WestRock Company
Q1 2021 Earnings Call Transcript

Published: 28 Jan 2021

[Operator:]

Thank you for standing by and welcome to the WestRock Company First Quarter Fiscal 2021 Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there wil be a question-and-answer session. I would now like to hand the conference over to your speaker today, Mr. James Armstrong. Please go ahead sir.

[James Armstrong:]

Thank you, Justin. Good morning and thank you for joining our first quarter 2021 earnings call. We issued our press release this morning and posted the accompanying slide presentation to the Investor Relations section of our website. They can be accessed at ir.westrock.com or via a link on the application you are using to view this webcast. With me on today's call are WestRock's Chief Executive Officer, Steve Voorhees; our Chief Financial Officer, Ward Dickson; our Chief Commercial Officer and President of Corrugated Packaging, Jeff Chalovich; as well as our Chief Innovation Officer and President of Consumer Packaging, Pat Lindner. Following our prepared comments, we will open up the call for our question-and-answer session. During the course of today's call, we will be making forward-looking statements involving our plans, expectations, estimates and beliefs related to future events. These statements may involve a number of risks and uncertainties that could cause actual results to differ materially from those we discussed during the call. We describe these risks and uncertainties in our filings with the SEC, including our 10-K for the fiscal year ended September 30, 2020. In addition, we may be making forward-looking statements about the impact of the COVID-19 pandemic and the recent ransomware attack on our operation -- operational and financial performance. The extent of these impacts, including the duration scope and severity is highly uncertain and cannot be predicted with confidence at this time. We will also be referencing non-GAAP financial measures during the call. We have provided a reconciliation 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 said, I'll now turn it over to you Steve.

[Steve Voorhees:]

Okay. Thanks, James. Good morning and thank you for joining our call. I'm going to start with an overview and update on the ransomware attack that we reported on Monday. We're following strict protocols laid out by industry-standard incident response directives, because of this, we're being careful, not to share certain details around the incident at this time. However, following is information that I can share with you today. On Saturday, January 23, our systems identified what we've quickly determined was a ransomware attack. We immediately implemented our business continuity processes and initiated our response containment protocols. These processes have been supported by cybersecurity experts and these include Dell Secureworks, a global instant response leader. These actions included taking preventative measures, including shutting down certain systems out of an abundance of caution. We've been in active communication with law enforcement.

[Ward Dickson:]

Thanks, Steve. Turning to slide 10. The pandemic action plan has been an important component of our ability to pay down debt. Over the past three quarters, the plan has contributed an additional $600 million in cash. We are on track to achieve our goal of approximately $1 billion in additional cash available for debt reduction through the end of calendar year 2021. We started the year with a strong first quarter. Going forward, we see opportunities to grow earnings, given the strong demand for paper-based packaging, along with implementing the previously published price increases and recognizing the benefits of our strategic capital projects. We have a strong track record of generating free cash flow. Each of the past five years, we have generated more than $1 billion of adjusted free cash flow, and we have generated over $1.6 billion of adjusted free cash flow during the past 12 months. With our ability to generate strong free cash flow, we have a road map to return our net leverage ratio to the targeted range of 2.25 to 2.5 times. And as Steve mentioned, we continue to work on remediation and recovery from the ransomware attack. We will provide additional detail on the financial impact of the attack and provide an outlook for the quarter and the year at the appropriate time. Turning to Slide 12. We've been very clear about our near-term focus on paying down debt, investing in our business and returning capital to our stockholders through our dividend. Over the past 12 months, we've reduced our adjusted net debt by more than $1.3 billion and our net leverage ratio has improved from 3.01 times to 2.86 times. Capital investment plans remain unchanged and we still expect fiscal 2021 capital investments of $800 million to $900 million. Our Florence paper machine started up this past quarter and we expect the Tres Barras project to be completed during the spring and begin ramping up in the second half of the fiscal year. These strategic investments combined with our KapStone synergy realization will contribute approximately $125 million of EBITDA in fiscal year 2021 and a similar amount in fiscal year 2022. Longer term, we expect normal capital investment levels will be between $900 million and $1 billion. Our cash flows are resilient. We will continue to pay a competitive and growing dividend and we also expect the potential for M&A opportunities that help us grow our packaging business and our integration rate. WestRock continues to operate from a position of financial strength and is supported by our significant cash flow generation. We have minimal near-term debt maturities and approximately $3.4 billion of liquidity and a road map to return our leverage to our targeted range of 2.25 to 2.5 times. I'll turn it back over to Steve to provide some closing remarks and prepare for Q&A. Thank you Steve.

