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WestRock Co (WRK) Q3 2019 Earnings Call Transcript

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WestRock Co (NYSE: WRK)
Q3 2019 Earnings Call
Aug 1, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, my name is Chris and I will be your conference operator today. At this time, I would like to welcome everyone to the WestRock Company's Third Quarter 2019 Earnings Conference Call. At this time, I would like to turn the call over to Mr. James Armstrong, Vice President of Investor Relations, you may begin your conference.

James Armstrong -- Vice President of Investor Relations

Thank you, Chris. Good morning and thank you for joining our third quarter 2019 earnings call. We issued our press release this morning and posted the accompanying slide presentation to the Investor Relations section of our website. The release and presentation can be accessed at ir.westrock.com or via a 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; the Chief Commercial Officer and President of Corrugated Packaging, Jeff Chalovich as well as our President of the Consumer Packaging, Pat Lindner. 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 30, 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

Thank you, James. Good morning, thanks for joining our call this morning as we discuss our fiscal third quarter results and outlook . WestRock's net sales increased to $4.7 billion, this was 16% over last year. Adjusted segment EBITDA increased to $858 million, this was 14% over the last year. Our adjusted segment EBITDA margin was 18.3%.

The WestRock team is performing extremely well as we proactively respond to a changing industry landscape characterized by the challenges of additional new paper capacity combined with softer demand in some markets. We see increasing opportunities for sustainable packaging, e-commerce packaging and value-added packaging solutions. We generated $749 million in adjusted operating cash flow during the quarter and we deployed $351 million of this cash flow in capital investments. This included a $181 million invested in our strategic capital projects.

We paid $117 million in dividends and we reduced our net debt by $282 million. Our net leverage at the end of the quarter was 2.95 times. Our pension plans remain fully funded. The improvement in our financial results has been driven by the actions we've taken to grow our business organically by providing value-added solutions to our customers, improving our asset base through capital investment and simplifying our business to take advantage of our scale.

I'll discuss the progress we're making in each of these areas during my comments.

Let's turn to Slide 4. Adjusted segment EBITDA increased by $104 million. Setting aside the impact of Kapstone volumes declined primarily due to lower containerboard and paperboard shipments. We had favorable price and mix in both segments. Due to the flow through of the previously published price increases. Our productivity improvements outpaced inflation. Inflation of $44 million was primarily due to wage and other cost. Higher wood and freight costs were essentially offset by the lower cost of recovered fiber. We captured $47 million in productivity from the capital, synergy and other performance improvement projects we've implemented over the past year.

Economic downtime and scheduled consumer mill outages reduced EBITDA by $45 million and the KapStone acquisition contributed $152 million of year-over-year adjusted segment EBITDA improvement. Corrugated Packaging segment sales excluding recycling increased 32% and adjusted segment EBITDA increased 28% as compared to the 3rd quarter of fiscal '18.

North American corrugated adjusted segment EBITDA margins improved to 23.1% up 110 basis points. This was the 7th consecutive quarter that we've reported North American corrugated adjusted segment EBITDA margins of 20% or more.

The sustained strong performance is a direct result of WestRock Corrugated Packaging teams focused implementation of our differentiation strategy to help our customers when all the while investing in the capital systems, processes and people to enable improvements and the quality and cost of our products across our integrated system. We reduced containerboard and kraft paper production by taking approximately 259,000 tons of downtime, including 94,000 tons attributable to planned maintenance, and 165,000 tons of economic downtime.

Our inventories at the end of June were 123,000 tons below March levels and a 182,000 tons below the peak in December.

Our inventory levels are now in our desired range of what we need to efficiently operate our system. Our box volumes increased 20% on a per day basis over last year, our organic box volumes increased 2.7% due to our success and delivering customized solutions that enable our customers to win in their markets.

Corrugated sales into distribution in e-commerce users were up. We saw growth in packaged food. Agriculture shipments were down due to wet weather in the Western United States.

Our containerboard integration rate was 80% for the second consecutive quarter. You might recall on our 3rd quarter fiscal ' 17 earnings call that we first articulated a goal to increase our integration to 80%. At that time our integration rate was 72%. We've made substantial progress in just 2 years.

We're updating our integration rate target to reach 90% over the next several years. This provides us ample room to grow our box volumes while serving our preferred domestic and export markets.

The Florence paper machine project is well under way and the new machines on schedule to start up during the first half of calendar 2020. As a reminder, this project will replace three obsolete paper machines with a new state-of-the-art low cost paper machine that's optimally design for today's and tomorrow's market requirements, producing lighter and better performing kraft linerboard.

