Nov 2, 2017
Executives
Matt Tractenberg – Vice President-Investor Relations Steve Voorhees – Chief Executive Officer Ward Dickson – Chief Financial Officer Jim Porter – President-Business Development in Latin America Jeff Chalovich – President-Corrugated Packaging Bob Feeser – President-Consumer Packaging segment
Analysts
George Staphos – Bank of America Merrill Lynch Debbie Jones – Deutsche Bank Brian Maguire – Goldman Sachs Mark Weintraub – Buckingham Research Chip Dillon – Vertical Anthony Pettinari – Citi Lars Kjellberg – Credit Suisse Scott Gaffner – Barclays
Operator
Good morning. My name is Sarah, and I will be your conference operator today.
I would like to welcome everyone to the WestRock Company Fourth Quarter Fiscal Year 2017 Results Call. At this time, I would like to turn the call over to Mr.
Matt Tractenberg, Vice President of Investor Relations.
Matt Tractenberg
Thank you, Sarah. Good morning, everyone, and thank you for joining us today.
We issued a press release this morning and posted the accompanying slide presentation to the Investor Relations section of our website. They can be accessed at ir.westrock.com or via the link on the right side of the application you're using to view this webcast.
With me today are WestRock's Chief Executive Officer, Steve Voorhees; Ward Dickson, our Chief Financial Officer; Jim Porter, President of Business Development in Latin America; Jeff Chalovich, President of Corrugated Packaging; and Bob Feeser, President of our Consumer Packaging segment. Following our prepared comments, we will open the call up for Q&A.
Before we begin, I'd like to point out that 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 we discuss during the call.
We describe these risks and uncertainties in our filings with the SEC, including our 10-K for the fiscal year ended September 30, 2016, and our 10-Q for the quarter ended June 30, 2017. Additionally, we will be referencing non-GAAP financial measures during the call.
We provided reconciliations of these non-GAAP measures to the most closely directly comparable GAAP measures in the appendix of the slide presentation. The slide presentation is available on our website.
So with that said, I'll turn it over to you, Steve.
Steve Voorhees
Thanks, Matt. Good morning, everyone.
Thank you for joining our call today. September marks the completion of WestRock's second full fiscal year.
It's been a remarkable two years. Our team's made outstanding progress in building WestRock into the leading paper and packaging solutions company that we are today.
WestRock's adjusted earnings per share were $0.87 in the quarter. This includes an adjusted tax rate of 28.4%.
Full year adjusted earnings per share were $2.62. Our fiscal 2017 adjusted free cash flow exceeded our $1.2 billion target.
We delivered $80 million of productivity in the September quarter, and we're delivering on our $1 billion synergy and performance improvement goal. In September, we reached a run rate of $840 million, $15 million more than our estimates going into the quarter.
Our customers are seeing firsthand what our differentiated strategy means to them. Our comprehensive portfolio of paper and packaging solutions uniquely positions WestRock in the marketplace.
We're combining the delivery of our products and services to address the business needs of our customers. As background, we developed an early focus on a group of 40 customers with a total of $4 billion in sales.
It's remarkable that three quarters of these customers are buying significant amounts of paper and packaging from multiple business lines across both our consumer and Corrugated Packaging segments. The fact that so many of our customers by both consumer and corrugated packaging from us makes a lot of sense.
Since virtually all of our consumer packaging customers buy boxes and many of our corrugated customers buy paperboard, folding cartons and displays. In 2017, this focus paid off with our closing an incremental annual run rate of more than $200 million in new business from these 40 accounts.
Our success has set the stage for additional growth across our portfolio. MPS has brought a new set of solutions and is creating even more opportunities to grow our sales across WestRock.
I'm confident in our ability to further broaden our relationships with many of our customers. The capabilities of our sales and design teams are key to our success in meeting the needs of our customers.
I'm proud to say that two industry organizations recently recognized the outstanding performance of WestRock's sales and design teams. In September, WestRock's merchandising displays business received 18 Design of the Times Awards from the Path to Purchase Institute.
In October, WestRock's folding carton businesses received 13 awards from the Paperboard Packaging Council. This recognition helps confirm my belief that WestRock is unique in our ability to design and deliver outstanding solutions across so many types of consumer and Corrugated Packaging.
This capability differentiates WestRock as we help our customers succeed in their markets. We've improved our business through acquisitions.
During fiscal 2017, we made five acquisitions for a total enterprise value of approximately $2.65 billion. We sold our dispensing business and received net proceeds of over $1 billion.
This net investment of $1.65 billion will increase our future adjusted EBITDA by $300 million on a net basis after the full realization of synergies and after deducting the EBITDA of the sold dispensing business. This results in an effective EBITDA multiple for acquisitions during fiscal 2017 of 5.5 times.
This has been a very successful transformation of our portfolio that has increased our focus on paper and packaging. Given the strength of our cash flows and the long-term outlook for our business, on Friday of last week, the WestRock Board of Directors approved a 7.5% increase in our annual dividend to $1.72 per share.
WestRock pays an attractive and competitive dividend, and the board intends to increase our dividend over time as we increase our earnings and cash flow. I'm pleased with the substantial progress that we've made over the past three years and how our strategy has developed.
