Q4 2020 Packaging Corp of America Earnings Call
Thank you for joining packaging Corporation of America's fourth quarter and full year 2020 earnings results Conference call. Your hosts today will be Mark Kohl's, and chairman and Chief Executive Officer of P. C. A upon conclusion of his narrative there will be a question and answer session.
I will now turn the conference over to Mr. Colson and please proceed when you are ready.
Thank you Holly and good morning, everyone and thank you for joining us today.
I'm Mark holds the chairman and CEO of Packaging Corporation of America, and with me on the call. Today is Tom has further chief executive from Executive Vice President of runs of packaging business and Bob Mundy, Our Chief Financial Officer, I'll begin the call with an overview of our fourth quarter and full year results and then turn the call over to Tom and Bob who.
To provide more details.
I'll, then wrap things up and we'll be glad to take questions.
Yesterday, we reported fourth quarter 2020, net income of $124 million or $1 30 per share.
Excluding the special items fourth quarter 2020, net income was $127 million of.
For $1 33 per share compared to the fourth quarter of 2019 net income of $163 million.
For $1 71 per share.
Fourth quarter net sales were $1.7 billion in both 2020 and 2019.
Total company EBITDA for the fourth quarter, excluding special items was $293 million in 'twenty, 'twenty and $335 million in 2019.
Fourth quarter net income included special items of $3 million, primarily for facilities closure and restructuring costs.
In addition, we also reported full year 2020 earnings excluding special items.
Of $550 million or $5 and.
And 78 cents per share compared to 2019 earnings excluding special items of $726 million were $7 65 per share.
Net sales were $6 $7 billion in 2020 and $7 billion in 2019.
Excluding the special items total company EBITDA in 2020 was 1.2 of $3 billion compared to 1.4 of $5 billion in 2019.
Details of the special items for both the fourth quarter and full year 'twenty 'twenty and 'twenty 19 were included in the schedule of that accompany the earnings press release.
Excluding special items, the 38 cents per share decrease in fourth quarter 2020 earnings.
Compared to the fourth quarter of 2019 was driven primarily by lower prices and mix in our packaging segment of 30.
The paper segment five cents.
Lower volumes in our paper segment of 27 cents and higher scheduled maintenance outage costs of eight cents.
High demand for trucks due to low inventories along with driver shortages and rail rate increases drove higher freight expenses of seven cents and our tax rate was five cents per share of higher primarily due to some of the benefits. We had in 2019 that were not repeated in 2012.
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These items were partially offset by higher volumes in our packaging segment of <unk> 40 per share and excellent management of costs during the quarter, which resulted in lower operating costs of <unk> and lower other costs of <unk> <unk> per share.
Looking at the paper packaging business.
EBITDA, excluding special items in the fourth quarter of 2020 of $303 million with sales of $1.54 billion of resulted in a margin of 20%.
Versus last year's EBITDA of $303 million and sales of one point of four $6 billion or 21% margin.
For the full year 'twenty 'twenty packaging segment EBITDA, excluding special items was $1 $2 billion with sales of $5.9 billion or 21% margin compared to full year 2019, EBITDA of 1.3 billion with sales of $5.9 billion or 22% margin.
Demand in our packaging segment remained very strong as sales volumes in both the containerboard mills and the corrugated products plants set all time records.
Although we were able to replenish some inventory during the quarter by postponing a large discretionary outage at the Deridder mill and utilizing the Jackson mill for additional containerboard production. We again ended the period with inventory levels lower than planned and at a new low from a weeks of supply standpoint due to <unk>.
Stronger than expected demand.
As we mentioned on last quarters call during the fourth quarter, we make we did begin producing high performance Virgin linerboard on the number three machine at Jackson, Alabama to help meet the continued strong demand from our box plant customers and also to build some much needed inventory prior to the year end.
The machines capabilities net our expectations for the quarter producing excellent quality light weight high performance grades for the months of November and December.
Although as we said previously these tons are currently at a very high cost we were able to refine our previous studies and the assumptions in order to more accurately estimate the future capital investment and process changes.
Required.
In a phased approach to fully utilize the potential of the mill to produce containerboard at an optimal cost and quality.
In order for us to address our strategic integrated containerboard supply needs capable of providing the necessary runway to grow our downstream box plant demand. This analysis along with other options. We've been evaluating will be reviewed by the board of directors and our February meeting.
We will then be able to discuss this further with you.
I'll now turn it over to Tom who will provide more details on containerboard sales and the corrugated business.
Thanks Mark.
As Mark mentioned, our corrugated products plants established new all time quarterly records for total box shipments up 9.9% compared to last year's fourth quarter as well as shipments per day up 11.7% compared to last year said another way, although there were three less shipping days this quarter compared to the third.
Third quarter, our total fourth quarter shipments exceeded the third quarter by 2.2% for the full year annual corrugated shipment records were set as well both in total and per day up 5.8 per cent and five 4%, respectively with one more shipping day compared to 2019.
