WestRock Co (WRK) 2022 Q4 法說會逐字稿

Good morning, and welcome to the WestRock Fourth Fiscal Quarter 2022 Earnings Call. (Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Rob Quartaro, Senior Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining our fourth fiscal quarter 2022 earnings call. We issued our press release this morning and posted the accompanying 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're using to view this webcast. .

With me on today's call are WestRock's Chief Executive Officer, David Sewell; and our Chief Financial Officer, Alex Pease. Following our prepared comments, we will open the call for a question-and-answer session.

During today's call, we will be making forward-looking statements involving our plans, expectations, projections, estimates and beliefs related to future events. These statements involve a number of assumptions, risks and uncertainties that could cause actual results to differ materially from those we discussed during the call. We describe these assumptions, risks and uncertainties in our filings with the SEC, including our 10-K for fiscal year ended September 30, 2021.

We will also be referencing non-GAAP financial measures during the call. We have provided reconciliations 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, I'll now turn the call over to you, David.

Thank you, Rob, and thank you all for joining our earnings call today. Fiscal 2022 was a tremendous year for WestRock. We achieved record financial results, realigned our segment reporting more in line with our long-term strategy, executed several portfolio optimization actions, initiated self-help cost improvements and set the foundation for our transformation agenda.

On our call today, I'll provide a review of our results, give an update on our transformation initiatives and provide further details on our plastics replacement innovations.

Following that, our CFO, Alex Pease, will provide a deep dive into the quarterly results for our segments and other performance. I'll also provide guidance for the fiscal first quarter and full year 2023. We will then move to Q&A to answer any questions you may have.

In fiscal 2022, we set company records for net sales, consolidated adjusted EBITDA and adjusted EPS. On a year-over-year basis, net sales increased 13% to $21.3 billion. Consolidated adjusted EBITDA increased 15% to $3.5 billion and adjusted earnings per share increased 40% to $4.76.

For the year, we generated $1.2 billion in adjusted free cash flow and we reduced our net leverage to 2.05x as of September 30, well within our stated target of 1.75x to 2.25x.

We also announced the planned acquisition of the remaining stake in Grupo Gondi, our joint venture in Mexico. For the 18 months through September 30, we repurchased 722 million of WestRock shares and increased our dividend by 25%. And just last month, we announced an additional 10% increase to our dividend.

Looking ahead, the global economy faces several challenges, including elevated inflation, rising interest rates, energy shortages, supply chain disruptions and geopolitical conflict. These challenges, along with continued inventory rebalancing negatively impacted our business in the fiscal fourth quarter. Still, WestRock remains well positioned to navigate the current environment. Our broad portfolio of paper and packaging products provides tremendous value to our customers. We are unique in our ability to provide primary, secondary and tertiary packaging as well as machinery that all work together to help our customers win in the marketplace.

Our packaging solutions enable our customers to safely and reliably ship and market their products, and our machinery solutions enable customers to speed up production lines and reduce costs. Our innovations in plastics replacement are designed to help our customers achieve their sustainability targets and contribute to the circular economy. This is a long-term trend that we expect to continue. We have a stellar balance sheet and we have generated over $1 billion in adjusted free cash flow for 7 consecutive years. While we are not immune for macroeconomic challenges, we are well positioned for 2023 and beyond.

Turning to our fourth quarter results on Slide 4. Thanks to the resolve and focus of our talented WestRock team members, we delivered solid results despite a challenging environment.

Net sales increased 6% year-over-year to $5.4 billion, and consolidated adjusted EBITDA increased 5% to $920 million. Adjusted EPS was $1.43, an increase of 16% compared to the prior year quarter, and the company generated $268 million of adjusted free cash flow. Our Corrugated Packaging adjusted EBITDA margins, excluding trade sales were 16.7% as strong pricing and mix continued to more than offset headwinds, including cost inflation.

Consumer Packaging adjusted EBITDA margins were 16.8%, a decrease of 30 basis points year-over-year. We remain focused on implementing previously published price increases in our consumer business which will continue into the first half of fiscal 2023.

In our Global Paper business, we delivered a solid 21.4% adjusted EBITDA margin due to strong execution and a focus on margin over volume.

As I previously noted, in October, we increased our dividend 10%, demonstrating confidence in our outlook and our commitment to a sustainable and growing dividend. As we look ahead, we plan to continue to use our strong free cash flow to invest in our business and return capital to our shareholders through our dividend and opportunistic share repurchases.

We'll also continue to pursue attractive tuck-in acquisitions. While we have seen a slowdown in corrugated demand due to inventory destocking and the slowing economy, our Consumer segment remains robust, demonstrating the value of our diverse portfolio to navigate the current challenges.

In addition, we remain focused on our transformation initiatives and delivering on the fiscal 2025 goals that we outlined at our Investor Day.

Turning to Slide 5. In fiscal 2022, we made significant progress on our portfolio optimization. We are continuing to rightsize our portfolio, focusing on core assets to increase and maximize return on invested capital.

In July, we announced the planned purchase of the remaining stake in our Grupo Gondi joint venture. This strategic acquisition positions us to take advantage of onshoring trends and capture growth in the attractive Latin American market. The transaction remains on track and is expected to close in December 2022.