Brazil. Brazil of adjusted segment EBITDA margins for the quarter were 27.9%. Porto Feliz box plant is running very well and ramping up production. A Valinhos box plant is largely down. We'll have our grand opening of WestRock's largest and most technically advanced box plant in October. A Tres Barras mill upgrade project is well under way. Construction is on track and start-up is scheduled for the first half of calendar 2021.

The majority of the capital investment on this project will occur -- will occur in fiscal 2020.

The integration of Capstone's progressed exceptionally well. We're realizing our synergy and performance improvement targets ahead of schedule. We were at an annual rate of $80 million at the end of June and we expect to exceed our $200 million target by the end of fiscal '21. The pace of the KapStone integration has benefited from the investments we've made in our box and mill system over the past several years. Our scaled and simplified operating systems and regional structure have accelerated our integration activities. Multiple Capstone box plants and the Longview Mill have already transitioned to WestRock operating systems.

We have internalized 71,000 tons of annualized box shipments through our Victory Packaging system and we expect to achieve a 100,000 annualized tonnes by the end of September.

With the addition of Capstone, to scale geographic reach full range of containerboard and kraft paper grades and box making technologies, our corrugated packaging network enables us to reliably and efficiently serve our customers throughout North America. But consumer Packaging business reported adjusted segment EBITDA of $233 million during the quarter in which we invested in 3 strategic capital projects at our mills that will improve margins and the long-term performance of the business. We realized price-mix improvements of $38 million and productivity improvements of $9 million.

Our backlogs remain at 4 to 6 weeks across SBS, CNK and CRB.

We completed the major capital maintenance outages at Mahrt, Demopolis and Covington in the quarter. The Mahrt outage was completed early in the quarter and we're exceeding our project objectives for volume, quality and cost.

We replaced the head box at our Demopolis mill in June and this investment is also performing well. At Covington, customer qualifications are in process and gone very well to date.

The aggregate impact of these outages as well as regular maintenance outages at our other mills adversely affected our financial performance in the quarter by $22 million. The mill outages challenged our supply chain, resulting in lower paperboard sales in the quarter impacting EBITDA by an additional $16 million. Wood cost, particularly at our Evadale mill remained elevated in the quarter due to the unusually wet weather in the region.

With the completion of these projects, we expect our supply chain to stabilize and see margin improvement during the current quarter. Converting shipments in Consumer Packaging increased 1.3% year-over-year. North American converting shipments increased 2.7% was partially offset by declines in Europe and Asia.

Sustainable packaging and plastics replacements are generating significant market demand and interest. We currently are working with dozens of customers on projects to replace plastics with fiber-based packaging. We're currently at a $70 million run rate of incremental annual sales and we expect to reach a $100 million run rate by the end of this fiscal year.

We provide our customers with customized value added solutions using the industry's broadest portfolio of paper and packaging solutions. This portfolio differentiates WestRock in the marketplace and enables us to help our customers lower their total cost, grow their sales, reduce the risk and achieve their sustainability goals. Our strategy of bringing our full suite of solutions to our customers is driving organic growth. 144 customers are buying more than $1 million of products and services from both our Consumer and Corrugated segments accounting for approximately $6.8 billion of sales per year.

These numbers represent more than a 40% improvement over the past 3 years. We're enhancing the strength of our product and service offerings, with the investments we're making and digital technology to automate customer experiences, simplify our processes and standardize our systems. A couple of examples include the digital channel that many of our customers currently used to view and place orders and the advanced data analytics, we used to anticipate unplanned downtime reduce quality issues and minimize production variability. We operate proprietary software that combines primary, secondary and tertiary packaging design to create packaging that minimizes waste and improves packaging performance for the benefit of our customers.

I want to take a few minutes to talk about the increase in SIOC packaging. SIOC is SIOC ships and own container. WestRock's comprehensive portfolio, uniquely positions us to partner with customers to meet today's changing sustainable packaging mandates. Amazon will soon require that all suppliers provide items -- that provide items, which are 18 by 14 by 8 inches or larger, use packaging certified, is ready to ship or face additional fees for packaging. Using our integrated suite of products and working with our customers, we've developed solutions that create branded SIOC packages that meet these changing requirements.

A terrific example of our effort to develop SIOC solutions as our work with Colgate-Palmolive. In collaboration with Colgate we created the small box which combines a folding carton manufactured by our joint venture partner Grupo Gondi with corrugated packaging manufactured in our [Indecipherable] and facility to deliver an optimized branded SIOC package that's packed using WestRock machinery. The small box has been very successful for Colgate. We're currently partnering with them on 2,000 other skews for this type of packaging solution. As consumers push for more sustainable packaging, ones that are recyclable, renewable and minimize material use, WestRock's comprehensive portfolio of fiber-based packaging solutions enable us to meet these needs for our customers.

