2023-05-10 05:52:00 ET
Summary
- Corrugated Packaging and Consumer Packaging segments increased their EBITDA performance.
- In 2023, the company is well on track to achieve $250 million in cost-saving initiatives.
- 2023 guidance confirmed as well as our buy rating target.
Here at the Lab, we are disappointed about WestRock's stock price performance ( WRK ), and since our latest publication bluntly called ' Disappointing Guidance ', the company lost a further 17.65%. Today, we are back to analyzing WestRock's financials and providing key insights on the company's latest development.
Mare Evidence Lab's previous publication
Aside from our positive view on the Plastic to Paper thesis (supported by the company's packaging division), in our Q1 follow-up note, there were three significant takeaways that we emphasized:
- Client inventory negatively impacted the quarterly demand;
- Adverse weather conditions were not supportive of the company;
- And more importantly (even for Wall Street's investment sentiment), the company did not disclose full-year 2023 guidance, providing a reduction in its free cash flow generation. Therefore, here at the Lab, we decided to conservatively reduce our target price, maintaining a buy rating target.
Upside view
Starting with our thesis, corrugated and consumer packaging divisions are driving the company's net sales performance (Fig 1 and 2). However, turnover decreased by approximately $105 million signing a minus 1.9% on a yearly comparison, which was driven by a $370 million reduction in the global paper division (Fig 3). WestRock's top-line sales were also positively up thanks to Gondi's latest acquisition. This well supported Mare Evidence Lab's investment thesis on how the company is growing through innovative solutions to replace plastic.
Fig 1
Fig 2
Fig 3
Going to the cost base, the company is aiming to drive production costs down and improve return on invested capital.
For this reason, WestRock already announced the closure of Panama City and North Charleston mills . Having listened to the Q&A call, we report on how WestRock intends " to continue these mill evaluations with a focus on driving growth with our most efficient assets ". We understood that the company plans to exit URB production which is not a vital investment. As a reminder, WestRock already sold two URB mills in December 2022.
In addition, it will close four converting facilities with an effort to achieve $1 billion in cost savings initiatives by 2025. SG&A expenses are on track to save $175-$200 million per year, and the company's procurement will deliver an additional $250-$275 million run-rate cost savings per year. These savings will offset higher fiber and energy costs evolution. Even if it is not related to the company's P&L, non-cash pension costs increased by $40 million on a yearly basis; however, WestRock's pension plans remain currently overfunded.
WestRock saving initiatives per year
Q2 FCF update and Conclusion
In Q2, the company recorded a $1.9 billion impairment. In detail, this negative one-off was split into $1.4 billion in the Global Paper division and $514 million in the Corrugated Packaging division. The goodwill was related to a previous M&A and was driven by a sustained decrease in asset value and further macroeconomic deterioration. During Q2, WestRock's restructuring costs reached $445 million (of which $347 million was non-cash). As already mentioned, this was due to the North Charleston paper mill closure. On the positive side, the Corrugated and Consumer Packaging division reported a positive delta in price MIX evolution (Fig 4). For this reason, WestRock was able to maintain its 2023 guidance, confirming an adjusted FCF of at least $1 billion (Fig 5). This is why we also reaffirm our previous target price estimate.
Closing North Charleston was not an easy choice. WestRock portfolio transformation is progressing well and the company is accelerating to streamline its operations. We believe that WestRock already completed its main portfolio reshaping and is ready to deliver. The quarterly dividend was confirmed and last time, we already decreased our target price to $55 per share rolling forward our EBITDA to $3 billion. This is based on a blend valuation supported by a lower than peers EV/EBITDA on our 12-month estimates at 7.0x and a DCF valuation with a 10% cost of equity and a conservative terminal growth rate of 2%.
Fig 4
Fig 5
For further details see:
WestRock: Accelerating On Its Transformation