Outside sales volume of containerboard was 16000 tons below last year's fourth quarter as we ran our containerboard system to supply of the record needs of our box plants.
Domestic containerboard and corrugated products prices and mix together were <unk> 31 cents per share lower than the fourth quarter of 2019 and down 11 cents per share versus the third quarter of 2020, primarily due to a less rich mix as the graphics and point of purchase display business as well as the produce business in the Pacific Northwest tails off.
This period.
Export containerboard prices were a penny per share above both the fourth quarter of 2019 as well as the third quarter of 2020.
As expected late in the quarter, we began to see the initial benefit of our recently announced packaging segment price increases while we don't comment on forward of pricing specifics, we would expect to realize the vast majority of the increases during the first quarter of 2021.
I'll now turn it back to Mark Thanks.
Thanks, Tom looking at the paper segment EBITDA, excluding special items in the fourth quarter was $10 million with sales of $156 million or 6% margin compared to fourth quarter 2019 EBITDA of.
Of $53 million and sales of $244 million or 22% margin.
For the full year 2020 paper segment EBITDA, excluding special items was $73 million with sales of $675 million.
Or an 11% margin compared to the full year of 2019 EBITDA of $213 million.
With sales of $964 million or 22% margin.
Market conditions in the paper segment continued to be challenged due to the nationwide responses to help control of the spread of the pandemic as expected sales volume was below seasonally stronger third quarter levels and over 30% below the fourth quarter of 2019 as.
As mentioned previously with the scheduled outage at our International Falls Mill. The Jackson Mill was restarted on White paper in October and produce both paper and containerboard during the fourth quarter.
We will continue to assess our outlook for paper demand and optimal inventory levels and we will run our paper system Accordingly.
The average paper prices and mix were 1% below the third quarter of 2020, and approximately 3% below the fourth quarter of 2019.
I'll now turn it over to Bob.
Thanks Mark.
For the fourth quarter, we generated cash from operations of $271 million and free cash flow of $103 million.
The primary uses of cash during the quarter included capital expenditures of $168 million.
Common stock dividends totaled $75 million $51 million for federal and state income tax payments and net interest payments of $40 million.
We ended the year with $975 million of cash on hand, or just over 1.1 billion, including marketable securities. Our liquidity at December 31 was just under $1.5 billion.
For the full year 2020 cash from operations was one point of <unk> 3 billion.
We had capital spending of $421 million.
Free cash flow was $612 million.
Our final recurring effective tax rate for 2020 was 25% and our final reported cash tax rate was 18%.
Regarding full year estimates of certain key items for the upcoming year.
We expect total capital expenditures to be between 500 millions of $525 million.
Which excludes any potential capital spending related to the Jackson Jackson conversion since that is still being evaluated as mark indicated earlier.
The DNA is expected to be approximately $407 million.
Pension and postretirement benefit expense of approximately $2 million, which is net of a nonoperating pension benefit of almost $20 million, primarily due to a pension asset performance in 2020.
We also expect to make cash pension and postretirement benefit plan contributions of $52 million.
Based on the recent 27% increase to our dividend, we expect dividend payments for the year of $380 million.
Our full year interest expense in 'twenty 'twenty, one is expected to be approximately $95 million and net cash interest payments should be about $93 million.
The estimate for our 'twenty 'twenty, one combined federal and state cash tax rate is about 25%.
And for our book effective tax rate approximately 25%.
The currently planned annual maintenance outages at our mills in 'twenty and 'twenty one.
Will result in approximately 81000 less tons of containerboard production compared to 2020.
The annual earnings impact of these outages.
Including lost volume direct cost and amortized repair costs is expected to be 90 cents per share compared to the 65 cents per share we had in 2020.
The current estimated impact by quarter in 2021 is 10 cents per share in the first quarter.
The 25 cents in the second.
<unk> 13 cents in the third quarter and 42 cents per share in the fourth.
I'll now turn it back over to Mark.
Thank you Bob.
As they've done through this pandemic, our employees demonstrated tremendous resiliency to overcome adversity and both the personal and work lives to deliver significant accomplishments throughout the company.
Not the least of which was running our manufacturing and office locations safely. During these times of constant change and distraction.
Without question, we experienced difficulties in unique challenges during the year. However, our employees never lost the resolve to succeed our manufacturing and sales organizations continued to successfully adapt to the needs of our customers. During this period of unprecedented demand in our packaging business.
And also effectively managed the market challenges in our paper business brought on by the pandemic.
As well as working through the impact of multiple hurricanes.
Our engineering and technology organization has stayed on track with the key capital projects and the process improvements for our box plants and mills and our corporate staff groups found innovative solutions for remote working conditions to ensure we continue to manage the company effectively.
