WestRock Co (WRK) 2020 Q1 法說會逐字稿

Good morning. My name is Marcella, and I will be your conference operator today. At this time, I'd like to welcome everyone to the WestRock Company First Quarter 2020 Earnings Conference call.

At this time, I'd like to turn the call over to Mr. James Armstrong, Vice President of Investor Relations.

Thank you, operator. Good morning, and thank you for joining our fiscal first quarter 2020 earnings call. We issued our press release this morning and posted the accompanying slide presentation to the Investor Relations section of our website. They can be accessed at ir.westrock.com or via a link on the right side of the application you are using to view this webcast.

With me on today's call are WestRock's Chief Executive Officer, Steve Voorhees; our Chief Financial Officer, Ward Dickson; our Chief Commercial Officer and President of Corrugated Packaging, Jeff Chalovich; as well as our Chief Innovation Officer and President of Consumer Packaging, Pat Lindner. Following our prepared comments, we will open up the call for a question-and-answer session.

During the course of today's call, we will be making forward-looking statements involving our plans, expectations, estimates and beliefs related to future events. These statements may involve a number of risks and uncertainties that could cause actual results to differ materially from those we discussed during the call. We describe these risks and uncertainties in our filings with the SEC, including our 10-K for the fiscal year ended September 30, 2019.

Additionally, we will 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.

And with that said, I'll now turn it over to you, Steve.

Thanks, James. Good morning. Thank you for joining our fiscal first quarter 2020 earnings call. During the fiscal first quarter, we made substantial progress executing our differentiated strategy in markets that are characterized by stable demand, increasing supply and customers with ever-growing needs for innovative, sustainable packaging solutions.

WestRock is well positioned to meet these needs with our comprehensive portfolio of fiber-based packaging solutions. This is demonstrated by another quarter of growth of our sales to more than 160 customers buying at least $1 million from each of our segments. These customers now represent an annual rate of sales of $7.5 billion or 40% of our total sales.

During the quarter, our sales increased 2.2% to $4.4 billion, mainly due to the addition of KapStone. Our adjusted segment EBITDA of $675 million was within the guidance expectations that we provided in November. Our capital investments of $375 million in the quarter included $132 million for strategic projects, and these projects include our new Florence paper machine and the upgrade of our containerboard mill in Brazil. We expect this most recent quarter to be the high watermark for our capital expenditures for this fiscal year. We expect our CapEx to decline next fiscal year to an annual rate of $900 million to $1 billion on an ongoing basis.

During this past year, we've completed our strategic investments at our Covington and Mahrt mills and at our box plant in Porto Feliz. The projects to be completed this fiscal year include our Florence paper machine in the North Charleston mill reconfiguration. While these investments have negatively impacted our results in this quarter, these projects will deliver substantial benefits in the near and long term for our company.

As these projects ramp up, we expect they will deliver an additional $85 million in annual run rate EBITDA by the end of the fiscal fourth quarter and a total of $175 million in cumulative annual run rate EBITDA by the end of fiscal 2021. We expect to increase this run rate when the Tres Barras' upgrade is fully operational in fiscal 2022. This, along with the accretion of KapStone benefits, will provide productivity benefits that will sustain our financial results and cash flow generation.

Let's turn to Slide 4. Adjusted segment EBITDA decreased by $58 million year-over-year. The EBITDA decline from the prior year was the result of the flow-through of previously published price changes, lower export in domestic containerboard and kraft paper prices and lower global pulp prices. The decline in pricing was partially offset by input cost deflation, the benefits of ongoing productivity initiatives and the additional month of KapStone's results.

We had a relatively high scheduled maintenance outage quarter with 146,000 tons of downtime across our North American mill system. This is more than double the amount of maintenance downtime that we had in the same quarter last year.

We generated $453 million of adjusted operating cash flow in the quarter. This was up $105 million from the prior year. In fiscal 2019, our adjusted free cash flow was more than $1 billion, and we expect to sustain that $1 billion in free cash flow during the course of fiscal 2020.

