Aug 4, 2016
Executives
Matt Tractenberg - VP, IR Steve Voorhees - CEO Ward Dickson - CFO Jim Porter - President of Paper Solutions
Analysts
George Staphos - Bank of America Merrill Lynch Mark Weintraub - Buckingham Research Group Phil Ng - Jefferies & Company Chip Dillon - Vertical Research Partners Mark Wilde - BMO Capital Markets Scott Liebman - CLSA Anthony Pettinari - Citigroup Scott Gaffner - Barclays Capital Adam Josephson - KeyBanc Capital Markets
Operator
Welcome and thank you for standing by. [Operator Instructions].
This call is being recorded. If you have any objections, you may disconnect at this time.
Now I will turn the meeting over to your host, Mr. Matthew Tractenberg.
Sir, you may begin.
Matt Tractenberg
Thank you, Nicole. Good morning, everyone and welcome to our FY16 third quarter earnings call.
My name is Matt Tractenberg. I am WestRock's new Vice President of Investor Relations and I am excited to be here.
I am joined this morning by Steve Vorhees, WestRock's Chief Executive Officer; Ward Dickson, our Chief Financial Officer; and Jim Porter, President of our Paper Solutions business. During the course of today's 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 describe these risks and uncertainties in our filings with the SEC, including our 10-K for the fiscal year ending September 30, 2015.
Additionally, we will be referencing adjusted or non-GAAP, financial measures during the call. We have provided reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in the appendix of this slide presentation.
The slide presentation is available on our website. With that said, I will turn the call over to you, Steve.
Steve Voorhees
Thanks, Matt. Good morning.
Thanks for joining our call. For those of you who have not yet met Matt, Matt joined WestRock in May.
He has 10 years of investor relations experience. I'm very happy Matt has decided to join our team here at WestRock.
I want to start by taking a moment to look back on the first year of WestRock. It's been an exciting year, one that has had many accomplishments.
The merger has gone extremely well and now, a year in, I'm pleased to report we've brought together a great team, created a great Company with the size and scale to succeed in the marketplace and deliver attractive and increasing cash flows to investors. WestRock holds the number one or two market share positions in attractive packaging markets.
We're providing differentiated packaging solutions that help our customers win in the marketplace and our broad portfolio of products and services is resonating well with customers. We're delivering on the expectations that we outlined at the outset of the merger.
These expectations fall into three overall categories, cash flow, productivity and the use of our balanced capital allocation strategy to create long term value. Beginning with cash flow, we managed our business to maximize our long term cash flow returns and we executed well on this objective during the quarter.
We generated operating cash flow of $532 million, with $106 million coming from the reduction of inventory in our corrugated and Consumer Packaging businesses. We expect that our full-year FY16 adjusted free cash flow will exceed $1 billion.
This was the upper end of our previously stated guidance. This highlights the strength of our business model, the capabilities of our team, our leadership position in the marketplace.
It is worth pointing out that WestRock stock continues to provide an attractive, free cash flow yield of nearly 10% at the current share price. Next, productivity, improving productivity requires us to mobilize our Organization, getting literally hundreds of projects defined and completed.
WestRock's teams are getting a lot done to improve productivity. This is demonstrated by the $105 million of productivity benefits realized in our quarterly earnings and our current annual run rate of synergies and performance improvements of $425 million.
Our balanced capital allocation strategy includes paying an attractive dividend, reinvesting in our businesses, pursuing acquisitions that improve our business and repurchasing WestRock shares, all while keeping leverage within our targeted range of 2.25 to 2.5 times EBITDA. Over the past year, in addition to the $1 billion that we returned to stockholders, we invested $1.4 billion back into our business through more than $800 million in capital expenditures and approximately $600 million in acquisitions, including our joint venture with Grupo Gondi.
This quarter we successfully completed the separation of Ingevity. I'm pleased to see the stock perform well.
WestRock shareholders who have held on to their Ingevity stock have over $6 per WestRock equivalent share of additional value. All told, we're executing well on our strategy and this is reflected in our results for the quarter.
During the quarter, we performed well across our businesses. Sales for the June quarter were $3.6 billion and adjusted earnings per share was $0.71.
Adjusted EBITDA for the quarter was $611 million or 17.3% of sales, driven by strong capture of our synergy and performance improvement opportunities. Adjusted EBITDA margins improved by 190 basis points in the Consumer Packaging segment versus the prior year.
We generated adjusted free cash flow of $373 million in the quarter. This brings our fiscal year-to-date free cash flow to slightly more than $800 million.
Then how about this? Over the last 12 months, we achieved more than $350 million in productivity benefits that positively impacted our income statement and cash flow.
Our leverage ratio at quarter-end was 2.33 times. This is within our targeted range.
