Smurfit Westrock Plc (SW) Q2 2023 Earnings Report, Transcript and Summary

Good morning, and welcome to the WestRock Second Fiscal Quarter 2023 Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Rob Quartaro, Senior Vice President of Investor Relations. Please go ahead.

Good morning, hello, can you hear me?

Good morning, and thank you for joining our second fiscal quarter 2023 earnings call. We issued our press release this morning and posted the accompanying presentation to the Investor Relations section of our website. They can be accessed at ir.westrock.com or via a link on the application you're using to view this webcast. With me on today's call are WestRock's Chief Executive Officer, David Sewell; and our Chief Financial Officer, Alex Pease. Following our prepared comments, we will open the call for a question-and-answer session. During today's call, we will be making forward-looking statements involving our plans, expectations, projections, estimates and beliefs related to future events. These statements involve a number of assumptions, risks and uncertainties that could cause actual results to differ materially from those we discussed during the call. We describe these assumptions, risks and uncertainties in our filings with the SEC, including our 10-K for the fiscal year ended September 30, 2022. We will also be referencing non-GAAP financial measures during the call. We have provided reconciliations of these non-GAAP measures to the most directly comparable GAAP measures in the appendix of the slide presentation. As mentioned previously, the slide presentation is available on our website. With that, I'll turn it over to you, David.

Thank you, Rob, and thank you for joining our earnings call today. I'll begin our call with some highlights from our fiscal second quarter, then provide updates on our portfolio optimization strategy and cost-savings initiatives. Following that, Alex will review our results in more detail and provide our outlook for the third quarter as well as our assumptions for the full year. Turning to our second quarter results on Slide 3. During the quarter, market trends were largely consistent with our first fiscal quarter. Our Corrugated Packaging and Global Paper segments remain impacted by lower demand, high inflation and shifting consumer spending. We have seen more stability in our Consumer Packaging segment, supported by new business wins and growing plastics replacement revenue. While we face difficult year-over-year comparisons in the quarter, we executed very well in a challenging environment. Our transformation initiatives continue to gain traction, and we are accelerating our portfolio actions. We remain on track to reach our $250 million full year target. I'll provide more detail on this shortly. I'm also proud to share that WestRock was recently included in Barron's most Sustainable U.S. Companies list, further recognizing our commitment to sustainability. Net sales during the quarter were $5.3 billion, down 2% year-over-year, and consolidated adjusted EBITDA declined 8% to $789 million. Our results exceeded our guidance, primarily due to better-than-expected inflation trends, strong results from our operations in Mexico and progress on our transformation and cost-savings initiatives. Adjusted EPS was $0.77, a decrease of 34% compared to the prior year quarter. Please note, our adjusted EPS includes amortization of intangible assets, which was approximately $86 million or $0.25 per share for the quarter. Given current market conditions, we incurred a noncash goodwill impairment linked to past acquisitions of $1.9 billion pretax or $7.16 in earnings per share. We also incurred restructuring charges of $445 million pretax or $1.32 in earnings per share, primarily related to our decision to close our North Charleston paper mill. Within these restructuring charges, $347 million were noncash. Alex will provide more details on our performance in a moment. Before that, I'd like to discuss our transformation efforts. We remain committed to executing our strategy, and we are making tremendous progress. Our goals remain to leverage the power of One WestRock to deliver unrivaled solutions to our customers. With over $9 billion in enterprise sales, our customers value the broad portfolio of packaging solutions we provide. We are also driving efficiencies from our centralized purchasing initiatives, which have delivered $50 million in year-to-date savings to invest in innovations that contribute to the circular economy and enable us to replace plastics. We are currently targeting $400 million in revenue from plastics replacements this year. To improve efficiency and drive margins through our cost savings initiatives, we are making significant progress, and we continue to target $250 million in cost savings in fiscal 2023. And finally, to drive strong cash flows to invest in growth, optimize our footprint and improve our return on invested capital, we are focused on returning leverage to our targeted range of 1.75x to 2.25x while investing in our assets and returning capital to our shareholders through our dividend. We are confident in our strategy and our portfolio optimization is a critical component. Turning to Slide 4 and our initiatives to drive efficiencies and improve our operations, we are committed to operating world-class assets and focusing our portfolio on markets and segments with the most opportunity for growth. With this work fully underway, we have widened the scope of our planned portfolio actions and have identified a number of less efficient noncore assets that don't meet our return thresholds. As a result, we are taking targeted action to exit these assets and prioritize growth in more attractive areas. Our increased visibility into demand planning, production and inventory management is enabling us to optimize our converting network to drive throughput in our most efficient assets. In that regard, we are already in the process of closing 4 of our less efficient converting sites across both our corrugated and consumer segments. With these moves, we are consolidating our production into other more efficient facilities and improving our throughput to enable us to better serve our customers. Importantly, these actions are expected to have minimal impact on revenue, while driving profitability and return on invested capital. We have additional plans underway to continue these consolidation efforts. On the mill side, last year, we closed our Panama City mill and we eliminated corrugated medium production in St. Paul. Earlier this week, we announced the closure of our North Charleston mill. We intend to continue these mill evaluations with a focus on driving growth with our most efficient assets. The North Charleston mills production capacity was approximately 550,000 tons, including linerboard, saturating kraft paper and uncoated kraft paper. Similar to our previous capacity reductions, this mill would require significant investment to achieve our targeted productivity levels and we did not see a path to meeting our return on invested capital. The majority of the mill's linerboard and uncoated kraft paper production will be transferred to other facilities in our network. With the closure, we will exit the saturating kraft business and reduce our long-term exposure to the export market. Closing facilities is never easy, and we are working closely with our employees and our customers to support them as we move forward with these plans. We are also in the process of exiting URB production, which is not a strategic priority. In December, we closed on the sale of 2 URB mills and we are in the process of selling our stake in our RTS joint venture along with our Chattanooga mill. We continue to expect this transaction to close in fiscal 2023, subject to receipt of regulatory approval. By exiting these less productive assets, we are able to direct our capital towards better use and invest for growth in the most attractive markets and geographies. An example of this is our Grupo Gondi acquisition, which closed in early December. Our integration efforts here are well underway, and I am pleased to report that we expect to exceed our synergy targets. The business is performing better than our initial expectations despite a challenging macroeconomic environment. Our assets in Mexico, combined with our assets in Brazil and the rest of Latin America, bring us closer to our multinational customers and position us to benefit from growing onshoring trends. We are well on our way to capturing this highly attractive growth opportunity. Our portfolio actions are also reducing our long-term exposure to external paper sales. We are focusing on strategic partnerships that value our differentiated portfolio, value-added services and innovation. Reducing exposure to external paper sales will improve our vertical integration, reduce earnings volatility and optimize our production. Taken together, these actions demonstrate our commitment to operating world-class assets across our portfolio, and we see significant opportunities ahead. Turning to our cost initiatives on Slide 5. We also continue to make progress on our cost savings and productivity initiatives. We remain focused on streamlining our operations and centralizing our back office functions. We expect these planned SG&A efforts to deliver $175 million to $200 million in run rate savings by the end of the fiscal year. And through our One WestRock procurement and supply chain initiatives, we are targeting $250 million to $275 million in run rate savings by fiscal year-end. In North America, our portfolio actions have driven an $8 per ton decrease in containerboard costs. We are also investing to maintain and improve our assets, and we expect to spend approximately $1 billion in CapEx this fiscal year. Taken together, we are targeting approximately $1 billion in savings through the end of fiscal 2025, including $250 million this year. Note, these targets exclude the impact of economic downtime and inflation. Our portfolio actions and cost-savings initiatives are creating a leaner, more efficient WestRock. Though current market conditions present short-term challenges, we are executing very well and establishing a strong foundation to accelerate earnings power as demand improves. I'll now turn it over to Alex to discuss our segment results in more detail.

