WestRock's (WRK) CEO Steve Voorhees on Q1 2016 Results - Earnings Call Transcript

| About: WestRock Company (WRK)

Call Start: 09:00

Call End: 10:05

WestRock Co (NYSE:WRK)

Q1 2016 Earnings Conference Call

January 29, 2016 09:00 am ET

Executives

Steve Voorhees - Chief Executive Officer, Director

Ward Dickson - Chief Financial Officer, Executive Vice President

Jim Porter - President, Paper Solutions

Bob Beckler - President, Packaging Solutions

Analysts

George Staphos - Bank of America Merrill Lynch

Mark Weintraub - Buckingham Research

Mark Wilde - BMO Capital

Scott Gaffner - Barclays

Chip Dillon - Vertical Research

Anthony Pettinari - Citigroup

Debbie Jones - Deutsche Bank

Chris Manuel - Wells Fargo Securities

Adam Josephson - KeyBanc

Mark Connelly - CLSA

Phil Ng - Jefferies

Steve Chercover - D.A. Davidson

Operator

Thank you for standing by, and welcome to the WestRock Fiscal 2016 First Quarter Earnings Conference Call. This call will be an hour in duration. At this time, all phone participants will be on listen-only mode until the question and answer session of today's conference. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the call over to Mr. Steve Voorhees. Sir, you may begin.

Steve Voorhees

Good morning. Welcome to our conference call. I am Steve Voorhees, Chief Executive Officer. I am joined this morning by Ward Dickson, Chief Financial Officer; Jim Porter, President of our Paper Solutions business; and Bob Beckler, President of our Packaging Solutions business.

During the course of the call, we will make forward-looking statements involving our plans, expectations, estimates, and beliefs related to future events. Statements may involve a number of risks and uncertainties that could cause actual results to differ materially from those that we discuss during the call.

We described these risks and uncertainties in our filings with the Securities and Exchange Commission, including our 10-K for fiscal year ending September 30, 2015.

We will refer to non-GAAP financial measures during the call. We have provided a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in the Appendix of the slide presentation, which is available on our website.

Before we share the details about the quarter, I would like to comment on one of the questions I get asked most recently these days, how is the merger integration going. I am pleased to report the merger integration is going extremely well. I believe even more strongly today in this strategic rationale of the merger than I did when we announced the merger one year ago, we have the first or second leading positions in attractive global packaging markets and we are aggressively working to maximize the opportunities of the merger.

We are improving operational efficiency across our organization. We are executing on making meaningful progress toward realizing $1 billion in synergy and performance improvement opportunities, culturally building an outstanding WestRock team that is aligned and focused on building the premier global packaging company.

Our customers are very interested in using innovation to increase their sales and reducing their cost to increase their profitability. WestRock suite of paper packaging and merchandising products and services, across a multinational platform is enabling us to engage with customers in ways that no other company can.

We are an integrated global packaging solutions provider and this is resonating with our customers. We are executing on our strategy and we are working all together while doing so. We are taking advantage of the opportunities to improve our business through our investment in people, assets and acquisitions.

WestRock is a compelling value creation opportunity. We are well-positioned to deliver value for stockholders, we are strong believers in managing the business to generate cash, we have aligned our strategy and incentives to do just that.

During our first six months of operation, we generated $609 million or $2.33 per share in free cash flow after adding back after tax cash, merger and integration-related restructuring cost. For this fiscal year, we expect to generate in the range of $950 million to $1 billion free cash flow or approximately $3.75 per share based on our current share account.

We have demonstrated our commitment to returning capital to stockholders. We have repurchased $9.5 million shares over the past seven months and are paying an annual dividend of about $400 million.

We intend to maintain our dividend after the spin of Specialty Chemicals. At yesterday's closing stock price, our current yield of 4.7% would increase over 5% after completion of the spin.

Let us turn to the financial results for the quarter. WestRock sales for the quarter were $3.7 billion and adjusted earnings per share were $0.59.

Our last 12 months' credit agreement EBITDA margin was 16.9%. These returns are largely in line with our expectations.

Our Corrugated Packaging businesses performed well. The strong growth in bark sales in by sales in the United States, we have matched our supply with our customer demand. As a result, we have permanently closed three mills to shock in Newberg and Uncasville, with the total annual capacity of 675,000 tons.

Our resilient corrugated packaging operations continue to perform exceptionally well. This business is providing great current returns and also providing attractive investment opportunities to improve our returns over the next several years.

With added SP Fiber and Cenveo packaging businesses to our platform. We expect to complete our joint venture with Grupo Gondi during the first half calendar year 2016. All three transactions add to the strength of our business.

We have repurchased 4.1 million shares of our common stock since November. To-date, we have bought back 9.5 million shares under our 40 million share repurchase authorization. We reassessed our valuation of Specialty Chemicals business in light of changing market conditions and financial performance and lower comparative market valuations for their peer group.

We will reduce the estimated enterprise value of Specialty Chemicals business from the purchase accounting value recorded last July to approximately $1.6 billion.

As a result, we have reported non-cash goodwill impairment charge of $478 million.

We are making progress on the spin Ingevity. Earlier this month, we received a private letter ruling from the Internal Revenue Service; positively address each issue we needed to have addressed for the spin, including the removal additional limitations on WestRock stock repurchases.

We anticipate completion of this spin by early May, later than previously announced, due to the inherent complexities of the separation process.

