WestRock Company
Q4 2016 Earnings Call Transcript

Published: 7 Nov 2016

[Operator:]

Welcome and thank you all for standing by. At this time, all participants will be in listen-only mode until the question-and-answer session of today's conference call. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect at this point. I would now like to turn the call over to your host, to Matt Tractenberg. Sir, you may begin.

[Matthew Tractenberg:]

Thank you, Dexter. Good morning, everyone, and welcome to our fiscal 2016 fourth quarter earnings call. My name is Matt Tractenberg. I'm WestRock's Vice President of Investor Relations. I'm joined this morning by Steve Voorhees, WestRock's Chief Executive Officer; Ward Dickson, our Chief Financial Officer; Jim Porter, President of Business Development & Latin America; Jeff Chalovich, President of Corrugated Packaging; and Bob Feeser, President of our Consumer Packaging segment. During the course of today's call, we will make 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 discuss during the call. We describe these risks and uncertainties in our filings with the SEC, including our 10-K for the fiscal year ending September 30, 2015. Additionally, we will be referencing adjusted or non-GAAP financial measures during the call. We've provided reconciliations of these non-GAAP measures to the most directly comparable GAAP measures in the appendix of the slide presentation. The slide presentation is available on our website. So, with that said, I'll turn it over to you, Steve.

[Steven Voorhees:]

Thanks, Matt. Good morning, everyone. Thank you for joining our call today. September marked the end of our first fiscal year at WestRock. We've had an exciting and productive year. We've made considerable progress in building WestRock into what we are today. We're a $14 billion paper and packaging company. We hold leading positions across a broad set of markets. We're providing our customers with tailor-made solutions that help them win in their markets. We're executing our strategic plan and delivering excellent results. After only five quarters, we're already halfway toward our $1 billion three-year synergy and performance improvement target. Over the same five quarters, we've delivered $444 million in productivity improvements. We manage our business to sustain and grow our cash flows over the long-term. During fiscal 2016, we delivered over $1 billion in adjusted free cash flow. We returned $716 million to stockholders through $381 million in dividends and $335 million in share repurchases. To-date, we've bought back 13.5 million shares or 5% of WestRock's outstanding shares. We improved our business by investing $588 million in two acquisitions and one joint venture. Our balance sheet is in great shape with a leverage ratio of 2.33 times. On Friday, we announced a $0.10 per share increase to our annual dividend. The dividend increase underscores our confidence in our long-term cash flows. We have ample capacity to reinvest in our existing facilities. We have the flexibility to make acquisitions that improve our business and generate attractive returns. We will continue to purchase WestRock shares and expect to hold leverage within our targeted range of 2.25 times to 2.5 times. Sales for the quarter were $3.6 billion and adjusted EBITDA was $589 million for a margin of 16.3%. Adjusted earnings per share were $0.71. Productivity initiatives contributed $89 million to our income during the quarter. We transferred $2.5 billion of pension assets and liabilities to a third-party. This transaction significantly de-risked our U.S. qualified pension plan. For the full year, sales were $14 billion and adjusted EBITDA was $2.3 billion for a margin of 16%. We achieved our productivity and cash flow objectives in fiscal 2016 and we've set the stage for a very successful 2017. The Corrugated Packaging team delivered solid results in the quarter, including North American adjusted EBITDA margins of 18.2%. Adjusted EBITDA declined by $31 million from the prior year and was flat sequentially. As we said would happen on last quarter's call, the Pulp & Paper Week price reduction from earlier this year continues to flow through this quarter. This is true for both our box and domestic containerboard businesses. We reduced inventory by 143,000 tons from a year ago and we reduced inventories 16,000 tons sequentially. We took 32,000 tons of maintenance downtime in the quarter. Most of this downtime was at our Stevenson mill, where we completed our capital project to convert to a new pulping process. This scheduled outage of the Stevenson mill reduced income by $10 million. We've communicated a $50 per ton price increase to our customers for domestic containerboard and corrugated packaging. Export pricing has improved in our largest markets, including Latin America, where pricing was up $8 per ton sequentially. Our system has been and continues to be tied with good demand, low inventories and high operating rates. Within our box business, backlogs have strengthened and our current pipeline of new business remains strong. Our differentiated strategy is earning us new business. In October, our box volumes were up 1.6% over last year on a daily basis. Turning to Hurricane Matthew, I'm pleased to report that our employees came through Hurricane Matthew with no injuries. We have had several employees and their families with damage to their homes. And some of these employees are receiving support from the WestRock Employee Relief Fund. The impact of Hurricane Matthew on our business has reduced production by 35,000 tons. We've reduced shipments to export markets to help meet our improving demand, as well as address the lower production due to Hurricane Matthew. Grupo Gondi sales in the quarter were $180 million and EBITDA margins exceeded 20%. We shipped 55,000 tons of containerboard to the Grupo Gondi joint venture. And we expect shipments to increase going forward, as Gondi grows its business. Lastly, Gondi completed the acquisition of Aluprint, a leading manufacturer of folding cartons in Mexico. This acquisition adds additional capabilities for Gondi to serve customers in the growing Mexican packaging market. In Brazil, our team performed exceptionally well despite continued regional economic challenges. Box shipments per day were up by approximately 9% over the prior year and up 4% sequentially. EBITDA margins were 26.4%. Jim Porter is working with the team in Brazil. And I expect that they will create attractive investment opportunities for WestRock over the next year. Jim continues to advise us on the North American containerboard business, as Jeff Chalovich has assumed the responsibility of leading this business for WestRock. Jeff brings over 25 years of industry experience to WestRock. He joined RockTenn in 2008 when we acquired Southern Container. He's been leading our $5 billion box business for the past four years. Over the same period, we've improved our North American Corrugated Packaging EBITDA margins from 13% to 18%. Jeff's leadership has driven much of this improvement and we have more runway to increase margins. I'm looking forward to supporting our entire Corrugated Packaging team to deliver even better results through the execution of our differentiated strategy. Consumer Packaging delivered improved earnings and margins in the quarter. Net sales were $1.6 billion and adjusted EBITDA was $268 million. We delivered $42 million in productivity improvements. This drove our 90-basis-point increase in adjusted EBITDA margins. Folding carton revenue grew by 10% year-over-year driven by the Cenveo Packaging acquisition and organic growth of 2% in our core North American business. We're making good progress on productivity initiatives across our converting businesses. Pricing and mix were favorable, primarily due to lower pulp volumes. This was partially offset by the flow through of previously published index reductions for SBS and CRB. Our SBS backlogs have strengthened and are currently at five weeks. We produced less pulp at our SBS mills in the quarter. This was a result of improved paper board demand and planned maintenance outages of the Covington and Demopolis mills. We're seeing limited penetration from European and Asian board suppliers that's been targeting the U.S. market. Finally, sequentially, both our CRB and CNK backlog have increased and both are approximately three weeks. Bob Feeser leads our Consumer Packaging business. Bob's career started at Mead about 30 years ago. His known converting experience includes consumer, corrugated, domestic and international assignments. Bob has as broad set of experiences as any executive at WestRock. Bob's been instrumental in delivering more than $230 million in productivity improvements in the Consumer Packaging business. Our Consumer Packaging business is successfully implementing our differentiated strategy. I look forward to supporting the business in their drive to improve margins. Home, Health & Beauty. Our Home, Health & Beauty business has been performing extremely well over the past few years. Fiscal 2016, our sales were $567 million. EBITDA was in excess of $100 million. Capital expenditures have been less than 5% of sales. The business has generated very strong cash flows that have grown – that we expect to continue to grow over the next several years. The entire Home, Health & Beauty organization deserves recognition for what they have accomplished since the merger and many years before the merger. While the businesses fit well with WestRock's portfolio of packaging solutions, publicly-held peers of Home, Health & Beauty are valued at higher multiples than WestRock overall. And, in fact, our Home, Health & Beauty business may fit even better with another company. Accordingly, our board has authorized us to evaluate strategic alternatives for the Home, Health & Beauty business. These alternatives include the potential sale of the business during the first half of calendar 2017. In the event we sell the business for cash, we expect to use the sale proceeds consistent with our balanced capital allocation strategy. With that, I'll turn the call over to Ward.

