WestRock Reports Fiscal 2023 Second Quarter Results; Transformation Progressing Well

WestRock Company (NYSE:WRK), a leading provider of sustainable paper and packaging solutions, today announced results for its fiscal second quarter ended March 31, 2023.

Second Quarter Highlights and other notable items:

• Net sales of $5.3 billion
• Net loss of $2.0 billion, included a $1.9 billion pre-tax, non-cash goodwill impairment and $445 million of pre-tax restructuring and other costs; Adjusted Net Income of $198 million
• Simplifying our portfolio to streamline our business, improve performance and deliver best-in-class returns
• Consolidated Adjusted EBITDA of $789 million; Corrugated Packaging and Consumer Packaging segments Adjusted EBITDA increased 24.0% and 6.2% year-over-year, respectively
• Results negatively impacted by $58 million due to economic downtime, as well as a $40 million increase in non-cash pension costs year-over-year; our U.S. qualified and non-qualified pension plans remain overfunded
• Loss per diluted share of $7.85 and Adjusted Earnings per Diluted Share of $0.77

“The WestRock team delivered a solid second quarter, demonstrating the strength of our integrated and diversified packaging business,” said David B. Sewell, chief executive officer. “Our broad portfolio, product innovations and self-help initiatives are enabling us to successfully navigate the current market challenges.

“Closing our North Charleston mill is another step in our ongoing portfolio optimization strategy. We are accelerating our efforts to streamline our operations and drive growth in the most attractive markets. Looking ahead, we remain committed to operating world class assets and investing our capital to drive the greatest returns.”

Consolidated Financial Results

WestRock’s performance for the three months ended March 31, 2023 and 2022 (in millions):

Net sales decreased $105 million, or 1.9%, year-over-year driven by a $370 million, or 24%, decrease in Global Paper segment sales that were partially offset by a $308 million, or 13.3%, increase in Corrugated Packaging segment sales. Net sales in the current year quarter included $328 million related to the consolidation of Gondi, S.A. de C.V. (“Grupo Gondi” and “Grupo Gondi Acquisition”).

The net loss in the second quarter of fiscal 2023 was primarily due to the $1.9 billion pre-tax, non-cash goodwill impairment and higher restructuring and other costs. The net loss was also impacted by lower volumes excluding the Grupo Gondi Acquisition, increased net cost inflation, economic downtime, increased non-cash pension costs, costs associated with the Mahrt mill work stoppage, and business systems transformation costs. These costs were partially offset by higher selling price/mix, cost savings and contribution from the Grupo Gondi Acquisition.

Consolidated Adjusted EBITDA decreased $65 million, or 7.6%, year-over-year, primarily due to lower Global Paper and Distribution segment Adjusted EBITDA that was partially offset by higher Adjusted EBITDA in our Corrugated Packaging and Consumer Packaging segments. The Adjusted EBITDA impact of the Grupo Gondi operations contributed an incremental $50 million compared to the prior year quarter.

Additional information about the changes in segment sales and Adjusted EBITDA by segment are included below.

Goodwill Impairment

During the second quarter of fiscal 2023 we recorded a $1.9 billion pre-tax, non-cash goodwill impairment (or $1.8 billion after-tax); $1.4 million in Global Paper and $514 million in our Corrugated Packaging reportable segment. The goodwill impairment was linked to prior acquisitions and driven by the sustained decrease in the Company’s market capitalization and further deterioration of macroeconomic conditions, including the impact of soft demand, pricing pressure and elevated inflation, which negatively affected our long-term forecasts in certain segments, as well as certain higher discount rates.

Restructuring and Other Costs

Restructuring and other costs during the second quarter of fiscal 2023 were $445 million ($347 million of which was non-cash), and were primarily related to the decision to close our North Charleston paper mill. Restructuring and other costs during the second quarter of fiscal 2022 were $363 million ($321 million of which was non-cash), primarily related to the closure of the Panama City, Florida paper mill.

Cash Flow Activities

Net cash provided by operating activities was $284 million in the second quarter of fiscal 2023 compared to $390 million in the prior year quarter primarily due to lower earnings.

Total debt was $9.5 billion at March 31, 2023, $9.3 billion excluding $166 million of unamortized fair market value step-up of debt acquired in mergers and acquisitions, and $9.0 billion after further excluding cash and cash equivalents of $363 million. Total debt was largely unchanged compared to last quarter. The Company had approximately $3.2 billion of available liquidity from long-term committed credit facilities and cash and cash equivalents at March 31, 2023.

During the second quarter of fiscal 2023, WestRock invested $282 million in capital expenditures and returned $70 million in capital to stockholders in dividend payments.

Segment Results

We have included the financial results of the Grupo Gondi operations in our Corrugated Packaging segment.

WestRock’s segment performance for the three months ended March 31, 2023 and 2022 was as follows (in millions):

Corrugated Packaging Segment

Corrugated Packaging segment sales increased $308 million, or 13.3%, primarily due to $328 million of sales from the acquired Grupo Gondi operations and higher selling price/mix that were partially offset by lower volumes excluding the Grupo Gondi Acquisition.