As well as perform all of the necessary administrative activities that are necessary for our employees or are required as a public company.
I'm very proud of our accomplishments and the strong partnerships, we've built with our customers and suppliers over the many years.
Looking ahead as we move from the fourth into the first quarter, our packaging segment demand should remain strong with shipments exceeding those of last year's record first quarter.
This will require us to continue producing containerboard at our Jackson Mill. In addition to an appropriate amount of white paper to maintain optimal inventory levels.
For servicing the paper customers as Tom mentioned, we expect to realize the majority of our recently announced the packaging segment price increases.
During the first quarter.
And we expect average export prices to move higher as well.
However, higher freight costs are expected to continue and labor costs will be higher with annual wage inflation and timing related increases to fringes and benefits as we start the new year.
Seasonally colder weather will increase energy and wood costs, and we also expect higher prices for recycled fiber.
Finally, scheduled outage expenses should be lower although inflation related increases with our operating supplies and repair costs are expected to offset much of that benefit.
Shelter in place and lockdown conditions are constantly changing across the country and with the new Federal administration in place, we expect that guidelines and requirements will continue to evolve.
There continues to be numerous events and actions that could significantly impact our expectations and assumptions for the upcoming quarter in both of our packaging and paper segments.
This is true not only for the operation of our facilities, but also for the needs of our customers and the availability of services and products, we rely on for our.
From our suppliers.
As a result, we are not able to appropriately quantify our guidance for the first quarter.
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.
These 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 on file with the SEC. The actual results could differ materially from those expressed in the forward looking statements.
And with that Holly I'd like to open up the call for questions. Please.
Thank you once again, if you would like to ask a question. Please press Star then one on your telephone keypad.
And our first question is going to come from the line of George Staphos with Bank of America Securities.
Hi, everyone. Good morning, hope you're doing well. Thanks for taking my question I guess, the first question I had regarding Jacksonville, and the containerboard that you produced in the fourth quarter. I was wondering if you could give us any kind of additional qualitative or quantitative common.
Terry on the effect in the quarter.
In terms of additional cost.
I know it might be sensitive, but thought you might be able to cover at least the will deliver the additional detail there.
You know, we're not going to give you the exact cost we called it out is very very high cost production as you can imagine yes.
Without spending the capital on the mill.
That you would normally spend on the conversion that would help you with the the pulp yield as an example in various of features on the paper machine to improve drawing capability of <unk>.
Youre limited in productivity and also again fiber yield so the the costs.
Obviously of the highest in our system, but nevertheless, the machine exceeded our expectations in terms of its productivity and we were extremely pleased during the quarter.
The machine accomplished what we needed in that was providing our box plant system the needed tons to continue supplying the box demand for the quarter and try to build a little inventory.
Again, we're extremely sleeves. The effort also enabled us to fully understand.
What we believed would be inappropriate phased approach to consider a conversion of the mills to containerboard and much of the same way we looked at the Deridder mill and the balloon the.
We'll be going forward with the discussion with the board of directors in February on our different options and alternatives.
On on how we want to approach that but we're very pleased.
Again, the machine has performed quite well and as I also called out in October.
That machine is in just the outstanding paper machine and the the mill itself has a lot of great opportunity to go forward.
Bob you want I had not of just saved a.
George that.
From reading I guess some of the write ups that of last night and so forth it.
The impact from Jackson was probably what drove that difference that people were noticing in the fourth quarter relative to the cost side of the on the packaging segment.
Right that makes sense.
The next question I wanted to hit on is on costs.
Except that you can give us a little bit of additional directional guidance and then my last question would be on kind of what volume you're seeing.
Early in the quarter. So on the items that you could perhaps have some line of sight on and if we compare it to the year on year impact in the fourth quarter, what would you say well, we have maintenance outages, but on on freight.
On energy.
And then the other costs that again could talk too should be the direction versus the fourth quarter year on year change when we look at first quarter. So that's question number one question number two Tom if you can talk about your early shipments and bookings that would be great. Thank you guys.
Yeah, George I'd say that.
As we look from the fourth to the first similar to the the comments that Mark made.
Freight costs, we expect those to stay high and actually move up a bit more.
As well as OCC cost.
Recycled fiber prices are moving up.
Certainly the or let you know.
Reset of new year our.
The fringes and benefits on our labor costs as well as any.
Increases in wage rates that that'll be an impact as we move from the from the fourth to the first.
And then also on a lot of outside services of material supplies things of that nature. As you know is a headwind as well, but to your point of outages maintenance outages will be will be favorable.
Moving as we move into the into the first.
First quarter.
And of course of the benefits will be on the as Tom mentioned the price realization that we got a small piece of that in the fourth but we expect the.
The vast majority to come in in the in the first quarter.
Yes.
Understood.
George This is Tom I'll comment on the volume it remains it remains incredibly strong.
Through through 16 days of our billings are up just slightly over 10% and our bookings are well north of that so so business remains very robust.