[Ward Dickson:]

Thank you, Steve. We're making great progress on monetizing our land and development portfolio. We completed the $13 million after-tax sale of a residential apartment complex during the quarter. As discussed on our previous call, we expect to realize one-half of the $275 million to $300 million in net after-tax free cash flow during fiscal 2017. As Steve indicated, we continue to execute very well on our synergy and performance improvement objectives. We exited the September quarter in an annual run rate of $500 million. Fiscal 2016 productivity was driven by insourcing initiatives, procurement, actions to rationalize our footprint, return generating capital investments and merger-related synergies. We expect to achieve an $800 million run rate by the end of fiscal year 2017 and remain on track to achieve our $1 billion goal by the end of fiscal 2018. Fourth quarter adjusted segment EBITDA declined by $27 million, driven in part by unfavorable volume, the anticipated impact of price and mix and inflation of both input cost and labor. The impact of these three items was nearly offset by ongoing productivity improvements. On a full year basis, combined company adjusted EBITDA declined by $51 million, driven by lower volume and favorable price and mix, wage and other input cost inflation. However, we were able to offset much of these items by delivering $384 million of productivity improvements. In summary, both the quarter and the full fiscal year were successful. And I'd like to thank all of our employees for making this happen. As we look back at the first five quarters of WestRock, we have allocated $2.8 billion of capital. We have invested over $1 billion in capital expenditures over the last 15 months and continue to seeing numerous attractive return generating opportunities. We returned $1.14 billion or almost half of the total to stockholders in the form of dividends and stock repurchases. This return of cash to stockholders via dividends and share buybacks will continue to be an important part of our capital allocation strategy. In the first quarter, we expect sequential earnings will be lower, in line with the seasonal pattern we experienced last year. I'd like to remind you that from Q4 fiscal 2015 to Q1 fiscal 2016 segment income declined by $88 million. We have outlined several of the drivers of the first quarter and full year on slide 12. For Q1, we anticipate that price and mix will be negative as the impact of the previously announced corrugated price increase will be more than offset by the flow through of the previously published consumer price decreases. The first quarter is typically our heaviest maintenance period. And we're planning 160,000 tons of downtime. Volumes will likely decline, driven by four less shipping days in our container business. Consumer grade experienced seasonal softness in the first quarter as well. Inflation of input prices will continue in the period. And, finally, Hurricane Matthew will negatively impact us by approximately $15 million to $20 million. These items should lead you to a first quarter adjusted EPS lower than what we delivered in the fourth quarter of fiscal 2016, but increasing steadily as we make our way through the year. For the full year of fiscal 2017, we expect to deliver adjusted free cash flow of $1.2 billion, including approximately $150 million of land and development after-tax cash flow. We expect to invest approximately $750 million in CapEx. We also expect to realize significant productivity, as well as meaningful inflation in some commodity categories, including natural gas, recycled fiber and certain chemicals. Book tax rates are estimated at 34% to 35% and cash tax rates are in the high 20%s. Steve, I will hand it back to you for closing comments.