Thanks, David. Moving to our consolidated quarterly results on Slide 6. Second quarter net sales were $5.3 billion, down 2%, and consolidated adjusted EBITDA was $789 million, down 8%. Consolidated adjusted EBITDA margin was 14.9%, a decline of 100 basis points year-over-year. Price and mix positively contributed $335 million year-over-year and lower operating costs contributed $55 million. These benefits were more than offset by lower volumes of $204 million cost inflation of $143 million and economic downtime of $58 million. We incurred 265,000 tons of economic downtime in the quarter. Noncash pension costs also negatively impacted consolidated adjusted EBITDA year-over-year by $40 million. As a reminder, our pension plans remain overfunded. Turning to Slide 7. Corrugated Packaging segment sales, excluding trade sales, were $2.5 billion, an increase of $308 million or 14% year-over-year. Adjusted EBITDA increased $79 million or 24%, driven largely by our Grupo Gondi acquisition. Adjusted EBITDA margin, excluding trade sales, increased 130 basis points year-over-year to 16%. Pricing and mix contributed $155 million. And our operating costs contributed $28 million. These benefits were partially offset by inflation of $44 million, lower volumes of $36 million and economic downtime of $30 million. In connection with our Grupo Gondi acquisition, we also moved certain of our operations into the Corrugated segment. This change was not material and we therefore did not recast prior year amounts. For the second quarter of fiscal 2023, these operations generated revenue of $40 million and adjusted EBITDA of $7 million. While market conditions remain challenging, we've seen improvement in April with corrugated packaging shipments per day increasing mid-single digits for March. We remain focused on serving our customers and reducing costs. We're establishing a strong foundation for the coming years through our cost-savings initiatives and portfolio optimization efforts. Turning to the Consumer Packaging business on Slide 8. Our consumer business has performed well despite a difficult year-over-year comparison, including strong results from our Healthcare business last year. In the quarter, segment sales increased $15 million or 1% year-over-year to $1.3 billion. Adjusted EBITDA increased $13 million or 6% and adjusted EBITDA margin was 17.3%, an increase of 80 basis points year-over-year. Strong price and mix contributed $122 million and lower operating costs contributed $21 million. These benefits were partially offset by inflation of $58 million, lower volumes of $45 million and pension, FX and other of $27 million. As previously mentioned, we realigned certain Latin America consumer converting operations into the Corrugated Packaging segment in connection with the Grupo Gondi acquisition, and we did not restate our segments. Normalized for the realignment, Consumer Packaging revenue grew 4% and adjusted EBITDA grew 10% year-over-year. Quarter-end backlogs in our consumer business remains steady, while we continue to focus on capturing new business and growing our plastic replacement solutions. As David indicated, we're now targeting over $400 million in revenue from plastic replacements in fiscal 2023. Turning to Slide 9. Global Paper segment sales decreased $370 million or 24% year-over-year to $1.2 billion. Adjusted EBITDA declined 39% to $187 million with adjusted EBITDA margin declining 410 basis points to 16%. We continue to face soft demand and difficult year-over-year comparisons in our global paper business. While adjusted EBITDA declined year-over-year, it was still 17% above the second quarter of fiscal 2021. Price and mix contributed $63 million, more than offset by lower volumes of $105 million, inflation of $35 million and economic downtime of $27 million. Additionally, sales to Grupo Gondi are now eliminated from our global paper results following our acquisition. Results were also negatively impacted by unplanned downtime at several of our mills. We're actively addressing these issues and deploying capital to improve our reliability and productivity. Volume in our global paper business continues to be affected by lower market demand for our products as well as higher inventory throughout the supply chain. We're also seeing the effect of published price changes flowing through our results with year-over-year moves in paperboard more than offsetting the negative moves in containerboard and kraft paper. In this environment, we're continuing to prioritize margin over volume. Over time, our portfolio optimization strategy will enable us to better serve our strategic customers while increasing vertical integration and reducing our exposure to external paper sales. Despite the lower overall volumes driven by current market dynamics, we continue to win new business where customers value our diverse portfolio and product offering. As David outlined, we're accelerating our portfolio actions and focusing on strategic customer relationships in our most attractive markets. Our goal is to increase our vertical integration and reduce volatility from external paper sales. Next, our distribution results are on Slide 10. We faced a difficult year-over-year comparison due to last year's large health care order in the second quarter. Segment sales decreased 15% year-over-year to $307 million, and adjusted EBITDA decreased 67% to $9 million. Results were negatively impacted by lower volumes of $24 million and inflation of $3 million, partially offset by lower operating costs of $5 million and positive price and mix of $3 million. Normalized for last year's large health care order, revenue declined 3% and adjusted EBITDA grew 34% compared to the prior year. Looking ahead, we remain focused on driving commercial excellence and unlocking additional cost savings in our distribution business. We generated $36 million of adjusted free cash flow during the quarter, down $176 million, driven by higher capital expenditures. We continue to expect fiscal year 2023 adjusted free cash flow of approximately $1 billion, driven primarily by working capital improvements and lower capital expenditures. We ended March with net leverage of 2.45x. Looking ahead, we remain focused on returning our leverage to our targeted range of 1.75x to 2.25x. Turning to guidance on Slide 12. We expect a sequential volume improvement offset by the flow-through of previously published price decreases. Our forecast for third quarter consolidated adjusted EBITDA is between $650 million to $750 million, and adjusted EPS is between $0.30 and $0.60 a share. Some assumptions behind our sequential outlook include favorable costs driven by natural gas down approximately 30%, higher costs for recycled fiber, moderately lower cost in virgin, fiber, chemicals and freight, an effective adjusted tax rate of between 24% and 26% and approximately 257 million diluted shares outstanding. We're planning 121,000 tons of scheduled maintenance downtime across our system in the third quarter. Turning to Slide 13 and our full year cost assumptions. For our full fiscal year 2023, we expect a favorable year-over-year EBITDA benefit from lower energy prices of between $40 million and $50 million, primarily related to lower natural gas prices. In terms of fiber, we expect a benefit of between $250 million and $300 million. We're expecting negative impacts of $70 million to $90 million from chemicals inflation and $25 million to $45 million from higher freight costs. Lastly, we expect a headwind of between $450 million to $500 million from wages, benefits and other inflation as well as $160 million from noncash pension expenses that we've previously discussed. During the second quarter, we incurred a noncash goodwill impairment linked to past acquisitions, driven in part by the impact of soft demand, pricing pressure and elevated inflation on our longer-term forecast. Despite this challenging macroeconomic environment, we remain focused on our transformation initiatives and are confident in our ability to deliver $1 billion in cost savings by 2025. In the event market conditions stabilize and the relationship between price and inflation returns to more normal levels, we believe our 2025 goals remain attainable. As you would expect, should current macroeconomic conditions persist, where we see continued price degradation and significant inflationary effects, the goals would be significantly under pressure. This quarter's strong results in a challenging environment demonstrate the progress we're making in driving cost savings and continuing to optimize our portfolio. Now I'll turn it to David to conclude before we move to Q&A.