We repurchased 1.2 million shares in the quarter, bringing the total to 12.5 million shares or almost 5% of the outstanding shares over the past 12 months. Our Corrugated Packaging team executed very well in the quarter, with North American adjusted EBITDA margins of 18.3%.
This is an increase of 80 basis points sequentially. Our North American box shipments declined by 2% on a per day basis from the very strong prior-year quarter.
Our fiscal year-to-date box shipments have increased over the last year and in July, our box volumes have increased 1.7% on a per day basis over last year. Our backlogs are higher than last year.
I am very encouraged by our new business pipeline that's up significantly over last year and is a leading indicator of volume growth. Our box prices declined $16 per ton from the prior-year period as a result of the previously published pulp and paperweight container board price declines.
Sequentially, third quarter box pricing declined by only $6 per ton. Shipments of domestic container board were about the same as last year.
They were up slightly sequentially. Prices of domestic container board were flat sequentially.
Current North American container board markets are healthy, with industry operating rates at 95.6%. Industry daily box shipments increased by 1.5% in June over the prior year.
Container board consumption increased 2.4% in June and industry inventory levels declined and are now down to four weeks of supply. Shipments of export container board decreased slightly from the prior year and increased slightly sequentially.
Our mix of export business was unchanged, with approximately 60% to Latin America and the rest split between Europe, the Middle East and Asia. Export pricing declined only $2 per ton sequentially.
The negative price mix across our box, domestic independent and export customers had a pre-tax impact of $41 million in the quarter as compared to last year. This unfavorable impact was directly offset by ongoing productivity improvement efforts.
Sequential changes in pricing and mix reduced income by less than $15 million which reflects very favorably on our disciplined approach to the market. We balanced our supply with our market demand by taking 72,000 tons of economic downtime in the quarter.
In addition, we took 60,000 tons of maintenance downtime. The joint venture with Grupo Gondi, the premier operator in Mexico, is now complete.
As a reminder, we hold 25% ownership interest in the partnership. Their exceptional team and exceptional assets provide us with a growth platform in a very attractive market.
In the quarter, we shipped 67,000 tons of container board to the joint venture. We anticipate our shipments into Mexico will increase going forward, both from additional integration opportunities, as well as from strong growth opportunities.
We're reporting Gondi's results in the equity investment line on the income statement. For the three months in the June quarter, Gondi's sales were $188 million and EBITDA margins exceeded 20%.
I would encourage you, for the purpose of valuation to include our share of their EBITDA at an appropriate multiple Based on our independent purchase price valuation as of the time of formation of the joint venture, this was in excess of $1 per share for WestRock's interest. Gondi's management is led by Eduardo Posada and they've moved quickly to deploy additional capital available to them as a result of the joint venture.
This includes the announcement of the acquisition of the Aluprint folding carton business and the order of 11 new production lines from Bobst and BHS that will be used to upgrade existing Gondi plants and capitalize new plants. In Brazil, our performance remains strong, despite the continued challenges the country faces, With EBITDA margins of almost 23%, our combined corrugated box and container board shipments increased by 5% compared to the prior year.
Our year-to-date box volumes are tracking the industry, down 2.3% and we're implementing price increases to mitigate input cost inflation. The Tres Barras Mill is running well and we're capitalizing on strong mill performance and weak local currency to profitably export liner board to offset the impact of a soft domestic box market.
As we indicated on our last call, we expected inflation in natural gas, recycled fiber prices during the third quarter to begin to have an impact. This played out as we anticipated, as seen in the recycled fiber prices which were higher by $7 per ton.
An increase in natural gas prices has started to impact us this fourth quarter, but prices are still down as compared to last year. The average NYMEX natural gas price for the third quarter was $1.95, lower than the current strip of $2.82 for the second half of the calendar year.
Overall, the Corrugated Packaging team navigated the market extremely well, offsetting price with productivity improvements and aggressively executing our commercial strategy. I will now turn to our Consumer Packaging business.
We drove meaningful adjusted EBITDA margin expansion of 190 basis points from the prior-year period. This was on solid productivity and integration synergies.
Consumer Packaging net sales for the quarter were $1.64 billion and adjusted EBITDA was $275 million. We're in the process of integrating 250,000 tons per year in SBS volumes from both internalized consumption and the Carolina business.
Pricing was stable in our core markets in the quarter, as the published price reductions covering SBS, CRB and URB in Pulp and Paper Week had limited impact on our results at this point, given our differentiated strategy, portfolio and mix. We delivered $59 million in productivity improvements year-over-year, reflecting the great progress we're making in integrating our Consumer Packaging businesses and realizing the synergies and performance improvements across our expanded platform.
Demand has been stable in our folding carton and beverage packaging grades, as well as an our merchandising displays, home, health and beauty groups. In our consumer mills, industry backlogs improved during the second half of the quarter, particularly in SBS; we're now above prior-year levels.
