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WestRock (NYSE:WRK)
Q3 2020 Earnings Call
Aug 04, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning. My name is Amy, and I will be your conference operator today. At this time, I would like to welcome everyone to the WestRock Company first-quarter 2020 earnings conference call. At this time, I would like to turn the call over to Mr.

James Armstrong, vice president of investor relations. Please go ahead.

James Armstrong -- Vice President of Investor Relations

Thank you, Amy. Good morning and thank you for joining our fiscal third-quarter 2020 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 a link on 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 chief innovation officer and president of 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, 2019, and our 10-Q for the quarter ended March 31, 2020. In addition, we will be making forward-looking statements about the impact of the COVID-19 pandemic on our operational and financial performance. The extent of these effects, including the duration, scope, and severity of the pandemic is highly uncertain and cannot be predicted with confidence at this time. We will also be referencing non-GAAP financial measures during the call.

We have provided reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in the appendix of this slide presentation. As mentioned previously, the slide presentation is available on our website. With that said, I will now turn it over to you, Steve.

Steve Voorhees -- Chief Executive Officer

Thank you, James. Good morning. Thanks for joining our fiscal third-quarter earnings call. I'll start by thanking the outstanding WestRock team for their commitment, focus, and performance over the past several months.

The safety of our teammates is first and foremost. In addition to implementing comprehensive precautionary measures to address the impact of COVID-19, WestRock teammates have reduced the frequency and severity of physical injuries across our footprint. This is a testament to the focus of our entire organization during the pandemic. Our teammates at our operating locations are making and delivering the paper and packaging needed to ensure that supplies of essential goods, including food and medicine, are delivered on time and in full.

Our team is dedicated to providing our customers the solutions that help them win in their markets through innovation that helps them grow their sales, reduce their total cost, manage the risk, and achieve their sustainability goals. For customers and markets that have had increased demand, such as e-commerce, food, and healthcare, the scale of our operations has enabled us to partner with our customers to support these needs. All of this was evident in the results delivered by the outstanding WestRock team during the quarter. And we recognized this performance with a one-time bonus for our manufacturing and operations teammates that was paid during the quarter.

Now let's turn to the results in the fiscal third quarter. Our sales were $4.2 billion with adjusted segment EBITDA of $708 million and $0.76 of adjusted earnings per share. Despite lower sequential net sales, adjusted segment EBITDA margins increased sequentially. Margins improved by 80 basis points primarily due to cost-reduction efforts, productivity gains, and other items.

Across our company, we moved quickly to adjust our cost as our volumes changed. We deferred outages, controlled maintenance cost, curtailed travel, and reduced our discretionary expenses. Our entire supply chain performed well in this dynamic environment. In addition, fiscal third-quarter results reflect the benefit of nonrecurring items, including a reduction in our annual short-term incentive compensation expenses.

To balance our supply with our customers' demand in the quarter, we took 154,000 tons of economic downtime across our corrugated and consumer mills. The value of our broad portfolio of products and capabilities continues to be recognized by our customers. Sales to our enterprise customers rose to $7.5 billion over the past 12 months compared to $6.8 billion a year ago. This is a 12% increase.

During the quarter, even with the pandemic, we placed an additional 63 machinery solutions in customer facilities, bringing our total to more than 3,900 placements. We also made progress against our internal growth initiatives. Our strategic capital projects are progressing. We expect to start up the Florence paper machine later this year and complete the mill upgrade at our Tres Barras mill in Brazil in the first half of 2021.

We're implementing our KapStone integration plan with run-rate synergies growing to $150 million, on our way to over $200 million by the end of fiscal '21. We generated $752 million of adjusted operating cash flow this quarter, and we reduced our net debt by $455 million. Our adjusted total funded debt was less than $9.4 billion at the end of the quarter. In May, we announced the WestRock Pandemic Action Plan, which outlined a number of actions that will provide an additional $1 billion of cash through the end of FY '21 to ensure that we remain well-positioned for long-term success.

This $1 billion is in addition to the cash we will generate through our operations. And we're on track to generate more than $350 million from the plan during this fiscal year with the majority of the $1 billion expected to be generated during FY '21. This will support our continued investment to sustain and improve our business while providing additional cash to reduce debt. Let's turn to Slide 4.

During the quarter, our volumes were affected by COVID-19. The strength in e-commerce, food, and healthcare end market segments was more than offset by lower sales in other market segments. These include industrial, protein, commercial print, and high-end consumer products. The bridge on this and the following slides are sequential, which we believe is the most useful comparison now.

We've included the year-over-year bridges in the appendix. The sequential price/mix variance reflects the flow-through of previously published price decreases and the market declines in pulp and kraft paper pricing. The increase in inflation was driven by the $55 per ton increase in recyclable fiber cost that was partially offset by lower virgin fiber, energy, and freight cost. You can see from the bridge that we moved quickly to control expenses in the face of reduced revenue.

We postponed maintenance outages originally scheduled in the third quarter to the fourth quarter of fiscal 2020 and the first quarter of fiscal 2021. Our cash flow performance was solid in the quarter. And as we've highlighted in the past, our operating cash flow generation is seasonally weighted to the second half of our fiscal year. Now for the corrugated packaging segment.

Corrugated packaging team performed extremely well, delivering adjusted segment EBITDA of $482 million and adjusted segment EBITDA margins of 18.3%. North American adjusted segment EBITDA margins were 19.8%, and Brazil's adjusted segment EBITDA margins were 23.6%. Box segments were stable in the fiscal third quarter as compared to the fiscal second quarter. Our monthly trends reflect month-to-month declines in April with month-to-month growth in both May and June.

This trend has continued in July, with per day shipments up 1.7% from June levels on the same number of shipping days. Our box backlogs measure our expected box shipments over the next two to three weeks. These have increased steadily during the month of July, indicating stable volumes in August. Now, for the quarter, per day shipments declined 4% compared to the prior year.

