PaperAge Magazine

WestRock Reports Fiscal 2016 First Quarter Results

Steve Voorhees, CEO of WestRock "This quarter we delivered strong cash flows and made strategic investments to position our business for growth, while maintaining our disciplined and balanced capital allocation strategy." – Steve Voorhees, CEO, WestRock.

Jan. 28, 2016 - WestRock Company (WestRock) (WRK) today announced results for its fiscal first quarter ended December 31, 2015. Due to the $478 million non-cash goodwill impairment charge associated with the Specialty Chemicals segment, WestRock recorded a loss of $1.76 per diluted share and adjusted earnings of $0.59 per diluted share.

“We continued to make excellent progress toward building the premier global packaging company that we envisioned when we announced the strategic combination of RockTenn and MeadWestvaco just one year ago,” said Steve Voorhees, chief executive officer of WestRock. “This quarter we delivered strong cash flows and made strategic investments to position our business for growth, while maintaining our disciplined and balanced capital allocation strategy. WestRock is realizing the strategic benefits of the merger, having already achieved an annual run rate of over $250 million of synergies and performance improvements, and we remain on track to meet our $1 billion objective by the end of fiscal 2018.”

Net sales for WestRock for the quarter ended December 31, 2015, were $3.68 billion and segment income was $279 million. Adjusted segment income was $284 million, excluding the pre-tax impact of expensing $5 million of inventory that was stepped-up to fair value in purchase accounting, net of related LIFO.

Restructuring and other items included $138 million of pre-tax facility closure costs, which primarily related to the previously announced permanent closure of the Coshocton, Ohio, medium mill and the Newberg, Oregon, mill; $21 million of pre-tax integration expenses primarily including severance and other costs primarily associated with the merger; $12 million of operating losses and transition costs primarily associated with operations in the process of being closed; $8 million of pre-tax costs associated with the planned spin-off of our Specialty Chemicals business into a new public company, Ingevity; $4 million of acquisition expenses; and $3 million of start-up costs at the Specialty Chemicals carbon facility in China.

The Company re-assessed the valuation of the Specialty Chemicals business in light of changing market conditions and lower comparative market valuations for companies in their peer group, and reduced the estimated enterprise value to approximately $1.6 billion. As a result, the Company recorded a pre-tax and after-tax goodwill impairment charge of $478 million. WestRock is continuing with the spin of Ingevity, and anticipates completion by early May, later than previously announced due to the inherent complexities of the separation process.

Presentation of Financial Statements

On July 1, 2015, Rock-Tenn Company (RockTenn) and MeadWestvaco Corporation (MeadWestvaco) completed a strategic combination of their respective businesses. After completion of this transaction, RockTenn and MeadWestvaco became wholly owned subsidiaries of WestRock. RockTenn was the accounting acquirer in the transaction with MeadWestvaco, therefore, unless otherwise indicated, the financial statements included in this release beginning on page seven reflect only the results of RockTenn for fiscal periods prior to the transaction. WestRock's consolidated financial statements include the consolidated results of the new company WestRock for periods following the transaction.

The results disclosed in this release as “Combined” for the prior year period beginning on page two do not reflect WestRock's pro forma results on a GAAP basis but rather represent the addition of RockTenn and MeadWestvaco's individual results for the quarter ended December 31, 2014. MeadWestvaco's results have been recast for changes to charge the MeadWestvaco segments for items such as additional corporate costs, pension service costs and stock-based compensation in order to be consistent with WestRock's methodology, as well as to remove interest expense and other income, net from MeadWestvaco's Corporate and Other category. The combined results for RockTenn and MeadWestvaco in this release for the quarter ended December 31, 2014, also do not reflect the effect of any purchase accounting adjustments, including but not limited to the elimination of intercompany sales and the fair value of assets and liabilities. In the tables below, Segment EBITDA is computed as Segment Income plus Depreciation and Amortization. See Non-GAAP Financial Measures and Reconciliations beginning on page eleven.

Consolidated Financial Results

The financial results below illustrate the performance of WestRock and the combined performance of RockTenn and MeadWestvaco (as described above) for the quarter ended December 31, 2015, and December 31, 2014, respectively (in millions).

The $208 million decline in net sales compared to the combined prior year period was primarily attributable $125 million due to foreign currency translations, $41 million for the reduction in net sales in the Consumer Packaging segment due to MeadWestvaco's sale of its European tobacco converting business in fiscal 2015, prior to the merger, $31 million of specialty chemicals sales and $30 million of lower Land and Development net sales primarily related to forestland sales that occurred in the prior year quarter. In addition, approximately $119 million of net sales related to the SP Fiber and Carolina brand acquisitions were offset by $118 million in declines in volume, price and mix in our Corrugated and Consumer Packaging businesses.

Adjusted Segment EBITDA declined by $68 million compared to the prior year quarter due to the $29 million decline in Specialty Chemicals, the $25 million decline in the Land and Development business and a reduction in pension income of $29 million. Adjusted Segment EBITDA of our core Consumer and Corrugated Packaging businesses and corporate expenses excluding pension income, increased by $15 million due to our synergy and performance improvements more than offsetting the decline in volume, price and the net impact of deflation.