Corrugated Packaging Adjusted EBITDA increased $79 million, or 24.0%, primarily due to the incremental $50 million contribution from the Grupo Gondi operations, the margin impact from higher selling price/mix and cost savings, which were partially offset by increased net cost inflation, lower volumes excluding the Grupo Gondi Acquisition and economic downtime. Corrugated Packaging Adjusted EBITDA margin was 15.5% and Adjusted EBITDA margin excluding trade sales was 16.0%.

Consumer Packaging Segment

Consumer Packaging segment sales increased $15 million, or 1.2%, primarily due to higher selling price/mix that was partially offset by lower volumes and the unfavorable impact of foreign currency.

Consumer Packaging Adjusted EBITDA increased $13 million, or 6.2%, primarily due to the margin impact from higher selling price/mix and cost savings that were largely offset by increased net cost inflation, lower volumes, increased non-cash pension costs and the unfavorable impact of foreign currency. Consumer Packaging Adjusted EBITDA margin was 17.3%.

Global Paper Segment

Global Paper segment sales decreased $370 million, or 24.0%, primarily due to lower volumes that were partially offset by higher selling price/mix. Additionally, segment sales are lower than the prior year period as sales to Grupo Gondi are now eliminated.

Global Paper Adjusted EBITDA decreased $122 million, or 39.4%, primarily due to lower volumes, increased net cost inflation, economic downtime and increased non-cash pension costs, which were partially offset by the margin impact from higher selling price/mix. Global Paper Adjusted EBITDA margin was 16.0%.

Distribution Segment

Distribution segment sales decreased $55 million, or 15.2%, primarily due to lower volumes that were partially offset by higher selling price/mix. The volume in the prior year quarter included a large healthcare order.

Distribution Adjusted EBITDA decreased $19 million, or 66.8%, primarily due lower volumes and increased cost inflation that were partially offset by cost savings and the margin impact of higher selling price/mix.

Conference Call

WestRock will host a conference call to discuss its results of operations for the fiscal second quarter ended March 31, 2023, and other topics that may be raised during the discussion at 8:30 a.m., Eastern Time, on Thursday, May 4, 2023. The conference call, which will be webcast live, an accompanying slide presentation, and this release can be accessed at ir.westrock.com.

Investors who wish to participate in the webcast via teleconference should dial 833-630-1583 (inside the U.S.) or +1 412-317-1822 (outside the U.S.) at least 15 minutes prior to the start of the call and ask to be joined into the WestRock Company call. Replays of the call can be accessed at ir.westrock.com.

About WestRock

WestRock (NYSE:WRK) partners with our customers to provide differentiated, sustainable paper and packaging solutions that help them win in the marketplace. WestRock’s team members support customers around the world from locations spanning North America, South America, Europe, Asia and Australia. Learn more at www.westrock.com.

Cautionary Statements

This release may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on our current expectations, beliefs, plans or forecasts and are typically identified by words or phrases such as "may," "will," "could," "should," "would," "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "target," "prospects," "potential" and "forecast," and other words, terms and phrases of similar meaning. Forward-looking statements involve estimates, expectations, projections, goals, forecasts, assumptions, risks and uncertainties. A forward-looking statement is not a guarantee of future performance, and actual results could differ materially from those contained in the forward-looking statement.

Forward-looking statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond our control, such as developments related to pricing cycles and volumes; economic, competitive and market conditions generally, including macroeconomic uncertainty, and adverse developments affecting the financial services industry, customer inventory rebalancing, the impact of inflation and increases in energy, raw materials, shipping, labor and capital equipment costs; reduced supply of raw materials, energy and transportation, including from supply chain disruptions and labor shortages; intense competition; results and impacts of acquisitions, including operational and financial effects from the Grupo Gondi Acquisition, and divestitures as well as risks related to our joint ventures; business disruptions, including from public health crises such as a resurgence of COVID, the occurrence of severe weather or a natural disaster or other unanticipated problems, such as labor difficulties, equipment failure or unscheduled maintenance and repair; failure to respond to changing customer preferences; the amount and timing of capital expenditures, including installation costs, project development and implementation costs, and costs related to resolving disputes with third parties with which we work to manage and implement capital projects; risks related to international sales and operations; the production of faulty or contaminated products; the loss of certain customers; adverse legal, reputational, operational and financial effects resulting from cyber incidents and the effectiveness of business continuity plans during a ransomware or other cyber incident; work stoppages and other labor relations difficulties; inability to attract, motivate, train and retain qualified personnel; risks associated with sustainability and climate change, including our ability to achieve our environmental, social and governance targets and goals on announced timelines or at all; our inability to successfully identify and make performance and productivity improvements and risks associated with completing strategic projects on the anticipated timelines and realizing anticipated financial or operational improvements on announced timelines or at all, including with respect to our business systems transformation; risks related to our indebtedness; the scope, costs, timing and impact of any restructuring of our operations and corporate and tax structure; our desire or ability to repurchase company stock; the scope, timing and outcome of any litigation, claims or other proceedings or dispute resolutions and the impact of any such litigation (including with respect to the Brazil tax liability matter); and additional impairment charges. Such risks and other factors that may impact forward-looking statements are discussed in Item 1A “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022, as well as the other risks discussed in our subsequent filings with the Securities and Exchange Commission. The information contained herein speaks as of the date hereof, and the Company does not have or undertake any obligation to update or revise its forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent required by law.