The decline was due to reduced demand from distribution, industrial and agricultural customers, the exit of low-margin sales of sheets to third parties, and the consolidation of five box plants over the previous year. We expect demand from our distribution and industrial and agricultural customers to increase as the economy recovers. I'm confident in our team's ability to grow the corrugated packaging business over the long-term as they've done this over the previous three years. The year-over-year volume variance is not a long-term trend.

Our long-term goal is to further integrate the business and to be a differentiated supplier to customers have not changed. The volatility in unprecedented situation of COVID-19 virus may delay the timing of when we reach our growth and integration goals. But it doesn't change the destination or our ability to reach these goals. We're delivering on our value proposition with customers and are focused on opportunities in our hot pipeline.

Our hot pipeline measures business that we will begin to onboard over the next 90 days, and it's the highest it's been since the KapStone acquisition. This indicates that our relative volumes should improve toward the end of this calendar year and the beginning of 2021. COVID-19 had a significant impact on corrugated packaging sales during the third quarter. Sales for e-commerce, agricultural, and pizza end market segments were up significantly sequentially.

E-commerce sales increased 18% from an already strong fiscal second quarter. This market remains strong. Other markets, such as industrial and protein, declined due to our customers' plant closures early in the quarter. We saw these markets recovering as these operations came back online.

Export containerboard shipments declined 51,000 tons sequentially. Over the past 12 months, approximately 55% of our exports have gone to Latin America, about 25% to Europe, the Middle East, and Africa, with the remainder going to Asia and other parts of the world. As we integrate more containerboard tons, this end market is likely to become a smaller portion of our total corrugated packaging shipments. In an environment of declining demand and rising recycled fiber cost, our North American corrugated packaging businesses' adjusted segment EBITDA margins improved to 19.8%.

This is 80 basis points more than the second quarter. We moved quickly to control cost and balance our supply with our customers' demand. During the quarter, we took 124,000 tons of economic downtime in addition to 21,000 tons of maintenance downtime. In the month of July, we took only 13,000 tons of economic downtime.

Our system currently is operating in balance with inventory slightly below our target levels. The entire corrugated packaging segment and supply chain performed extremely well during the quarter, working to operate efficiently and control costs. Our key operating metrics, and these include waste, productivity, and on-time delivery, were exceptional and are a credit to the focus and commitment of the corrugated packaging team. Now, let's turn to our consumer packaging segment.

In the fiscal third quarter, our $1.6 billion in sales declined compared to last year. Adjusted segment EBITDA of $243 million increased 9% sequentially and 4% year over year. Adjusted segment EBITDA margins of 15.6% improved 190 basis points from the fiscal second quarter. Disciplined cost management and strong execution drove the adjusted EBITDA and adjusted EBITDA margin improvement.

Demand in our food, foodservice, beverage, and healthcare end market segments increased sequentially, and our team performed well to meet increasing demand in these markets. Increased demand in these categories was offset by significantly lower demand in commercial print and softness in the high-end consumer markets. These include beauty, cosmetics, and high-end spirits. We've seen a pickup in these markets coincident with the reopening of the economy.

Our consumer packaging mill system volumes, excluding commercial print, were stable, and our system backlogs are currently between three to four weeks. We took 31,000 tons of economic downtime during the quarter, mainly in SBS, to balance our supply with our customers' demand. In July, we continued to adapt to our customers' demand and took 33,000 tons of downtime in our SBS system. As you may recall from last quarter, we view our consumer packaging segment through the following categories: food, foodservice and beverage, MPS specialty packaging, specialty SBS and pulp, and other.

We've seen strength in food, food service, and beverage this category during the pandemic, and this represents 59% consumer packaging revenue. Sales in our MPS business, and this accounts for 27% of revenue, has been mixed with strength in healthcare and softness in high-end specialty packing. Our specialty SBS business, and this represents 10% of revenue, had a difficult quarter mainly due to the sharp decline in demand for commercial print. Finally, pulp and other accounts for only 4% consumer packaging sales and continues to be negatively impacted by low global pulp prices.

The improved performance of the consumer packaging segment is a credit to the commitment and focus of the entire consumer packaging team. During the quarter, this team successfully navigated varied demand trends across the many consumer and customer end markets and geographies that we serve. They successfully served our customers, adjusted supply chain, and controlled their cost. While COVID has caused many of our customers to shift priorities in the near term, sustainable packaging continues to be in high demand, including the movement away from plastics and packaging.

Since July of 2018, our sales from plastic replacement are at a run rate of more than $170 million, and they're growing. The highest demand for more sustainable fiber-based packaging is for the e-commerce, food, foodservice, and beverage markets. In these markets, our businesses leverage a broad set of value-added capabilities that include design, material science, advanced printing, and machinery automation capabilities. WestRock has multiple ways to innovate with our customers to convert from plastic to fiber-based packaging.

Slide 7 shows several of the many packaging designs and automation solutions that we offer for customers. These packaging designs, integrated with the machinery for these products, position WestRock well to grow our plastic replacement applications as the demand for sustainable packaging increases. In addition, we focus on carton designs that do not contain glue, which is an important differentiator for our customers. During the last quarter, Nestlé, Anheuser-Busch InBev, Coca-Cola, and others chose WestRock paperboard, packaging, and automation solutions to transition beverage packaging from plastic shrink wrap and plastic rings to paperboard.

In addition, we've provided our CanCollar to more than 40 kraft brew customers. Red Bull is expanding its production in the United States through the development of a greenfield location in Glendale, Arizona. WestRock will provide the secondary and tertiary packaging for the products manufactured at the site. This includes folding cartons, corrugated trays, end pads, and machinery as a complete packaging supply chain solution.

