WestRock (WRK) Q2 2021 Earnings Call Transcript

WestRock (WRK 1.50%)
Q2 2021 Earnings Call
May 05, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the WestRock Company second-quarter fiscal 2021 results conference call. [Operator instructions] I would now like to hand the conference over to your speaker today, James Armstrong. Please go ahead.

James Armstrong -- Vice President of Investor Relations

Thank you. Good morning and thank you for joining our second fiscal quarter 2021 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 are using to view this webcast.

With me on today's call are WestRock's chief executive officer, David Sewell; 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, 2020. In addition, we may be making forward-looking statements about the impact of COVID-19 pandemic and the recent ransomware attack on our operational and financial performance. The extent of these impacts, including the duration, scope, and severity, 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 a reconciliation 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, David.

David Sewell -- Chief Executive Officer

Thank you, James, and good morning. It's great to be joining you all today on my first earnings call as WestRock CEO. I've been in this role now for seven weeks and spent that time meeting with our customers, our business leaders, and teammates. With every interaction, I'm impressed with the capability and strength of the WestRock team and couldn't be more excited about our future prospects.

It's still early in this process, but what I'd like to do today is share with you my initial observations since joining and my priorities going forward. Before doing that though, let me touch briefly on our performance in the second quarter which Ward will discuss in more detail shortly. Faced with dual issues of the ransomware incident and significant weather disruption, the team focused, executed, and delivered for our customers, generating revenue of $4.4 billion, adjusted segment EBITDA of $641 million, and adjusted EPS of $0.54 per share. The ransomware and weather incidents lowered our adjusted EPS by $0.23.

Ward will provide additional detail about our performance. I am pleased to say that we have fully restored our IT systems with all sites up and running, and we continue to make excellent progress on restoring our supply chain and customer service levels. During the time we were dealing with this incident, we prioritized serving our customers and incurred additional costs that impacted earnings in the quarter. We are accelerating investments that were on our IT development timeline to further strengthen our infrastructure.

Throughout these events, the WestRock team demonstrated incredible resiliency and dedication, and we have made a remarkable recovery. I want to extend my sincere thanks to my WestRock teammates for all they have done and continue to do for the company and our customers. With all of this now behind us, I am confident in our team, our markets, and our path forward. I mentioned at the start that much of my time over these first seven weeks has been spent getting to know our company.

I toured 12 facilities, met virtually or in-person with hundreds of teammates, and spoken with many of our top customers WestRock has built a unique portfolio, successfully integrating acquisitions, and investing to create a differentiated set of capabilities with incredible opportunities for growth. I've seen firsthand how the consumer, corrugated, and machinery businesses work together, and believe we can do even more to maximize the performance of our platform. We serve, diversify, and grow in packaging end markets and the demand for fiber-based paper and packaging continues to gain momentum. Key markets that we serve such as food and beverage, e-commerce, and healthcare continue to grow.

For example, the demand from customers for safe and secure e-commerce solutions has only been accelerated by the pandemic, and I believe this remains a significant opportunity that WestRock Solutions are well-positioned to address. One of my visits was to our high-quality, low-cost facility in Florence, South Carolina, and it was great to see the new state-of-the-art paper machine up and running. This slide includes a QR code you can use to view a video of the mill and the new equipment. This machine produces high-performance containerboard grades at low basis weights and replaces three machines in our system.

This mill is well-positioned to serve a diverse set of customers seeking these low basis weights to drive more sustainable packaging solutions. This investment makes Florence one of the lowest-cost virgin containerboard mills in North America. We expect Florence to ramp up to full capacity by the end of our fiscal fourth quarter. The Florence mill is a great example of a strategic capital investment that improves our capabilities, lowers our costs, and expands margins.

Looking forward, there are a few key priorities that I want to focus on. WestRock has a unique portfolio of sustainable fiber-based packaging and great opportunities to leverage the enterprise and help our customers win in their markets. The path to long-term shareholder value creation is through a focus on attractive markets where our differentiated portfolio and combination of products and services are valued and rewarded. We will also focus on improving our productivity and operational excellence across the enterprise, which are both important levers to grow earnings and margins.

I believe strongly in the leadership role that WestRock can play in improving the circular economy and helping our customers improve the sustainability of their products. We recently refined our sustainability platform to focus on people and communities, bettering the planet and innovating for our customers and their customers, whether it's developing new fiber-based packaging solutions that enable our customers to meet their sustainability goals, initiatives to reduce our own environmental impact, or our work to improve the diversity inclusion of our company, WestRock has substantial capabilities and opportunities to help drive a more sustainable future. And a more sustainable future means that we must focus on innovation to develop new fiber-based packaging that meets the needs of customers and consumers. Removing plastic from packaging and developing more sustainable packaging solutions through design, material science, digital, and automation continue to be growth drivers in our industry.

WestRock has a capability to create new, recyclable fiber-based solutions that are good for our customers and the environment. Next, I'd like to share my initial thoughts on capital allocation. I believe that disciplined, balanced capital allocation is a key factor in creating sustainable shareholder value. I'm impressed by the strength and stability of West Rock's cash flows and believe this is a positive attribute for the company and our investors.