We intend to use our $1 billion delayed draw term loan facility and existing liquidity to fund the transaction. As a reminder, Grupo Gondi's projected calendar year 2022 EBITDA is $200 million to $210 million, and we are targeting an additional $60 million in annual synergies by year 3 following the closing.

In April, we announced the closure of our Panama City mill. And just last month, we announced the closure of our corrugated median production in our St. Paul mill. These assets required significant capital investment to maintain and improve and we did not see a path to achieving our return hurdles.

The Panama City closure removed 353,000 tons of linerboard capacity and 292,000 tons of pulp capacity, while the St. Paul closure removed 200,000 tons of corrugated medium capacity.

As a result of the St. Paul closure, we expect to incur approximately $36 million of total costs and $24 million of cash costs. We recognized $15 million of total costs and $3 million of cash costs in the fourth quarter, and we expect to recognize the remainder in fiscal 2023. Our CRB machines in St. Paul remain competitive in the market and continue to operate.

Lastly, we recently announced 2 divestitures, including our 65% stake in our RTS joint venture as well as 3 URB mills. With these sales, we will exit the nonstrategic industrial URB businesses. Net proceeds from the sales will total $380 million combined, which we will use to maintain leverage within our target. These divestitures further demonstrate our commitment to portfolio optimization and our focus on driving return on invested capital.

Turning to Slide 6. We continue to execute on our transformation initiatives to improve productivity and drive long-term profitability.

Starting with our supply chain, we've begun piloting our distribution center optimization and inventory management initiatives in one of our markets. The initial pilot is yielding terrific results. We've identified $10 million in expected annual run rate savings. We believe these savings are scalable across our broader enterprise, and we continue to target $150 million to $200 million from our logistics and planning projects once fully implemented. We are also executing on our procurement initiatives and have identified approximately $45 million in estimated annual savings, and we expect more to come. We are executing additional SG& A savings, which we expect will deliver a net cost reduction of $40 million in fiscal 2023, and we are currently working towards $150 million to $200 million in productivity improvements in our mill system and converting operations.

With our Panama City and St. Paul actions, we've reduced our North American corrugated mill cost by approximately $5 per ton. Taken together, we are targeting more than $250 million in net productivity and cost savings by the end of fiscal 2023. We are making significant progress on our 2025 targets, and we remain confident in the opportunities ahead.

Moving to Slide 7. The global trend towards plastics replacement remains an attractive long-term growth driver, supported by an estimated $9 billion total addressable market in North America and $50 billion globally. As well documented, consumers and governments continue to demand that companies support the environment and sustainability.

Given our broad portfolio, the breadth of paper grades we offer and our continued investment in product innovations, WestRock is well positioned to continue capturing a growing share of the packaging market.

As of today, we anticipate $345 million in annual run rate revenue from classic replacements, and we are targeting to more than double that by the end of fiscal year 2025. Some of our notable plastic replacement solutions include can color X, our sustainable large format can beverage packaging, Evergrow our paper-based produce punnets Echo push, our paper-based plastic tubes replacement and cluster pack packaging for multipack canned foods. Our complementary machinery also helps our customers automate their production lines and reduce labor costs. These are just a few of the solutions we have today, and we remain committed to offering a complete portfolio of recyclable, compostable or reusable packaging by 2025.

Looking ahead, we see tremendous opportunity for plastics replacement. Many of our customers have set aggressive goals to improve their packaging sustainability by 2025 and and we are working hard and alongside them to reduce or replace plastics with fiber-based solutions. Our innovations in plastics replacement support continued revenue growth and contribute to the circular economy.

I'll now turn it over to Alex to discuss our segment results in more detail.

Thanks, David. Moving to our consolidated quarterly results on Slide 8. Fourth quarter net sales increased 6% year-over-year to $5.4 billion, and consolidated adjusted EBITDA increased 5% to $920 million. Consolidated adjusted EBITDA margin was 17%, down slightly year-over-year. Price and mix positively contributed approximately $687 million year-over-year. Continued inflation in energy, freight, labor, chemicals and virgin fiber along with other challenges, partially offset these benefits. .

Also, please note that consolidated adjusted EBITDA includes year-over-year insurance recoveries of approximately $26 million related to last year's ransomware.

Turning to Slide 9. Corrugated Packaging segment sales, excluding trade sales were $2.3 billion, an increase of $195 million or 9% year-over-year. Adjusted EBITDA increased $23 million or 6%. adjusted EBITDA margin, excluding trade sales, declined 5 0 basis points year-over-year to 16.7%.

During the quarter, North American shipments per day declined 4.6% as continued inventory rebalancing and softer demand drove weakness in several of our end markets. That said, we serve a broad range of customers and several other end markets exhibited more resilient demand, including packaged food and beverage.

During the quarter, we were focused on driving margin over volume. We also incurred economic downtime of approximately 288,000 tons as we sought to balance our supply with our customers' demand.

Strong pricing and mix contributed $284 million largely offset by $168 million of inflation, $77 million from higher operating costs and $29 million from lower volumes. We continue to navigate a difficult inflationary environment, driven by higher costs across energy, freight, labor, chemicals and virgin fiber during the quarter.

In the near term, we will continue to actively manage our business for the current environment, and we will focus on balancing our production with our customers' demand. We continue to see significant opportunity to drive higher margins as we execute our transformation and deliver on our cost savings and productivity initiatives.

