Q3 2020 Packaging Corp of America Earnings Call
Ladies and gentlemen, this is the operator your lines will remain on musicals.
The conference to begin the conference will begin momentarily.
Thank you for your patience.
[music].
[music]. Thank you for joining packaging Corporation of America.
<unk> third quarter 2020 earnings results conference call.
Today will be Mark cools, and chairman and Chief Executive Officer of P.T.A. Upon conclusion of his narrative there will be a question and answer session. I will now turn the call over to Mr. calls and.
And please proceed when you are ready.
[music] good morning, and thank you for participating in packaging Corporation of America's third quarter 2020 earnings release Conference call.
Mark Goldring, Chairman and CEO piece here and with me on the call today is Tom Hassfurther Executive Vice President runs the packaging business and.
Bob Mundy, our Chief Financial Officer.
I'll begin the call with an overview of our third quarter results and then I'll be turning the call over to Tom and Bob will provide more details.
And then I'll wrap things up and we'd be glad to take questions.
[music] yesterday, we reported third quarter net income of $139 million or $1.46 cents per share.
Excluding special items third quarter 2020, net income was $149 million or $1.57 cents per share compared to the third quarter 2019 net income.
A $182 million or $1.92 cents per share.
Third quarter net sales were $1.69 billion in 2020 and $1.75 billion in 2019.
Total company EBITDA for the third quarter, excluding special items was $323 million and 2020 and $364 million in 2019.
Third quarter net income included the special items expenses of 11 cents per share related primarily to the impact of hurricane Laura on our Deridder mill during the months of August and September.
Bob will discuss that in more detail in a few minutes.
Details of all special items for the third quarter 2020 were included in the schedules that accompany the earnings press release.
Excluding the special items, the 35 cents per share decrease in third quarter 2020 earnings compared to the third quarter of 2019.
It was driven primarily by lower prices and mix at our packaging segment of 36 cents and paper segment seven cents.
Lower volumes in our paper segment of 33 cents.
Higher scheduled maintenance outage costs four cents.
And higher freight expense two cents.
These items were partially offset by higher volumes at our packaging segment of 22 cents.
Lower operating costs of 20 cents, which were primarily from lower indirect costs at the idle Jackson mill as well as lower indirect and fixed costs in our box plants.
We also had lower converting costs of four cents and lower other costs of one cents.
Looking at our packaging business.
EBITDA, excluding special items in the third quarter 2020, <unk> $324 million with sales of 1.5 billion resulted in a margin of 22% versus last year's EBITDA of 324 million in sales of 1.5 billion and also 22% margin.
In the packaging segment demand was very strong throughout the quarter and we set new all time quarterly records for total box shipments and shipments per day.
Our flexible containerboard mill system was able to overcome the hurricane Lora related downtime at our Deridder mill.
And avoid any disruptions to customers.
The mill was able to mitigate a portion of the downtime by postponing a previously scheduled outage during the quarter and other productivity gains.
However, this unplanned downtime combined with the extremely strong demand resulted in an inventory drop of 55000 tons during the quarter or 58000 tons below last year's level.
As a result, our weeks of supply.
At the end of the quarter was at an all time low.
We decided to postpone the large planned discretionary fourth quarter outage at the Deridder mill that we had discussed on the last earnings call in order to enable us to build inventory ahead of next year's annual outage schedule and the expected continued strong demand were seeing.
The mills did a great job of managing through the hurricane induced production challenges to supply the record breaking needs of our box plants and the efficiencies and cost improvement at the plants continued throughout the quarter.
I'll now turn it over to Tom Who'll provide more details on containerboard sales and our corrugated business.
Thank you Mark.
As Mark mentioned, our corrugated products plants established new all time quarterly records for total box shipments up 6.4% compared to last year's third quarter as well as shipments per day up 4.7% compared to last year.
Through the first three quarters of 2020 or box shipment volume is up 4.4% in total and 3.3% on a per day basis out.
Outside sales volume of containerboard was 28000 tons below last year's third quarter as we ran our containerboard system to overcome the her career can related downtime at deridder and supply their record needs of our box plants.
Mastic, containerboard and corrugated products prices and mix together were 34 cents per share below the third quarter 2019, and up five cents per share compared to the second quarter of 2020, primarily due to a favorable product and customer mix.
Export containerboard prices were down two cents per share compared to the third quarter of 2019 and flat compared to the second quarter of 2020.
Finally, we recently notified our containerboard customers have a 50 dollar per ton price increase effective November Onest and in addition, we have also notified our box customers of a price increase.
Well, we don't comment on forward pricing specifics, we would expect to realize some of the benefits of the increase during the fourth quarter, but the vast majority of the benefit would be expected in the first quarter of 2020.
I'll now turn it back to Mark.
Thank you Tom look.
Looking at our paper segment EBITDA, excluding special items in the third quarter was $17 million with sales of $178 million or a 9% margin compared to the third quarter were 29 teen EBITDA of $58 million.
Sales of 243 million or 24% margin.