We will invest in our business to maintain and improve our assets, and investments and acquisitions and strategic capital projects will be tightly aligned to our strategy and deliver returns above our cost of capital. We will remain committed to returning capital to our dividend and intend to steadily increase it every year. We've already taken the first step today with the announcement of a 20% increase to our quarterly dividend. Today's increase reflects our confidence in the outlook and cash flow generation of our business.

In addition, we will evaluate share repurchases in the future as another way to return capital to shareholders. We remain committed to our investment-grade credit profile and believe that our leverage target of 2 in a quarter to 2.5 times is appropriate. And in the coming months, I'll share more detail about my priorities and vision for WestRock's future. And now, I'll turn it over to Ward to provide our financial detail about the quarter.

Ward?

Ward Dickson -- Chief Financial Officer

Thanks, David. We were able to serve our customers, deliver solid earnings, and continue to reduce our leverage despite the challenges in the quarter. We generated revenue of $4.4 billion, adjusted segment EBITDA of $641 million, and adjusted EPS of $0.54 per share. These results were impacted by both the ransomware incident and winter weather.

The two events negatively impacted revenue by $189 million, adjusted segment EBITDA by $80 million, and adjusted segment EBITDA margins by approximately 110 basis points. Adjusted EPS was $0.23 lower as a result of these events. In addition to the impact of the ransomware incident that we show on the adjusted segment EBITDA bridge, we also incurred $20 million in ransomware recovery costs. The $20 million of recovery costs were excluded from our adjusted segment EBITDA and adjusted earnings per share.

We estimate that the total insurance claim will be approximately $75 million, and we expect to recover the claim from our cyber and business interruption insurance coverage in future periods. It's important to look beyond the events in the quarter to see the underlying trends in our business. Demand is strong and we continue to focus on improving our business mix. In addition, we are currently implementing the published price increases across all of our paper grids.

The implementation of these price increases and improved business mix drove $88 million in year-over-year earnings improvement. Notably, we had record second-quarter North American box shipments which increased 5.5% year over year on a per-day basis. Cost inflation was driven by a $43-per-tonne increase in recycled fiber from Q2 of the prior year, coupled with higher chemical and energy costs resulting from the winter storm. Transportation costs were also higher due to tight availability across all modes.

We did not exercise the option to purchase an additional 18.7% equity interest in Grupo Gondi. As a result, we recorded a charge of $22.5 million that we excluded from adjusted EPS. As we indicated earlier in the quarter, the lag in customer invoicing from the period when our systems were down negatively impacted our working capital in Q2. As expected, accounts receivable increased in the second quarter and we expect receivables to normalize in the third quarter.

Despite this, our net funded debt declined $74 million from Q1 and our net leverage decreased to 2.8 times. Due to the decisive actions we have taken over the past year to strengthen our balance sheet, we have reduced our adjusted net debt by $1.6 billion. Demand continues to increase for sustainable fiber-based packaging, and we sell into an attractive set of end markets. Our overall packaging volumes increased by 3% in Q2, including e-commerce box volume growth of 18.4% on a per-day basis.

Our paper sales represent 27% of our total revenue in the company and we are focused on reducing our participation in the export containerboard and specialty SBS markets. The pricing environment has improved across our paper and packaging grades. We are implementing published increases across our paper and packaging businesses as expected. Turning to segment results, our corrugated packaging segment reported revenue of $2.9 billion and adjusted segment EBITDA of $438 million.

North American adjusted segment EBITDA would have been $54 million higher and margins approximately 140 basis points higher without the events in the quarter. Corrugated box demand is very strong across most of our end markets, and we reported record per-day shipments for the second quarter. As I said earlier, corrugated box shipments were up 5.5% per day year over year. Excluding the impact of the ransomware and weather incidents, per-day box shipments would have increased approximately 8%.

We lost approximately 121,000 tons of containerboard production and revenue due to the disruptions in the quarter. This directly impacted our external containerboard channel sales as we could have sold all of the lost production. We highlighted the primary drivers of cost inflation earlier, higher recycled fiber, energy, chemical, and transportation costs. However, we offset this inflation in the quarter through higher pricing and volume, excluding the impact of the events.

We also continue to implement the previously published price increases and expect the benefit of these increases to more than outweigh inflation. Inventory levels remain low as we head into our peak mill-outage quarter in Q3 with 112,000 tons of planned maintenance outage downtime. Finally, we are making great progress on our strategic capital projects. The Florence mill continues to increase its production and operate well.

As David commented earlier, we expect the mill to be at full production levels at the end of the fourth fiscal quarter. The margins in Brazil have been lower in the past two quarters as a result of the maintenance and capital outage related to the Tres Barras expansion. Demand is strong in the Brazilian market, and we expect margins to improve in the second half of the fiscal year. Turning to consumer packaging.

The segment reported revenue of $1.6 billion and adjusted segment EBITDA of $212 million. EBITDA would have been $26 million higher and margin's approximately 100 basis points higher without the events in the quarter. Our sales mix is improving by shifting to higher-margin food and beverage packaging sales. Food and beverage packaging revenues were up 4.7% year over year, driven by improved mix to quick-service restaurants and beverage packaging.

We lost approximately 46,000 tons of production and corresponding revenue due to the disruptions in the quarter. In addition, we had approximately 20,000 tons of consumer paperboard shipments that were deferred into the third quarter due to these disruptions. Backlogs have increased across all substrates and are currently at six to eight weeks. We are in the process of implementing the previously published price increases.