[Steve Voorhees:]

Thanks, Ward. While the ransomware attack on WestRock is receiving our immediate attention and urgent response, I remain very optimistic about WestRock for the long term. Here's why. WestRock provides sustainable fiber-based packaging. It's a market that's benefited from recent trends in consumer preferences and buying behavior that we expect to continue in our favor. We're remarkably well positioned to meet our customers' needs. We see strong supply and demand conditions in almost every major grade as well as strong demand for our converting and machinery solutions. Export markets are tightening. The need for packaging to serve the stay-at-home economy as well as sustainable fiber-based packaging to replace plastic is growing. The investments that we've made on our box plant system, our mill system and our capabilities are benefiting our results and will continue to do so as we bring our strategic projects online over the next year. We're generating very attractive free cash flows that over the near term will be used to reduce debt and our leverage ratio and longer term will be used to return capital to our stockholders and grow our business. All of our success is due to the incredibly resilient WestRock team that has dealt with and is dealing with changing market conditions, COVID-19 and our ransomware attack. Our resilience gives me confidence in our ability to succeed and to create value for our customers, communities and stockholders. That concludes my prepared remarks. James, we're ready for Q&A.

[James Armstrong:]

Thank you, Steve. As a reminder to our audience to give everybody a chance for a question, please limit your question to one with a follow up as needed. Also we're not able to give any further information on ransomware attack. We’ll get to as many questions as time allow. Operator, can we take our first question, please?

[Operator:]

Your first question comes from the line of George Staphos. Your line is open. Please ask your question.

[George Staphos:]

Hi, everyone. Good morning. Thanks for taking my question. And congratulations to the consumer team. Very strong results versus our forecasting the event. I want to hit first really on the leverage from volume in corrugated and whether it was where you had expected it to be. Obviously, you had a lot of ongoing productivity programs. But with the very strong volume you saw in a per work day basis in corrugated, I would have expected a bit more year-on-year improvement in EBITDA in the segment. And relatedly, in Brazil, even when I make the adjustments for Tres Barras and the $15 million, I think the EBITDA -- guys, correct me if I'm wrong, was flat year-on-year. But it's been a booming market you're getting 5% to 10% pricing in the market in corrugated. Just interested if the leverage that you got out of the volume there was as expected.

[Jeff Chalovich:]

Hey, George, good morning. It's Jeff.

[George Staphos:]

Good morning.

[Jeff Chalovich:]

So, I think the leverage in the box system in North America is what we expected. We would have liked to have more paper to ship into our domestic markets. We were down a bit in our domestic too. And I think if we had further paper, we could have made more shipments in box and obviously domestic. So from the standpoint of we shipped every ton of paper, we could possibly ship in every one that we made. So I think that the leverage though from the box system was exactly what we expected. On the Brazil side, their volume is strong. I think we've got what we expected from the box. On the mill EBITDA, I'd ask Ward to comment on the EBITDA question on flatness year-over-year.

[Ward Dickson:]

Yes. George, this is Ward. The expectation that we had in Brazil, it's actually as we had planned and guided in the quarter. In fact, if I just step back and look at how the total company performed for the quarter, we were above the high end of our guidance range. And as we went through the quarter, demand ended up being stronger than what we expected, but we also -- and we started to get the initial flow through of some of the PPW increases. But we also experienced higher energy and fiber cost than what we expected entering the quarter. I think the mills and box plant systems across both segments performed very well in the quarter.

[George Staphos:]

Okay. Yes. I mean I get the inflation point, but I appreciate the color and I'll follow on later I guess. And then, Pat a question for you. It's obviously I think good to see the strength coming across your entire boxboard network. But given some of the emerging trends that Steve was talking to in his remarks, what does it mean in terms of how you see your grade evolving over time? It sounds like you're considering moving more to coated or unbleached kraft as opposed to bleach. But could you talk a little bit more about how you expect to roll that through your system and the related work behind that? Thank you very much.

