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WestRock Co (WRK) Q2 2019 Earnings Call Transcript

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WestRock Co  (NYSE: WRK)
Q2 2019 Earnings Call
April 30, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, my name is Marcella and I will be your conference operator today. I'd like to welcome everyone to the WestRock Company Second Quarter Fiscal 2019 Results Call. At this time, I'd like to turn the call over to Mr. James Armstrong, Vice President of Investor Relations.

James Armstrong -- Vice President, Investor Relations

Thank you, Marcella. Good morning and thank you for joining our fiscal second quarter 2019's earnings call. We issued our 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 link on the right side of the application you're using to view this webcast.

With me on today's call are WestRock's Chief Executive Officer, Steve Voorhees; our Chief Financial Officer, Ward Dickson; our Chief Commercial Officer and President of Corrugated Packaging, Jeff Chalovich, as well as our new President of Consumer Packaging Pat Lindner and Bob Feeser. Following our prepared comments, we will open up the call for a question-and-answer session. During the course of today's call, we will be making 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 30th, 2018. Additionally, we will be referencing non-GAAP financial measures during the call, we have provided reconciliations of these non-GAAP measures to the most directly comparable GAAP measures in the appendix of the slide presentation. As mentioned previously, the slide presentation is available on our website.

With that said, I'll now turn it over to you, Steve.

Steve Voorhees -- Chief Executive Officer

Thanks, James. Good morning, thanks for joining our call today. Our WestRock team delivered outstanding results in the second fiscal quarter of 2019. Our adjusted segment EBITDA of $757 million, improved by $108 million over last year. The increase in EBITDA was primarily driven by the acquisition of KapStone and our adjusted EPS was $0.80 per share. We're responding to changing market conditions by matching our production to our customers' demand.

During this past quarter, we reduced our containerboard and kraft paper production by nearly 300,000 tons, with approximately 100,000 tons from plant maintenance and 200,000 tons from economic downtime across our system. We're focusing on organic growth opportunities where we can create customized, value added solutions for our customers that reduce their total cost and/or grow their sales. This focus increased our packaging shipments during the quarter and increased the use of the converting assets across our system.

This contributed to the realization of $68 million in productivity in the quarter. We successfully completed the installation of the new curtain coater at the Mahrt mill in March. This was the first of three significant projects in our Consumer Packaging mill system that will be completed by the end of June. In aggregate, these projects will enhance our ability to meet our customers developing needs and improve our cost structure. The advantages of our broad paper and packaging portfolio coupled with the multiple levers we have in our control, provide me with confidence in our team's ability to create long-term value for our customers and our stockholders.

Turning to the financial results for the quarter, we benefited from the flow-through of previously published price increases for all of our major paper grades. The positive impact of price increases were offset by lower containerboard export volumes, economic downtime, mill outages and wage and other inflation. Hardwood cost were largely offset by lower recovered fiber cost. Our net leverage ratio was 2.96 times at the end of March.

Corrugated Packaging adjusted segment EBITDA of $553 million increased by 24% over last year. This represents the sixth consecutive quarter that we've reported North American corrugated margins of 20% or more. During the March quarter, we lowered our inventory levels by 60,000 tons. And so far in April, we've reduced our inventories by another 30,000 tons and have taken 55,000 tons of economic downtime. Our box shipments grew 20% year-over-year on a per day basis. After adjusting out the volumes from the KapStone box plants, our volumes grew organically by 2% on a per day basis over last year. Gains in e-commerce, food service, processed food and bakery contributed to this growth.

Let's discuss our integration rate. Our integration rate for the last 12 months has been 77% and it was 80% this past quarter. Organic growth in box volumes contributed to the increase in integration, KapStone's complementary footprint has afforded additional sales to existing WestRock customers, who are now able to access our broader geographic footprint. We've integrated an additional 67,000 tons in annual box shipments through our Victory Packaging systems.

Also contributing to the increase in integration has been a decline in our export volumes which during this past quarter accounted for only 10% of our total containerboard shipments. This compares to 15% in the same quarter of last year. We saw higher year-over-year inflation especially in wood, freight, energy, labor and benefits. These inflationary pressures were partially offset by lower recycled fiber cost. We're making progress rebuilding the Panama City mill. We expect the mill's two machines to build back up to normal production during the June quarter. Other repairs will be complete by the end of the calendar year.

We recorded income from the $30 million in business interruption insurance proceeds. These proceeds were not included in our guidance for the quarter. After taking these proceeds into account, the contribution to income from the Panama City mill was approximately equal to last year's contribution, when the mill was fully operational. Results, adjusted segment EBITDA margins for the quarter declined to 22.2%, down from 26.8% last year. This decline was driven by overlapping cost as the Porto Feliz box plant ramps up and the Valinhos box plant ramps down. This will continue until Valinhos is closed the summer.

Our Consumer Packaging business performed well during the quarter, with sales up approximately 2% year-over-year, as we realized higher prices from previously published price increases. Adjusted segment EBITDA was ahead of last year. The outage expense related to the Mahrt curtain coater project and significantly higher would cost, especially for our Covington mill contributed to slightly lower margins. Without these two items, adjusted segment EBITDA margins would have been 180 basis points higher than what we reported.

Our team delivered strong productivity of $41 million as a result of high operating utilization across our converting system and the benefits from ongoing productivity programs and capital investments. Commodity inflation was elevated in the quarter, driven by wood cost that were $17 million higher year-over-year due to fiber supply challenges from the extended wet weather. We've seen improvement in water availability in April and we expect cost to moderate in the second half of the fiscal year.

Backlogs remained strong across all of our major grades. In the second quarter, we expect sales growth across our target end markets especially food service, retail food, beverage, beauty and cosmetics. In beverage, our machinery solutions are enabling customers to replace printed shrink films, with more sustainable paperboard multi-packs. We've installed more than 20 machines year-to-date, including high speed machines for soft drink applications and basket alp machines for beer to replace printed plastic film. Customer activity remains high and we have a strong machine pipeline for the second half. Our team at Mahrt successfully executed the installation of the new curtain coater in March and the mill is now fully operational.