The increased pricing improvement in our business mix and productivity more than offset inflation in the quarter. We continue to produce containerboard at our Evadale, Texas mill, given the strong demand and low inventory levels. In addition, we are making progress with CNK production at the Evadale mill and are on track to deliver 25,000 tons of CNK production in FY '21 and 50,000 tons of production in FY '22. We are able to flex the CNK and containerboard capacity from SBS with no additional capital investment.

Turning to guidance. Here are some things to consider for our fiscal third quarter. We expect adjusted segment EBITDA of $775 million to $805 million and adjusted EPS of $0.88 to $0.97 per share. The primary drivers of our sequential increase include the implementation of the previously published price increases, continued strength in packaging demand, and the return to normal operations for the third quarter.

These items are partially offset by modest sequential inflation across recycled fiber, chemical, and transportation costs. In addition, we will take approximately 112,000 tons of scheduled maintenance downtime across our North American containerboard mills. Finally, we expect higher incentive accruals due to a stronger earnings outlook. We want to share with you our current outlook for fiscal 2021.

We expect the continued flow-through of the previously published price increases, as well as packaging growth across our primary end markets. As a result, we expect full-year adjusted segment EBITDA to be approximately $3.05 billion. Given our earnings outlook and continued strong cash flows, we fully expect to be within our leverage target of 2.25 to 2.5 times by the end of the fiscal year. We will provide additional details on our next earnings call.

And now, I'll hand it back over to David for closing remarks. David?

David Sewell -- Chief Executive Officer

Thanks, Ward. I'm excited about the future of WestRock. We have great opportunities to grow our company and provide value to our customers, our teammates, and our shareholders. We have a broad portfolio of products that is uniquely positioned to meet our customers' needs, and we will further leverage the power of the enterprise to create value.

We intend to lead in sustainability by being a valued partner to our customers to help them achieve their sustainability goals as we work to achieve ours. To do this, we will focus on accelerating innovation, creating products that enhance the performance and sustainability of our products and services, and we will continue to be disciplined in our capital allocation strategy. We have confidence in our future, evident by the increase in our dividend this quarter. As recovery picks up momentum, we are well-positioned with significant financial flexibility to pursue our goals.

The future is bright at WestRock, and I am proud to be part of the team. That concludes my prepared remarks. James, we are now ready for Q&A.

James Armstrong -- Vice President of Investor Relations

Thank you, David. [Operator instructions] Operator, may we take our first question, please?

Questions & Answers:

Operator

Our first question comes from George Staphos of Bank of America. Your question, please.

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

Hi, everyone, good morning. Thanks for the details. David, thanks for the comments, and we're looking forward to working with you. I guess I wanted to spend the first question on kind of your initial comments, you spent time talking with customers.

You've obviously been reviewing the operations. Of the things that you enumerated, in your view, what's the one or two things that WestRock has to get right in the next year to position itself for the future? And what are customers saying, they think of WestRock and what WestRock needs to get better on a going-forward basis? That's question number one. Question number two, if you can comment kind of shorter term, what kind of trends are you seeing in volumes across your businesses early in the fiscal third quarter? And will there be any lingering effect from ransomware? Thank you very much.

David Sewell -- Chief Executive Officer

George, thank you. I appreciate the question and your comments. I'll try to answer each one of your questions. I'll start with customers.

I can't tell you how important it is to get our voice of the customer, I believe in a real outside-in approach, customer-focused approach as we look at the business. You know, one of my first meetings actually was with one of our largest customers, very strategic global account, and we happen to win the supplier of the year award. So hopefully, all my customer meetings go like that. But I would say several themes emerged when talking to a variety of customers.

And I think it ties into what we need to do as a company. And the first one was sustainability. You know, our large strategic customers want their products to become more sustainable, and they want to partner with us to find those solutions. And this is really especially true with plastics replacement and the opportunity we have there.

So concurrent to that, I think innovation is going to play a critical role in our growth and sustainability, but also innovation across all of our products and services and including digital in our machinery businesses. So we've got to get sustainability and innovation right, to your point earlier. And then the third thing I heard was service. I think with the pandemic, to your question, I think across multiple industries, it certainly accentuated the stress across supply chains worldwide.

So reliable service and quality is critical for our customers and just take this opportunity to really thank our teammates at WestRock when we went through the ransomware attack, how well they communicated, and kept our customers going. And as Ward alluded to, we did incur some costs to do that, but that was something we absolutely had to do to service our customers. And I think one last thing that I heard from our strategic customers was the value they placed in our enterprise. And the approach in bringing everything together and how that can help them be more effective.

So I think all that fits exceptionally well into our future vision. And, you know, the way I look at it is we really want our customers to come to us with their biggest challenges, and we want to help them be more successful in achieving their goals. So as I talk about what we must do. I talked about sustainability and innovation.

And the enterprise value proposition, the differentiation that we bring and it's not only from a customer growth standpoint, but I believe it's also from an operational standpoint, leveraging our manufacturing and supply chain, our footprint, and our assets, and just having a relentless drive on productivity. We're going to be really focused here to drive efficiency, lower our costs, and improve our margins. And then finally, the last piece would be our acceleration around the discipline in our capital allocation. I talked about, you know, the importance of reinvesting in our business for safety and maintenance, but also capital projects that really drive that productivity that we talked about, really believe in a sustainable growing dividend.