Thanks, Alex. While current market conditions present challenges, these dynamics are temporary, and the market will recover. Fortunately, our unique capabilities and resilient business model are enabling us to successfully navigate this slower demand environment. Longer term, we remain focused on leveraging the power of One WestRock. Our diversified portfolio industry-leading innovation platform and suite of automation solutions enable us to provide differentiated products and services for our customers. With over $9 billion in enterprise sales we see additional opportunity to capture more share of wallet. Our transformation initiatives and portfolio optimization strategy are creating a more efficient and more profitable company. We are laser-focused on reducing costs across our operations, supply chain, logistics, purchasing and back-office functions. Our efforts are beginning to bear fruit, and we see significant opportunity ahead. Lastly, our accelerated portfolio optimization strategy is enabling us to streamline our operations and drive growth in the most attractive markets. Our assets in Latin America are a great example where we are well positioned to benefit from shortening supply chains and onshoring trends. Taken together, our portfolio optimization actions will improve margins, increase our vertical integration and reduce volatility in our business. Our future is bright, and we look forward to sharing future updates on our transformation progress. Thank you. And with that, Rob, let's move to Q&A.

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

[Operator Instructions] And our first question today comes from Anthony Pettinari from Citi.

Just following up on the North Charleston closure, is there any detail you can give us on potential cash costs of the closure, maybe EBITDA impact? And then, I guess, on the benefit side, any kind of fixed cost reduction estimate or way to think about that?