The start-up of the machine has gone extremely well and we're seeing the productivity benefits and lower cutting cost that we expected. The Covington mill upgrade is under way as I speak and it will be complete in May. We're installing a new head box at the Demopolis mill in June. The cost of the Covington and Demopolis projects will adversely impact our margins in the June quarter.

In the September quarter, we'll benefit from the volumes and improved quality and productivity available from all three projects, Mahrt, Covington and Demopolis. Llooking into fiscal 2020, we expect improvement in margins from the capital projects and also the additional actions that we'll take across the segment to improve the value that we provide our customers and reduce the cost that we incur to deliver this value.

We won KapStone for six months, we've made great progress with our integration activities. I'm pleased with the level of engagement that our new teammates have demonstrated and we are proceeding well with the integration. We've accelerated the realization of the synergy and performance improvements and we are now at an annual run rate of $70 million. We expect to achieve a $90 million run rate by the end of this fiscal year. We expect to exceed the $200 million of run rate of synergy and performance improvements by the end of fiscal 2021. We're executing well across each integration category, including our mill system, our box plant system, logistics, procurement, information technology and administration.

We've internalized 67,000 tons of annual box shipments through our Victory Packaging system and we expect to achieve 100,000 annual tons by the end of fiscal 2019. We're pursuing many opportunities to improve our performance and profitability in the years to come. Between our strategic capital projects and the realization of synergies from KapStone, we see runway to more than $440 million of EBITDA improvement through 2022, of which only the $70 million run rate of KapStone's synergies has been realized.

The new Florence paper machine project is progressing well and is on track for the announced start-up in the first half of calendar 2020. As we communicated when we announced the project, the primary benefits of the investment are quality improvements and the increased operating efficiencies gained by operating one new paper machine and start of the three older machines.

In Brazil, the first pieces of equipment are already running at the Porto Feliz box plant. We expect to run higher volumes through the facility in the coming months. We've already broken ground the Tres Barras mill and a significant amount of the machinery orders have been placed. The Tres Barras mill project is well on track to be completed in fiscal 2021. In total, we expect to realize $80 million in run rate EBITDA in fiscal 2020 from the projects completed this year, with strategic projects adding $240 million a year in EBITDA by the end of fiscal 2022.

We're delivering value to our customers by helping them lower their total cost, grow their sales, improve their sustainability and minimize the risk. 140 customers buy more than a million dollars of product from both our consumer and corrugated segments. This accounts for $6 billion in annual sales. We're uniquely positioned to win with our customers and with our broad portfolio of paper packaging, merchandising, machinery and supply chain solutions.

In February, we expanded Jeff Chalovich's role to lead our commercial efforts across WestRock. Jeff is off to a great start in accelerating our differentiated strategy and bring added emphasis to top line growth at WestRock. I'm delighted to report that during this past quarter, WestRock was recognized twice by third parties for innovation in the manufacturing of sustainable paper and packaging products.

The Sustainable Packaging Coalition recognized WestRock with it's Innovator Award for a decision to accept poly coated foodservice packaging at our 100% recycled paperboard mills in the United States. Instead of this material going to landfills ,we're able to process and recycle this fiber into new paper-based packaging.

We've developed a recyclable and compostable paperboard prototype design to hold hot and cold beverages. This prototype was recently named one of 12 winners of the NextGen Cup Challenge and we're optimistic about our ability to fully commercialize this product. Our research and development on new more recyclable and compostable packaging designs exemplifies our commitment to working with our customers to find ways to make packaging more sustainable.

Our customers are demanding even more environmentally sustainable solutions. Our broad portfolio of customized value-added sustainable paper-based packaging solutions is well positioned to capitalize on the shift in consumer preference and it's especially applicable when it comes to creating packaging solutions that reduce the use of plastic.

Our solutions include the use of innovative materials, new designs and the applications using our machinery platform. Examples of our plastic replacement products today include food service solutions like EnShield Natural Kraft that replace plastics and bakery applications and the beverage packaging solutions such as the Cluster-Pak EvoClip. We're seeing growing customer interest in solutions that make packaging more recyclable, such as the non-poly coated ice cream cartons which enable these products to enter the fiber recycling stream.

We see this interest in sustainable packaging solutions continuing to grow. Over the past year, we've generated $50 million in additional annual sales and we have the potential to increase this several times over. A great example of how we create innovative, sustainable packaging solutions for our customers are the projects that we have under way for Diageo, the owner of Guinness. We're transitioning their packaging from plastic to paper and eliminating their use of shrinked film and plastic rings.

We're providing a better billboard for their product on the shelf, which will give them the opportunity to grow their sales. This is a powerful combination and we're able to provide this turnkey solution for Diageo with the right substrate, right packaging design and are highly productive and flexible machinery that are working in concert to help Diageo achieve their environmental and financial goals.

I'll now hand it over to Ward to discuss our outlook. Ward?

Ward Dickson -- Executive Vice President and Chief Financial Officer

Thanks, Steve. Turning to slide 12, we outline our key assumptions for our fiscal third quarter guidance. We expect adjusted segment EBITDA in the third quarter to be between $830 million and $870 million, as compared to $757 million in our second fiscal quarter and $754 million last year. Sequentially higher seasonal volumes across both segments should add $20 million to $40 million in EBITDA, compared to our second quarter. We expect significant sequential cost deflation driven by declines in recycled fiber, seasonally lower energy cost and some moderation in virgin fiber cost. We do not anticipate any business interruption insurance recoveries for the Panama City mill until the fiscal fourth quarter.

We estimate slightly higher depreciation in interest expense and the tax rate of 23.5% in our fiscal third quarter. These items impact the quarter by a negative $0.03. We are aligning our outlook to the recent changes in the containerboard market. For the full-year, we now expect adjusted segment EBITDA of approximately $3.3 billion to $3.4 billion.

Turning to our balance, we remain committed to returning to our long-term leverage ratio of 2.25 times to 2.5 times and expect our leverage ratio to be less than 2.9 times by fiscal year end 2019. We expect fiscal 2020 capital expenditures will decline to a level of $1 billion to $1.2 billion and that capital expenditures will be approximately $1 billion in fiscal 2021, as we complete our strategic capital projects. We remain committed to a stable and growing dividend and our primary use of free cash flow near-term will be debt reduction.