And I think today was the first step in doing -- in showing the ability to drive that increase. We have a wonderful ability to generate cash in this business. So we look forward to continuing to grow our dividend. Accelerating our leverage to our target range of 2.25 to 2.5, which Ward mentioned earlier, we will achieve by the end of our fiscal year.

And we'll be opportunistic with share repurchases. You know, we -- we're going to invest our cash. We don't intend to hold on to it. We wanted to fuel growth and create value for our shareholders.

So we'll continue to do that. And we'll look at M&A as it aligns to our strategy, and those are the real priorities that we have. So I think I captured everything. And then the last piece of your question, if I got it, George, was trends.

You know, a couple of things we've seen through the pandemic. We've seen a huge increase in e-commerce, in some of our food and beverage and healthcare segments. We fully expect e-commerce to continue to grow. This is a new reality.

We think of the market. But as we get through the pandemic and things come back, we do believe retail, brick-and-mortar, beauty, industrial will continue to come back as things open up. And that's why I'm so excited about the breadth of our portfolio because no matter where the markets take us, we feel confident in the products we have. And I'd love to have Jeff just reemphasize some of the volumes we've seen in April now that we've come out of this and just see the trends that we're seeing.

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

Thanks, David. Good morning, George. Overall, the demand in the business was strong across a broad base of end markets that David just outlined. So Ward commented we were up 5.5% in the quarter.

And actually, if it wasn't for weather, you know, and cyber, we would have been up almost 8%. We left -- you know, April was not closed yet. So I don't have the final number, but we were up 12% in shipments year over year as we left the month, which is a record level, you know, for April shipments. And the demand is strong across almost all of our end markets still.

So e-comm remains strong, our distribution paper, retail, industrial. Also, our backlogs remain strong coming into May. Our hot pipeline was up $90 million year over year coming into the quarter, almost 22% increase, and we continue to onboard new and incremental business. Domestic markets remain strong.

You asked about lingering effects for us, it's really getting our inventories back in line. And with the outages this quarter, it's probably going to take this quarter into next to really get back to the inventories. And we took 160,000 tons out of export. So getting back to some of our direct, being able to fully supply some of our contract customers, we need to make up tonnage as we've significantly reduced in our export markets even to some of our contract customers in the last two quarters.

So that's been a lingering effect. But overall, integration rates are up to 82%, up from 78% last year, 80% in the first quarter. Demand is strong in all of our segments. And finally, thankfully, out of this last quarter, we're back to full operations, and we've operated well through April.

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

Thank you very much. I'll turn it over.

David Sewell -- Chief Executive Officer

Thanks, George.

Operator

Our next question comes from Mark Connelly of Stephens. Your question, please.

Mark Connelly -- Stephens Inc. -- Analyst

Thanks. David, you talked a lot about cost of productivity, and Florence is obviously a major step for your system there. And WestRock has been making hard choices about which mill to support and not to. But $850 million of sustaining capex is a big bogey and, you know, we tend to think that big projects like Florence are a way to help whittle that down.

Should we be expecting more big projects like that to help, you know, move the system down in a big way rather than incrementally?

David Sewell -- Chief Executive Officer

Yeah, Mark, thanks for the question. I -- the way we look at capex is, you know, we'll probably have like an investment span of about $800 million to $900 million this fiscal year. And next year, we'll target $900 million to $1 billion. And when you break that down, a portion of that just goes to core maintenance and safety that are critical.

But, you know, at least half of that is going to go to those productivity product -- projects like Florence, driving enhanced efficiencies, driving down our cost. And so that is going to be a huge focus and you can expect a continuous investment in that $900 million to $1 billion in capex year over year.

Mark Connelly -- Stephens Inc. -- Analyst

OK, that's helpful. And just to follow up, I'm wondering how you and your team are thinking about the puts and takes of business reopening where it might create some drags, and where you're going to get the biggest bang from it?

David Sewell -- Chief Executive Officer

Yeah. What I'll do is I'll have Pat talk about that and then turn it over to Jeff and we can go into depth on their business.

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

Great. Thanks, David, and thanks for the question. This is Pat. So I'll talk a little bit about consumer and what we're seeing.

We still see strong demand, and even in last quarter and into this quarter and through the remainder of the year. The demand is -- it continues to be strong in general folding carton, as well as food and beverage. And certainly, the economy is going to shift a little bit with the preferences that people have in terms of work, getting back to the office, and getting back out and being mobile again. But we still see these trends continuing.

In fact, there was a conference here in mid-February called the Consumer Analyst Group of New York Conference, and the -- about 30 CPG companies were there and they project over the near mid-term about 2% to 3% growth in their businesses. So -- and that included kind of the end or slowing of the stay-at-home pandemic. So we're pretty robust and positive about that. I think healthcare is also one.

We participate in COVID test kits, as well as in leaflets and inserts for the vaccine. So we're seeing good strength there. And I think the other driver for us that's really not dependent at all on the pandemic or recovery is this plastics replacement opportunity that David referred to and we've talked about before. We've already, since July of 2018, commercialized over $200 million of plastics replacement.