We also remain excited about the long-term opportunity in Latin America. We are developing a new sheet plant in Sao Paulo state that we expect to open in early 2023. The new plant is expected to produce smaller runs and complex products to complement our Porto Feliz production. Our world-class assets in Brazil and our pending Grupo Gondi acquisition are expected to drive significant growth, enabling us to take advantage of onshoring trends in the fast-growing Latin American market.

Turning to the Consumer Packaging business on Slide 10. Segment sales increased $147 million or 13% year-over-year to $1.3 billion. Adjusted EBITDA increased $21 million or 11% and adjusted EBITDA margin was 16.8%, a decrease of 30 basis points year-over-year. Strong price and mix contributed $126 million, while higher volumes added an additional $14 million. These benefits more than offset a negative impact of $84 million from inflation in energy, freight, labor, chemicals and virgin fiber as well as higher operating costs. Demand in our consumer business remains solid.

During the quarter, we saw strength in beverage, retail, food and health care, offset by softness in foodservice and home, beauty and personal care. Our unique combination of corrugated and consumer packaging provides significant growth opportunities through the complementary packaging solutions we provide, additional cross-selling opportunities and the trend towards plastics replacements. We continue to see solid demand trends, and we are focused on the execution of our strategy.

Turning to Slide 11. In Global Paper segment sales decreased $33 million or 2% year-over-year to $1.4 billion. Adjusted EBITDA was relatively flat, while adjusted EBITDA margin increased 40 basis points to 21.4%.

Strong price and mix contributed $247 million more than offset by inflation of $144 million, a volume of $97 million and higher operating costs of $13 million. As David mentioned, we focused on margin over volume in the quarter, which led to solid results in a difficult environment. We see great value in this business going forward and continue to leverage the flexibility and diversification it provides.

Next, our distribution results are on Slide 12. Our distribution business was strong, driven by execution and cost discipline. Segment sales increased 7% year-over-year to $374 million and adjusted EBITDA grew 11% year-over-year. Strong price and mix contributed $44 million and lower operating costs contributed an additional $10 million. These benefits were largely offset by inflation of $47 million and lower volumes of $4 million.

Turning to Slide 13. We generated $268 million in adjusted free cash flow during the quarter. Fiscal year 2022 adjusted free cash flow was $1.2 billion, making this the seventh straight year delivering adjusted free cash flow above $1 billion. This represents an adjusted free cash flow conversion of 34% for the fiscal year. Our balance sheet remains strong with net leverage at the end of the quarter at 2.05x, well within our targeted range of 1. 75 x to 2. 25x.

Turning to Slide 14 and our financial guidance for the quarter. As mentioned earlier, we have recently seen softer market conditions in our corrugated business and the external containerboard market, driven by continued inventory destocking and macroeconomic headwinds. However, our consumer business and the global paperboard market remain remarkably resilient. We continue to actively manage our business to balance our supply with our customers' demand as we navigate the current economic uncertainty. In this dynamic environment, WestRock is well positioned to benefit from its financial strength, diverse end market exposure and the broad range of packaging solutions we provide. Our forecast for first quarter consolidated adjusted EBITDA is $625 million to $725 million and adjusted earnings per share is between $0.45 to $0.74.

Some assumptions behind our sequential outlook include the following: first, favorable costs driven by 2 things: natural gas down approximately 20% to $6.70 per MMBtu and OCC down approximately 70% to $33 per ton. Second, unfavorable noncash pension expense of approximately $40 million year-over-year due to higher interest rates and market volatility. Third, 4 less shipping days versus fiscal year of '22 Q4. Fourth, an effective tax rate between 24% and 26% and and finally, approximately 257 million diluted shares outstanding. We are planning 150,000 tons of scheduled maintenance downtime across our system in the first quarter.

Turning to Slide 15. We expect continued strong price realization in fiscal year 2023. Our forecast for full year consolidated adjusted EBITDA is between $3.2 billion to $3.6 billion and adjusted earnings per share is between $3.57 to $4.73.

Notable items impacting our 2023 year-over-year guidance include the following: first, a contribution of approximately $85 million from the net impact of the pending sale of our RTS joint venture and URB mills along with our Grupo Gondi acquisition in the fast-growing Latin America market. Our guidance also includes the closures of our Panama City mill and corrugated medium production in St. Paul. These benefits are partially offset by an unfavorable noncash pension expense of approximately $160 million due to higher interest rates and market volatility.

And finally, we have a $50 million unfavorable impact from foreign exchange rates. Despite the current macroeconomic challenges, we continue to deliver excellent operational performance. Our business remains well positioned, and we are laser-focused on delivering strong results and executing on our transformation initiatives.

I'll now turn it over to David to conclude before we move to Q&A.

Thanks, Alex. Fiscal 2022 was an incredible year for WestRock. We generated record results and laid a solid foundation for our transformation. While we expect a challenging environment in the near term, we are actively managing our business and continuing to balance our supply with our customers' demand. We are well positioned to navigate the current challenges given our strong balance sheet, robust cash flows and diverse revenue streams. We serve a broad range of resilient end markets, and we are uniquely positioned to serve our customers' changing packaging needs, including helping them achieve their sustainability goals. Only WestRock can provide a full breadth of sustainable packaging solutions, including automation that all work together. Our innovation platform is robust with over 225 active projects in the pipeline.