The corrugated packaging team delivered outstanding results across our North American box business, with box shipments up 2.9% on a per day basis. Box prices were stable, sequentially. All regions of the United States did well, although we did have a slight decline in the West, principally due to a decline produce volumes.

We had particularly strong performance in ecommerce. We shipped 530,000 tons to domestic and export markets, including approximately 280,000 tons to domestic markets and 250,000 to export market.

Without SP Fiber, domestic shipments were 86,000 tons less than last year and our prices were essentially flat, sequentially, export channels continue to be price-competitive. Overall export pricing was down $9 per ton on a sequential quarter basis.

We actively managed our system to meet our customer demand and took 264,000 tons of economic and maintenance downtime in the quarter. The incremental cost of the economic downturn was $11 million year-over-year. The closure of the Uncasville and Coshocton mills will reduce our annual operating costs by $25 million.

The cumulative impact of these actions has balanced our containerboard system. We made solid gains in productivity with incremental contributions to pre-tax income of $36 million over the last year.

Brazil continued to perform very well both, individually and compared to the rest of the Brazilian market, with EBITDA margins of 24.8%.

The Tres Barras mill and our virgin fiber supply are competitive advantages in this market. WestRock's box shipments increased 1% compared to the prior year. This is significantly more than the overall market in Brazil, which declined by 5%.

Turning to the consumer packaging segment, our adjusted EBITDA margin of 14.2% grew by 160 basis points over last year. This was driven by strong performance in our packaging businesses, overall stable consumer mill volumes, productivity gains and energy deflation.

Pricing mix was stable for the quarter. External SBS volumes from our mill system were modestly down, largely related to the loss of our customer last year. Otherwise, we are seeing good growth in premium applications, including tobacco, commercial print and foodservice [ph].

While the SBS market is challenged by slower demand and processed food applications, we are continuing to perform well across the diversified mix of end markets that we serve. We are seeing a small amount of foreign competition in more commodity portions of the market such as foodservice plate in general market. This has not had an appreciable impact on our business.

In addition to external SBS sales, we are making good progress internalizing approximately 100,000 tons of incremental SBS production into our converting system from opportunities identified during the merger, the recent acquisition of Cenveo packaging businesses.

Also in the quarter, we continued the integration of more than 150,000 tons of the Carolina commercial print business that we acquired last year. This production transitioned fully to our SBS system earlier this month. The net result of the gains and internal converting [ph] in the Carolina acquisition increased the loading and production efficiencies of our SBS mill system.

The combined CNK and beverage packaging businesses deliver a good quarter as modest growth in global beer markets offset declines in carbonated soft drink volumes, particularly in North America.

Our CRB mills operated well during the quarter. We have executed on the $50 per ton price increase announced last summer.

With the Cenveo Packaging acquisition, we will internalize an additional 5,000 tons of CRB into our system. Our folding carton converting business continues to perform well. Volume growth exceeded that of the overall market. Pricing was slightly down as contract renewals were competitive and some food customers experienced declining volumes.

Home, Health and Beauty, had a very good quarter with strong European volumes more than offsetting some weakness in North America. Margin continues to improve with good mix, cost management and productivity.

Merchandising display sales declined due to lower promotional activity with key customers. The core business remains attractive and we are continuing to optimize the fixed cost structure of this business to improve profitability.

Turning to specialty chemicals, depressed oil prices have reduced demand for oil field chemicals and certain industrial products. This has made competing petroleum-based chemistries more economical.

Total sales during the quarter declined by $31 million compared to last year. Segment EBITDA of $32 million was a little more than half of last year's quarter. Segment profitability also reflected $8.5 million in outage and China start-up expenses.

The December quarter is seasonally the softest quarter for this business. Ingevity annual revenues running at more than $900 million and adjusted EBITDA now at an annual rate of approximately $200 million. The oilfield services business is now less than 10% of annual revenue at approximately $80 million, so this business is relatively small as compared to the total business.

We achieved record quarterly sales for activated carbon and asphalt additive products. We had good growth engines in the asphalt additives in automotive carbon, including the new automotive carbon plant that is starting up in China.

We have a strong profitable business, a very strong management team and the scale with which to operate as a successful public company. The long-term fundamentals of the business are sound and it will make for a compelling growth equity story.

Post-spin Ingevity will have reasonable leverage at about 2.5 times EBITDA. This will provide an immediate cash inflow of approximately 400 million to WestRock at the time of the spin, plus funding an additional $80 million of security for a capital always retained by WestRock.

Our land business results reflect a purchase price accounting step up of the assets to fair market value as of the July 1st merger. The step-up effectively removes what the anticipated development profit was at that time. This has no effect on cash flow, only on reported earnings.

Most important thing to know about this segment is that we are operating in Charleston, one of the healthiest real estate markets in the country.

We are looking at ways to monetize our portfolio faster than the normal development process would allow. We have already made some progress on certain projects and we expect to do more on this front. Over the last several months, we completed SP Fiber and Cenveo Packaging acquisitions with the total investment of approximately $400 million.

Both SP Fiber and Cenveo Packaging are great strategic fits with our business and strategy. We believe these businesses will generate excellent returns on investment. We expect to complete the Grupo Gondi joint venture investment in the next couple of months.

Mexico is a very important to our customers and to us, due to its proximity to the United States and a strong growth [ph]. We have been looking for a long time for the right opportunity to grow our capabilities in Mexico, and I believe that the partnership Grupo Gondi is the best way for WestRock to grown in Mexico.