And now, I'll turn it back over to Steve for closing remarks.

Steve Voorhees -- Chief Executive Officer

Thanks, Ward. Going to take a couple of minutes and talk about where WestRock stands at this moment. In time, from an investor perspective, I think it starts with markets. and while I appreciate the concerns about global supply and demand, I will point out that there is other trends to consider, the most significant of which is that buyers of packaging are interested in much more than price.

Our customers are interested in reducing their total cost across their entire supply chain, growing their sales and minimize the risk by having a supplier that performs well day in and day out and finally, achieving their sustainability objectives. Paper-based packaging is well situated to help customers achieve these goals. WestRock has the world's most comprehensive portfolio of paper and packaging products and we're well positioned to help our customer succeed. We deliver value by creating customized, value added solutions for our customers and our talented and engaged workforce is committed to delivering value for our customers and profitably growing our company.

WestRock has multiple levers to improve our results. These levers include our commercial approach that supports organic growth, our strategic capital projects and the capture of the KapStone synergies that will lower our cost. As is the case with many companies they have grown by acquisition, we're simplifying our business with systems and processes and along the way building our capabilities to be successful in very competitive markets.

As we do this, we're reducing our exposure to commodity markets and increasing the stability of our business by providing value-added products and services for our customers. While we're doing this, we're generating strong cash flow and paying an attractive dividend. And we remain committed to returning our leverage to 2 in quarter to 2.5 times target. Before we turn to your questions, I'd like to take a moment to thank Bob Feeser for his 32 years of service. Today is Bob's final day with WestRock. Bob, I appreciate your leadership and commitment to WestRock. We could not have integrated two companies into WestRock as well as we did without your presence and your passion. So I thank you for all that you've done and all of us at WestRock wish you and ensure the best in next phase of your life.

And I'm pleased to welcome Pat Lindner to WestRock as President of WestRock's Consumer Packaging Business. Pat's 20 years of global business experience provides valuable perspective to all of us WestRock. Pat has got a proven history of being a strong driver of operational excellence, innovation and growth. And we're fortunate to have him on our team.

That concludes my prepared remarks. James, we're ready for Q&A.

James Armstrong -- Vice President, Investor Relations

Thank you, Steve. (Operator Instructions) Marcella, can we take our first question please.

Questions and Answers:

Operator

Your first question comes from Chip Dillon from Vertical Research. Your line is open.

Chip Dillon -- Vertical Research -- Analyst

Yes, good morning everyone, thanks for the details. And Bob all the best to you as you move forward. It looks like the CapEx guide for '20 and '21 is a little lower than what, I think you had said in the past and yet you're maintaining, obviously, the high-profile projects you went through. Could you just tell us where you're finding some savings if I'm correct in that assessment.

Ward Dickson -- Executive Vice President and Chief Financial Officer

Chip, this is Ward. Thank you. Yes, you are correct. We're just balancing our capital investments with our current view of supply and demand conditions. And we're very focused on returning to our long-term leverage target of 2.25 times to 2.5 times. We've talked in the past about a maintenance CapEx level of $500 million, ongoing return generating capital projects of approximately $500 million. We have flexibility to defer or scrub those two categories and that's what we're doing in the outlook. We are continuing to devote the capital required to complete the strategic capital projects on time because of the significant EBITDA generation opportunities that those represent.

Chip Dillon -- Vertical Research -- Analyst

Okay. And a quick follow-up, this might be for Jeff. I'm not sure. But one of your big competitors down in Brazil announced a major -- the PUMA project, a major expansion in Kraft linerboard. And the first of those expansion projects involves just only eucalyptus based pulping, which we always understood that hardwood was not really compatible with containerboard, maybe there's a light weightness to this or something unique about this, if you could just help us understand what you think they're doing.

Jeff Chalovich -- Chief Commercial Officer and President of Corrugated Packaging

Good morning, Chip, I can say that the technology is advanced with paper science, chemicals, fiber that you can make a decent sheet in fact, in our business in Brazil we're mixing eucalyptus so along with short wood fibers and making tremendous paper for that market and for our export. So I don't know what markets where they're going to use the paper, but I think the science and what chemicals that the paper should be fine, I don't really know what else they're thinking of that.

Chip Dillon -- Vertical Research -- Analyst

Okay, thank you.

Operator

Your next question comes from the line of George Staphos from Bank of America. Your line is open.

George Staphos -- Bank of America -- Analyst

Congratulations to Bob and Pat and everyone on their new roles. And I guess the first question that I had, to the extent that you can comment, what do you think was driving the recent industry weakness in box shipments, recognizing that you did better in the last quarter. And if you could sort of parlay that into what are you seeing in terms of early fiscal third quarter trends both in terms of your shipments and what customers are saying. And then I had a follow-on.

Jeff Chalovich -- Chief Commercial Officer and President of Corrugated Packaging

hey, good morning George, this is -- it's Jeff.

George Staphos -- Bank of America -- Analyst

Hey, Jeff.

Jeff Chalovich -- Chief Commercial Officer and President of Corrugated Packaging

So, I can speak and articulate what we're seeing in our markets. As we reported, we're up 2% organically and 20% overall with KapStone. I think it's important to note the year-over-year comparisons too. So if you look at this quarter, last year was a strong quarter. And to just give you some insight sort of put your number two question in, what our customers are saying there, our independent customers are saying they're flat, they may be a bit down, but they're coming off two record years. And their view is bullish on the economy and what they're seeing in their marketplaces.

So that's what they're telling us, what we see our e-commerce business continues to grow double-digit, we're strong in processed foods, our ability to put innovation with our machinery business into multiple segments is allowing us to grow and I think has helped us the last 24 months grow the business because we're driving and answering critical customer challenges, that's an omni channel. So these are big CPG customers, are looking to compete in box stores and retail stores and also in the e-commerce channels. We're uniquely positioned to provide solutions for that.

Add that to sustainability, our opportunity to drive cost out of the system and with a very good graphics business in the corrugated space paired with what we can do in our display business and our consumer business, we can hit all of the critical customer challenges and that's continued to enable us to grow the business. We're up in April slightly year-over-year, we haven't finished yet, so it's up a bit and it's another tough comp. We're up 14% last year in the aggregate and over 3% on a per day basis. So our box business remained solid and we will continue to grow organically in the business.