Fiscal 2017 was an important year for us and sets us up for significant growth in sales, earnings and adjusted operating cash flows in fiscal 2018. We have attractive opportunities to grow by investing in our business and making acquisitions that improve our business.
Our free cash flow and balance sheet provide us ample capacity to take advantage of these opportunities. Let's turn to the results for the quarter.
Sales were over $4 billion, a 12% increase over the prior year quarter. Our sales increase was due to $495 million from acquisitions and $175 million in pricing gains, driven primarily by our containerboard price increases.
This growth was partially offset by lower volume and the impact of the sale of the dispensing business. Total company adjusted EBITDA margins of 16.1% were stable year-over-year.
This is impressive given the $162 million in inflation that we experienced in the quarter and the $27 million negative impact of the hurricanes. For the full year, total input cost and labor inflation was $548 million.
Productivity was an important contributor to earnings, with $80 million realized in the quarter and $361 million for the full year. Our adjusted tax rate for the fourth quarter was well below our guidance, mainly due to the very favorable resolution of several items earlier than we thought heading into the quarter.
Our balance sheet remains in great shape with ending leverage of 2.54 times. Our pension plans are fully funded.
Turning to the Corrugated Packaging segment. WestRock team delivered strong results in the quarter even after considering the impacts of the hurricanes and high recovered fiber cost.
The fundamentals of supply and demand within our North American Corrugated business are very strong. Global demand for virgin containerboard is growing, and export market pricing has been increasing.
During the quarter, WestRock's North American Corrugated Packaging segment sales were $1.95 billion and adjusted EBITDA was $359 million. Our adjusted EBITDA margin was 19.2%.
This is an increase of 100 basis points over the prior year quarter. Our fourth quarter North American daily box shipments increased 7.5% year-over-year due to gains in e-commerce, pizza, dairy, bakery and industrial markets, as well as the three acquisitions we made during the year.
October daily box shipments have increased by 4.3% from the prior year period. We are improving our channel mix.
Our integration rate for North American Corrugated Packaging business for the quarter was 75%. This represents an increase of 700 basis points from last year and represents substantial progress toward our target of being 80% integrated.
With our strong domestic box demand, we sold 213,000 tons to export markets. This was 34% less than the prior year quarter.
This was the lowest quarterly amount we've sold to export markets in over four years. While our export volume declined, our export pricing increased.
Average pricing across all export containerboard markets increased by more than $100 per ton year-over-year and more than $30 per ton sequentially. Hurricanes Harvey, Irma and Maria resulted in a loss of 30,000 tons of mill production and a pretax reduction in income of $15 million.
We incurred $7 million in incremental cost from the consolidation of two older box plants into a single state-of-the-art plant in Sioux City, Iowa, and the consolidation of our acquired Island Container plant into our Deer Park, New York plant. On a year-over-year basis, recycled fiber cost increased $60 per head per ton with a $66 million unfavorable impact to segment results.
Total inflation across the corrugated segment was $116 million. As we prepare for our winter maintenance outages, we're building our inventory and expect containerboard inventory to increase by 106,000 tons sequentially and reach a peak in our first quarter.
We expect our inventory to decline over the balance of the year, ending fiscal 2018 at approximately 60,000 tons higher than the end of fiscal 2017. We shipped 54,000 tons of virgin containerboard to the Grupo Gondi joint venture during the quarter, and we expect shipments to increase as Gondi grows its business.
Gondi's new lightweight recycled linerboard mill, with a projected investment of $300 million, will be built in Monterrey, Mexico, and will bring its annual production to more than 1 million tons. In October, WestRock increased our investment in the attractive Mexican market with an additional $108 million equity investment.
This brings our ownership in the joint venture to 32.3%. We performed well in Brazil with box line growth of almost 8%, ahead of market growth of 6%.
We incurred $6 million of one-time pretax items in the quarter, adversely affecting adjusted EBITDA margins by 500 basis points. We currently operate an older box plant in the state of Sao Paulo, Brazil.
This plant produces nearly 2 billion square feet of Corrugated Packaging. We've considered many alternatives and concluded that our best alternative is to replace our old box plant with a new, exceptionally well-equipped box plant at a new site also in the state of Sao Paulo.
When fully operational, this new plant will produce over 4 billion square feet of Corrugated Packaging. This investment will provide multiple benefits to us.
First, we'll improve our cost structure and improve our already attractive margins from operating a much more efficiency box line. Second, we build the capacity to serve the growing Brazilian market.
Third, we'll integrate over 100,000 tons of our own high-quality virgin containerboard production from our trades Varkaus Mill. Lastly, we'll fund the project entirely from the cash flow we generate from our existing operations in Brazil.
The net cost of the project will be approximately $125 million, and we expect that the plant will be operational by the end of fiscal year 2019. The WestRock Consumer Packaging team delivered improved sales and adjusted EBITDA in the quarter.
Markets remain mixed would strength in liquid packaging, food service, health and beauty and the strength balance by weaker demand in tobacco and commercial print applications. Overall demand within food packaging and beverage end markets has been relatively stable, with some pockets of strong growth in the U.S.
craft brew, Latin American and Asian Pacific beer and emerging brands in food. Backlogs across our systems are normal for this time of year.
