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Good day. Thank you for standing by. And welcome to WestRock Company Third Quarter Fiscal 2021 Results. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advise that today’s conference is being recorded. [Operator Instructions]
Thank you. I would now like to hand the conference over to your speaker today, Mr. James Armstrong, Vice President of Investor Relations. Sir, please go ahead.
Good morning. And thank you for joining our third fiscal quarter 2021 earnings call. We issued our press release this morning and posted the accompanying slide presentation to the Investor Relations section of our website. They can be accessed at ir.westrock.com or via a link on the application you are using to view this webcast.
With me on today’s call are WestRock’s Chief Executive Officer, David Sewell; our Chief Financial Officer, Ward Dickson; as well as Pat Lindner, President, Commercial, Innovation and Sustainability. Following our prepared comments, we will open up the call up 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, 2020.
We will also be referencing non-GAAP financial measures during the call. We have provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures in the appendix of the slide presentation. As mentioned previously, the slide presentation is available on our website.
With that said, I will now turn it over to you, David.
Thank you, James, and good morning. I’d like to start today with a summary of WestRock’s performance in the third quarter, as well as provide some perspective on our progress and the work underway since I joined the company. Then I will turn it over to Ward who will provide additional detail on our financial performance and outlook for the remainder of the year.
We delivered very strong performance in our fiscal third quarter with demand for fiber-based packaging continuing to be robust. We generated record revenue of $4.8 billion, an increase of 14% year-over-year. Adjusted segment EBITDA was up 15% to $811 million and adjusted EPS rose 32% to $1 per share. This was terrific performance in a challenging inflationary environment and positions us well for the future.
We had robust sales growth across all of our businesses, with packaging sales up 15% during the quarter, demand continued to be strong in the key markets we serve, including e-commerce, food, beverage and industrial. North American per day box shipments were up 9% year-over-year.
We are implementing the previously published price increases across our major paper grades. These pricing gains, combined with our volume growth and mix improvements, outpaced inflation and drove 15% adjusted EBITDA growth year-over-year and adjusted even a margins of 16.8%.
We continue to generate strong free cash flows that we used to strengthen our balance sheet, while also investing in our business and delivering value to shareholders. Overall, net leverage at the end of Q3 is 2.54 times, down from 3.13 times at our peak.
Last quarter, I talked about the key strategic priorities for WestRock, leveraging the power of the enterprise, meeting sustainability, accelerating innovation and executing a disciplined capital allocation program. I’d like to take a minute to walk through some of our progress in each of these areas and our path ahead.
We have been moving quickly in the first four months on the job. During this time, I continue to visit our facilities and spend time with our customers. These visits have reinforced my belief and the unique opportunity we have to provide value through our broad portfolio of paper and packaging solutions, and help our customers meet their most challenging needs for sustainable packaging solutions.
We have initiated a detailed review across the business looking at how to further enhance our focus on attractive end markets where differentiated portfolio is rewarded. We are still in the early stages of this process, but our recently announced team realignment is a significant step forward in fully leveraging the power of our enterprise.
We are strengthening our focus on commercial excellence, innovation and sustainability across the enterprise, and combining these functions. Bringing these critical activities together provides focus, integration and alignment to the disciplines that would enable us to grow our company and lead in providing sustainable and innovative solutions for our customers.
We are focused on growing our packaging business and maximizing opportunities across the portfolio. We have combined the former MPS in our food and beverage packaging business into one team. Unifying these commercial teams and operations to better serve our customers and maximize the productivity of our global operations. We have also integrated the sales teams across our consumer paperboard and containerboard businesses, and combined our consumer and containerboard mills into one system.
During the third quarter, we continue to implement our disciplined capital allocation strategy and further strengthened our balance sheet. Over the past three quarters, we have reduced adjusted net debt by $1 billion, raised our dividend by 20% and completed the investment in our strategic capital projects.
So what’s ahead for WestRock. The WestRock team is relentlessly focused on leveraging the power of the enterprise to improve margins and returns, while continuing to deliver excellent free cash flow.
We will invest in our converting systems to support growth in packaging, and in our mill system to improve our overall cost structure. These investments will further enhance our packaging capabilities to serve those markets where our customers value our differentiation. This also means working to reduce our exposure to markets where we don’t see this potential, such as export containerboard and low margin SBS businesses.
We also remain disciplined in our capital allocation. We are working to ensure the strength and flexibility of our balance sheet as we invest to grow our business. We remain committed to maintaining our investment grade credit profile and consistently growing our dividend.
We will invest in our future through capital projects and tuck-in M&A opportunities that clearly aligned with our strategy and provide attractive returns on invested capital. And we will make opportunistic share repurchases to return value to shareholders.
The significant progress we have made in reducing our leverage ratio provides additional optionality as we consider our capital allocation priorities going forward. We will be balanced in our approach, always seeking to maximize returns, while maintaining the financial strength and flexibility required to execute our strategy.
As we strive to lead in sustainability, we announced our commitment to set a science-based target to reduce greenhouse gas emissions. As we work to partner with our customers to improve their sustainability, we are also focused on improving our own. Sustainable fiber-based packaging is critical to realizing the full potential of a circular economy and we are working to accelerate our innovation pipeline to help our customers meet demand for sustainable packaging.