[Steven Voorhees:]

Thanks Ward. I'm proud of the progress we've made in our first full year as WestRock. WestRock offers a comprehensive portfolio of paper and packaging products and services. This portfolio provides WestRock the opportunity to deliver winning solutions to our customers that help them win in their markets. We're doing just that. This is and will translate into great value for our customers, our employees and our stockholders. We exceeded our productivity and free cash flow targets in fiscal year 2016. And we're looking forward to continued success in fiscal 2017. Our cash flow is the foundation of our balanced capital allocation program, investing our business through capital improvements and acquisitions and returning value to stockholders in the form of dividend and share repurchases. And, as important as anything else, we have a terrific team and strategy. We're looking forward to driving even greater value creation in the future. Matt, back to you.

[Matthew Tractenberg:]

Thanks, Steve. I'd like to remind the audience that in the interest of time, please limit your questions to one with a single follow-up, if needed. We'll take as many as time allows. Dexter, please open the call for questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And now, our first question comes from the line of Mark Wilde of Bank of Montreal. You may now ask your question.

[Mark Wilde:]

Yeah. Ward, I wondered if you could – good morning. I wondered if you could help us a little bit more on the free cash flow guidance because it seems like between kind of CapEx down about $50 million, $150 million from land and development and $300 million from additional synergies you've got more tailwind than your current free cash guidance would suggest.

[Ward Dickson:]

Sure. Let me walk you through the details of the $1.2 billion. I'll really highlight three things. You're right. We do have the contribution of $150 million from land and development versus a small use from land and development in fiscal 2015. In earnings, we have modeled in the implementation of the containerboard price increase. That's partially offset by the full year impact of the flow through of the previously announced PPW decreases in some of our consumer grades, along with the negative impact of input cost inflation. So, if you take our current pricings for some of our key raw materials and you compare that to the average of those prices in 2016, you can easily model between $175 million and $200 million of inflation on a year-over-year basis. Our working capital and other balance sheet items should be a source as we expand some of our payment terms with our vendors through our supply chain financing programs. The other thing that I would also call out is that we've got some non-cash related earnings. I think we highlighted at the equity and non-consolidated affiliates. That's Gondi and it's also the portion of our land and development holdings that are not – where we don't have a consolidating interest. And we highlighted that as a negative $60 million for the full year.

[Mark Wilde:]

Okay. And just, if I could, as a follow-on, just on this containerboard pricing front. I know it's a sensitive issue, but I'm just curious. Earlier in the year, there was a decline of about $15 in the linerboard price series in Pulp & Paper Week and there was a lot of talk that that wasn't large enough to trigger any contract adjustments in the box business. So, now with the containerboard price hike much more than that, I'm just trying to figure out whether there's any kind of a netting effect of the two.

[Steven Voorhees:]

Jeff?

[Jeffrey Chalovich:]

Hey, Mark. So, we have -

[Mark Wilde:]

Hey, Jeff.

[Jeffrey Chalovich:]

A multitude of contracts and trigger mechanisms literally in thousands of customers, over 15,000 customers. So, we're not going to comment generally on that. We have communicated the $50 a ton price increase to our customer base and we will report on future calls on the progress.

[Mark Wilde:]

Okay. Fair enough. Thanks. I'll turn it over.

[Operator:]

Thank you very much. Our next question comes from the line of George Staphos of Bank of America. You may now ask your question.