This builds on the strong relationship that we have with Red Bull in Europe and highlights how our broad portfolio of products and global operations complement one another. WestRock has partnered with Domino's to promote the recyclability of pizza boxes. While many believe that pizza boxes can't be recycled, we conducted a study and demonstrated that grease and cheese residuals at levels typically found in pizza boxes don't impact the recycling process nor do they impact the quality of new packaging made with the recycled material. Given that many people are not aware that pizza boxes are recyclable, WestRock and Domino's are partnering to build a consumer website to provide access to instructions, facts, and answer questions about pizza box recycling.

This WestRock initiative is helping Domino's meet its sustainability goals. Now, I'll hand it over to Ward to talk about our financial position and outlook. Ward?

Ward Dickson -- Chief Financial Officer

Thanks, Steve. Our balance sheet is strong with limited near-term maturities and significant liquidity. In the quarter, we reduced our net debt by approximately $455 million. S&P and Moody's reaffirmed our investment-grade credit ratings.

In June, we issued $600 million in 13-year bonds to extend our maturities and provide more liquidity at a very attractive long-term interest rate. Our long-term committed liquidity and cash are now in excess of $3.2 billion, and our U.S. pension plan is overfunded. There are some things to consider as you build your models for the fourth quarter.

We expect our recycled fiber cost to be approximately $25 per ton lower than the average in the third fiscal quarter, and we expect other commodity costs to be similar to the third quarter. In the fourth quarter, we plan to take 112,000 tons of maintenance downtime, and we will not have the benefit of the $29 million of nonrecurring items that we experienced in the third quarter. Uncertainty remains due to the resurgence of COVID-19 in many markets. We currently see modestly improving shipment volumes and have one additional shipping day in the fourth quarter.

Based on these current trends, we expect our fourth fiscal quarter's adjusted segment EBITDA to be slightly lower than the third quarter. We also expect an adjusted tax rate of approximately 27.5% in the quarter and a full-year adjusted tax rate to be 24.5%. One of the pillars of our business is the ability to generate cash. Each year since the creation of WestRock, we have produced more than $1 billion of adjusted free cash flow.

Even in the pandemic, we continued to generate cash. Traditionally, our second half of our fiscal year is our strongest period of cash flow generation. In the third quarter, we generated more than $500 million of adjusted free cash flow while we invested in our strategic capital projects. With relatively stable sequential earnings, as well as our focus on working capital, the reduction of capex, and the other benefits of the Pandemic Action Plan, we believe that the fourth quarter will be another quarter of strong cash flows.

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

Steve Voorhees -- Chief Executive Officer

Thanks, Ward. Thanks again to the outstanding WestRock teammates for their commitment, focus, and performance. It's been incredible. We're a company that values the strength that comes from our teammates.

Teammates with diverse backgrounds, experiences, and ideas. Diversity encompasses many things. The diversity of WestRock will increase over time. We're building a more diverse and inclusive company where equity and a sense of belonging are an integral part of the WestRock culture.

I want everyone at WestRock to be welcome, heard, valued, and safe. Recent events have heightened the necessity and urgency of doing this, and we're acting accordingly. WestRock teammates are focused on safety, customers, quality, cost, productivity, and building our company for the future. We have scale and leading market positions in our businesses.

Our products, markets, and capabilities are well-positioned to take advantage of the short-term impact of the pandemic and long-term trends in sustainability and innovation. Our strategy remains to partner with our customers to help them grow their sales, reduce their total cost, manage their risk, and help them achieve their sustainability goals. With our broad differentiated portfolio and scale, we're well-positioned for success. We're an attractive company based on our strong market positions, the operating improvements that we have in place, and the steps that we've already taken to generate cash to sustain and improve our business while making additional cash available to reduce debt.

James, that completes our prepared remarks. We're ready for Q&A.

James Armstrong -- Vice President of Investor Relations

Thank you, Steve. As a reminder to our audience, to give everybody a chance for a question, please limit your questions to one with a follow-up as needed. We'll get to as many as time allows. Operator, can we now take our first question?

Questions & Answers:


Operator

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

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

Thanks. Hi, everyone. Good morning. Thanks for taking details and taking my question.

Really, my primary question is around the outlook for next year, realizing that you're not in a position to guide. When we consider the impact of Tres Barras, which will be coming on middle of next year, let's say, Florence, KapStone, the incremental synergies you'll have there, and any additional productivity that we may see because of moves you make within the business, holding price constant, what do you think -- and assuming volume trends stay the same, what do you think that increment to earnings power might be all in? And if you could parse any of that, that would be great. The second question, kind of related to the first. You showed some impressive, large productivity numbers, both for consumer and corrugated in the quarter, what was in some of those figures, the larger movers in consumer, the $33 million there, and in corrugated, for $44 million? Thank you, guys.

Good luck in the quarter.

Ward Dickson -- Chief Financial Officer

Hey, George. It's Ward.

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

Good morning, Ward.

Ward Dickson -- Chief Financial Officer

Let me start with the second question first, OK? So if you look at the cost performance in both businesses, it was really remarkable. And I can walk you down the P&L, and it was really in all cost categories that we performed as well. So Steve highlighted the fact that the mill systems adapted very well to the fluctuating demand. We deferred maintenance costs, maintenance outages.

We controlled maintenance expenses. We had meaningful reductions in overtime across our systems. Steve talked about the fact that waste in operating performance in our converting systems in both corrugated and in consumer performed extremely well. Our discretionary expenses declined sequentially, meaningfully.

So a small simple example is travel expenses declined almost $15 million sequentially. We also had the normal payroll seasonality of payroll. Payroll is -- our payroll expenses -- payroll taxes are usually at their highest in the first calendar quarter. And so they declined to almost $10 million sequentially.

So it is really across the P&L. You can see it both in SG&A and up in the manufacturing portion of our P&L is where the cost control took place. And it was true across both corrugated and consumer and even in our headquarters' operations as well. So that's the quarter.

Let's go forward to next year. So remember, our -- let me just kind of walk you through what our key strategic projects are. There was the mark curtain coater that's been completed. And it's performed extremely well.