Our new EverGrow product is a great example of leveraging the power of the WestRock enterprise with capabilities that no other packaging company can bring to the customer. This product leverages our design capability, consumer and corrugated packaging, and our machinery expertise and creates a sustainable fiber-based curbside recyclable alternative to plastic produce packaging. It has great shelf appeal, protects the produce and can be recycled into new packaging. You can use the QR code on this page for a closer look at this exciting new packaging.
And with that, I will now ask Ward to provide details about our financial performance in the third quarter. Ward?
Thanks, David. We executed well in the third quarter and our results reflect this. As David mentioned, we generated revenue of $4.8 billion, adjusted segment EBITDA of $811 million and adjusted EPS of $1 per share. These results exceeded the high end of our guidance range we outlined last quarter.
Demand was strong with record net sales that increased 14% compared to the prior year. Our revenue grew across all of our businesses and we continue to focus on improving our business mix. The implementation of published price increases and improved business max drove $320 million in year-over-year earnings improvement and exceeded cost inflation by more than $100 million. Cost inflation was driven by higher transportation, energy, chemical and recycled fiber costs.
Operating costs were higher year-over-year due to the non-recurring nature of some of the cost actions taken last year as part of the pandemic action plan. In addition, Q3 was our peak maintenance outage quarter in FY 2021.
We generated more than $550 million in adjusted free cash flow in the quarter and use the majority of that cash to reduce debt. Our net leverage is approaching the high end of our 2.25 times to 2.5 times leverage target.
Our packaging businesses continue to grow with sales increasing 15% year-over-year. This revenue increases due to both strong demand and the implementation of published price increases.
As you can see on this slide, our packaging sales were 71% of our total sales in the third quarter, while paper sales were 29% of total sales. Packaging volumes were up year-over-year, with strong demand in food and beverage, retail, e-commerce and distribution. Demand in markets such as cosmetics and spirits also improved as global economies continue to recover.
External paper sales increased 10%, with price increases more than offsetting lower volumes. We are focused on growing our integrated packaging, domestic container board and paperboard businesses. We are also working to reduce our volumes and lower margin specialty SBS and export containerboard markets.
For reference, the combination of the adjusted EBITDA margins in our lower margin specialty SBS and export containerboard market is below 10% as compared to WestRock’s 16.8% total company average. As we actively manage our mix, we will improve our profitability going forward. We look forward to updating you on our progress.
We believe it’s important to also discuss our results on a sequential basis to highlight current trends. We reported significant improvement in earnings, with revenue up 8.5% and adjusted segment EBITDA up 27% quarter-over-quarter. Increases in pricing and improve next enabled us to outpace inflation by approximately $100 million sequentially.
While we had the sequential benefit from the ransomware and weather impact in the second quarter, the third quarter was our peak maintenance outage period. Inventories in both of our business segments remain tight.
Turning to the segment results, our corrugated packaging segment reported revenue of $3.2 billion and adjusted segment EBITDA of $557 million. Adjusted EBITDA margins for our North American corrugated business were 19.3% and our Brazil adjusted EBITDA margins were 23.2%. As I mentioned before demand remained strong across a broad set of end markets, corrugated box shipments increase 3% sequentially.
Sequential cost inflation was driven by higher recycled fiber cost, which were up $20 per tonne versus Q2, along with increased transportation, energy and chemical costs. Corrugated packaging pricing and mix outpaced inflation by $89 million from Q2 to Q3. Inventory levels remain low as we came out of our peak mill outage quarter. We have only 11,000 tonnes of planned maintenance outage downtime in the fourth quarter.
Finally, the Florence mill continues to increase production and operate well, and we expect the mill to be at full production levels at the end of the fourth fiscal quarter. Demand is very strong in the Brazilian market and we expect margins to improve in the fourth fiscal quarter as the Três Barras mill continues to ramp up.
Turning to consumer packaging, the segment reported revenue of $1.7 billion and adjusted segment EBITDA of $269 million. Adjusted segment EBITDA margins were 15.5% in the quarter and were up 210 basis points sequentially.
Our sales mix continues to improve driven by strong demand and higher margin food and beverage packaging and paperboard sales. Packaging sales increased in North America, Europe and Asia, and paperboard sales were up in all substrates sequentially.
Our backlogs remained very strong and are currently at six-weeks to seven-weeks across our grades. Our mill system performed exceptionally well with strong production and high operating rates.
On price mix, we saw the benefit of the flow-through of published price increases. Our sales mix improved, as we sold less pulp and had higher sales of containerboard and CNK from the reconfiguration of our Evadale, Texas mill. In Q3, we produced 44,000 tonnes of kraft liner and 18,000 tonnes of CNK at this mill.
Cost inflation has increased at a higher than normal levels throughout the year. Many of our commodity input costs have increased significantly, including OCC, which is up -- July is up $77 per tonne since the end of FY 2020.
