WRK: Earnings Report for the Quarter Ending December 31, 2020

WestRock Company reported before the market opened on January 28, 2021, it earned $0.57 per diluted share in the quarter that ended on December 31, 2020, up 8 percent from earnings of $0.53 in the same 3 months of the previous year. These figures are the earnings determined in accordance with U.S. Generally Accepted Accounting Principles (GAAP). 

Adjusted earnings, a non-GAAP figure, rose 5 percent to $0.61 per share from $0.58 one year earlier, a less robust change than the GAAP percentage. The exclusions responsible for the $0.04 per share difference in the latest quarter between the GAAP and Non-GAAP earnings were: COVID-19 relief payments [$0.06 per share], Restructuring and Loss on extinguishment of debt [$0.03 per share], and Gain on sale of investment [($0.05) per share].  Non-GAAP earnings, by excluding unusual and non-cash items that could obscure the results of a business's principal, ongoing operations, are intended to be cleaner measures of corporate profits.

This post compares the quarterly Income Statement published by WestRock to the estimates I made in a previous “Look Ahead” post.  My estimates were based on publicly available guidance provided by WestRock's management to financial analysts, news reports, and trends in the company's historical results.  Unless otherwise mentioned, all reported values mentioned below are GAAP figures.

First, a little background about the company:  WestRock is a leading, multinational manufacturer of corrugated packaging, packaging for consumer goods, and other paper products.  WestRock was formed in 2015 when RockTenn and MeadWestvaco merged.  The combined company spun off its specialty chemicals operations and Home, Health and Beauty (HH&B) business in order to acquire several other firms in the  paper and packaging business.  The largest acquisitions were KapStone Paper & Packaging for $4.9 billion (2018) and Multi Packaging Solutions for $1.35 billion (2017).  In May 2020, in response to COVID-19, WestRock announced steps to reduce its expenses and to conserve cash.  Cutting the common stock dividend was one such step. Later in 2020, WestRock recorded a $1.3 billion non-cash charge to lower the carrying value of Consumer Packaging assets.  In January 2021, some of WestRock's electronic systems were impacted by a ransomware attack.

The following table is a simplified version of WestRock's Income Statement for the quarter that ended in December 2020, with company-reported numbers along side my predictions.  Figures from the year-earlier quarter are also provided for comparative purposes.

Revenue in the December 2020 quarter totaled $4.4 billion, about the same as last year. The Corrugated Packaging business was responsible for 65 percent of overall revenue, and this unit's revenue percent fell by 1.5 percent compared to the year-earlier result. The Consumer Packaging business contributed 36 percent of revenue, and this unit's revenue increased by 3.8 percent.

I was expecting WestRock to report revenue of $4.3 billion for the December 2020 quarter.  The actual amount surpassed my estimate by $64.5 million (1.5 percent).

The Cost of Revenue (also known as Cost of Goods Sold) was $3.6 billion in the latest quarter, which translates into a Gross Margin of 17.1 percent of revenue. Since it was lower than the 18.3 percent Gross Margin achieved in the year-earlier quarter, it's a sign that WestRock sold its products and services at less profitable prices relative to production costs. I was expecting the Gross Margin to be 18.0 percent in the December 2020 quarter, and WestRock missed that prediction by 0.9 percent.

Sales, General, and Administrative expenses totaled $418 million in the December 2020 quarter, down 1.9 percent from one year ago.  SG&A expenses decreased from 9.6 percent to 9.5 percent of quarterly revenue, which shows WestRock spent less per dollar of sales on indirect operational costs, such as marketing. I had estimated that SG&A expenses would be 10.0 percent of revenue, and the actual percentage turned out to be lower than the prediction.

The last operating expense line on the Income Statement is where the sum of other operating income and charges, such as restructuring, may be listed.  For WestRock the amount listed on this line was a $102 million loss in the latest quarter.  I was expecting a net loss of $120 million.

WestRock's Operating Income was $233 million in the quarter, down 7.3 percent from the year-earlier period.  Operating Income exceeded my $226 million estimate by $7 million.

Interest and other non-operating items summed to a net expense of $30 million.  My estimate for non-operating items was $80 million.

The effective income tax rate fell by 0.2 percent to 24.8 percent, which had a positive effect on net income.  I expected the tax rate to be 23.3 percent.

Net income attributable to WestRock was $152 million, $0.57 per share in the quarter ending December 2020.  The figures for the year-earlier quarter were $139 million, $0.53/share. My earnings estimate for  the latest quarter was $112 million ($0.43/share), so WestRock Company earned $0.14 per share more than I had predicted.