And as we get into FY '21, it will be at its peak run rate of the cost performance that it will generate. Porto Feliz continues to ramp up. So some of the Porto Feliz benefits are somewhat volume-dependent and dependent upon the overall market conditions down in Brazil. The Florence paper machine will, again, be somewhat dependent upon the ramp-up of and overall demand environment that we are operating in.

But we should get meaningful benefits as we go into FY '21 or over the course of FY '21 from Florence. And then Tres Barras, again, much of the benefits for Tres Barras will flow into FY '22. I could see the year-over-year benefits from the projects could easily be $75 million FY '21 versus FY '20. But it is somewhat volume-dependent and could be better or could be slowed by what the overall market conditions could be.

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

Thank you, Ward. I will turn it over.

Operator

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

Anthony Pettinari -- Citi -- Analyst

Good morning. You referenced box shipments improving from May to July, with August demand remaining pretty strong. And I guess my question is you had some box plant closures that sort of set up a difficult comp for you earlier this year. Are those completely lapped? Or did that comp getting easier contributed -- did that contribute to the strength that you saw kind of as you went through the quarter?

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

Good morning, Anthony. It's Jeff. So no, we're not lapped on the plant closures yet. So it started in April through January, so we still have some time until that's completely lapped.

So that's still a headwind on the volumes at this point.

Anthony Pettinari -- Citi -- Analyst

OK. Is that headwind maybe less than a point or half a point? Or is there any kind of way you could quantify it?

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

Yes, sure. It's half a point. It's in that range, a half a point to a little lower. But directionally, that's where it is.

Anthony Pettinari -- Citi -- Analyst

OK. That's helpful. And then just in consumer quickly, you talked about improved foodservice demand. I was just wondering if it's possible to put a finer point around maybe the level of improvement that you saw sequentially from fiscal 2Q to 3Q and maybe what products or categories are doing well.

Pat Lindner -- Chief Innovation Officer and President of Consumer Packaging

Sure. Thanks for the question. This is Pat. I'd be happy to help with that.

So foodservice for us involves a number of different applications. We sell open paperboard SBS into the cup and plate markets. And we also have integrated offerings for takeout, for curbside delivery and quick-serve restaurants, for example. And so if you look at each of those markets, cup stock had been holding in there through probably May.

And then it actually had some softening in June and July as kind of the recovery and the opening of the market softened a little bit. Plate stock, on the other hand, has done quite well sequentially. And so we've seen some growth there. And take-out and quick-service restaurants, despite the fact that there have been fewer concerts and kind of sporting events where we typically see demand, the curbside of restaurants, quick-serve restaurants, have been pretty strong.

So net-net, we've seen good sequential increases in demand for foodservice.

Anthony Pettinari -- Citi -- Analyst

OK. That's helpful. I'll turn it over.

Operator

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

Mark Weintraub -- Seaport Global Holdings LLC -- Analyst

Thanks. First, congratulations to the whole WestRock team. Obviously, great performance in challenging times. One thing I just wanted to drill down a little bit more if I could.

On the maintenance, on the deferring the maintenance expenses, can you give us a sense as to how much that is? And does that then have to essentially show back up in a larger amount at some later date?

Ward Dickson -- Chief Financial Officer

Yeah. Hey, Mark, this is Ward. What I would tell you is that if you look at it from Q3 to Q4, you saw the benefit on the bridge from Q2 to Q3. When you go from Q3 to Q4, I would say that it's approximately $15 million to $20 million incremental expense in the fourth quarter relative to the third quarter.

Mark Weintraub -- Seaport Global Holdings LLC -- Analyst

And then as we think about this year as a whole, will it be where it normally would be? Or is it still going to be at a deferred-type level?

Ward Dickson -- Chief Financial Officer

I think it's relatively normal, Mark.

Mark Weintraub -- Seaport Global Holdings LLC -- Analyst

OK. Super. And then just lastly, obviously making great progress on the debt side. And you talked about leverage ratio targets.

Did you also have like an absolute type of target for debt or net debt that we should be thinking about?

Ward Dickson -- Chief Financial Officer

We're more focused on, really, the leverage target given kind of the -- we're clearly focused on paying down debt, taking the absolute level down. The leverage target is obviously dependent upon the EBITDA generation in the business, and that also is the primary driver and source of paying down debt. So we're more focused on the targeted range.

Mark Weintraub -- Seaport Global Holdings LLC -- Analyst

Right. And I guess because the EBITDA is potentially volatile, I was wondering if there is kind of an absolute number that would be helpful in understanding what your goals are.

Ward Dickson -- Chief Financial Officer

No. I think our goal has been very consistently stated, which is as quickly as we can return it to the two and two and a half times target rather than the absolute.

Mark Weintraub -- Seaport Global Holdings LLC -- Analyst

OK. Thank you.

Ward Dickson -- Chief Financial Officer

Yes.

Operator

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

Mark Connelly -- Stephens Inc. -- Analyst

Thank you. Can you tell us what's been happening in the display business? It's been choppy the last couple of years. Where I live, there's no displays at all. So I'm just sort of curious what's happening more broadly.

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

Well, good morning, Mark. It's Jeff. So in the display business, there has been, just because of the pandemic, some headwinds on the shelf-ready, some of the displays that are in the store and of all stores. We started off the year very good until the pandemic.

What we're looking at now is business -- well, our Litholam business is significantly up, some of the kitting business, e-comm. So we're looking at how to ship more into retail-ready, shelf-ready, kitting, subscription business as the economy still has not fully opened up. Had a decent quarter in displays. They've made great progress in costs and taking out costs.

A lot of our actions on furloughs, some of the folks for controlling costs, they did a very good job. But there's work to do, I think, going forward on what this market looks like and how we convert it to a more self-ready, retail-ready kitting type of business versus just pure displays that are in the realm.