However, we have been successful in implementing previously published price increases across our system, which have offset those inflation. In the fiscal third quarter the spread between price and inflation turn significantly positive.
The April containerboard published price increase should be fully implemented in our system at the end of August. We are also implementing published increases in kraft paper and realizing higher pricing in export containerboard. Consumer price flow-through will continue accelerating into fiscal year 2022/
We generated more than $1.1 billion in adjusted free cash flow in the first three quarters of this fiscal year. Following the KapStone acquisition, our adjusted net debt peaked in the second quarter of 2019 at $10.5 billion. We have made outstanding progress in reducing this debt quickly and exited the third quarter with $7.9 billion in adjusted net debt.
We are quickly approaching the high end of our 2.25 times to 2.5 times net leverage target. We continue to reduce debt and strengthen our balance sheet. We recently announced the redemption of $400 million of our senior notes that mature in March of 2022. The redemption will occur in September using cash on hand which will reduce our debt even further.
Turning to fiscal fourth quarter guidance, we expect higher prices, stronger volumes, minimal scheduled maintenance downtime and improved productivity. This will be partially offset by sequentially higher recycled fiber, virgin fiber and energy costs. As a result, we expect adjusted segment EBITDA to be in the range of $870 million to $920 million and adjusted earnings per share in the range of $1.15 to $1.29.
And now, I will turn it back over to David.
We have great opportunities to grow our company and improve margins, while providing value to our customers, teammates and shareholders. We are making rapid progress on our strategic priorities.
First, we are leveraging the power of the enterprise. This quarter we made several commercial and operational leadership changes that further align our teams to our strategy. This new structure will enhance market alignment, enable greater agility and deliver efficiencies. And we are working to determine how we grow faster in high value markets and minimize our exposure in export, containerboard and low margin specialty SBS markets.
Second, we are striving to lead in sustainability and accelerate innovation. We remain excited about the growing opportunity to partner with our customers, to improve the sustainability of their packaging. As I mentioned earlier, we have committed to setting a science-based target to reduce our greenhouse gas emissions and are making excellent progress on the commercialization our plastic replacement solutions.
Finally, we will be disciplined in capital allocation. As we achieve our leverage target, we have more opportunities to utilize our strong cash flows to create shareholder value.
The future is bright at WestRock and I want to thank our 50,000 team members for their incredible work. This is a team that is truly committed to solving our customers’ most difficult challenges. I am confident in our ability to successfully achieve our goals and as we provide differentiated solutions that customers’ value, we will continue to deliver excellent performance. With our complete and differentiated portfolio, we have multiple levers to create value and grow sales and earnings. We are excited about the opportunities ahead.
With that, that concludes my prepared remarks. James, we are now ready for Q&A.
Thank you, David. As a reminder to our audience to give everybody a chance to ask a question, please limit your question to one with a follow-up as needed. We will get to as many as time allows.
Operator, may we take our first question.
Thank you. Your first question comes from the line of Anthony Pettinari of Citi. Your line is open.
Good morning. David, do you have a timeline for when the strategic review might largely be completed? And then, as you look at the, kind of people processes technology, is there anything that stands out to you in your first few months as a particular strength within WestRock or a particular need within the organization?
Yeah. Thanks, Anthony. A couple things to your question. I think we are in the early stages of our strategy review and I -- you will see announcements throughout the rest of the year and through the activities that we do as we make progress, but we are really looking forward to announcing those. But the structure changes were the first step in supporting our strategy. And I will tell you there will be a few things to our approach, which are really important.
And I think it goes to the second part of your question is, what’s the strength that I have seen in the four months I have been here? And the biggest strength I see other than the people, who have been tremendous, is the value of our unique portfolio. How do we continue to leverage that both from a growth standpoint and an efficiency standpoint, and we have tremendous opportunity to do that.
Our enterprise customers who buy both corrugated and consumer are approaching $8 billion annually. And they want to partner up with us for solutions on innovation and sustainability, which is a huge demand from our customers. So we want to continue to push that.
And we are excited to have Pat lead our innovation and sustainability, and focusing on market growth, where we can get rewarded, as well as continuing to be relentless in our productivity efforts.
So, I guess, to answer your question, I’d say, the timing will be throughout the rest of the year. I think the structure was the first piece of that. The strength is really our broad portfolio with our people and executing that. And we just -- the opportunity that I see is further integration in synergies from the acquisitions that we made and I think we have an opportunity to continue to take cost out of our systems. So that’s where I see it so far in the first four months and I think you will see a lot more here throughout the rest of the year.
Okay. That’s very helpful. And then just in consumer, is it possible to say what you think sustainable underlying demand is in this market? Are you seeing real evidence that it’s moved higher because of sustainability or plastic substitution? Just asking, because there’s a lot of moving pieces with reopening and food service and a comp against COVID, just trying to understand what…
Yes.
What’s the underlying growth? Yeah.
Yeah. We are excited about our consumer business. As you know, we have consolidated our former MPS business with our consumer business, our food and beverage business. And that’s really exciting, just, again, from the efficiencies on the back end, but also the growth we can bring pulling those together.