[Pat Lindner:]

Yes. Thanks for the question, George. This is Pat, good morning. So, we are expecting some changes in mix as we go forward and we continue to focus on our packaging markets that tend to be much higher value and faster growth. So think of moving those products towards -- or the mix towards retail food and quick-serve restaurant beverage and healthcare as well. Now that takes a mix of our products across CNK, CRB as well as SBS, and so driving those packaging volumes is extremely important to us. And as you know, SBS has been more challenged, particularly during the COVID pandemic crisis and commercial print liquid packaging and paper cup stock has been down significantly year-over-year. And part of our action plan there is to -- has been to reduce the amount of SBS capacity in our system. So we announced a $200,000 reduction -- or a 200,000 ton reduction of capacity in SBS at our Evadale mill in the last quarter. And as you pointed out and Steve commented, the shift of some SBS production at Evadale to CNK is very important because some of the growth that we're seeing in our packaging markets is both across food and beverage and we want to be able to support that. So overtime, we'll be moving this business towards a more favorable mix and packaging in those areas that are growing and reducing our exposure to some of those SBS -- specialty SBS markets. And I think one last comment is around sustainable packaging. We have literally a dozen customers -- dozens of customers are making claims and setting goals towards 2025 and even beyond for 100% recyclable or compostable or reusable packaging. And fiber-based packaging has a really important component in that with some tailwinds, you've seen in some of the examples we've shared recently in beverage food and foodservice. So with those moves, we feel confident we're going to continue to improve the mix of the business.

[George Staphos:]

All right, thanks for the comment. I’ll turn it over guys.

[Operator:]

Your next question comes from the line of Gabe Hajde. Your line is open. Please ask your question.

[Gabe Hajde:]

Thank you. Good morning, guys. And good luck with the challenges ahead. I was hoping you can maybe comment a little bit about inventories. I'm assuming just based on industry data that they're pretty well depleted and you're redirecting some containerboard tons from the export market domestically. But maybe just give us a sense, if you can how the mills are running as it relates to the ransomware and how long it might take you to kind of restore a comfortable operating or inventory level?

[Jeff Chalovich:]

Hey, Gabe, it's Jeff. I'll start with our inventory. So year-over-year, we're down about 22,000 tons. And then sequentially, we came up a bit over 50,000 tons. So we're getting back to a place on the floor -- on floor inventories for the box plants that we're a little more comfortable. And as far as the ransomware attack, it's too early to comment on our operations or the effect on inventories. I'll let Pat comment on his inventories.

[Pat Lindner:]

Yes. Thanks, Jeff. And I echo your last comment on too early to really comment on any of the impacts from the ransomware. Our inventories if you recall from the last quarter we made some very significant reductions on our inventory especially in our SBS system and that led to in the last quarter -- or I should say fiscal year '20 fourth quarter led to about 87,000 tons of downtime. We continue to adjust our inventories at the beginning of our first quarter of fiscal year 2021 and took about 39,000 tons of downtime to balance our supply with our demand. And we now feel that we're in good shape. And with some of the increasing demand that we're seeing across a number of our markets sequentially, we have -- as a result of that we have started restarted the idled paper machine in SBS at Covington. And so we feel we're pretty balanced right now, but we continue to operate with high operating rates across the system and that's going to be critical to service our customer demand because our backlogs as Steven indicated across all of our substrates is operating between a four and six week area.

[Gabe Hajde:]

All right. Two quick follow-ups maybe if I can. Jeff, can you comment at all if you guys are having to buy board on the outside market? And then real quick, I guess from a -- maybe it's premature to say, but I'm assuming that any of the capital that might be required on Evadale to shift over to CNK is within the scope of the $900 million to $1 billion that you guys have talked about and maybe timing path on that project?