Our SBS and CNK system backlogs are about five weeks and CRV backlogs are over two weeks. Net sales were $1.87 billion.
Adjusted EBITDA was $280 million, and adjusted EBITDA margins were 15%. Segment shipments, excluding pulp, increased 6% and were helped by the NPF and Hannapak acquisitions.
Pricing and mix were favorable as we realized PPW published price increases, and we shifted pulp production to higher-value paperboard production. The impact of Hurricanes Harvey and Irma reduced our production by 22,000 tons and reduced our pretax income by $12 million.
The consumer packaging team delivered $33 million in productivity for the quarter and $205 million for the year. This outstanding result has been due to the effort by the entire team and includes the impact of integrating our businesses, closing redundant facilities and operating more efficiently at our mills, our converting plants and across our SG&A categories.
The Multi Packaging Solutions business performed very well in the quarter. Adjusted EBITDA of $65 million was more than MPS reported as a stand-alone company last year.
The integration is well underway. We've announced the closure and restructuring of three plants that were made redundant as a result of the acquisition.
As of the end of the quarter, we've achieved more than $20 million of run rate synergies and performance improvements, and we remain on track to achieve $85 million by the end of fiscal 2019. The Hannapak acquisition performed well in the quarter, and we're introducing our global customers to our new capabilities in the region.
Overall, WestRock had a solid quarter. We're well positioned in executing our strategic plan.
I'll turn the call over now to Ward. Ward?
Ward Dickson
Thanks, Steve. Our land and development monetization activity is on track to deliver $150 million to $175 million in cash flow next year as well as realize the full cumulative $275 million to $300 million in cash flow from these efforts.
As Steve indicated, we continue to execute very well on our synergy and performance improvement objectives. We exited the September quarter in an annual run rate of $840 million.
We realized $340 million of run rate growth in fiscal 2017 and had $361 million of synergies and productivity flow through our income statement in the year. Our drive to generate productivity is shared by all of our businesses and functions.
Beyond capturing the merger and acquisition-related synergies from internalization, footprint actions and procurement savings, we continue to invest into capital projects that reduce our costs, drive earnings growth and improve our competitiveness across our mill and converting network. For example, we've installed 29 of the planned 30 EVOL Flexo Folder Gluer’s in our container plants.
In our Consumer Packaging converting network, we've updated 13 facilities with printing press and die cutter investments over the last two years. Our culture of continuous improvement is demonstrated by the breadth of our deployment of Lean Six Sigma across our facilities.
We now have more than 850 trained black, green and yellow belts across our company. During fiscal 2017, we completed approximately 1,000 projects that were, in aggregate, a significant contributor to our overall performance improvement.
As previously indicated, we expect to reach our $1 billion target during the upcoming June quarter. Our business is stable, and we generated significant adjusted free cash flow, more than $800 million after dividends in fiscal 2017.
How we allocate this capital is important to our overall strategy and to increase shareholder value. Our first priority is to invest in our business, and we have numerous opportunities in fiscal 2018 and beyond.
Our base capital expenditures for fiscal 2018 will be $850 million, with approximately 50% of that for maintenance and replacement projects, and the remaining investments generating an attractive return that improve our mill and converting assets. We have consistently generated after-tax unlevered returns on average in the 20% range.
In addition to the $850 million of base capital in fiscal 2018, we expect to invest $100 million in two strategic projects: the Brazilian box plant and the installation of the state-of-the-art plant and coder at the Mahrt mill. The net investment in these two projects will be approximately $175 million to $200 million over a two-year period, and are expected that they will provide unlevered after-tax returns in the high teens.
As evidenced by last week's dividend announcement, we are improving our business and growing our earnings and cash flow, which enables us to increase the dividend and return more capital to our stockholders. Share repurchases also remain an effective way for us to return value to stockholders and maintain proper leverage on our business.
Fiscal first quarter earnings are usually lower than the fourth fiscal quarter due to three factors: First, seasonal demand is lower in the December fourth quarter as compared to the September quarter, along with one less shipping day sequentially. Second, increased mill maintenance activity with 113,000 tons of maintenance downtime across our containerboard and consumer mill systems as compared to 19,000 tons in the September quarter, and third, higher medical insurance cost as employees spend more on health care in the December quarter.
In the first quarter, we expect the combination of price and mix to be positive and volumes to be negative. The net impact of these items is a negative pretax impact of $30 million to $35 million.
The assumption regarding WestRock's recycled fiber index is $120 per ton in the first quarter or a decrease of $55 per ton sequentially. Given this recent decline, we expect an overall sequential commodity deflation benefit between $28 million and $38 million pretax.
While OCC should be favorable, we do expect some negative impact from freight and chemicals and increases to virgin fiber pricing due to the recent weather. The hurricane impact from both Q4 and the carryover into Q1 will have an approximate $20 million positive impact on first quarter results.
The combination of maintenance downtime and the previously mentioned group insurance will have a $35 million negative pretax impact. The increase in the adjusted tax rate to 32.5% to 33% will have a negative impact of $0.05.
Increases to net interest expense, D&A and outstanding shares will have a negative impact of approximately $0.03. These items would lead you to a first quarter adjusted EPS range that is more than 50% higher than last year's first quarter adjusted EPS of $0.47, a testament to our stronger business and solid industry fundamentals.