We are seeing retail come back, obviously, quite a bit. And what’s also really exciting about the consumer business is their ability to improve margins, which is a big focus for us. Our tie in with the machinery business allows for really unique solutions.
So we are -- we think consumer has tremendous opportunities for further growth. We are seeing that growth both in the U.S. and in Europe. So we see this continuing as we go through the rest of the year and into 2022.
Okay. That’s very helpful. I will turn it over.
Thanks, Anthony.
And your next question comes from the line of Phil Ng of Jefferies. Your line is open.
Hey, David. The changes you are looking to accomplish to further integrate the business and extract more synergies, certainly very exciting. Curious would require a noticeable amount of capital to step up from here. And do you think you have the right people to kind of execute on the goals that you are trying to implement going forward?
Yeah. Phil, thanks for the question. The people have been tremendous. We have the right leaders leading our businesses now. So I am really excited about our path forward. The piece on the capital, we are really focused on our productivity efforts and bringing -- as evidenced by bringing the mill systems together.
And there will be additional capital spent to extract further cost out opportunities. We have committed to $900 million to $1 billion in fiscal year 2022 in CapEx. So we are comfortable with that number, and along with those investments and our productivity efforts, we are really confident we are going to start seeing results and extracting value out of our operations.
Got it. And then maybe the question for, Ward, certainly, it’s a very inflationary backdrop. I think implicit in your fourth quarter guidance, price cost is still kind of the headwind. When we look at the Q1 and assuming the August increases reflected by the indexes for containerboard, do you think you are still going to be behind the price cost curve in fiscal 1Q and do you have enough productivity to potentially drive margin expansion year-over-year?
Thanks. Thanks, Phil. So I am going to challenge you a little bit. I think our -- if you look at our price inflation trends both sequentially and year-over-year, we are actually driving more price realization than we are, it’s a positive relationship between price and inflation.
Moving into the fourth quarter, clearly the largest inflationary item that we have, as we have got the increase in OCC and it’s really $45 to $50 a tonne embedded in our guidance. But we also have the continued flow-through and the full quarter flow-through of the PPW published price increases in containerboard from April. And the accelerating momentum that we have in the realization of the all of the price increases across the published price increases across the consumer business.
As we head into Q1, what -- I think if PPW does in fact publish, we will start to generate the benefits really in Q1 pretty quickly. We won’t get much in Q4. It will be -- it will ramp up in Q1 and then move into Q2.
So, I think, our guidance is actually, we are growing earnings sequentially from Q3 to Q4 and part of its volume, part of it’s the fact that we are -- we exited our peak maintenance outage, but it’s also the price cost relationship as well. So we think we have earnings momentum as we move into next year, albeit in an environment where we have elevated transportation cost recycled and virgin fiber cost.
Got it. Okay. That’s helpful, Ward. Really appreciate it.
[Operator Instructions] Your next question comes from the line of Adam Josephson of KeyBanc. Your line is open.
David and Ward, good morning. Thanks very much. Ward just one more…
Good morning.
… question about the assumptions embedded in 4Q guidance. So for OCC it was up 20 in July, so I assume that you are thinking, it will be up another, call it, 25 to 30 in August, just please confirm or refute that? And then what about the insurance -- any insurance proceeds you are expecting in fiscal 4Q compared to what was in your previous full year guidance and then any impact from that the potential third price increase in that guidance?
Yeah. So, let me take the quarter first and then I will give -- I will…
Okay.
… spend a minute on the second half relative to the guidance that we gave you back in April. So our average OCC cost for Q3 was about $105 a tonne. What’s embedded in our guidance is about $145 a tonne to $150 a tonne for Q4. So that implies some sequential increases from August into September as well. But you can -- I have always tried to be very transparent about our OCC assumptions and I think I have done that here as well.
What we have with price, the price realization has been very, very consistent from what we had in the April guidance for both Q3 and for the full year. Really the driver of the midpoint being lower than the $3.05 billion full year guidance that we gave at the end of -- on April call. It’s simply been the elevated inflation environment. So our assumptions back then and I think you can probably go to the transcript is, we thought we would exit Q4 with OCC around $105 a tonne. So it’s going to be $45 to $50 higher than what we assumed back in April.
And then we have had higher natural gas costs that we thought would start to moderate and they have remained elevated and then virgin fiber is also a little bit higher. But we have been able to steer our way through this and still feel really good about the momentum that we have in FY 2022.
The cash flow generation that we have, and Adam, I have not -- we have filed our claim with our insurance carriers for the ransomware recovery, because I have not embedded any recovery in the current quarter guidance related to the business interruption portion of the claim. I just don’t -- I am very confident that we are going to recover our claim. I just don’t have clarity around the timing and as we get more clarity I will communicate it.
I appreciate that, Ward. And then, David, one for you, just on the containerboard export commentary? Yeah, how do you plan to sustainably reduce your exposure to that market? Is it through acquisitions of independents, is it through some other means, because obviously, in the good times when domestic demand is booming as it is now, it’s pretty easy to do, but when things go in the opposite direction, it’s that much more difficult to not be involved in export markets in some capacity? So just wondering how you are thinking about that.