Mark Connelly -- Stephens Inc. -- Analyst

OK. And just one more question. That's helpful. Can you give us a little bit more color on what the composition of the pandemic plan is? $1 billion is a lot of money in a short period of time.

So I'm just wondering what kinds of costs you're targeting.

Ward Dickson -- Chief Financial Officer

This is Ward. So we published the pieces of the pandemic plan in the -- there was actually a slide in the earnings release last quarter. But I'll walk you through the pieces. I mean, there is the reduction in capex in both years.

There was a reduction of the dividend. There was the use of stock for our short-term incentive compensation in 401(k). And then there was also the benefits related to the CARES Act where we could defer payroll taxes. So those pieces were enumerated in that slide.

I just don't have it in front of me, but we're executing to that plan.

Mark Connelly -- Stephens Inc. -- Analyst

Yes. I'm sorry, I didn't ask my question very well. What I was wondering is, as you look at pieces and particularly the capex piece, how does that break out? Because you got a lot of big capex programs. And I'm just sort of curious whether that is going to change the timing of your future operational changes? Sorry for asking so badly.

Ward Dickson -- Chief Financial Officer

So we're continuing to execute -- yes, I'm sorry. We're continuing to execute the strategic capital projects. And in fact, as we close the fourth quarter and to move into next year, we'll have less than $100 million of capex required to complete those projects. So we have protected the strategic capital projects.

We've protected the high-return project that we have both in our mill and converting system and are very focused on doing the maintenance projects that are required to sustainably run our operations.

Mark Connelly -- Stephens Inc. -- Analyst

OK. That's helpful. Thank you.

Operator

Your next question comes from the line of Mark Wilde with Bank of Montreal. Mark, your line is open.

Mark Wilde -- BMO Capital Markets -- Analyst

Thanks. Good morning. My first question is really for Pat. And I'm interested in whether you can give us some sense in consumer packaging of sort of highs and lows in terms of market segments in the quarter, how MPS is performing.

And then, it seems like there's a lot of structural pressure on markets that are served by Covington, and I'm wondering what you're doing to mitigate that.

Pat Lindner -- Chief Innovation Officer and President of Consumer Packaging

Great. So happy to help with that. Thanks for the question. So some of the highs and lows in the quarter, I'll speak really sequentially.

Food continued to be relatively stable, and we saw sequential increases with kind of center of the store and pantry restocking dynamics. I mentioned about foodservice before. There's parts of the market there that we're, first of all, really winning with our customers with our differentiated solutions and take-out and then curbside. Plate stock has been strong, but it's offset by some of the cup stock dynamics, particularly in June and July that have softened.

Beverage seems relatively stable right now. The big downside impacts are really on commercial print, which starting in April versus March, was down about 50%. I shared that in the last earnings call. And it's really stayed at those April levels ever since then.

So it's off in the 40% to 45% range, both year over year and sequentially. Turning to MPS, there's two pieces associated with that. First of all, MPS is performing very well, driving strong productivity, and being focused on the differentiated specialty offerings to the customers. Health care has been a real bright spot with growth sequentially and year over year.

That's been offset, as Steve has mentioned, by some of the beauty and cosmetics and high-end spirits. Some of that associated with travel retail, duty-free travel retail that has been relatively soft. So that's a bit of an update on kind of the ups and downs, as well as MPS. And I think you had a third question -- third part of that.

If you can remind me of that.

Mark Wilde -- BMO Capital Markets -- Analyst

Yeah. Well, first of all, just on MPS, is it possible to just get a revenue number for MPS? And then the other question was really on just sort of Covington and the structural pressures on some of the products.

Pat Lindner -- Chief Innovation Officer and President of Consumer Packaging

Yes. So I think if you look at Slide 8 or Slide 6 on the consumer packaging results, you can see MPS specialty packaging at 27% of the revenue of this segment. So you can see that reported out there. As far as Covington is concerned, so at Covington, we do make some of the commercial print products that have been, as I mentioned before, significantly impacted by COVID.

And so we announced in May that we will be idling one of our lines there for at least 30 days. We have not provided an update to that externally, so I'm keeping that confidential at this point. But clearly, you can see in our results, that we took 31,000 tons of economic downtime in the quarter. And then in July, that even increased to 33,000 tons, and that still reflects the softness that we have in commercial print.

And as I mentioned before, SBS has also been impacted by cup stock declines in June and July, which also impacts the need to match our supply with our customers' demand and the increased economic downtime in July.

Mark Wilde -- BMO Capital Markets -- Analyst

OK. And again, just one more on just MPS. Is it possible to get a year-over-year on the sales?

Pat Lindner -- Chief Innovation Officer and President of Consumer Packaging

I don't have that right in front of me right now, but we can certainly get back to you and follow-up with that.

Mark Wilde -- BMO Capital Markets -- Analyst

Super. Thanks, Pat. I'll turn it over.

Pat Lindner -- Chief Innovation Officer and President of Consumer Packaging

Thank you.

Operator

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

Debbie Jones -- Deutsche Bank -- Analyst

Hi, good morning. Thanks for taking my questions. I wanted to start by asking about kind of the export shipments. I know that you're integrating tons a bit more, but I just want to understand what your strategy is there over the next a couple of quarters here, especially with the dollar weakening.

Would you expect that number to continue to come down? Or would you expect that export sales might increase a bit? And kind of what's the demand level that you're seeing out there?

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

Hi, Debbie. So they were down sequentially this quarter versus Q2. We were flat basically year over year. And as we stated before, our goal is to integrate further our box business, and the least profitable channel is export.

So as we look to integrate further into the box channels, I would expect, ultimately, to come out of the export channel, which implies that we're going to decrease that channel as we move forward.

Debbie Jones -- Deutsche Bank -- Analyst

OK. And then you're highlighting again some of the substitution to paper products versus plastic, and I'm curious, is there something that you have the capability to do there that you think your customers aren't fully appreciating? Just trying to get a sense of what's kind of coming or what's available out there because there does obviously seem to be a big shift away from plastic.