Average prices and mix were about 5% below the third quarter of 2019 and about 1% below the second quarter of 2020.
Although our seasonally stronger third quarter cut size in printing and converting volumes were about 45% higher than the second quarter levels.
They were well below last year's levels by almost 24%.
We had our Jackson mill down for the entire third quarter to help manage our supply.
To this lower demand levels.
We restarted paper production at the mill in early October partly as a result of our demand outlook relative to our inventory levels as well as the scheduled outage at our International Falls Mill earlier this month.
We'll continue to assess our outlook for paper demand and will run our system Accordingly.
I'll now turn it over to Bob.
Thanks Mark.
Very good cash generation in the third quarter with cash provided by operations of $298 million and free cash flow of 196 million.
The primary uses of cash during the quarter included capital expenditures of 102 million.
Common stock dividends totaled $75 million pension.
Pension payments of 71 million.
We want a million dollars for federal and state income tax payments and net interest payments of $7 million.
We ended the quarter with $949 million of cash on hand, or just under 1.1 billion, including marketable securities.
Our liquidity at September Thirtyth was just over $1.4 billion.
Regarding Hurricane war related cost and expenses at our Deridder mill.
Based on the way our insurance coverages work for name storms such as this.
There are separate deductibles for property damage and the time element or business interruption aspects of our coverage.
The cost incurred over the months of August and September did not meet the deductibles for either of these so there will not be an insurance claim filed for these damages and downtime, which together totaled just under $10 million.
Finally, as Mark indicated because of our extremely low containerboard inventory and expected continued strong demand we postponed a scheduled third quarter machine outage at Deridder.
And we will postpone the mills large plan discretionary fourth quarter outage that we mentioned on last quarter's call.
As a result, our planned outage expense for the third quarter came in four cents per share lower than what we last discussed.
And a revised estimate for the fourth quarter is now expected to be 23 cents per share.
Or 11 cents per share higher than the third quarter.
This would put us at 60 cents 66 cents per share in total for the full year 2020.
We are currently assessing wind to reschedule these outages as well as the entire plant outage schedule for 2021, and we'll communicate that to you in January as we normally do.
I'll now turn it back over to Mark.
Thanks, Bob.
For three quarters now our employees across the company ran their operations safely in a cost effective manner during the pandemic.
They are doing an outstanding job adhering to the processes and strict protocols, we have instituted to help protect them and their families.
What makes this even more remarkable is that our employees focus on these new work requirements is occurring while we are experiencing unprecedented demand within our packaging business.
And they continue to successfully meet the expectations of our containerboard and box customers.
Everyone has worked very hard to overcome the challenges and obstacles we face this year and I couldn't be more proud of the entire organization as well as the strong partnerships, we have with our customers and suppliers.
Looking ahead as we move from the third and into the fourth quarter in our packaging segment, we expect corrugated products demand to remain strong.
Although box shipments will be lower than the third quarter with three less shipping days volume should be higher than last year's record fourth quarter shipments.
In early October 2nd Hurricane Hurricane Delta again impacted operations at our Deridder mill by approximately four days and almost 8000 tons.
Which further challenged our historically low inventory position.
However, we expect higher containerboard production volume compared to the third quarter.
As we work towards building some inventory prior to year end in preparation for the first quarter of 2021 scheduled maintenance outages and expected continued strong demand.
As we mentioned on last quarter's call. The converted number three machine at the woolen mill as well as the mill itself is currently running to its capacity.
However, we do plan to get some additional volume during 2021 after we optimize the RCC plant capital project, we're currently finishing up and complete some reliability improvements.
Therefore to help bring our inventory back to an appropriate level by year end beginning in November we will also be producing high performance Virgin linerboard on the number three machine at our Jackson, Alabama Mill. In addition to any white paper needs.
Most of you know for some time that the Jackson mill has always been an option for us to address our strategic integrated containerboard supply needs.
That's capable of providing the necessary runway to grow our downstream converting demand.
Weve done numerous studies in estimates over the last few years and with the depressed demand in the uncoated freesheet market for Jackson products, our integration rate consistently in the upper Ninetys percent range.
Our historically low inventory levels.
And limited outside availability of the types of containerboard, we need to run the mix our box plants require.
Now is the perfect time to do some trial work and learn some things relative to the studies we have performed.
We're confident however of our ability to produce high quality Virgin Kraft containerboard for use in our box plants. During this period.
The number three machine at Jackson is a great very versatile machine and the mill infrastructure itself allows us the nexus necessary flexibility and optionality to react appropriately to our containerboard and white paper needs. During these fluid and dynamic times.
Obviously to fully utilize the potential of the mill to produce containerboard at an optimal cost and quality future capital investments and process changes in a phased approach will be required and will use this period to further refine our estimates and assumptions as well as our volume and capital spending plans for 2020.
One.
Yes.
Continuing on as Tom mentioned, we expect to begin realizing some of the recently announced containerboard price increases during the fourth quarter.