Non-GAAP Financial Measures and Reconciliations

WestRock reports its financial results in accordance with accounting principles generally accepted in the United States ("GAAP"). However, management believes certain non-GAAP financial measures provide WestRock’s management, board of directors, investors, potential investors, securities analysts and others with additional meaningful financial information that should be considered when assessing our ongoing performance. Management also uses these non-GAAP financial measures in making financial, operating and planning decisions, and in evaluating WestRock’s performance. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, WestRock’s GAAP results. The non-GAAP financial measures we present may differ from similarly captioned measures presented by other companies.

Business Systems Transformation Costs

In the fourth quarter of fiscal 2022, WestRock launched a multi-year phased business systems transformation project. Due to the nature, scope and magnitude of this investment, management believes these incremental transformation costs are above the normal, recurring level of spending for information technology to support operations. Since these strategic investments, including incremental nonrecurring operating costs, will cease at the end of the investment period, are not expected to recur in the foreseeable future, and are not considered representative of our underlying operating performance, management believes presenting these costs as an adjustment in the non-GAAP results provides additional information to investors about trends in our operations and is useful for period-over-period comparisons. This presentation also allows investors to view our underlying operating results in the same manner as they are viewed by management.

We discuss below details of the non-GAAP financial measures presented by us and provide reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated in accordance with GAAP.

Consolidated Adjusted EBITDA and Adjusted EBITDA

WestRock uses the non-GAAP financial measure “Consolidated Adjusted EBITDA”, along with other factors such as “Adjusted EBITDA” (a GAAP measure of segment performance the Company uses to evaluate our segment results), to evaluate our overall performance. Management believes that the most directly comparable GAAP measure to “Consolidated Adjusted EBITDA” is “Net (loss) income attributable to common stockholders”. It can also be derived by adding together each segment’s “Adjusted EBITDA” plus “Non-allocated expenses”. Management believes this measure provides WestRock’s management, board of directors, investors, potential investors, securities analysts and others with useful information to evaluate WestRock’s performance because it excludes restructuring and other costs, goodwill impairment, business systems transformation costs and other specific items that management believes are not indicative of the ongoing operating results of the business. WestRock’s management and board use this information to evaluate WestRock’s performance relative to other periods.

Adjusted EBITDA, a GAAP measure of segment performance, is defined as pretax earnings of a reportable segment before depreciation, depletion and amortization, and excludes the following items the Company does not consider part of our segment performance: gain on sale of certain closed facilities, multiemployer pension withdrawal income, restructuring and other costs, goodwill impairment, non-allocated expenses, interest expense, net, loss on extinguishment of debt, other (expense) income, net, and other adjustments - each as outlined in the table on page 7 ("Adjusted EBITDA").

Adjusted Segment Sales and Adjusted EBITDA Margin, Excluding Trade Sales

WestRock uses the non-GAAP financial measures “Adjusted Segment Sales” and “Adjusted EBITDA Margin, excluding trade sales”. Management believes that adjusting segment sales for trade sales is consistent with how our peers present their sales for purposes of computing segment margins and helps WestRock’s management, board of directors, investors, potential investors, securities analysts and others compare companies in the same peer group. Management believes that the most directly comparable GAAP measure to “Adjusted Segment Sales” is “segment sales”. Additionally, the most directly comparable GAAP measure to “Adjusted EBITDA Margin, excluding trade sales” is “Adjusted EBITDA Margin”. “Adjusted EBITDA Margin, excluding trade sales” is calculated by dividing that segment’s Adjusted EBITDA by Adjusted Segment Sales. “Adjusted EBITDA Margin” is a GAAP profitability measure, and it is calculated for each segment by dividing that segment’s Adjusted EBITDA by segment sales.

Adjusted Net Income and Adjusted Earnings Per Diluted Share

WestRock uses the non-GAAP financial measures “Adjusted Net Income” and “Adjusted Earnings Per Diluted Share”. Management believes these measures provide WestRock’s management, board of directors, investors, potential investors, securities analysts and others with useful information to evaluate WestRock’s performance because they exclude restructuring and other costs, goodwill impairment, business systems transformation costs and other specific items that management believes are not indicative of the ongoing operating results of the business. WestRock and its board of directors use this information to evaluate WestRock’s performance relative to other periods. WestRock believes that the most directly comparable GAAP measures to Adjusted Net Income and Adjusted Earnings Per Diluted Share are Net (loss) income attributable to common stockholders.

This release includes reconciliations of our non-GAAP financial measures to their respective directly comparable GAAP measures, as identified above, for the periods indicated (in millions, except percentages).

Reconciliations of Consolidated Adjusted EBITDA

Reconciliations of Adjusted Net Income

Reconciliations of Adjusted Earnings Per Diluted Share

Reconciliations of Adjusted Segment Sales and Adjusted EBITDA Margin, Excluding Trade Sales

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