In conclusion, the following list shows where the reported results differed from my expectations:

      – Better than expected:  SG&A/Revenue + Special operating items + Misc non-operating items 

      – Worse than expected:  Gross Margin + Interest + Income tax rate 

      – Near expectations:  Revenue growth + SG&A 

This post is not investment advice, and the accuracy of the information, tables, charts, and any commentary presented is not guaranteed.  Readers are encouraged to independently verify all data using information from original sources. The Income Statements discussed in these blog posts have not been audited and may differ in material respects from those published by the subject company.  These differences are intended to facilitate analysis and cross-company comparisons. Complete financial statements with notes can usually be found in the 10-Q and 10-K filings companies submit to the Securities and Exchange Commission (SEC).

 #westrock    #wrk    #gauges  #gcfr  #gcfr2 #QtrlyRpt   #nac_financialanalysis

WRK: Look Ahead to December 2020 Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for WestRock's earnings for fiscal 2021's first quarter, which ended on December 31, 2020, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between.

Once the company’s official results become available later this month, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative.  Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.

But, before we get into the details, let's take a step back and start with background information about WestRock.

WestRock is a leading, multinational manufacturer of corrugated packaging, packaging for consumer goods, and other paper products.  WestRock was formed in 2015 when RockTenn and MeadWestvaco merged.  The combined company spun off its specialty chemicals operations and Home, Health and Beauty (HH&B) business in order to acquire several other firms in the  paper and packaging business.  The largest acquisitions were KapStone Paper & Packaging for $4.9 billion (2018) and Multi Packaging Solutions for $1.35 billion (2017).  In May 2020, in response to COVID-19, WestRock announced steps to reduce its expenses and to conserve cash.  Cutting the common stock dividend was one such step. Later in 2020, WestRock recorded a $1.3 billion non-cash charge to lower the carrying value of Consumer Packaging assets.

Shares of WestRock now trade for about $45 each, giving the company a market value of $12 billion. These shares can be found in the Standard and Poors 500, New York Stock Exchange Composite, and Russell 1000 stock indices.

WestRock incurred a loss of $691 million on revenue of $18 billion during the last year.  In the quarter that ended on 30 September 2020, WestRock earned $0.74 per share (excluding certain items), which beat the $0.68 Wall Street consensus forecast. See https://tinyurl.com/y237sr6f for WestRock's most recent quarterly report.

Revenue in the September 2020 quarter totaled $4.5 billion, 4 percent less than last year's $4.7 billion. The Corrugated Packaging business was responsible for 65 percent of overall revenue, and this unit's revenue percent fell by 4.0 percent compared to the year-earlier result. The Consumer Packaging business contributed 36 percent of revenue, and this unit's revenue decreased by 3.6 percent.

My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts.  It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling.  I also look for other information about the company in the news, and I take advantage of trends in the company's historical results.  While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP).  Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.

WestRock management described their expectations for the first quarter of fiscal 2021 in October 2020 after they last reported quarterly results.

The guidance indicates that WestRock expects Adjusted EPS (a non-GAAP figure) in the December 2020 quarter to be between $0.46 and $0.54.  The equivalent figure was $0.58 per share in the December 2019 quarter, so an earnings decline is the expectation.  Note also that GAAP EPS will be lower than Adjusted EPS, although the difference between these figures varies quite a bit from quarter to quarter.

The guidance does not include a quantitative estimate for revenues, but the comments don't suggest optimism.  My guess is a 3-percent decline from Revenues of $4.47 billion in September 2020 quarter.

The Gross Margin has been about 18.2 percent in recent periods, but I am going with 18.0 percent because the guidance hints at higher costs.  For a similar reasons, I'm assuming Sales, General, and Administrative (SG&A) expenses will edge up to about 10 percent of revenue.  For the other lines of the Income Statement, I followed the trends evident in WestRock's historic results.

With these assumptions, the GAAP EPS turns out to be $0.44 per share.  Non-GAAP EPS would be higher, presumably within the guidance range.  I have no reason to believe there will be a larger-than-usual charge that would impact GAAP but not non-GAAP results.

The following Income Statement results from estimates made as discussed above. 

Please note that my organization of revenues, expenses, gains, and losses, which I use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

#westrock  #wrk  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis

WestRock Company: Gauge Analysis (updated November 23, 2020)

I have analyzed WestRock's financial statements to determine whether the reported figures suggest that the company's shares are a good value and reasonable risk for prudent investors. The way I performed this analysis was inspired by Benjamin Graham's recommendations in "The Intelligent Investor," which was first published in 1949 and is still one of the best-known books about value investing. I modified Graham's specific suggestions to fit modern times; however, the goal is the same: find stocks that are inexpensive relative to the company's strengths and aren't excessively risky.

