Westrock's (WRK) CEO Steve Voorhees on Q2 2016 Results - Earnings Call Transcript

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Westrock Company (NYSE:WRK)

Q2 2016 Earnings Conference Call

April 29, 2016 10:00 am ET

Executives

Steve Voorhees - CEO

Ward Dickson - EVP, CFO

Jim Porter - President, Paper Solutions

Analysts

George Staphos - Bank of America Merrill Lynch

Mark Weintraub - Buckingham Research

Mark Wilde - BMO Capital Markets

Anthony Pettinari - Citi

Adam Josephson - KeyBanc

Scott Gaffner - Barclays

Mark Connelly - CLSA

Chris Manuel - Wells Fargo Securities

Chip Dillon - Vertical Research Partners

Phil Ng - Jefferies

Operator

Welcome to the Westrock Fiscal 2016 Second Quarter Earnings Conference Call. For today's conference, all participants are in a listen-only mode. We will have a question-and-answer session after today's discussion. [Operator Instructions] The call is being recorded. If you have any objections please disconnect at this time.

I'll turn the meeting over to your host, Mr. Steve Voorhees. Sir, you may now begin.

Steve Voorhees

Thank you, Viviane. Welcome to our fiscal 2016 second quarter earnings call. I'm Steve Voorhees, Chief Executive Officer. I'm joined this morning by Ward Dickson, Chief Financial Officer; and Jim Porter, President of our Paper 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. These statements may involve a number of risks and uncertainties that could cause actual results to differ materially from those that we discussed during the call. We described these risks and uncertainties in our filings with the Securities and Exchange Commission and include our 10-K for the fiscal year ending September 30, 2015 and our 10-Q for the period ending December 31, 2015.

We will refer to non-GAAP financial measures during the call. We provided reconciliations of these non-GAAP measures to the most directly comparable GAAP measures in the appendix of the slide presentation which is available on our Web site.

Before Ward and I discuss our quarterly results in detail, I want to take a moment to underscore the reasons that Westrock is a compelling value creation opportunity. Westrock holds number 1 or number 2 positions in attractive paper and packaging markets by providing differentiated tailored packaging solutions that help our customers win in the marketplace.

Our strategy is sound, and we are achieving the objectives that we outlined when we created Westrock. We've already delivered $350 million or over 1/3 of $1 billion synergy and performance improvement target in the past nine months. We expect to be at an annualized run rate of $450 million to $500 million by the end of our fiscal year in September.

We've added to the strength of our business. Most recently through the formation of our joint venture with Grupo Gondi, the leading paper and packaging company in Mexico and with the separation of Ingevity over the next two weeks we will remove a non-core business from our portfolio.

We manage our business to generate long-term cash flow and we're maintaining our free cash flow guidance of $950 million to $1 billion for fiscal 2016. After adjusting for the separation of Ingevity this would provide an attractive 10% free cash flow yield at our current share price.

We're returning our free cash flow to stockholders through our $1.50 per share annual dividend that we plan to maintain after the separation of Ingevity. We're continuing our balanced capital allocation strategy that includes paying a very attractive dividend, reinvesting in our businesses, pursuing bolt-on acquisitions and share repurchases with our 2.25x to 2.5x leverage ratio target. All told we're executing well on our strategy and this is reflected in our results for the quarter.

Westrock sales for the March quarter were $3.7 billion and adjusted earnings per share were $0.61. We performed well both commercially and operationally. Over the last 12 months, our credit agreement EBITDA margin was 17.4%. We generated adjusted free cash flow of $81 million in the quarter and a total of $432 million fiscal year to date. The impact of our synergies and performance improvements is being reflected in our reported financial results. The March quarter productivity improvements increased EBITDA by $103 million year-over-year.

We repurchased 3.7 million shares in the March quarter at an average price of $39. About half of these purchases were in January at a price of $43 per share. The other half of these purchases were in February and March at an average price of $35 per share. Since July 1, with the inception of Westrock, we've repurchased 11.2 million shares and we've returned $856 million in capital to stockholders through dividends and share repurchases.

In the corrugated industry, domestic in these markets are flat to slightly up. Operating rates have continued to be in the mid 90s with declining inventories overall and we're headed into the seasonally stronger time of the year. Our Corrugated Packaging business continues to improve with good operational and commercial execution. eCommerce, dairy and produce markets were strong for us in the quarter with some softness in beverage, retail and bakery.

Corrugated Packaging net sales in the quarter were $1.9 billion with EBITDA of $316 million. North American corrugated EBITDA margins of 17.5% increased by 20 basis points over the prior year. Total segment shipments in the quarter were 2.2 million tons, an increase of 5% over last year and in large part to the increased craft bag volumes at our mill in Dublin, Georgia.

We continue to balance our supply with customer demand. The majority of the 30,000 tons of economic downtime that we took this quarter was medium downtime in January and in advance of the final closure date at Uncasville. Our mill system was in balance during February and March. We've taken 35,000 tons of maintenance and economic down time so far in April, 10,000 tons of the 35,000 has been economic downtime.