Moving to the full year. We're very excited about the state of our business and overall industry conditions and are expecting a very strong fiscal 2018.
With our current portfolio composition and positive volume and pricing dynamics, we expect strong growth in the upcoming year. First, we anticipate net sales growth to be up approximately 10% from the prior year period, resulting in more than $16.3 billion.
These sales will be approximately 55% in Corrugated Packaging and 45% in Consumer Packaging. Second, we anticipate adjusted operating cash flow of more than $2.3 billion, a growth of more than 15%.
And finally, we expect to achieve adjusted segment EBITDA growth of more than $2.8 billion, approximately 20% over fiscal 2017. Included in our guidance is approximately $275 million to $300 million in productivity and acquisition-related synergies, including internalization of additional tons.
With the potential volatility in recycled fiber prices, transparency regarding our inflation assumptions is important. We anticipate overall commodity inflation of $90 million and increased labor, health care and benefit costs of $130 million.
Included in the commodity inflation figure is an average recycled fiber index price for WestRock of approximately $140 per ton for the year, as compared to $147 per ton this year. Due to the investment that I discussed earlier, we are forecasting total CapEx of $950 million for the year with $850 million in base CapEx and additional $100 million for the Brazilian box plant and the Mahrt coder.
And finally, we recommend using a full year book tax rate between 32% and 33%, and you can find other key assumptions for fiscal 2018 in the appendix. We're excited about the progress we are making in our business, and it is translating into strong financial performance.
Fiscal 2018 is setting up to be a very good year. Steve, I'll hand it back over to you for closing comments.
Steve Voorhees
Thanks, Ward. I'm proud of the progress we made in our first two years as WestRock.
We're partnering with our customers about differentiated solutions that help them win in their markets, and we're building our business in an industry with very attractive long-term fundamentals. Our strategy is working.
We have a large pipeline of internal and external opportunities that will improve our business for the long-term. In fiscal 2018, we expect to significantly grow sales, EBITDA and cash flow.
Using our capital allocation framework, we are reinvesting our cash flow to generate strong returns, improve our business, create long-term value for our customers, employees and investors. On December 8, we'll be holding our first Financial Analyst and Investor Day in New York City.
For those of you who won't be able to attend in person, we'll be webcasting the event live. You can contact Matt for more information.
Matt, I'll turn it over to you.
Matt Tractenberg
Thank you, Steve. I’d like to remind the audience, that in the interest of time, please limit your questions to one with a single follow-up, if needed.
We’ll get to as many as time allows. Sarah, can you please open the call for our questions?
Operator
[Operator Instructions] Your first question comes from the line of George Staphos from Bank of America Merrill Lynch. Your line is open.
George Staphos
Hi, everyone. Good morning.
Thanks for the all details and congratulations on the progress in fiscal 2017. My two questions are going to be really more on strategy and bigger picture.
Steve, if you would – and gentlemen, if you could talk about how defensible you think the strategy is and your positioning is relative to your – obviously, very competent peers that's been able to generate – if I heard you correctly, that $200 million run rate pickup in EBITDA from customers right – to paraphrase your cross-selling? What are you doing differently, to the extent you can comment on that on this call, that you think is defensible that machinery or something else?
And then the second question is, we again appreciate all the color you gave us on your guidance and assumptions. On OCC, given the volatility that we've seen over the last several years, which is probably a little bit more than normal, how is that being built into your strategy, if at all, in terms of how you run your business going forward?
Thank you.
Steve Voorhees
Thanks, George. First, the $200 million increase in sales.
George Staphos
Thank you. Sorry about that.
Have to change the model again. Okay.
Steve Voorhees
Yes. I think with respect to defensibility, our business is one of blocking and tackling.
I think our – we just need to block and tackle better than our competition. And we're doing a lot to integrate our product and solution offerings.
I think – I mentioned the 40 accounts. I think we organized those teams over a year ago, and we include on those teams experts in each of the products and solutions that are relevant to the key account.
I think we're doing very well with that. We've also organize dedicated teams to meet the needs of specific end markets.
And I'm not going to go through all of the specific end markets, but a really good example of this is craft beer, where we have developed – George, you mentioned machinery, we have developed the custom machinery solution offering both corrugated and folding cartons. And we're spending a significant amount of resources to provide commercial and technical training across our sales force and support our ability to provide solutions to the customers.
And I think we made acquisitions, MPS in particular, provides us great experience in integrating the sale of cartons, labels and inserts, providing great example to us as we build those capability across WestRock. Again, I'm very confident in our ability to do that and just very happy with the strategy.
George Staphos
Steve, you think your machinery capability is a little bit better or differentiated versus peers? You don't have to spend a lot of time.
It’s just a quick tag on.
Steve Voorhees
I think it is. I think in – both the corrugated and consumer great capability.
George Staphos
Thank you.
Steve Voorhees
And I think, George, you saw it at Path Expo. So in fact, I'd like you have some direct experience with that.
With respect to OCC. OCC is volatile.
I think it's difficult to assess the direction it will take long term. I think we're balanced.