And we're envisioning right now, we're increasing our projection on that up to an incremental $300 million over the next few years. So we think that this is going to be really economically independent. It's really the sustainability trend that our customers have and our ability through new technology, through innovation to deliver new products for those customers. David, I'll turn it back to you.

David Sewell -- Chief Executive Officer

Yeah. Jeff, I don't know if you want to make any comments on your business.

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

Sure. Hey, Mark. I'll just add that, you know, without having a crystal ball, we don't know for sure. But I can tell you, we do believe the e-commerce trend has accelerated, so two years of growth in the last year.

And every one of our customers and retailers are either trying to figure out how to grow in that channel or how to get into the channel if they're not. And to possibly at this point, I think we're uniquely positioned with our automation platform. So our new pack on demand machine is coming out, but are replacing envelopes good way. And now we're in a way to get into smaller packaging, improve SOG recycling.

The stay-at-home categories for us will remain sticky. And as people will continue to work from home, we see growth staying across us through frozen vegetables, meals cooked at home. You might see a fall-off in some of the retail or some of the SKUs and some the industrial that we have, but overall, I think we're well-positioned as food service comes back online to serve broad markets through consumer and corrugated.

Mark Connelly -- Stephens Inc. -- Analyst

Super helpful. Thank you, everybody.

David Sewell -- Chief Executive Officer

Thanks, Mark.

Operator

Our next question comes from Mark Weintraub of Seaport Global. Your question, please.

Mark Weintraub -- Seaport Global Holdings -- Analyst

Thank you. Welcome, David. One of the comment that you made that sort of definitely catch my attention, the intention to steadily increase the dividend every year. And obviously, we saw the 20% this year of having cut it last year.

I understand, a big number. Do you have a perspective on what that rate of growth can be on average, and is it something that you think is going to be ratable, so very similar year to year, obviously excluding this year? Or is it something that given this business historically has had some cyclicality, expect more moving up and down?

David Sewell -- Chief Executive Officer

Yeah, thank -- thanks, Mark. The way I look at the dividend is, first and foremost, ensure it's a sustainable and growing dividend. And then as part of our capital allocation principles is really allow for flexibility across the cyclicality in the markets that you mentioned. So if you think about it, the levers that we pull in regards to that.

I mentioned the capex investments that are going to be constant. I think the team has done a terrific job deleveraging. So that gives us even more flexibility. So with that, you know, we'll take a portion of how we -- of that available, you know, cash that we have and we'll look for the best return.

We'll -- it'll be in a steadily increasing dividend. If there is opportunistic share repurchases, we'll continue to look at that. And if there's M&A that aligns to our strategy, we'll look at that while remaining core to the rest of the principal. So the increase that we announced we believe was the right amount.

We're very comfortable with it. We'll continue to assess it year over year. And we've -- to give a specific number, I don't think we're in a state to do that other than saying we're committed to a sustainable growing dividend despite market conditions because I think with the cash flows we generate and the flexibility we have, we'll be in a good position.

Mark Weintraub -- Seaport Global Holdings -- Analyst

OK. Great. And one follow-up. You -- obviously, great volumes in the box business.

We saw some of the pricing flow through. A couple of the competitors that talked about how getting the containerboard increase into boxes went exceptionally fast this go around. Now, you were in a bit of a different situation given ransomware and lots of different other issues. I was curious whether what your experience had been on that path through, and perhaps one way maybe you could get out it would be, Jeff, how much of the box price from the November increase is yet to be gotten in -- into say the second quarter versus the first quarter? Is that something you could share with us? And then, obviously, we got March, April yet to achieve as well?

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

Sure. Hey, Mark. So the November is basically done. We leave the quarter.

As you know, it's our normal flow through. So we left the quarter over 90%. April, it's complete with $50. And then the 20 and 40 that follows on will follow the same type of pattern.

So it's going well. We have a good methodology to run our increases and there is no change in outlook. The $50 is basically complete.

Mark Weintraub -- Seaport Global Holdings -- Analyst

And I don't know if you're willing to share, but how much in terms of the average that you achieved in the fiscal quarter, how much would then carry over into this quarter from the first increase?

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

That's a smaller amount. I mean, it's -- like I said, most of it was done. It's over 90%. So there's a small amount left in the quarter, and really now we're focused on the $20 and $40.

Mark Weintraub -- Seaport Global Holdings -- Analyst

OK. I'm a little -- a little confused on the 20 and the 40. I thought it was a $60 mark [Inaudible]

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

Yeah, that's $20 in March and April --

Mark Weintraub -- Seaport Global Holdings -- Analyst

Got it. OK, I understand. Thank you.

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

It's OK.

Operator

Our next question comes from Mark Wilde of Bank of Montreal. Your question, please.

Mark Wilde -- Bank of Montreal -- Analyst

Good morning and welcome, David.

David Sewell -- Chief Executive Officer

Thank you. Good morning.

Mark Wilde -- Bank of Montreal -- Analyst

I wondered -- just to start off, Jeff, go back on this e-commerce for a moment. What footprint changes might you have to make to kind of deal with the higher level of e-commerce activity going forward? And does that even ripple back to more changes in terms of what you're producing at the middle level?

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

Good morning, Mark. So on the footprint, I think, in general, what we're doing is increasing some of the [Inaudible] locations that we've had. So we've added in the Northeast Texas we're having to expand. So every plant in Texas, we're investing.