We're entering the quarter with backlogs of five weeks. Of note, we're continuing to see solid demand growth from hot and cold drink cups.
In SBS, we're seeing limited penetration at this point from European and Asian competitors. CRB is the softest grade due to continuing pressures on packaged food categories such as cereals, crackers and snacks.
Our backlogs for CRB and CNK range from two to three weeks. Beverage had a strong quarter, posting improvements in profitability versus prior-year due to productivity.
We continue to achieve gains in global beer and sparkling water markets which offset the continued weakness in traditional carbonated soft drink demand, primarily North American. We continue to grow with customers that have packaging needs that correspond well with our strategy and capabilities, including craft brewers, new product introductions and paperboard multi-packs in Latin America and China.
Our folding carton team performed very well in the quarter and is executing on our differentiated strategy. Organic sales growth was up slightly as compared to a slight decline for the overall folding carton industry.
Integration of the Cenveo facilities into our folding carton business has been successful. As part of the integration, we announced the closure of a former Cenveo facility in Jacksonville, Florida.
This closure, as well as internalization of mill tons, is driving $12 million of current run rate synergies. We're projecting $17 million of total synergies associated with the Cenveo transaction; this is $10 million more than originally projected.
Using the acquisition purchase price of $98 million, we paid 3 times EBITDA after synergies. This is a terrific transaction for WestRock.
Home, health and beauty results significantly exceeded the prior-year, driven by strong sales executions on growth and mix improvement initiatives, cost containment and operating productivity. Adjusted EBITDA margins for the quarter were at a record for the business and were several hundred basis points higher than prior-year.
Revenue was 4% higher than prior-year, due to growth in North America, Europe and Brazil. In merchandising displays, customer promotional activity has stabilized and we're seeing year-over-year growth with many of our customers.
Our cost actions had a positive impact on results and we're seeing sequential adjusted EBITDA improvement the last two quarters. As part of our long term strategy to balance capacity and investment with market demand, we announced the closure of our Chicago manufacturing facility in April.
We anticipate the cost savings of that closure to have a positive impact in FY17. Now I'll turn the call over to Ward, who will talk about the progress we're making with our land and development business, our synergy capture and other financial topics.
Ward?
Ward Dickson
Thank you, Steve. We made significant progress this quarter and completed a detailed review of projects and strategy within our land and development portfolio.
Segment sales for the period were $42 million and segment income was $10 million. We accelerated the sale of the Walworth property and the $27 million in proceeds was more than expected.
We have been engaged since January with our Charleston-based team and an outside real estate advisor on a project-by-project review to determine the best path forward to maximize value, accelerate cash flows, reduced development costs and risks. We now expect to complete the accelerated monetization of the portfolio within the next 24 to 30 months and realize gross sales proceeds of approximately $600 million.
After distributing our partners' ownership interest and paying off project-specific debt, we expect to realize after-tax cash flows of approximately $275 million to $300 million, in line with original purchase price estimates. More than one-half of this cash flow should be realized by the end of FY17.
The original book value in the merger accounting was approximately $400 million on a pre-tax basis. As Steve indicated, we continue to execute very well on our synergy and performance improvement objectives.
We exited the June quarter at an annual run rate of $425 million. We have generated benefits from the optimization of our consumer mill system, including the internalization of the Carolina tons and the outside bleach board purchases for our folding carton operations.
In addition, we're realizing savings from our footprint actions in both business segments. We continue to make capital investments that reduce costs, such as our EVOL deployment and press upgrades in our converting operations.
WestRock's size and scale has led to sourcing benefits across our raw material purchases. We expect to achieve a $500 million run rate by the end of the fiscal year which is the upper end of our previous range and we remain on track to achieve our $1 billion goal by the end of FY18.
Adjusted segment EBITDA declined by $23 million. We had a $20 million unfavorable volume decline, primarily within Consumer Packaging.
The $39 million unfavorable impact of price and mix was due primarily to our Corrugated business. However, we have benefited from commodity deflation, as lower natural gas and wood prices more than offset increased recycled fiber cost.
Labor cost inflation more than offset these lower energy and material costs. We remain committed to our ongoing productivity initiatives and expect them to continue to contribute meaningfully going forward.
The small FX impact of only $4 million reflects our primarily U.S. dollar revenue base.
And finally, pension income was lower by $18 million, a non-cash impact reflecting our successful pension derisking plan. I am pleased with the strong cash flow we have generated through the third quarter which gives us confidence to say we will exceed our $1 billion adjusted free cash flow target for the FY16.
We're a Company that generate strong cash flow and believe that this metric is important when valuing WestRock. Some of the key business drivers for the fourth quarter are as follows.
First, we anticipate inflation of input cost, including natural gas and recycled fiber. And we're planning major maintenance outages with our Consumer Packaging mill system that will have an approximately $11 million pre-tax impact.