[George Staphos:]

Thanks. Hi, everyone. Good morning. Thanks for the details. My first question – what I'll do is I'll piggyback off of Mark's question on pricing and again recognizing it's not necessarily something you like to talk about in a public forum. Can you give us a little bit more color in terms of the aggregate pricing benefit or actually reduction that you're thinking about in the fiscal first quarter? Directionally, we know containerboard is up and we know you have the flow through on the consumer side that's negative. Is there a way to parse those and, if not, just aggregate those in terms of what we should be thinking about given today's pricing? That's my first question. Second question, a totally different topic on Home, Health & Beauty. We're not terribly surprised by the announcement. We thought this is a good business within the whole of WestRock. But, in the past, Steve, you've talked about being a packaging company and dispensing systems being part of being a packaging company. Has there been anything that's changed in your view? Perhaps it's just valuation multiples. Does that suggest now is a better time to look to explore the valuation arbitrage, if you will, on that business? Thank you.

[Steven Voorhees:]

George, on dispensing, it has fit well with us. I think you answered the question by saying its valuation multiples.

[George Staphos:]

Do I get another one then? Just kidding.

[Steven Voorhees:]

Yeah. So, Ward, take the first question.

[Ward Dickson:]

So, George, on the first question on pricing, sequentially from Q4 to Q1, we said down slightly with – we will see some of the initial benefits of the containerboard price increase, but we will also see the continued flow through of the PPW reductions on the consumer grades. And, again, it'll be a small net negative between the two.

[George Staphos:]

Okay. I'll turn it over. Thank you.

[Operator:]

Thank you very much. Our next question comes from the line of Adam Josephson of KeyBanc. You may now ask your question.

[Adam Josephson:]

Thanks. Good morning, everyone. Ward, one more on the guidance. I know Mark asked you about the cash flow guidance. Can you talk about the implied EBITDA guidance based on everything you laid out in that guidance slide? Are you expecting full year EBITDA to be up or down relative to the $227 million that you generated this year?

[Ward Dickson:]

It should be up. The primary drivers of the EBITDA change – we will continue productivity. The productivity won't be as high as it was in this fiscal year because we have the benefit of some of the merger related synergies in the first year. We will have more pressure related to inflation. And I size the input cost inflation and I'd remind you of the $120 million to $125 million worth of labor inflation that we have on top of it. So, we will be moving from a – as you look at the full year FY 2016 bridge where the net commodity deflation and wage inflation was only a negative $50 million, it's going to be considerably more unfavorable on a year-over-year basis. Productivity will be – you should expect productivity in the $325 million to $350 million range for next year. And then, we will have the pricing flow through in the containerboard, which will be partially offset by the full year impact of the PPW reduction from the consumer grades.

[Adam Josephson:]

Okay. Just as a follow-on, I assume Home, Health & Beauty is in your full year cash flow and EBITDA – cash flow guidance?

[Ward Dickson:]

It is. And it's – again, I would reference some of the key facts that Steve gave you. It's approximately just north of $100 million worth of EBITDA. Their CapEx is approximately 5% of sales. And so, we estimate that the free cash flow for the full year is around $60 million.

[Adam Josephson:]

And that's included in the $1.2 billion?

[Ward Dickson:]

That's included in the $1.2 billion.

[Adam Josephson:]

Thanks a lot, Ward.

[Ward Dickson:]

I would highlight, as you look at FY 2017 versus FY 2016, we also had a small source, less than $30 million, ultimately, from Ingevity in 2016. That was included in the full year number. And so, that obviously doesn't recur and shows that the underlying free cash flow of the business increases year-over-year.

[Adam Josephson:]

Thank you, Ward.

[Operator:]

Thank you very much. Our next question comes from the line of Mark Weintraub of Buckingham Research. You may now ask your question.

[Mark Weintraub:]

Thank you. I'm curious as to your sense how the corrugated market is feeling and this price increase is feeling relative to prior price increases that you have put through?

[Steven Voorhees:]

Yes. Jeff?

[Jeffrey Chalovich:]

Hey, Mark. So, currently, the industry fundamentals are really solid. Box demand is up 2.3% year-over-year in September and 1.6% year-to-date on an absolute basis. Consumption is up 2.8%. AF&PA inventories are down 272,000 tons year-over-year September. And inventories are sitting at 3.8 weeks. Operating rates are strong and high at 95.9%. And these are the highest we've seen since those times. So, fundamentals are very good. Our system is extremely tight. We're having to repatriate tons out of the export market to meet our domestic demand and customers. Orders for our domestic containerboard are and are solid, about 95,000 tons year-over-year and 24,000 tons sequentially. So, we see the market fundamentals as strong and very good.

[Mark Weintraub:]

And relative to prior increases is the – the way it's going, does it feel very similar? And just as a tag on, Pulp & Paper Week had put out a piece this weekend suggesting that the export price increases, even to Latin America, were, at least from their perspective, not really getting any traction. Do you disagree with that?