[Pat Lindner:]

Sure. So I can start out with a comment on CNK. So the CNK is produced at Evadale. We expect this year as far as timing is concerned to produce about -- we believe we'll produce about 25,000 tons of CNK there. We have the ability to ramp that up significantly. And as Steve indicated earlier, as we start to qualify that with customers and trial it and look at the different operations to scale that up, we'll certainly update that. But we're looking at 25,000 tons this year of CNK at Evadale.

[Jeff Chalovich:]

Yes, Gabe. I'm not going to comment on external purchases, but I will say that Evadale continues to help us on kraft and will run through this quarter at least on the kraft for us. So we expect 10,000 to 15,000 tons from Evadale a month.

[Gabe Hajde:]

Thank you. Good luck.

[Operator:]

Your next question comes from the line of Anthony Pettinari from Citi. Your line is open. Please ask your question.

[Randy Toth:]

Good morning, guys. This is actually Randy Toth sitting in for Anthony. I think in the slide, there's a comment about over the medium term using targeted M&A to increase vertical integration for the company. And I think we've seen over the past year, on the containerboard side at least integration has been improving to expand demand growth alone. So can you remind us about your integration rate in boxboard for each grade? And where you would like those to move over the longer-term? Thank you.

[Pat Lindner:]

So I can certainly start on that. And so right now, we are in the arena of CRB about 60% integrated and we feel pretty good about that because it allows us to service our independent customers and access some of the local markets. CNK is about 65% and that is highly integrated in beverage less so in some of the food markets. And again that allows us to really access some of the local markets through the independent converters. And SBS were much lower in terms of our integration. That's really driven primarily by the open external paperboard we sell through commercial print tobacco as well as liquid packaging. And so we feel pretty good about where we are. But of course we're always going to look at opportunities to as Steve has mentioned and Ward to continue to look at grow those businesses both organically as well as inorganically where it makes sense to do so and where it's profitable to do so.

[Randy Toth:]

Understood. Thank you. And then maybe shifting gears just quickly. I think the expected EBITDA benefit from Porto Feliz moved from $20 million to $10 million. Can you just comment on what's driving that?

[Ward Dickson:]

I think it's really just the timing of the ramp-up. That's all it is.

[Randy Toth:]

Okay. Got it.

[Ward Dickson:]

The full expectation is -- we expect the full benefits of the project.

[Randy Toth:]

Got it. Makes sense. Thanks. I will turn it over.

[Operator:]

Your next question comes from the line of Mark Wilde from Bank of Montreal. Your line is open. Please ask your questions.

[Mark Wilde:]

Yeah. Yes. Just back on the ransomware, I want to be respectful of the situation. But can you give us some sense of what the middle output might be looking like at the moment or the number of mills, which mills might not be running right now just so that we can get some sense of how volume is moving? And then just Ward on capital allocation, I'm just curious about the section with potential increase in your stake down at Gondi and also the potential for at some point doing another machine out at Longview. KapStone had long talked about how they had excess fiber capacity out there and they have raised the issue of potentially adding another machine at Longview so just those potential uses of capital if you could comment on that?

[Steve Voorhees:]

Okay. Mark, this is Steve. I think you've got three topics and it's going to be difficult for me to comment on any of them. So -- but I'll tell you just on the ransomware, we're five days into this and I'd love to be able to communicate exactly what's happening. But -- and I just don't know if you've ever gone through a situation like this but it's a very fluid situation. This is day six and it's -- as much as I'd like to be able to report something, we're just not in a position to where we can report anything. I think our disclosure on Gondi is -- but we do have a 30-some-odd percent interest and we do have a relationship with them. And there's the opportunity obviously to change our interest over time. And I just don't have anything to report on that either. And then lastly on Longview, I will say we look at our system strategically about how we want to position it long-term. And we look at alternatives and we continue to look at all the alternatives for our system. And I just don't have anything to report on Longview. So as much as I'd like to be able to respond to each one of the questions that's what I can tell you Mark.

[Mark Wilde:]

All right. Turn it. Thanks, Steve.

[Steve Voorhees:]

Yes.

[Operator:]

Your next question comes from the line of Neel Kumar from Morgan Stanley. Your line is open. Please ask your question.

