WestRock Pricing Spineometer: 4 of 5 Vertebrae
WestRock, a corrugated packaging company, had a challenging Q2 2023. Revenue decreased 1.9% to $5.3 billion while earnings before interest and taxes decreased 5.2% to $344 million over the same period last year after excluding goodwill impairments and restructuring costs.
What drove this performance? A review of WestRock’s May 4th earnings call and financial report provided greater clarity.
Some of the revenue and earnings decline are driven by strategic choices. David Sewell, CEO of WestRock, is focusing the company on key markets and customers while exiting markets which fail to meet strategic criteria. He is targeting cost savings, reducing production costs, and closing plants and mills which are unlikely to meet targeted returns on capital invested. These decisions reduce revenue and profits in the short term but should improve margins and business resilience/opportunity in the future.
Some of the earnings decline can be attributed to specific fluctuations in operational efficiency. Unplanned mill downtime was identified as a particular challenge in the past quarter, yet not an unexpected challenge in their industry.
And some of the revenue and earnings decline is attributed to a short-term demand shift as businesses global exit pandemic purchases and adjust to a new normal. Alex Pease, CFO of WestRock, attributed a reduction in sales volume to a temporary market demand shift rather than pricing actions. He added, “in this environment, we’re continuing to prioritize margin over volume.” In forward-looking statements however, Pease signaled an expectation of price decreases accompanied with volume increases over the balance of the year.
Do executives at Westrock acknowledge the importance of price management? While they are hesitant to speak about pricing actions as customer negotiations are a constant part of their business, Alex Pease called out the positive impact of price and mix improvements on profits in his opening remarks.
WestRock operates globally with major operations in North America, Latin America, Europe, Africa, and Asia Pacific. WestRock offers a wide variety of products including linerboard, kraft, containerboard, corrugated packaging graphics, paperboard, and plastic. And WestRock expressed an interest in wallet share with strategic customers rather than gaining customers overall.
Combined, we can set some expectations regarding the needed pricing capability at WestRock. Their operations and strategy imply a need for pricing professionals to interact with product and commercial operations as well as finance and possibly economists. Indices, such as the PPW (Pulp, Paper, and Wood), may be used for long-term price setting or published price lists. We are unsure of how WestRock would set list prices outside of the U.S. The analysis of margin and mix by customer might be used to inform customer negotiations. With annual revenue of $21 billion, benchmark metrics would imply a pricing team of 40 to 110 individuals. Given their operations, these pricing individuals should be distributed across North America, Latin America, and elsewhere globally. And, then we get to the question of pricing technology, order management technology, rebate technology, sales incentives, and currency management. In short, a complex set of pricing challenges.
Does WestRock have the appropriate pricing capability to address its commercial goals and strategic challenges?
Research into the quality of WestRock’s pricing team yielded strongly positive results. Over 40 individuals could be identified in the pricing team. Pricing professionals worked at the analyst, specialist, manager, lead, director, and vice president levels. Pricing professionals engaged with deal pricing, promotion planning, marketing strategy and planning, commercial excellence, innovation, and estimation. And pricing professionals self-identified as analysts as well as strategists. While Pricing professionals were readily identified at their Atlanta offices, we also found them across the U.S. in Minneapolis/St. Paul, Chattanooga, Tacoma, Winston-Salem, Sioux City, Cincinnati, and elsewhere as well as in Sao Paulo and the United Kingdom.
Open questions remain. (1) Our expectations were to find more pricing professionals internationally than our research uncovered. (2) We are unsure of what technology or pricing methodologies are used at WestRock. I do know however that I have had more than one professional at WestRock in one of my training sessions with the Professional Pricing Society as their Academic Advisor.
Given the importance and capability of pricing at WestRock as indicated in financial reports, management statements, and our pricing team research, and given their performance, we have come to the following conclusion as of July ‘23.
WestRock Pricing Spineometer: 4 out of 5 Vertebrae.
WRK (WestRock Company) was relatively unchanged at 28.3 on the day prior to their earnings call and 27.6 one week later. FY 2022 revenue of $21.3 B with a 6.2% operating margin and P/E ratio near 9.1.
Currently, a 1% improvement in price would yield a 16% improvement in EBIT holding all else constant at WestRock.
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