We're focusing on executing our differentiated strategy for commercial excellence, operational excellence and digital programs that will result in profitable organic growth and productivity improvements and generate cash flow that will return our -- to -- that will return our leverage ratio to our 2.25x to 2.5x target.

Turning to our Corrugated Packaging segment. Sales for the fiscal first quarter were $2.9 billion. This was an increase of 6.4% over last year and was primarily due to the KapStone acquisition. Our North American Corrugated Packaging adjusted EBITDA margins were 19.3%. This decline versus the prior year was driven primarily by lower domestic and export containerboard, kraft paper and pulp pricing, was partially offset by lower fiber and energy costs and the additional month of KapStone results.

Industry operating rates improved from 91.8% in the fiscal fourth quarter to 94.1% in the fiscal first quarter. Similar to our first quarter January demand in our North American business is stable year-over-year, and backlogs across domestic export in box are solid. Demand from e-commerce continues to grow at a double-digit pace.

Despite the stable demand that we've experienced earlier this month, PPW price watch published a price reduction of $10 per ton on domestic linerboard and $15 per ton on domestic medium. Our fiscal first quarter included 110,000 tons of maintenance downtime and no containerboard economic downtime. Inventories across our system are in balance. And our integration rate for the quarter was 78%, 2% higher than a year ago. Our long-term integration rate target is 90%.

In September, we announced the reconfiguration of the North Charleston mill, which included the permanent shutdown of a paper machine earlier this month that reduced our linerboard capacity by 288,000 tons. We expect to achieve the $40 million in annual run rate benefits by the end of the calendar year. This transition impacted adjusted segment EBITDA by $10 million due to higher operating costs and lower sales volume.

The new paper machine at our Florence mill remains on schedule and is scheduled to begin operation during the first half of this calendar year. The machine installation and construction are nearing completion. We're wrapping up the remaining work necessary to transition to commissioning efforts.

Our box shipments grew 4.5% on a per-day basis, and this includes an additional month of KapStone. We're helping our customers win in their markets. Our ability to win with customers is enabled by continued investment in the most modern, high-speed, low-cost corrugators and converting equipment in the industry. We're delivering high-quality products on time and in full to customers in solving their critical challenges.

We're bringing a multifaceted set of solutions to our local, national and global customers that include the most comprehensive portfolio of converted, lightweight, 100% recycled and virgin liners and coated white top and specialty kraft liners. The investments we've made in the rightsizing technology, like Box On Demand and BoxSizer, enable our customers to reduce their packaging and waste, help achieve their sustainability goals and dramatically reduce their shipping, manufacturing and total supply chain costs.

Our containerboard product portfolio and machinery enable us to customize our packaging to meet the specific needs of our customers for the lightest weight, optimally sized and most sustainable packaging solutions that can reduce their fiber usage by up to 40%. We have unrivaled scale and a full suite of graphics capabilities. They include the most modern preprint operation, the preeminent display business in North America. These capabilities enable our customers to revitalize, reinvent or launch new brands at scale.

Now turning to Brazil. Brazil's first quarter adjusted EBITDA of $22 million was negatively impacted by the ramp-up of Porto Feliz. This plant operates the first preprint machine in South America, which is now providing the opportunity for customers in this region to differentiate their packaging with exceptional graphics. While still a small portion of the plant's volume, our preprint capability is supporting our growth in the market. We expect to increase production and sales over the remainder of fiscal 2020. Tres Barras' expansion product -- project is on track for start-up in the first half of calendar 2021.

Moving to Slide 6. The Consumer Packaging segment reported sales of $1.5 billion and adjusted segment EBITDA of $184 million. Shipment volumes in the quarter of 922,000 tons were down 47,000 tons as compared to the prior year. Over the past 9 months, we've had extended outages at our Covington and Mahrt mills in order to complete our strategic capital projects. We've also conducted major scheduled maintenance outages at these mills in the fiscal first quarter. These outages and the inventory destocking by our converting customers negatively impacted our sales volumes, especially in the food, foodservice and beverage end markets.