Additionally, we recognized a $10 million pre-tax benefit during Q3 from our Walworth land sale which sold for more than its stepped-up value. We do not expect to repeat these gains in the fourth quarter and expect a sequential $10 million decline in land and development earnings.
However, while these items will result in a sequential decline in adjusted earnings per share, we continue to work aggressively to capture commercial opportunities while controlling cost. We have protected our significant overfunded status in our U.S.
pension plans and that has paid off. We matched our investment strategy with our pension liability so the decline in interest rates has no impact on our overfunded status, as our assets and liabilities move in tandem.
We were overfunded by 107% against our GAAP liability which translated to a $450 million overfunding as of July 15. We do not expect to make any contributions to our U.S.
qualified pension plan. Steve, I will hand it back over to you for closing comments.
Steve Voorhees
Thanks, Ward. Let's look back at the first year of WestRock.
We have allocated $2.4 billion of capital. We have invested $841 million in capital expenditures.
We expect to invest $800 million to $825 million during this fiscal year. This includes the Ingevity funding prior to the separation.
While we've completed our capital expenditure plans for FY17, we expect capital expenditures for the year to be in the range of $725 million to $750 million. We estimate our annual maintenance capital needs to be approximately $400 million to $450 million.
We see numerous attractive return-generating opportunities providing between 15% and 25% unlevered after-tax returns on these investments. Over the past year, we have returned $1 billion or more than 40%, to $2.4 billion to stockholders in the form of dividends and stock repurchases.
This return of capital to stockholders will continue to be an important part of our capital allocation strategy. We continue to see acquisitions as an important growth driver for WestRock.
We have a proven core competency in making good acquisitions and driving fantastic results from them. This is an exciting time for WestRock.
I want to thank all of our WestRock co-workers who have worked to achieve all that we've accomplished in the first year. If you look back, our accomplishments in the first year are significant.
We successfully integrated the Companies, both culturally and operationally. We delivered more than $350 million of productivity benefits.
We separated Ingevity, completed two acquisitions and formed our partnership with Gondi. That's just a partial list because most importantly, we're building WestRock for the future.
We're investing in developing key commercial and operational capabilities that will support our teams as we build upon our accomplishments. WestRock provides value-added innovative paper and packaging solutions that help our customers win in the marketplace and we deliver attractive and increasing cash flows for our shareholders over the long term.
That concludes our prepared remarks. We're now ready for questions.
Operator
[Operator Instructions]. Our first question is coming from the line of George Staphos from Bank of America Merrill Lynch.
Your line is open.
George Staphos
My first question, can you talk a bit about your ability to replicate the productivity performance in consumer in upcoming quarters? Your performance was better than our expectations in the model.
What comparative factors may weigh against it or accelerate it? Obviously, you have the maintenance program -- or the maintenance outage of $11 million this coming quarter?
Ward Dickson
As I think of the synergies and performance improvements that we've had in consumer, we have had a lot of the benefits related to the merger occur in the segment and we've done that very quickly. We have had the internalization of the Carolina tons, the internalization of our external folding carton tons and we've done that on the front end of the merger.
We will continue to have those benefits. We will continue to have the sourcing benefits that we're seeing across both segments flow through.
We will start to achieve some of the synergies that we -- and realize them related to the Cenveo acquisition and the internalization. We do have the headwinds in the fourth quarter related to the downtime that we will be taking across the consumer mill system.
So we're making -- some of the synergies reported to date were front-end loaded related to the internalization, but we're continuing to generate gains across both our converting operations and the mill system.
George Staphos
Okay, so to conclude on that, until you lap this last 12 months, we can continue more or less at this pace, obviously adjusted for whatever volume is going to bring you and also the quarter-to quarter maintenance effects. Would that be fair?
Ward Dickson
That is fair.
George Staphos
Okay. The other thing I had and then I will turn it over, on the Corrugated side, again, you're a bit better than our forecast.
Congratulations on that. Can you talk to the degree you think you have still natural ability to move lower on the cost curve across your fleet of mills?
Thank you, guys.
Steve Voorhees
Jim?
Jim Porter
I'm great, thank you. George, we have an incredible runway of opportunities in our corrugated mill system to drive value.
We've got a big system and you've seen us make changes to our portfolio with the closure of three of our assets and the acquisition of Dublin which has been a reset in our capability to move products around through our system and has improved our free cash flow within the portfolio. We also have substantial capital investments that are producing fruits.
We have a supply chain system that is going through substantial improvement and modification. You've seen that evidenced by the dramatic drop in inventories that we posted this last quarter.
So there's a nice runway of projects and our team is highly aligned and driven to create productivity.
George Staphos
Jim, do you think you can move down one quartile?
