On Mar 20, we issued an updated research report on WestRock Company WRK. The company is benefiting from favorable demand, price and mix trends across its paper and packaging businesses. Execution of its capital allocation strategy and the acquisition of KapStone Paper and Packaging Corporation will also aid growth. However, cost inflation and higher maintenance downtime remain near-term headwinds.
Demand to Buoy Fiscal 2019 Results, Maintenance Downtime Ails
For second quarter fiscal 2019, WestRock projects adjusted segment EBITDA at $700-$735 million, compared with $733 million reported in first-quarter fiscal 2019. Benefits from the KapStone acquisition and pricing will be offset by higher maintenance downtime in both the Corrugated Packaging and Consumer Packaging segment in the current quarter.
Further, in the Corrugated Packaging segment, the company ended up with approximately 100,000 tons of excess containerboard inventory following the KapStone acquisition. In the second quarter of fiscal 2019, the company plans to reduce inventories and match its production with demand. This is likely to impact earnings for the second quarter fiscal 2019. Further, higher wages and related taxes and other input costs primarily owing to rising virgin fiber costs on account of the wet weather will dent earnings. The Zacks Consensus Estimate for second quarter of fiscal 2019 is currently pegged at 64 cents, projecting a year-over-year decline of 23%.
WestRock lowered adjusted EBITDA guidance for fiscal 2019 from $3.6 billion to $3.5 billion. It projects an improvement of 21% from the adjusted EBITDA of $2.89 billion in fiscal 2018. WestRock will benefit from favorable demand, price and mix trends across its paper and packaging businesses. However, these gains will be somewhat negated by cost inflation and higher maintenance downtime.
In the Consumer Packaging segment, the company expects to install a new curtain coater at Cottonton, AL mill in March 2019, upgrade one of three paper machines at Covington, VA mill in April 2019 and replace a headbox at its Demopolis, AL mill in June 2019. The downtime associated with these three projects will adversely impact earnings in the second and third quarters of fiscal 2019. Overall for the segment, maintenance downtime will be 121,000 tons in fiscal 2019, much higher than 47,000 tons in fiscal 2018.
The Zacks Consensus Estimate for fiscal 2019 is $4.07 (0.5% year-over-year decline) on the back of revenues of $18.94 billion (16.3% year-over-year growth).
KapStone Acquisition: A Key Catalyst
In November, WestRock completed the acquisition of rival KapStone Paper and Packaging Corp. The integration is on track and the company anticipates around $200 million of cost synergies and performance improvements by the end of fiscal 2021. KapStone’s corrugated packaging operations will enhance the company’s North American corrugated packaging business and provide complementary products in geographical locations that will enable WestRock to better serve customers across the system. The buyout will help the company strengthen presence in western United States and enable it to compete better in the growing agricultural markets in the region.
It also fast-tracks its target to improve margins of its North American corrugated packaging business. WestRock will also be able broaden portfolio of paper grades, allowing it to tap into the kraft bag market with the inclusion of KapStone's complementary specialty kraft paper offerings. Further, the deal will augment WestRock’s portfolio of virgin fiber-based paper from 65% to 67% as KapStone's 3 million tons of paper is made of 78% virgin fiber and only 22% paper is made from recovered fiber.
Capital Allocation Strategy Right on Track
During the first quarter of fiscal 2019, WestRock deployed $4.9 billion for the KapStone acquisition, including debt assumed. The company also invested $322 million in capital expenditures, paid $116 million in dividends and returned $44 million to stockholders through stock repurchases. As of Dec 31, 2018, the company had approximately 20.3 million shares of its common stock available for repurchase under the program. Further share repurchases will be accretive to earnings.
Meanwhile, the company plans to invest approximately $1.4 billion of capital in its business in fiscal 2019. With the completion of many of its strategic capital projects in fiscal 2019 and fiscal 2020, the company projects capital expenditure target of $1 billion in fiscal 2021.
In October 2018, WestRock also announced an increase of 5.8% or 10 cents per share, in annual dividend to an annualized rate of $1.82 per share. Notably, since its inception, the company has increased dividend by 21%. The company’s net leverage ratio at the end of the first quarter fiscal 2019 was 2.89. WestRock retains its target to lower net leverage ratio to 2.25-2.50.
WestRock is a provider of paper and packaging solutions to consumer and corrugated markets. It falls under the Zacks Paper and Related Products industry along with other players like International Paper Company IP, Clearwater Paper Corporation CLW and Neenah Paper, Inc. NP.
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