Market-driven reductions in pulp prices, the impact of 36,000 tons of scheduled maintenance outages impacted our results. The first quarter was our peak maintenance outage quarter across our consumer mill system. Shipments of converted products were stable with growth in foodservice and beverage end markets, partially offset by some softness in branded consumer shipments in Europe and Asia. We also saw a reduction of shipments during the holiday shutdown period from some of our large branded customers.

Consumer demand for sustainable packaging continues to gain momentum. For example, we've commercialized fiber-based pressed trays to eliminate foam in perishable food applications such as meat trays. We're also converting beverage customers from plastic high cone and shrink wrap to paperboard packaging solutions. We're extending our carton design, paperboard materials and machinery capability to canned food applications where we're building a pipeline of opportunities to replace plastic shrink wrap.

Our ability to partner with customers on innovation with the broadest portfolio of products is a key differentiator for WestRock. With the strategic investments in our mill system behind us, we expect the Consumer Packaging segment to improve its financial performance, and we're striving to achieve our medium-term target of 18% EBITDA margin in this segment.

In 2016, when we formed WestRock, we supplied 102 customers that bought at least $1 million from each of our Corrugated and Consumer Packaging businesses for a total of $4.7 billion. Since 2016, we've grown this group of customers to 161 with $7.5 billion in annual sales. This is a 60% increase. These customers value our broad portfolio of paper and packaging solutions and the ability that WestRock has to partner with them to solve their most critical challenges.

Our machinery business is a key component to this enterprise effort. We placed more than 100 machines during the quarter. This brings our total machine placements to more than 3,700. When you combine all of WestRock's capabilities with the full range of paper grades and folding carton, label and insert capabilities that we have across our company, there isn't a packaging company that's better positioned than WestRock to create customized, environmentally sustainable solutions for customers that help them reduce their total cost, sell more product, minimize their risk and reduce their environmental impact.

Sustainability continues to be a very important topic for all of our stakeholders. Many of our customers are making long-term commitments to use packaging that's 100% recyclable, reusable or compostable. Our partnership with Santa Monica Seafood demonstrates how WestRock's broad portfolio can enable a customer shift to more sustainable packaging. They ship fresh fish around the world. These shipments have to stay cold from the plant to the customer. They were using hard-foam packaging and nonrecyclable gel cooling packs. Santa Monica Seafood needed a machinery and packaging combination that would make their cold supply chain more sustainable and efficient.

We designed a corrugated package that's recyclable and maintains the critical temperature control needed without the use of additional cooling materials like gel packs. We then designed and installed the tray-forming equipment needed to handle this new sustainable package, resulting in lower labor cost for this customer. This is a great example of how we're combining our innovative packaging solutions with machinery to create a cost-effective and efficient solution for our customers.

Another example of how we're helping our customers shift to sustainable packaging is our success in replacing plastic makeup palettes with a premium paper-based palette. We've created a new high-quality paper palette with the visual, structural and technical characteristics that make it the ideal paper-based package for the luxury beauty markets. This design recently received the Paper and Packaging Council's Gold award.

WestRock's innovative solutions in paper-based packaging position us well to partner with our customers to reduce the environmental impact of packaging and help them meet their ambitious goals to use more recyclable, reusable and compostable packaging.

Hey, Ward, I'll turn it over to you now.

Thank you, Steve. On Slide 10, we outline our key assumptions for our fiscal second quarter and full year 2020 guidance. We expect adjusted segment EBITDA in the fiscal second quarter to be between $680 million and $710 million. Sequentially, we expect modest seasonal volume increases across both segments. The January 2020 PPW linerboard and medium index reductions will have some impact on our domestic pricing in the quarter. Productivity improvements and lower sequential health care costs should more than offset higher sequential wage cost and the payroll tax reset that occurs at the beginning of each calendar year.

Our second quarter guidance includes an adjusted tax rate of approximately 27.5% compared to 24% in the first quarter due to the timing of discrete items. We still expect our fiscal 2020 adjusted tax rate to be approximately 24.5%, and our full year cash tax rate forecast remains at 21%. We are maintaining our full year guidance of $3.0 billion to $3.2 billion of adjusted segment EBITDA. We expect to invest a total of $1.1 billion in capital expenditures during fiscal 2020 and should generate more than $1 billion in adjusted free cash flow this year. As we complete our strategic capital projects, we anticipate that we will return to a $900 million to $1 billion annual CapEx level in fiscal 2021.