Our shipments of containerboard to the domestic independent market declined by 8,000 tons sequentially. Our average price per ton for this portfolio of sales to this market increased by between $1 and $2 per ton sequentially. This was principally due to the positive mix change where we sold an increasing proportion of liner and white top liner.

Export demand remains solid although pricing remains very competitive due to the strength of the U.S. dollar and the availability of supply from Brazil, Russia and Finland.

We exported 304,000 tons, 18,000 tons more than last year, while our mix of export business was consistent with 62% going to Latin America and the rest going to a combination of Europe, the Middle East and Asia. Our portfolio of export pricing declined $43 per ton compared to last year and was down $18 per ton sequentially.

Turning to our North American box business. Our box pricing was stable both compared to last year and sequentially. Our domestic box shipments were slightly up on an absolute basis and down 1% on a same day basis as compared to last year. Last year was a very strong quarter for Westrock and is therefore a very tough comparison. We're experiencing similar pricing and volume trends so far this quarter. We feel good about the demand environment and see positive momentum with the commercial opportunities we have and how we're competing and winning in the marketplace. We're improving operationally as a result of our productivity programs and our ongoing capital investment to upgrade our capabilities.

We're now installing the 21st of 30 EVOLs a project that started two years ago that we expect to complete by the middle of fiscal year 2017. We've grown our volumes in excess of the industry and 13 of the last 15 months and continue to be confident in our ability to profitably grow our box business.

In Brazil, our performance remains strong despite challenges the country is facing. Our combined corrugated box and containerboard shipments increased by 13%. We're capitalizing on strong note performance and weak local currency to profitably export linerboard to offset the impact of a contracting domestic box market.

Now turning to our Consumer Packaging business. Favorable financial performance year-over-year was driven by strong operational and commercial performance and we continue to realize merger synergy benefits. Consumer Packaging net sales for the quarter were $1.6 billion and EBITDA was $224 million up from the $181 million in the prior year quarter. We delivered $58 million in productivity improvements year-over-year reflecting the great progress that we're making in integrating our Consumer Packaging businesses and realizing the synergies and performance improvements available to us.

Industry backlogs for all of our consumer board grades stabilized during the quarter. We exited the quarter with backlogs ranging from two to four weeks and are now moving to the three to five week range.

In SBS, our shipments increased 50,000 tons in the second quarter. This was fueled by solid growth in tobacco, foodservice, the onboarding of the Carolina brand business and additional internal demand from our folding carton plants. Tobacco, we're continuing to have success in business development with China Premium tobacco brands. We see solid growth in foodservice costs driven by the ongoing conversion of foam cups to more sustainable paper cups.

In commercial print, we're successful in working with our merchant partners to capitalize on the strength of our expanded offering of SBS for commercial print. This offering now includes both the Carolina and Tango brands. We're pleased with the integration of the Carolina brand and we manufactured 12,000 tons of this product in the quarter. We expect the Carolina tons that we manufactured to increase to an annual rate in excess of 150,000 tons during the June quarter.

Our Covington and Demopolis Mills performed so well that we needed to balance supply with demand in our SBS system. As a result, we produced 41,000 tons more pulp primarily at Evadale. Pulp prices were $73 per ton lower than last year, this is reflected in the pulp pricing mix shown on the bridge.

More broadly, in the paperboard markets, we're seeing limited penetration from European and Asian competitors. Pricing was stable in our core markets with some discounting and more commodity portions of the foodservice plate and folding carton markets. The recent published price reductions covering SBS, CRB and URB and pulp and paper week will have limited impact in Fiscal Year 2016. This limited impact was reflected in our cash flow guidance.

The SBS price decrease applies only to general folding carton markets to less than 50% of our total SBS volume. The folding carton markets remain challenged by soft primary demand for processed, frozen and dry foods. This is consistent with the ongoing consumer preference for fresh foods and the shrinking center of the supermarket. With this backdrop of folding carton team performed exceedingly well during the quarter and is benefiting from our differentiated strategy. We're now onboarding new folding customers that were previously only box customers of Westrock and we've secured new business for our SBS, CRB and CNK systems.

Folding carton volumes grew by 6% in the quarter and 2% excluding the impact of the Cenveo acquisition. Integration of the Cenveo facilities into our folding carton business has been successful; the business is performing at expectations. Our beverage business, we've achieved gains in global beer and sparkling water market that offset the continued weakness in traditional carbonated soft drink demand primarily in North America. We are growing with customers that have packaging needs that correspond well with our strategy and capabilities including craft brewers, new product introductions and paper board multi-packs in Latin America and China.

Home health and beauty had a very strong quarter with EBITDA margins of more than 18% driven by positive sales mix especially in Europe. Continued cost focus and a record productivity quarter for the business.

In merchandising displays, customer promotional activity has stabilized and we're entering a seasonally stronger time of the year. We're taking action to balance our capacity with current market demand which will improve our cost structure and improve our margins. We have tremendous capabilities in our display business and over the past several months, we've received 31 industry awards for work we performed to support companies such as Procter & gamble, Pfizer, Johnson & Johnson, Colgate, Coca Cola and Newell brands.