However, we also expect to seasonally less rich mix in corrugated products compared to the third quarter as the produce business and the Pacific northwest as well as the display in high end graphics business for the holiday period normally falls off during the quarter.
In addition, we expect average export prices to move higher in the fourth quarter versus the third quarter and our paper segment, although demand. During this period is well below historical levels as schools and businesses have reopened to some extent volume has improved since the low point reached during the second quarter.
[music].
However, we believe our sales volume in the fourth quarter will be lower than the seasonally stronger third quarter, although with the scheduled outage, we had over international Falls mill earlier. This month, our Jackson Mill was restarted in October on October six.
Beginning sometime in early November the mill will be in a position to begin producing an appropriate amount of white paper to maintain the optimal level inventory levels and service our customers require as well as begin the trials and production of containerboard that I just referred to.
We also expect freight costs to be higher and with anticipated colder weather energy costs should be higher as well.
And finally, as Bob mentioned scheduled maintenance outage costs should be about 11 cents per share higher than third quarter.
As certain areas of the economy continue to reopen shelter in place and lockdown conditions are expected to continue changing across the country, especially considering the upcoming colder weather and holiday gatherings.
There continues to be numerous events and actions that could impact our expectations for the upcoming quarter and the operation of not only our facilities.
But also adversely impacting the needs of our customers and the availability of services and products, we rely on from our suppliers.
As a result, we are still not able to appropriately quantify our guidance for the fourth quarter.
And with that we'd be happy to entertain any questions, but I must remind you that some of the statements. We've made on the call constituted forward looking statements stay.
Statements were based on current estimates expectations and projections of the company and involve inherent risks and uncertainties, including the direction of the economy.
And those identified as risk factors in our annual report on form 10-K, and subsequent quarterly reports on form 10-Q.
Filed with the SEC.
Actual reports could differ materially from those expressed in the forward looking statements.
And with that I'd like to open the call for questions go.
Go ahead.
Certainly at this time, if you'd like to ask a question. Please press star one on your telephone keypad, George Staphos with Bank of America. Your line is open.
Hi, everyone. Good morning, Thanks for the details.
Mark I was wondering if you could give us a bit more color on Jackson, recognizing it's a bit fluid.
No one should we.
Take away from this that you're still determining whether you will.
Ultimately convert.
Third paper machine or Tim three a jackson or a year.
We're going to keep this there's a chance that you could keep this as a as a flex machine that can run uncoated and containerboard.
And what might the trialing cost be in the fourth quarter and first quarter that we should try to build into our models.
I think as we look at the paper machine a Jackson in the mill in General you have to keep in mind that for eight years now we've not only thought about this but we've worked towards enhancing the capability of the mill and its flexibility.
We would run.
Run the mill to supply, both our white paper needs and our containerboard needs as such we.
We believe where we are currently we're in a good place to do that.
The costs that you talk about it.
It's truly the fact that we will have higher input costs.
In terms of the production of containerboard on that machine.
The mill, obviously is not fully configured as you would think about integrated containerboard mill.
To run high Kappa.
At the speeds.
To get the big tonnage out right.
But nevertheless, we can produce a good quality sheet.
And at the same time maintain the flexibility of the mill to provide.
Our paper customers what is required.
It gives us a chance to see.
What.
And how long this pandemic plays out.
And then at the end of this pandemic, what the paper demand will ultimately look like.
So it's an elegant way for us to understand the capability of Jackson long term, while at the same time.
Understanding how we need to supply our paper business short term and long term.
With that Bob do you have anything on the cost side of things.
George that satisfy that.
Yes, I guess I mean, there is no way to quantify what the Trialing and further understand might cost you or given all the work you've done the last eight years.
Calling out.
Well again.
It for anybody that knows US you would have to believe we have done an awful lot of work with our annual maintenance work with the annual upgrades that we do too.
Bolster in beef up the capability of the infrastructure that being said.
Huh.
Well, we have a lot of knowledge in this arena.
And as far as the costs, there should not be a great deal of cost in terms of the trialing.
But again I would expect us to be able to get on grade rather quickly and produce a very high quality sheet, albeit at lower normal production rates than you would see at our conventional containerboard Virgin Mills, Okay. No. Thanks for that Mark.
The next question is around the movement of the maintenance.
Discretionary outage that you're planning for the fourth quarter.
How that would likely come into results and.
2021, I assume would be into Q.
I know you didn't really want to guide too much for the fourth quarter, you don't want to quantify but.
Can you give us some of the larger buckets, we should consider I mean, you're starting out $1.57 entering the quarter from Threeq.
The deferred outage.
Based on your numbers in the past should add 30 cents.
Then you have seasonal factors and some of the other factor is.
Anyway to quantify what some of those larger buckets would be or as we sit here kind of a range between two Q3, Q seems reasonable, but any thoughts on that would be helpful. And then my last one would be any kind of.
Quick thoughts on how volumes are starting in the quarter. Thank you very much.
Hey, George.
Just looking at Threeq to Fourq huge in starting you know.
I'm not sure what you have in your model, but.
You know as we've said the outages will will be.