Due to the seasonality of our cash flows, with our strongest cash flows in our fiscal third and fourth quarters, we expect net leverage to peak in the fiscal second quarter before declining in the second half. We remain focused on reducing debt and returning to our target leverage ratio of 2.25 to 2.5x. We settled our insurance claim related to Hurricane Michael's impact to our Panama City mill. In the quarter, we recovered $32 million, $12 million of which was business interruption related and included in our EBITDA. We have now closed out this claim with our insurer and have recovered $212 million.

I'll now turn it back over to Steve for some closing comments.

Thanks, Ward. We're making substantial progress executing our differentiated strategy as we proactively respond to a changing industry environment. We have increasing opportunities in the market for value-added paper and packaging solutions that help our customers grow their sales, reduce their total cost and risk, all while helping them achieve their sustainability goals.

We're looking to the future as we're investing in our business and in our people for the long term. We're building our systems and processes to take advantage of the scale of our platform. We're using digital technology to enhance our customer experience, improve our operating efficiency and better engage our teammates. We've moved past the peak period of investment into a period of capturing the benefits of our strategic projects, growing organically, driving productivity and generating free cash flow, a combination that will create value for our customers, stockholders and teammates for the long term.

Now that concludes my prepared remarks. James, we're ready for Q&A.

Thank you, Steve. (Operator Instructions) Operator, can we have our first question, please?

Your first question comes from the line of Chip Dillon from [First] Vertical Research.

I don't know if you gave us a lot of detail on this, but could you just tell us the process of the switchover at Florence, sort of when the new machine you further switched? And how much of a transition -- or how much of a magnitude of transition costs and operating disruption you expect? And kind of when do you think things are going to be operating normally there?

Chip, it's Jeff. So we expect in the quarter before the midyear that we'll be operating, putting paper through the machine. And the ramp-up runs through the fiscal year. So we should leave September, October at a run rate of the machine -- the capability of the machine late in that fourth quarter. And so the -- it's just normal start-ups, but we're finishing up in this before midyear. A lot of the wirings and now the machines in piping, wiring, some of the finishing touches, but it's progressing well.

Chip, this is Ward. I'll remind you that I gave the financial impact of the disruption to the mill, both in Florence and Tres Barras, when we gave our guidance on the call last quarter for the full year, and I estimated that would be between $35 million and $50 million in FY '20.

Okay, presumably no change. And a quick follow-up. I know in the last, I think, in the 10-K, and this, I believe, was the first we had seen, you talked about some put-call arrangements tied to the Grupo Gondi investment. And just any comments about how that joint venture is going. And I mean, strategically, would we expect you to be more likely to buy their position relative to selling your position back to them?

We've had the joint venture in place for several years. There are put and call rights. I think the big project they have going on is the paper machine in Monterrey, which is on a comparable schedule to the one to the Florence machine. We like the -- we like our partnership interest. I think it's worked very well. So I think -- so is it more likely for us to increase or decrease our interest? Say, over time, it's more likely for us to increase our interest.

Your next question comes from the line of George Staphos from BofA Securities.

I wanted to work on the enterprise sales approach. You see what progress you think you're having beyond the numbers that you've discussed. And in particular, you see, kind of as a follow-on, whether it's having the desired impact on consumer that you'd like given that you mentioned in the commentary that you're striving for your 18% goal, which means it may or may not be achieved.

So first of all, you provided numbers for the quarter. I think you had a $7.5 billion cumulative rate. That grew about 3% from the fourth fiscal quarter. Jeff, were you pleased with that performance in terms of the growth in revenues from the customers buying $1 million each from you?

And it seems like it's not really -- kind of my second question. It seems like it's not having quite the same effect on margin and consumer. Would you agree or disagree? And what do you need to do to strive and ultimately achieve that goal? And that's probably more for Pat.