George Staphos -- Bank of America -- Analyst

Okay. Thanks for the comments on that, Jeff. The related question, I think you mentioned in the prepared remarks that you had 20 machine installations in the quarter. Can you help us sort of quantify that in terms of what kind of growth you're seeing year-on-year in terms of installations, whether there is more of a shift toward consumer or to a corrugated recognizing some cases it's marrying both. And I know you can't give a lot of detail on this, but is this helpful to your margin, helpful to your return or kind of average any, any thoughts on that would be great. And thanks and good luck in the quarter.

Jeff Chalovich -- Chief Commercial Officer and President of Corrugated Packaging

Thanks, George. I'm going to let Pat answer on the 20, the 20 was consumer. And then I can follow Bob corrugated.

Patrick Lindner -- President, Consumer Packaging

Great, thanks -- thanks, George .Good morning. This is Pat, nice to join this call.

George Staphos -- Bank of America -- Analyst

Good morning, Pat.

Patrick Lindner -- President, Consumer Packaging

Good morning. So, yeah, the 20 box shipments are machine shipments that we had, really represent a nice increase over last year. We expect that to continue into the rest of this year. What this really does, it helps us add additional value to our -- to our customers at Downstream, because obviously we can not only bring our folding carton capability to -- and our boxboard capability to the customers, but also design that in a customed way into their solutions. And maybe one example of this is the one that Steve shared around Diageo, where we actually not only sell the board and help them design the board, but we also help install, machine and design that.

And one of the reasons we won that piece of business was because it had much higher productivity than any other solution. And that's not clear how the outcome -- the outcome may have been different if we didn't have that machinery component to our offering. So we really think when we look at our business, innovation and especially this plastics to paper conversion from design to material science with our paperboard substrates and then machinery. We think all of that is really important to our ability to serve our customers.

Jeff Chalovich -- Chief Commercial Officer and President of Corrugated Packaging

And then George, I'll comment, we had 48 installations in the quarter and our automation platform continues to drive differentiation for us in volume growth. And compared with our consumer business and beverage is giving us unique opportunities and I'll give you an example, we had a large install almost a $27 million project for a customer. So it wrapped up $50 million in sales for us. We drove almost $3 million in cost out of that business. So when you talk about quantifying value for the customers, we're able to do that with solutions, but it also gave our consumer group a chance that over $40 million of business that we're looking at. And we're looking at the consumer business, just not making machines for beverage, but moving into other machinery, their platform is tremendous. And so we're looking at doing a full integrated install in this customer's business, with an opportunity for the consumer business also.

We're also looking at new innovation in our BoxSizer and Box on Demand. So we came to market with a pack on demand pouch that we just rolled out at Promate. So it gives us an opportunity for a fully recyclable pouch. And then if you look at BoxSizer that we just acquired, we already have sold packaging in through a retailer that had 15 skews was looking at go to five skews, was looking at (37:45) weight reduction had been shipping to retailers, but wanted to go to direct and e-commerce. So when you talk about sustainability platform, it's so called although the filler pack that this customer is using, it reduced their working capital because your inventory went from 15 skews down to five and it drove out cost because they had an automated solution. So these are things that are continuing to drive organic growth for us and differentiating us in the marketplace through our customers and driving margins.

George Staphos -- Bank of America -- Analyst

Okay, thanks, Jeff. I'll turn it over.

Operator

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

Anthony Pettinari -- Citigroup -- Analyst

Good morning and congratulations to Bob and Pat. On containerboard you indicated in your comments that 10% of your total shipments are now export versus I think 15% last year, is 10% a good way to think about where you are early in fiscal 3Q? And then we've obviously seen a big deterioration of export prices, just wondering if you've seen any kind of stabilization into the regions that you sell into and sort of how you would characterize levels of inventory and supply demand from an export perspective?

Jeff Chalovich -- Chief Commercial Officer and President of Corrugated Packaging

Good morning, Anthony, it's Jeff. So 10% I think is a good way. It may go up few percent, down a few percent, but in general 10% I think is a good way to think about our export. And then if you break that down to the world, 60% of our 10% goes into the Latin America market, which is more stable, more direct customers for us. And the pricing has not been as pressured as the other areas of the world, 30% is Europe, Mid East Africa combined. And so what we've seen in those markets has been some higher inventories, some pricing pressure and that chance to that definitely high inventory, some pressure on the pricing. However, what we're seeing now is the volumes in our export is or as we've expected, so we're seeing steady orders at least in the areas we participate.

We've had some areas I'll call out Turkey, Israel that are trying to lock in prices for six months, typically that's a sign that they believe that the market is bottomed. And as they worked on inventories, I'd expect our business to say stable in that market. But much reduced, as you know, we've done a lot of work integrating into a North American box business. So that's been part of the strategy and we've been executing against that.

Anthony Pettinari -- Citigroup -- Analyst

Okay, that's very helpful. And then just switching to the consumer side, we've seen this kind of divergence with an SBS grade, Kap stock stronger, folding carton seen a small price decline in pulp and paper weak. And then the delta between SBS and CUK is kind of in sort of a different place than it has been historically. I was wondering, what's driving this if you can kind of frame how it impacts your portfolio in terms of your mix between Kap stock and folding cartons. And just sort of what you're seeing in those box board end markets?

Patrick Lindner -- President, Consumer Packaging

Yeah, thanks Anthony. This is Pat. And so the dynamics around the SBS and CNK pricing that you mentioned, of course, we can't comment on the forward pricing dynamics that are out there in the industry, but I certainly can give you some perspective on what's happening in the markets. And I would like to focus most of this on CNK because I think this is a pretty dynamic marketplace where we're seeing really strong demand for this product. And it's -- and it's really been driven by a number of things and the beverage market has been driven by the demand for wet and high-strength applications beverage, as well as frozen food. And I don't think really capitalizing on the opportunity from plastics into the paper-based products.

And so we expect that demand to continue. I think as Steve mentioned, we've got $50 million or so of sales into that plastics, the paper conversion that's certainly driving strength in CNK. We continue to have strong backlogs there and we expect to get $100 million of sales this year in that type of a conversion again from plastics to paper. And in many more -- many times over that going into the future.