Our fiber mix is about 60% virgin and 40% recycled. And I think we build into the way we operate our business being flexible to try to adapt to whatever market conditions and OCC prices affect us.
So I think our strategy is rich in that regard.
George Staphos
Thank you.
Operator
Your next question comes from the line of Debbie Jones from Deutsche Bank. Your line is open.
Debbie Jones
Hi, good morning. I wanted to focus a bit on Brazil.
Can you talk about your decision to invest any amount of capital? What are you seeing if it’s going to changes your mind on your purpose in the region?
And should we expect any kind of near-term headwinds as you're focusing on these projects in the region?
Steve Voorhees
Debbie, I'm going to let Jim Porter respond to that.
Jim Porter
Good morning, Debbie. First of all, we've got just a great business in Brazil.
It's a outstanding management team. We've got a great portfolio of assets.
The best virgin containerboard in the market and a growing marketplace. So it's – we love that business.
And currently, we're near capacity in our packaging system. And as Steve mentioned in his remarks, we've got a business in Valinhos.
That's about a 2 billion square foot plant. That's produced excellent results over time, but it's really at capacity, and we have the opportunity to upgrade it.
So this new plant will be one in which we replace that volume with state-of-the-art capabilities and in fact double that capacity, giving us the capability to capture the growing market in Brazil, reduce our cost and further integrate over 100,000 tons of our high-quality virgin board to capture the needs of the Brazilian market. So we think it's an outstanding project returns in the high-teens.
And it just further complements the already excellent business we have in that region.
Debbie Jones
Okay. And then just quick question on the Q4 guidance.
Are you assuming – or can you quantify at all how much you think is [Audio Dip] hurricane-related headwinds? And then on the maintenance and insurance benefits, are you – headwind – are you going to kind of parse that out?
And how is that aligns to your expectations? Is there anything on the hurricane moving into Q4 as it related to maintenance?
Sorry, that I believe about that?
Ward Dickson
Debbie, this is Ward. So the hurricane, the bleed over into Q1 is primarily in the logistics and supply chain with some M&R as well.
And it's – we have about $8 million, $7 million to $8 million embedded into our outlook for Q1 related to additional costs that we'll have really – as a result of the hurricane. When I look at the group insurance and the M&R, that total is – or the group insurance and the maintenance and outage expense, that amount, it's roughly split half and half between those two categories.
And the group insurance, sequential increase that we projected is consistent with the level that we saw from Q4 to Q1 of last year.
Debbie Jones
Okay. Thanks, I will turn it over.
Operator
Your next question comes from the line of Brian Maguire from Goldman Sachs. Your line is open.
Brian Maguire
Good morning, everyone. So I want to start with a question on the export prices in containerboard.
You noted they're up quite a bit sequentially and year-over-year. And I know, over the last year or two, priority has been to improve the domestic integration and ship some of your export tons towards the domestic market.
Just wondering if the pickup in export pricing and the sort of narrowing of the spread between domestic and export price over the last couple of quarters has changed your thinking there at all and just your prioritization of capital going forward. Do you – do these downstream integration still makes sense?
Or does the pretty strong export market make that an attractive outlook now?
Steve Voorhees
Jeff.
Jeff Chalovich
Hi, Brian. Good morning.
So there has been a narrowing of the gap in export market, and as Steve reported, we’re up little over $100 a ton. We'll maintain a significant presence in the export markets.
We have long-standing and valuable relationships in those markets, and we intend to stay there. As we stated in previous calls, we continue to manage details of our three channels, including box, domestic and export.
And over time, though, integration of our box plant system has been and is today the most profitable channel, with the least amount of market fluctuations over time. That's why we're trying to increase our integration rate.
Even as we do that, we have over 700,000 tons plus, even if we made it to 80% of containerboard that we can export. So we're going to maintain a significant presence in those markets.
Downstream acquisitions are still attractive, and each acquisition we judge on its own merits. So what other returns we can generate?
Does it fit our strategy? Would it put us into new and expanding markets?
What synergies can we garnish? And over time, integration has been the least volatile and offers the most attractive margins in all of our channels.
So as far us looking at those, we have a disciplined approach to investing capital. We have shown the ability to integrate acquisitions over time, and so we'll continue to look at it in that regard.
Brian Maguire
Okay. And just another quick question on the consumer side of the business.
Last week, we had a pretty big news from two of the players in the industry kind of combining some of their SBS assets. Just wondering, as you look ahead on the box board markets in general, do you think that, that level of consolidation is a positive for the industry?
Or do you think that there could be any challenges to WestRock from it? But just kind of an overall flavor of any impact you see from that potential transaction.
Steve Voorhees
Bob.
Bob Feeser
Hey, Brian, it’s Bob. Overall, we weren't surprised by the announcement.
And we do think it's generally positive. It doesn't change our strategy in any way.
We have a very strong business model and a strong strategy in the markets. We like the penetration that we have in the targeted end markets with our differentiated packaging solutions.
We've got about 50% of our mix today that's in health and beauty, food service and liquid packaging. And we see those markets as growing better than GDP.
And we've got 40% of the mix that's really what we feel is a stable retail food and beverage business. And we've got great solutions, where we're winning business in those end markets.
So overall, we feel like we're going to be very good and win within those markets.