George, so yes, I was pleased with the progress of the team. And I think we're well positioned with the accounts that we have that have either $1 million in each segment already or the ones that don't quite have $1 million in one segment and have over $1 million in the other. The customers are finding value in the solutions that we bring, so being able to optimize primary, tertiary -- secondary, tertiary package through the supply chain, machines, combo machines in beverage that do both corrugated and folding. We've had some large wins on both segments, and I'll let Pat talk about some of the consumer.

But I think as we put enterprise leads in each of our segments and divisions, and our sales force really combined as teams with machine reps, graphics reps, marketing reps, we have a full complement of teams in these customers. And we're actually approaching them as one WestRock. So the growth has been good, and I think we have continued upside in all of the segments that we provide. And we see customers taking advantage from display, consumer, corrugated, our machinery businesses. And as we look to run more than just beverage machinery and look at partnering equipment, I think we have more opportunity to grow across those top customers that have opportunities for over $1 million each.

And then I'll let Pat talk about the consumer a bit.

Yes. Great. Thanks, Jeff. So let me talk a little bit about the margins that you asked about. And we still expect to meet the 18% EBITDA run rate in the coming years. And I'll just share a couple of the key elements of that. First of all, we -- our margins have been negatively impacted and suppressed by some of the strategic outages that we've had. And these are really important parts of our plan to get to 18% because we've had to -- we wanted to increase the productivity of those mills, and we expect to get about $36 million of run rate by the end of fiscal year 2021. So they're a very important part, and while they impacted our near-term results, very important part of the margin improvement.

And connecting back to the enterprise sales, this gets really to our innovation capability around plastics replacement. And we continue to see strong demand there in beverage, foodservice as well as in food. And we've so far delivered $115 million run rate since we started tracking this about 15 months ago, and we're on track to deliver that $400 million and -- that we've shared before.

And as Jeff said, this enterprise sales is a really important part to consumer on its innovation. We've had customers around plastics replacement really ask for combined solutions between corrugated and consumer. And we see that being a really part -- important part of our differentiator. So with our productivity as well as our innovation capabilities, everything that we're doing, we do have confidence and certainly expect to hit the 18%.

Your next question comes from the line of Mark Wilde from Bank of Montreal.

I just wanted to ask about 2 kind of global issues right now. One is the impact of the coronavirus on your business. I think this is probably more for Pat. I know MPS has a lot of business in kind of premium goods, the kind of stuff that moves through duty-free shops. The other issue right now I'm wondering about is whether you're seeing any impact from this Finnish pulp and paper strike. They export a lot of containerboard. They also export a lot of SBS.

So Mark, I can speak to China. Just for perspective, we employ about 900 people in China. Our sales are between -- annual sales are between $100 million to $150 million. And I think you may know this, but the China government has extended -- has announced extending the Chinese New Year until February 2. Shanghai has announced that all companies won't restart until February 10. We have plants in Wuxi and Kunshan that are in that same general area, and so they won't restart until February 10. And then we have a plant in Guangzhou. They haven't released a similar notice, so we're planning to go back to work there February 3.

We're supporting our employees. We've shipped masks there, and I think we're just monitoring that situation pretty carefully.

I don't have a comment on your second question. I don't know -- I'm looking at Jeff.

Sure. We haven't seen anything as of this point in time, Mark, in our export. No difference from our demand and backlogs in pulp or export based on the strike.

Right. And just, Steve, just back on the coronavirus. So you're not picking up anything for many of your customers right now about a slowing in demand or any thoughts in their production schedules because of potential slowing?

We haven't, so far.

Your next question comes from the line of Brian Maguire from Goldman Sachs.

Just a question for Jeff. I know you guys talked about the box shipment growth being about 4.5%, including the acquisitions. I think in the past, you kind of gave us more of an organic number without KapStone and some of the other acquisitions. Just wondering if you could provide that. And maybe within that, just sort of comment on how trends ended the quarter and sort of what you're seeing in January so far.