We're nearing completion of our review of our land and development portfolio. Working with the team in Charleston, we've accelerated the modernization of some projects that's reflected in significant increase in our sales under contract figures. The original plan for this year had modestly negative cash flows and current plans have positive pretax cash flows for the year. We'll share more detail with you in the upcoming quarters on our progress in monetizing specific projects within our portfolio.

The separation of Ingevity is expected to occur on May 15. The Ingevity management team lead by Michael Wilson will be on their equity road show over the next two weeks. As part of the separation, Westrock will receive a distribution of $518 million, retain approximately $438 million in cash after expenses as we can use for general corporate purposes. Ingevity has the right team and strategy in place and looking forward to follow Ingevity successes as an independent company.

As a result of the separation, Westrock's credit agreement EBITDA will decline by the amount generated by Ingevity about $200 million in EBITDA on a trailing basis. After adjusting for this, Westrock's leverage ratio post separation will be in the 2.35x to 2.4x range within our target. We've outlined Westrock's results for the quarter of with and without Ingevity, and these numbers should help you with your modeling. Ingevity contributed $0.08 in adjusted EPS is in the quarter. For June 2016 quarter will reflect six weeks of Ingevity operations as discontinued operations.

We closed on our new joint venture in Mexico with Grupo Gondi on April 1. We believe the Gondi is the premier operator in the market. Based on their recent performance, we expect the joint venture to generate annual sales more than $750 million and EBITDA margin in excess of 20%. We're currently supplying the joint venture with containerboard at a rate of 250,000 tons per year. Importantly, the $175 million that we've contributed to the joint venture will remain in the joint venture and be available to support its growth.

As an example, Gondi has just started production on a new state-of-the-art 120,000 metric ton box plant in Nava. This plant is adjacent to the new Constellation Brands brewery. This joint venture accelerates our ability to win in the growing Mexican packaging market and gives Westrock and Gondi many new growth opportunities.

Now, I turn the call over to Ward.

Ward Dickson

As Steve indicated, we are executing very well on our synergy and performance improvement objective with stronger results across our entire company. We exited the March quarter with an annualized run rate of savings of $350 million. We continue to realize procurement and logistics savings and the expanding scale we now have enables us to be more efficient overall. We can balance our system over this larger footprint, producing the right products and the right locations to better serve our customers and maximize efficiency.

In addition, work is continuing to streamline our businesses and corporate functions across our company. We expect to be in the $450 million to $500 million run rate range by this September and we remain on track to achieve our $1 billion goal by the end of FY 2018.

Adjusted segment EBITDA increased $29 million due primarily to the $103 million in productivity. Commodity input cost deflation of $37 million and the flow through of these into our businesses. The negative pulp price and mix impact across our corrugated and consumer businesses was $23 million. Natural gas was the biggest input cost savings area with $21 million in lower costs compared to the prior year.

Lower chemicals, freight, diesel, wood, fiber and other costs contributed an additional $16 million to income. The reduction in pension income is a non-cash charge that negatively affects earnings.

Before turning it back to Steve, I want to take a minute to discuss our cash flow outlook and assumptions. We are maintaining our cash flow guidance for FY 2016 of $950 million to $1 billion. As we think about our business for the third quarter there are several key items to help you with your modeling. As a starting point, our March adjusted EPS of $0.61 includes $0.08 of Ingevity. Using that adjusted base and looking sequentially you should consider some of the following trends that will affect our earnings in the June quarter. We expect to see some seasonal volume increases with negative price and mix across our businesses related to export markets and the PPW changes in both corrugated and consumer grades.

We anticipate price inflation in some commodity categories including natural gas and recycled fiber. Our both tax rates are expected to be in the range of 34% to 36%. Net of any contribution from Ingevity, we expect an increase in adjusted earnings per share in the June quarter as compared to the March quarter.

I will now turn the call back over to Steve.

Steve Voorhees

Thanks Ward.

We are enthusiastic about our strategy, our performance and our outlook. Westrock is a compelling value creation opportunity. We have outstanding people and assets and a strategy to provide differentiated products and services that help our customers win in their markets. We're delivering on the objectives we set out when we created Westrock. And we are well on our way to achieving our synergy and performance improvement target that contributed to over $100 million productivity gains in the quarter.

We've added to the strength of our business and our growth prospects through the formation of our joint venture with Grupo Gondi, the leading paper and packaging company in Mexico. With the separation of Ingevity next month, we'll remove the non-core business from our portfolio.

We're generating attractive free cash flow returns, have the opportunity to grow this cash flow over time through execution of our strategy. We're returning a significant portion of our cash flow to stockholders through dividends and share repurchases. Our strategy execution and results today position us well to create significant long-term value for investors.

And now with that, I'd like to open the call for your questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of George Staphos from Bank of America Merrill Lynch. Your line is open.

George Staphos

Hi, everyone. Thanks for taking my question and appreciate all of the details. Two questions to start and I'll turn it over. First of all, can you talk at all about how volumes in corrugated and also in folding cartons progressed over the quarter that just concluded, were things stronger coming out of the quarter that would be our expectation and what are you seeing in your early days obviously in the fiscal third quarter and in terms of volumes?