Branded SIOC packaging provides our customers with an opportunity to further build their brand loyalty and recognition and improve their customer experience . Our partnership with customers extends to helping them build a sustainable supply chain. We're working with our customers, including US Auto Parts and installing our box-on-demand machines to create custom-sized boxes for their products. This rightsizing of packaging lowers packaging materials and shipping cost,. Our packaging solutions lower our customers' total cost and help them meet the changing e-Commerce and market requirements.

Now I will turn it over to Ward.

Ward Dickson -- Chief Financial Officer and Executive Vice President

Thank you, Steve. Turning to Slide 11, we outlined our key assumptions for our fourth quarter guidance. We expect adjusted segment EBITDA in the fourth quarter to be between $880 million and $925 million. This compares to adjusted segment EBITDA of $858 million in our third fiscal quarter and $802 million in last year's fourth fiscal quarter. Sequentially higher seasonal volumes across both segments should more than -- should be more than offset by the flow through of previously published containerboard and kraft paper price declines and lower containerboard export prices.

We expect sequential cost deflation driven by declines in virgin fiber cost, freight cost, recycled fiber and seasonally lower energy costs. In addition, we expect to see material sequential gains due to lower scheduled mill outages and seasonal productivity improvements in the fourth quarter. We anticipate consumer packaging margins will improve over the third quarter levels. Depreciation, amortization and other items should be approximately $0.02 per share higher quarter-over-quarter and our tax rate in the fourth quarter should be consistent with our third quarter rate.

We received $15 million in business interruption proceeds from the Panama City insurance claim in the third quarter and we expect to receive a similar amount in the fourth quarter.

Turning to our balance sheet, we remain committed to returning a long-term leverage ratio and generating significant free cash flow. We expect fiscal 2020 capital expenditures will decline to a level of approximately $1.1 billion, $300 million less than this year. We also anticipate the capital expenditures will decrease $900 million to a $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 in the near-term will be debt reduction.

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

Steve Voorhees -- Chief Executive Officer

Thanks, Ward. WestRock team is performing extremely well as we proactively respond to a changing industry environment characterized by the challenges of additional new paper capacity combined with softer demand in some markets. We see increasing opportunities for sustainable packaging, e-commerce packaging and value-added packaging solutions. We're growing organically by creating customized value-added solutions for our customers that support their needs to grow their sales, reduce their total cost and risks, all while helping them achieve their sustainability goals.

We're investing in our business for the long term to sustain and expand our competitive advantage and we're building our systems and processes to take advantage of the scale of our platform. We're moving from a period of growth by acquisition, investment in large strategic projects and building the advantages of scale into our business to a period of increased focus on organic growth, innovation, productivity and free cash flow generation. A combination that will create value for our customers, stockholders and teammates for the long term.

James that completes my prepared remarks, we're ready for Q&A.

Questions and Answers:

James Armstrong -- Vice President of Investor Relations

Thank you, Steve. As a reminder to our audience to give everyone a chance to ask a question, please limit yourself to one question and return to the queue. We'll get to as many as time allows. Operator, can we please take our first question.

Operator

Certainly. Your first question comes from the line of George Staphos with Bank of America Merrill Lynch. Your line is open.

George Staphos -- Bank of America Merrill Lynch -- Analyst

Good morning. This is actually John [Indecipherable] on for George. Just starting now I was wondering if you could talk about, first of all, the early fiscal 4Q volume trends and then earlier you also referenced getting your integration rate to 90% and want to get a little bit more color on how you expect to get there and if you could provide a little bit more detail on timeline, I will be very pleased [Phonetic].

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

Sure. Good morning, John. It's Jeff Chalovich. So quarter-to-date starting on July, our shipments are up about 5.4%, that's organic. If you take Kapstone in there, we were up a little bit over 23%. So part of the 5% came from early in the month Prime Day in some of our e-commerce shipments. So that's about a point of that 5.4% and then our Victory shipments contributed about 0.8% to that.

Overall our backlogs are strong. They ticked down a little bit from the first half, but they're in line with what we saw in both in May and June months and we finished 2.2% up in May and 4.4 % in June. So I'm not expecting a 5%, but our volumes and backlogs still strong through this month. The strong markets, we continue to see a strong market certainly in e-commerce, bakeries, snack-foods, eggs started a little slow as we mentioned, but we are seeing pick up now with a better weather in the West and some of the Northwest Cherry season was decent and now Apple we're waiting to see some pick up there.

We continue to win basically with solution sales. We've shown the ability to grow organically and if you look at how we've grown in the last three years we're adding 180,000 to 200, 000 tons a year through the converting system, so that would imply four to five years, we can make that 90% integration rates and we've shown the ability to do that over the past three years.