El Paso, Houston, Fort Worth, and Mesquite. So the footprint there -- it's not just e-commerce, but e-commerce is a part of that. But there's a large broad base in that area. Our Midwest up in Michigan, our new plants, from Box On Demand that we move to Brownstown.

We're actually going to make a box plan out of that plant. So moving on, it has continued to increase and invest in the [Inaudible] platform, high yield rotary die cutters. And then we're continuing to innovate in our machine business. So our 2.0 Pak On Demand, 2.0 our box size or those machine reinvestments we're penning off and we have great opportunity to expand on that one.

We also expanded some investments in the Box On Demand sheet feeders where we have a patent on two technology on the coordinator. So we're actually making pouches coming off of our corrugators that had made fanfold. So that's another investment that we're continuing to make. As far as new locations, we're going to look at and see what we might have to do in the future.

And then also Victory, adding the 65 distribution centers for Victory has put us in a good spot to help distribute into some of the retailers. And so some of the e-com business to our customers who can't change their inventory or need quick turns in distribution. And that's a great way to work between the box plants and Victory. So a lot of positive things for us in our footprint investments and then Victory and our machine business.

Mark Wilde -- Bank of Montreal -- Analyst

OK. And then, David, as a follow-on if I could.

David Sewell -- Chief Executive Officer

Sure.

Mark Wilde -- Bank of Montreal -- Analyst

You talked about the discussions that you've had with customers. I -- I'd just like to get a few more thoughts on this idea of kind of selling kind of a full range of packaging because right through my career, we've heard a lot about this you know. But it seems like in reality, for the most part, the decisions about corrugated purchases and folding carton purchases have pretty much been made separate from each other. So there -- it only seems like the rhetoric is much better than the reality.

What is your take on this?

David Sewell -- Chief Executive Officer

Yeah, and I appreciate the question. I think about it, but in the way how customers buy. And to your point, I think different customers buy differently. So I wouldn't make a blanket statement of 100%.

But I would say that there are many customers that I've already talked to that really like the approach of an enterprise to help them be more efficient. I mean, you heard Jeff talk about the machine. When you think about machinery, corrugated and consumer, for some of these customers, we can really tie all that together. And there's innovation to be had when we do that.

And so when we have that ability to strategically align with our customers for those complete solutions, that's where we'll focus. And there will certainly be some customers that separated the way -- the way you mentioned, and we'll treat them the way they want to -- they want to buy. So it's not 100%, but there is significant value there. And, you know, just as a data point, I would tell you that our growth rate with enterprise customers is higher than nonenterprise customers.

So we see this as a significant opportunity. It's already a multibillion-dollar sales platform for us. And then when you tie in the operational piece internally to really leverage our assets, from an enterprise standpoint, we think there's tremendous value there and that's something unique that we can bring to the market as we innovate in our approach in doing so.

Mark Wilde -- Bank of Montreal -- Analyst

OK, that's helpful. Thanks very much and good luck.

David Sewell -- Chief Executive Officer

Thanks, Mark. Appreciate it.

Operator

Our next question comes from Kyle White of Deutsche Bank. Your question, please.

Kyle White -- Deutsche Bank -- Analyst

Hey, thank you, good morning. And congrats, David, on the new role.

David Sewell -- Chief Executive Officer

Thank you.

Kyle White -- Deutsche Bank -- Analyst

I apologize if I missed this in the prepared remarks, but do you have an idea in terms of the potential proceeds from insurance related to the ransomware incident or the weather guide and also the timeline on when you had the inspector see this?

Ward Dickson -- Chief Financial Officer

Yeah. So we -- Kyle, this is Ward. We estimated the total claim right now for the ransomware attack to be approximately $75 million. We are initiating the claim process as we speak.

So they'll be both the recovery of the one-time expenses and the business interruption and lost profits. But those will be the components of that claim. And we do not have a timeline for when we're going to recover, but we're confident that we're going to recover substantially all of the claims. We have not gone through -- we are evaluating the process right now to assess whether we have a potential claim on the weather events because it impacted so many different facilities.

I think it impacted over 30 converting facilities and multiple mills. We're aggregating that analysis right now and we'll give you -- share more with you as we learn more about that.

Kyle White -- Deutsche Bank -- Analyst

Got it. That's helpful. And then, Ward, prior to the pandemic, WestRock provides some form of cash flow guidance and you have it here. Just wondering what is the reasoning why chose not to? Are there just too much uncertainty regarding your working capital or something else?

Ward Dickson -- Chief Financial Officer

No. You know with -- prior to the pandemic, we were given full-year guidance, right? And then during the pandemic, we went to sequential earnings guidance. And so we stopped that, obviously, on the call in January because of the timing of the ransomware event. But -- so what -- we thought it was important to do as we exited the quarter and put these events behind us, we wanted to give you clarity for earnings for Q3.

And then, we gave you a reference point for the full year that -- for earnings. But I'll shift to cash flow and I'll talk about the strength of cash flow. So clearly, we had a really good first quarter from a cash flow point of view. Q2 was negatively impacted by the ransomware as we had talked about during the quarter.