Pat Lindner -- Chief Innovation Officer and President of Consumer Packaging

Yes, Debbie, so this is Pat. I'll try to answer that, and Jeff can add as appropriate for corrugated. But I think this is a place where we're really differentiated and have great capabilities around design, around material science with our coating solutions and coating chemistries, our packaging and converting capability, as well as machinery, which is really important. And Steve, on Slide 7, showed a couple of examples that add to an example we shared a couple of earnings ago around Diageo, where we are, through our automation platform, through our design, have multiple solutions in beverage, where we can convert customers from plastic into paper, in those cases, shrink wrap and Hi-Cone rings.

But it extends well beyond that. The applications for us in plastics replacements comes certainly in beverage, as I mentioned, but foodservice with clamshells. Our bio pack solution is very well received there. We're seeing a lot of different applications in food, e-commerce, mailers.

Foam and plastic trays, which really leverages our coatings capability, barrier coatings capability. Personal goods like razors and deodorant eco tubes has been profiled in the marketplace. And so I think there are a number of different examples, again, going back to -- going back to our design capability, our coatings capability, printing, converting capability, as well as automation. And, Jeff, maybe you want to add a little bit on machinery and automation to add to how we bring value to our customers.

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

Sure. So, Debbie, I think the only thing I'd add is our customers are starting to see as we roll out some of the machinery applications combined with our differentiated substrates, whether that's in consumer or corrugated. And Pat highlighted one of them. We had moved some of our large e-commerce customers into fiber-based mailers versus the plastic mailers, and that started off as a small trial of 30,000 a month, and it's up to 800,000 a month and growing.

We also rolled out our Pak On Demand. So we have customers looking at replacing some of these other mailers that were using single-phase or just a paper solution for some of the envelopes. And as customers focus more on replacing plastics with fiber-based packaging, our automation platform and the broad portfolio of products is getting traction in the marketplace and with our customers.

Debbie Jones -- Deutsche Bank -- Analyst

Thanks. That's very interesting. I'll turn it over.

Operator

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

Brian Maguire -- Goldman Sachs -- Analyst

Hey. Good morning, guys. Thanks for the details. This might sound like a strange question.

But I'm sort of wondering, as you guys have had a couple of months now into the lockdowns and the pandemic, how you see it impacting your corrugated demand? And the question is really just trying to get a sense of if we were to see an end of the lockdowns or a vaccine or some sort of a relief from the trends we've seen, do you think that would be sort of positive or negative for corrugated volumes in here? And I guess I'm sort of referencing -- the appendix shows your e-commerce percentage of the mix has come up quite a bit from some of the past wise. And obviously, that's been a business that seems like has benefited a little bit from all the lockdowns. So, yes, there's a lot of moving pieces to what's going on this year. But as you look at your corrugated volumes overall, probably not too far off from where we would have thought otherwise.

So is there any way to kind of say how you kind of see the entire lockdown situation kind of impacting volumes at this point?

Steve Voorhees -- Chief Executive Officer

Sure. Hey, Brian. It's Jeff. So there's really three major end-use segments that have been highly affected by the lockdown, and I'll start with our distribution and our paper business.

And the paper is really our sheet feeder business. So some of that is just we decided to walk away from some of the low-margin segment of that business. But the other part is really the independents who supply more nonessential single plants that have been disproportionately affected by the lockdown. And the other part of that is distribution.

And for us, the effect of that is really mostly our Victory business and moving in storage. And as the lockdown starts to open up, we've even seen in July, some moderating of that and a pickup in that space. So I think opening up the economy will help that business, that segment come back online. A large part of the other part of this is industrial.

So if you look at our industrial mix, a large part of the 4% year over year, so it starts with distribution and paper. The next biggest part is industrial, and that's really been affected by the lockdown. And as we said, as things open up, we expect that to come back online. And last quarter is really ag, and produce is the other large segments.

So sequentially, quarter over quarter, we've seen and started to open back up, but it's still not back to where it was last year. And that's really due to the foodservice side of the commercial piece, restaurants and other places that are serving produce and agricultural products. And I think as the restaurants and economy open back up, that will also be another segment. So it's really those three segments that have been disproportionately affected for us during the lockdown, and we expect that to gradually increase.

As we've seen into June, July, as things start to open that back up, we've seen that moderate and start to increase.

Brian Maguire -- Goldman Sachs -- Analyst

OK. And then just a quick question following up on what some others have already asked on the SBS market. Obviously, some people talked about some of the weakness in commercial print, Covington, in particular, and the amount of economic downtime you've taken in July. Others in the industry like Graphic Packaging, you've talked about taking a lot of SBS downtime in July as well.

Just wondering what you guys would need to see before you'd make more permanent decisions around capacity in the industry and if you think that some capacity does need to come out across the industry in that particular grade.

Pat Lindner -- Chief Innovation Officer and President of Consumer Packaging

Yeah. Thanks for the question. This is Pat, and I'm not able to comment on anything that might look out into the future or considered plans out in the future. As you saw in the quarter, as well as in July, we did share the economic downtime that we've taken and a reflection of our matching our supply with our customers' demands.

Brian Maguire -- Goldman Sachs -- Analyst

OK. Thanks again, guys.

Operator

Next question comes from the line of Steve Chercover with D.A. Davidson. Steve, your line is open.

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

Thank you. It's a little late in the session, so I hope this doesn't come across as nitpicky. But if your North American corrugated EBITDA margins were 19.8%, and Brazil was 3 points higher, how does the entire segment come out lower at 18.3%? Is that something to do with India?

Ward Dickson -- Chief Financial Officer

The primary driver is our distribution business called Victory.

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

Gotcha. OK. Well, OK, I know Victory. How big is India? And are you doing well there?