Brian, so just the -- KapStone was the 4.5%. This is the last quarter. Going forward, organic will be all-inclusive. We were up 1.5 points in the aggregate for WestRock organic. And I start with the aggregate because at the end of the month in December 31, New Year's Eve day was counted as an FBA day, but it was really -- we had 80% -- over 80% of our plants down and not shipping that matched what our customers were. So the per day looked flat. But on the aggregate, we were up 1.5 points, leaving that organically for WestRock. And then going forward, it will all be organic sales. January is flat year-over-year, and it's right on top of basically what we expected for the month.

Great. And I think last quarter -- and your guidance sort of assumed you'd be running maybe, I think, 200 basis points above the industry or something in that ballpark. Is that still the target expectation that you would kind of be running above industry growth rates?

Our plan is to continue to outgrow, and we've said we'd grow 1% to 2% this year, growth above the industry.

Your next question comes from the line of Anthony Pettinari from Citi.

Just following up on Brian's question on demand. With regards to the $10 a ton cut that Pulp & Paper Week published, it sounds like that didn't necessarily reflect what you were seeing with regard to kind of firm demand. Is that fair to say? And is there anything you kind of -- expand on that a little?

Anthony, sure. It was -- I was surprised, honestly, in the cut. We had seen some pressure in our kraft paper more than our containerboard, and we had seen the kraft paper and some of the recycled. So I was surprised that it wasn't recycled versus virgin kraft. And there had been some looseness in medium. But our export volume, our domestic volumes in box were all good in the quarter. And our export pricing was flat quarter-over-quarter. So we -- I was surprised by the move in PPW, honestly. And I'll add that our inventories and operating rates -- inventories are in good shape and operating rates were good, so I was surprised.

Okay. That's helpful color. And then maybe a question for Ward. Since you issued the 2020 guidance, Pulp & Paper Week has obviously published this cut. I'm just wondering which offsets, whether it's productivity or lower cost, that's kind of offsetting that for you. And what gives you confidence in sort of maintaining the guide despite that?

Yes. So our original guidance had included assumptions on pricing, volumes and costs. And we provided a range because we thought there could be a range of outcomes on each one of those individual assumptions. And based on what we see today across both our synergy attainment, our -- the -- our ability to capture volume and commodity costs, we're still comfortable maintaining the full year range. So it's a combination of all the factors.

Your next question comes from the line of Mark Weintraub from Seaport.

Following up perhaps, Ward, is there any additional potential price erosion embedded in the ranges now? Or is that cushion now somewhat gone? And then just as a addendum, I mean, last year, I know there was a lot of skepticism when you laid out the EBITDA. And people looked at the first half and said, well, how can you possibly get there in a second? And you basically did. How much of the improvement that we -- that you're expecting this year is -- or sort of seasonality versus the projects, et cetera, that you have underway that are going to really deliver in the second versus the first half?

So I can give you a clear answer to your first question, which is I can't comment to you on forward pricing. We've taken all -- on any individual assumption. We're comfortable with the overall range that includes price, volume and cost and productivity.

In relationship to the first half and the second half, I told you last year, I think our profile was approximately 45% in the first half, and 55% of our EBITDA was in the second half. When we gave guidance for this full year, we said the same thing. And whether it's 44% and 46%, that profile remains the same. And it does reflect both seasonal volume increases that we have in the second half, acceleration of synergies and productivity. The elimination of most of our downtime is in the first half of the year. It's a reflection of all those that drive the first half to second half profile.

Your next question comes from the line of Mark Connelly from Stephens Inc.

This is John Rider on for Mark. Our first question is, could you just give us an update about how you're thinking about backlogs in consumer? In aggregate, they've fallen fairly steadily. And a lot of investors have been asking us whether that means we may be running a higher risk that negative growth is coming back. And if you could just help us understand what you're seeing in your order flow in each of the 3 substrates.

Yes. Thanks for the question. This is Pat. And I think when you look at the backlog, there's a couple of different factors. But I think the primary one really is that the independent folding carton converters have been destocking over the last, I would say, 4 to 6 months. And this is data that's available from the Paperboard Packaging Council, which has shown the drawdown of inventory is at those converters. And this is -- we don't think it's the end-market demand so much, but through a number of the supply issues across CRB, CNK and SBS in the industry. You saw, in 2018 and 2019, you saw probably some inventory build, which is now getting corrected. And so we think that's the biggest issue is really just the destocking.