Yeah. I appreciate the question on that, Adam. A couple of things, there is some very attractive domestic containerboard markets that we enjoy and are good margin. We have successfully improved our integration over last several years from the mid-60% to 80% and we have said we want to be around 90% from a vertical integration standpoint.
And what we will do to continue to do that is exactly what you said. We will continue to look at bolt-on acquisitions of independents that will continue to happen as we move forward and we also have a multiyear investment plan in our operating systems.
So we will continue to invest there to optimize what the right manufacturing footprint is to support the markets that we want to be in and grow, and that’s part of our strategy work that’s going on right now is our desire to accelerate that and get that moving faster. And I think you will see as a result continued margin expansion in this segment and we think we have a great path to get there.
Thanks so much, David.
Thanks.
[Operator Instructions] Your next question comes from the line of Cleve Rueckert of UBS. Your line is open.
Great. Thanks very much and thanks for all the color already. I just wanted to ask a follow-up on the integration and sort of your plans for the containerboard market. I appreciate that it’s a strategic focus it has been for a couple of years to improve integration and can you tell us where it was in the quarter? And then, I guess, what’s the timeframe for your investment plan, do you have excess capacity in the box business today, the -- some of these changes on the, again, sales force side are going to help improve that or is it really going to require investment and any other type of bolt-on acquisitions that we have been discussing?
So we exited -- thanks for that question, Steve. We exited Q3 I believe at 81% integration in the system, and again, that’s continuous progress of where we want to be. As far as timing, that is something that we are looking at right now and we will certainly share that with you as soon as we really dial that in, but you will see continued progress and focus on that.
And again, it’s going to go exactly, as you said, it’s going to go as part of our investments in our system, it’s going to be shifting into strategic markets that we want to be in, which is with our mill system providing flexibility to where we want to play and also de-emphasizing where we don’t want to play and then there will be strategic bolt-on M&As that help support that as well.
So it’s going to be a multifaceted approach to that. We want to accelerate this, because this is an important part of where we want to go as a company. I am not ready yet to give you exact timing, but we will share that with you as soon as we start dialing in a lot -- the plan to do so. And Ward, I will turn it over to you, just for any other further commentary.
Cleve, what I would note is that, we have invested in our box plant system. If you look over the last five years, we have invested almost over $750 million to upgrade our system and we have installed over 43 EVOLs. So we have had a path that we have been on and we will continue to do that. And then we will supplement it with potential of tuck-in acquisitions as well for more vertical integration.
Yeah. So, I mean, I guess, I don’t know, it sounds almost like more of sales focus at this point that an investment focus. But, I guess, we will sort of stay tuned and see how it go?
Yeah. I would actually say it’s both.
Yeah.
I would say it’s both. I mean, we are…
Yeah. Okay.
I mean it’s also part of just how do we optimize what we have and there will be investments on our infrastructure towards point on what we have done and our facilities there will be M&A piece and there will be the strategic focus piece.
Right. Right. Yeah. That makes sense. Thanks. Thanks for the detail.
Thanks.
I just wanted to one follow-up on OCC and OCC availability. I guess one of the thematic just some things that we heard throughout the first half was that recycling rates were quite a bit lower in OCC last year with sort of the shift to at-home consumption. I am just wondering if you are seeing any increase in OCC availability within your system as a sort of the reopening has played out through the middle part of the year.
Yeah. That’s a really good question, because you know, we operate our own, we operate 18 plants of our own recycling facilities and many single streams facilities. And it’s interesting, our generation over the last year is actually up 3% and what we have done inside of our system is we have actually made some investments in our single stream capabilities to ensure that we can capture some of the smaller sort packaging that we see from the e-commerce stream.
So generation in our facilities has been up and but we have made investments to make sure that we can capture the shift. And remember, we also from a fiber security point of view, we manage more tonnes than we actually consume, so we have…
Right.
… brokerage relationships with other generators of OCC to ensure that we have got fiber security into our system.
Got it. Thanks, guys. Good luck this quarter.
Thanks.
And your next question comes from the line of George Staphos of Bank of America. Your line is open.
Hi everyone. Hope you are doing well. Thanks for taking the questions…
Good morning, George.
… and providing details. Hi, David. Hey. So, David, I want to ask you a question. Given your past experience, so you haven’t been running WestRock for very long. But what experience do you have in adjusting and consolidating operations and sales forces. There is frequently sensitivities around doing that? What do you think is key about enabling that effectively? And kind of the related point, I did not see the detail, perhaps, it’s in the deck and I missed it, on the number of accounts and combined revenue to customers who are buying over $1 million of both consumer and corrugated for you, if you could sort of update us on that in your answer? And then I had a quick question on the quarter itself coming up.
Sure. Thanks. Thanks, George, for the question. From an experience standpoint, going back to my previous life at Sherwin-Williams, being part of an $11 billion acquisition of Valspar. That’s exactly what we did. We fully integrated that business. We segmented where appropriate. We brought teams together where we brought more value from a customer standpoint to bring solutions. And then on the infrastructure side, we brought operations in -- into under one leader to really drive those efficiencies. And I am really proud of the work I was a part of with that team to really drive a lot of value.