Now we have some great examples of our business growing, which Steve mentioned based on our differentiation and so the solutions we're providing in supply chain optimization, automation, some of the box on demand that you saw solving problems and DIM weight taking cost out. We have some great examples of wins in the period in the quarter that really show the benefit of solution selling through the corrugated segment, but also the breadth of products we bring across the enterprise. And I'll point out a few, we had a large bakery customer that with our new links acquisition, we added $1 million of machinery based on our pelletizing opportunities. So that's the box size where we had our first two sales of box size. We have about 40 customers in line of 40 machines in the Q that customers want to talk to us about those.

So we have an open house late in August, where we have about two dozen customers looking at that business, but that's $5 million of sales wrapped [Phonetic] up for five years -- $5 million a year for five years. Our merchandise display had their first machine sales through their group, $9 million of sales and equipment for a seven-year contract $5 million a year, $35 million. We had an enterprise win, oatmeal customer that was breakfast foods bags that go into a folding carton and those folding cartons going into a box that

was our first sale of machinery thereabout $3 million in machinery and then $11 million of Folding Carton and boxes and then Victory had their first machine sales through our APS Group. We added $1 million in sales for machine and $1 million in corrugated packaging and 0.5 in the consumables for a 5 year. We're also seeing great lift in our retail ready shop ready packaging through our graphics business.

So all those things combined, will help us to keep to grow continually. And then on the other side of the house for our machinery business, we have great things going on with the consumer and plastic replacements in shrink. There is just augmenting and helping us grow, not to say [Phonetic], Pat, if you want to comment on that piece.

Pat Lindner -- President of Consumer Packaging

Sure. Thanks, Jeff. Appreciate that. Well, first of all a little bit on the quarter and how we're seeing the original question around the 4th quarter demand. Our volume trends , we still see pretty strong demand. I think year-over-year were probably flat, up slightly, but sequentially we expect to be on track and up a little bit. We are ramping up, you just see in our results from our three strategic outages in our mill system.

We see strength in food and -- food service as well as in beverage and you'll also see from our results that are converting assets were up about 2.7% in North America. Again that's driven by food service and beverage largely and that, that continues into this quarter. What Jeff was mentioning around some of the plastics replacements and we may get into this later, but this is a tremendous opportunity for our business and for our entire company.

It's rare to see and in industry this type of what I'll call not inclined [Phonetic] substitution where we're replacing material like plastic with paper and we're seeing this really ramp up. It's hit a tipping point for our industry and this is, this is really exciting. A couple of the examples or maybe one I'll just share right now, is when we talked about this last quarter briefly as an introduction, but we won some significant business with Diageo where they are replacing their plastics shrink wrap with a paper-based solution, with our cluster packed solution. And to Jeff's earlier point around machinery, a key part of us winning this is our value proposition that we bring around machinery and producing in -- designing and producing a machine that operate a much faster rates in the competitions and along with that comes the carton business that's based on our CNK product, high strength and high wet strength CNK product. So that's a great example.

And there are others as well that we have, but that's a great example where we're taking machinery combining it with our design around materials and just in this quarter, the quarter we're reporting on, here in the 3rd quarter, we picked up two new machines as they scale up in the cartons associated with that.

So we're really excited about the opportunity to leverage our full value proposition and our capabilities and driving the plastics to paper replacement efforts.

Operator?

Operator

Your next question comes from the line of Brian Maguire with Goldman Sachs. Your line is open.

Brian Maguire -- Goldman Sachs -- Analyst

Hi, good morning everyone. Question on the capex outlook. I think, late last year, you were talking more like $1.25 billion for 2020 and some flow-through from growth projects into 2021 on a base of about $1 billion. And then I think you lowered it in April to like $1 billion to $1.2 billion in 2020, maybe $1 billion in 2021 and now looks like you're taking it down again to 1.1 next year, $900 million to $1 billion in 2021, if I heard you right. I was wondering what are the moving pieces there, does that imply maybe that you don't think there'll be as much growth in the industry, you don't need to spend on projects or are you maybe just finding more savings and efficiencies in the projects and the spending that you're doing today.

And then just sort of tag into that, the comment around improving the integration to 90% sort of seems to imply some investment is needed in the downstream converting assets to kind of get there. I just wondering if you think we're just, we might see some growth investment in that part of the business if some of the mill investment winds down. Thanks.