Non-Allocated Expenses excluding non-service pension income decreased $21 million compared to the prior year quarter due to cost reductions and increased allocation of costs to our segments. Non-service pension income associated with our qualified and nonqualified defined benefit pension plans declined by $25 million. The decrease in non-service pension income compared to the prior year quarter was primarily due to the lower expected return on asset assumption that management established in the fourth quarter of fiscal 2015 as a result of the U.S. Qualified Pension Plans investment de-risking implemented in anticipation of the merging of certain RockTenn and MeadWestvaco pension plans at that time.

SEGMENT RESULTS

Corrugated Packaging

Operating Highlights for the Quarter Ended December 31, 2015:

  • North American corrugated Adjusted EBITDA margin of 17.7%; Brazil corrugated Adjusted EBITDA margin of 24.8%
  • North American box shipments increased 2.9% compared to the prior year quarter; pricing stable over the prior year quarter
  • Corrugated Packaging segment shipments in North America were 2.05 million tons in the quarter ended December 31, 2015; an increase of 51,000 tons from the prior year quarter
  • Economic downtime of 144,000 tons and maintenance downtime of 120,000 tons; the economic downtime tons exclude 40,000 tons of containerboard related to the Newberg mill closure in the December quarter
  • Incurred pre-tax operating losses of $7 million associated with operating the Newberg mill in the quarter ended December 31, 2015

Period Comparability Items:

  • The impact of foreign exchange on Corrugated Packaging segment sales and income for the quarter ended December 31, 2015 was unfavorable $80 million and $14 million, respectively

Consumer Packaging

Operating Highlights for the Quarter Ended December 31, 2015:

  • Consumer Packaging segment year-over-year Adjusted EBITDA margin growth of 160 basis points
  • Solid demand in folding carton and beverage packaging
  • Merchandising displays softness in customer promotional spending during the quarter
  • Home, health and beauty business delivered strong EBITDA margin growth due to favorable product mix, lower input costs and improved productivity
  • Exited certain non-core international operations which incurred $4 million of pre-tax losses during the quarter

Period Comparability Items:

  • The impact of foreign exchange on Consumer Packaging segment sales and income for the quarter ended December 31, 2015, was an unfavorable $45 million and $3 million, respectively
  • The quarter ended December 31, 2014, included $41 million and $3 million of sales and segment income, respectively, related to the legacy MeadWestvaco European tobacco converting business that was sold in fiscal 2015 prior to the merger

Specialty Chemicals

Operating Highlights for the Quarter Ended December 31, 2015:

  • Record December quarter sales for activated carbon and calendar year sales of activated carbon and asphalt additive products
  • Significantly higher plant outage and other costs in the quarter compared to the prior year quarter
  • Oilfield chemicals sales down significantly due to reduced oilfield drilling and production activity
  • Pricing and volume pressure in certain industrial specialties markets due to competitive materials
  • New activated carbon plant in China started trial production runs during the quarter; start-up costs of $3 million pre-tax; segment expects to realize sales in the first half of calendar 2016

Period Comparability Items:

  • The impact of foreign exchange on Specialty Chemicals segment sales and income for the quarter ended December 31, 2015, was an unfavorable $5 million and favorable $1 million, respectively

Land and Development

Operating Highlights for the Quarter Ended December 31, 2015:

  • Continuing strong economic and real estate trends in Charleston, SC market

Period Comparability Items:

  • The prior year quarter included $37 million of forestland sales
  • Segment income in the quarter ended December 31, 2015, was impacted by expensing $5 million of step-up in land values for items sold during the period; the step-up in values occurred due to purchase accounting and will impact future periods' reported cost of sales

Cash Provided From Operating, Financing and Investing Activities

Cash from operations was $523 million in the first quarter of fiscal 2016. Total debt was $5.82 billion at December 31, 2015. Total Funded Debt (as defined) was $5.55 billion at December 31, 2015; our Leverage Ratio (as defined) was 2.20 times. The primary difference between total debt and Total Funded Debt is due to the inclusion of unamortized debt stepped-up to fair value in purchase accounting and deferred financing costs which are included in total debt.

During the first quarter of fiscal 2016, WestRock invested $282 million in the previously announced acquisition of SP Fiber Holdings, Inc. net of cash received and paid $37 million for debt owed by Green Power Solutions of Georgia, LLC, a renewable energy joint venture providing energy to Georgia Power and steam to the Dublin, Georgia, paper mill acquired in the transaction.

The Company invested $204 million in capital expenditures, returned $94 million to our stockholders in stock repurchases and returned to stockholders an additional $96 million in dividends.

WestRock (WRK) aspires to be the premier partner and unrivaled provider of paper and packaging solutions in consumer and corrugated markets. To learn more, please visit: www.westrock.com

SOURCE: WestRock