And I think the other thing around CNK that's pretty interesting right now is that the brown side of CNK is viewed by consumers as environmentally friendly and again adding to the strength that we see there. So we're -- we're pretty bullish on what we see in CNK and we're also excited about having the Mahrt mill back up and running with that big investment that we had there and getting back to servicing our customers the highest level that we can.

Anthony Pettinari -- Citigroup -- Analyst

Okay, that's helpful. I'll turn it over.

Operator

Your next question comes from the line of Mark Weintraub from Seaport Global. Your line is open.

Mark Weintraub -- Seaport Global -- Analyst

Thank you. Just one detail question, the insurance recovery impact on EBITDA in the quarter, was that $60 million?

Ward Dickson -- Executive Vice President and Chief Financial Officer

Mark, this is Ward, remember there are three categories of the insurance recoveries and the claim. We've had -- we've incurred M&R expense, right, just direct cost -- repair cost. And those cost and those recoveries have been adjusted out of adjusted EBITDA and adjusted EPS. And then the business interruption the loss production volume, the loss profit, that has flowed through adjusted EBITDA and adjusted EPS and the recoveries have flowed through adjusted EBITDA and adjusted EPS. And then finally, there is the reimbursement for the capital investments. So the -- the total recovery was $60 million and it was in three buckets, a portion of it was devoted to the capital investment that we have to replace the direct cost that we exclude from adjusted EBITDA and adjusted EPS and then the business recovery for the business interruption losses. So the amount that flow through adjusted EPS and adjusted EBITDA in the quarter was the recovery related to the business interruption claim.

Mark Weintraub -- Seaport Global -- Analyst

Got. And so that was the $3 million net income number?

Ward Dickson -- Executive Vice President and Chief Financial Officer

Yeah.

Mark Weintraub -- Seaport Global -- Analyst

And so can we assume it was roughly $40 million in terms of the EBITDA contribution?

Ward Dickson -- Executive Vice President and Chief Financial Officer

It was $30 million of EBITDA, we tax effected it to the -- to get to the $0.09.

Mark Weintraub -- Seaport Global -- Analyst

Okay, great. Super. Thank you. And how much more potentially could we be seeing from Panama City in Q4, that would flow through the EBITDA adjusted number?

Ward Dickson -- Executive Vice President and Chief Financial Officer

It would -- we're envisioning an amount that's not that much different than what we experienced in the first half. The other thing as you think of Panama City, as we ramp up to full production and we look at the second half versus the first half, we were actually incurring operating losses in the first half before the business recovery -- business interruption recovery. And then we start those losses -- are reduced greatly in Q3 and then we return to full operation, as we move into Q4.

Mark Weintraub -- Seaport Global -- Analyst

Great. Super helpful. And maybe one real quick follow-on to, if we were to look at KapStone pro forma, would the box shipments for the quarter still have been up for WestRock in total year-over-year?

Jeff Chalovich -- Chief Commercial Officer and President of Corrugated Packaging

Hi, it's Jeff. Yes, so 2% year-over-year without KapStone.

Mark Weintraub -- Seaport Global -- Analyst

And if we were to include KapStone, is it pretty close to that same number or does that actually move -- I realize it's pretty small, you wouldn't think it would move the dial, but does it move the dial if we looked at what KapStone did last year, add that to what WestRock did last year and then compare to what WestRock did in total this year, is it still pretty close to 2%?

Jeff Chalovich -- Chief Commercial Officer and President of Corrugated Packaging

Look -- now because for that -- I'm not quite -- so we're up 20% combined, I'm not clear what their box shipment is in the quarter were, but I know we were up 2% organically and with KapStone included, we're up 20%.

Mark Weintraub -- Seaport Global -- Analyst

Okay, thank you.

Operator

Your next question comes from the line of Mark Connelly from Stephens, Inc. Your line is open.

Mark Connelly -- Stephens Inc. -- Analyst

Steve, we've seen WestRock and Rock-Tenn respond to containerboard market imbalances with higher exports, with plant closures and economic downtime. Can you help us understand how you think about those options with a bigger system, with higher potential export potential. And with respect to downtime, has your approach to taking downtime shifted or you're thinking about it, you used to talk about your one mill as a swing mill, I'm curious with the new system and with lower OCC whether that approach has changed?

Steve Voorhees -- Chief Executive Officer

I think first on the downtime, we have a larger system, we have more flexibility, right, and we're continuing to match our production to meet customers' demand of just -- our system just has lot more flexibility, so that you really can't identify one mill as a swing mill. As far as our approach to the market, we're -- our approach is to focus on our customers and grow organically. I think the more we can sell boxes, the better and I think that's one of the key things that thrilling advantage of KapStone's box plant does, more able to have a broader platform to be able to do that. And I think it's contributed to the increase in our integration, right?

Mark Connelly -- Stephens Inc. -- Analyst

That's helpful. Just one more question, working capital was a bigger use of cash than I expected. Can you help us understand why and where you think we might end up for the year on working capital?

Ward Dickson -- Executive Vice President and Chief Financial Officer

Yeah, Mark, this is Ward. So seasonally, if you think about it, our first half versus second half, let me just step back and just talk about the total cash flow generation. If you look, there is a seasonal element of our cash flow generation. Last year, we generated approximately $1.7 billion or 69% of our full-year adjusted operating cash flow in the second half. And this year is no different. We're projecting a similar level of cash flow generation in the first -- in the second half of this year. And the key drivers really are higher EBITDA in the second half. And then working capital as always shifts from a use in the first half to a source in the second half, we've talked about the reduction in inventories. If you think about it in the first half of our year, we pay out our annual bonuses and then we start to accrue those bonuses, as we go throughout the year. So the pattern that we see in the working capital model as we project our full-year cash flow generation is really fairly consistent with what we've seen in previous years.

Mark Connelly -- Stephens Inc. -- Analyst

Very helpful, thank you.

Operator

Your next question comes from the line of Steve Chercover from Davidson. Your line is open.