Higher by 11 cents from from third quarter.
And you know we referred to freight costs I think if you compare it to our you know the last two or three years relative to Threeq to Fourq you.
I would expect our freight costs to be higher than it than what it has been historically.
Energy, maybe a little bit higher.
Where demand is and the packaging segment as we head into up you know a holiday season.
The overtime requirements because of the strong demand.
Labor benefits costs would be a little bit higher than normal and as mark referred to which you know running Jackson running white and Brown and then as we you know.
Do some of the work that we plan to do to improve the.
The linerboard that we'll be running there there will be some costs hiccup. So we certainly have something in there for for for that as we sort of do these do do this work and make this linerboard in the fourth quarter that so you have some cost and some of the variable areas that you normally wouldn't see going from Threeq to Fourq you.
All right I'll turn it over thanks very much.
Thank you next question please.
Mark will be with bank of Montreal. Your line is open.
Thank you good morning, Mark morning, Tom and Bob.
Good morning.
I wondered the Mark if either you or Tom could just talk a little bit about what has changed so dramatically.
The last three months on the demand side of the industry I mean, if if we go back to.
The June July you talked in your second quarter release about running to demand you know one of your bigger competitors took a nearly a million ton mill in Oregon out in mid July.
Sensibly for kind of market downtime and all of a sudden we're in a situation where lots of people are saying. This is the tightest market in 25 years. So.
What's driving this from your perspective, where the incremental demand really coming from.
You know I'm going to have Tom Scott that answer off by answering George's last question, then getting into yours, Tom Why don't you talk about the volume and then well first of all Mark Let me just tell you that our volume through 16 days. This month is trending up 15%.
[laughter] Wow.
Did you hear that number 50, I don't know [laughter], Okay, hi, yes, because I have to I have to remind myself of that number occasionally trusted you're not the only guy for when I got the number around Tom Yes, yes.
You know and let me tell you something you know when when you dig in and you review the segments.
That are up I mean, it's virtually every segment across the board is up significantly now you had as we talked about on the previous call the.
The food service side of the business was down dramatically it was down almost 80% in some cases and that's recovered quite that's recovered quite a bit but still not nearly where it was you know in the past. So you know we still have we still have an opportunity there and that segment now you know if you look anecdotally and say why.
As this demand like it is.
One of the one of the key elements to this is that you've got consumers that are not spending their discretionary monies on try.
Travel Entertainment things like this you know movies and all these other sorts of things you know they traditionally would have and.
And I think they're spending on on a lot of products that actually come in boxes and its whether its home improvement or whatever the case might be and then of course, you've got that ecommerce segment, which as you know obviously up significantly as well so.
You know that's that's the best description I can give you at this point in time I really.
I have no other explanation for it other than and I think you've also got a situation I'll just add that.
Our customers tell us their inventory levels are desperately low as well, we're telling you. The same thing about about the you know our containerboard and they're looking to try to replenish that and and at the same time trying to satisfy very very strong demand.
Yeah.
Hope that hope that helps mark.
Backlog for.
Or a box customer look like right now.
I'm sorry, you did you didn't come through clearly I want.
What would be what would your backlog look like for a box customer right now in other words somebody comes into you with your new volume how long is that going to take the film because I've been hearing numbers, you know out the kind of three four or five weeks.
Well, yeah, I mean, we're not will satisfy our customers you know based on what they need I mean, we've got a very very flexible system that we've set up.
And you know we don't we don't really talk about ultra.
Ultra long lead times or anything like that but I can tell you that when you look out and you say how far out is the demand and that sort of stuff I mean, our trend our trend going into November as much like what I'm talking about you know in terms of demand that we have in October.
So and this and this of course ties in directly to the discussion we just had regarding the Jackson mill.
We can't buy any containerboard out in the open market that's impossible to do.
At this high demand level. This is the perfect time do you know to trial, Jackson and and put some and put some brown into our system and I would also say you know again as mark alluded to.
We planned this for a long time, we knew this day would come.
And you know our track record demonstrates that PPA takes care of itself and you know, we're we're committed to being fully integrated and this is just yet. Another example, and we're not going to do it you know and tilt until the market demands it.
Okay, Mark for people, who aren't familiar with that Jackson mill can you just help us I think there are two machines. There is that is the number three.
The machine that they put in the Oh in the late Ninetys, whereas at the smaller machine down there.
Oh is it the number of machine is the big machine from the 19 nineties. It's.
About 365 inches wide, it's big high speed modern machine lots of capability quite frankly, you know we've always spoken in terms of relative.
Quality of machine to machine. The Deridder were good machines, the machine or will lose that we converted the number three was a better machine and what we converted at deridder, but quite frankly, this Jackson machines, a better machine and then all of those put together. Okay. Just finally on Jackson would it be would it be possible to think about.
Of making that a white top model over time, the market seems to be moving toward white top I don't think you produce any right now.
It has that capability, if we determine that that made sense to us. Okay. Obviously, the the machinery tooling think about white top you would have to put a top sheet on where the many ford linear.