[Neel Kumar:]

Great. Thanks for taking my question. In corrugated your maintenance schedule shows particularly heavy maintenance in the third quarter. Can you just discuss what is driving that? Does that generally correspond with how you expect volumes to evolve through the year and perhaps demand trends normalizing in some degree in the third quarter?

[Jeff Chalovich:]

So the maintenance, we schedule it's based on requirements for boilers. It's not unusual for our maintenance schedule. Our volumes we continue to have strong volumes, strong backlog. So through the year we expect our volumes to remain strong. And I'm sorry, I didn't hear the last part of your question.

[Neel Kumar:]

I was wondering if the maintenance schedule, kind of, corresponds with perhaps demand trends normalizing to some degree in the third quarter. But it seems like it's actually more about just timing of your...

[Ward Dickson:]

That's absolutely right. That's right, Neel. That's absolutely right.

[Neel Kumar:]

And then just in terms of your outlook for the dividends in 2021. Just given the deleveraging that's been so far and the likely higher profitability this year is there scope to raise the dividend back to where it was earlier in 2020?

[Ward Dickson:]

So I think, we've been pretty clear that our capital allocation priority is reducing debt and getting our leverage back into our targeted range. I think we've been -- we've talked about the fact that from a dividend strategy and the discussions that we've had with the Board is that we'll want to have a competitive and growing dividend. We're not in a position right now to talk about what the size and timing of that dividend increase is going to be because we're -- our immediate focus right now is returning to the targeted leverage range. I will say that, Steve has been pretty consistent that he said that, again, we reduced the dividend. We didn't say we were going to return the dividend to the previous level. So we will -- our dividend policy will take in a lot of considerations, which includes no payout levels and our capital allocation alternatives. And again, what we will -- when we will articulate the strategy, I think, it will incorporate a competitive and growing dividend.

[Neel Kumar:]

All right. Thank you.

[Operator:]

Your next question comes from the line of Kyle White from Deutsche Bank. Your line is open. Please ask your questions.

[Kyle White:]

Good morning. I hope everyone’s doing well. I just wanted to focus in on box demand and kind of see what you guys are expecting here or what you're seeing here in January. We're hearing some talks on maybe a slowing of the pace of the recovery and kind of just curious if you're seeing that with any of your customers in your system, maybe particularly on industrial side as well. Thanks.

[Jeff Chalovich:]

Hey. Kyle, Good morning, it's Jeff. So through 13 days in January we were up over 11%, so our demand has remained strong, including in industrial, e-commerce. Most of our end use segments remain strong. And so, through the first 13 days, we were up over -- a little over 11% and our backlogs remained strong through the same time period.

[Kyle White:]

Sounds good. And then just focusing on inflation. It was a little bit -- a touch higher than we were expecting. It sounds like it was a little bit higher than you're expecting as well on the OCC and maybe energy cost. Just curious, what you expect for the year here. Do you expect these kind of continued levels throughout the year? Are you going to be able to offset it with productivity, or do you need the kind of pricing benefits to start going through to offset it?

[Ward Dickson:]

This is Ward. I'll take this one. So I think we've been -- when we look at -- we are seeing a return of inflation in our business and I think a key component of it is recycled fiber cost. When you look back at FY 2020 we actually had a decline in recycled fiber on a year-over-year basis, so we actually had cost deflation from that component of our cost. What we're seeing is a normal level of cost inflation for us, if you just go back all the way back to the acquisition, it's about $225 million a year. We're expecting higher inflation this year, because of the increase in recycled fiber cost. In fact, our outlook right now is that, recycled fiber cost will potentially increase $15 to $20 sequentially from Q1 to Q2 and then maybe another $5 per quarter, as we go out into Q3 and Q4. So that would be a meaningful increase on a year-over-year basis driving cost inflation for that component of our business. We are -- in the short term, we're seeing pressure in freight cost and it's really been as a result of the pandemic. And then, we have our normal wage and healthcare inflation. Now, what we have going for us is, we've had strong demand. We have an improved pricing environment. We have the benefits of the strategic capital investments starting to come into the year and then we have our ongoing productivity initiatives.

[Kyle White:]

Thank you. Good luck in near year.

[Ward Dickson:]

Thanks.