Steve Chercover -- D.A. Davidson -- Analyst

Thanks, good morning, everyone. So I wanted to start first of all with the six pack solutions, the EconoClip and Cluster-Pak, I mean it seems to be a real trend now and why did suddenly become so urgent, are you guys driving this or is it the beverage companies or the consumer?

Patrick Lindner -- President, Consumer Packaging

Yeah, Steve. Thanks very much. This is Pat and I think the short answer is, it's really a lot of the consumer and as well as in turn the consumer packaging companies. And maybe a little bit of background then I have on this from a personal side. I spent the last 20 years in the plastics industry. And within this industry and packaging in a number of different ways. And as you know, there's been a lot of effort in the plastics industry around recyclability and composability in making the products more environmentally friendly. But efforts have changed significantly and I would say consumer preferences have changed significantly over the last couple of years. And it was really kind of a tipping point or a turning point. And what they're basically saying, consumers are basically saying is that, we don't want single use plastics in our stream and our consumer stream and a lot of that is driven by some of the images probably out on social media, you can see though single use bottles floating in the ocean and plastic bags in various places.

And so that's a big shift. And so our customers are now coming to us asking for solutions. And we have a pretty broad array of solutions that we're bringing to them that capitalize on our capability around design, around material science and it's not just the paperboard science, but also the coatings technology to make sure that these products are -- meet the customers needs and the application needs. And as we've talked about and Jeff articulated nicely, the opportunities we have, the leverage are machinery capability there, brings us -- it allows us to have a really a holistic approach to this. So, econo pack and EconoClip and Cluster-Pak, these are real options and real opportunities, they are being very much driven by end-user demand.

Steve Chercover -- D.A. Davidson -- Analyst

Well, congratulations on your shift from the dark side to the right side of history. And sticking with the g'head on plastic, the little box you show on slide ten the EnShield bakery box. So is that -- the see through window, is that plastic or is that like a cellulose based cellophane?

Patrick Lindner -- President, Consumer Packaging

Yeah, that is still plastic. And so there is different solutions that we're looking at for that, but I would like to highlight some of those applications leverage what we call our EnShield technology. One of the challenge is we're replacing plastics is achieving the barrier properties that they inherently have around grease and oil resistance and just general moisture resistance. And so we've developed the recyclable compostable environmentally friendly products that are based in water, aqueous dispersions and coatings that we can put on these packages to render and achieve the same types of properties. So, we're pretty excited about EnShield and it's broad application and really across all of our substrates. And we'll continue to work with our customers wherever we can to replace plastics driven by consumer demand.

Steve Chercover -- D.A. Davidson -- Analyst

Thanks. I had just one quick one on the box side, the 2% organic growth, is it odds with the industry stats. So can you help us reconcile that, are you gaining share or is there may be something wrong with the statistics?

Ward Dickson -- Executive Vice President and Chief Financial Officer

I think we have been gaining share based on our ability to differentiate in the marketplace and providing solutions for customers that really add value in the things as Steve articulated earlier. We're helping them reduce the total cost and their supply chains. We're helping them activate brands and some more product through retail ready, shelf ready solutions on shelf displays, graphics in general. We have a naturally sustainable product and with the g'head you just mentioned on plastics, we're well positioned across our system to take advantage of that. And then we have scale that helps our customers manage risk when we go into change business or install machines or do full on integrations. The risk is much lower and it's easy to switch and is easy to be used across North America, Brazil, Canada, Mexico. So I think all of those things have helped our customers win and we're winning with them.

Steve Chercover -- D.A. Davidson -- Analyst

Great, thank you very much.

Operator

Your next question comes from the line of Mark Wilde from BMO Capital Markets. Your line is open.

Mark Wilde -- BMO Capital Markets -- Analyst

Good morning and congratulations on a good quarter.

Steve Voorhees -- Chief Executive Officer

Thanks, Mark.

Mark Wilde -- BMO Capital Markets -- Analyst

I wanted to start, Jeff, if we could talk about what looks like a little bit of a potentially a paradigm shift in the business where the corrugated business where you've got new entrants building large converting plants and also mills that use a lot of low cost mix waste. And I know a lot of people in the industry have been dismissive of this in the past, but you know at least one of these players is just steadily marching across the country, building mills and building converting plants.

Jeff Chalovich -- Chief Commercial Officer and President of Corrugated Packaging

I'm sorry, what was the...

Mark Wilde -- BMO Capital Markets -- Analyst

How do you think about, is that -- is this really a paradigm shift in the industry?

Jeff Chalovich -- Chief Commercial Officer and President of Corrugated Packaging

I can't say in the industry, Mark, I think they have a play that they're running and what they're trying to do. I think from our standpoint, what we're doing WestRock is we're running off hands in the things that we control and that we do, we have a great mix. So one of the benefits of our system of our size, we have a good mix of recycled and virgin kraft liner, so virgin kraft fiber. So we're a balanced system and it gives us great flexibility and markets good and bad. And so we like that position and we've been deliberate about how we've gone above that. We're continuing to invest in our mill system to drive our cost to lower side of the cost curve. We've built a very solid converting system. And then combine our systems with our consumer display, we are unique in our industry.

So I think that while we have continued to grow our business, we continue to add margin. So I think we're well positioned and our customers are voting with purchase orders and organic growth for us. So I think we're well positioned in the market. As far as a paradigm shift in the industry, I can't speak to the whole industry. I know what we're doing and how we're executing and we'll continue to integrate through our box plants and build a system that helps customers win their marketplaces.

Mark Wilde -- BMO Capital Markets -- Analyst

Okay. And then I just for a follow-on, I just want to turn back to this machinery issue because a few months ago, you had a company sold at a very high multiple that had very high margins just turning kind of kraft paper into tonnage inside packaging for consumer packaging. And I'm just curious, you know, WestRock and KapStone have historically produced a lot of kraft paper, that market gets pretty rough in the down market, I just what -- is there an opportunity for you to kind of replicate that strategy or replicate that kind of product going forward, it seems like that's all -- the margin is in the business.

Jeff Chalovich -- Chief Commercial Officer and President of Corrugated Packaging

That's a great question. We look at our machine platform broadly. I haven't spent a lot of time in those markets, but it's a great question and we'll think more about that, but it's certainly as we look at machine platforms and opportunities, we've looked at multiple spaces just like that.

