On June 10, we issued an updated research report on WestRock Company WRK. The company’s results is benefiting from favorable demand, price and mix trends across its paper and packaging businesses in fiscal 2019 despite higher maintenance downtime and steps taken to reduce inventory. Productivity and performance improvement programs and cost-saving actions remain tailwinds. Execution of its capital allocation strategy and the acquisition of KapStone Paper and Packaging Corporation remain long-term catalysts.
Volumes to Aid Fiscal 2019 Results
WestRock projects adjusted segment EBITDA in the third quarter of fiscal 2019 to be between $830 million and $870 million, compared with $757 million reported in second-quarter fiscal 2019. Higher seasonal volumes across Corrugated and Consumer Packaging segments and seasonal sales increase in Victory business will aid adjusted EBITDA by $20-$40 million. Lower recycled fiber, virgin fiber, seasonally lower energy cost and freight costs will bolster EBITDA by $50-$65 million.
However, higher maintenance downtime will impact third-quarter results. In the Corrugated Packaging segment, maintenance downtime will be 104,000 tons in the third quarter fiscal 2019, higher than 99,000 tons in second quarter fiscal 2019. In the Consumer Packaging segment, maintenance downtime will be 43,000 tons in the third quarter fiscal 2019 compared with 42,000 tons in second quarter fiscal 2019. Further, higher depreciation expense and interest expense and higher tax rate will impact third-quarter fiscal 2019 earnings per share by 3 cents.
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 reduced inventory by approximately 60,000 tons. WestRock will continue to reduce inventories to match production with demand. This will impact the company’s results in the coming quarters.
For fiscal 2019, the company anticipates adjusted segment EBITDA within $3.3 and $3.4 billion. Compared with the adjusted EBITDA of $2.89 in fiscal 2018, the guidance range reflects an increase of 14-18%. For the Corrugated Packaging segment, maintenance downtime will be 287,000 tons in fiscal 2019 much higher than 233,000 tons in fiscal 2018. For the Consumer Packaging segment, maintenance downtime is estimated at 103,000 tons compared with 47,000 tons in fiscal 2018.
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. Of this, WestRock has already achieved $70 million in the first half of fiscal 2019 from the targeted $90 million in fiscal 2019.
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 accelerates the company’s goal 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
In the fiscal second quarter of 2019, WestRock invested $303 million in capital expenditures, paid $118 million in dividends and returned $44 million to stockholders through stock repurchases. As of Mar 31, 2019, the company had approximately 19.1 million shares of its common stock available for repurchase under the program.
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, which in turn will generate $240 million in annualized EBITDA. In October, 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 formation, the company has increased dividend by 21%. The company has a dividend yield of more than 4.9%.The company’s net leverage ratio at the end of the second quarter fiscal 2019 was 2.96. WestRock retains its target to lower net leverage ratio to 2.25-2.50.
Shares of WestRock have slumped 41.1% over the past year compared with the industry’s decline of 43.1%.
Zacks Rank & Stocks to Consider
WestRock currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the basic materials space are AngloGold Ashanti Limited AU, Arconic Inc. ARNC and Materion Corporation MTRN. All these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
AngloGold Ashanti Limited has an expected earnings growth rate of 90.57% for 2019. The company’s shares have appreciated 67.9% in the past year.
Arconic has a projected earnings growth rate of 31.99% for the current year. The company’s shares have appreciated 28% in a year’s time.
Materion Corporation has an estimated earnings growth rate of 27.1% for 2019. Its shares have rallied 12.7% over the past year.
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