And then, my other question Steve, you provide a little bit of color or commentary anyway about boxboard price declines in pulp and paper and how it's having a relatively limited effect on your results for this year. How much of that is to the extent you can comment driven by the contractual legs that you have in your business, how much of it is driven by the fact that it only affects general purpose and that's not where all of your business is, any additional clarity there would be helpful? Thank you, guys.

Steve Voorhees

I'm going to start with the second question and Jim can talk about the first question. The second question, CRB and URB, the PPW changes will impact those. As you would imagine and consumer markets that takes a little bit longer to just pass through the system. And then on SBS, I did include in the comments that about half of our volumes would be affected by PPW that would go to the pulp and carton markets and the other half would be just much less sensitive to that. And again, the Consumer Packaging markets -- how the contractual process is much more delayed than you'd experience on corrugated.

George Staphos

Sure. And just on that, half that is affected by PPW, that's bleach board, that's also lagged more than we would see obviously embark -- sorry, corrugated markets that's correct?

Steve Voorhees

Exactly, yes.

George Staphos

Thank you.

Steve Voorhees

And I'll let Jim comment on the volumes we experienced this quarter.

George Staphos

Thank you.

Jim Porter

Good morning, George.

George Staphos

Hey, Jim. How are you?

Jim Porter

So, box volumes previous quarter and current quarter. So first of all, I couldn't be more excited about how our Corrugated Packaging business is operating, just made tremendous improvement from a culture and quality service innovation and satisfying our customers which really is the foundation of the wins that we've been seeing really proud of the team and that's a lot of -- to equal or exceed the industry performance in 13 out of the last 15 months.

However, the comps are getting a little tougher. Second Quarter 2015, we were up 6.5% on a per day basis, so this past quarter we were virtually flat on an absolute basis or up slightly that is and down slightly on a per day basis. So that is a little bit behind the industry, but we've got a very strong pipeline of new opportunities. And we would expect to see some seasonal strengthening as we go into Q3. So therefore, we would expect to be relatively flat with another difficult quarter last year because we were up 4.5%. But I think the climate is improving and I'm confident in our teams' ability to drive innovation and wins for our customers.

George Staphos

And folding carton, any kind of sequential detail you can provide us there? Thank you.

Steve Voorhees

Just on the folding carton rates, we have seen the modest increase or the increase in backlogs over the past few weeks, which is I think a sign of seasonal strengthening that we are seeing across our business.

George Staphos

Fair enough Steve, you did mention that. Thank you. I'll turn it over.

Operator

Thank you. The next question as we do have comes from the line of Mark Weintraub from Buckingham Research. Your line is open.

Mark Weintraub

Thank you. Two questions, first, hoping to get if possible some sort of sense of the pace you might anticipate on the share repurchase, whether the $150 million or so that we saw in the prior quarter, is that the type of quarterly rate because that would tie in I guess to, if you take your free cash flow and divide it by four and subtract your dividend and that's sort of is kind of the number you come up with or are there other parts to the equation that could potentially make that accelerate?

And then second, unrelatedly, you -- I think if you look in your presentation, your corrugated shipments were up about 100,000 tons this year versus last year. And I think box shipments were pretty flat and I thought you basically only talked about a small increase in exports and actually a decrease in domestic, so just trying to put all that information.

Steve Voorhees

Mark, I'm going to let Ward respond to the footing, but I think on the share repurchases. I think we've been consistent in our balance capital allocation strategy. And I think in the nine months since the merger, we've allocated a total of $1.9 billion of capital. And I'll just go through the math on that which is $645 million to capital investments, $380 million to acquisitions, and then we've returned $850 million to shareholders, $290 million of that's been in dividends and $567 million has been through share repurchase. We're within our target leverage range. And I think you should expect us to maintain our balance capital allocation strategy going forward. How that fits from quarter-to-quarter, I think it's premature to comment on that right now.

Ward Dickson

And then on the containerboard shipments, our box tons were up slightly, our export tons were up and then our craft tons were also up on a year-over-year basis. So the piece that you didn't have Mark was that craft was up.

Mark Weintraub

Okay. I'm sorry what are the craft tons that you're referring to?

Ward Dickson

Well, the craft bag largely out of our Dublin, Georgia mill a little bit out of Tacoma. And I think those are up about a 100,000 tons from where we were prior.

Mark Weintraub

Got it. Okay. Thank you. That's helpful.

Operator

Thank you. The next question that we do have comes from the line of Mark Wilde from BMO Capital Markets. Your line is open.

Mark Wilde

Good morning.

Steve Voorhees

Hello Mark.

Mark Wilde

Steve, I wondered if you or maybe Jim Porter or Ward, could give me a sense of what's in that other component in the corrugated segment, the one that has a 4.5% EBITDA margin. I think that there's probably the Indian business in there, but what's the balance of it? Is it pulp or other stuff and what's a good kind of number for that business going forward? Is that a single-digit margin business?

Ward Dickson

Mark, this is Ward. Remember it also includes the recycle business.

Mark Wilde

Okay. And how big a piece of that would recycling be Ward approximately?