As we look at fiscal 2023, we face a challenging environment to start the year. However, we have a resilient business model and a strong cash flow engine. We have laid a clear road map for long-term growth and our transformation remains on track. We continue to see tremendous opportunity to unlock value from our portfolio through cross-selling, new packaging innovations and executing our cost savings and productivity initiatives. Our future remains bright, and we look forward to providing additional updates as the year progresses. Thank you. And with that, Rob, let's move to Q&A.

Thank you, David. Operator, we're ready for questions. .

(Operator Instructions)

Our first question will come from Mark Weintraub with Seaport.

On that portfolio condition, congrats on the new moves, trying to understand where you might be now in the process relative to the Investor Day when you had signaled that there were going to be a number of moves. Do we have more to come? And is there any color at this juncture that you could provide as to the magnitude of the types of moves that might yet to become if there are more to come?

Yes. Thanks, Mark. Going back to our Investor Day, as you alluded to, we talked about a couple of things, and I think we've demonstrated our direction over the last year with some of our portfolio moves. Our objective is to optimize our footprint and have a portfolio that aligns to our strategy that we laid out. And if you think about our footprint, and our desire to have a world-class mill network, world-class cost and focus on high margin, high-value markets. The moves we made have demonstrated that we first look to try to invest like we did in Florence or down in Brazil or on a conversion site standpoint, like our new converting plant in Longview. And if the investment doesn't meet our ROI threshold to achieve what we want to achieve on those assets, then we look to make the tough decisions like St. Paul and Panama City. Then we also look to identify are there acquisitions that bolt on that help us grow in those markets or geographies where we want to grow, and that's where we added in to our portfolio last year. .

So this is something that's ongoing and continuous process. So to answer your question more directly, I would say we will continue to look at our portfolio and an ongoing level that continues to optimize both our mill network and our growth aspects in the markets that we want to grow in. So I think you can just see us continuing to be very strategic in how we manage our portfolio.

Okay. Great. And just simplistically, I think you had -- at the Investor Day suggested when you were looking out a few years, there would be a negative impact to EBITDA from the portfolio moves. And so far, given Grupo Gondi, it's actually positive. So might there have been a shift? Or it really just comes back to there's still more stuff in the pipeline potentially?

Well, we did not have Gondi at the Investor Day. So if you think about Panama City and St. Paul, at a full run rate, that is negative to EBITDA. If you look at RTS and our URB mills that is negative to EBITDA. So that's really what we built in. We did we will be opportunistic, as we said, on bolt-on M&As that are very strategic. But we look more so at kind of how we were thinking about our footprint rationalization versus M&A that you just don't know if it's going to come to fruition until it does.

Our next question will come from George Staphos with Bank of America.

Hear me okay. I want more though to I want to go to Slide 6, if you could, and just try to hit on a couple of topics related to operations. So first of all, can you comment a bit on what, if any, reduction in cost, productivity initiatives you have going on specifically within the corrugated converting network any sort of reorganization, footprint efforts, et cetera, and where that would reside within the 4 or 5 figures you have there?

Relatedly, if I understood the slide correctly, and correct me if I'm wrong, this year, within your overall guidance, I think the 3.2 to 3.6 you have inclusive in that $250 million of net cost saving. I want to make sure that that's right. And then if you could tell us how those 5 items feed into that $250 million, that would be very helpful.

Yes. Sure, George. What I'll do is I'll give you a kind of an overview of it, and I'll certainly have Alex add to it. So yes, as we laid out at our Investor Day, we are laser focused on efficiencies, productivity and self-help initiatives that we really believe we have to further integrate all of our acquisitions. That $250 million is our target for this year. If you look at our converting sites and specifically corrugated, which you highlighted, we have several initiatives that are underway and several that are already paying benefits and several that we fully expect to happen throughout the year. We have reorganized our corrugated business. We have a terrific leader leading that business. And the way we're going to really look to run that business is when you think about all of our converting assets in corrugated, we're really going to leverage, and this is a pilot that I think Alex highlighted, but we're really going to leverage our scale and run these converting plants a little bit differently. And we've done this in the Midwest, and it's paying off terrific results.

And what that does is it's going to allow us to manage production as opposed to at an individual plant level, it's going to be at a regional level, so we can optimize operations and production planning and transportation in a region where we have great density of converting plants.

So for example, in the Midwest, we have 10 converting plants in a region. We're now looking at those as 1 entity to truly maximize our efficiencies where we make the product, where we ship the product, how we support our customers, how we service our customers, and we're seeing a lot of dollar benefits already, and then we plan to fully scale that out across North America.

So those are just some of the pieces we're doing. There's also some low-hanging fruit on supply chain with corporate purchasing on both direct and indirect fully leveraging our scale. So we believe that this self-help is a better way to run our business and drive profitability. I'll certainly have Alex add to some other efforts that we have underway.

Yes. So thanks for the question, George. What we wanted to highlight was a combination of things. First of all, the real progress we're going to make in the next fiscal year, but also the traction we're making towards the commitments we made on Investor Day. So just to help sort of map it back to Investor Day. That $40 million that we mentioned in SG&A. That's an in-year savings number that's embedded in our productivity. The run rate for that number is around $100 million. And so you'll remember back to Investor Day, the commitment we laid out was $100 million in '23; $150 million in '24; and another $150 million in '25. So we're directly in line with what we committed to in Investor Day from an SG& A standpoint. The 150 million to 200 million in logistics and planning initiatives. David tough through the mechanics of that. That's largely related to the work that's ongoing in the Midwes that we expect to scale across our entire footprint. And then the additional $45 million, again, that's an in number for the indirects. Again, because not all of that was in flight in the beginning of the year, the exit rate is much higher.