Yes, Anthony, I'll just give you a quick overview, and I'm going to have Alex walk you through some of the financials. It's -- we're not really in a position to tell you the EBITDA impact because we're going to be transferring the linerboard and the uncoated kraft paperboard to other facilities in our network. If you break out the 550,000 tons, about 280,000 tons were linerboard, the remaining were really split between uncoated kraft and saturating kraft. So we think it's really immaterial to look at it from an EBITDA standpoint. And DuraSorb was really a low-margin volatile segment for us. But as you get into the financials, I'll turn it over to Alex to talk about the cash cost.

Yes, sure. Thanks for the question, Anthony. So as David mentioned, in the quarter, it was $415 million, that would all be noncash. Then in the sort of out periods, we anticipate about $25 million for the balance of this year and then an incremental $75 million between $24 million and $27 million. The majority of those out-year payments would be cash and they'd be related to ongoing carrying costs. For the facility, the resolution of some employee matters, ongoing utilities, those sorts of things. So that should help you with the cash cost. So in aggregate, you're looking at about $550 million of total cost, about 1/3 of that is cash and about 2/3 of that is noncash.

Okay. That's very helpful. And then maybe just switching to Global paper. I mean that performed above our expectations despite the volume weakness and weak global markets. Is there any kind of further detail you can give us on global paper in terms of how containerboard versus boxboard external sales played out or maybe regions that are still quite weak or maybe others that have maybe looked like they're bottoming or just customer inventories? Or just wondering if you can walk us through the market conditions in global paper as you see them right now?

Sure. Happy to do so, Anthony. If you look at the Global Paper segment, obviously, a majority of that is in containerboard versus paperboard. And if you break down our containerboard, the biggest drop has been in export. We probably saw about a 50% drop in our containerboard export business. Domestic was less than that, but still down double digits. Kraft paper much more resilient in domestic markets. And if you look at containerboard moving forward, we believe and we are at a point where we've reached the bottom, and you'll start to see sequential improvement quarter-over-quarter, still down year-over-year, especially driven also with the PPW pricing. But we feel good that we've kind of -- are at the bottom of the trough of the containerboard domestic and export market and see sequential improvement moving forward, but still down year-over-year. If you move over to paperboard, mostly domestic market smaller percentage in the export market, probably about 10% to 12% of our paperboard sales going to the export market. And the export market was down in paperboard and the domestic market was softer, but in the single-digit range. So nothing nearly as material as we've seen in containerboard. So if you break it down, that's kind of how we see our global paper business. And just as Alex mentioned in his notes, despite the really unprecedented drop in volumes that we've seen, EBITDA is still up from 2 years ago, 17%. Margins held at the 16% range, while down over 400 basis points. The team has done a really good job managing really an unprecedented downturn in this segment that we now fully believe will sequentially improve as we move forward.

And our next question comes from Gabe Hajde from Wells Fargo.

I had a question about just, I guess, what we've heard from several of our companies was that January started off pretty good and then sort of deteriorated as the quarter progressed. I'm curious if you guys had the same experience? And then your comment, Alex, about corrugated volumes kind of being down -- or excuse me, mid-single-digit up from March. I guess that still implies down mid-single digit year-over-year. So maybe just a little bit of context around how the quarter progressed and then what exactly you're seeing on a year-over-year basis in April?

Sure, Gabe. And Gabe, just for clarification, I'm assuming you're talking about the corrugated trends?

Yes.

Yes. Okay. So if you look at our quarter, January was definitely our strongest month. We saw it get softer February and March. In February, March, it was pretty stable. We didn't see a drop from March from February. It was pretty similar in February, March in the softness. And then as Alex alluded to in April, as we exited March, we saw mid-single digits growth in April. And everything customers are telling us, everything we're seeing in our backlogs is we'll continue to see that sequential improvement quarter-over-quarter and then, of course, down year-over-year. And one thing to remember in your modeling and it goes into our forecast for Q3 is we see about a 3- to 6-month lag in our contracts on the Corrugated side. So with the PPW pricing decline, we'll start to see that here as we go through the quarter and into the third quarter, but volumes we see sequentially improving. So that will be the balance as we move forward.

Okay. And I guess to make sure that I'm interpreting this correctly, the -- on Slide 5 here, effectively, I think you're telling us the prior $1.5 billion of targeted savings that you guys had communicated, I know a portion of that was sort of capital contingent, and it doesn't look like you're kind of spending that $300 million to $500 million of capital this year. I don't know what next year looks like, but that's the piece that you're kind of taking off the table in terms of the bridge to get you to $1.5 billion. So think about $1 billion as of today. And I guess if that is, in fact, the case, I think Alex said maybe the $4 billion might be achievable still. So how do you -- I guess, what's the incremental bridge item there?

So about 3 questions there, Gabe. I'll try to take them and then just dial me in if I don't get everything that you were after. So first, on the $1.5 billion that we mentioned during our Investor Day. I think it's important for everybody to know, we actually never guided to the $1.5 billion of total productivity. We were always clear that we would reserve some of that to reinvest in the business, predominantly around growth. So what we're doing, the sort of new news here is we are guiding to $1 billion in 2025 through all of the great work that the team is doing and the self-help initiatives that David mentioned. So we're focused on controlling what we can control and we're confident that we can deliver that $1 billion to 2025. But as Slide 5 suggests, we still see $1.5 billion in self-help opportunity, and we will continue to drive to unlock that opportunity in the out years beyond the 2025 time horizon. So that's I think on the first portion of your question. On the second portion of your question regarding the capital to attain that, in line with what we suggested during Investor Day, our sort of steady-state capital diet is in the order of $1 billion a year. We've earmarked $300 million to $500 million for strategic investments. We've pointed to things like the Longview box plant as an example of those strategic investments, investing in some mill conversion type efforts to get to more strategic substrates would be another example. So obviously, this year, we haven't deployed that incremental $300 million to $500 million, but I think it's reasonable to expect as we continue to drive the WestRock of the future. We will look to some of those strategic investments. So I think that was the second part of your question. And then the third part of your question is regarding the 2025 targets, I think it's really important for everybody to hear that we're focused on controlling what we can control, and we're driving strong execution around the cost-savings initiatives and the portfolio-optimization strategy. And despite the challenging macroeconomic environment, we're really focused on this. Should the market conditions stabilize and the relationship between price and inflation return to more normal levels, we do believe that our 2025 goals remain attainable. But as you would expect, and it should be fairly obvious, if the current macroeconomic conditions persist, where this price degradation continues and we have significant inflationary effects, those goals would be under significant pressure, and I don't think that should come as a surprise to anybody. So hopefully, I answered your question, but just to underscore, I do think that this quarter's results in an extremely challenging environment really underscore the progress we're making in driving what we can control.