Ward Dickson

On an annual basis, it's recycling -- let me give it -- give it to you. Recycling revenues for the current quarter were about $90 million.

Mark Wilde

Okay.

Ward Dickson

That's pretty consistent flow on an annual basis. The Indian revenues are around $20 million in the quarter.

Mark Wilde

Okay. All right. That's helpful. And then just as a second question, Jim can you give us some sense down at Dublin how much of that output is going to bag paper versus containerboard and whether that bag paper component has been rising?

Jim Porter

Not really rising, Mark. It's really a great market for us. We've been able to penetrate the lightweight bag market that we all see in a lot of the fast food restaurants and so it's fit that mill perfectly. The mill capacity is just below 600,000 tons and the beauty is we can swing between lightweight containerboard grades, liner medium as well as bags, so we have significant flexibility. Currently that bag has been operating in the 90 to 100,000 ton, about 90,000 tons a quarter. And again, it remains a good grade for us and the balance of the Dublin mill is producing linerboard and medium.

Mark Wilde

Okay. And Jim, would you assume -- could we assume over time that you'll be able to put more containerboard into that Mexican JV? I think you mentioned it's about 250 right now on a run rate basis?

Jim Porter

Yes, Mark. We are really excited about that joint venture. We see the Mexican market as being a very powerful growth engine and our partners with Gondi could not be better. They have incredible assets and very focused on the beverage and high graphics market. Our business down there had been more focused on the agricultural markets and so together I think it gives us the ability to penetrate with a lot more capability into the agricultural areas, which is a great pipeline for our virgin containerboard.

I think we mentioned also this new Nava plant. I wish you all could see it. I've been in the industry a lot of years and I frankly have never seen a corrugated facility like this one has tremendous upside potential and we're excited about the pipeline for the future.

Mark Wilde

Okay. So we also assume that you might be able to put CNK and SBS into the JV?

Jim Porter

That's correct.

Mark Wilde

Okay, thanks. I'll turn it over.

Operator

Thank you. The next question comes from the line of Anthony Pettinari of Citi. Your line is open.

Anthony Pettinari

Good morning.

Steve Voorhees

Hi Anthony.

Anthony Pettinari

Jim I was wondering if could you speak to trends in containerboard export pricing maybe late in the quarter or in April. Are you seeing any stabilization there given a weaker dollar or is there still some pressure. And I was wondering that given some of the price weakness we've seen in export markets, obviously, your volumes are up year-over-year. Is there any situation where you might have to exit some of the markets you participate in on the containerboard side?

Jim Porter

Let's start with the fundamentals of our international business, which amounts to about 15% of our total shipments. First of all, the global demand is then solid over the last couple of years. It's averaged 4%. I think the last quarter of North American exports was up 3.6%, so we can see solid demand principally for virgin containerboard. We've developed a very strong series of relationships across the world that frankly value our virgin containerboard on quality service, supply chain, consistent delivery to them month in and month out. So there's more to it than price.

On the other hand, we certainly acknowledge that prices have become incredibly competitive, largely due to a new machine start up in northern Europe and the Russian and Brazilian economies, which is taking board produced in those countries that aren't being cut up in boxes in those countries. We're seeing that in other parts of the world and with the currency differential they have over U.S. dollar, it has put significant impact on price.

So to your question of is it getting better, we have seen some currency strengthening so we would expect that to contribute to the pricing scenario. We have as you know, right sized our portfolio some so we are not supplying all of the business across the world we once did; however, we've got an important customer based there and we're committed to that part of the world and cycles change and our products are needed and valuable.

Anthony Pettinari

Okay. That's helpful. And then, switching gears, Steve I think you indicated you're now selling some cartons to customers that you only sold corrugated to before and I was wondering is it possible to quantify the cross-selling opportunities either in terms of sales or maybe the number of large accounts you're now cross-selling to. And then, just maybe generally when you think about getting your sales organization to a point where they can really leverage all of Westrock's offerings, are you early innings there or is that process kind of completed or how should we kind of think about that?

Steve Voorhees

Its early innings. I think you asked about quantification of cross-selling. We are not trying to quantify that, because I don't want to get the organization in a mode to where we are trying to count one sale over another sale but we just like to market our products and services. We do have a much broader product line as Westrock and that breadth is by product. It's by service. It's by geography and we're taking the product line and focusing on tailoring solutions for our customers. We're in the process of doing that. I think we've got tremendous enthusiasm across the organization for our ability to the opportunity that we have to do that.

I think a couple examples; we serve a lot of consumer products companies and a lot of consumer products companies use pre-print. And so we've been able to take the pre-print offering to Brazil and are working with customer that we would serve in North America to add pre-print to their packaging and we think it has the potential to help them sell more product. There's a number of examples about that. I think we are saying we are in the early innings because while we have a lot of enthusiasm and a lot of connection, I think we can get better at institutionalizing that through the company. And I don't often talk about IT projects, but last week, we had a lot of excitement because we went live on a single instance of Salesforce, which is going to allow much better transparency throughout the organization about the relationships that we have across the organization. I think through time, I think it's going to grow and it's going to grow in the contribution that makes to the success of Westrock.