The analysis evaluates investment suitability by gauging how well the company satisfies seven criteria.  GREEN, YELLOW, and RED grades indicate whether each gauge is fully satisfied, partially satisfied, or not satisfied at all.  An Overall Score between zero and 100, which takes the details of all gauges into account, is also computed.  While the analysis includes both growth and value criteria, the calculation of the Overall Score has been designed to favor companies that exhibit good value characteristics over fast growing firms that are expensive.  An Overall Score above 60 isn't easy to achieve, and it signifies that the company has enough value-investment appeal to be worth examining in more detail. 

First, a quick review of the company itself.

WestRock is a leading, multinational manufacturer of corrugated packaging, packaging for consumer goods, and other paper products.  WestRock was formed in 2015 when RockTenn and MeadWestvaco merged.  The combined company spun off its specialty chemicals operations and Home, Health and Beauty (HH&B) business in order to acquire several other firms in the  paper and packaging business.  The largest acquisitions were KapStone Paper & Packaging for $4.9 billion (2018) and Multi Packaging Solutions for $1.35 billion (2017).  In May 2020, in response to COVID-19, WestRock announced steps to reduce its expenses and to conserve cash.  Cutting the common stock dividend was one such step. Later in 2020, WestRock recorded a $1.3 billion non-cash charge to lower the carrying value of Consumer Packaging assets.

WestRock incurred a loss of $691 million on revenue of $18 billion during the last year. In the quarter that ended on 30 September 2020, WestRock earned $0.74 per share (excluding certain items), which beat the $0.68 Wall Street consensus forecast. See https://tinyurl.com/y237sr6f for WestRock's most recent quarterly report.

Shares of WestRock now trade for about $42 each.  These shares can be found in the Standard and Poors 500, New York Stock Exchange Composite, and Russell 1000 stock indices.

Analysis Results:

WestRock's grades on the seven investment criteria are listed below, along with some of the financial figures that influenced these color assignments

1. The Company's Size is Substantial: GREEN

    Market Value: $11.0 billion (large cap)

2. The Company is Conservatively Financed: RED

    Current ratio = 1.7 (>2.0 is conservative)

    Long-term debt/Working Capital = 457% (<150% is conservative)

3. The Company Generates Stable Earnings: RED

    Seventeen positive quarterly earnings reports in last 5 years (worrisome)

    Earnings variability = 93% (very high)

4. The Company Exhibits Earnings Growth: YELLOW

    Owner Earnings growth rate (trailing year) = 37% (very good)

    Owner Earnings growth rate (five-year average) = 8% (modest)

    Free Cash Flow growth rate (trailing year) = 16% (good)

    Free Cash Flow growth rate (five-year average) = 2% (weak)

5. The Company is Efficiently Profitable: YELLOW

    Cash Flow Return On Invested Capital = 10% (so-so)

    Operating Profit/Sales = 8.9% (okay)

6. The Company Pays a Healthy Dividend: GREEN

    Dividends paid for the last 7 years or longer

    Dividend 5-year average growth rate = -1% (not good)

    Dividend = 32% of last year's FCF (easily sustainable with room to grow)

7. The Company's Shares are Fairly Valued: YELLOW

    Price/Owner Earnings (last year) = 8.7 (appealing)

    Price/GAAP Earnings (five-year average) = 22.7 (moderate to pricey)

    Free Cash Flow/Market Value = 10.0% (very appealing), more than the five-year average of 8.1%)

    Acquirer's Multiple = 12.8 (reasonable)

    Price/Book Value = 1.0 (about the same as its five-year average)

    Price/Sales = 0.6 (about the same as its five-year average)

In summary, the analysis assigned WestRock Company two GREEN, three YELLOW, and two RED grades.  The resulting Overall Score is 48 of the 100 possible points, which is unappealing.  The score is below the 60-point threshold, and, therefore, WestRock does not qualify at this time for more in-in-depth consideration.

Check back here occasionally for updates to the Overall Score, which can change when the company releases new financial results and when there's a significant change in the company's share price.

This analysis reported here is a limited evaluation of the subject company.  It does not consider all material facts about the company's operations, finances, or future prospects.  The analysis relies on publicly available financial data assumed, but not guaranteed, to be accurate and consistent.  Readers are strongly encouraged to perform verify all data and perform their own independent analyses.  Other analytical approaches and screening criteria will be more applicable to investors having different goals, circumstances, and tolerance for investment risk.  This post is not and should not be considered investment advice, nor does it constitute an offer or solicitation to buy or sell any security. The author might have a long or short position in the subject company and/or its competitors. The analytical approach, the criteria used, and all calculations are subject to change without notification.

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 #westrock    #wrk    #gauges  #gcfr  #gcfr2 #valueinvesting   #financialanalysis