We proceed with a question from George Staphos from Bank of America.

Piggybacking on that last question, Alex and David, so you're trying to control what you can control. We appreciate that. We realize that you can't control inflation and other factors. How do you gauge -- how should we gauge your progress on your commercial progress? And what I really mean is your gain of mind share, market share with new products and your ability to maintain your volume and hopefully grow it in this environment that we're going to be in the next couple of years. Relatedly, you -- we appreciate the statistic on the machine installations and the enterprise sales, can you give us a bit of color in terms of what the comparisons were and what your goals for growth here are going to be? And then a couple of follow-ons.

Yes, George, I think that's a really important question because when you're in a downturn environment like this, it's easy to focus on the cost and productivity, which I couldn't be more proud of what the team is doing. But you never want to take your eye off of growth. And we have a tremendous amount of effort in our commercial excellence initiatives. And when you look at our commercial progress, it's the solutions we're providing and are we gaining new wins in the market with our complete solutions. So you hit on a couple of things. So first, plastics growth. I think if you were to look at a year ago, we were just over $300 million run rate in plastics replacements. This year, we're already at $400 million, and we continue to expect that to expand. And when you look at our innovation pipeline of new business, it is significant and some really groundbreaking technologies that the team is working on. And that ties also to our machinery because it's automated. And when you look at the strong backlog and the stickiness of our machinery and automation business, the customization that we're able to do. We're seeing that just continue to expand our commercial growth. So that is organic growth that we really feel strongly that we're winning. And then on enterprise sales, what's been really nice about our growth in Latin America is the number of multinational companies that want us to provide complete solutions globally. So they're bringing -- they're doing a lot of onshoring. There's significant growth in Mexico. Brazil, we're seeing tremendous growth. Our assets are really world-class in Latin America. So that enterprise piece, whereas a year ago, we were at $8 billion of enterprise sales, we're now at $9 billion of enterprise sales. And -- so we feel like this complete solutions that we bring in an environment, where we've got a strong innovation pipeline of new products. We measure our new product growth as a percent to our sales. Our machinery and automation provides tremendous stickiness. We have a tremendous backlog in that piece of our business. Our plastics replacements and are we growing profitably? To your point, we don't want to be in this transactional situation where it's onesie-type transaction efforts. Our customers are ones that are partners with us. We've had long-term relationships. They value what we brought to them during a really challenging time over the last couple of years through COVID and supply chain tightness. And we're with them right now in global expansion in organic growth, plastics replacement, and complete solution selling. And we will continue to see the results like what we see, I believe, this year where we have such a broad range of levers to grow and to get through an economic downturn. We just feel great about our portfolio.

Yes. So David, I just appreciate you giving the comparison of enterprise sales from last year. Do you have a target for that by whatever interval? And then on machinery, if you had a comparison and a target, that would be great. And then just my last question, I'll turn it over. In the impairment charge that you took for goodwill, where was that largely centered, which business or which acquisition over the last number of years saw most of that impairment hit? Just are there any things that we should take away as we try to gauge your business and its prospects, either across end market or product line?

So thank you, George. Appreciate that. I'm going to address your enterprise and machinery question, then I'm going to have Alex go through the details on our impairment charge. So as we think about our machinery business, our backlog is incredibly strong, and we're looking to accelerate our manufacturing of those assets because customers are looking to obviously improve their automation with the labor challenges that are happening. So we are looking to expand our machinery business. We love this piece of the stickiness that it brings us for both Consumer and Corrugated. So you're going to look for that to continue to grow. And we'll really start providing more detail on the wins that we have and how that looks. From an enterprise, as we work with the Gondi acquisition, we have just such a wonderful leadership team that came with Gondi and the acquisition. We are just scratching the surface on what that could potentially bring from an enterprise standpoint. One thing to remember about Gondi is they were doing both corrugated and high-graphics so there was a consumer aspect to them. So they're already there from an enterprise because they saw the value with their customers, especially in beverage. And now as we look at onshoring and the connectivity we have in North America with large multinationals bringing that in, I think we're just scratching the surface of what that can bring in Latin America. So we fully expect it to grow mid-single digits is our expectations, where customers want that growth. And again, that's just another value proposition that I think we have to offer. And then on the impairment, I'll have Alex talk about.