Ward Dickson -- Chief Financial Officer

We're generating positive EBITDA. The Indian business is approximately $50 million of revenue a year, I think.

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

Got it. So real pipsqueak. OK. And then on consumer packaging, you did better than we thought.

I know it seems to be a source of consternation. So do you think something is getting fixed there? Do you have a mid-cycle EBITDA target for the consumer side?

Pat Lindner -- Chief Innovation Officer and President of Consumer Packaging

Yeah. So this is Pat. Thanks for recognizing the improvement there. We're really proud of the work that the team did.

As Steve mentioned in his prepared comments, 150 basis points improvement in EBITDA margin year over year and 190 basis points sequentially. And so we're driving a lot of innovation. We're winning with our customers. Plastics replacement is a piece of that.

Leveraging the enterprise solutions capability. You saw the example of Red Bull. These are all really positive and good thanks for consumers. So driving the commercial side of it and, at the same time, managing our costs effectively.

You saw we did that well in the third quarter, and we're going to continue to look for options to make sure that we're as productive as possible. As far as looking forward, as Ward and Steve have shared, we're not sharing guidance right now because things are too uncertain in terms of how things are going to unfold. But as you can see throughout this fiscal year, we've made good progress, and we think we have plans to continue to improve the consumer business going forward.

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

Terrific. Well, thank you, and good luck.

Pat Lindner -- Chief Innovation Officer and President of Consumer Packaging

Thank you.

Operator

Your next question comes from the line of Neel Kumar with Morgan Stanley. Neel, your line is open.

Neel Kumar -- Morgan Stanley -- Analyst

Hi. Thanks for taking my question. In your corrugated business, can you just talk about how box demand has trended in your Brazilian business? What have you seen so far in the quarter? And how do trends compare to the U.S.?

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

Sure. So Brazil is seeing the same things we're seeing with some of the nonessential businesses being down. We were flat in the quarter, which was still outperformed the industry in Brazil, which was down a little bit over 3%, and I think they're seeing the same things we're seeing here with the virus. Nonessential businesses are being shut down.

And as they open up, they'll see some progress. But overall, that business performs well and has outperformed the market over time.

Neel Kumar -- Morgan Stanley -- Analyst

Thanks. And just one on customer inventory levels. I mean, how would you characterize inventory levels for your customers in both businesses? Are you generally seeing them keep lower levels and require quicker turnaround times in this environment? Just kind of any kind of color on the customer ordering patterns would be helpful. Thanks.

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

I'll start. I'll just pick up. So if you're talking about box customers, I think they're keeping their inventories as filled as they possibly can to meet the demand. That has shown itself uncertain with restocking, destocking.

So I think our customers are trying to keep their box inventory at levels where they can meet the demand that they've seen in their segments. I think in our domestic customer base for containerboard, they're same thing. They're keeping their inventory levels to the extent that they can supply their box plants, their individual converting plants. I don't see them going tighter than they typically have.

They want to be able to take advantage of any spikes that happen. So from our standpoint, we don't see an unusually low or smaller inventories than they would typically keep.

Pat Lindner -- Chief Innovation Officer and President of Consumer Packaging

Yeah. And, Jeff, maybe I'll just add to that on the consumer side. I think what we're seeing is similar to what you shared is that customers, especially in food and foodservice, want to keep their inventory sufficient to meet the changing customer demand. Things are changing rapidly, so that does lead to some lumpiness in how we plan our manufacturing and then supply our customers.

I would say that there is also maybe a trend to simplify the portfolio. Our customers have a desire to really keep it as simple as they can and streamline for productivity. And so minimizing the number of SKUs. And of course, we have the ability to work with them with our design capability, our automation capability, we can help them reduce their complexity in their supply chain, and that's really important for them to supply their end customers, as well as reduce and manage their overall costs.

Neel Kumar -- Morgan Stanley -- Analyst

Great. Thanks.

Operator

Your next question comes from the line of Adam Josephson with KeyBanc. Adam, your line is open.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Good morning everyone. Thanks for fitting me in here. Jeff, just on demand, you talked about box backlogs having steadily increased during the month of July, indicating stable volumes in August. Can you just talk about what that implies year over year in both July and August compared to the down 4% in 2Q?

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

So July right now, Adam, with 21 days out of the 22, in the aggregate, we're up about 2.5%. And there's an extra day, so we're down about 2% year over year in July. August, it's too hard. I don't know yet for August as we're coming in, but I can say the backlogs have steadily increased when we go into August with the strong backlogs that we saw in July.

And that's really a function of some of the opening up in the economy. So those three segments that I called out sequentially month over month are improving as we see some opening in the economy. Now that's subject to change based on what happens with outbreaks in the economy, but that's what we're seeing so far. And in this last year, we were up 5.4% in July.

So it's a tough comp also, but we're up year over year and the aggregate, down a bit in per day.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Terrific. Thanks, Jeff. And Steve, on the dividend, is your priority to get down to the two to two and a half level before restoring the dividend to where it was before? Or are there other criteria involved?

Steve Voorhees -- Chief Executive Officer

We're going to look at the overall context of our business. And I think we do want to get our debt down a little bit. But as things develop and we have more visibility into where the market is going over time, we'll obviously evaluate our dividend.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Thank you.

Operator

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

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

Hi. Thank you for taking my follow-on. I got three. Guys, as you look to the businesses that are doing well, in the business that have some challenges right now, should we expect, looking to fiscal '21 and fiscal '22, some additional moves, some additional commentary from WestRock in terms of what you'll be doing to adjust those businesses, address those businesses? And directionally, is there any way to quantify what benefit, again, you might see from adjusting these businesses, fixing their performance, and so on in terms of the outlook? That's question number one.

Pat, question number two, just on the consumer segment. As I thought you said that healthcare was actually relatively good in the quarter. Yet the percentage of pies that healthcare represented in the quarter was down from the last chart. Foodservice, it sounded like it was stable, but it was down from the last quarter's chart.