Anthony Pettinari

Thank you. That's really helpful. I'll turn it over.

Operator

Thank you. The next question that we do have comes from the line of Adam Josephson from KeyBanc. Your line is open.

Adam Josephson

Thanks. Good morning, everyone and congrats on the quarter. Ward one just on the guidance I think you mentioned excluding Ingevity, you did $0.53 in the second quarter you would be up sequentially from that. Can you be anymore specific than that?

Ward Dickson

No, what we are doing is we reaffirming our full year cash flow guidance. And what I can say in that full year cash flow guidance is we've taken into consideration all the PPW changes both in corrugated and on the consumer grades. We've reflected what we think our latest achievement of synergies and productivity are going to be. We've gone through the entire the balance sheet assumptions, capital expenditures, and we feel good about our opportunities to still achieve the $950 million to $1 billion.

And again, we had stated that Ingevity, we thought would be cash flow neutral for us up to the spin. That is the pattern that they will not actually generate any contribution to that overall goal, their operating cash flow will be offset by the capital expenditures that they have in business. So again, rather than going through every individual assumption what I'd say is that we've reflected all the changes in the marketplace, commodity cost, productivity and feel good about the overall guidance.

Adam Josephson

Thanks Ward. And Steve or Jim one for you on containerboard, I get asked this frequently that our containerboard prices in your view, they are created by supply demand or by input costs because investors often want to know as input costs change how would one expect prices to change and I'm just hoping you could provide your view on that. Thank you.

Steve Voorhees

Adam unfortunately the answer is both. It's a market. I can put cost and do have an input into it. If I had to pick one over the other it would be supply and demand and I think the evidence over time would support that.

Adam Josephson

Just one last one. Ward back to the input cost, for how much longer do you expect year-over-year declines in your input costs and I know you said they would be up sequentially but year on year?

Ward Dickson

Yes. So if you look at our bridge, Adam for the first quarter, we actually had net deflation if you look at the commodity deflation and it was actually greater than our wage and cost inflation. We're at parity in Q2 and as we start to look at the second half of the year I actually think you are going to see a little bit of net inflation on a year-over-year basis as we go through, as we exit Q3 and Q4.

Adam Josephson

On input costs as well as on wage and other?

Ward Dickson

We'll still have some, what I was referring to was the net of wage and input costs. I think we will continue to have some year-over-year benefits, but it's going to start too moderate.

Adam Josephson

Thanks very much Ward.

Ward Dickson

Yes.

Operator

Thank you. The next question that we do have comes from the line of Scott Gaffner from Barclays. Your line is open.

Scott Gaffner

Thanks, good morning.

Steve Voorhees

Good morning, Scott.

Scott Gaffner

Steve the first question I had was for either you or Jim and really is around the addition of the EVOL machines that you've done in last couple years. Because I think in your prepared remarks you talked about the number of months you've out grown the industry. But my question is really around how does adding the EVOL machines change your mix of business? I would think it would move towards more longer run businesses or longer run boxes but maybe it frees up those other machines you have to do more customized work but any color you can give around that would be appreciated.

Jim Porter

Scott, this is Jim. The EVOL is just an incredible piece of equipment and it really does not change our mix of business at all. It simply makes a better box. If you hold a box coming up in EVOL, compared to one coming off a 20-year old flexo folder gluer, it is clearly a better product. It runs much faster, requires less labor to operate, it has quicker set ups, better precision, better print quality it just improves our capability to be a quality box supplier to all of our customers.

Scott Gaffner

Okay. And as you've added these machines, where do we stand as far as the potential for box plant footprint rationalization?

Steve Voorhees

We did the Cenveo acquisition; I think we took out if I remember correctly 28 plants through consolidation. We're at a good footprint now. I think the EVOL, when we looked at the -- just the machines that we had in each of the box plants we needed to invest in flexo folder gluers. And so each of these EVOL projects when they go into the plant, they will displace two, three or four flexor folder gluers, and then, there will be some benefit to the economics of the plant as a result of that. The better box attributes pretty significant because where we put these EVOLs in, I think it has an uplifting impact on the performance of the entire plant.

I think it just helps most every dimension of the plant, but just specifically with respect to the footprint, we're comfortable with where we are now because EVOL is less of a capacity increase than it is an efficiency investment.

Scott Gaffner

All right. Steve just last one for me. You mentioned bolt-on acquisitions. How should we think about sizing within a bolt-on, what does that mean for you and do you have enough management bandwidth with, with all the integration you're doing. I mean you've done a few bolt-ons since the merger. Any color you can provide would be helpful? Thanks.

Steve Voorhees

Sure. The transactions, SB5 versus Cenveo and Gondi would be in the range of what I'd characterize as a bolt-on. I think with respect to the management, I think we're in great shape because if you are would have told me what the merger, we would be able to go through and do the work that we've done on the three acquisitions and it is living inside the world that is difficult to describe the work that has to be done to spin a company. And we are -- I just got on just our support functions are doing fantastic and each quarter I'll tell you as we prepare for the conference calls, we're getting better and better at getting the books closed each and every month, each and every quarter. So I think we have the bandwidth to invest the time we need to in order to improve our business and where opportunities are there to take advantage of those.