Yes. I'll go through that, George. So just to state a couple of things that are probably obvious to the group that are worth stating. The impairment is all noncash. So it's not a cash charge. And it is related to historical acquisitions as you would probably guess. It's impossible -- because of resegmentation efforts that have occurred, it's impossible to attribute it to any one specific acquisition. I think you could make your own assessment on which acquisitions were more or less favorable in our portfolio. In terms of where it fell regarding the segment, it was largely in our Global Paper segment. So we wrote the goodwill on our Global Paper segment down to 0, which again, I think would be intuitive given the challenging macroeconomic environment that we've been facing. And then it was about 1/3 of the goodwill in the Corrugated segment. So that's how it broke out through the financials.

Our next question comes from Mike Roxland from Truist.

Congrats on a good quarter despite various headwinds.

Thanks, Mike. Appreciate it.

Absolutely. David, you mentioned, I think, in some of your opening remarks that you widened the scope of your portfolio optimization and in terms of identifying noncore assets. So I want to get a sense from you, what has changed over the last couple of months for you to take another look at this portfolio optimization?

Yes. That's a good question, Mike. We've always had this, and we've talked about this over the last several years. I think the biggest change has been what we've seen in the market with the really significant turn that happened in demand, it really allowed us to accelerate where we were. You have to remember a year ago, we were basically sold out. And now with this environment that we're in, it's allowing us to accelerate some of the opportunities that we saw. And even when you look at the converting plants, that's a really big opportunity for us because of all the acquisitions we've made we really never fully integrated it from an operational standpoint. And so now that we're able to breathe a little bit with where demand is, we're recognizing in some areas, we might have multiple converting plants within a couple of hundred miles with the productivity that we're generating and delivering and with the ability to potentially move from 5 days of production to 7 days, we can be more efficient in our converting sites while maintaining customer service levels, improving -- and improving our quality, improving our flow through. So I think, Michael, what's changed is we're able to allocate resources to drive some of these productivity efforts and the success that we're seeing, and this goes back to kind of Alex's comments, we may invest more because we're seeing the return on these investments really deliver for the bottom line.

Yes. So just to build off David's comments, just we closed 4 facilities as we mentioned, I think, in the prepared remarks. So within one of those facilities, we had 6 other sites within 200 miles. Another one of those facilities, we had 4 other sites within 200 miles. So a lot of the great work that the team is doing around unlocking that hidden factory is enabling us to consolidate facilities where just by nature of the acquisitive history of the company, we've inherited a bit of a congested footprint. So I think that's really the benefit of the productivity work that we're driving internally. I also think and this gets back to Gabe's question around CapEx and David touched on it. We learned a lot from the Florence investment that we made. We've learned a lot from the Longview box plant on how do we deploy our capital to build the next generation of facilities and really fundamentally shift our cost position. And so as we talk about the $300 million to $500 million of incremental capital, a lot of that is really going to enable us to optimize our portfolio in just a fundamentally different way.

Got it. Very helpful color. I appreciate. Just one quick last question, Alex. You also -- you mentioned some unplanned downtime at several mills and that you're working to improve overall mill reliability. Can you just provide some more color on what happened at those mills, if you can share which mills they were? And if the impact is ongoing and impacting in fiscal 3Q and beyond?

Yes. So I'll start and David can pile on. I'm reluctant to sort of call out specific mills, just because unplanned downtime is sort of the nature of the beast in any asset-intensive manufacturing operations. Some of the examples of that include basically issues in the head end, it includes tears and brakes. It includes issues with the winders. So in the quarter, what we pointed to specifically were some unplanned downtime events predominantly in the mills that serve our global paper business. This is one of the reasons when you look at the productivity bridges, you'll see a pretty big negative productivity impact in the global paper business. And again, if you know our mill network, you can kind of deduce where a number of those mills were. Again, pointing back to focusing on what we can control, what we can control is recapitalizing our assets and driving productivity through the deployment of that capital. And so we're really looking hard at what are the root causes of these unplanned downtime events and how do we address those through the strategic deployment of capital. And in cases where the deployment of that capital is not going to meet our return thresholds, then we'll look at closures, just like we did in Panama City and Charleston. But an example that we've talked about a lot is our ongoing winder investment program. We're really upgrading our winders across the entire fleet. That drives better reliability of the mills and brings us to a different position on the cost curve. So that's how we're -- that's what the issues are and where it manifests in the network and then how we're thinking about addressing those issues as we drive towards the $1 billion in 2025 and beyond. And David, what would you add?

Yes. The only other thing I would add on that is what we're really interested in investing and is looking at predictive analytics. This is an opportunity for us to ensure that we understand if there is heavy vibrations on a machine, we can capture it early, fix it before there's any unplanned downtime as a result of that. So we're also -- as we look at capital investments, we're also looking at digital investments, and we're piloting some pretty neat technologies that are giving us really good insights into our equipment and into our reliability. And I think you can expect us to continue down that pathway.

And our next question comes from Mike Weintraub from Seaport.

Wanted to ask, as you're going through this process of identifying the assets to be reinvesting in and obviously in Panama City, Charleston, the decision to close. Are you seeing that there's a real wide discrepancy in the choices that there are mills and assets in your system that are well capitalized and highly profitable and then there are mills in your system that are at the very far end of the scale. And so then you have to kind of choose among that subset. Or is it more that it's sort of more even across and you've got to make decisions on this is the best places -- in a difficult decision to make, but these are the ones that we choose to go forward with? And are there -- maybe just start with that, please.