Mark Wilde -- BMO Capital Markets -- Analyst

Okay, good enough. Good luck in the quarter.

James Armstrong -- Vice President, Investor Relations

Thanks.

Operator

Your next question comes from the line of Debbie Jones from Deutsche Bank. Your line is open.

Deborah Anne Jones -- Deutsche Bank -- Analyst

Thanks, good morning. The first question I had was on solving Kap stock grade, I think that Anthony asked this part of the question earlier, but it's a little confusing to me if there is going to be a bit of an inflection quite beyond what we've already seen in demand for these grades as some of these strategic companies shift away from the non-environmentally friendly applications.

And this is supported by some of the things you highlighted, but I was hoping that you could talk us through what your expectation is over the next couple of years and then specifically how you're positioned on that.

Patrick Lindner -- President, Consumer Packaging

Yeah. So, thanks. Thanks, Debbie. This is Pat. And so I think we're positioned really well across any one of these substrates. We're -- one of the nice things about our portfolio is we're pretty agnostic as to which material or which substrate is actually used. And so across CNK or CRB, URB, SBS we really look to meet the customers' needs and there are going to be natural shifts based on what the customers are really looking for. And we've been able to make some of those shifts over the last couple of -- last couple of years and we'll continue to do that as it makes sense. And maybe I can ask Bob make additional comments on this perspective.

Bob Feeser -- President of Consumer Packaging

Hey, Debbie, it's Bob. Just related to (technical difficulty) specifically in food service, that continues to be a big trend, the shift away from foam in particular and we are seeing high single-digit growth in that part of the market. And I would expect that to continue going forward, as more of those conversions happen. And clearly the innovation that we're bringing to the market by trying to remove plastic liners in cups is going to further accelerate that as well, that's why we're so excited about the work with the next-gen cup challenge as well and feel very good about the innovation that we're bringing to that market.

Deborah Anne Jones -- Deutsche Bank -- Analyst

Okay. Thanks, that's helpful. It just it seems like with both McDonalds and Starbucks back in life it, they're quite curious about it, but it's so little confusing to me as to what the potential uptake is from that, but that's helpful. My second question just sticking with volumes in the consumer segment. I think on the last call you did mention that you thought there would be an inflection at least in the volume bucket of the EBITDA bridge in the second half of the year and I was just wondering if that's still the case.

Patrick Lindner -- President, Consumer Packaging

Yeah. So I think, this is Pat again, Debbie. So I think for the rest of the year, first of all, our volumes right now are about flat as you saw the top line is up about 2%, that's really some of the price that they were realizing from the price previously published price increases. So right now, we expect volume to be -- it has been above flat, we may see some increases here. We think in the market in general, all in is about 1% to 2% CAAR and we're kind of still holding with that point of view. We've got some things that are improving and increasing. We've got some strength in food service. We've certainly got some strength in healthcare with our NPS portfolio in cosmetics and the beauty segments as well. But as you know, there's things offsetting that such as the some of the secular decline, that's been going on in tobacco and to maybe a lesser extent commercial print. And so we're probably looking at similar to what we had before, we're looking at overall probably 1% to 2% on our general volume growth for this business all in.

Bob Feeser -- President of Consumer Packaging

Hey, Debbie, it's Rob. Just a quick follow-up on that, we will see some normal seasonal strength in the second half of the year. And then also, it's important to remember to our volumes in the first half of the year have been a bit muted because of the -- the big strategic outages that we've taken in the mills. So in the fourth quarter, that will be behind us, the facilities will be running full. So we should see some modest growth in the fourth quarter.

Deborah Anne Jones -- Deutsche Bank -- Analyst

Okay, thanks. Can I just squeeze in one more, I wonder if you can update on Grupo Gondi in trends in Mexico, if you could just comment on what you're seeing there and what the expectation is?

Jeff Chalovich -- Chief Commercial Officer and President of Corrugated Packaging

So we continue to partner with Grupo in Mexico, their business is solid, our exports to them and to Mexico have remained solid. So in general, the market conditions remained strong, that's a great business. They continue to invest -- the mill project is well under way. They continue to build world-class box plants and continue to grow their business organically. So in general, the relationship is strong, their business is strong. And I think the opportunity to continue to partner with them with customers in North America is solid.

Deborah Anne Jones -- Deutsche Bank -- Analyst

Okay, thanks, Jeff. I'll turn it over.

Jeff Chalovich -- Chief Commercial Officer and President of Corrugated Packaging

Sure.

Operator

Your next question comes from the line of Gabe Hajde from Wells Fargo Security. Your line is open.

Gabe Hajde -- Wells Fargo -- Analyst

Good morning, gentlemen, two questions. One, could you discuss what's going on in the non-containerboard pieces of the KapStone business, there is a little less visibility with respect to sort of supply demand and/or pricing trends, particularly kind of talking about the extensible kraft grades and what you're seeing with demand and pricing there?

Jeff Chalovich -- Chief Commercial Officer and President of Corrugated Packaging

Sure. In general, the kraft market is are a bit challenged, not significantly like a containerboard pricing is good. And then I think the extensible markets, I'll talk specifically for us on some of the saturated. So there's kraft extents when saturated, there is large opportunities on the saturated side for us. We have opportunities grow that market. The compound annual growth rate is pegged to be between 5% and 7%. So we think there's opportunities to expand in that market where there's not a lot of players across the globe. The segment for us has been steady. Again, there are some challenge in the pricing, but we have locked up some of our large customers and longer-term contracts. And then the extensible market, that's not much different than our kraft more. So in general, that's that business is fine.

Gabe Hajde -- Wells Fargo -- Analyst

Okay. And shifting gears a little bit, historically I think the industry and at least WestRock has talked about box is performing to a spec as opposed to the specific linerboard or medium that goes into on whether it's a recycled or kraft content, given where recycled fiber costs are, have you had any sort of influx of customers asking for more recycle boxes or anything like that just on the margin?