So should we read on that last point that up-stock and whatever else was sufficiently negative, so as its percentage total of consumer was impacted negatively? Thanks and good luck in the quarter.

Pat Lindner -- Chief Innovation Officer and President of Consumer Packaging

Thanks. So first of all, healthcare, I'll answer the second one and then maybe Steve around -- or Ward on the overall portfolio. But on your second question, as it relates to MPS, yes, healthcare performed well, and we've seen increasing demand for that. I think you might be referring to Slide 6 where MPS, specialty packaging also shows in there some of the health in -- or some of the beauty and cosmetics and high-end spirits that have been negatively impacted.

So that may impact some of your mix. And then food, foodservice, and beverage, of course, is a mixture of a number of different applications and foodservice. As we've talked about already, the cup stock was negatively impacted. That was offset by a number of other areas in foodservice, including our integrated offerings that have improved throughout, well, Q3 versus Q2.

Steve Voorhees -- Chief Executive Officer

I think, George, just on the first question, we're going to continue to look at our business and maximize the value of the business. We've got fantastic integrated packaging businesses. We have a, I think, great portfolio of paper that we sell to value to open market customers. We do have areas, and I think Jeff mentioned export.

Containerboard, Pat's mentioned some of the paperboard in our consumer business that I'd expect, over time, will reduce our emphasis on those lower-margin businesses and how that evolves -- but stay tuned. I mean, it's an adventure out there in the marketplace to see what's happening. And I really couldn't be more pleased about the way we've executed over the past several months. We went in, trying to be as flexible as we could and both adjust our cost structure and our operations to supply our customers.

And we've done extremely well the past several months, and I'm excited to see how we're going to embrace the future.

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

As are all of we, I guess. So thanks very much for the color guys. Good luck.

Steve Voorhees -- Chief Executive Officer

Yes.

Operator

Our final question comes from the line of Mark Wilde with Bank of Montreal. Mark, your line is open.

Mark Wilde -- BMO Capital Markets -- Analyst

Thanks. Just two quick follow-ups. One, I wondered if there are any changes you foresee, as we're heading toward the 2020 holiday season, whether it's displays, prestige goods, etc. And then the other one is just if you could comment on Gondi and performance there, particularly, in light of the brewery situation in Mexico in the second quarter and also the ramp-up of that new paper machine and any impact it might have on your transfer of paper down into Mexico.

Steve Voorhees -- Chief Executive Officer

OK. On Jeff or Pat, I'll comment on Gondi, but after you comment on the holiday season, if you have any comments on that.

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

Sure. So I'll start on the holiday season, Mark. I think depending on what happens with purchasing, as we get into that, October, November, December, typically, there's a large uptick driven a lot by the holiday season in the e-commerce. So it remains to be seen.

It's too hard to call right now what that will look like, especially with the -- if a prime day sort of overlaps storing of the holiday season, it's just too hard to tell what that may be. And as I said before, same thing on the displays. It's hard to tell based on what's going on with the opening in the economy and what marketing budgets folks are going to spend on. Typically, that's not too far out, but in this environment, a month is a year in this environment.

So it's too hard to tell at this point.

Steve Voorhees -- Chief Executive Officer

And I think -- go ahead, Mark.

Pat Lindner -- Chief Innovation Officer and President of Consumer Packaging

I'm sorry, Steve. This is Pat.

Steve Voorhees -- Chief Executive Officer

I'm sorry.

Pat Lindner -- Chief Innovation Officer and President of Consumer Packaging

I was going to add. I would echo that on consumer. It's just too hard to tell in terms of when things open up, when the economy opens up, and social distancing that impacts so much of the beverage and the food and the foodservice market, for example. So just echoing Jeff's comments on corrugated, certainly apply to consumer as well.

Steve Voorhees -- Chief Executive Officer

OK. Thanks, Pat. And then just on Gondi, Mark, we do have the paper machine coming on, though, start just making paper in September, potentially October. They have been impacted.

I don't have a specific number for demand. We are a paper supplier. We supply virgin to the agricultural markets. And that's paper that provides Gondi the ability to compete in those markets.

Mark Wilde -- BMO Capital Markets -- Analyst

So, Steve, that would not change with a new paper machine because that's a recycled machine. So you're actually prep-lining the board.

Steve Voorhees -- Chief Executive Officer

Exactly. Exactly.

Mark Wilde -- BMO Capital Markets -- Analyst

OK.

Steve Voorhees -- Chief Executive Officer

And then I think Ward has an answer to your MPS question.

Ward Dickson -- Chief Financial Officer

Hey, Mark. This is Ward. The MPS sales decline year over year was approximately 8% compared to approximately 6% for the whole segment.

Mark Wilde -- BMO Capital Markets -- Analyst

OK. That's super. Thanks, Ward. Good luck, guys.

Operator

This concludes our question-and-answer session. I will now turn the call back over to James Armstrong for closing remarks.

James Armstrong -- Vice President of Investor Relations

Just want to say thank you for your interest in WestRock and have a great day.

Operator

[Operator signoff]

Duration: 64 minutes

Call participants:

James Armstrong -- Vice President of Investor Relations

Steve Voorhees -- Chief Executive Officer

Ward Dickson -- Chief Financial Officer

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

Anthony Pettinari -- Citi -- Analyst

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

Pat Lindner -- Chief Innovation Officer and President of Consumer Packaging

Mark Weintraub -- Seaport Global Holdings LLC -- Analyst

Mark Connelly -- Stephens Inc. -- Analyst

Mark Wilde -- BMO Capital Markets -- Analyst

Debbie Jones -- Deutsche Bank -- Analyst

Brian Maguire -- Goldman Sachs -- Analyst

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

Neel Kumar -- Morgan Stanley -- Analyst

Adam Josephson -- KeyBanc Capital Markets -- Analyst

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