Jim Porter
That's being a little specific, George. We have -- each mill has its own runway of opportunities and we still have some movement between our assets, but certainly that concept is what drives us.
Operator
Our next question is from Mark Weintraub of Buckingham. Your line is now open.
Mark Weintraub
Thank you. I was hoping if possible to get a bit more color on the comment that you're very encouraged by the business pipeline and noting that, that's a good indicator.
One thing that -- a very good quarter, obviously -- one thing, year-over-year volume was still a negative for you in what's been a not a great but an okay environment. How close are we, do you think, to where that volume variable can start being a positive for you?
Steve Voorhees
Mark, on the pipeline, we have a very structured approach build, go-to-market in container. We measure backlogs, we measure pipelines and they have proven to be very reliable indicators of changes in volume over time.
I reported I was very encouraged by the business pipeline. That's because we aggregate the potential we have across our system and prioritize it, I feel very good about our ability to grow volume from this point and have showed in the July results.
Mark Weintraub
So you're hoping that, basically, volume can start being a positive, assuming no negative macro developments?
Steve Voorhees
Exactly. It was a positive in July.
Mark Weintraub
Okay. And maybe somewhat relatedly, you said you'd shipped 60,000 tons of container board to Gondi in the just ended quarter and they ship 211,000 tons of converted product.
How much more are they buying from the outside or is most of the balance there board that is actually made at Gondi?
Jim Porter
Their assets and that marketplace is one that has substantial growth opportunity and partnering with them gives us an incredible pipeline to further integrate with them. They have approximately 500,000 tons worth of manufacturing capability in the fiber-based packaging grades in Mexico and the balance is procured from others.
There is local board that is procured, but a big benefit to Gondi is being able to tap into our very high-quality virgin substrates that gives them further capabilities to penetrate in the markets we serve. So net/net/net, we see a big opportunity to both improve their capabilities, as well as our vertical integration.
Mark Weintraub
So would it be fair to say a little bit more on the integration from where it is, but then you grow with them. Is that the way to think about it?
Jim Porter
Mark, that is exactly the way to think about it. We can get you the exact number offline.
Operator
Our next question is from Phil Ng of Jefferies. Your line is open.
Phil Ng
Strong quarter. Backlogs in the CNK and CRB was a little bit weaker than I would've expected.
You are taking a little maintenance in fourth quarter, but are you planning to take a little economic downtime, as well? I just want to get some clarity on how order patterns are shaking out in that segment in July and August because I've heard that some of the CPG guys have ratcheted back inventory late in the year?
Steve Voorhees
So your question centers on CNK and CRB.
Phil Ng
Yes.
Steve Voorhees
Both of those segments, we'll say, the demand is solid; however, backlogs have retreated somewhat. The beverage business, as we all know, is seasonally strengthening somewhat below prior years, but it's still a solid market for us.
Clearly, the craft brewers is a growth segment and so we will, yes, match our supply with demand and that's the landscape in the CNK area. CRB backlogs in the two- to three-week range and certainly it's competitive in the food board segments of the market, but we like our portfolio.
We have a very strong customer base and we will succeed in those markets.
Phil Ng
Okay. And a question for Ward, I'm not sure if you prepared to give too much color on 2017, but with input costs rising a bit, some slippage on pricing, offset by synergies and CapEx is looking a little lighter than we baked in.
Is that $950 million to $1 billion type free cash flow threshold sustainable when we think about 2017?
Ward Dickson
We're in the early stages of doing our FY17 plan. We're not prepared to give any guidance for 2017.
We did give what our ongoing CapEx would be, as we move forward into 2017. We feel really good about the runway that we have related to the performance improvements and synergy targets.
We will have inflationary pressures just like the rest of our peers in the segment. We will -- as we put the plan together, though, we also have to assess what we think the opportunities are going to be from a volume and price point of view.
So we're not prepared to give 2017 cash flow guidance, but we're piercing through the high end of our range for 2016.
Phil Ng
One last one for me, now that you guys have spun off Ingevity, should we expect buybacks to pick-up? Just want to get your thoughts on what you're seeing on the M&A pipeline side.
There obviously been a few box transactions in the marketplace, further integration probably wouldn't be a bad thing for you guys. Just wanted some thoughts in terms of capital deployment the next year or two?
Thanks.
Steve Voorhees
Philip, we're going to continue to implement our balanced capital allocation strategy. As far as stock buybacks, we've bought back about $50 million this quarter.
That's a $200 million run rate which is in line with where our cash flow generation is. As far as the acquisitions, we continue to look at acquisitions and you should expect us to continue looking at acquisitions and take advantage of the opportunities that we see to improve our business.
It's part of our strategy.
Operator
Our next question is from Chip Dillon of Vertical Research. Your line is open.
Chip Dillon
Yes, good morning, Steve and Ward. First question is on the land sale situation.