Scott Gaffner

Great thanks a lot.

Operator

Thank you. The next question that we do have comes from the line of Mark Connelly of CLSA. Your line is open.

Mark Connelly

Thanks. Steve, how do you square the strong results in home health and beauty with the continued mediocrity in merchandising display? It seems to me that after the big pullback in merchandising display that the two should be moving in the same direction. Is there just something different happening in stores and this is going to be the new normal?

Steve Voorhees

I think there are two different situations. So I'm not sure how well they are connected. Home health and beauty, the management team is just I think performed exceptionally well and they are doing the fundamentals of what they need to do in order to be successful in that business. And the display business has -- I think the Wal-mart effect had an impact on primary demand for displays. I think that's bottomed.

And then, I think we're in the process of taking the actions we need to align our cost structure with I think that I'm not sure what the new normal is in promotion, but I think we feel our business needs to adapt to the changing marketplace. And then, I'll add the display business is important for us as we develop relationships with customers because it is a promotional business that works with our customers to help them sell more product. And I think it broadens the relationships that we have and I think that cast a very positive light on the rest of our businesses.

Mark Connelly

So it sounds like you're saying that home health and beauty is outperforming consumer spending just with your internal progress maybe?

Steve Voorhees

Yes. Go ahead.

Mark Connelly

Just one more question. Working capital is seeing some of the biggest swings we've ever seen from Westrock or its predecessors. And obviously, you've got a lot of stuff going on. But is that just one-off or is there something different happening in the way you manage working capital?

Ward Dickson

No, our working capital assumptions for the full year that we have embedded in our cash flow guidance back after the first quarter are still intact. The receivable increase as you look from quarter-to-quarter really was based on the timing of some collections that we had at the end of last quarter plus the some increased sales, so it is and we are managing our inventory levels to the planning scenarios that we had both in our corrugated business and consumer business. So again, the full year assumption of what we would get from working capital is still intact.

Mark Connelly

Okay. But these $100 million up, $150 million down swings are not going to go away?

Ward Dickson

I wouldn't say from quarter-to-quarter, I'm talking about the outlook for the year.

Mark Connelly

Sure. Okay. Thank you.

Steve Voorhees

Thanks Mark.

Operator

Thank you. The next question that we do have comes from the line of Chris Manuel from Wells Fargo Securities. Your line is open.

Chris Manuel

Good morning, gentlemen. Congratulations to a good quarter. Couple of topics, I wanted go at. First, just a couple of housekeeping questions. Help me with the -- and this kind of ties into the last question, but your $950 million to $1 billion free cash flow guidance, what's the CapEx number you've got embedded in there, what is your change in working capital number that you've got embedded in there for this year and I think you may have given D&A earlier but if you did I missed writing it down. Could you just remind us of that too?

Ward Dickson

Yes. So, I would refer you to the assumptions that we gave last quarter. We aren't updating every individual assumption. I do believe for CapEx spending we will be on the low end of the range. We gave a range of $825 million to $850 million. I think the best place to refer you to for the D&A, is the exhibit that has our business excluding Ingevity as you look at the Q2. I think it showed that the quarterly run rate for D&A excluding Ingevity was just over $270 million. And you can use that as you start to think forward with some additional capital expenditures as we exit the year.

We did not go through line by line all the other assumptions, but the pension and postretirement funding is consistent with what we said in January. I actually think the operating cash flow range is also consistent. Cash taxes may be a little bit higher as we look, I'd said that the cash taxes would be in -- tax rate for the year would be in the mid-high 20s, I think it will be just above 30% as we exit the year.

Chris Manuel

Okay. That's helpful. I wanted to -- if I could switch gears for a second reading through kind of some of the slides in prepared comments, it sounds like you really didn't feel much of an impact from the cuts in box prices or things of that nature. It doesn't sound like you're anticipating seeing a lot as the year goes on. I mean can you maybe give us some color as to how or why, as some of that has contracts that are annual contracts? Is some of that maybe it just didn't fit within caps colors or if price were to move another $10 and then maybe hit 25 cumulative, did that trigger something? How does that work?

Steve Voorhees

Chris, we did say our box prices were stable. I think going forward we have a host of relationships with each of our customers and we're just reluctant to talk about forward pricing. And so I think what we've done as we've said whatever pricing impact we expect to experience is embedded in the cash flow guidance that we give.

Chris Manuel

Okay. Thank you.

Operator

Thank you. The next question comes from line of Chip Dillon from Vertical Research Partners. Your line is open.

Chip Dillon

Yes. Good morning, guys. The first one is more for Jim. On the export situation, we saw yesterday that the largest producer in Europe announced a substantial €40 per metric ton price increase and I didn't know if you'd seen the conditions in Europe get better in the last few weeks that might have lead them to make that move?

Ward Dickson

Chip, I can't really comment on what another company is doing. I read this and we're aware of discussions with our customers, but I can't comment on what another company is doing.

Chip Dillon

Or whether you're seeing better conditions there?