Ward Dickson -- Chief Financial Officer and Executive Vice President

Okay. Brian, this is Ward. I'll start and then I'll have Jeff chime in on the converting investments. So you're right. This year we lowered our guidance to a $4 billion, embedded in that $4 billion this was the peak year of our capital investments in our strategic projects. We will invest over $500 million in the strategic projects next year as we move from FY '19 to FY '20. We've pinpointed FY '20 now in the midpoint of the range that we previously gave you. We have just over $250 million, between $250 and $275 million that's targeted for the strategic capital projects next year.

So the decline year-over-year is really being driven by the decline in the strategic projects. I will say and as we've gotten into the Capstone assets, the integration of those assets, remember that we had set an ongoing capex level to support Capstone at approximately $150 million. We believe now with a better understanding of the assets that, that those investments are lower.

So that's why we're confident in the -- that we can both complete the strategic capital investments and continue to make investments inside of our system to generate productivity and differentiation. As you know, we have invested substantially into our, over the last 3 to 5 years, into our container network through the e-bill [Phonetic] deployments and so we've been modernizing that system and we're generating the benefits from those investments. Jeff, do you want to add anything to that?

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

Sure. Hey, Brian. So I'd tag on to what Ward said one of the things we found as we looked at the projects in the Capstone queue for capital over a 3-and 5-year period. They were heavy in these next 5 years on container, on their converting assets and they have between $30 million and $60 million in greenfields coming up. Based on the scale of our system, we don't need to do that.

We've invested well as Ward just said, in the container system. So we've built the capability over the last 5 years to grow organically. And so in our normal capital rate, we continue to do that and we've been able to reallocate capital based on what we've seen in the Capstone. But it would also show that we have the ability to create a list of high return projects on assets.

So we're going to continue to look through that through the system. But this year and into the next year some of the capital that needed for new box plants, we don't need to do that and we're able to reduce the capital expense because of that.

Brian Maguire -- Goldman Sachs -- Analyst

Okay, great. Just one follow-up on consumer, if I could for Pat, just any, any change to your pricing term when one of your big peers talked about shortening some of the lags in implementing pricing. I'm not sure if that was as much of a priority for you or you're seeing any change in those terms going forward.

Pat Lindner -- President of Consumer Packaging

Yeah. Thanks, Brian for the question. When it comes to pricing, of course we can't comment any forward-looking dynamics in the marketplace or plans that we might have , but when we look at the pricing in this specific question around lagging capture of previously published price increases, we look at it in terms of a number of different mechanisms that we have.

And you know, we have a wide cross section of different customers and markets and so we have pricing or contract in terms of pricing that link up, pricing to PPW as well as open contracts and cost-based indexes. So it's a little bit difficult to give you a just one answer because of the complications associated with that because it does vary so much across the customers in the markets. But I think as you can see from our results over the last 9 months, we've realized about $100 million, actually a little over $100 million of flow through from those previously published price increases and in the 3rd quarter alone it was $30 million -- $38 million year-over-year.

So we're confident in our ability to capture the gains associated with those, with those previously published price increases, but it's a little bit complicated to give you an exact number because of the different mechanisms that we have.

Brian Maguire -- Goldman Sachs -- Analyst

Okay, thanks very much.

Operator

Your next question comes from the line of Chip Dillon with Vertical Research Partners. Your line is open.

Chip Dillon -- Vertical Research Partners -- Analyst

Yes, good morning and thanks for all the details. If I look at your capex guide, just a quick question on this. For the fiscal year that starts in 3 months, I'm sorry, a year from 3 months from now, the fiscal 21 and I assume your DD&A stays at $1.53 billion that would suggest you would generate 2.25 [Phonetic] of free cash flow if you earn zero, which is 6% of your stock price, which means your free cash flow yield at zero earnings will be higher than almost all the rigid Flexible Packaging stocks.

Could you just make sure my math is right? And also could, do you have a thought as to whether that $950 -- $900 million to $1 billion is sort of a sustainable level of capex that reflects modest growth projects in addition to maintenance.

Ward Dickson -- Chief Financial Officer and Executive Vice President

So, Chip, this is Ward. To be clear, we will generate a lot of free cash flow in this business and that one of the leverage that we have, as we've been investing in these strategic projects, we will invest over $1 billion in these projects and they're going to generate approximately $240 million worth of incrementally EBITDA that will flow through to both earnings and cash flow generation for us. So we are comfortable that the ongoing level of strategic -- base capex is going to be in that $900 million to a $1 billion range. There is a small tail of the Tres Barras mill in fiscal '21. We have about $50 million to $60 million of capital that remains in FY '21 and then the rest of it is our base capex that we're comfortable with.

We do believe that the dividend yield and the free cash flow yield of WestRock is one of the compelling points of our valuation.