And we're going to start to recover from that in Q3 and Q4. Seasonally, we always drive a large portion of our cash flow in the second half of the year. I'll just give you some reference points in light -- to demonstrate to you the power of cash flow generation. So if you look over the last two years, we've -- if you take our adjusted EBITDA, we convert 75% of that roughly to adjusted operating cash flow.

You take that with the midpoint of the capex guidance that we've given you and you see very, very strong cash flow generation for the full year and our ability to deliver very quickly from where we are right now.

Kyle White -- Deutsche Bank -- Analyst

Got it. I'll turn it over.

Operator

Our next question comes from Phil Ng of Jefferies. Your question, please.

Phil Ng -- Jefferies & Company -- Analyst

Hey, David, looking forward to working with you and congratulations.

David Sewell -- Chief Executive Officer

Thanks. I look forward to it, too.

Phil Ng -- Jefferies & Company -- Analyst

Under your watch going forward, are you going to use a different lens in terms of metrics and methodology, in terms of capital placement, and any changes in terms of how you're going to structure incentive comp and, once again, metrics that you're going to be looking at?

David Sewell -- Chief Executive Officer

Yeah. So as you would expect, I'm looking at everything. So we would -- I do believe, you know, aligning our metrics to our strategy is critically important and we'll absolutely do that, and we'll look at it across the company in our cabinet -- cap projects, cap allocation as well as, you know, our incentive plans. So we're going to look at all that.

Phil Ng -- Jefferies & Company -- Analyst

That's it for us. And I guess a question for Ward. Within your guide, can you give us a little more color on how you're thinking about inflation for the full year? Certainly, very elevated right now. On the core and Q2, it seems like inflation was a bit more outsized for corrugated versus consumer.

Any color on what's driving that trend?

Ward Dickson -- Chief Financial Officer

Sure. It's the impact of recycled fiber. So we talked about in the prepared remarks. I think.

we said recycled fiber was up almost 43 bucks a ton, I think, approximately year over year. So as you think going forward, remember that the comparison of recycled fiber especially in Q2 is off a very low level during FY '20. So my guidance as we think about Q3 and Q4 for inflation from where we are today is we're estimating that recycled fiber will be up approximately $15 from Q2 to Q3 and then another five bucks from Q3 to Q4. If you look at the single biggest driver of inflation for us, and I've been signaling this all year long, was going to be recycled fiber.

Recycled fiber on a year-over-year basis for the full year could be approximately $150 million based on the consumption of fiber that we have across our system. Then the other elements have been elevated energy cost off of last year's lows and then we've talked about the tightening freight markets. I gave guidance earlier in the year that I thought freight for the full year would be 3% to 5% on a year-over-year basis for the full year, we're on the high end of that range now. And then given the events that occurred and in Texas related to the winter, whether that has had some impact on some of our chemicals.

So historically, I've said that if you look at the average inflation for this business since the inception of WestRock, averaged about $225 million a year. It's going to be elevated this year simply because of the elevated energy and recycled fiber. And really, I've embedded those in our guidance. The sequential inflation outlook that I just talked about was included in our guidance for Q3 and then for the full year.

And it just reinforces our need to drive productivity across the business.

Phil Ng -- Jefferies & Company -- Analyst

Super helpful, guys. Thank you.

Operator

Our next question comes from Anthony Pettinari of Citi. Your question, please.

Anthony Pettinari -- Citi --Analyst

Good morning and welcome, David.

David Sewell -- Chief Executive Officer

Thank you.

Anthony Pettinari -- Citi --Analyst

Just piggybacking on some previous questions on capital allocation, I think you could argue M&A has been pretty integral to WestRock's DNA, maybe RockTenn before that. And you know, obviously, not asking about anything sort of near term or specific but just longer term, do you view consolidation in paper-based packaging as an opportunity? How do you think about the criteria and strategic importance of the acquisitions? And when you looked at the company's history of acquisitions coming from an outsider perspective, what were your sort of lessons learned?

David Sewell -- Chief Executive Officer

Yeah. So I think we'll certainly be open to M&A, it will be part of our organic growth platform moving forward, but we're going to be really disciplined in our approach. It's got to align with our strategy. It's got to meet our expectations for returns.

And the piece on the multiple integrations, the acquisitions we've made to your question, my observation is it's critical that we extract all the value from bringing these businesses together. So you know, I think about it as how do you make one plus one equals three. So it's driving the productivity, it's ensuring our return on assets, it's leveraging the scale that we have and ensuring we get the return for the investments we've made. So that's why I mentioned earlier that that critical importance of driving that productivity and optimization from our past acquisitions and on future acquisitions as they fit the strategy and they fit our return criteria, it'll certainly be part of our process.

Anthony Pettinari -- Citi --Analyst

OK. That's very helpful. And then just maybe a follow-up for you or maybe Jeff. On e-commerce and corrugated, as you increase your mix into e-commerce, should we think about that as sort of margin accretive, is it margin neutral versus non-e-commerce customers? And I understand it's hard to tell in a dynamic market, you had ransomware and some other stuff.

But do you think you're growing faster than the market or faster than your peers in the e-commerce category? And if so, why?

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

Hi, Anthony. Good morning. It's hard to tell on just head-to-head e-commerce growth. I think we're continuing to grow the business and broad-based.