[Operator:]

Your next question comes from the line of Phil Ng. Your line is open. Please ask your question.

[Philip Ng:]

The inflection in price mix was very encouraging consumer. Pat, was that largely mix from some of the stuff that you're doing to shift to packaging? And is this level sustainable as we kind of think about it? And then, on top of that, any color on how we should think about the recent boxboard increases flowing through to your P&L? Appreciate it, there's a lot.

[Pat Lindner:]

Yes. I appreciate that, Phil. So this is Pat. So, yes, the majority of the increase that we saw, which was mix price reported in our -- if you look at the bridge on slide 17, the majority of that was in fact mix, because of the higher packaging volumes associated with food, foodservice and beverage as well as healthcare. So you can think of that primarily as mix. And I'm not really able to share the impact on the price increases that have been announced through PPW on a forward-looking basis, but we are obviously working with customers to implement those as quickly as we can, both in terms of those that have been announced of PPW, as well as those that through our other pricing mechanisms allow us to capture additional price.

[Phil Ng:]

Got it. But do you feel pretty good about the mix dynamic being pretty sticky in the coming quarters, right, Pat?

[Pat Lindner:]

We do and sustainable packaging trends certainly help that. And the COVID stay-at-home economy is driving some tailwinds there. And, of course, healthcare is strong as well. So we feel good about the order pattern that we see. Our backlogs are strong and we feel pretty good about demand.

[Phil Ng:]

Okay. That's great. And shifting gears to your corrugated business. Demand obviously is still very, very strong start of the year. Inventory had gone a little better. But the previous quarter, you had some limitation in meeting that demand. So I'm just trying to get a better sense, how you're situated in your ability to kind of meet that demand on the board side and when you can expect lead times to get back to more normalized levels?

[Jeff Chalovich:]

I'll start with the back part of the question. It's hard to determine where – when lead times will go back to normal levels depending on what happens in the economy. As I mentioned, sequentially, we came up to a better position for our inventory, so we felt we were almost where we wanted to be not quite. So we felt good about our ability internally. And then going forward, it's about what we can produce and get onto the floor and also in our domestic – and some of our export customers our direct customers, we want to make sure that we maintain our relationships and can ship going forward.

[Phil Ng:]

Okay. Sounds like you're in a much better spot this quarter and you have a little more ability to kind of service all your customers. Is that fair Jeff?

[Jeff Chalovich:]

I think that's fair. Yeah, before the malware attack we're trying to discern out where we'll be going forward. But yes that was fair up until the 13th day of the month, I'd say.

[Phil Ng:]

Got it. Appreciate it guys.

[Operator:]

Your next question comes from the line of Mark Weintraub from Seaport Global. Your line is open. Please ask your question.

[Mark Weintraub:]

Can you give us a sense as to how much CNK you think Evadale could eventually go to?

[Pat Lindner:]

Yeah. So this is Pat. So thanks for the question. So as I mentioned, we're probably going to – we believe we can go about 25,000 tons this year depending on how customer trials go and our ramp-up there. We expect next year that that could be potentially in the – for the fiscal year in the range of 50,000 tons. We theoretically have the ability to potentially move up to 150,000 in that neighborhood, but it's a little bit too early to really commit to that. We believe that's possible, but we have a lot more work to do there. And of course, another factor here is that how we choose to use that paper machine at Evadale, how we choose to move that between SBS and CNK, because there's certainly some high margin and attractive business in SBS there that we want to bring into that mix. So hopefully that helps you with a little bit of color to that.

[Mark Weintraub:]

That is perfect. And then Ward, you mentioned freight also having picked up a bit. Can you scale for us the type of impact that you see that having this year? And then just one just clarification, on the ransomware you had mentioned that you're in the middle of the response and that you're five or six days into it. I assume, I shouldn't read into that. Does that means you're thinking it's like a two-week type thing? It's – I assume the middle of the response is just more kind of – it's not the start and it's not the end. It's somewhere in the middle. I just want – or can we think about this as likely being at this point a two-week type of process?