WestRock will contribute $175 million in cash and our three Mexican box pants, and Grupo Gondi will contribute their business.

Based on current exchange rates in the last 12 months results, the joint venture on a pro forma basis has generated $670 million in sales and $135 million in EBITDA. Our box plants have generated about 10% to 15% of the $135 million.

We will have a 25% interest in the joint venture joint venture and the joint venture will have net positive cash on its balance sheet when the joint venture is formed.

The cash that we are contributing will be invested by the joint venture to support growth. WestRock will continue to provide the 200,000 ton that we have supplied to our three box plants and we will have continuing opportunities to supply additional tons as the joint venture grows.

We are currently executing on the opportunity to supply 25,000 tons of kraftliner to Gondi that we were not supplying six ago.

We will have the opportunity to build upon our combined relationships and capabilities to grow in the attractive paper and packaging markets of Mexico.

Now, I will turn it over to Ward for additional details.

Ward Dickson

Thank you, Steve. Total non-allocated expenses were $4.5 million in the current quarter. We reduced corporate expenses by $21 million and this is included as part of our $250 million synergy and productivity performance.

Our non-service pension income was $25 million lower than the $47 million reported last year. This was principally a result of our pension de-risking strategy, which was implemented to protect overfunded pension plan status.

We reallocated our investments to lower return asset categories, which reduced our pension income. Our U.S. -qualified plan have $6.4 billion in assets. These are 108% funded and have lost very little value during the recent market disruptions.

Our de-risking strategy made a lot of sense last summer and even more now. We are one of the few U.S. companies and the only one of our peers with an overfunded pension plan and we are careful to protect that value.

We have a very disciplined approach to realizing our synergies and performance improvements across our businesses and functions. We are executing on the opportunities and projects to reach our $1 billion goal and on track to reach this target by the end of fiscal 2018.

Our entire company is critically focused on delivering on and exceeding our goal. Work spans many areas; we are realizing procurement logistics savings using the power of the expanded size of our company to our advantage in purchasing around the world. We are benefiting from our comprehensive mill system, maximizing our ability to produce the right products in the right locations and in-sourcing paperboard throughout the system and we are continuing to use best practices from each former company to develop the right models and streamline our businesses and corporate functions across the Company.

We continue to make capital investments in our mills and converting operations with projects that reduce cost. Based on the strength of these and other initiatives, we exited the quarter at an annualized run rate of more than $250 million and are on track to achieve at least $450 million by the end of fiscal 2016.

Adjusted segment EBITDA declined $68 million, due primarily to the reductions in specialty chemicals, the land and development business and a reduction in pension income. Adjusted EBITDA of our core consumer corrugated packaging businesses and corporate expenses, excluding pension income increased by $15 million.

During the quarter, we generated $88 million in productivity, which demonstrates our continued focus on progress in this area. Our productivity more than offsets the negative impact of volume, price and other negative market factors. We continue to benefit from deflation in key energy categories.

Before turning it back to Steve, I want to take a minute to discuss our cash flow outlook and assumptions.

We generate significant cash flow and that is likely the key metrics that has not been fully appreciated in this stock market. For fiscal 2016, we are forecasting cash flow provided by operations of between $1.8 billion and $1.825 billion, and capital expenditures in the range of $825 million to $850 million.

As Steve reported, our net free cash flow should be in the range of $950 million to $1 billion. We are including Ingevity's results in this outlook for the seven-month period that they will be part of WestRock, and they will be excluded for the remaining five months. However, Ingevity's operating cash flow is equal to the forecasted capital expenditures for the period as they are finishing their growth initiatives in China and Brazil and the winter is their seasonally slower time of the year.

Our outlook reflects a view on the impact of recent PPW price changes in our corrugated packaging segment. Looking into the March quarter, there is a lot to be excited about in our business as we continue to execute on our strategy.

From a financial standpoint, there are more seasonal headwinds in the March quarter on a sequential basis. We will have more energy usage due to the winter weather and we will have some impact from the recent snowstorm that blanketed much of the Northeast. Wood will be more expensive than in the December quarter. In addition, the labor cost pool also resets with annual salary increases beginning as well as the new year of employment-related taxes.

The mart [ph] mill is undergoing a major maintenance outage in March that will have a $10 million impact on income in the quarter. In the corrugated business, export pricing will likely continue with some softening in pricing.

Currencies will also likely have some negative impact on the quarter. We will continue to deliver on our productivity and synergy, improvement program, which is creating a lot of value. When all of this is taken into account, we expect that the March quarter will be lower on an adjusted EPS as compared to the $0.59 posted in December.

I will now turn the call back over to Steve.

Steve Voorhees

Thanks Ward. Before I open the call for questions, let me summarize by saying, we are very pleased with our solid execution and the progress we have made and continue to make toward building the premier global packaging company.

Today, we have leading positions in our markets; we are expanding our customer relationships through a comprehensive offering across a broad geographic footprint. We are realizing the strategic benefits of merger and remain on track towards achieving our productivity improvements targets.

We are confident in our ability to successfully execute our growth strategy and generate strong cash flow, enabling us to deliver value for our stockholders and customers.

With that, we are pleased to respond to your questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question and answer session of today's conference. [Operator Instructions] Our first question is coming from Mr. George Staphos, sir your line is now opened.