So those are mapped again, if you think back to our Investor Day against the $500 million commitment that we made on the supply chain. And then this $150 million to $200 million maps against the commitments that we made in the combination of the mill and the operating network.

So hopefully, this gives some of the listeners a pretty high level of confidence in the progress we're making against the commitments we made towards the $1 billion, $1.5 billion of self-help.

Sure. One quick and I'll turn it over. I know others will probably ask you on inventories and volumes. Just 1 question more again on operations. So at the Analyst Day, you talked about trying to become a little bit I'm paraphrasing here, maybe paraphrasing poorly, but closer to the customer, having more of a local market approach yet at least outwardly, when you do more of a regional approach on converting, it would seem to be, at least again to the outside observer a little bit at odds with that. So tell me why that works well and why it will be successful as you try to become more local market in your approach?

Yes. No, thanks, George. I would say one thing that we learned is the closest converting site wasn't always the converting site that was closest to the customer. So with all the acquisitions that happened, there were some historical legacy aspects of that. So we're cleaning that up.

The other piece is when I say regional, you might be thinking of 3, 4, 5 states, I'm talking a very dense area that's very local, same-day delivery area. We're not going to change that. So that's the aspect and the benefit of our scale. If you have 5 or 6 converting sites within a 6-hour range. That gives you a lot of flexibility. It also allows you to look at your converting site network and do things like Longview, where it's like, let's put one large facility next to the mill that's highly automated, low-cost and allows us to maybe consolidate a couple of other local locations. So that's how we think about it.

I don't want you to think we're getting further from the customer. On the flip side of that, our commercial organization on the structure we're doing is purely to get even closer to the customer. So you will see a commercial team that's very local and close to the customer where we maybe in the past, took a very national approach in some cases. So that does -- this is going to allow us to get closer to the customer and allow that a surety of supply and still maintaining local delivery.

Our next question will come from Phil Ng with Jefferies.

Your full year guidance and pushing you giving it, first of all, just given how visibility is pretty choppy out there. And based on the moves that you made on the portfolio side, full year guide looks pretty reasonable, but your 1Q guide, you've been accounting for some of those move seems to be pretty outsized from a step-down standpoint. I don't believe you called out economic downtime in 1Q. Can you give us a little color on what you're penciling in? And how should we think about the earnings cadence progressing through 2023?

Yes. I'll start, and then I'll turn it over to David to give a little bit more of the macro context. So I think in line with, I think, what you've heard other commentary and the commentary in the industry saying you certainly heard in David's remarks, our first -- we're still working through the inventory rebalancing issues and that's going to drive some softness in the quarter. We expect that to really stabilize as we get towards the end of the calendar year or the end of our first fiscal quarter. But we do expect our first fiscal quarter to be a bit weaker, given these inventory rebalancing issues predominantly on the corrugated side of the business and possibly on the global paper side of the business.

So as is always the case, we'll take actions to maximize our margin and to keep our internal supply in line with our customer demand. But I think -- as you think about the cadence going through the year, the first quarter is likely to be the weakest. I'd also mention that there is inclusive in that guide of $40 million pension headwind. That's a noncash headwind related to the increase in interest expense. And so if you sort of add that back, you get to a modestly up year-over-year. But even with that, you're looking basically flat to last year.

The last thing I'd mention is you do have maintenance downtime Typically, the first quarter is our heaviest maintenance downtime quarter, and it's in line with the maintenance downtime that we guided to last year.

And then you asked the question specifically on economic downtime. And I think for obvious reasons, we don't comment on how we're going to manage our production. But David, what would you add? .

I think, Phil, I think Alex captured it well. I would only add to it, maybe to your question on how we're thinking about it. As we saw October, we saw that stabilized from September on the corrugated and containerboard side. And as we look out to the future on our backlogs and the conversations we have with customers, we do feel like as we get into second quarter, we will start to get back to a more normalized order rate from our customers as they work through that inventory and some of the softness that they have. So we do feel like this first quarter will be more challenged on both sides of our business.

On the flip side of that, we feel very, very good about our consumer business as well as our paperboard business in global paper. That's remained very resilient as we go through this cycle. And so we think we're really -- with the point Alex made with our Q1, when you look at the macroeconomic factors and some of the commentaries of the industry, we feel like this is a very strong quarter as we ramp that back into a more normalized efforts in calendar year 2023.

Super. And then a question for me on the cash flow. You guys obviously have a excellent track record and generating really steady and strong cash flow through a cycle. Any color on how we should think about in a choppier backdrop how to think about CapEx we certainly some puts and takes on some of these growth ambitions and productivity ambitions. Certainly, working capital could be a little elevated. Help us kind of think through how we should think about free cash flow in 2023. And then your willingness to deploy capital in this backdrop. I mean you guys have certainly been pretty optimistic with buybacks. So kind of help us think through how we should think about cash flow next year and then your priorities in terms of capital deployment.