Yes. No, that's -- it's a good question, Mark, and I think it goes to the acquisitive nature that the company history has. And when you make these acquisitions, you do get a variety of assets that maybe have been undercapitalized versus overcapitalized in the strategy of the company that made those acquisitions. And so to answer your question directly, I would say we do see a wider range of assets that are well capitalized versus maybe under-invested and they sit differently on our cost curve as we look at it from a cost per ton basis. So what we want to make sure we do is we never want to make sure we underinvest in our strategic high-quality assets, so we make sure we keep those at a great level. And maybe some of those at the other end of the spectrum, we -- that's the decisions that we make. It's -- this is the investment we need to get to the asset quality that we want. Does it give us the return that we expect from that investment? And if it does, we'll always look to invest. And if it doesn't, we have to make the hard decisions like we made in Panama City or North Charleston.

And when...

Does that help answer your question, Mark?

It does. Obviously, more precision over time just would be incredibly helpful. And for instance, just understanding with North Charleston, what is the -- how do you see the financial impact? And presumably, you have a sense of the cost takeout and much of that, as you've mentioned, much of that production, you think you're going to be able to shift, so that's really a cost takeout, but we are going to lose whatever EBITDA might have been affiliated with DuraSorb. So presumably, that would be something we could get something of a sense of as we try to figure out the -- kind of the thought process behind making that move.

Sure. So let me take a run at it, Mark. And the challenge with answering your question, just to be very candid, is obviously, we're not going to talk about specific mills before any decision has been made for a lot of reasons that I think should be obvious. But as David mentioned, there's a very sort of balanced scorecard that we look at in terms of what are the grades that the mill produces and how strategic are those grades and substrates? What is the source of fiber and the fiber supply? And is that competitive when you start thinking about recycle mills that are about 1/3 the ongoing capital diet as a virgin mill. And so that's obviously something that we evaluate. And then what markets does the mill serve and what's the EBITDA less CapEx contribution of those mills. And so that's really the criteria, and we tier each one of the mills in a Tier 1, Tier 2, Tier 3, Tier 4 framework, which I've described for this group before. And we're always looking at if a mill can't move between those tiers, how do we adjust our capital accordingly? As it relates to the Charleston question, which was your specific question, it's an interesting case because we're able -- and I think David mentioned this in a prior question, we're able to basically move a lot of the production of that mill to other mills in the system, again, through the great work that the team is doing and unlocking the hidden factory. And then for the nonstrategic highly volatile DuraSorb product, that's a product line that we're not strategic for us, and we'll exit that and work with our customers to exit that over time. But in aggregate, there is essentially no EBITDA impact from the closure of that mill, and there's a significant benefit in terms of our capital efficiency because we can redeploy that capital into our higher-performing assets. And so that's how we thought about it. And that's the same candidly, the same framework we use for Panama City, and it's the same framework we'll use for ongoing decisions.

Okay. That is helpful. Shifting gears. One thing I noticed is you have a lot less maintenance downtime in the fourth quarter, your fourth fiscal quarter. How big a benefit all else equal, would that typically provide as we're thinking sequentially from the fiscal to the fourth quarter -- fiscal third to fourth quarter?

Yes. Fourth quarter is usually always our lowest maintenance downtime scheduled. As we look at it this year, it is -- I think we have about 19,000 tons scheduled for impact. We'll look and we did this last year, we'll look as we look to balance can we pull in some Q1 depending on where the market conditions are for 2024 into fourth quarter. But that's just typically how it happens. And historically, it's always been that way, but we'll continue to balance it. And if market conditions continue the way they are, we can maybe pull some scheduled maintenance in Q1 2024 into Q4. But as we've mentioned, we do believe sequentially, we'll continue to see volume improvements, and that's going right into our planning as to how we see the market.

And maybe, Mark, just to help with the math a little bit. I think we mentioned on the call, we did take 265,000 tons of economic downtime and slowback. That cost the company about $58 million. So you can sort of do the math to figure out how much the downtime costs us when we take it. And that's obviously economic downtime, not maintenance downtime, but I think it's a relatively good heuristic.

Okay. Because sometimes maintenance downtime is often a lot more expensive than because you're actually spending money in the course of the maintenance. So that's sort of what I was just trying to get a bit more clarity if there was help you could give us.

Yes. I mean it's a fair point, although there's incremental costs associated with economic downtime as well as it relates to the inefficient usage of machinery, inefficient usage of labor, and that sort of thing. A lot of the incremental costs associated with maintenance downtime is capitalized over time. So again, I think it's a fair heuristic to use without getting into specifics of what the maintenance downtime costs us.

Yes. Maybe one last comment I'd add on that is we also have the ability, can we get the equipment that we ordered that we may have scheduled for our maintenance downtime. Backlogs aren't coming down on equipment, but they really got stretched out over the last year or 2. So some -- we've got to make sure we plan our scheduled maintenance as we can get the equipment and so we can do the proper work.

Okay. Super. And just one last one. Just on the energy, if I look at the delta you're expecting for the full year, I think you buy like 85, 90 MMBtu of nat gas. And so that's a pretty low number. Do you have a fairly significant hedging program in place that is kind of minimizing the benefit for this year that we potentially can be seeing next year if nat gas has stayed where they are?

Yes, a couple of things for me to sort of clarify on the bridge. To your specific question on hedging, about 50% of our natural gas is tied to NYMEX, and we do hedge a portion of that through basically a dollar cost averaging approach over time. And so our realized NYMEX price is slightly above what you see and if you were to look at the NYMEX strips currently, but then we're reaping a benefit of that over time as natural gas comes back to more normal levels. The remaining 50% is tied to local contracts. And so that tends to be pretty variable depending on transportation, premium, local market dynamics, contract structure, all of those sorts of things. So that's why our natural gas -- delivered natural gas is not directly comparable to NYMEX spot. The other thing in the number that we provided that includes, it's not just natural gas, it includes electricity and coal as well as other things like diesel and fuel. So it's a bit of a bucket of total energy cost, not just natural gas. So hopefully, that helps.