And as far as going forward, it's a little bit early to tell in the year, but we're cautiously optimistic based on what we're seeing that some of that destocking will be passed to us and that we'll see slightly increased volumes in the second quarter and then increasing throughout the year.

Okay. That's really helpful. And then just our final one. So we're seeing published OCC prices at exceptionally low levels. We're just curious, are your actual OCC costs as low relative to the past as the published figures are?

If you look at our earnings bridge, you can see the cost deflation that we have. A large driver of that has been the decline in OCC. So our OCC costs and recycled fiber costs do match the indices. And what we embedded in our full year guidance when we gave it at the beginning of the year was a $15 per ton year-over-year reduction on the average.

Your next question comes from the line of Gabe Hajde from Wells Fargo.

I was going to try to focus in on the consumer segment for a moment. I was curious if you guys have seen this type of destocking behavior before. Is it more pronounced in any particular grade? And if you have observed it in the past, how long do they persist? And what was the driving force behind the customer's behavior, if you can comment at all to that?

Yes. I don't have any -- this is Pat. Thanks for the question. I don't really have any comparison directly head-to-head of the past. I think this is -- as we work in the market and we understand -- trying to understand what's going on, we think this is probably more of a temporary event than a long-term one, this current situation. And as said before, we're cautiously optimistic that our demand will increase as we go throughout the year. And of course, we're through our strategic outages now, and so our ability to supply that and capture that volume is there. And our backlogs are in a good healthy position. So we're really looking forward and ready to capture that recovery as it happens.

Okay. And Ward, I'm curious if you -- if I remember correctly, the working capital build was up to $250 million for this year. Given sort of, I guess, a depressed input cost environment and then the price cut here in January, might that be a little less? Or is that still the target?

And thank you for pointing that out. I remember the -- in free cash flow guidance, you're right. As we walk through the free cash flow guidance, there was a working capital build of over $200 million. And I said half of it was timing related because of the strong collections and the timing of payables that we had in fiscal 2019. And then half of it was a working -- temporary working capital build that was associated with the outages -- the major outages and the ramp-up of both Tres Barras and the Florence paper machine.

So as we go through the year, we're going to continue to focus on reducing that working capital build. And as we exit the year, we'll be -- we'll have that temporary build behind us. So we have confidence that we're going to be able to exceed the $1 billion free cash flow target. And one of the elements for us is the continued focus on working capital reductions.

Your next question comes from the line of Debbie Jones from Deutsche Bank.

I wanted to ask, if we sit here today and just kind of look at your corrugated footprint and all the things that you've done and the offerings you have to your customers, would you expect that you will outpace industry growth over the next 12 to 18 months?

Debbie, our plan is certainly to do that. We have invested significantly in the footprint. We've consolidated -- we've built a robust performance excellence platform, a machinery business and an enterprise business that supports growth. And it's supported in the last 8 quarters above the market. So my expectation for our business is to continue down that path.

Do you think it would be kind of at the same level that you've already been appreciating the market?

It's hard to tell. I mean we set our goals of what we expect. It's hard to say what it will be above the market without knowing exactly what's going to happen to the market.

Okay. And can I just ask for a quick update on Grupo Gondi and just kind of your position and relationship down there in Mexico?

Sure, Debbie. We own, I think, 32%. And the Gondi management team manages it, and so we have a couple of seats on the Board. Jim Porter and others with our company are highly involved with them on their capital projects. And we work with our customers that have packaging needs in Mexico. We coordinate that closely with Grupo Gondi to the extent the customers want to have us support that.

Your next question comes from the line of Steve Chercover from Davidson.

Could you please discuss the strategy to raise your integration from 78% to 90%? Is it a blend of organic and acquisitions? And have the prices for box plants or maybe particularly folding carton operations changed?

