Morningstar | WestRock Will Face Margin Headwinds in Corrugated, but the Company Remains a Cash Cow
A decade of consolidation in the corrugated packaging industry has allowed WestRock and its peers to push more aggressively on prices, resulting in a period of sustained high margins. WestRock, the result of a merger between RockTenn and MeadWestvaco, did its part by acquiring Smurfit-Stone and Kapstone, and now holds 25% market share. We expect increased competitive intensity to diminish profitability for WestRock and its peers in the coming years. Thinner margins in corrugated packaging, which accounts for half of WestRock's sales, are likely to weigh on consolidated profit growth beyond the next year.Despite the ubiquity of Amazon’s packaging, corrugated packaging remains a slow-growing business. Although e-commerce is likely to remain a demand tailwind, that growth comes on a modest base. Meanwhile, falling paper consumption (12% of U.S. corrugated box usage) and a flat volume outlook for food and beverage (40%) diminish the upside. In total, we expect waning corrugated packaging demand growth, averaging just below 1% per year over the next five years.Falling paper demand threatens more than just the profitability of paper producers. We expect a portion of the industry's idled paper capacity will be converted to linerboard production, attracted by the corrugated packaging industry's healthier economics. Rising supply amid slower demand growth is likely to pressure prices and diminish margins for WestRock. The combined consumer operations of RockTenn and MeadWestvaco present the most compelling opportunity for shareholders. Representing around 30% of solid bleached sulfate production, WestRock is poised to widen margins as procurement costs fall and productivity programs trim costs. Consumption of coffee cups and cereal boxes remains slow and steady, closely tracking North American population growth over the coming years. Lower operating margins in paperboard production, relative to linerboard, make it less attractive for future conversions.WestRock is a provider of paper and packaging solutions for consumer and corrugated packaging markets. The company partners with its customers to provide paper and packaging solutions. The company's operating and business locations are in North America, South America, Europe, Asia and Australia. The company's segments include: Corrugated Packaging, which consists of the company's containerboard mills, corrugated packaging and distribution operations, as well as its merchandising displays and recycling procurement operations; Consumer Packaging, which consists of the company's consumer mills, food and beverage and partition operations; and Land and Development, which sells real estate primarily in the Charleston, SC region.
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