Jeff Chalovich -- Chief Commercial Officer and President of Corrugated Packaging

No, Gabe, I think you articulated well upfront. So what we have basically across our box customers is a request for performance based spec. So they want us to build a box that suited for how they use it and the conditions that go into DCs and warehouses. So we're building a box with the spec. The quality of our paper products across our mill system, whether that's recycled or virgin, we're using liners that are recycled or version and applications that meet our customers demands. So we could do that with a 42 pound virgin kraft liner or 42 pound recycled liner say any thing with high performance one or so, either ECT values or performance based specs or what our customers are moving to and we are well positioned to meet that demand.

Gabe Hajde -- Wells Fargo -- Analyst

Thank you.

Operator

Your last question comes from the line of Scott Gaffner from Barclays. Your line is open.

Scott Gaffner -- Barclays -- Analyst

Thanks, good morning and congrats Bob and Pat on the changes.

Bob Feeser -- President of Consumer Packaging

Thanks.

Scott Gaffner -- Barclays -- Analyst

I just wanted to talk a minute, go back to the some of these new products that you mentioned Cluster-pak and EconoClip. I was hoping maybe you could help us out a little bit with the addressable market there, just given the fact that a lot of the market as you mentioned is in plastic rings today. I know there's some customers that are agnostic to price especially some of the premium customers you mentioned, but how should we think about the addressable market there for say paper versus plastic on those types of applications?

Patrick Lindner -- President, Consumer Packaging

Yeah, thanks Scott. This is Pat for the question, really appreciate it. I think there are a lot of markets that could really capitalize on this and maybe I'll start with Europe. The plastics challenges that have been out there were -- I think they're probably most acute and most are first really recognized in Europe. And so we have seen a number of customers come to us and ask for solutions and as quickly as we can deliver them and that's particularly in the beverage market, but also in the healthcare market, there is this, as well as cosmetics and beauty there is this initiative that P&G is very involved we call it Ecopush, which is another example on a very different market beauty and cosmetics where they're trying to get rid of any type of container that is environmentally unfriendly. And so plastic certainly fit into that.

And so when you specifically think about the addressable market, it's really hard to put a exact figure on. We've kind of thought, as we said, we've got maybe $100 million worth of sales into that conversion expected this year. We're certainly well on track for that. As far as where is it goes from here, we've talked about and I think talked in the past about maybe $400 million of sales. But we're not sure that that's the and represents the entire market as we go global with this, with this conversion. So somewhere in the neighborhood of north of 50,000 tons, could be 70,000 tons, somewhere in that neighborhood is kind of what we're -- kind of what we're projecting, but we're really bullish on it, we're really excited about it and the number of applications that we have continue to increase.

Scott Gaffner -- Barclays -- Analyst

Understandably, thanks for the detail there. Jeff, if we just look at the box shipments in 1Q, I mean, you mentioned the tough comps, but we did know about the tough comps maybe coming into the quarter. Clearly, things down shifted a little bit in 1Q, is there anything outside of weather that you're seeing, whether it's the KapStone business in the Pacific Northwest , where they're shipping not just actual containerboard, but shipping boxes to customers in the region where you've seen a slowdown or anything regionally or end market-wise that you could point to outside of the weather for the slowdown in 1Q box shipments relative to expectations?

Jeff Chalovich -- Chief Commercial Officer and President of Corrugated Packaging

So for our standpoint, we're not -- we're up. So I'll start with that. If you're talking about what we're seeing industry wise, but we're not, we're up 2% organically and 20% total. So our shipments continue to grow. There are some regional challenges, the West Coast is challenged in ag, it's off to a slower start, but we see a pickup there. I think the sheet feeder business in the country has had some weakness. But in general, I think the biggest industry wide one is ag, that's been slower start, that's been really weather. And then of course you had a bunch of weather events in Q1 that was hurting the overall shipments I think.

Scott Gaffner -- Barclays -- Analyst

Okay, fair enough. Just lastly, $150 million EBITDA reduction at the midpoint of the guidance then, if volumes are kind of as expected, is it more just external shipments whether that's export pricing et cetera, if you could just sort of bridge the old to the new, what were the buckets that really moved appreciate it and good luck in the quarter.

Ward Dickson -- Executive Vice President and Chief Financial Officer

Hey, Scott, this is Ward. So our current guidance range reflects potentially lower volumes for both domestic and export containerboard and lower volumes relative to our previous expectations on the kraft side as well. We've also flowed through the impact of the $10 per ton published price decrease for the balance of the year. Now, we have had some benefits and lower recycled fiber, but as we talked about, we had elevated virgin fiber and energy costs in Q2. Although, we are seeing moderation in second half, it's moderating from a higher point. And then we've taken, we've highlighted the downtime that we've taken in the month of April.

Our full-year outlook for the consumer business is really largely unchanged, so the primary drivers have been reflection of the supply demand conditions that we've seen in corrugated. And beside all of that, we're still focused on all the things that are in our control. We're executing the strategic capital projects. We're focused on capturing the synergies and completing the integration of KapStone. So we feel good about how we are performing in these conditions.

Scott Gaffner -- Barclays -- Analyst

Thanks, Ward.

James Armstrong -- Vice President, Investor Relations

Thank you and thank you to our audience for joining our call today. As always, reach out to us if you have any questions, we're always happy to help. Have a great day.

Operator

This concludes today's conference call. You may now disconnect.

Duration: 67 minutes

Call participants:

James Armstrong -- Vice President, Investor Relations

Steve Voorhees -- Chief Executive Officer

Ward Dickson -- Executive Vice President and Chief Financial Officer

Chip Dillon -- Vertical Research -- Analyst

Jeff Chalovich -- Chief Commercial Officer and President of Corrugated Packaging

George Staphos -- Bank of America -- Analyst

Patrick Lindner -- President, Consumer Packaging

Anthony Pettinari -- Citigroup -- Analyst

Mark Weintraub -- Seaport Global -- Analyst

Mark Connelly -- Stephens Inc. -- Analyst

Steve Chercover -- D.A. Davidson -- Analyst

Mark Wilde -- BMO Capital Markets -- Analyst

Deborah Anne Jones -- Deutsche Bank -- Analyst

Bob Feeser -- President of Consumer Packaging

Gabe Hajde -- Wells Fargo -- Analyst

Scott Gaffner -- Barclays -- Analyst

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