Chip Dillon -- Vertical Research Partners -- Analyst

Okay. And just quick follow-up, when you look at the -- that you were talking about the e-commerce impact of SIOC and you gave an example of the Smile Box, how do you think of some of the initiatives of making for frustration free packaging that say Amazon is leading and others. How will the net impact of that be on both yourselves and the industry. I know there are lot of moving parts, but are you seeing a reduction in corrugated demand because of this or is it slower growth or is it actually helping?

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

Hey Chip, It's Jeff, like I said, it's -- there's a lot of moving parts, we're doing a considerable amount of testing for our customers for SIOC packaging. We have seen no degradation in our demand because of SIOC. It's -- I don't know if it will be a plus or minus, but right now, it hasn't degraded at all. We've seen more fallout in the smaller box stuff from some of the envelopes, and we're coming out with fiber-based envelopes from our consumer business and testing those as we speak in this quarter and we're looking at what we can do with our paper business also and some of the pouches.

We also came out with a new machines that is making pouches out of Stanford [Phonetic]. So our pack on demand will pack small from a 4 by 4 or 6 by 6 up to a hoodie sweat shirt, a large bulky sweat shirts will help us compete in those markets and meet customers' demand in SIOC and also TIM weight and shipment reduction. So overall, we think we're well poised to design innovate around that and will help our customers when I think overall, that's good for us in the markets.

Unidentified Speaker

Just as a reminder, please limit yourself to one question. Operator, can we have our next question, please.

Operator

Certainly. Your next question comes from the line of Mark Connelly with Stephens. Your line is open.

Mark Connelly -- Stephens -- Analyst

Hey, good morning. This is actually John Reider [Phonetic] on for Mark. So start question is if you could just give us an update on the kraft paper business and if you expect a pressure on plastics to have a material impact on that business over the two to three years. And just in terms of that, if you could just give us a sense of which kraft paper markets are doing better than other?

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

Sure. So I'll start at the high point of the kraft paper. It's our Durasorb [Phonetic].

So saturated kraft demand is strong in that market. And if we can make it, we can sell it. The demand on the kraft paper and the aggregate is a bit down matching containerboard. I think there has been more pressure lately on the kraft bag markets, the extensible markets more challenged and that was really because seed, cement, fertilizer in the Midwest, our customers producing for those were affected by the floods.

So that's off a bit now, along with the kraft bag but not, it's not substantial, it's a few thousand tons from what we expected and overall I would say that if you looked at inventories and stock, where we've seen destocking in the containerboard space, the kraft bag space is a bit different right now, and we see inventories higher and a bit of a slower destocking in our kraft sack business.

And the extensible where we've seen more than our regular bag. In the long term, I think, yes, that we have opportunities through our customers now with plastic replacements and opportunities and the sustainability around as I've said, we're looking at pouches, envelopes, and other things we can use in our kraft space.

Operator

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

Mark Weintraub -- Seaport Global -- Analyst

Thank you. First just wanted to clarify, Jeff so when you were talking about July business, would you say that represents some pick up as one of your competitors suggest they were seeing or is it more kind of the same as what you had been seeing as another of the competitors had suggested?

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

It's a bit of a pick up, Mark, even without the Prime and Victoria, it's a bit of a pickup, if you look through the last quarter, into this quarter. It's a pick up.

Mark Weintraub -- Seaport Global -- Analyst

Okay, great. And then I think the previously you told us a roughly 20% of your corrugated sales were now going through machinery tied systems, can you update us to what that might be now and where you think that could potentially go over any defined period of time.

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

Sure, we're over 30 now, Mark, getting toward 40 with associations of our machinery to our packaging and as we continue to expand the machine business that whole ratio will continue to also grow. So as we look at driving our differentiation higher that's a major pillar in our differentiation strategy and solving major challenges for our customers. So there is not a customer today, we don't talk to, there is not having labor challenges, efficiency challenges, trying to streamline their observations and solve supply chain issues.

So with our ability of innovation, design and then to marry that with our automation platform across our whole enterprise we expect sales lift from that.

Mark Weintraub -- Seaport Global -- Analyst

Okay, thanks. So that sounds like a really big increase, is that a big reason why you think you've been very successful in gaining share in the last year or two?

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

Yes, that's part of it. I think the other part is the design that goes with that, the innovation and just the solutions that we're providing solutions for customers across broad array and we're able to do that now with our folding carton business, NPS is another one. So I'll give you a great example. We just said, they're in a horticulture space and their horticulture tags, we're going to be replaced with labels. They needed an automated solution to label the flower pots. And so in 90 days we designed the machine with the supplier partner produced the machine, we kept the labels, we got the labels, they are digital, so person can scan on the label without having a horticultural tag and sold four machines immediately and there is great upside for that.