I'll also just add on the cost side with the with this dramatic increase in volume.
And sharp link business between plants and Havent plants cover for each other and things like that that obviously drives our costs up as well, especially in the area of freight.
Understood. Thank you guys I'll turn it over.
Thank you next question. Please. Thank you. Our next question is going to come from the line of Mark <unk> with bank of Montreal.
Good morning, Mark Good morning, Tom wearing Bob good morning.
I wondered.
Mark just on Jackson the to two questions per.
Can you give us some sense of you know differences between what you might have to do at Jackson versus what you did at the redder and while Lula and then maybe some sense of of what other options might be out there for you beyond Jackson.
Yep.
You know as you could imagine.
Let's go back the things we've said for years and years, you can convert any mill to make anything depend.
Depending on how much capital you're willing to spend on that conversion.
That being said if you look at a mill like Deridder and the like well Lula, they're all unique they have their strengths and weaknesses that you have to address with capital Jackson.
Jackson's no different.
What you would be typically looking at is in the pulp mill Hot.
Hot stock refining Defiber arising.
You know the various pumping capabilities that would allow you to raise capa.
The paper machine itself with the stock approach additional refining capabilities.
And just mass throughput capabilities with the.
Running containerboard versus the lightweight fiber. So then youre looking at head box dynamics drainage formation in terms of the former and then the pressing and drying and then wind or modifications and roll handling. So there's there's a comprehensive checklists that you have to go through and do.
In your analysis, but with those of the type of things you would look at in that those are the the items that we have now.
Have a.
Really good understanding of the Cape.
Capability and the limitations. So it has helped us.
We fine our expected scope.
But nevertheless, you're talking about of project at a minimum that's in the hundreds of millions of dollars to convert of Jackson mill.
And do it the way P C. A wood would do a conversion.
The.
But it.
It would be a good project and so we have other alternatives. Obviously, we're looking at I don't want to get into those you can imagine the they include everything from from further investments in existing assets to looking at other mills in mill opportunities. So it's that that hasnt changed for.
For years now so again that that discussion will be of discussion we have with the board in February.
Okay, and Mark just if I could on on Jackson, and that's a newer machine than either the renter or wallow Les.
If I'm not wrong and then also would there be an option to actually do something a little different of Jackson like make whitecap I don't think of you produce any white top of the market seems to be moving in that direction.
The machine has the potential to do that the the machines and extremely modern machine.
1990 vintage of machine. It was one of the last the.
Big Big machines built during that period of time 385 inches wide high speed.
Sure.
We've taken.
Taking care of it as you can imagine it's a really great assets.
And that being said we.
We understand what we would do.
As it is it differs I, it's a much better quality machine and what we had at Deridder and what we had at.
Ah well Lula in terms of its capability and so it does prove for.
Vied us of long term opportunity.
Again, depending on the scope of work we choose to go forward with right now to to become one of our premier machines in the future.
And also addressing the cost.
Of the production.
So we have that opportunity to spend capital and then as we've done it the rigor and will provide the necessary containerboard into our box plant system as needed.
Okay, Alright, and then just finally, mark with OCC going up can you just remind us if we factor in the Occ's us from out of well, what's your net purchase of OCC. If we kind of if we exclude the stops the transfer from your own box plants, how much OCC are you buying right now on the open market on an annual base.
Mrs.
I mean, I can't give you that right now we will have to get back to the after the call of what probably net net around 15% of our total total fiber base into our mills.
Okay, Alright, that's helpful. I'll turn it I don't want I don't want of I don't want to throw of a tonnage purchase number at June <unk>.
Well, we'll get that exact number when we talk with you later.
So we're somewhere around 15% of total furnish fiber furnish.
Thank you. Our next question will come from the line of Mark Connelly with Stephens.
Thanks.
Mark we are hearing from a range of companies outside of this industry about operating and logistics problems really not transportation.
Or make running full and delivering on time more challenging, especially in the Midwest I am curious if youre seeing that from your customer base yet most of those comments started to happen in mid November and so I wonder if the impact is really more of a <unk> thing.
Well.
As the.
Positivity rate in the <unk>.
Covid pandemic during that holiday period of November and December was was spiking throughout various regions.
And the demand was at all time records from the containerboard mills to the box plants to the box customers you can only imagine that win.
You're a carrier whether its of trucking carrier or a rail carrier and you now have this unprecedented demand along with your work force that is being challenged with this pandemic.
And of direct example of that is at any given time during those few months.
We had upwards of.
100 people in our mill system that were out either quarantining.
Or or positive and then the same thing in the box plants. So it was a challenge and we saw that through the logistics chain on how.
Our customers were dealing with this and how our carriers we are dealing with this in their own work force capability and so it was it was.
It was the human factor and the rolling stock factor in terms of trucks and rail.
In order to move the goods.