So there’s a playbook that I that I use, when bringing on acquisitions to ensure that you just don’t do a bolt-on. You do it for how do you drive more growth, bring more value to customers, where they get excited about it and then also drive the synergies on the infrastructure. And I think that’s really important and it’s been a lot of what I have done throughout my career. And I am excited about the opportunities here. There’s just really good opportunities for us to continue to further integrate this business and bring value.
As far as the enterprise piece, we have -- we will approach on a yearly basis about $8 billion in sales of customers that buy over $1 million in consumer and over $1 million in corrugated. So there is, obviously, with that data tells us there is value and customers wanting to come to us with solutions for all of our products. And I thought EverGrow, which we highlighted is a great example of that, when you tie in our machinery business and even you look at our Victory Packaging distribution business with e-commerce.
So where we are focused is, we know our customers want innovation and sustainability. They are looking for us to help them achieve their sustainability goals. Those enterprise customers are the ones pushing us the hardest and we can combine our complete solutions, we are seeing a lot of value in that and we are getting rewarded for that. And Pat, maybe I will turn it over to you just to extract a little bit about what we are doing on enterprise and the excitement we have there.
Sure. Thanks for that, David, and good morning. So, as David mentioned, we are making good progress in increasing our sales across the enterprise and up to almost $8 billion from about $5 billion at the time of the merger. So that’s a really good progress.
I think, as we go forward, we are going to put even more focus on those top strategic accounts. I was with a very important customer earlier this week and they were commenting on the importance of WestRock providing unique solutions, particularly to optimize primary, secondary and tertiary packaging, and we are the only ones that can do that.
I mean, we have a unique capability to pull all of those together, mix it in with machinery, drive the automation, our digital capability. We don’t often talk about the displays business, but that’s a really important part of it too. Because every time you have a display in retail, which is gaining some strength now, you have a carton, a folding carton in that. So there’s opportunities for us all the way throughout the value chain to optimize primary, secondary, tertiary packaging.
And from a commercial standpoint, sustainability, innovation, we are going to put a lot more focus on those top accounts and we certainly look forward to sharing many of those examples with you where we have been successful, as we have done in the past, but share even more examples in the future.
Thanks for that. I just -- prices are going up. So $8 billion is great relative to the $7.5 billion you are at in the prior quarter. Just can you talk about number of accounts, you are at 169 last quarter. Have you added accounts here? And then my follow-up just on the quarter, can you talk about how volumes are shaping up so far early in fiscal 4Q and what the maintenance step down as to your earnings? Thank you. Good luck in the quarter.
Yeah. So just on the -- from the 169 we are up to 178. So we continue to add customers. So it’s the number of customers, as well as the revenue that continues to climb and that’s just really important to us, not only in cross-selling, but leveraging the overall power of the enterprise. I think if I understand your second question, it was really around how the quarter -- the current quarter is starting off and I will just…
Yeah. It’s more for Ward.
Okay. Ward, do you want to handle that one?
So, yeah, remember, in the earnings -- the sequential earnings, I think, we have one more shipping day sequentially, so that’s a part of the driver of volumes. There is volume contribution to earnings sequentially. The comparisons -- the year-over-year comparisons obviously get harder as we go into the end of the calendar year when everything started to reopen and demand started to strengthen across both of our businesses. Your maintenance downtime question, it’s down almost 110,000 tons sequentially. George, I’d say, that’s $15 million to $20 million of earnings contribution sequentially.
Thank you very much, Ward. Thank you, guys.
Thanks, George.
Your next question comes from the line of Mark Weintraub of Seaport Research Partners. Your line is open.
Thank you. First one, big picture question, as you are looking at the two businesses, containerboard and consumer packaging, for a long time you have been getting pretty substantially higher margins in the corrugated business than the consumer business, I think, it’s like 400 basis points right now. When you think about these businesses and their capital intensity and other various ingredients, is there reason for there to be on, an average basis that sustained spread in the margins in those businesses? Or is that something that you think will equalize more over time?
Mark, thanks for that question. I want to make sure I understand it. Are you talking about the consumer business margins matching our corrugated business margins?
Yeah. Comparing those two, the EBITDA margins.
Yeah. Yeah. So our goal is to continue to drive our packaging margins to a much more attractive level to where we are at. We have further to go in consumer, as you well know, but I am really pleased with the progress we are making.
I am not sure we will get all the way to where we think our corrugated margins can get to, but we want to get very close to that. I think our EBITDA margins in the quarter have improved sequentially over 200 basis points on consumer, and we expect that to continue.
The other thing about that is we are reporting our paperboard sales in there. So if you extract the lower margin external SBS, our margins are even more attractive. So that’s why that focus of reducing our exposure to the external market in SBS, combining our former MPS business with the consumer business, with that opportunity plus the plastics replacement opportunity, we really believe that it’s going to enhance continued acceleration of our margin expansion.
Great. That’s helpful. And then -- and I apologize if you had some technical difficulties earlier, but I have picked up some indications there’s going to be a little bit more capital to achieve the various goals. Can you give us kind of a general view as to what average CapEx might be in the next couple of years?