Brian Maguire
Okay. Thanks very much.
Operator
Your next question comes from the line of Mark Weintraub from Buckingham Research. Your line is open.
Mark Weintraub
Thank you. First, congrats on the stronger volume in the box business.
I was hoping to get any senses to what's been your experience in October. Did that continue?
And then also, thank you for the transparency on the OCC. And you – clearly, you're building an escalation in OCC pricing as the year goes along.
And I imagine that, on the containerboard pricing side, you just put as a placeholder where prices are. But I just clarify – would want to clarify, I assume that's not necessarily a forecast.
That's just a placeholder. And in that context, well, what would be the critical variables, if we are in a rising OCC environment again, what would be the critical variables that might influence on how you think pricing on the containerboard side might play out, what the variables are?
Obviously, I don't expect you’re going to tell me what your plans would be, but the variables you need to focus on.
Ward Dickson
Yes. I'll start with the assumptions that are embedded in the model.
I'll start with OCC for FY 2018. As we said, the average, in the first quarter, for our index is $20 per ton.
And then we have an increase of approximately $20 per ton in the second quarter and then just slight moderation upwards from that through the remainder of the fiscal year to get to an average of $140 per ton compared to this year's average of $147 per ton. Embedded in our revenue model is the full year impact of the implementation of the previously announced price increases both in Corrugated and on the consumer side of the business.
And so with that, I'll turn it over to Bob.
Bob Feeser
Hey, Mark. Good morning.
These multiple variables when we look at when we consider how we go-to-market. Certainly, inflationary cost, input cost we look at.
We look at our channels. We look at our inventory supplies.
We look at our demand, and how that's shaping up. We look at – do we have specialty projects, how we can differentiate it in markets.
So there's a host of variables that we consider in our strategy when we look at pricing going forward. October, I'll talk a little bit about the volumes.
Our volumes remain healthy. So we're at 7.5% in the quarter.
We're up over 4% in October. Even with some of the headwinds in the hurricanes, our Puerto Rico plant is still only at 30% production on the Island.
So the markets remain strong. Our inventories remain tight.
Our backlogs remain strong. So we started off the month as we ended the quarter, and we don't see that changing right now.
Mark Weintraub
And just to clarify, was that 4% average a week or average a day?
Bob Feeser
Yes. Per day.
Mark Weintraub
Thanks.
Operator
Your next question comes from the line of Keith Ventura [ph] from Nemo Capital Markets. Your line is open.
Unidentified Analyst
Thank you. Just to come back on those box volumes numbers one more time.
Sorry if I missed it. But did you mention how much of that was M&A versus organic?
Bob Feeser
No I did. So when we look at – we've integrated acquisitions across our business.
One plant we've totally closed and moved into our Northeast businesses. We're investing capital to grow the business.
The 7.5%, just to give you a range, I'll – we're not going to continue to track it, but the 7.5% in the quarter, we are right on top of the FBA, over 4% was organic. But as we move business around the new plant and customer pairings, we're not going to continue to break out what was organic and what was acquisition because the business gets mixed into other plants, and we're investing the capital to grow the business both organically and through acquisition.
Unidentified Analyst
No, that's helpful. I appreciate that.
And then just one follow-up. Can you talk about what your integration level will be in consumer packaging after MPSX and Hannapak?
And what your target is in consumers packaging for integration, and where does that sits high up of your priorities or getting more integration?
Steve Voorhees
Yes, our overall integrations in consumer packaging are roughly 35%, and that varies significantly by substrate. So in SBS, roughly 20%, in CUK, roughly 70%, and in CRB, a little over 55%, and we haven't set a specific target for overall integrations within consumer.
We continue to look at a number of opportunities that are attractive to grow the business in attractive end markets. And to the extent that, that also has integration benefits for us, that's a positive and certainly something that we would look at.
Unidentified Analyst
Okay. That’s very helpful.
I will turn it over. Good luck in 2018.
Operator
Your next question comes from the line of Chip Dillon from Vertical. Your line is open.
Chip Dillon
Good morning, Steve and Ward. First question, it has to do with what your thoughts are about – or just an update.
You mentioned Gondi's new machine, which, I assume, will – is underway – or in terms of construction. And your tons to them continue to grow.
But when they start the new machine up, will that free up some of the tons you're sending to them from the North American mills you have? And roughly, will that be proportionate to what they start up?
Or would it be something that's less than that, just given the rate of growth?
Steve Voorhees
Jim.
Jim Porter
Good morning, Chip. No, this new mill will not impact in any way our virgin containerboard supply to Gondi and Mexico.
In fact, we anticipate that as they continue to grow as the agricultural demand raises in the region. The premise is this investment is that the markets in Mexico are just extremely tight, and Gondi has a mill system of about 650,000 metric tons and packaging demand is over 1.2 million tons.
So they're in the market buying recycle board in Mexico that is very tight. And so this capacity will allow us to integrate the growing packaging to meet demand that we have.
And we think it's an excellent investment for an excellent business that Gondi operates in Mexico.
Chip Dillon
And on that, you mentioned the tightness down there. Does that extend also to the raw materials situation?