Like say to meet the unprecedented demand and as Tom said in many cases, we were moving product from plant to plant and plants. We're cooperating with one another so theres a very challenging time in that regard.
Okay.
Mark you've said in the past debt you might have as many as a dozen dozen box plant debottlenecking or other projects going on at any one time.
Curious, whether you've shifted that sort of pace and resources.
Whether it's shifted either.
The amount of effort or whether youre shifting your priorities too.
Move closer to E commerce or some other part of your customer base has there been a meaningful change in the way of approaching box plant capacity.
Tom I'll, let you go ahead and can talk about that now we've you know we've we continue to do our projects are on schedule on time for the most part.
Providing our suppliers you know can give us what we need are we've got a great technology and engineering group that are executing at a very high level.
And obviously you know we we've talked many many times about the fact that we build our business around our customers and their demands and we will continue to do so mark.
Thank you.
Next question. Please our next question will come from the line of Mark Weintraub with Seaport Global.
Thank you I was hoping to get more color on the recent demand strength in the.
By category or by the drivers as you are seeing them.
Then.
Would also love to get your thoughts on.
What happens to the man how sustainable it is when the economy eventually reopens more fully.
Hey, Mark this is Tom I'll handle that.
You know our our demand strength is basically across all segments with the exception of foodservice.
Obviously at the no surprise E commerce is growing at a faster rate than those other segments, but they're all in growth mode, which is great, which also I think signals very clearly that this demand is strong across the board and sustainable going forward.
I would I would contend that a lot of purchasing habits have changed probably accelerated by five years or more and those those are expected to remain the same. We're also seeing obviously, the big trends and people moving away from cities buying homes. When you buy homes. There's a lot of things that go into those homes that are associated with corrugated.
<unk> and in addition, you've got this trend moving away from plastics into paper related products, which is also very positive going forward. So you know the.
The demand the demand strength the.
Is it sustainable I'd say absolutely yes.
Great and maybe give us the census to how much growth you're seeing for instance in E Commerce and.
And how you well we don't we don't we don't typically share of our numbers per segment, but as I said, it's been a you know, it's it's obviously significant and it's higher than the other segments.
But again all of those segments are growing and are and of course, we expect foodservice to come back as well and is already beginning to as states begin to open.
Great and it seems like in the last couple of months, we've seen even.
A new step up from what was already stepped up and again that just that was was evenly broadly across everything work.
Is it more specified for certain areas now.
No I'd say it I'd say again that is across the board.
And keep in mind also that we're hearing from every one of our customers. Their inventories are very low they have not been able to replenish any inventory as a result of the strong demand on their side.
And one last one and do you think.
Even with this latest step up in the man, they're still not replenishing those inventories or do you think that part of this.
10% plus type of demand growth that we're seeing.
Might represent some replenishing at this point.
Some may represent replenishing, but we're hearing from our customers, they're still desperate to try to replenish any inventory. That's all I can tell you at this stage super Thank you.
Next question. Please our next question will come from the line of Adam Josephson Keybanc.
Thanks, Good morning, everyone.
Mark one question on morning, Mark.
The Jackson for a second what would the conversion of the of the machine their duty of your ability to service your large paper customers.
And Relatedly what are your expectations for cut size. The man. This year, obviously of the pandemic had a huge impact last year and will likely continue to for the next several months I would imagine so I'm just wondering.
What your outlook for paper demand and specifically cut size demand is just as we go into this year and how that's affecting your thought process about Jackson as well.
All of US as you can imagine the demand is still down at the levels, we saw throughout last year.
This first quarter is not much better than what we saw in the fourth quarter.
I would expect as the economy finally recovers and you have.
Workplaces, starting to come to some new semblance of normalcy in the <unk>.
Schools fully opening up across the country, all the way up to a higher education that at some point over the next year the dim.
Man will pick up to a new norm I don't really know what that new normal B I do have to believe that there has been now a permanent demand destruction of some number that people have learned.
Working from home, how they do their business and so.
Jackson currently affords us the opportunity to short term take advantage of the asset and make again a high cost.
Very good quality containerboard, but at the same time.
You would have to assume debt our box demand grows and our paper demand destruction remains at a certain level that it will be difficult to justify.
Having a very large machine that only is able to fill its orders for a portion of the time.
In the future years, so we're looking.
Looking at that as an opportunity that we have a very strong need for the containerboard.
And as we've always done we have long term filled the those needs internally rather than go out to the outside market and even if we wanted to go to the outside market now there are no tons to be purchased.
And so we believe that Jackson ultimately will be a far better asset in the containerboard side of the business ultimately.
What the timing is I'm not sure I'm just thinking over the next couple of years the debt that timing will play out.
Yeah, sure and as Youre thinking about the paper business again longer term I know, it's really difficult to make forecast of anything these days, but.