Well, we have come out with a CapEx of $900 million to $1 billion for fiscal year 2022. I would expect us to maintain that range moving forward. We will look at opportunities with our capital allocation, though.
So with the strong cash generation, we are going to look at with the excess cash we have, where do we provide the best return? So if there’s great return with further CapEx to drive out costs, we will look at that. We will continue to look at other opportunities for bolt-on M&As and we will look at opportunities and share repurchases.
So from a capital allocation standpoint, we want to be a very disciplined in where we go with our CapEx, with our sustainable and growing dividend and then with the excess cash and where we are with our debt levels, we are excited about the opportunities that brings for flexibility.
Great. Appreciated it. I will hand it over. Thank you.
Thanks, Mark.
[Operator Instructions] Your next question comes from the line of Mark Wilde of Seaport (sic) [Bank of Montreal]. Your line is open.
Good morning, David. Different firm, but you get the idea. When you talk about these investments in the mill and converting businesses, is it possible to give us some examples of what you are thinking about in both cases? I mean there has been a fair amount of money, as Ward mentioned, that’s going into the converting business over the last five years and really if we go back over the last eight years to 10 years, there were a number of mill projects at Hodge, at Hopewell and then most recently at Florence. So trying to get a sense of what those projects might look going -- like going forward, how they might be different.
Yeah. Thanks, Mark. Appreciate the question. I will start and then I will turn it over to Ward with any additional commentary. As Pat alluded to earlier, we continue to invest in EVOLs at our conversion plants.
We think they really bring a great return for us. We look to do things like Florence. We obviously had the investment in Brazil as well. Tres Barras was, I believe, a $345 million investment, Florence was $400 million investment. So we have made some really large investments in our mill systems and we continue to make investments in our conversion plants.
One of the things that we really are looking at to is flexibility in our mill systems. So if you recall at Evadale, we converted SBS to CNK that provided us an ability to get into higher margin businesses, and again, get into the strategy of exiting lower margin SBS business.
So with that, there was no capital needed to do that. But as we look at our footprint now that we have one mill system, we are going to continue to look at those flexibility options, some of them may require CapEx.
But if we can invest in flexibility in what we want to produce depending on demand, which provides the best return for us in those high margin growth segments, we will continue to do that. Ward, I will certainly turn it over to you as well.
Yeah. I mean, Mark, again, I will kind of reiterate some of the key things of the investments that we have made in the container system, the EVOL deployment, the corrugator upgrades. We actually did build on greenfield box plant a couple of years ago in Sealand [ph]. And then on the mill side, there’s continued opportunities for woodyard upgrades, other debottlenecking projects and numerous projects that are focused on reducing costs.
Yeah. That’s helpful. David, for my follow-up, I just wondered you have been in the sales for four months or five months now, just any thoughts on potential changes in terms of how you would like to set up incentive comp structures at WestRock?
Yeah. Mark, that’s a really good question, because for me, it’s really important to reward our sales team with where we want to grow. So part of that is revamping and reinvigorating our sales incentive plans to reward the behaviors that we want to do. So as we go into fiscal year 2022, that’s a high priority for us, and it’s something we are working with the teams on right now.
Okay. Very good. I will turn it over. Thanks, David.
Thanks, Mark.
Your next question comes from the line of Mark Connelly of Stephens. Your line is open.
Just got two things.
Yeah.
David, now that the teams are in place, can you give us a little more insight into the benefits you are expecting to get from combining containerboard and paperboard mill operations? In containerboard, it’s been more common to tightly align the mills with the box plants and that was the strategy of some of the companies that WestRock acquired. Does this new approach put more separation between your board manufacturing and your converting operations?
Actually, what we hope is to allow -- and we will allow our mill systems to be 100% focused on being as efficient as possible and supporting our converting systems the most effective way possible.
So with allowing this structure and again, talking about some of the flexibility, optimizing our supply chain understanding the -- with the strong demand we have -- how do we ensure we have the most efficient supply chain as well. This structure allows us to do that.
I just really believe in focus and segmentation and it’s a mill systems wake up every day, they are going to be thinking about safety, quality, cost and service. And that’s going to benefit both our customers and our shareholders.
Okay. Now second question, following up on Mark Weintraub’s question, you have a lot more recycled into your containerboard system that some of your competitors do. Does that significantly reduce your ongoing CapEx requirements of those mills and is it a goal to introduce more recycled fiber as you reinvest in that system. I am really wondering about the systems capital intensity relative to your peers.
Yeah. So, Mark, this Ward. You know our fiber mix is approximately 65% virgin, 35% recycled and you are right, the virgin, I mean, the CapEx load for a recycled fiber mill is lower than it is for the virgin mills.
We have always like the balance that we have in the system. Because ultimately we have a very broad offering to our customers in terms of lightweight, heavyweight virgin and recycled miners of mediums and we think that ultimately positions us to support a wide range of customers.
And so, I -- David, I will ask you to see a comment about whether you think that mix is appropriate, but it gives -- we have balance in the system and we have always felt comfortable with the balance. And, again, Mark, I think, another thing to remember is we have got some fiber flexibility across our mills to be able to…
Yeah.