So, that type of ability in our system across the whole enterprise is a great way to differentiate and grow our sales.

Mark Weintraub -- Seaport Global -- Analyst

Thank you.

Operator

Your next question comes from the line of Ketan Mamtora with BMO Capital Markets. Your line is open.

Ketan Mamtora -- BMO Capital Markets -- Analyst

Good morning. Can you remind us what is your integration level in consumer packaging. And has your view changed at all on kind of what level you need to be there in consumer packaging?

Pat Lindner -- President of Consumer Packaging

Yeah, thanks very much for the question. This is Pat. So our integration level overall as we consider to be about 60%. Let me describe a little bit of how that breaks down. In SBS, we're a little bit over 50% integrated as a whole, about 20% of that goes through our folding carton business internally. So our internal conversion, but that's a little bit understated because we have specialty applications such as tobacco, commercial print and a couple of other applications like liquid packaging where we consider those to be integrated because effectively we're specified a most of those downstream. So when you put all of that together, we're actually in SBS about 55%.

In terms of CNK we are higher than that. We're at 70% and CRB is about 60%, a smaller part of our portfolio in URB; the uncoated recycled board is down around 30%. So overall, net-net the weighted average of that is about 60% as an overall company. As far as your second question around, are we happy with that and where it is. We continue to look at this on an ongoing basis and our main priority right now is to, as we drive integration and move that further toward an integrated system, it's really all about organic growth for the plastics replacement opportunity and organic growth in general. But we see that as an opportunity to think about how do we strategic play in our markets and how do we best serve our customers in those markets with our paper-based solutions with a again plastics replacement being one great opportunity.

That's not to say that we won't selectively explore inorganic opportunities. But I think as you probably know, there is other multiples in this space, they are still pretty high. And we've got to be very selective on deals that would look attractive to us. And so, our focus right now is to drive organic growth as we look to in certain places to integrate our -- to increase our integration levels.

Ketan Mamtora -- BMO Capital Markets -- Analyst

Thank you.

Operator

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

Steve Chercover -- DA Davidson -- Analyst

Thanks, good morning everyone.

Steve Voorhees -- Chief Executive Officer

Good morning.

Steve Chercover -- DA Davidson -- Analyst

So first of all, on the capital allocation priorities with respect to debt. I know you're still a touch above your target leverage ratio, but following the debt repayment in Q2. Are you approaching a point where repurchasing stock might move up the pecking order in the capital allocation framework considering, you've got a 5% dividend that's probably up there to commensurate with some of your, the coupons on your debt.

Steve Voorhees -- Chief Executive Officer

That's a great question. I think that's something we look at periodically, just as the trade-off of that. I think this past quarter we chose to pay down debt, but we'll continue to look out over time. If you look at us over time, we've done both and I think you've cited a couple of aspects that would make share repurchase relatively more attractive.

But I think this past quarter we're very comfortable paying down debt, because, and from our enterprise value standpoint, our stockholders to get the benefit of that almost dollar for dollar.

Steve Chercover -- DA Davidson -- Analyst

Yeah, I agree. So I guess at some stage if you think that your equity is undervalued. And then it also makes sense to front-end loaded. And just a quick one on the Capstone synergies are continuing to accrue ahead of schedule. I know that you said you'll do better than $200 million, which was the initial target. Is there a point where you're going to quantify how much more than 200 you might be able to achieve?

Steve Voorhees -- Chief Executive Officer

Sure. I think there will be a point I think, we'll get to 200, if not [Phonetic] we'll figure out how far will get fast 200.

Steve Chercover -- DA Davidson -- Analyst

Okay, thanks, Steve.

Steve Voorhees -- Chief Executive Officer

Welcome.

Operator

Your next question comes from the line of Edlain Rodriguez with UBS. Your line is open.

Edlain Rodriguez -- UBS -- Analyst

Thank you, good morning guys. One quick -- one on consumer packaging and what's your outlook on the SBS market, which has been, hasn't been as strong as the other grades and also in terms of sustainability, like, are you seeing similar trends in the US, as you will see in Europe in terms of shifting from some plastics to paper base package.

Pat Lindner -- President of Consumer Packaging

Yeah. So thanks very much for the question. This is Pat. So on the SBS market, we actually see areas of pretty good growth. And as you know SBS is a pretty complicated one because of the broad markets that it serves, unlike some of the others, which are a little bit more focused in their market.

So just looking at a couple of those segments. When you look at food service as an example, food service is pretty strong right now. And that's driven by sustainability. But I think it's also driven by just the trends in consumers today.