George Staphos

Hi, everyone. Thanks for the details and for taking our question. My two questions will be to extent you can comment around cash flow EBITDA. If we assume no changes in prices going forward, because obviously you can't do that, when we rework the free cash flow guidance, we would get EBITDA somewhere in the range of about $2.1 billion. Is there a way that you could comment to whether that is a reasonable forecast at this juncture? If not, can you remind us of any other a large cash items we should be thinking about, cash interest, cash taxes that you did not show on Slide 14?

Steve Voorhees

Yes. George. I am going to let Ward respond to that.

George Staphos

Thank you.

Ward Dickson

George thank you. Again, what we provided was free cash flow guidance of $950 million to a $1 billion. We also included the pension post-retirement funding. Working capital assumptions in our book tax rate of 34% to 36%.

The other thing to consider, the D&A. We had million $294 million of D&A in the quarter Ingevity is about $7 million to $8 million a month, so we will have the D&A for them for the remaining through the seven-month period.

Cash taxes will be less than book. Share based comp will be a source, equity and income and unconsolidated affiliates with the investment in Gondi will actually be a use. These and other balance sheet item over the course of the year should generate between zero and $25 million of source.

George Staphos

Okay.

Ward Dickson

…for the remainder of the year.

George Staphos

All right. Ward, thanks for that. Then I guess my other question - I appreciate all the detail. I am going to just the outlook. Can you any commented all in terms of how bookings have been thus far in the quarter, just you know an overall comment about how the corrugated markets in particular have been early in the fiscal 2Q. Thank you very much.

Steve Voorhees

Jim?

Jim Porter

Good morning, George. Jim Porter.

George Staphos

Hey, Jim.

Jim Porter

First, I would like to highlight how excited I am about the progress at our corrugated container business has made and just continue to make progress in so many areas. The investment that we have made in our people and processes and capital equipment improvements, have really given us exceptional quality and service for our customers that is being rewarded by increased business and I highlight that with, we have 12 months in a row in which our box shipments have exceeded the FBA industry, so we are quite proud of the progress being made.

This last quarter, we were up 2.9% on a per day basis and that demand continues to be strong. Now after 12 month of exceptional growth, we are going to be entering a period, where the comps are getting tougher, but current demand as evidenced by our backlogs continues to be strong.

Now, as Steve mentioned, we have had some weather events to start January, that will probably put a dent in those numbers, but we expect that by the end of the quarter we should be flat on a year-over-year basis.

Operator

Thank you. Our next question is coming from Mr. Mark Weintraub of Buckingham Research. Sir, your line is now open.

Mark Weintraub

Thank you. I wanted to just to follow, Steve, you had mentioned that $950 million to $1 billion of free cash flow on a per share basis, where the share count today is 375, but of course you do have the share repurchase authorization in place for an additional 35-plus million shares and given the cash flow, given the dividend that comes in from Ingevity, given that you are below your targeted cap [ph], presumably you are in a position to act fairly aggressively and perhaps expeditiously on that share repurchase and I was hoping to get a sense as to what your thoughts on the timing might be and just to throw in there is a part of the question is, when the share repurchase program was originally authorized, the stock was North of 60. Now it is closer to the 30. Were you conceiving of the repurchase as the dollar amount conceptually internally or as a number of shares, and given that the - if share price were to stay at this bargain basement level, would you potentially be in a position to buyback even more over time?

Steve Voorhees

Mark, when we announced merger, we had our balanced capital allocation strategy when we had the authorization for 40 million shares. I feel like we follow through on that very well with the purchase of 9.5 million shares.

When I think about balanced capital allocation, I look at the opportunities that we have to invest in our business, make acquisitions and buy back stock, and I will tell you based on the current price, the share buyback has risen in attractiveness to us.

Just the cash flow that we have, the dividend that we pay, it is attractive for us to buy back stock. With respect to aggressive or timing, I think we will see how the quarter goes. I can't really speak to exact on timing, but I will tell you the buyback is much more attractive than it was when the price was higher.

Mark Weintraub

Thank you.

Operator

Thank you. Our next question is coming from Mr. Mark Wilde of BMO Capital. Sir, your line is now open.

Mark Wilde

Good morning, Steve. Good morning, Ward.

Steve Voorhees

Good morning, Mark.

Mark Wilde

Just to follow-on Mark's question, would you consider an accelerated repurchase programs just to take advantage of stock of $31 to $32 a share?

Steve Voorhees

We have considered that I think as we have gone along and advice we have got and it is not the most efficient way to buy back stock. We have been able to buy 9.5 million shares without an accelerated share repurchase, so like never say never, but when consider to, we included the open market purchase routes and more efficient way for us to buy back stock.

Mark Wilde

Okay. Then the other question I had is just on the boxboard market. I wondered, Jim Porter, if you can give us kind of an update on kind of global boxboard markets across all three of your substrates. I guess we are thinking about new capacity over in Europe, but also what affect all of that Chinese capacity is having in global markets around the world. It sounds like we are even seeing some of that coming to the U.S.

Steve Voorhees

Good morning, Mark. I am going to have Bob Beckler take the lead on that and I will piggyback as necessary.

Bob Beckler

Hi, Mark.

Mark Wilde

Hi, Bob.