Sure. Again, I'll start with just some of the more quantitative details, and then David can give some philosophical points on how we think about CapEx. So we're sticking to the range that we committed to during Investor Day. So we have $900 million to $1 billion in sort of base CapEx, and then we give ourselves the flexibility to spend an additional $200 million to $5 00 million in strategic CapEx. .

A couple of examples that we look to specifically are the Hogs Woodyard we've pointed to at different points in time, we pointed the Longview box plant, which is continuing to develop and we're really excited about some of these. And obviously, we have a number of future strategic capital projects in the works.

And so again, one of the real benefits of our model is the fact that we do generate such strong cash flow and we can continue to invest in our business and grow our business. We obviously are -- continue to be committed to a sustainable and growing dividend. So over the last 12 months, we increased the dividend 25%, and I think you probably saw we just increased it another 10%, really demonstrating our confidence both in the business as well as the cash flow and our ability to sustain that dividend.

We're opportunistic on share buybacks. And I think you see we've bought back more than $700 million of shares, and we'll continue to be opportunistic as market conditions support that. And then David talked a bit about M& A and looking at M&A strategically. Certainly, as we've talked about transformational M&A, it's probably off -- they're definitely off the table, but incremental bolt-on technology adjacencies, things like that are certainly things we evaluate on an ongoing basis. Obviously, we've got work ahead of us with the Gondi acquisition to integrate that and exceed our $60 million synergy target. But as that gets weaved into the portfolio, we'll continue to look at exciting opportunities to grow the business through bolt-ons.

I would just add, Phil, that we do have authorization to purchase 29 million shares. We will be opportunistic as those opportunities come up. We think that's a good use of our cash. We do fully anticipate to maintain the run rate we talked about. We think that's really important for our desire to have world-class assets and cost bases and be close to our customers where we need to be in that regard as well. .

So we fully anticipate to run down that path. The only caveat I would say is we're going to manage our business. If market conditions change dramatically, who knows what happens in the Ukraine. Geopolitical issues that are out there. I think the entire industry was maybe surprised a little bit about the sharp drop last quarter in the inventory rebalancing. So we're going to continue to watch if there's anything that happens there with all of these macroeconomic issues. But from everything we see, this is the direction that we're going and we believe we've actually even taken a conservative look at how we see the year as well.

Our next question will come from Mark Wilde with Bank of Montreal.

I wondered just to get started. Can you give us a little bit more color on the big drop in outside paper and board sales. It looked like it was about 25%-ish. And given that it was your highest margin segment in the quarter, just trying to understand exactly what you're doing there?

Yes, Mark, thanks for the question because I think it's an important one because we're really running our paper business much differently than we have in the past and taken a very strategic outlook. And the message I would give you is it's value over volume. We have very strategic partnerships that we have with customers. We are really the only ones that have the full array of products in our portfolio, whether it's substrates, like SBS, versus containerboard, lightweight, heavyweight, so customers that truly value that and long-term relationships that we continue to have.

So having said that, we're being very strategic in the market. And our biggest drop to get specific answer to your question in our global paper business was in export containerboard we saw a very significant drop in the fourth quarter in that regard, it was down high double

mid-double digits. So that was -- as you'll talk to our customers around the world, they were through the supply chain challenges throughout the year, they were buying as much containerboard as they could to make sure they had inventory because things were so tight, as things slowed down in the outside world. They had high inventory levels, and they are working those down. The good news on that is with all the conversations we're seeing and some of the backlogs we're seeing, we expect them to start working through that by the end of this quarter.

And as we get into Q2, we expect that to come back. We did not chase volume in this scenario. We stuck with our high-value mantra. On the positive side of that, on export and craft, it was actually up. And our paperboard sales were up double digits. So we love how we're managing the business and the fact that we saw EBITDA margin increase through a challenging year. And we feel like as we get through Q4 and Q1 here, which will be, we think, the bottom of the market. This just gives us great opportunity because we kept the relationships, we've kept our share, and we've been focusing on the high-value products to keep our margins. So this is why we think this business really helps us manage our overall portfolio.

Okay. That's really helpful. Just one follow-up. From a capital deployment standpoint, David, I wondered if you could talk about any further thinking on repositioning the 2 biggest bleached board mills, the mill at Covington and the mill down at Evadale. I think you've been doing containerboard and some other things at Evadale. But I think Covington remains a great big question mark in my mind in terms of how you reposition that asset.

Yes. Thanks. These are 2 terrific assets, especially for SBS, as you know. And with Finland I talked about our paperboard sales, we're basically sold out on SBS. So these mills are just tremendous assets and what we're talking about with customers, which is why we really like the breadth of our portfolio, we have a lot of customers, both domestically and export through global paper that not only on SBS, but they want other products as well. So we like having these breadth of portfolios to have true solutions for our customers that no one else can bring. We think that's a differentiator for us in the market. .

So the only thing we really look at right now, similar to what we did at Evadale is how do we continue to analyze flex manufacturing into other grades. So where can we flex from 1 grade to another grade depending on where we see growth in the market, especially in plastics replacement where SBS plays such a huge role CNK plays. So we are looking at investments in those mills for more flex manufacturing capabilities to go to different substrates to make them more flexible. So that's kind of how we think about it because if you look Evadale, where that is today versus. And you know that now very well, Mark, where that mill was 3 years ago, it's really night and day, and that team has just done a tremendous job.

Our next question will come from Mike Roxland with Truist Securities.