Theres been some permanent destruction you think do you think there is a reason to expect a rebound in cut size. The man for the full year or next year or do you think that we're just we've established a new lower base and hopefully we hold the space and not go much lower than that.
Again, I don't know I just for my own personal observations of what we see around us I would have to believe that even.
Post pandemic, there will be some new lowered demand efficiency that businesses and schools and individuals.
Our learning to function with and that will just continue to play out.
So we're in a position that we have the optionality on how we utilize assets and we're just going to play that Optionality out again, it's hard for me to start giving you numbers that there's nothing I could base of the month sure sure I clearly understood and just on OCC your near term outlook.
How much inflation sequentially are you expecting and I'm, just asking in the context of ocean.
Taner availability being exceptional and limited and presumably that having an impact on OCC export volume. So I'm just wondering what what's driving your expectation of continued to OCC inflation, how sustainable you think that will be in the magnitude of the inflation you're expecting sequentially.
Yes.
Sure.
Hey, Bob.
Sure.
I'm, sorry, it's sequentially, it's probably three or four cents.
As we move into the into the first quarter based on where we see price is going.
And and.
And just in terms of the drivers of that just given the lack of availability of containers.
It's just absolute demand worldwide.
All right, let me, let me add a couple of things there Adam you know we've talked about for a long time about the need for fiber around the world.
And you know we it took a while to digest, China's exclusion of OCC and and moving to other moving to other fiber and you know as you see pulp.
Pulp is up dramatically and being shipped over there as well as linerboard being.
Being shipped directly over to China as an example, so you know.
They're just they're just gaining their fiber in some other form other than OCC OCC has been found markets elsewhere around the world.
The global outlook is very strong and weak the way we know it'll continue to be so.
You know as we said it it found it found its bottom it's moved up dramatically from that point and we expect it'll it'll move up for you know.
As well going forward as strictly just based on supply and demand.
Got it thanks, a lot of time.
Next question please.
Our next question will come from the line of Gabe hard day with Wells Fargo Securities.
Good morning, Mark Tom.
Morning.
I think the the capex figure at least relative to what I was expecting.
A little bit higher.
And I was just curious if there were any kind of discrete projects in there that you would like to call out for us.
I recognize that there's probably.
Some either preparation work of our ongoing maybe projects at Jackson to continue producing containerboard or swinging between the two grades.
But I'm more thinking down on the converting operations.
And then there was that the river project that you guys had the kind of pushed out. So if there's anything you can call out for us that'd be helpful.
Now you know the.
Theres nothing of significance in terms of anything unique right now besides we've got dozens and dozens of of great.
<unk> that we're working on in the in the box plants, we've got projects that we're addressing in the mills.
We'll address cost and efficiencies and so it's just an entire.
Category and host of of projects numerous projects in our box plant system that the.
Group is working on.
But it's no one big it's not like building of new Richland box plant, that's taking up of the bulk of the capitals dozens and dozens of.
And in many cases, new converting equipment installations modifications again mill equipment.
Equipment installations that will address some opportunities we have.
Which is the good news these are low risk.
High return quick return type of opportunities that were addressing.
Again were things that were good at doing.
Thank you Mark so to be clear the there there's nothing in there for potential Jackson conversion.
Not at this time.
Okay, and then maybe Tom I know, it's difficult sometimes to speak.
The speak to the competitive landscape, but given what we read in the outside world in terms of new capacity coming in.
Are there particular.
Grades or end markets, where customers are saying.
Hey, we'd like you to add capabilities.
Here, because you don't necessarily have it and maybe that's a competitive threat and maybe that plays into what some of Mark is talking about in terms of new converting capabilities I'm just trying to understand where you guys are.
Best positioned I guess.
Well, let me, let me kind of start at the beginning of little bit here Gabe.
You might ask you might start with the question of you now again, why why Jackson and why do what we're doing of Jackson and as we alluded to earlier. The fact is I can't by any tons in the open market.
The I you know we have we have great volume demand, we have great need if anything our customers are concerned that we have enough supply you know even as an industry.
So consequently.
We you know we were fortunate to be able to have this great asset as mark alluded to that's that's a you know that's not going to produce at its normal rate because of the the.
Destruction of demand in the white business, and we were able to convert it and yes, it's at a high cost, but the great quality of kept us going and it gave us the ability to grow gave us the ability to satisfy our customers and was incredibly integral to a show it to our ability to continue this growth trend. So.
Now when it comes the white and some other things you know we have trade agreements. We've got some other arrangements where we're in good shape. There. So we're not really that concerned about that.
But.
Of these again with what you see and I think it's important to point out that.
Whats going on what we observe at least in the marketplace and you know our inability to buy any additional tons. We would have only bought those for a short period of time anyway, because we intend to be fully integrated.
And supplier on tons and I, you know and I would assume other.
Others might think the same way but.
It's important to note that.
Some of these projects that you're the.