I know that when Plum Creek did the deal with MeadWestvaco about three years ago, the all-in value of their lands, they implied, were around $530 million. It looks like, if I add this up right, you are expecting $600 million more on top of the $75 million you just got, if I got that right.
Is that a fair representation of how much that land value has gone up over those three years? The all-in value might be closer to $700 million or am I -- are there still more lands in addition to the 68,000 acres?
Ward Dickson
That is a tough question for me to look back that far. What I can tell you is, we look back and presented to the Board last week a look-back of the total proceeds of the land and development operation.
I found an investor presentation that was done by a MeadWestvaco team in 2011 and they projected what the gross proceeds were going to be across all of their holdings. We've looked at the sales to-date from 2011 to now and what we think we're going to realize, we're actually on the higher end of the range that they projected back in 2011.
So we feel good about the progress. We feel very good about the accelerated monetization strategy that we have and we have confidence that we're going to be able to generate the $600 million in gross proceeds and the $275 million to $300 million of after-tax cash flows to WestRock.
Chip Dillon
Okay. As you -- let's say that you continue to get a little bit better than the stepped-up basis, I would assume that, as each quarter as you sell land and you get some above your basis, you would continue to report that as ongoing earnings, so there could be a little bit of lumpiness like we saw this quarter.
Is that something we should expect? Nothing major, but I would imagine it could be to be -- could it be a $10 million or $50 million one quarter, $0 the next?
Ward Dickson
Exactly. Because remember, we valued each project within the portfolio and we feel very confident about the aggregate, that we will exceed the purchase price original purchase price that was done in the merger accounting, but we could have some ups and downs on the individual projects.
That will cause some earnings contribution and volatility from quarter-to quarter.
Chip Dillon
Okay. And then just the last question, just on the container board business.
Are you happy now, in the sense of where your inventories are now down to or do you feel there is more reduction required? Then looking it around, how do you think about the industry now on the cost perspective?
It would seem like, even globally, that we had seen costs basically moving down for the last two, three years, but now it looks like suddenly they are up meaningfully, especially outside the U.S. on the fiber side.
And here, not only on the OCC side as well, but on nat gas. Does that change the way you think that the business dynamics look, at least next year or the year after versus what we saw in the past?
Jim Porter
This is Jim. I will take that one.
First of all, on our inventories, as I've shared on previous calls, we manage our inventories at a very granular level and the whole purpose of our inventories is to make sure that we're able to provide our customers on time delivery and using the best weight freight. I also said that coming out of our heavy outage period this past couple of quarters, we would be reducing inventories this quarter and that's exactly what we did.
Frankly, from the February peak, we were down 191,000 tons and quarter-over quarter 152,000, so that's a substantial drop in inventories, as we said we would. Where we're currently, we like our position.
The logistics network and our supply chain capabilities have improved dramatically. Railcar availability, truck trade availability leads us to a point where we're pretty pleased with where we're currently.
There will always be some pluses and minuses and maybe over time, a small incremental further reduction, so I hope that gives you color on that front. Relative to cost, there's no question that we're facing some headwinds on natural gas and fiber and you have normal inflation.
However, we also have a nice pipeline of productivity. So we think, overall, our cost structure in our North American container board mill system is one that we have opportunities to further improve.
The competitiveness globally which I think you were implying is all currency related and certainly we can't control that. So I hope that's germane to your question, Chip.
Operator
Our next question is from Mark Wilde of Bank of Montreal. Your line is open.
Mark Wilde
A -
Steve Voorhees
Sure. We start with looking at acquisitions as we want to do those that improve our business.
We do see opportunities in our North American Corrugated and Consumer Packaging businesses. Cenveo was a relatively small transaction.
SP Fiber would fit into that. I know you're very familiar with Gondi, Mark.
Latin America fits very well with our Company. We have a great business in Brazil.
We would like to invest more in that. We export 60% of our container board to Latin America, so I would say very natural place for us to grow, so that would remain, outside the U.S., the primary focus.
We do have strong operations in Europe and Asia and those we would look at, as well, but the opportunity has to fit our business and has to make our business better.
Mark Wilde
Okay. All right.
The following question I had, Steve, was just back in the SBS market. You mentioned specifically that you weren't seeing a lot of pressure from Asia and European SBS.
I assumed that, that was coming into the U.S. and I just wondered if you could talk about your export business, because when I look at the trade data so far this year, all the SBS-grades are down pretty sharply?
Steve Voorhees
I am going to let Jim respond to that, Mark.
Jim Porter
As you know, our portfolio of paper board grades is very focused on the premium end of the marketplace, where we're serving the most demanding market segments in tobacco and commercial print, liquid packaging and specialty poly-coated applications. In North America, we compete very well and that's the reason has Steve remarked that we have seen negligible penetration into our markets competing against our premium grades.