I noticed one of their major competitors is doing something that seems a little bit out of convention by basically taking over a recycled newsprint mill way up in the Seattle area. I guess, presumably, to convert that to recycle board and send that back to Mexico would be my guess.
I didn't know if you had any thoughts on that. Just so everyone knows, this was announced many months ago.
Steve Voorhees
I really have no insight in particular on that. We're aware of that investment, and it's an interesting transaction with what the strategy is.
I really can't speak to, Chip.
Chip Dillon
Okay. And then lastly, Steve, you've mentioned – you all have just a fantastic track record going back certainly to 2010 and really putting with the Smurfit-Stone deal, putting together assets others have built.
As you think about the future and the tight supplies in North America, how do you think about getting your hands on new boards supply? And would that include maybe partnering with others that might spend their capital to convert their capacity and in return you offer some kind of an off-take agreement?
Is that something that you even consider as you look out and you think about the supplies continuing to get tighter?
Steve Voorhees
We look at a bunch of different alternatives as we look at how we can improve our business. I think we're – WestRock is a, I think, in a good position to be able to look at a number of different alternatives.
I think those – pretty consistently our capital allocation strategy. So we're just trying to improve our business.
I think we have the platform to be able to continue to do that.
Chip Dillon
And in that vein, do you feel you’re well supplied in your own system, say it through fiscal 2019?
Steve Voorhees
I'm comfortable with where we are with our supply through fiscal 2019.
Chip Dillon
Terrific. Thank you.
Operator
Your next question comes from the line of Chris Manuel from Wells Fargo. Your line is open.
Chris Manuel
Good morning, guys. Congratulations as far as strong finish of the year.
Just a couple – one quick question and then another question. Consumer.
First quick question, the $1.35 billion plus of free cash flow you talked about, is that inclusive of how much of land sale? Is that roughly $100 million, or?
Ward Dickson
The net after-tax cash flow related to the land sales next year will be approximately $150 million – $155 million to $160 million in that range. And that compares to – its approximately a $30 million increase versus what we did in fiscal 2017.
Chris Manuel
Does that leave any left for 2019? Or is that pretty much in the program?
Ward Dickson
Pretty much end of the program.
Chris Manuel
Okay. Perfect.
And then the second question I had was, when we look at the consumer business, it looks like price kicked positive this quarter to first quarter in a while it's done so, about, I think, $7 million if I’m looking at the slide. What's the cadence?
I think you've got a chunk more there to come with the April increases across some of the grade. How does that layer through?
Is that mostly a calendar 2018 event? Or could we see some of that here in your first quarter?
Bob Feeser
Yes, Chris, this is Bob Feeser. We're realizing the $20 in SBS, that was also reflected in PPW.
So that’s kind of continued to flow through in the – our fiscal first quarter and through 2018. Then also, the CRB increase, we're realizing the $50 that was also reflected in PPW.
Most of that will flow over the next two quarters, and we will see the full annual benefit of that in our fiscal 2018.
Ward Dickson
I would also add, in the quarter, a part of that benefit is the mix benefit related to the 32,000 tons of less pulp shipment and sales in the quarter.
Bob Feeser
Yes, that's been a – just a follow-on that. That's been an important driver of price/mix for us as well, that conversion of pulp to paperboard within our system.
Chris Manuel
Okay, guys. Thank you, good luck.
Operator
Your next question comes from the line of Anthony Pettinari from Citi. Your line is open.
Anthony Pettinari
Good morning. A question on consumer.
You indicated you were pleased with the MPS business and earnings were up year-over-year. I was wondering if you could talk about what categories or products have been strong for MPS.
I think, as a public company, they had seen some uneven demand trends. And if you could just talk about the overall integration of the business.
And specifically, in terms of leveraging, their labeling insert capabilities, is that something that you've been able to bring to other WestRock-converting facilities?
Jim Porter
Yes. Anthony, just in terms of some of the areas in MPS that had been strong, the whole health and beauty segment in general has been strong.
The fundamentals are good in that market. And we see that growing in the 3% to 5% range.
And certainly, MPS is taking advantage of that as well. Another area has been high-end confection.
Our business in Europe has been quite strong. And then also the spirits business in the UK has also been strong as well.
So those are just some of the segments that within MPS where we've seen good strength in terms of overall demand. In terms of taking advantage of some of the capabilities with labels, inserts and other products, we're really beginning to integrate that into our overall offering.
It's still early on, I would say, in terms of the opportunity for us to leverage that, but we're having great conversations with a number of customers, where we believe that those are capabilities that we will be able to leverage in the food markets, to some extent, the beverage markets as well.
Anthony Pettinari
Okay. That's very helpful.
And then just following up on Chip's question on Gondi. Looks like you increased your stake to 32%.
I think when you originally entered the JV, it was 25%. Given the strength of the Mexican market, I mean, is there potential to raise your ownership stake further or even possibly consolidate the business at some point?
Steve Voorhees
There's that potential. I think, right now, we're very happy with where we are at the 32%.
They've got a great management team, great partners. And we are very happy for with where we are.
Anthony Pettinari
Okay. That's very helpful.
I’ll turn it over.
Operator
Your next question comes from the line of Lars Kjellberg from Credit Suisse. Your line is open.
Lars Kjellberg
Thank you. Just had two questions.