But in in capital spending and upgrades to machine that was going to be permanently converted in the future years, you would more than likely put too many forward or near on that machine that can handle brown or a bleached fiber and then the machine currently has a size for us. So you wouldn't have to add a size for us so.
It just determines in in terms of where we believe we're where we need to take that mill and what's.
What's the demand look like.
Okay fair enough I'll turn it over to Mark.
Okay next question please.
Mark Connelly with Stephens Your line is open.
Thanks.
Two two questions you, obviously have a reputation for being service intensive and flexible.
But I'm curious as as this volume expands is your mix moving away from value add orders more towards regular orders and do you see that as a as a permanent shift is happening.
Mark I don't I don't see that I don't see that shift happening as I mentioned before a bit virtually in every segment of our business I mean were up significantly so.
I think our their customer base has remained very much. The same obviously, we continue to grow our business and first of all grow with our existing customers.
But no I think I think part of our I think part of our.
Service flexibility you know is a is a driver of our growth as well so I don't I don't see it changing significantly.
Okay Super and just one more question.
You have talked about the.
Dramatically increased flexibility of your newer machines that will.
Deridder.
Is there a productivity lag that comes with that increased flexibility or do you get the flexibility without those legs.
You bet pretty much kept flexibility without the lags.
Okay.
It's good to know thank you very much.
Next question please.
Brian Maguire with Goldman Sachs. Your line is open.
Hey, good morning, Thanks for taking the questions just a couple more just on the paper segment and Jackson in General just in the last couple of months when you weren't running Jackson and you were just running international falls.
Obviously, not the probably the best environment for demand in paper, but just wondering if you were able to.
Provides a variety of paper to your customers and service that and then have you had any feedback from customers on the quality. The paper you were producing there versus what they were getting at Jackson any kind of issues with.
Yes kind of eventually transitioning to just one mill system and paper.
No keep in mind I falls in Jackson has.
I have said have supplied the marketplace.
With cut size as an example.
It's the same product.
We also have the ability we've had that for years that I falls on the smaller machine to produce color grades and so we were producing a few of the color grades. During this period of time, but also just running out of inventory.
Little more pointedly to answer your question I falls ultimately has the ability to supply our current customer portfolio if in fact.
Thats all that was required in terms of future demand destruction, but will that.
Remains to be determined where we end up with it but but I falls is a very versatile capable mill.
Okay and then just I think this question is kind of been asked a little bit.
Already but just maybe more directly is is there a capacity number or tonnage you could estimate for how much linerboard you would be able to produce on the number three machine. If you decided to run it full out I mean ex the Trialing is part and parcel that happened is there an expectation of what you might be able to get to if all goes well.
No you know, we'll we'll update you in January.
We have some numbers in the back of our mind that we think we're capable of but I don't want to put that out until we prove it ourselves.
And then as time goes on you would have to imagine a mill the size of Jackson with the appropriate level of capital has tremendous.
Tremendous opportunity to supply just about anything that.
Packaging side of the business needs for the foreseeable future if.
If growth.
Demands that so we've got lots of Optionality in that regard and.
Yeah.
We'll play it out that way.
Okay, and just last one from me just with the really strong demand, we're seeing and the need to kind of add a little bit more paper supply how is that utilization at the box plant level going do you foresee having to add any more capacities of the box plants or is there enough should just be able to add shifts to exists.
Thing.
Operations to meet the demand.
Brian This is Tom Ford.
Fortunately, we have consistently invested in our box plants over the years, given given how our customers drive our business.
And you know so.
So we're I mean, we're stretched there's no question I mean, we're incredibly busy I mean, you don't just all of a sudden take these kind of surge demands and.
Be able to roll that out you know again I'll go back in and I do want to mention that.
Our employees have done an unbelievable job during this call that pandemic.
As Mark mentioned earlier, and you know to be able to satisfy these kind of these kind of demand levels.
With this going on at the same time as just absolutely remarkable.
We will continue to invest.
We're positioned to do so we've got we've got projects rolling on all the time and of course you know.
How we run our business are we run our business based on what our customers want that fit and that factors all the way back to the mill level. So you see that's why again as we mentioned that it's so important that we get some output out of Jackson, just to replenish some inventory and to and to keep our pair customers supplied with boxes.
Okay. Appreciate the color thanks much.
Next question please.
Dave with Wells Fargo. Your line is open.
Good morning, Thanks for taking the question the first one.
I guess with the delaying the optional I guess to Ritter work that you're looking to do.
Im assuming that goes into next year has anything changed on the Capex side of the equation for this year.
400 million.
Yeah, we're still right in that ballpark.
Okay, and then as it relates to containerboard inventories I mean.
I think I don't know by my math, maybe if there were store 55 to 65000 tons.
This quarter and that would.
Aid and.
Fixed overhead absorption by about $15 million is there Bob.
Can you help us with that.
So I think you're right Gabe I think you're in the right ballpark and that certainly will help and you know with our cost absorption.
You know in the quarter.