Steve, it's Jeff. So the strategy for us is to grow organically, as you pointed out. And we stated we believe we can continue to grow at about 2% a year. We'll be opportunistic if we see bolt-on acquisitions in the future that makes sense for us. At a full run rate, if you take Charleston and no economic downtime, that's about 300 basis points that would add some integration. And so we look to grow organically, be opportunistic in acquisitions and bolt-ons.

And I'm not clear on the question on the consumer or the box pricing. But if you look at our channels, we've said this that the most profitable channel is running our businesses and integrated through our box plants. And so the integration continues -- will continue to aid our margins.

Yes. Thanks, Jeff. Maybe I'll comment a little bit on the consumer integration elements that you touched on. And just the way we look at this is in SBS, we have about 40% of our volume that is -- serves some specialty markets such as tobacco, commercial print and liquid packaging. And in those situations, we're really specified down to the end user and sell the product on through a converter. So we really consider those a significant amount of volume integrated, and we'll continue to operate with that business model.

And I think when you look at the folding carton piece, there is a difference in our substrates in terms of the integration level. Today, we're about 70% integrated with CNK; CRB is at 60%; and SBS that goes through folding cartons is roughly 20%. We certainly see opportunities and increase that integration, and we'll look at those in terms of where it makes sense and the valuation of those opportunities inorganically. But really, what we're trying to do is grow organically through the plastics replacement opportunities that we have and selling across the enterprise, as we discussed earlier. So we see organic growth as a main way to get there, but at the same time, we will continue to look for opportunities.

And I also want to close that with saying that it's very important that we continue to strategically supply our independent folding carton customers because they sometimes give us access to markets, for example, regional markets that we would not have through our larger folding carton operations. So really, all of that is strategic to us.

Yes. My question on the consumer side was really -- it's my impression that it is maybe 10 years behind where the integration levels are on corrugated, and so that's really where there's a big opportunity, but it's also probably more impacted by the war on plastics. So I thought the valuations might be getting skewed a bit.

Yes. Okay. Thank you.

Your next question comes from the line of Adam Josephson from KeyBanc.

This is actually Michael LeBlanc filling in for Adam. One question just on export markets. Can you just talk about if you've seen much change in any particular region?

Michael, the quarter we saw really stability across the globe, and that's in all our markets: China, Asia, Europe, Latin America. We have good produce seasons in Europe and Latin America, so the export markets were steady. And like I said earlier, the pricing was flat quarter-over-quarter, so stability across our -- all of our export markets.

Okay. And then just one on box pricing. Can you talk at all about any trends you're seeing, either toward the end of last year or early this year?

So we talked about the flow-through from the PPW movement. And so we've seen that in our business that moves down like it moves up, and we've commented on some of that. I've commented on what I saw in the market in the quarter based on recycled liner. We saw some of the medium but -- and more in kraft paper for our business. So to that extent, that's all I'll comment on.

(Operator Instructions) Your next question comes from the line of Paul Quinn from RBC Capital.

Just a question on Consumer Packaging. You guys have highlighted the increased demand for sustainable packaging. I'm just wondering, how big a component of that is your -- to get to your medium-term target of 18% EBITDA margin? And when is that target expected to happen?

Yes. Thanks, Paul. This is Pat. And so as you mentioned, plastics replacement, I would say, overall, sustainable packaging is a very important part of our growth going forward. We, right now, have delivered $115 million run rate in applications that are in that space. And we expect, over the next few years, to get to that $400 million run rate. So it's an important part of what we're trying to do to grow this business organically, and we're confident that more and more opportunities are coming. And for example, China just banned the use of single-use plastics here recently. And there are other taxes or charges or surcharges associated with single-use plastics. And so we're engaging deeply with our customers. We've got great opportunities, and we think it will be an important part of our effort to get to our improved 18% margin that we mentioned earlier.

There are no further questions at this time. I'll turn the call back over to the presenters.

Thank you, operator. As a reminder -- or thank you to our audience for joining the call today. As always, reach out to us if you have any questions. We're always happy to help. Have a great day.

This concludes today's conference call. You may now disconnect.