Debt are continually mentioned out there that are the one offs somebody's gonna put of Milan.
With the with no downstream caught up.
Very difficult to do.
I don't know where they get the customer base again, it's I can only speak for ourselves we're going to supply ourselves. We're not we're not buyers in the open market. So.
We have to take care of yourselves. So I guess, that's the point and you see very few of these one offs ever come off.
I can name one that did and it's now shut down so I'm not I'm not really concerned about that we have to take care of ourselves and we have to figure out our own supply.
Very much appreciate play that hopefully that gives you a little hopefully that gives you an answer that you can digest.
It does thank you for quite a long.
Alright. Thank you next question. Please our next question will come from the line of Neel Kumar of Morgan Stanley.
Hi, good morning, Neil.
In terms of our freight you mentioned it in a.
Headwind for you year over year, and your expectation of it staying pretty elevated I. Just can you give us a sense of the magnitude of inflation youre seeing in freight rates year over year and getting the low double digit percentage level and then can you just remind us how youre expecting the split between trucking versus the rail.
Yeah, No I'd say it's.
The year over year increase in our in our costs as we look out for 'twenty.
'twenty 'twenty, one versus 2020 years I wouldn't right.
Right now I don't think it's that high it's certainly of the.
Higher single digits as a percent.
But not not into the double digits at least not what we see right now.
And you know our split of as far as rail versus truck you know roughly it's.
The 70% the cost 70 per cent rail.
<unk> 30 per cent Trump, but but.
But obviously you know box plants typically use trucks to deliver their products in the meals are using rail, but that's sort of the breakdown of the cost.
We are nailed the airtime.
Hey, Neal it's Tom I'd also add debt, we are a little bit concerned about rail costs going up going forward as the result of this new administrations.
Taken taken out the pipeline and being less interested in and piping oil, which could lead back to the shortage of boxcars that we had at one time when the railcars when the rail industry all went to shipping oil line congestion.
Okay, Great. That's very helpful. And then I just had a couple of questions on the scope of M&A opportunities you would consider just given maybe the balance sheet affords you a lot of optionality.
Are you largely interest sit in small bolt ons of box plants.
The opening of something larger and is there a specific size cutoff.
And just given your track record in pursuing paper conversion of the containerboard.
Would you consider opportunities to acquire the minerals for conversion opportunity or do you see too many unknown variables in doing that.
As far as M&A activity as we've always done we look at all opportunities.
On small acquisitions as well as larger opportunities are always considered and looked at.
As far as.
Any other opportunities.
Again.
It just depends on.
On.
The specifics the.
You would always have the consider.
If you were talking about spending X dollars to convert the current assets as opposed to being able to buy them.
Mill assets from somebody and what's the differential in the ultimate total investment.
So that's always a consideration.
So I would say that all of the above are always on the table to evaluate and consider.
Alright, thank you.
Thank you next question and our next question will come from the line of Anthony Pettinari with Citi.
Hi, good morning.
In the in white in White paper with the 30% sequential decline in shipments you, obviously had the conversion of Jackson and the outage at I falls, but I think you referenced weaker market demand as well I'm just wondering of those lower white paper volumes, how much was sort of planned and expected versus maybe unexpected market weakness.
We're sort of.
How did volumes hold up versus maybe what you expected going into the quarter.
Rounding off.
When the pandemic started in the the in the March April period, when we saw the massive decline.
We were down say on average 30% for the year.
And that's what we saw going through the December period in an even as we look at the first quarter now, we're probably in that 25% to 30% demand destruction in.
In terms of our business from where it was a year ago.
It's it's not declining further, but it's not getting better.
In any significant manner.
Yes.
I'll just add as you know.
Relative to the quarter.
One thing to keep in mind as far as the results in the paper segment you know the volumes were.
The about where we thought they would be but.
You know one of the things that impacted paper was the.
For outage costs that we.
We had for the quarter you know, there's like 10 cents negative impact.
Year over year in paper.
Packaging not you know it was.
The slight positive I believe but but that was the big hit on our paper results in the fourth quarter.
Okay. That's very helpful. And then Bob is it possible to quantify or put a finer point on the level of wage inflation and timing of increases for fringes of benefits that you see step up.
The new year.
Either on a percentage basis, or maybe sort of relative to what you saw last year.
Well you know right now it's it's you know in that the 3% to 4% range.
It is what we see in and that's in this.
And that's coming off of actually as Tom I think alluded to.
Especially in the fourth quarter.
Our our labor cost just to run to get the volume out of our box plants and of converting costs and so forth. We had to pay a lot of overtime and we were running really really hard and so you know our wages and what have you in the fourth quarter, where were high and they've been the high they've been like that pretty much. The most of the year to meet the demand so those purse.
Vintages of given you're off a year that has had very high labor cost to begin with.
Okay. That's very helpful. And then just one final one if I could.