You know as we as we increase production.
To get our inventories are.
Okay. Thank you good luck.
Thank you next question please.
Mark Weintraub with Seaport Global your line is open.
Thank you on Jackson understanding premature to give us where were at the mill gets to potentially but.
But obviously you need paper now to the extent you can is there any color you can provide in terms of short.
Short term capability.
And.
I know if it's at the same time in the past you've talked about.
The ability to expand that we'll lose some incremental capital is that something thats also on the table and being considered.
You know a little bit to help quantify that question. If you recall when we started this process at Lou.
Almost four years ago and we.
And then we took the machine brown without all the benefits of the major capital.
We call that we expect to build it was probably about 700 tonnes a day have a good kraft linerboard on that machine at at will.
And don't forget the balloon machines and narrower machine, it's almost 100 inches narrower.
The machine a jackson's wider but quite frankly, we're hoping in same relative terms to be able to produce that type of volume sub seven 800 tons a day of production, but again that remains to be seen.
The challenges on the folks at the mill and our technology organization over the upcoming weeks.
But theoretically that machine has that kind of capability currently.
And then.
It's as far as its future capability, it's just capital dependent.
Great and.
The potential to do something incremental well lula as that Phil.
Something to be.
Considered.
Well not in a big way, we know that we've got some opportunity with the O. CCGT plant.
We'll be starting that up after the first of the year were.
Finalizing the the actual project work as we wrap up this fourth quarter, and then getting ready to start it up that will.
Lend itself to a benefit in terms of the fiber furnish makeup and.
Drainage pressing drying capabilities quality characteristics.
And then also we had some ongoing project work on now.
Number two machine at a will have smaller machine, but as of next year, we'll be adding a new head box in new wed end capability, we'll see a true.
Tremendous more.
Reliability and quality benefits from this work so so.
Incrementally, we'll see improvements, but as we've always said.
We'll lose a mill.
On a run rate basis was probably going to be around 600000 tons a year and we're there as of this past summer we've been running the mill, depending on grade mix right at that run rate tonnage on an annual basis of about 600000 tons a year and we're very pleased with this.
Great and one last quick one if I could.
The the cost so I think you talked about the indirect cost that Jackson being lower in the third quarter than the second quarter.
Well there is still much in the way of costs related to Jackson, or where we were getting a relatively clean look at no.
What the white paper system does.
X. Jackson I imagine there were still some costs related to Jackson.
No yes.
Yes, Mark obviously, there you know your fixed costs are fixed you know, whether you're producing or not you have a substantial amount of costs there and of course, a portion of your indirects as well. So I would say that's not a good clean look as you were referring to of about one mill paper system.
Okay, and any chance of getting additional color on that or.
No I think that's you know that's.
I'm not going to quantify that for you but on.
That's that is.
You know it will improve somewhat in the in the in the fourth quarter, because we did run Jackson.
We are running Jackson, rather as we speak.
But you still will.
It's not going to quantify right now I guess with the you know what a one mill system would look like from a cost perspective, but maybe next year sometime as things unfold relative to packaging demand in our paper demand as well understood. Thank you.
Next question please.
Adam Josephson with Keybanc Your line is open.
Mark Tom Good morning.
Good morning, Arnie App Mark back to Jackson, if you assume that white paper demand stays at roughly these levels, maybe it bounces a little bit next year, just given how much it's fallen this year, but if it stays at roughly these levels do you envision needing to produce much paper.
That Mel next year, and and and if not then what do you think the containerboard slash White paper mix could look like at that point or if not next year. Then then once you fully.
Configured the machine to produce containerboard.
Yes, if you assume that the pandemic related impacts continue on through next year, we would anticipate about 50% for production of white paper coming out of the mill, which would then allow us the flexibility to take care of some extra brown.
Linerboard for the system, so, but we would expect about 50% white paper coming out of that mill to support our anticipated customer demand.
Which would result in roughly how much containerboard production Mark.
I'm not going to we'll talk more in January after we've had the three three months under our belt and can really give you. Some some hard numbers im sure and and a little bit better conviction on.
What we see sure I understood.
Tom follow.
Following up on marks question will these question earlier, just about the abrupt change in demand patterns from last quarter to this quarter. What is your visibility like just not just right now but in general how much visibility into future box demand do you generally have at a point in time.
And so three months ago would you do you have any idea this was coming I, presumably not and so if you did and what gives you confidence that you all three months from now demand will be at.
There if not these levels and still very robust while I'm just trying to understand.
Just walk us through what your visibility is.
Okay. Adam lets go back let's go back three months ago first and you know the the we had we had little visibility because nobody knew where the pandemic was really headed other than the fact that the economy was going to continue to open up and depending on what happens in these various states and how fast they opened in those sorts of things that you know that.
Drive some of this demand level.
I think in addition, because it hits, so quickly and so fast and because of the where customers running their business inventory levels as I said, both for us and our business and and our customers got dramatically low and as soon as this demand is going up there's there's actually two forms of demand that are taking place.