In the margins, if you look at our margins, the packaging margins are the best channel we have. So not comparing e-commerce to others, it's how you run the business. We've set up our manufacturing facilities to be highly efficient to run whatever product we've put into the plants. It's revenue per machine our contribution from the machine and we've equipped our plants to be able to maximize whatever product we're running through those.

And I think we'll continue to do that. And keep in mind, as we look at our 90% integration rates, the tons that we move into the packaging are considerably better than export at any price in the cycle. So we'll continue to do that and it will be, overall, the volume in the packaging whether it's e-commerce or anything else will be accretive for us.

Anthony Pettinari -- Citi --Analyst

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

Operator

Our next question comes from Cleve Rueckert of UBS. Your question, please.

Cleve Rueckert -- UBS -- Analyst

Great. Good morning, everybody. Thanks for taking my questions. I just want to follow up on recycled fiber.

You know, I appreciate the inflation there but I'm just curious to understand what you're seeing in terms of recycled fiber supply in the domestic U.S. market. I mean, we've been hearing reports that the residential channel recycling rates are much lower than commercial. So I was wondering what you're seeing on that side of the business and I don't know if you expect it to change with the reopening playing out?

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

Hi, Cleve. It's Jeff. So on the supply demand and the generation in the typical large grocery stores, the box stores have been good. There is less collection in the residential, but the recycling centers are investing to be able to capture more of that as they're coming up.

I think what's really driving the demand now is some of the start-ups, the robustness of the business to start-ups of some of those so-called mills started getting upward pressure on that and then export into Asia, India area, not China, but it's all the places around China, is also strong and robust because in the global economy for packaging paper right now is so strong everywhere. So that's really what's putting some of the upward pressure on the pricing.

Cleve Rueckert -- UBS -- Analyst

OK. That's clear. And I just wanted to follow up on something from earlier on in the prepared remarks. You mentioned that customers in containerboard are speaking low basis weight products.

I was wondering if you give us a sense there and some color on who those customers are and, you know, what maybe besides sustainability is driving that shift?

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

Sure. It's not just low-base weight. It's really lower basis weights but with the strength properties, and that's what the Florence investment do. So you have better restaurant properties at a lower basis weight.

So less fiber, definitely lower cost of sustainability play. But it's really performance that thereafter. So we do expect the performance and it depends on the EMEA's market. So the lower basis rates, you can put in some of the e-commerce markets, some of the less industrial and then we have a great portfolio of diverse products.

And so when you look at our protein or produce, there are looking at 100% virgin heavier weights. Some items are mediums that are heavyweights. So it's really about the full complement of products across a basis weight. And we're really well suited across our system to be able to supply whatever our customers need.

Cleve Rueckert -- UBS -- Analyst

Got it. That's clear. Thanks very much and good luck this quarter.

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

Thank you.

Operator

Our final question comes from Adam Josephson of KeyBanc. Your question, please.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Thanks. And, David, best of luck in your new role, and look forward to working with you.

David Sewell -- Chief Executive Officer

Me as well. Thank you, Adam.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

So just two on -- two-part on cap allocation. One is just others have asked about M&A and the company's M&S history. So, as a result, you have boxes, folding cartons distribution, URB, Brazil. I'm just wondering how you think about the necessity of all of these businesses if there are areas of pruning or do you think that the company as currently constructed is the right business mix? And then relatedly, if a big acquisition opportunity were to come up, would you pursue it or are you really -- would you much preferred it to be more balanced in terms of buying back stock every so often increasing the dividend and then selective perhaps bolt-on M&A instead of large-scale M&A as has been the case and in recent years of the company?

David Sewell -- Chief Executive Officer

Thanks, Adam. I look at it a couple of ways. The first one is ensuring that we are really dialed in on our strategy and in our portfolio. And going through that process now, to assess what our strategy and portfolio look like as it relates to our products, our markets our infrastructure, and our footprint, really, you know, how do we best serve our customers, how do we provide the most value for our shareholders, but also there is an opportunity to truly be differentiated from our competitors.

So bringing that all together is extremely important. So I'll probably be able to be in a better position over the next you know coming months to share a lot more detail on that. And when we come out of that we will be extremely well-aligned as an organization, what our path forward is toward our strategic foundation. And then from there, we'll just be relentlessly focused on executing to our strategy.

And then as far as M&A goes, you know, it would tie right into the strategy. So I think, you know, the work and the team have done a phenomenal job so our balance sheet is strong. If the right opportunity came up, and the strategy met our criteria, we'll look at it but we're going to dial in and not shift from our strategic platform.

Adam Josephson -- KeyBanc Capital Markets -- Analyst

Thanks a lot, David.

David Sewell -- Chief Executive Officer

Thank you.

Operator

[Operator signoff]

Duration: 60 minutes

Call participants:

James Armstrong -- Vice President of Investor Relations

David Sewell -- Chief Executive Officer

Ward Dickson -- Chief Financial Officer

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

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

Mark Connelly -- Stephens Inc. -- Analyst

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

Mark Weintraub -- Seaport Global Holdings -- Analyst

Mark Wilde -- Bank of Montreal -- Analyst

Kyle White -- Deutsche Bank -- Analyst

Phil Ng -- Jefferies & Company -- Analyst

Anthony Pettinari -- Citi --Analyst

Cleve Rueckert -- UBS -- Analyst

Adam Josephson -- KeyBanc Capital Markets -- Analyst

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