Bob Beckler

Yes. Let me just do a quick run through starting with CRB and CNK, where backlogs are up from a year-on-year standpoint. Although, sequentially, we have seen some expected using that is really seasonality. Overall, we are in good balance from a supply and demand standpoint and the markets are generally stable.

On SBS, the demand that we are seeing in the higher end premium markets, where we concentrate our efforts has been stable to up slightly and that is a global statement. Backlogs are s stable and pricing is stable.

Considering the internalization that Steve mentioned in his opening comments, which came from opportunities that the merger created to the recent acquisition of the Cenveo packaging business to the acquisition last year of the Carolina commercial print business, this brings a lot of SBS into our system that we are now producing internally, so in terms of near-term outlook will be up solidly.

Now, specific to Europe, what we see there is imports are attempting to penetrate, primarily in the more commodity end of the market. Such as general markets and foodservice plate stock, where we have less of a position, so in terms of direct impact for us, it has really been zero out of euro.

Then in terms of Chinese imports, which I believe was your question. Again, we are not seeing a significant impact there. The hurdles are fairly high at this stage for competition on that front. We have an advantage cost position. Again, we focus on a very diverse range of higher end markets. We have the quality advantage and not to mention there is a very high hurdle rate around the very complex supply chain that exist. It is a very complicated market to serve with very demanding customers service requirements that we are well-positioned, so net-net, not much effect that we are seeing from an import standpoint.

Mark Wilde

Okay. Is it possible to get any color? You have mentioned the loss of a key customer in the third quarter last year. I do not recall hearing about that before. Can you just quantify that for us and give us maybe a little bit of color?

Steve Voorhees

Yes. Mark that was one specific customer, in our liquid packaging sector that occurred about the seven or eight months ago.

Just add to the comment, we are obviously offsetting that with the lose that I outlined earlier and continued modest growth in the premium sectors that we that we focus on such as tobacco, foodservice, cup stock and commercial print.

Operator

Thank you. Our next question is coming from Mr. Scott Gaffner of Barclays. Sir, your line is now open.

Scott Gaffner

Thanks. Good morning.

Steve Voorhees

Good morning, Scott.

Scott Gaffner

Hi. Steve. I just wanted to go back for a minute to the SP Fiber acquisition, because you know, since then you have closed about 675,000 tons capacity and you had a couple of key comments here in the presentation on the rationale for that acquisition, but can you just maybe go a little bit deeper on what exactly SP Fiber provide maybe from a product portfolio perspective that you did not have before or couldn't get by investing in your own system?

Steve Voorhees

Jim?

Jim Porter

Yes. I will take that Steve. First of all, we are really excited about the opportunity to have acquired the SP assets, specifically the Dublin, Georgia mill. I think the proposition goes back to how we look at our markets and in our quest to improve the cost of the system, but you have seen us behave consistently in a way that we matched our supply with demand. Then over the last number of quarters, we have tried to balance our system through a combination of temporary shutdowns slow backs and permanent closures to get our system in just the right balance with our demand.

The acquisition of SP Fiber in October gave us the capability to add $575,000 tons of really excellent quality, low-cost, lightweight packaging great papers in the center of our neural network of supply chain, so that gave us the ability to build a very granular plan in order to improve the cost structure and service capability of our system, so that allowed us to first permanently close the Coshocton mill in November.

Secondly, to close permanently the Newberg, newsprint and packaging great mill in mid-November and our latest move to close Uncasville, medium mill, which will be permanently shut by January 31, so this acquisition has given us the ability to provide a very good quality market demand substrates in a lower cost both, fixed and operating and has allowed us to balance supply with demand in a much more efficient way taking 675,000 tons out of the market, so I hope that gives clarity to our move.

Scott Gaffner

That is great. Steve, just following up on that, since you have done the merger, you did the two acquisitions SP Fiber, Cenveo, also the JV, obviously, acquisitions have been a key part of the WestRock going back to the RockTenn story historically. Do you see that continuing going forward? Are you reaching sort of maximum capacity as far as - I mean, obviously not from a leverage perspective, but from a management bandwidth perspective to keep doing these smaller bolt-on acquisitions or should we see them continue at this pace going forward?

Steve Voorhees

I think it is a function of priorities. If you look at the opportunity set that we have, we have an incredible opportunity to operate our businesses even better than they have. We have a lot of opportunity to bring more money to the bottom-line through a focus on our own business, so when I look at our priorities, I think, acquisitions is probably less of a relative priority than it might have been in the past, because of the opportunities we have to combine our organizations and go-to-market and operate even more efficiently. I think internal focus is probably a relatively greater priority than it would have been to me previously.

Now, having said that, the acquisitions that we have made I think have been strategic and been helpful to our business, so we will continue to look at them, I just do not see them as, in response to your question, as high priorities might have been in the past.

Operator

Our next question comes from Chip Dillon of Vertical Research Partners. Your line is now open.

Chip Dillon

Yes. Good morning, gentlemen. I think, the first thing I think the previous questioner had said, 275 million shares. I just want to clarify your 257. At least, you are on average in the quarter, is that right? Hello?

Steve Voorhees

Yes. Could you repeat the question, Chip?

Chip Dillon

Yes. I just wanted to clarify that share count was 257 million, not 275. At least that was the average, I think in the press release.

Steve Voorhees

Yes. It was 257. Yes. I got it now that was 257. I think it different - basic and diluted shares.