In the international markets, we use those products in exactly the same way. We have excellent customers in literally all the regions of the world that value our premium substrates and we've seen very consistent demand for those products and we'll see so going forward.
Steve Voorhees
Mark, I would add, when I have gone to Europe and Asia and talked to our sales force, they are incredibly talented at taking the needs of the customer and translating it into the specific quality of paper that they need. It is remarkable to me to see what they do.
If you look at the overall volumes that we export, it ends up being a more of a -- it's a differentiated business, but it's more of a niche business because we're taking our technology and talent and just serving the precise needs of our customers. So is on point to our strategy.
Operator
Our next question is from Mark Connelly of CLSA. Your line is open.
Scott Liebman
This is Scott Liebman in for Mark. Just a quick question for you.
Is WestRock still being as selective in mill reinvestment that it makes on the container board side, similar to RockTenn and how they were? I'm curious as to whether you are selectively reinvestment to strengthen some of the mills but not others has achieved what you wanted thus far?
Would you say you are closer to a steady state? Or whether you are still selectively reinvesting with a view to further rationalize the number of mills as one of your big competitors has done pretty successfully in recent years?
Steve Voorhees
We have a very rigorous capital investment process within both our mill and our packaging operations. I don't think it's changed from -- you referenced to RockTenn to the present.
I don't think there's been any systemic change. We deploy capital to ensure the safety and environmental strength of each of our assets and then we deploy capital to maintain our assets in a highly efficient way.
Most of all, we try to tap into the creative opportunities to make our businesses better. It's a very rigorous process that we would see continuing.
Scott Liebman
And then just one follow-on. When you did the SP Fiber deal, you said you expected significant synergies and for the deal to be accretive in the second half of this year and you've obviously changed the footprint there since the transaction was made.
Was that part of the original plan and do you still think that SP will be accretive in the second half? And just overall in that transaction, are you getting the benefits that you expected?
Steve Voorhees
We're getting the benefits we expected. Newberg was not a significant contributor to the overall economics of the transaction.
Dublin is the assets that fits very well into our system. We did come up with a -- for Dublin, if you look at the -- say, the productivity improvements that we expected over the first three years, our goal at the time we announced the transaction was $41 million.
We're now, after less than one year, we're at $40 million. So we're not quite at what we achieved, but we're effectively there and then we have line of sight to $46 million and more.
We took our Board there last week and the mill looked great. The people looked better.
The production is on track. It is a good fit in our system.
We're selling a new product for us in recycled craft bag them and that has worked very well. Our productivity programs are in place and the mill continues to fit very well in our system.
So this is -- right now, it has worked out better than we anticipated at the time we announced the transaction.
Operator
Our next question is from Anthony Pettinari of Citi. Your line is open.
Anthony Pettinari
I was wondering if you could talk a little bit about market conditions in Brazil. Your box shipments declined in the quarter for you and the industry.
Are you seeing any stabilization or maybe improvement there in terms of local demand or do you expect it in the second half? And then, to the extent that you can, can you talk a little bit about the price increase that was announced there?
Ward Dickson
Brazil is, first of all, an incredible asset for us. The forest land, the Tres Barras Mill is state-of-the-art and our integrated packaging portfolio is a great business for us and is performing extremely well.
We're all well aware of the political and economic challenges in Brazil and I don't know that I could necessarily predict the trend line going forward on that whole thing, but I would say it will improve over time. I'm just not sure the pace of that.
Relative to our ability to compete, we have superior assets and the quality and capability of both our container board and the products coming out of our converting system are winning in the marketplace. So, as the economy improves, we're going to win.
The beauty is, we also have a very low cost mill that is able to toggle between domestic consumption and export, so you've seen our export shipments increase over time. Net/net, I love our position in Brazil.
Anthony Pettinari
Okay. Then following up on that, it seems like there's a lot of local producers there who might be much higher cost and OCC prices have come up pretty sharply there.
When you think about rejace's market position within Brazil over this very deep recession, have you been gaining share? Have there been smaller local guys who have dropped out?
Any color you can give on the market dynamics there maybe over the last year, 1.5 years?
Steve Voorhees
I don't know that I can speak to our competitors falling out. I just know I love our position.
We have a premium virgin product coming out of the state-of-the-art mill that's vertically integrated with a great packaging system and a forest resource that makes us very low cost. So I like our position.
Operator
Our next question is from Scott Gaffner of Barclays.
Scott Gaffner
Steve, just to go back as a follow-up question on this new business pipeline, has there been any change in the way that you approach the sales team, are we up against easy comps over last year, anything you could talk to about the go-to-market strategy that would have any consequence on that would be great? The only reason I ask is because you go from the minus 2% in the quarter to 1.7% in July.
That seems to be a pretty big inflection point?