There is a lot more interest in takeout and snacks and smaller meals rather than eating out with big meals and so a lot of our customers and retailers right now are looking to take advantage of that and offer packaging that helps service those needs and that demand. In many of those applications, they are moving toward to the extent they were in plastics, they're moving toward paper more and more.

That is a trend in North America, there is no question about that. Now as far as other markets, certainly tobacco for SBS, certainly tobacco and commercial print continue to be in a secular decline so that offset some of those increases. Now, we're also pretty excited by what's happening in some of the plate markets as well as cup stock. The sustainability thing and this is one that's in Europe, but also in North America to your, to your other question, your second question is that. SBS demand we think in the future could well be driven by some of the trends around sustainability around cup stock replacement and today those cups for example at Starbucks and others are poly coated so plastic coated on the inside.

Now at WestRock we can recycle that all the way through our entire system, our recycle system, but that's not true of many other recyclers in the industry. And so one of the things that we're doing there is that we're developing a fully recyclable coding and we recently won an award for that. The next-gen cup challenge. We want that and that was supported by a number of different companies like Starbucks and Coca-Cola and others.

And so we're excited about that win, we're in the process of customer trials, we're scaling that up where we think if that turns and really if we can commercialize that there is over 650 billion cups, a paper cups used in the world.

And so we think there is an opportunity there obviously to drive some SBS demand, but that's still a piece that's very much in development. And just closing out on your North America versus Europe in terms of sustainability, I would say Europe has been in the lead in some areas, certainly on the beverage side. I mentioned Diageo example where we picked up some nice business around shrink-wrap replacement, and there's others happening as well with other other big retailers and other big brands. North America has been a bit more focused on that food and service side. We think beverage will come, but around a plastics and different types of packaging.

When you look at aluminum cans in particular, North America has a pretty eclectic and diverse selection of different packages that are used that will happen, but that one is a little bit behind the trend in Europe, specifically on beverage.

Edlain Rodriguez -- UBS -- Analyst

Okay, thank you very much.

Operator

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

Mark Weintraub -- Seaport Global -- Analyst

Thank you. One question on that the Florence facility for next year, how much given that a lot of that by, I assume is just going to be improved productivity and lower costs. How much is that project deliver just on that. So forgetting the small increment in capacity, but if we just focused on the improved cost position, etc. Can you give us a sense as to how big an impact that can be?

Pat Lindner -- President of Consumer Packaging

Sure. I think what we've said previously, it's in the $60 million range.

Mark Weintraub -- Seaport Global -- Analyst

Okay, thank you.

Operator

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

George Staphos -- Bank of America Merrill Lynch -- Analyst

Actually, I just wanted to quickly follow up on SBS. I was just wondering if you could talk a little bit about, I mean. So basically we had read about some supply changes in boxboard, particularly in SBS and so essentially, want to get a sense for whether you're seeing any increase in demand associated with that.

Pat Lindner -- President of Consumer Packaging

Yes. So, SBS overall there has been a lot of changes in that market and and we can't comment other than some of the previously announced changes and additions and subtractions to the capacity that you've all seen. I think going back to my earlier comments, plastics replacement gives us an opportunity to drive some increased SBS demand.

I think its long-term direction is going to be dependent on our ability to capture some of those wins and plastics replacement. The tobacco as well as the commercial print are offsets to that. So it's a little bit difficult to tell how all that's going to sort out. But right now, what we see is we still have long backlogs in SBS, that 4 to 6 weeks, and maybe even on the upper end of that. We're ramping up from some of our production right now from the strategic outages to capture as much of that as we can.

So right now in the immediate term and -- right now in the near term, it's really still pretty strong and pretty robust. The long-term I think depends on capturing some of these new innovative solutions that help solve some of the sustainability challenges, particularly in the food service space.

Operator

Again, if you'd like to ask a question please press star then the number one on your telephone keypad. There are no further questions at this time. I turn the call back over to James Armstrong.

James Armstrong -- Vice President of Investor Relations

Thank you, Chris, 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

[Operator Closing Remarks]

Duration: 53 minutes

Call participants:

James Armstrong -- Vice President of Investor Relations

Steve Voorhees -- Chief Executive Officer

Ward Dickson -- Chief Financial Officer and Executive Vice President

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

Pat Lindner -- President of Consumer Packaging

Unidentified Speaker

George Staphos -- Bank of America Merrill Lynch -- Analyst

Brian Maguire -- Goldman Sachs -- Analyst

Chip Dillon -- Vertical Research Partners -- Analyst

Mark Connelly -- Stephens -- Analyst

Mark Weintraub -- Seaport Global -- Analyst

Ketan Mamtora -- BMO Capital Markets -- Analyst

Steve Chercover -- DA Davidson -- Analyst

Edlain Rodriguez -- UBS -- Analyst

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