Chip Dillon

Okay. Thanks guys. I just wanted to clarify that. I guess this is either for Jim are Steve. Could you just let us know as you look at your box situation in the United States, I would assume and what I have always been told is that where you do have index contracts, the analysts [ph] are totally tied to I guess that we see pulp and paper weak kraftliner price as opposed to some of the other you know recycled grade as they track. Is that still fair for your company?

Steve Voorhees

Yes.

Chip Dillon

Okay. Were you all surprised by the action they took last weekend or what did you think of that?

Steve Voorhees

I would say, everybody was surprised, including us. I think Jim is going to comment more on that.

Jim Porter

Good morning, Chip. I would have to say yes. We were very surprised to see specifically linerboard and white top linerboard published down by $15. We simply have not seen virgin containerboard down in the market. We have seen and heard of customers discounting some of the smaller recycled principally medium volume in the market.

However, our linerboard and white top has not been dropped and those factor supported by the fact that our domestic containerboard prices, excluding the addition of the recent SP mill, which we are fitting into our system has been flat year-over-year and flat, sequentially, so we are just simply not seeing that price drop, particularly in the virgin grade, so we were very surprised by that.

Operator

Thank you. Our next question is coming from Mr. Anthony Pettinari of Citigroup. Sir, your line is now open.

Anthony Pettinari

Good morning. Following the mill closures and the acquisitions, a lot of moving pieces, is it possible to share what your containerboard integration rate is and is there a rate that you think is sort of an optimal integration level for WestRock or is that not how you think about improving margins. Just if you could give any color there.

Steve Voorhees

We are currently in the range of in the high 60s, 67% to 69% integration within our corrugated system and we certainly do look at that. We think about our round number is 8 million ton containerboard business through three channels.

One is our outstanding domestic corrugated packaging business, which we have seen growing and their capability to penetrate the market. We then see the North American domestic sales and then the international sales.

When we look at how we maximize our portfolio of product and margin through those channels and the integrated corrugated box segment is one that is attracted to us and we will look for continued growth through organic means and certainly we look at acquisitions. They have been pretty price-related.

Steve Voorhees

Just in terms of priority, the best thing we can do for the corrugated packaging business is sell more boxes and that is exactly what we have been doing over the past several years. We have invested in capital, people, processes. I think, that team has just done, in my view an outstanding job for a long period of time showing up in the results.

Anthony Pettinari

Okay. That is helpful. Then just with Ingevity, you know, you mentioned complexities that are pushing the spinout a bit. Could you give any color there? I mean, are those issues related to the transaction that are taking a little bit more time than you expected or is it kind of choppiness in the capital markets or the complexities of separating the assets, just wondering if you could give any color there.

Complexities are by nature of complex. If I had to pick one, which was I guess a little bit surprising to me, it is the step plan to put everything in place with a number of foreign entities in the U.S. I think that has just required a lot thought. There was a lot tax implication to that, so if I had to pick, that would be it, but there is several of them.

Anthony Pettinari

Okay. That is helpful and maybe just one last one.

Anthony Pettinari

Okay. That is helpful. Maybe just one last one. Regarding the mill closures, do you have to build inventories at sister mills in advanced of the closures to give yourself a little buffer or how does the closure sort of impact your inventory levels maybe over the next three months?

Steve Voorhees

Inventories are something that we very granularly manage for the on-time delivery and services required by both, our internal and external customers to meet their demands. Then we have seen over the past couple of years that we are benefitted by generally increasing our standard levels of inventory. This take big dividends and our ability to serve our corrugated box customers.

As we think about inventories, particularly with down time season, we do build volume. While we have just gone through a sequential decline in our internal inventories, you will see us building somewhere in the 90,000 ton range over the next couple of months, which will then be absorbed by our annual shutdown schedule. When you get to the end of the fiscal year, we should be back at par with our standard inventory levels, so that is how we look at our system.

Anthony Pettinari

Okay. That is very helpful. I will turn it over.

Operator

Our next question is coming from Ms. Debbie Jones of Deutsche Bank. Ma'am, your line is now open.

Debbie Jones

Hi. Good morning.

Steve Voorhees

Hi, Debbie.

Debbie Jones

I wanted to turn to Brazil for second. You have a great assets down there. I think that there has been a lot of focus on your options in the U.S., but could you talk about your strategy going forward there and also just kind of characterize how you see the market?

Steve Voorhees

I am going to start and I will let Jim to chime in. I think Brazil is just a tremendous business for us. It shows up in the financial results. We implemented a project few years ago, which has really put Brazil on a great track and we have a number of options to be able to improve the business over time through capital investment. I think we are looking at that both internally in Brazil to get larger in the box business in Brazil, so I think market in Brazil have the opportunity to kind of add that to our system, if you will, to sort of exports markets. Jim?

Jim Porter

Yes. Steve, you covered it well. The only thing I would add is emphasis on the fact that we will have a great business in Brazil, and those investments have really paid off over time. That team is extraordinary in their ability to manage within a very difficult market conditions, but they really have premium assets. Our significant force resource give us a real competitive advantage in that region. We have one of the most modern virgin containerboard mills in the world at the Tres Barras facility that produces an extraordinary product that give us competitive advantage.

Our box system is capable of integrating that volume to penetrate the marketplace. In the way, as we reported that has grown far in excess of the local economy, and because of the currency you have seen us increasing our export volumes out of that region, which are certainly advantaged in the global markets today, so we are quite bullish on our capability to serve and grow in that region.