[Jeffrey Chalovich:]

So, the first part of that is, I think, it's very similar from the last time from what I'd recall. The industry fundamentals are solid. And I think that's what we're experiencing.

[Mark Weintraub:]

And on the export question?

[Jeffrey Chalovich:]

I'm sorry. What was the export question?

[Mark Weintraub:]

Pulp & Paper Week put out an article this weekend suggesting that the price increases to the export markets hadn't really been gaining traction. I did note you said that your prices were up $8 versus the prior quarter. But the current initiative – do you disagree with that assessment? Do you still feel that you have a good chance of getting traction on those price increases into the export markets?

[Jeffrey Chalovich:]

We're communicating directly with our customers. Like I said, we're repatriating tons and we are communicating directly with customers on our pricing stance with them.

[Mark Weintraub:]

Okay. Thank you.

[Operator:]

Thank you very much. Our next question comes from the line of Brian Maguire of Goldman Sachs. You may now ask your question.

[Brian Maguire:]

Hi. Good morning, guys.

[Steven Voorhees:]

Good morning.

[Brian Maguire:]

I just want to follow-up on the potential sale of Home, Health & Beauty. Just wondering if – what would be the priorities for uses of cash there? And maybe as part of that, you could just address the M&A landscape as you see it these days and what part of the portfolio you'd want to be reinvesting at this point?

[Steven Voorhees:]

Sure. Whatever proceeds we get, we'll insert into our balanced capital allocation strategy. And we'll look at the relative merits of the alternatives we have at that time. I'd say M&A landscape is – I think we have a good deal flow across all of our businesses, so both in consumer and corrugated. And so, that's where we are.

[Brian Maguire:]

Okay. Just as a follow-up. Just wanted to ask about the strength in the card in organic growth. I think it was up 2%. Maybe you could just dig into which grades and applications you're seeing the most strength in and how you kind of view inventories in that part of the business and just kind of the outlook for demand heading into fiscal 2017. Thanks.

[Steven Voorhees:]

Yes. Bob?

[Robert Feeser:]

Yeah. Hi, Brian. This is Bob Feeser. We're seeing stable demand across many of our consumer grades. As Ward mentioned, we will see the flow through on the published SBS and CRB reductions. But our demand is holding up well. We would expect to see normal seasonality in the December quarter. As we announced, our backlogs for SBS have improved to five weeks and CRB and CNK have improved to three weeks. So, demand is holding up well. CRB is probably one area that's a bit more pressured. But, overall, we're looking at a normal first quarter.

[Brian Maguire:]

Great. Thanks.

[Operator:]

Thank you very much. Our next question comes from the line of Debbie Jones of Deutsche Bank. You may now ask your question.

[Debbie Jones:]

Hi. Good morning.

[Steven Voorhees:]

Good morning.

[Debbie Jones:]

I wanted to talk about the $800 million in performance improvements, the incremental $300 million from the $500 million you've already got. Can you just talk about how difficult or different it will be to achieve those versus the initial $500 million?

[Steven Voorhees:]

Yes. Debbie, Ward will take that one.

[Ward Dickson:]

Hi, Debbie.

[Debbie Jones:]

Hey, Ward.

[Ward Dickson:]

What we've recognized so far we certainly have had the benefits of the merger related synergies, the reduction in the duplicate order costs. But I also highlighted the fact that we have internalized close to 250,000 tons in our consumer system. So, as we start to lap those benefits and move into FY 2017, the role of the procurement organization will continue to generate a third of those savings during FY 2017. We still have about half of the remaining SG&A reductions which are related to IP projects that will also occur during FY 2017. Capital investments in our system to return generating capital investments will play a larger role. And then we will also get the full year benefit of some of the footprint actions that we have made across both systems. So, we will transition away from the merger related synergies related to the internalization. And then, we'll be more focused on capital and investments that were in return generating projects, procurement, and then just the other ongoing performance improvement programs that we have across the whole company.

[Debbie Jones:]

Okay. Are these more skewed towards Consumer or Corrugated?

[Ward Dickson:]

In fiscal 2016, it was more skewed to Consumer because of the internalization opportunities that we had as a result of the merger. As we move into fiscal 2017, it will be more balanced between the two businesses.

[Debbie Jones:]

Okay. And just one more in this, the inflationary range you called out, $175 million to $200 million, is that just from raw materials or does that also include general cost inflation?

[Ward Dickson:]

Debbie that was just raw materials. And what I simply did was I took current prices for some of our key commodities and compared it to the average for 2016. And then, on top of that, you should anticipate that we would have the normal wage and benefit inflation that I've highlighted in the $125 million a year range.

[Debbie Jones:]

Great. Thank you. That's helpful.

[Ward Dickson:]

Okay.

[Operator:]

Thank you very much. Our next question comes from the line of Anthony Pettinari of Citi. You may now ask your question.

[Anthony Pettinari:]

Good morning.

[Steven Voorhees:]

Good morning.