We have a question from Cliff Rueckert from UBS.

Thanks for sneaking me in at the end here. Just a couple of quick follow-ups because I think there's been a lot of good color. First of all, David and Alex, I'm wondering if you could just give us some color on what's giving you confidence in the troughing demand that you're talking about? That's been a subject of debate for the last couple of months and I'm just wondering if you could give us some color on that, what you're seeing?

Yes. I'd start on the containerboard side. I think just as we look at April orders over March, up mid-single digits, I think we're -- on the domestic side, I think we're getting through most of the destocking that needs to occur. And just how customers talk about the second half of the year, with just a little bit more optimism. The piece that I would also say, though, is, it's still going to be down year-over-year, and we still have some pricing headwinds with our contracts in the second half of the year, but we do believe volume sequentially will continue to improve. I mean, we're out talking to our customers every day on this. We're working with them every day. But it will be a slower ramp up but we do see it sequentially get better quarter-over-quarter. On the consumer side, we -- as we talk to our customers, and again, it's different by segment. Our backlogs remain at about 6 weeks, which is a solid backlog for us, where we can continue to provide the service levels we have. We are seeing some segments that have been softer. And then we're seeing some segments like health and beauty that have been a little bit more resilient. So as we talk to those customers, I think they're feeling optimistic on the second half of the year, but I think some segments are definitely a little softer and some are a little bit more resilient from this standpoint. And then as we move forward, continuing that trend. On the paperboard side, as we mentioned, we've seen a little bit more softness domestically, and we'll watch that trend in our global paper business and see how that continues as we move forward sequentially as well. But it's really been for us on the global paper side, on the containerboard side, and we'll continue to hopefully see that sequential improvement that our customers are talking about, and we'll just have to balance the PPW pricing deflation that's occurred.

Got it. And sorry if I missed it earlier, but I didn't hear any detail on what drove the outperformance versus guidance in the quarter. I think I appreciate natural gas was lower than planned. But could you give us any detail on there? What was different than the guidance and then maybe some sources of variability that we can track into the next quarter?

Yes. So really, it's -- there are 2 primary drivers. Gondi continues to really perform well. And so we're, again, just highlighting how excited we are about that acquisition, the growth opportunities that it unlocks and the quality of those assets. And so that was a business that I think exceeded our expectations in the quarter and given the newness of the acquisition, just a little bit trickier for us to forecast. And then we did have quite a bit of benefit from inflation that exceeded our expectations. So those are really the 2 biggest drivers. And again, all of the actions that we're taking to focus on what we can control. We know it's a challenging market. And so we've really been driving a lot of work on the cost side to take cost out. We pointed to run rate savings in SG&A in the order of $200 million this year. We pointed to procurement and supply chain savings for the year at a run rate basis of between $250 million to $275 million. So again, just really driving towards that $1 billion of cost savings by 2025 with great execution.

And I would just add, even with the terrific performance in Latin America, which I think is really important as you look at our portfolio, you've got Mexico, which has been estimated to grow at 50% faster than North America. You've got Latin America where we have just wonderful assets, terrific leadership in our Latin America business. So that's really helping drive differentiation. But then if you just look at North America, the performance of the North America team has been really, I think, very, very strong. Our EBITDA was basically flat as you look at just North America. So that just talks to the productivity and cost-savings improvement that are going on. Our North America margins actually went up 50 basis points in this challenging environment. Now that will certainly get pressure with some of the pricing. But it, I think, illustrates all the efforts are really starting to have an impact on our bottom line.

Yes. Yes. I mean, I hope you can appreciate from our side, we're trying to gauge whether there's any conservative assumption in the Q3 guidance? And how much of that productivity that you're talking about can carry through, but we can follow up on that offline. Alex, just one really quick follow-up. I don't want to take up too much more time. Do you have an expectation for OCC prices for next quarter that you can share?

Well, let me get back to your prior question. I know you said we could take it offline. But look, we -- when we guide, we guide with our best assumptions that we have at the point in time and we focus on execution. And the fact that we were able to deliver a very strong quarter in the face of a really challenging macroeconomic environment just points to really, really great execution and all the progress that we're making on how we're transforming the company, and we talked about that at length. As it relates to -- and David's mentioned it several times, but as it relates to the back half of the year, we do anticipate that the price impact that we've seen through the Global Paper business will flow through the converting business because of the nature of the contracts. And again, David's mentioned that a number of times. When you think about our guide for Q3, that is clearly a headwind that we're facing. It's not going to slow down our execution, but it is a headwind that we're facing, which is probably the principal assumption in the outlook and how we're thinking about the second half. As it relates to your question on OCC, we are not really -- we're sort of suspending the practice of giving a specific outlook on OCC pricing because, obviously, that is sort of doesn't work in our favor from a commercial standpoint. We did point to total fiber costs impacting the year-over-year comp by around $250 million to $300 million. We do expect OCC to trend higher as we look to the back half of the year. And that's as this new capacity comes online and the demand for OCC goes up, we do anticipate it to trend higher. But of course, that could be offset to the extent there is a weaker demand environment for finished product. But we're not going to comment specifically on what we think OCC cost per ton is going to do. PPW probably does -- or not PPW, but RESI probably does as good a job at that as anybody.

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

Thank you, everybody, for joining our call today and your interest in WestRock. As always, we'll be available if you have any additional questions. And we look forward to updating you again next quarter. Thank you.

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