[Steve Voorhees:]

Mark ,this is Steve. It's difficult for us to say really much more than what we've already said. And I'll just repeat. It's unusual circumstance. We're working around the clock to restore everything. The team that we have, I think is just doing a phenomenal job in responding. And it's like every day is an adventure, and we're really focused on taking care of our customers. And it is unbelievable of the work that we have in our company to make sure our customers get what they need. And that's really, all I can say Mark.

[Mark Weintraub:]

Understood.

[Steve Voorhees:]

And yeah, and I'll just comment. When it's appropriate when we can say something we'll go out and we'll inform. And I really want to provide accurate information, but just we're at a point where it's just very difficult to do so. And – but we will do so, when it's appropriate.

[Mark Weintraub:]

I appreciate that. Ward on the freight, if you can?

[Ward Dickson:]

Yeah. So Mark, we spend almost $2 billion a year in moving material around our own system, delivering it to customers and warehousing it. And of course, a portion of that cost is our warehousing cost. If I look at the kind of the line freight, we're looking at inflation right now. I think for the full year, that's probably 3% to 5%.

[Mark Weintraub:]

Okay. Thank you so much.

[Ward Dickson:]

Yeah.

[Operator:]

Your next question comes from the line of Adam Josephson from KeyBanc. Your line is open. Please ask your question.

[Adam Josephson:]

Yeah. Thanks. Good morning all. Ward, just a couple more on inflation. You mentioned your OCC price expectations or you think prices could potentially go up as much as $15 to $20 a ton sequentially in fiscal 2Q and maybe $5 per quarter beyond that. Can you just talk about why you're expecting that? I mean, there's a shortage of ocean containers which presumably is affecting exports. You're obviously dealing with your ransomware incident. So can you just -- in light of those factors, why do you think OCC could go up as much as you're saying it could? And why would you think that strength would be sustainable thereafter?

[Ward Dickson:]

Yeah. I mean, what I'm going to do is I'm going to ask Jeff to start and then I'll tag on.

[Adam Josephson:]

Sure. Thank you. Is Jeff there?

[Jeff Chalovich:]

Sorry. Adam, it's Jeff. We've hit the road when you buzzed. So yes, the demand for OCC in the domestic market was strong. Generation was strong, but demand was also very strong. We saw Asia pulp producers in India both increased purchases from the U.S. And then overall recycled fiber supply domestically was adequate. But as you mentioned earlier too there is freight issues on container freight. So all of those things, we see driving up pricing. And we don't see really a big difference in that over the course of the next quarter or so.

[Ward Dickson:]

So Adam, we're just -- I mean, I've just given you a marker of what we think.

[Adam Josephson:]

Right.

[Ward Dickson:]

And I mean, we're not giving -- obviously we're not giving all the components of our guidance for the full year because of the current situation. And when we do that we'll -- I'll be able to update you on all the key assumptions. But I just wanted to put that marker out there, which says that this year in contrast to last year, we're seeing a return to inflation for some components of our costs when last year it was actually deflationary.

[Adam Josephson:]

I totally understand. Just one last one on that Ward. So sequentially, so you talked about OCC. Can you give us any sense of what you're expecting sequentially on freight chemicals just the other components of your COGS roughly? I appreciate on a per ton basis. Obviously, I don't mean your production.

[Ward Dickson:]

Yeah. Let me tell you the first thing that I want to make sure you think about when you think about our models from Q -- from our fiscal Q1 to fiscal Q2. As we always have our wage and salary the majority of our wage and salary increases occur January 1. And so, that's a meaningful sequential quarterly expense. The other thing that we have is we have the payroll tax reset that always occurs in the first quarter. So one of the key inflationary items just sequentially and the timing from Q1 to Q2 are those normal ongoing wage and benefit costs that we have each and every year. I mean, I gave you the assumption on recycled fiber and you can just apply that to our -- you can apply that to kind of our -- to our run rate. But let me see what else do I have. That would be -- I don't really have anything other meaningfully to highlight for Q1 to Q2.

[Adam Josephson:]

Okay. Thank you.

[Operator:]

Your next question comes from the line of Paul Quinn from RBC. Your line is open. Please ask your question.