In terms of the cost inflation that you're calling, about $220 million, can you give us any color on how you internally can mitigate that? Or what sort of actions you're taking?
We obviously know about the continuation of the benefits from the [indiscernible] deal et cetera. But any internal metrics that can kind of call out with the net cost inflation?
How you see that? And also in consumer board, there's a lot of moving parts at this moment.
Of course, if you start with FX and the potential import penetration, if you've seen any change in that? And equally so, there's quite a lot of overseas capacity, in particular, that is not integrated.
Are you seeing any dynamic changes in the business that would potentially improve domestic supply-demand conditions and pricing generally?
Steve Voorhees
I'll start with the productivity and inflation assumptions. We – many of our inflation assumptions are tied to broad market trends.
And I believe that it really reinforces the need for us to generate productivity in our business. If you look at – that's the single most important thing that we can control.
If you look at the relationship in FY 2018 of our productivity and the internalization – successful internalization of the MPS tons, it's greater than the inflation that we're forecasting for the business. So broadly speaking, we're subject to fluctuations in commodities that all of our peers face, and the thing that we have the most control over is the execution of our productivity programs and the guidance that we provided for FY 2018, we're actually gaining ground and improving earnings by generating more productivity than the input cost inflation is for the fiscal year.
And now I'll turn it over to Bob.
Bob Feeser
Yes. On the – just – you mentioned about the moving pieces around paperboard in the consumer markets.
It's certainly – I think that's certainly true. But Overall, we don't see any significant changes from where we were at, say, six months ago.
Just maybe a comment on penetration around imports. Again, we continue to see very limited penetration in the U.S.
markets. To the extent that we have seen, some that's been more in the low-end plate markets within food service and perhaps more penetration in Mexico and Latin America.
But overall, very little impact on our business, at least in the end markets that we participate in.
Lars Kjellberg
Do you have any thoughts on any upcoming commercials and buy something that will add meaningful – to this market? Are you seeing anything on that?
Anyone of that is – your customers, sort of trying to change suppliers?
Bob Feeser
Yes, I think it's still very early on. We're certainly aware of that pending conversion.
And we are extremely well positioned in the market, commercial print markets, with major distributors, so I feel quite good about our position, and we'll see how this plays out in the market.
Lars Kjellberg
Thank you, very much.
Operator
Your next question comes from the line of Scott Gaffner, Barclays. Your line is open.
Scott Gaffner
Thanks, good morning.
Steve Voorhees
Good morning, Scott.
Scott Gaffner
Hi, Steve, just wanted to ask about the box plant consolidation, $7 million headwind in the quarter. Is that more of a onetime event?
Or what caused that? And should we expect that going forward?
Jeff Chalovich
Hi, Scott good morning. It’s Jeff.
So the Sioux City project is an exciting project. It's really the consolidation of two plants within seven miles of one another into one plant.
It's also very complex. So we're operating the Sioux City Southland while we're consolidating and rebuilding it.
So we've expanded the building. The unemployment rate in that market is 3%.
So we paid some stay-on bonuses for folks in North, but they were able to find jobs. So we had if we run it like a straight contingency.
We've moved people in. We have significant cost from overtime, labor, some of the freight that happened from the hurricane has caused spot market increases in freight.
We had to buy incremental tooling. So it has been an exciting project but added some extra cost that we couldn't anticipate.
I think we've accounted for, going forward into the quarters, what we need to. So I don't see any incremental upset conditions, but the plant is going to be a world-class plant.
It's exciting for customers and for our folks in that marketplace. Greenfield is probably easier to build in, but it's harder to start up and satisfy customers.
So it's a good project overall.
Scott Gaffner
Okay. And when would that facility be completed, do you think?
Jeff Chalovich
So certificate of occupancy should be by the beginning of December, then we do shakedowns and get the equipment up and going. So we had originally anticipated in January.
And so we'll be a little early. Construction is on time.
So we're going to – we're already starting the corrugator up. We got a new flex going there, another one moving in, we still have some things to moving and get running.
But overall, we should have our CEO by December 1.
Scott Gaffner
Okay. And then just one follow-up, Jeff, on the box business.
I think you said October was up a little over 4% after the 7.5% in the quarter. Is there anything within that, whether it's just a comp year-over-year that – I mean, slight deceleration, but anything of note in that number that you call out?
Jeff Chalovich
No, I think – to your first point, we were up 4.5% FBA at the last year in October. So it is a harder comp, and we outperformed the market by over three points last year.
But it's one month in the quarter. It's not final yet, either.
So the 4%, 3% could move up a little or down a little. It's going to be over 4%.
But no, there's nothing in our business or backlog that makes me think there's anything different than what we've experienced in the last quarter.
Scott Gaffner
Okay, thanks Jeff, thanks Steve. See you guys in a few weeks.
Operator
There are no further questions at this time. Presenters, I will turn the call back to you.
Matt Tractenberg
Thank you, Sarah, and thank you for our audience, for your time this morning. We appreciate your interest in WestRock, if you have question following the call Investor Relations team happy to help you.
You can find our contact on today’s earnings release. We look forward to speaking with you again on December 8.
Have a great day, everyone.
Operator
This concludes today’s conference call. You may now disconnect.