Thanks, David. It's Alex. First question is, can you just make a quick update on the work stoppage as marked Where that stands now relative to a couple of months ago? (inaudible) represents over 90% of your (inaudible) capacity. We're also hearing about the potential for some other expired contracts don't now. So I'm just wondering how the company is addressing both more and potential other issues at other of your sites?

Thanks, Mike. I mean, for obvious reasons, I don't think it's appropriate for me to comment on any labor negotiations other than to say -- we are fully operating the Mart mill. And in fact, we're actually ahead of our planned contingency production rates at Mart, and there has been no impact in service to our customers. We hope to come to a resolution in the very near term with our team. But I really want to thank the WestRock employees that are there for the great work and really continuing our operations seamlessly for our customers. .

In regards to the other negotiations, all of our other mills are on a master agreement. Mahrt is the outlier that's just not on that master agreement. So we do have discussions coming with several other of our mills outside of the core economics of our master agreements, and it would not be appropriate for me to comment on those.

Got you. I appreciate the color I did. And just one quick follow-up on the consumer packaging. So it looks like your margin contract is sequentially despite higher pricing rolling through despite moderating inputs. And also the fact, it seems like Mahrt is ahead of plan. So Wondering if there's anything that impacted you in the quarter so that your margin decline sequential. .

Yes, that's a good catch, Mike. And the answer is yes. We had some unscheduled downtime at our mill in Evadale. We also had large LIFO. If you take out the LIFO and the unscheduled downtime, -- it brought our margins into probably around the 17.3% range. And then if you add -- if you wanted to, if you wanted to add paperboard sales through our global paper business, then that really brings it up to even higher and probably closer to 18%.

Got you. And just 1 quick follow-up on here. But I think last quarter, you had an 18% in margin. So is there anything -- were there any I think actually 18.5% of I'm looking right now. So it sounds like you would be slowed down sequentially in 4Q. Is that just a seasonality issue a little bit versus 3Q? I'm just wondering what -- I mean because that was sort very last quarter. I wonder if there's anything else in addition to what you mentioned that maybe a little bit weaker in fiscal '22.

No, when we looked at it, you're talking about for Q4, Mike?

Yes, the 16.8% versus the 18.5% you had in fiscal 3Q?

Yes. We had a terrific -- really a terrific quarter in Q3 in margins. It was an all-time high. And we're running to a 20% margin target in consumer. And I think the team is doing all the right things there to make that happen. I would agree with you that there will be some fluctuation quarter-to-quarter because of product mix and seasonality. But really, if you just take out maybe the unscheduled downtime that we had with the LIFO hit that we took. And there's also FX in there with our European business, which is a nice piece of our business and consumer. There's nothing there that gives us any pause that we're going to continue to grow this business. The dollar volume growth was 7% in this business. We expect margins to continue. The backlog continues to be strong. So this is a great aspect of our portfolio that's very resilient.

And maybe, Mike, just to help point out the mix point. We did see some incremental softness on the home, beauty and health. I think we mentioned that in our prepared remarks. That tends to carry with it higher margins. Food and Bev actually offset that. So as David mentioned, the overall volume growth was great at 7%. We continue to grow, but there was a mix shift between those 2 primary segments. But again, that business continues to perform extremely well. We have continued strong price flow-through great utilization. And obviously, there's some seasonal fluctuations, but nothing really to be concerned about.

Got it. Appreciate the color and good luck in fiscal '23.

Our next question will come from Kyle White with Deutsche Bank.

Just going back to box shipments any early signs on how October looks and here into November? Are you seeing larger impacts on the inventory correction that you called out? Or are you seeing gradual improvement on that? And may be able to give us a sense of what you're assuming in the quarterly guidance for shipments in fiscal 1Q.

Yes. So Kyle, if you look at our October shipment rates, they stabilized from where we came out in September. So we do see that continuing through the quarter. We don't see it continuing to go negative. We do see it stabilizing kind of how we exited Q4. Having said that, when we talk to customers, when we look at the backlog, we are starting to see a little bit of an uptick for where we come in, in Q2. So that's what gives us confidence that we feel like as we get through this Q4, this is kind of the bottom of the trough. And that's kind of the momentum we're seeing. .

On the consumer side, it continues to be strong to help offset that as well. But as far as box shipments I would say it's stable from how we exited Q4.

Kyle, the only other point I'd add is, and I mentioned this in my prepared remarks, we do have about 188,000 tons of planned downtime in the system seasonally when you think about it, our fiscal Q1 tends to be tends to be a bit lighter. And so I think it would be logical to assume that our box shipments in Q1 continue to be a bit soft strengthening towards the back half of the year. But as David mentioned, it does feel as though it stabilized quite a bit from where it was last couple of months.

If I just follow up, are you guys breaking out what your September shipments were on a per day basis year-over-year? .

You mean September on its own?

Yes, basically the run rate that you're talking about.

We've reported on a quarterly level. In North America, we were down 4.6%. Keep in mind, in Brazil, we were positive low single digits in box shipments. So when you combine the Brazil business with the U.S. business, our box shipments were only down about 4.1%. This is why we're so excited about Gondi because now we'll have an even stronger presence in Latin America. Latin America is definitely growing faster than the United States. So we feel like this just fits extremely well into our strategy.