[Paul Quinn:]

Yeah. Thanks so much. So good start to the fiscal year. Just wanted to get back to capital allocation and I appreciate the timing of where you're at right now versus the leverage target you've got. But how should we think about the sustainable payout of the competitive dividend? And then, has pandemic changed your thinking around what the sustainable level is?

[Ward Dickson:]

I'm sorry. I didn't hear the second half of the question.

[Steve Voorhees:]

How has the pandemic changed what we're thinking.

[Ward Dickson:]

I mean the -- I think what we feel very comfortable with is the 2.25 to 2.5 times leverage target that we've started the -- as we do the overlay to what our capital allocation priorities are. We've been very consistent about what we believe the ongoing CapEx needs of this business are which is the 800 -- I mean it's the $900 million to $1 billion on an ongoing basis. And then we start to look at the dividend. And when I say, I think competitive from a from a yield point of view. And then also we're going to just look at that side-by-side with the other opportunities that we have to invest in our business which include strategic capital projects that have attractive returns and then targeted M&A. And Steve, I don't know if you want to add anything to that.

[Steve Voorhees:]

I think you've covered it well.

[Paul Quinn:]

Okay. Then maybe just a follow-up on vertical integration. Do you see more opportunities on the Containerboard side or the Consumer Packaging side?

[Steve Voorhees:]

Just -- I think it's hard to make a judgment about that. I think there's an attribute of our business. There are a lot of independent converters out there and each one has its own story. And I think there's opportunities on both sides of the business. And I think it's very consistent with what we'd like to do long term is move the business to higher value-added packaging and that means integration. And I think as we put on the slide the medium-term independent M&A to improve our integration I think that's what we want to do going forward.

[Paul Quinn:]

All right. Thanks all I had.

[Steve Voorhees:]

Thanks.

[Operator:]

Your next question comes from the line of George Staphos from Bank of America. Please ask your question.

[George Staphos:]

Hi, thanks for taking the follow-up. Hey Jeff, I just wanted to make sure I understood something and I'm probably the only person on this call who didn't quite get the volume relative to the EBITDA leverage. So obviously you make more money with the converted ton versus third party. And you were up 8% or 11% depending on whether I think per work day or actual. And you also had built you said some inventory so you got back to a better position from an inventory standpoint. So you're able to generate paper to have some stock going into the year recognizing you have outages coming up now. So again just if you could help me understand how the volume -- very strong volume growth didn't really net to a lot of EBITDA year-on-year that would be helpful? Thanks guys and good luck in the quarter.

[Jeff Chalovich:]

Hey George. So I think that from our volume what we expected and what we forecast for our business was spot on. So the inventories remember you have on floor in transit. So a lot of that stuff was showing up through the month. And as I said the other pieces of the business where we could have shipped more like our domestic market we weren't able to ship more into that segment which would have helped. And there was some price mix a bit down, but not really material. So our mix overall was very positive. And so I think you would have seen a bigger deficit in our price mix, had we not shipped as much into the box segment, it's really about the overall being able to ship more volume I think into our domestic and honestly into the box system because we literally shift everything we could get on the floor to a corrugator and make -- and also to a domestic customer. But from the standpoint of our business and what I expected, we did exactly what we expected in the quarter.

[Ward Dickson:]

Hey George, this is Ward. And I guess I'm going to just reiterate a couple of things. We highlighted the decline in the export shipments on a year-over-year basis. We talked about the fact that we -- when you look at the year-over-year bridge you also had the year-to-year comparison of the flow through of the previously published price reductions that occurred and then you have the impact of the higher OCC. So those to me are the other elements of the margin change on a year-over-year basis for corrugated.

[George Staphos:]

Yes. No Ward, I get that but that would show up in a different portion of the waterfall that wouldn't -- I would think right? That wouldn't be in the volume component of EBITDA. But I do appreciate these comments and I'll turn it over and will follow up afterwards. But thanks guys. Good luck in the quarter.

[Operator:]

There are no further questions at this time. You may continue.

[James Armstrong:]

Thank you for joining our call today. If you have any follow-up questions please don't hesitate to reach out and have a great day.

[Operator:]

This concludes today's conference call. Thank you for participating. You may now disconnect.