[Anthony Pettinari:]

In your guidance, you indicated you were planning downtime in Consumer Packaging in 1Q and 3Q. And I was wondering if it's possible to say which grades you're taking that downtime. And then just zooming in on CRB, we saw the price cut in September. What drove that and what's driven maybe a little bit more of a weaker environment in CRB in your eyes?

[Steven Voorhees:]

Yes. Bob?

[Robert Feeser:]

Yeah. Anthony, the downtime that we've highlighted is maintenance downtime related just to normal mill outages that we have both in the first quarter as well as the third quarter.

[Anthony Pettinari:]

Okay. Is that spread across all three grades?

[Robert Feeser:]

Well, yes. It's spread between – primarily what you're seeing is SBS and CNK, a little bit in the CRB business, but it's mostly SBS and CNK.

[Anthony Pettinari:]

Okay. And then, in terms of CRB and the price decline in September, did that surprise you? And is there a reason that CRB seems a little bit weaker than the other two grades? At least from the outside it looks that way.

[Robert Feeser:]

Yes. I would say that it was a bit of a surprise, although, again, we continue to see the fundamentals in CRB a little bit more challenging with the dry food market which is well published in terms of weaker demand in some of the processed foods, dry foods in particular. I think that is what's primarily contributing to a little bit of a weaker environment in CRB.

[Anthony Pettinari:]

Okay. That's helpful. And then just maybe one last one on containerboard. Understanding you can't discuss forward pricing. In the past when you've implemented price hikes, is it possible to say how many months it typically takes to realize the full flow through of the price hike?

[Jeffrey Chalovich:]

No. Again, we've communicated the increase to our customers and we will provide more color on future calls.

[Anthony Pettinari:]

Okay. That's helpful. I'll turn it over.

[Operator:]

Thank you very much. Our next question comes from the line of Phil Ng of Jefferies. You may now ask your question.

[Philip Ng:]

Hey, guys. Box shipment to North America held up pretty well and it seems like things have picked up a bit in October. Just curious to get your thoughts. What's driving the resiliency? Any end markets that really stand out? And are you starting to see some of the initiatives that you made on the commercial front really flowing through a little more fully right now?

[Jeffrey Chalovich:]

Yes. I think that's a fair representation. We are seeing our Ag markets up year-over-year. We have strong dairy. Some of our retail e-commerce is significantly up for us. And then our food service packaging business, which is our pizza business, and the company businesses that go with the pizza, so some of our clam shells and things that we ship with that, are up year-over-year. So, our demand and backlogs are very good going into the season. And we are seeing some of the commercial efforts that we've worked on pay off and really driving the differentiated solutions. And we have the most comprehensive portfolio of paper and packaging products. And driving solutions with innovation is really paying off with our customers.

[Steven Voorhees:]

And, Phil – go ahead, Phil.

[Philip Ng:]

No. Please carry on.

[Steven Voorhees:]

Okay. Phil, I was going to add back on to Jeff's comments. We've formed an Enterprise Solutions Group. And their job is to connect our customers to the full breadth of our product and service offerings, whether it's Corrugated or Consumer. We're in the early stages of doing this. It's been very well received by our customers and we're recognizing new business opportunities from – I think we've put out a release on those a month or two months ago. Craig Gunckel leads the group. And Craig's got 20 years of experience with us and he has a long track record of delivering sales growth across several of our businesses. So, this is a very important thing for our company over the long-term.

[Philip Ng:]

Okay. That's really helpful color. And, Steve, that was actually one of my segues. Is there a bigger opportunity in Consumer or Corrugated in terms of some of these commercial initiatives? Or is it equally price lift, I guess?

[Steven Voorhees:]

It's balanced. The portfolio fits very well together and we're able to go to our consumers agnostically between Consumer or Corrugated, different paper grades, to put together a tailor-made solution for their needs. So, our portfolio really fits well together.

[Philip Ng:]

Okay. And just one last one on the corrugated side of things. Jeff, can you provide – I mean, you commented in the prepared remarks that backlog has certainly firmed up a bit in containerboard. Can you give us a sense how many weeks it in the quarter? How does that stack up year-over-year or sequentially? And good luck in the quarter. Thanks.

[Jeffrey Chalovich:]

I'm sorry. Can you ask that again on the backlogs?

[Philip Ng:]

Sure. You talked about containerboard backlogs have extended and firmed up a bit in fiscal fourth quarter. Can you just kind of frame how many weeks that was? How does that stack up either sequentially or on a year-over-year basis? That would be helpful.

[Jeffrey Chalovich:]

I can just tell you that we track on our backlogs in box really five days and 10 days rolling. And so, we see the backlogs building on our five days. The lead times are very short there. And then we're booking a month out through our supply chain. So the backlogs remain strong or up sequentially for us.

[Philip Ng:]

Okay.

[Operator:]

Thank you very much. Our next question comes from the line of Mark Connelly of CLSA. You may now ask your question.