… take advantage of introducing more recycled fiber mix into our virgin system and vice versa as market conditions for those critical input cost change.
Yeah. Ward, I think, you hit it right on. And I think there is a theme here of, I think, we are in a great position from a flexibility standpoint and that’s the benefit of our broad portfolio is we can pivot and shift to provide the best returns and service to our customers as needed throughout our system. So, I think, Ward, you covered that well.
Very helpful. Thank you.
Your next question comes from the line of Gabe Hajde of Wells Fargo Securities. Your line is open
David, Ward, good morning.
Good morning.
I am curious just -- have you guys put any thought into revisiting your leverage target. I mean I spent some time kind of beyond the upper bound for a while, obviously, you guys were doing some acquisition activity. But it just -- and I appreciate it, it seems like you guys are committed to an investment-grade rating. But to afford you the flexibility to do things you would like to do, it seems like a pretty tight window. I am just curious if you guys have thought about that?
We talk about a lot. We talk about with the Board and investors have -- I have had some investors ask us to consider expanding the range, and others to talk about tightening the range and lowering it.
Frankly, you help to answer part of the question. We like the flexibility that this target provides us. It -- we do like the investment grade credit profile, and the discipline that brings into our organization and capital allocation.
And I think we have talked about in the past and we have had a track record of saying, if the right opportunity exists for us to lever up for a short period of time above the target to generate synergies and then pay down debt to get back within the target than we are not are prohibited from doing that.
So I have always felt that this gives us the strong balance sheet that we need to be able to execute our strategy and also to have the flexibility in a business that has some variability and input cost and supply demand conditions from period to period. David, do you want to…
Okay.
… add anything to that.
Well, I would just say, as we talked about our capital allocation approach, where we want to put our cash is where we can get the best return. So part of that -- the must haves are a growing and sustainable dividend, reinvesting in our business, investment grade profile. And with the -- again the available cash will look at, should we -- how should we look at that, how should we look at share repurchases or even invest additional investments.
So I think that flexibility is really important. And as Ward mentioned earlier, calling a bond in 2022 to pay in the fourth quarter with our available cash was a good use of our cash. But we still have additional opportunities to look at other areas of investment, so we will continue to do that.
Okay. Thank you. And one last one, I appreciate it’s challenging sometimes on an open format like this. But in terms of the strategy, is there anything that’s off the table or can you give us a couple of ideas of things you might look at. I mean could it may include things up to divesting certain mills or product lines or something like that or is it everything you feel like you have -- you are going to keep and it’s more about investing and figuring out the way to maximize returns?
Yeah. I appreciate that follow-up question. My approach always when you are going to strategy is everything’s on the table. You have to evaluate everything. We have to evaluate our businesses, our footprint, the markets that we are going after, our structure that supports the strategy.
So to answer your question, I would tell you we are looking at everything in fairness. And we will continue to communicate with you throughout the year on what that means. But the ultimate goal results of our strategy will be organic profitable growth, margin expansion and improved return on invested capital.
Understood. Thank you.
Thank you.
Your next question comes from the line of Mark Weintraub of Seaport Research Partners. Your line is open
Thank you. Just a quick follow-up, if I could. As you have on that page 13, you have got a lot of published price increases recognized in the consumer packaging grades and I think most of that’s have a pretty good understanding of how the containerboard flows through, et cetera. Can you just remind us how the consumer packaging price increases tend to flow through and the degree to which there might be cost tight elements that also flow through into pricing?
Yeah. Great. Thanks very much. This is Pat. So let me try to handle that from a commercial standpoint. So as you mentioned, containerboard is a pretty good understanding of that, and majority of the corrugated box and containerboard is linked to PPW and pass it through in three months to four months as we have indicated in the past.
Consumer is a bit more complicated because of the number of substrates in the different routes to market, our different integration levels across the -- across those different substrates. And so we use a number of different value capture and pricing mechanisms in the consumer segment.
And in aggregate I can say about half of that is tied to PPW and those flow through in different time periods. The other models pricing models are based on cost and also a fair amount of open market, which gives us quite a bit of flexibility.
And so the way we think about pricing overall is that’s just the price in the lag and the type of model that we have is just part of the overall value capture negotiation and discussion with the customer.
As far as timing is concerned, we started flowing through and you can see some of the starting in the third quarter and more in the fourth quarter and as Ward indicated, accelerating into fiscal year 2022.
We start to see that right away. It will ramp up and it’s really based on a previously published price increase. It’s usually about six months to nine months for that all flow through. But again it doesn’t wait for the six months to nine months. It’s flowing through and it will continue in our case with the published price increases to date it will continue to flow through in the fiscal year 2022.
Thank you. That’s helpful.
And there are no further questions at this time. I would like to turn it back to Mr. James Armstrong for any closing remarks.
Thank you, Operator, and thank you for joining our call today. If you have any further questions, please don’t hesitate to reach out and have a great day.
This concludes today’s conference call. Thank you for participating. You may now disconnect.