One is to satisfy the end consumer but also to build inventory at ups of some sort and so it's almost a little like pushing water appealed to some extent so I think that what we'll see is we'll see we'll go through this and as those inventory levels do become you know.
A little more manageable.
This this surge is going to slow down to some extent at least that's what that's what we think and but.
But it's still going to be but it's still going to be positive and you know this this is right.
Right now, it's very positive for the box business and I expect it to remain so.
In talking to customers and kind of getting their forecast and what they think is coming forward, which is what really drives our business.
I would say that the.
That the.
It's a very positive attitude right now.
Positive outlook and.
You know there.
There there would they want suppliers, who can really you know adapt to to their demands as well. So I think it's I think it's very positive going forward.
I appreciate it and just one last one for mark or Bob on guidance. So obviously you are.
Quite confident about box demand heading into next year, but there are a number of uncertainties can you just.
Walk us through your hesitation and giving current quarter guidance, given that you're you're pretty much a month into the quarter and then just more broadly does this experience change your thought process about giving any sort of guidance in other words vis vis unclear, but its been this unclear for three straight quarters is there any compelling reason.
To give quarterly guidance thereafter.
Well I don't like the the if you if you look at what our internal numbers were for the last three quarters counting the third versus.
Where we ended up.
We were we were.
You know we were off another say, whatever we were better or worse, but if we have put those numbers out there.
It would have been a lot of discussion around why we didnt come closer to our guidance and Frac and its for the same reasons. We've said every every call.
And what Mark said in today's call.
It's it's an end.
Toms comments around the demand and where that went too you know.
It's just too is things are too fluid and when you look at the fourth quarter of this year, especially with how we're going to be running Jackson.
There's a lot of assumptions in there about about our containerboard production as well as our paper needs and depending on how that swings. It can it can move your costs wildly.
And just another reason that you know of another.
Another added degree of uncertainty.
Relative to get profit, providing fourth quarter guidance.
But and just beyond I mean is there a compelling reason to give guidance period.
As something it that's something we'll we'll say for another day out on that so that's not that's that's just what we've done historically has worked well for us.
These are unusual times, which is why we've we've taken a pause relative to what we've done historically and and you know when things get normalize whatever that means we'll we'll evaluate that.
As far as how we do it going for sure. Thanks, Bob.
Next question please.
Neel Kumar with Morgan Stanley Your line is open.
Hi, good morning, Thanks for taking my question.
He just talk about what you're seeing in terms of the box demand for the holiday season.
It seemed at retailers and had an earlier and more evenly spread out holiday season.
Any evidence of that so far given your strong October volumes.
I'll just respond real quick Neil you know E commerce in the holiday Inn et cetera is up is up dramatically.
And.
And you know the forecast is as it's going to be it's going to be incredibly busy all the way through the limitation I think on the holiday season for E. Commerce is going to be getting the product.
To the consumer.
You've heard Fedex, you've heard US you P.S., both say that they are basically maxed out for the season, that's whether encouraging.
People to get there to get their holiday deliveries earlier than normal.
Great. That's helpful. And then you referenced expecting a less rich rich mix in corrugated products in the fourth quarter relative to the third quarter. He will provide some more color on what's driving that Andy potential magnitude.
Yes, that's primarily around our graphics business, our point of purchase displays and other graphics business that you know that tails off quite dramatically in the fourth quarter. That's all done.
Primarily throughout the year for the various holidays and of course Christmas.
You know, it's a big holiday and that's already been delivered so that that just tends to drop off and then that then that begins to come back and that that is strongest in the second and third quarters.
Great.
Thank you next question.
Anthony Pettinari with Citi. Your line is open.
Good morning.
Hi, good morning, Tony.
Tom just circling back to Mark's earlier question is it accurate to say that you is it your expectation that Jackson will keep you from buying board externally in Fourq, you and maybe 21 as well or is there some risk that if demand is stronger than expected or are based on the results of the trial that you would have to buy externally how much of a risk.
That potentially and are you kind of related question are you exploring other capacity options outside of what you've outlined a Jackson and we'll look to mitigate that risk.
Anthony.
You know Fortunately because of the work we've done.
X. and leading up to this I've got a high degree of confidence that this is going to you know this is going to turn out to be very good for us and and we will continue to be able to supply us in.
In our box system.
And the reason I want to and as I mentioned earlier I said one of the reasons. We have to do is this is really.
Our only option.
There's not there's not board to be bought on the outside market right. Now I mean, everybody is incredibly busy and is unbelievably tight so we.
We're going to have to we're going to have to do what were you know what we what we plan to do in Jackson.
In order to keep our in order to keep our box plants supplied.
That's just that's simply driven by the demand we have right now.
Okay. That's helpful. And then just trying to understand that 15% growth you're seeing.
Actually it's been a big increase in coated cases heading into colder weather just wondering when you talk to your customers, especially on the CPG or grocery side is there any early indication that they're seeing consumer stockpiling like what we saw in March and April or is that has that been a part.
Part of customer conversations.