Steve Voorhees
We worked into the call comments, that over the past year, this fiscal year, our volumes are up slightly. We do not focus on, call it, quarter-to quarter or month-to-month changes in our volumes.
I know the investment community does, so we, in turn, have to focus on it, but we're focusing on building a Company that is very profitable and generates long term cash flows. So we're very focused in container, but we have just a very structured way to go to market.
If you come to work at WestRock, you go through a certain training and we go to market and a very consistent way. Then we're in the process of, I'd say, rolling that out broader, more fully across WestRock and we're in a position to do that.
I just came across something that Gallup, they have an email that they send out periodically that covers us all sorts of different topics. They sent one out yesterday and their conclusion was they find most companies can double their revenue by simply selling more to the existing customer base.
I just repeat that because that's really on point to what we're doing. Most of our customers will buy folding cartons, they will buy boxes and we're taking our sales force and we're going to market to identify those customers we can go through and add value to.
That's a long-winded answer to your question, but I am very pleased with what we're doing. We're building that capability over the long term.
Our volumes will go up or down from quarter-to quarter, but if you look at the overall portfolio of business we're generating, it's a very attractive portfolio of business. I am going to go on because we're supplementing that with capital.
So in Container, we've been very clear about the investment we're doing with respect to the EVOLs. As part of our capital budget process we talked about earlier, we go back and look at all of our capital as to whether it does what we thought it was going to do.
At least in Container, as part of this process, we reviewed $80 million in capital projects in our Box business and a lot of them were EVOLs but there were other projects, as well. The actual cost was within 1% of what we thought it was going to be.
The actual returns, we estimated at 15% after tax; the actuals were 20%. So they were well in excess of what we thought when we made the investment.
So we have, I'll just say, full-court press across our business to go to market in a way which is very for perfect us and then back that up with the investment in capital and talent to make the business -- we will create a lot of value over the long term by doing that.
Scott Gaffner
Okay. Just one clarifying point there then.
Are you saying that the pipeline looks better maybe year-over-year because you're finding opportunities to go out to Consumer Packaging customers that you didn't have maybe a year ago and sell them some of your Corrugated Packaging? Then I will turn it back over?
Thanks.
Steve Voorhees
That's a contributing factor. The answer is yes.
It's not the only factor, but it is a contributing factor.
Operator
Our next question is from Adam Josephson of KeyBanc. Your line is open.
Adam Josephson
Ward, two questions from me. The first is a multi-part question, if you don't mind, on free cash flow.
Can you just talk about what the source of the FY16 free cash flow increase was? Was it working capital, CapEx, EBITDA or otherwise?
And then -- and can you clarify what, Ward, you are expecting working capital to contribute to free cash this year? And lastly, with respect to free cash, your initial FY16 free cash guidance was $850 million which included chemicals.
Now you are saying, for next year it will be $725 million to $750 million, obviously excluding chemicals. How much of the difference is chemicals versus other?
And thank you for all those responses.
Ward Dickson
Adam, I will start with the second one, first. We had capital investments from our specialty chemicals business of approximately $45 million during the period of time that they were part of WestRock prior to the spin, so that is your reference point on the second point.
If I go back and I look at the free cash flow guidance that we gave earlier in the year, a lot of things have changed. We've had pricing changes in the marketplace; we have had inflationary pressures.
If I were to give you the reference points of why we're going to generate the higher cash flow or come out on the higher end of the range, earnings are better, our working capital source that we talked about at that point in time is actually lower. The other cash items, such as cash taxes, they are very consistent with the assumption that we laid out back earlier in the year.
Then CapEx is clearly on the lower end of the range that we had identified at the beginning of the year. We will even come in just below the $825 million that we had described.
So again, it's earnings, working capital is not as big of a use as we described back then, the remaining balance sheet items are fairly consistent and then lower CapEx.
Adam Josephson
Just one on the sequential guidance, I know you called out the $10 million lower income from land, the $11 million of higher outages in consumer, you had higher input costs, you had flat to slightly down price mix. Can you give us any more sense of the magnitude of the sequential decline that you are expecting?
Ward Dickson
We spelled out the two items that add up to $21 million and you can look at our natural gas usage in our recycled fiber and look at the changes in the strips and then the change in OCC. It is pretty straightforward how you calculate that.
We do have some residual price mix flow-through from the PPW reductions that took place earlier in the year that does occur in Q4, but we're not giving specific EPS guidance for the fourth quarter.
Operator
Thank you. That concludes today's conference.
That you for participating. You may now disconnect.
Matt Tractenberg
Thank you, Nicole. Thank you to our audience for joining us this morning.
We're proud of our progress and appreciate your interest in WestRock. If you have questions following the call, investor relations is happy to help you.
We can be reached at ir.westrock.com. We look forward to speaking with you in the coming weeks.
Have a great day, everyone.