Ward Dickson

Well, as I shared in my earlier comments, we're seeing currencies improved a little bit, global demand is solid and growing. Our customer demand is firm, but beyond that I really can't comment on forward pricing.

Chip Dillon

Got you. And second question is having to do with the EVOLs and the whole concept of the sheet feeding step and I'm just wondering have you, or is it possible to find opportunities to let's say go to an independent box customer that you might be is selling board to. And actually convince them that it might be a win-win for you to maybe redirect board safe from the export market into your own sheet feeder and then to sell them sheets.

In other words is that something that we could see in the future where the independence basically just do the cutting and folding and not do the sheeting aspect of it.

Jim Porter

That is today part of our business. We sell containerboard three channels. One is to our, most important channel is our domestic box system which includes a portfolio of sheet feeders and full scale corrugated box plants. And so we sell sheets to independence and we sell in some cases, boxes to independence that they do other work on them. So there's a mix of things that we do domestically. And in addition to our other two channels of our export customers and our North American independent base. So all three of those channels are important and we try to look for customer opportunities to provide them something that helps them to win in their markets.

Chip Dillon

Got you. And last one quickly is, I know that when I think of the whole situation with the SP tuck-in and Coshocton in Uncasville that maybe an indirect return is the $25 million you're saving on the closure half. But I notice that Dublin you said last quarter had lost $7 million, I believe in the first fiscal quarter. Has that turned positive and can you give us a sort of an idea of how well that mill is doing?

Steve Voorhees

Remember last quarter we had the Newberg loss, but Dublin is actually, it's EBITDA positive.

Jim Porter

It's operating quite well. We're very pleased with its performance, volumes are up, costs are going down, we committed to significant synergies with that addition and we're on track to meet those synergies. So we're really pleased with how that asset has improved our portfolio.

Chip Dillon

I'm sorry. Yes, you're right. It was Newberg, my apologies. Thanks very helpful.

Steve Voorhees

Thank you.

Operator

Thank you. The next question that we do have comes from the line of Phil Ng of Jefferies. Your line is open.

Phil Ng

Hi guys. Last quarter you guided to 1 billion, 90,000 tons of inventory ahead of some plant shutdowns and heavy down time period. How should we think about the cadence going in your Q3 and a competitor also mentioned they actually need a hold less inventory with the transportation bottlenecks improving. Are you seeing that dynamic play out?

Ward Dickson

Phil, thank you. We did share last time and historically we've given color as to our inventory being managed to ensure that we can give excellent customer service and on time delivery for internal box plants and external customers. And because of the heavy major maintenance down time load of this quarter, next quarter, we said we would build inventories that peaked in January. And since January we've seen a decline of about 40,000 tons in February and March. And we would expect to further reduce inventories pretty significantly by the end of our fiscal year in the September quarter.

And to your point, what we -- over the last couple of years have increased inventories in part due to the somewhat eroding supply chain in the rail and truck logistics channels. And we're frankly seeing that improve right now and together with all of the work that our internal supply chain team has done, it's giving us the opportunity to further reduce our inventories going forward.

Phil Ng

Would you be able to quantify the sequential decline from fiscal Q2 to fiscal Q3?

Ward Dickson

We've indicated we're down about 40,000 tons February and March and I just need to leave you with a significant reduction going forward. We just don't quantify that.

Phil Ng

That's helpful. There's been some senior leadership departure at the consumer segment, I'm glad you're still executing on the very high level on the synergy front. Can you talk about the game plan there?

Steve Voorhees

I think you're talking about Bob Beckler whose retiring and since you asked really appreciate the opportunity to get to know Bob over the past year. He's a quality person and worked for the company for a long time. And I'm obviously supportive of wishing him the best going forward.

The current organization is I think well structured. I think somebody asked a question earlier about cross-selling and that requires use the word nimble to communication across the company. And we need the leaders of the converting businesses and the paper businesses to both manage their business, which is their primary responsibility, but where there's opportunity and we have significant opportunity, we need each one of those leaders to work across the packaging grades, on an integrated basis or on an integrated basis with the paper grades to meet the needs of our customers. And I'm very pleased, very excited with the organization we have in place and optimistic about improving the results that we have as we implement our strategy.

Phil Ng

Okay. That's helpful. As I look at your impact on price mix for your consumer segment, the sequential change was pretty modest. I know one of your competitors were talking about some weakness in some of the commodity grades in plate stock. And obviously, DPW cut prices for SBS somewhat recently. Are you surprised by some of those moves and you talked about how backlogs have improved a bit and just wanted to see if you've seen increased competition from some of your can producers on the front? Thanks.

Steve Voorhees

I think there are a lot of questions in your question and I think we addressed them in the prepared comments. And I'd just invite you to go back and review those and we can talk to you offline about those if need be.

Steve Voorhees

I think we're at an hour and so I'll just like to thank you for your time and attention during the call. We're proud of the progress we are making and appreciate your interest in Westrock. It's a Friday. So I hope you have a nice weekend and we look forward to speaking with you in the coming weeks. Thank you very much.

Operator

That concludes today's conference call. Thank you so much for participating. You may now disconnect.

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