[Mark Connelly:]

Thanks. Steve, I've just got one question. You said you saw about 2% organic growth in folding carton. Do you think that is a sustainable growth rate? And when you think about your willingness to acquire any opportunities, what do you think is a realistic top-line opportunity for folding carton over the next couple of years?

[Steven Voorhees:]

Mark, I'm going to let Bob answer that.

[Robert Feeser:]

Yes. Hey, Mark. We really like our position in folding carton. As we indicated, we saw 10% growth in the fourth quarter, driven by the Cenveo acquisition, but also the 2% organic growth. And we really believe that we're outpacing the industry in terms of overall growth that's flat to down. We've got a solid growth pipeline overall that we're executing against. It's a very well-run business. We're driving good productivity improvements. And we're continuing to make good investments and creating more capabilities in that business. So, we feel quite good about how we're positioned in folding carton.

[Steven Voorhees:]

And then, Mark, I'll add. The business is – the majority of the business is food and beverage. And those trends have affected folding carton. I think our business, where we're integrated across all of our paper grades, we have the opportunity to, I think, grow organically probably faster than the industry, because of the breadth of offering we have in folding carton. We can offer CRB, SBS, and CNK.

[Mark Connelly:]

Okay. Thank you.

[Operator:]

Thank you very much. Our next question comes from the line of Chris Manuel of Wells Fargo Securities. You may now ask your question.

[Chris Manuel:]

Good morning, gentlemen. I wanted to kind of come back to probably your least favorite topic you've had this morning and that's price-oriented stuff. But I've heard you very carefully on a couple, four or five instances thus far say you've communicated with your customers a $50 ton price increase. I just wanted to kind of dive into that a little. As you sit today the beginning here of November, are you – you've communicated with customers. Are you, in fact, billing and receiving payments back for what you've put through? And then traditionally, that would equate to something, I don't know, 8%, 10% range as we think at downstream products. Are in you, in fact, communicated with them and billing and receiving for that as well?

[Jeffrey Chalovich:]

So, we went to the market on box with a 10% and 12% communicated increase. And, well, we announced and communicated with our customers the $50 on October 1 in board and began billing the $50 ton increase on October 1.

[Chris Manuel:]

Okay. That's very helpful. Second question I want to ask was it kind of comes back around to integration levels and in export and that type of stuff. So, I think, I heard you mention earlier, Jeff, that you were repatriating some board. But I was kind of thinking your integration rates were in the mid-upper 60%s. Can you kind of help me with where you sit today? Or maybe what you're talking about there? And then when we're thinking about those export markets, there've been some price announced there. It hasn't seen to gain a lot of traction. Do you think that that's something that over the next, call it, six months to 12 months we could see export prices come up as well? Thank you.

[Jeffrey Chalovich:]

Sure. So, we are in the upper 60%s integration level. And if you look at some of the JVs we have where we have paper agreements, we're into the low 70%s. And so we look continually at our channel mix and how to increase in integration. Export is a part of our channels. We are repatriating paper and bringing it into the domestic market because of the strong demand we have in our box and domestic markets. We will and have communicated with our customers and the export markets. We did note that some of our prices on our large areas is up. And, again, we are communicating directly with them on pricing.

[Chris Manuel:]

Thank you. Best wishes for the rest of the year.

[Jeffrey Chalovich:]

Thank you.

[Operator:]

Thank you very much. Our next question comes from the line of Chip Dillon of Vertical Research Partners. You may now ask your question.

[Chip Dillon:]

Yes and good morning, gentlemen.

[Steven Voorhees:]

Good morning.

[Chip Dillon:]

First question has to do with – you mentioned in the slides the strategic options you're looking at for Home, Health & Beauty. And if I kind of interpolate from pre-acquisition, it would seem like the EBITDA there is probably in the range of $130 million or so and maybe revenues of $750 million, $800 million. Is that the rough ballpark as we think about what the prospects are for that business?

[Steven Voorhees:]

We said $500 million and some odd of sales and EBITDA of over $100 million. With the merger, they had some folding carton business that we have integrated into our folding carton business, so that would account for the difference.

[Chip Dillon:]

Okay. That's helpful. You're missing some sales, but not much EBITDA, it sounds like. And then, a second question, just looking at the industry, in general, it's been almost a record period, three-and-a-half years, since we saw Corrugated prices move up in North America. And one thing I've seen and recall in the past is when you've had a long period of time, unless whether it's your box plant managers looking at it at their own P&L level or your independent customers. We've had a long time where they have not had the opportunity to offset naturally rising cost like healthcare cost or the fact that people might get paid a little more every year. And so my question is shall we read into the announced box price increase? I think you mentioned 10% to 12%. Some opportunity to capture some of those – to offset some of those cost increases, so that if I'm an independent player, I might actually see my realizations go up more than $50 because, obviously, if I'm paying $50 more for board, I need more than that to offset these other costs.