No I don't we're not saying, we're not seeing anything like the the stockpiling that we saw at the beginning of Kobin no.
Okay, and then just quick last one if I could on Deridder I'm wondering if you could talk about or delta's impact on the fiber basket around that mill and in terms of elevated fiber cost and availability is that something that is sort of largely dissipated in fourq you are or how long lived could that be.
Given what looks like pretty extensive damage to the timberlands around there.
Well quite honestly whenever you see a hurricane like this.
Because of all the damage trees, there's a glut of wood available you just have to get the producers into into the woods to get the word out to the mill. So the landowners the producers.
I have to get the word out in a timely manner before it starts running and a decaying in the woods. So.
Besides.
For a short period of time.
The impact of localized flooding longer term.
I don't expect to see any big impact on on fiber supply fiber cost of the mill.
Okay. That's helpful I'll turn it over.
Next question.
Again, if I could ask a question. Please press star one on your telephone keypad, George Staphos with Bank of America. Your line is open hi, guys. Thanks for taking the follow on I didn't take the analysis back more than a few years, but it certainly looks like your inventories are kind of the lowest they've been since 2017 could you confirm.
Furthermore, correct that view and is this an all time record low inventory for you just some some thoughts our guard rails that you could provide us on that would be appreciated and then question for Tom.
It's come up in different ways on the call. So far a lot of the questions that investors seem to have on containerboard and corrugated is hey look when this is all over whatever that might mean.
We stop ordering for direct to consumer ultimately the box volumes will normalize as we all go back out.
To movie theatres, and restaurants and the like.
What level of permit that's one view.
What permanent level of consumption do you think has now been built into the corrugated market because we've learned new behaviors right. We're ordering more at home that's convenient that behavior might stay going forward. What have you seen so far from what your customers are saying on that or any work you've done on the consumer side in terms of what the new embedded amount of.
Volume and target it is because what we've gone through thanks, and good luck on the quarter guys.
Okay I'll take the George out at this time, all that I'll first talk to you about this you know what this normalized demand is.
One of the reasons were not giving any forecast because we don't know what that normalized demand is quite frankly, okay.
I think if you yeah.
If you look back and you say well what is the average been so far this year prior to October.
I would have said at at a given point in time I, just said well maybe that's that's probably more indicative of what the average is going to be but but net you know now we've had this huge spike again. So it's it's very unpredictable at the moment and I think our customers are very much in the same boat there they're in a very.
Reactionary mode right now.
I think there are a lot of you know there are a lot of different there are a lot of different moving parts here not only you know consumer demand and co bid, but we've also got a presidential election, and we may have administration changes whatever the case might be.
There's just a lot of big gifts out there and we're just have to wait and see what that is.
The only thing I can tell you is that we're on a positive run a very positive trajectory and I think that will continue.
George regarding your I'm, sorry regarding your inventory question I went back as far as two.
2013, and these are from a supplies available supply standpoint, where were lower than we were back then and I didn't go back any further because obviously thats sort of when the transformation of the company occurred with the Boise acquisition. So.
So yes. These are these are these are historically low levels of inventory.
Tom without putting a number on it are your customers have the view that.
Corrugated demand has been permanently benefited by what we've gone through where even though it's too hard to discern at this time and if that's the case and totally understand just wanted to try one more time. Thanks again.
Yes, I think I think Thats I think thats, just too hard to discern at this point in time.
Okay. Thanks, Tom.
I think we've got mark will be accounted for.
Go ahead sorry.
Mike Willoughby with bank of Montreal. Your line is open two quick follow ons, one I wondered if we could just get some comment.
On the.
Cash position of the company I mean, a a billion won with the marketable securities is that there's a pretty impressive war chest and I just wonder about the need to maintain such a big position hip if we're at the front end of a cyclical upturn and then the other question I had is per Tom Hassfurther not sure whether there's any portion.
Of the corrugated market that you think you know maybe moving away from a reliance on kind of pulp and paper is the because the escalator de escalator I think particularly there about some of these big E commerce firms and whether they're striking different deal.
Let me let me answer the cash question I think we went back to the first quarter and someone asked a similar question and I think I answered it I said it wasn't.
Concerned about the level of cash and.
We were basically in very uncertain times.
But I think I said at the time that I would let you know when I thought we had too much cash and I still have that same position that we are living in very uncertain times and I'll. Let you know when we have too much [laughter] okay.
And and Mark I would say that you know.
I'm still not interested in stepping on land mines, So I'm really not going to even discuss anything regarding pulp and paper and of course, you know any agreements we have with our customers are between us and our customers. We don't we don't publicly disclose those so although I'd like to although I'd like to give you a little more clear answer to your question.
I really can't at this time.
Fine Tom better with two legs.
[laughter] alright.
Operator, I still believe we're out of time.
Do you have any closing comments mr. calls.
Yes, everyone. Thank you for joining us today, and we look forward to talking to you at the end of January.
Stay safe stay well have the nice holiday.
Thank you.
This concludes today's conference call. We thank you for your participation you may now disconnect.