Debbie Jones

Okay. Thank you for that. If I could just ask one follow-up, on your synergy and performance target just for the year, I think you took that out from 450 from 400. Can you just confirm that, and then what would the delta represent?

Ward Dickson

Debbie, this is Ward. Yes, we did do that and the driver has been the acceleration of some of the procurement savings. We are also going to have the benefit of some of the mill closures that we discussed as well and their impact on reducing costs.

Debbie Jones

Okay. Thanks. I will turn it over.

Operator

Thank you. Our next question is coming from Mr. Chris Manuel of Wells Fargo Securities. Sir, your line is now open.

Chris Manuel

Good morning, gentlemen. A couple of quick clarification questions and then one kind of new topic. The quick clarification questions, when you referred to the upper 60 utilization, 67 to 69, does that include - can I think about the tons you closed I guess they are mostly out now, but what you are viewing is the upside opportunities from Grupo Gondi putting extra in there and some of the other elements of the utilization rate you run today. I guess, what I am trying to get a sense of is to where that could go potentially with extra tons you bring in-house, integration?

Steve Voorhees

I do not know that I want to put a forecast number out there. The number I gave you is really the zone that we are operating in when we look at our internal North American containerboard system supply with our internal North American container system box shipment, so that is really the math on that.

Certainly over time, as I said earlier, we look at channel optimization and our box system is attractive place for our containerboard to flow.

Chris Manuel

The second topic I wanted to actually discuss was on inflation side, so you are running at about - you have given us some run rate, where you are working through 250 on the run rate moving higher through the end of the year. What do you think inflation looks like this year? I mean, you have got some puts and takes, you have labors obviously moving higher, you had some help on a few of the other input elements energy et cetera, but what do you think for fiscal year, what is your inflation kind of shakes out at?

Ward Dickson

Yes. This is Ward. Clearly, we are getting the benefits year-over-year in the first quarter on the decline in primarily the energy-related input costs. The wage and benefit inflation is very predictable and will flow as we have laid out and you have seen the quarterly profile of it.

As we start to get out into the second half of the year, I think our projections on a year-over-year basis is that they moderate. We do not get as much of the benefit because of the declines that took place in the second half of the last year. The one wildcard for us as we look out that far is what do we think the trends will be for OCC and recycled fiber.

Chris Manuel

Okay. I guess it is not going to chew up all [ph] over with your savings, but I mean we ballpark can say it is half of it or two-thirds of it. You can end up keeping same, because it is a little bit low on an inflation year that way or - just try to give us a sense of sense as to how to quantify it?

Steve Voorhees

It will clearly be less than the productivity that we generate, but it will be a component of the P&L, which includes obviously pricing and mix, foreign exchange and volumes.

Chris Manuel

Thank you.

Operator

Our next question is coming from Mr. Adam Josephson of KeyBanc. Sir, your line is now open.

Adam Josephson

Thanks. Good morning, everyone.

Steve Voorhees

Hi, Adam.

Ward Dickson

Hi, Adam.

Adam Josephson

Steve, you talked about the three containerboard mill shuts having balanced your system, so should I interpret that to me and that you are finished with the mill closures for the time being?

Steve Voorhees

Yes.

Adam Josephson

Okay. In terms of the - we see price reduction, can you quantify or perhaps the impact, the expected impact on your EBIT this fiscal year?

Steve Voorhees

When we gave you the cash flow guidance, we said that we reflected the PPW movement in that guidance. In fact, we updated all the assumptions that we have volumes, price, inflation and our realization of productivity. There are so many moving parts with 15,000 customers and agreements that we have that, I think, we are comfortable with our overall cash flow model, but we are not going to speak specifically to pricing and market movements that affect our customers more specifically.

Adam Josephson

Sure. One more on that free cash flow guidance. I know you said earlier, you expect cash taxes to be below book. Can you help us just with what you expect the cash tax rate to be versus the book rate in '16 and beyond '16 for that matter?

Steve Voorhees

In '16, it will be I think mid-to-high 20s. Then as we move into '17, I think, book and the cash will start to converge.

Adam Josephson

Thanks. Just one last one Ward. In terms of the seasonality of your business, obviously given that this is a new company, if I look at consumer packaging in fiscal '15, EBITDA in the second quarter was down quite a bit, sequentially, from the first quarter and then 3Q and 4Q are substantially higher than the first two quarters. Is that normal or what should we expect in terms of the seasonality of that business and why? Thank you.

Ward Dickson

In both businesses, I mean, we talked about the fact that we have higher energy costs. In the winter periods, we also have the impact of the reset of inflation, wages increases and the reset of payroll taxes as we moved from quarter-to-quarter. Clearly, our volume start to ramp up in the second half of the year in both businesses.

Adam Josephson

Thanks a lot, Ward.

Operator

Our next question is coming from Mr. Mark Connelly of CLSA. Sir, your line is now open.

Mark Connelly

Thank you. Steve, you have pushed back the timing of Specialty Chemical, but what is the rush? I mean, we have certainly seen another big chemical business spun recently when it was down and the shareholder situation did not turn out really well. I guess, I am just wondering, how do you figure the balance between the desire to clean up the portfolio quickly and the need to protect shareholder in such an uncertain market.

Steve Voorhees

I am glad you ask that question, because we have gone through and done, I think, a fair amount of thinking about that question ourselves. I think I start with we are a paper and packaging company. We are not a specialty chemicals business, so the business does not really fit with our portfolio.