[Jeffrey Chalovich:]

Sure. So I can't really speak to what the independents and others will do. I can speak to – we have a very rigorous process of how we manage our business and how we increase prices, track that and implement that. And whether it's during at time we've announced with our customers an increase or just normal course of business, we look to drive margins through other areas of our business. And that's through board rate optimizations. That's through efficiency gains. And so that's something we do as a matter of course with our customers. And we add value to them and help them drive total cost of use out of the system and improve our margins across our system.

[Chip Dillon:]

I see. Thank you.

[Operator:]

Thank you very much. Our next question comes from the line of Gail Glazerman of Roe Equity Research. You may now ask your question.

[Gail Glazerman:]

Hi. Good morning. I want to touch on containerboard inventories. Your 143,000 drop was quite significant relative to the industry decline of 272,000. And I know going all the way back to your Investor Meeting in 2013, you talked about carrying more inventory than four weeks. And, at one point, you had spotted a number that was much higher than the industry level. And I just want to know has that changed? And can you give any sense of where your current inventories are after that decline relevant to the 3.8 for the industry?

[James Porter:]

This is Jim Porter. I'll take that one. You've heard correctly. We've put a lot of energy over the last two years investing in our supply chain processes and people to drive better systems and capability to match our customer requirements. That's the only reason we have inventories to ensure we've got the right products available on time for all of our channels. And so, you saw us early in our journey increasing inventories, but you've now seen them steadily decline. And I believe that's really the success of the implementations that we've had within our systems. Our system currently is in balance. It was somewhat dinned by the Hurricane Matthew. So, what we – frankly, a little below where we should be at this point in time. And then, you will also see us needing to increase inventories slightly as we focus on next quarter's maintenance downtime. But we manage inventories at a very granular level and the trend line downward, I think, is a result of those initiatives.

[Gail Glazerman:]

Okay. That's great. Just one last question. Of the cost that you've estimated for the storm, how confident are you in that? Is everything kind of back up and running or are there any kind of risks in terms of operation, logistic, fiber supply beyond obviously the comments on inventories?

[Ward Dickson:]

Yes. So we – Gail, this is Ward. We tried to capture all of those factors when we gave you the range of the estimate. I would say 50% of that cost that we identified was related to the lost production and 50% of it was actually related to the additional maintenance repair and some scrappage cost that we had in the quarter.

[Gail Glazerman:]

Okay. Thank you.

[Operator:]

Thank you very much. And our next question comes from the line of George Staphos of Bank of America. You may now ask your question.

[George Staphos:]

Hi, guys. Thanks for the follow-up. Two questions, one kind of bigger picture and the other one more modeling related. On the latter, can you give us an update on what your thoughts for interest expense might be next year both cash and book, if there's any differences? And then we just came back from a conference where there was a lot of discussion on light-weight, high-performance grades and containerboard. Can you remind us what your position is on that and how SP Fiber helps you there and, ultimately, over time, what percentage of the market you think that might be able to represent? Thanks, guys. Good luck in the quarter.

[Ward Dickson:]

George, this is Ward. I'll give you the answer to the interest question.

[George Staphos:]

Yes.

[Ward Dickson:]

I would model about $225 million of net interest. That's the interest expense less the interest income and book and cash are virtually the same.

[George Staphos:]

Thanks Ward.

[Ward Dickson:]

Yes.

[James Porter:]

So, on the question of light-weight – this is Jim Porter.

[George Staphos:]

Hey, Jim.

[James Porter:]

Good morning. I think we've all seen a trend of lighter basis weights over the last several decades. Largely, though, in the U.S. market, those have been in, I would say, the middle weight grades transitioning from 69 and 42 down into the 33s and 35s. When we speak about light weight of sub-26 pound that really has been largely unchanged. It was 5% to 6% 30 years ago. And, frankly, today, it's about the same. Now, with that said, the Dublin mill has added some significant flexibility for us as we're able to go down really into the micro basis weights of 70 GSM or 14 pound board that we do have applications for. Our Corrugated business, some of the specialty food products grades, we now have the ability to integrate that with our own paper supply. So, we're quite excited about the future of that particular segment of the market.

[George Staphos:]

So, Jim, implied in your answers is just you've got the capability but the fact that it's not really changed all that much tells you that the demand thus far domestically is – it's growing but not significantly. So would that be fair?

[James Porter:]

I think that's exactly right.

[George Staphos:]

All right. Thank you. I'll turn it over.

[Operator:]

And, at this time, there are no questions. I'll turn it back to you, speakers.

[Steven Voorhees:]

Okay. Matt?

[Matthew Tractenberg:]

Thank you, Dexter. Thank you to our audience for your time this morning. We're proud of our progress. We appreciate your interest in WestRock. If you have questions following the call, the IR team is happy to help you. You could find our contact on today's earnings release. We look forward to speaking with you in the coming weeks. Have a great day, everyone.

[Operator:]

And that concludes today's conference. Thank you, all, for participating. You may now disconnect.