I would say, though, that on a per day basis in the appendix of the prepared materials, we were in the $65 million million square feet per day range. That's in line with where we're trending currently. So that's maybe a bit of a finer answer to your question.

Yes, I appreciate it. And then just a point of clarity on the outlook for the fiscal year outlook. I assume you're assuming flat pricing for all paper grades in that outlook?

And then secondly, really appreciate the commodity cost sensitivity that you provide in the appendix spot. Are you assuming any kind of deflation on some of your commodities through the year on that fiscal outlook?

Sure. So obviously, we're not going to talk about forward pricing. We never do. I will say that included in our guidance is continued strong price flow-through based on the actions that we've taken this year, and we continue to assume that the price inflation mix holds. So that's on sort of the pricing trend.

As you know well, OCC has come down quite dramatically. So it's a $33 a ton versus where it was a year ago. We expect that to creep up towards the back half of the year as that market gets to more normal conditions. Natural gas continues to be elevated. We expect that to mitigate.

So when you look at it all told, we do have a fairly significant inflation year-over-year, just under about, call it, $400 million -- the vast majority of that is tied to wages with around, call it, $25 million, $30 million tied to energy materials and freight. So the good news is we do have the inflationary effects that we've seen over the course of the last year mitigating somewhat. We have to offset continued tightness in the labor market. But we do have, as we mentioned earlier in the call, $25 0 million of productivity baked in there. And we think our guidance, just given 1 of the earlier comments on the level of sort of macroeconomic uncertainty, the situation in Ukraine and Europe going on, some of the inventory rebalancing that we've talked about. We did take a very conservative approach to our guidance. And to the extent the year begins to normalize more quickly than what we're anticipating. I think we will hopefully be at the upper end of that range.

Sounds good. Really appreciate all the details. I'll turn it over.

Our next question will come from Adam Josephson with KeyBanc.

David and Alex, just one follow-up on that guidance question. You mentioned you're taking a very conservative approach to it. Can you talk about what your volume and price to commodity cost assumptions are within that range. Obviously, you gave us some other year-over-year drivers on Slide 15, I think it is. But anything you can tell us in terms of volume and price to commodity costs based on the flow-through of the boxboard price increases from this past year? And also, -- why not -- why not -- it doesn't seem like you gave free cash flow guidance, as you normally do. Any reason for that?

No, no reason for not giving free cash flow guidance. I will say that we do -- as I mentioned, our ongoing assumption is that we have continued price flow-through from the actions that we've taken this year. We do expect that our -- the benefits of our pricing actions at least offset any inflationary effects. We do anticipate the inflationary effects mitigating over the course of the year. From a volume standpoint, I think for obvious reasons, we're not going to be explicit around our volume assumptions. We do have embedded in our guidance, as David mentioned, this continued inventory rebalancing effects. So I think we do anticipate the bulk of that happening through our fiscal Q1 and stabilizing as we get into early fiscal Q2. So if you think about the the cadence of earnings through the year, it's reasonable to expect Q1 to be quite light and then that's strengthening as we get towards the back half of the year. .

As you think about the portfolio and how the portfolio interacts together, I think it's reasonable to assume that the bulk of the weakness is probably split between the global paper business, predominantly in the export channel and then the continued challenges that we're seeing in containerboard offset by the strength that we're seeing in consumer, which I think highlights the benefits of having this diversified portfolio and some of the defensive characteristics of the consumer business relative to container business. I think, David, what did I miss?

Adam, I think the only other thing I'd say is if we start to -- as we get to our next quarter and as anticipated, the normalization comes back and corrugated, our containerboard business on the export side as well as domestic continues to go back to normalize. We'll give an updated quarter guidance. But with just the general macro uncertainty, we want to take approach this early to give a fiscal year guidance that a reliable number that depending on -- no matter what happens with Ukraine or the geopolitical issues, we came out with a guidance that was appropriate.

No, I appreciate that, David. And just one last eon. You've mentioned plastic replacement many times on this call and obviously, some of your competitors have as well, and one of your competitors announced a pretty major capacity addition, SBS capacity addition in the U.S. this morning because of those plastic replacement theme. And I'm just wondering, I just think back to what happened in Containerboard, whereby e-commerce got many companies excited, a lot of capacity came and now there is an oversupply. And I'm just wondering why -- what you think the risk is that the same thing happens in the boxboard market because of enthusiasm about plastic replacement. In other words, how much capacity growth can this plastic replacement realistically accommodate in your view?

Yes. Thanks, Adam. It's an exciting time for the industry with plastics replacement because it's totally incremental to the total market that's here today. So this is just new business. And the pull that we're getting is just really exciting. So if you think about the $9 billion market just in North America. And the run rates that we have, we're currently at $345 million. We expect that and hope that to double by 2025. And you think about our current backlogs and situation right now, the markets have a way of balancing themselves out. We're continuing to invest in the substrates and grades that our customers want for plastics replacement. I think this is only going to grow in addition to the core markets of consumer, when you think about food and beverage, -- this is a market that's going to continue to follow growth. Health care continues to grow for us. So I think this is totally different than containerboard because this is a significant amount of new applications that are coming to market.

This concludes our question-and-answer session. I would like to turn the conference back over to Rob Quartaro for closing remarks.

Thank you, everybody, for joining our call today. As usual, we will be available for any follow-up questions that you have. And we look forward to updating you again next quarter. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.