We have put in place, I think, a very strong management team and the business is going to perform better on its own than it would be as part of the WestRock.

I think you can go through the alternatives, and I think the spend it makes the most sense. You could say, well maybe I could look at some other alternative, but we just think this is for the shareholders and for WestRock, obviously most effective thing for us to do. I think going to May, I think, is going to help the team get off to a good start and they are going to all put together, I think, a very compelling story for investors the value of Ingevity.

Mark Connelly

Okay. Just one more question, Steve. Will WestRock significantly realign the product development priorities within the consumer division? You say you are going to be integrated packaging company, but perfumes spritzers and one care dispensing. I mean, where do you draw the line?

Steve Voorhees

We are going through that now. We have innovations, primarily capability of WestRock. We have extremely talented people in the organization to be able to do that and I think we are going to be customer and market-driven, so we will take the guide from our customers to match with our capabilities and prioritize that one.

Mark Connelly

Okay. Thank you.

Steve Voorhees

Thank you.

Operator

Our next question is coming from Mr. Phil Ng of Jefferies. Sir, your line is now open.

Phil Ng

Hey, good morning, guys. The question for Ward, I think since your Ingevity business, you are owning it up to May, most of that cash flow is generated in the last five months of the year. What would your free cash look like if you owned it for the full year. I guess ask differently, how is your free cash flow. Is your free cash flow guidance a pretty good proxy for or what WestRock core would generate? Thanks.

Ward Dickson

I think the easiest answer is yes. Our free cash flow guidance is a good proxy for the core WestRock post-event.

Phil Ng

Okay. That is pretty impressive. That imply s 14%-type free cash flow yield here. Okay. Then I guess switching gears a little bit, perhaps the question for Jim. You guys have done a fair amount of heavy lifting in terms of closing three paper mills here.

Did you need to take any more down time going forward, just what is your view on the broader market and can you provide a sense how demand is going to look for the full year. You provided some color in the first quarter?

Jim Porter

We have done a fair amount of very granular planning on how we improve the portfolio of our assets. Through all those moves, we have put our system in excellent balance and reduced our cost structure and we like our system where we are right now. We think we are poised to supply the market in a very efficient manner and we see generally a trend line of improving demand both, globally and in North America in our products, so we continue to be very bullish on our business.

Phil Ng

Okay, so you would expect demand just from a year-over-year perspective to firm up over the course of the year, because you said flattish-type volumes in the fiscal 2Q?

Steve Voorhees

I would.

Phil Ng

Okay. Just one last one for me. I know merchandizing display has been lower weak. Can you talk about how trends are shaking out there and if some of the operational issues you guys had last year has passed at this point? Thanks.

Steve Voorhees

The operational issues are past. I think, what we reported is promotional activity is down and promotional activity is by definition hard to predict, so we like to display businesses part of our portfolio, provides us a great entrée and great capability to help us work with our customers, so it is I like the business, I would like to see if there are being more promotional activity and I think that will come.

Operator

Thank you. Our next question is coming from Mr. Steve Chercover of D.A. Davidson. Sir, your line is now open.

Steve Chercover

Thank you. Good morning. Two quick one. First, I am wondering how corrugated and consumer packaging complement one another. Have you gained new customers on either side from customers looking for a one-stop-shop?

Bob Beckler

Steve, this is Bob Beckler. Great question. It is just one of the benefits of the merger that we are continuing to realize and gain momentum.

Within the largest customers of WestRock, there is overlap between our packaging lines of business, and in some cases packaging and paper board. It is substantial. The number, I think, we included in one of our slides is that our top $2 billion of customers participate in multiple product lines, and if you just take those customers with the upside that we see from an addressable market standpoint, we could see an additional $1 billion of opportunity just in that customers set, so it is still work in progress, but customers are definitely recognizing the benefits of, you call it a one-stop-shop, but it is really unique in the global industry to have these many capabilities under one roof.

Steve Chercover

Do they ask for a packaged deal? No pun intended?

Bob Beckler

No. We are really not seeing that as much as opportunities to enter into other products that they have. I think, if your question is are they trying to leverage that to their advantage, not so much that versus how can they increase their ease of doing business - complexity in their own supply change.

Steve Voorhees

I will just add. I am Steve. There is a gradation between corrugated and customer, the folding carton becomes micro fluid, become free print and often times the buyers were trying to choose between folding cartons and corrugated and we are just ideally position to help them work through those issues, because we are just understood and helping our customers be successful and we can do that more effectively with the broad product line without a bias on one substrait, one particular type of package.

Steve Chercover

Then I want to take one more stab at marking Mark's question. If you wanted to buy more than 40 million shares, do you have to go back to the Board for authorization?

Steve Voorhees

The answer is, yes.

Steve Chercover

Great. Thank you very much.

Steve Voorhees

Okay. I think we have completed the hour, so I just want to take the time to thank you for your time and attention. I think, we are making great progress in executing our plan to create value. We are growing our business, generating strong cash flow and realizing our synergies and performance improvements. I like what we are doing by expanding our customer relationships based on the breadth of our product offerings, we are using our capital to grow and invest in our business and return cash to stockholders.

I think WestRock is a compelling value creating opportunity, and I thank you again for joining us this morning. Thanks.

Operator

That concludes today's call. Thank you for your participation. You may disconnect at this time.

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