pretax income by $12 million
The consumer packaging team delivered $33 million in productivity for the quarter and $205 million for the year
This outstanding result has been due to the effort by the entire team and includes the impact of integrating our businesses, closing redundant facilities and operating more efficiently at our mills, our converting plants and across our SG&A categories
The Multi Packaging Solutions business performed very well in the quarter
Adjusted EBITDA of $65 million was more than MPS reported as a stand-alone company last year
The integration is well underway
We've announced the closure and restructuring of three plants that were made redundant as a result of the acquisition
As of the end of the quarter, we've achieved more than $20 million of run rate synergies and performance improvements, and we remain on track to achieve $85 million by the end of fiscal 2019. The Hannapak acquisition performed well in the quarter, and we're introducing our global customers to our new capabilities in the region
Overall, WestRock had a solid quarter
We're well positioned in executing our strategic plan
I'll turn the call over now to <UNK>
Thanks, <UNK>
I'm proud of the progress we made in our first two years as WestRock
We're partnering with our customers about differentiated solutions that help them win in their markets, and we're building our business in an industry with very attractive long-term fundamentals
Our strategy is working
We have a large pipeline of internal and external opportunities that will improve our business for the long-term
In fiscal 2018, we expect to significantly grow sales, EBITDA and cash flow
Using our capital allocation framework, we are reinvesting our cash flow to generate strong returns, improve our business, create long-term value for our customers, employees and investors
On December 8, we'll be holding our first Financial Analyst and Investor Day in New York City
For those of you who won't be able to attend in person, we'll be webcasting the event live
You can contact <UNK> for more information
<UNK>, I'll turn it over to you
Thanks, <UNK>
First, the $200 million increase in sales
I think with respect to defensibility, our business is one of blocking and tackling
I think our – we just need to block and tackle better than our competition
And we're doing a lot to integrate our product and solution offerings
I think – I mentioned the 40 accounts
I think we organized those teams over a year ago, and we include on those teams experts in each of the products and solutions that are relevant to the key account
I think we're doing very well with that
We've also organize dedicated teams to meet the needs of specific end markets
And I'm not going to go through all of the specific end markets, but a really good example of this is craft beer, where we have developed – <UNK>, you mentioned machinery, we have developed the custom machinery solution offering both corrugated and folding cartons
And we're spending a significant amount of resources to provide commercial and technical training across our sales force and support our ability to provide solutions to the customers
And I think we made acquisitions, MPS in particular, provides us great experience in integrating the sale of cartons, labels and inserts, providing great example to us as we build those capability across WestRock
Again, I'm very confident in our ability to do that and just very happy with the strategy
I think in – both the corrugated and consumer great capability
And I think, <UNK>, you saw it at Path Expo
So in fact, I'd like you have some direct experience with that
With respect to OCC
OCC is volatile
I think it's difficult to assess the direction it will take long term
I think we're balanced
Our fiber mix is about 60% virgin and 40% recycled
And I think we build into the way we operate our business being flexible to try to adapt to whatever market conditions and OCC prices affect us
So I think our strategy is rich in that regard
Debbie, I'm going to let Jim <UNK> respond to that
Bob
Yes, our overall integrations in consumer packaging are roughly 35%, and that varies significantly by substrate
So in SBS, roughly 20%, in CUK, roughly 70%, and in CRB, a little over 55%, and we haven't set a specific target for overall integrations within consumer
We continue to look at a number of opportunities that are attractive to grow the business in attractive end markets
And to the extent that, that also has integration benefits for us, that's a positive and certainly something that we would look at
Unidentified Analyst Okay
I will turn it over
Good luck in 2018.
Jim
I really have no insight in particular on that
We're aware of that investment, and it's an interesting transaction with what the strategy is
I really can't speak to, Chip
We look at a bunch of different alternatives as we look at how we can improve our business
I think we're – WestRock is a, I think, in a good position to be able to look at a number of different alternatives
I think those – pretty consistently our capital allocation strategy
So we're just trying to improve our business
I think we have the platform to be able to continue to do that
I'm comfortable with where we are with our supply through fiscal 2019.
I think, right now, we're very happy with where we are at the 32%
They've got a great management team, great partners
And we are very happy for with where we are
I'll start with the productivity and inflation assumptions
We – many of our inflation assumptions are tied to broad market trends
And I believe that it really reinforces the need for us to generate productivity in our business
If you look at – that's the single most important thing that we can control
If you look at the relationship in FY 2018 of our productivity and the internalization – successful internalization of the MPS tons, it's greater than the inflation that we're forecasting for the business
So broadly speaking, we're subject to fluctuations in commodities that all of our peers face, and the thing that we have the most control over is the execution of our productivity programs and the guidance that we provided for FY 2018, we're actually gaining ground and improving earnings by generating more productivity than the input cost inflation is for the fiscal year
And now I'll turn it over to Bob
Good morning, <UNK>