Your participation in the export market is very small now with Jackson, assuming you pursue of larger conversion in understanding. This is potentially far off is that mill close enough to the Gulf coast that you could potentially export if you needed to as the safety valve or is that something thats not possible just kind of wondering down the.
Road on exports out of Jackson.
Let me answer it this way if I were to invest.
To convert Jackson, I would not be considering an export opportunity in the savings calculus.
The conversion of Jackson would be fully to supply our own needs and that is how we would look at of conversion.
We have no desire to build capacity.
And then have to move it offshore.
Our own capacity will move through our own box plant system.
Understood that makes sense I'll turn it over.
Okay next question please.
Our next question will come from the line of Cai of light with Deutsche Bank.
Hey, good morning, hope everyone's doing well thanks for taking the questions.
The most of the outages are weighted to the fourth quarter of this year and just curious if we should kind of read into this at all in terms of how you anticipate demand playing out for the year do you anticipate for <unk>, you're kind of getting back to those normalized levels, which allows you to have a higher outage this quarter.
Yeah, I'll, let Bob the finish this up but if you're one of the big factors are this year, we have the outage that we had planned at the Deridder mill that was.
Originally going to be executed in the fall of the 'twenty 'twenty.
We postpone that it because of originally to be considered in the spring and the we've pushed it off but.
Because of demand we've now moved that work plus the annual work into the fourth quarter of this year. So the work that will be done at Deridder will be the normal annual war.
That has to be done along with the discretionary opportunity work that we have on the recovery boiler and the number one machine and so that's why that's just one factor in why the fourth quarter number is higher Bob you want to add some color of that.
Okay.
Got it.
But yeah that was gonna be my follow up on do you ever it wasn't curious, but I'm curious kind of just following up on the in terms of your visibility on demand and what kind of confidence that you have the this demand that we're seeing right. Now is sustainable obviously of backlogs are up and customers need to restore the inventories at some point, but from a delay of the underlying demand standpoint, what kind of.
And because of.
Do you have there for the for the back half of this year.
I can't it's hard to predict what the back half of this year is going to be call, but I would just say that our you know our demand levels will be will be higher for sure than they were in 2020 throughout the entire year.
And and we're starting out incredibly strong and we and we're not waiting any mill outage based on you know suppose the demand being less in the fourth quarter than it is in the first quarter.
It's very hard to predict, but but everything I'm hearing and all the indicators, we get from our customers in the various segments, it's going to be very strong all year.
Alright, perfect. Thank you good luck in the year.
Thanks Scott.
Once again with my questions.
We do and as a reminder, task of question Star one.
Our next question is going to come from the line of Phil <unk> with Jefferies.
Good morning, everyone, sorry, I got cut off a little bit so if I am repeating this question and I apologize in advance.
The man, obviously very very strong just curious how extended are your backlogs at this point and do you expect inventory to improve sequentially and being able to better service. Your all of your customers in the first quarter.
You know, we're not going out where we don't get into backlogs are most of our most of our orders on a very short lead time, and we're able to meet those demands at the moment.
We're very fortunate because we made some significant investments throughout the years.
We've been very consistent doing that and it allowed us to to respond accordingly to this demand.
And we as of as I said before it's going to remain strong and I feel very confident we're going to be able to meet all of the requirements of our customers.
That's helpful color.
There's the vaccination process ramps up is that an opportunity for you guys and do you have any exposure on the phone.
And in what terms as the box supplier, yes, the awkward plywood soon that if there is a lot of vaccines being transported through the country. The there might be Oh, yeah, Yeah, we're increasingly look for jobs.
Yeah, Phil we're participating in this.
And I'm proud to do so.
It's very important that we get these vaccines get out and we're proud to be a part of the of the packaging side of distributing those vaccines.
And do you envision that being a pretty meaningful contributor or.
Part of the ongoing growth story, not just the part of the ongoing it's part of the ongoing and it's kind of you know it's going to have a start and then the NAND eventually but the but.
But you know it's a it's one of those it's one of those areas where are you now where we take great pride in being able to contribute to the hopefully putting an end of this pandemic.
Got it that's helpful and one just one last question your largest customer of paper to be merging with the competitor is there a change of control provision in your supply agreement.
Any color would be really helpful.
I know the contract runs through next year.
And so.
I can't.
I don't know the details in that regard I I would doubt there is a change of control clause.
Can check on that and get back with you.
Okay.
Through the end of next year.
Okay. That's helpful and just one last one day, and if you're able to share any color.
You mentioned Mark debt, if you do ramp of Jackson's probably more of a phased approach.
With that process would you be able to continue to produce board and could that help your cost profile throughout the year. Thanks, a lot and good luck on the quarter.
Well again right now with what we're producing we have of home for all of these tons in our own system now the the bigger opportunity with the capital investment of Jackson over the next say 24 months would be to address not only additional incremental productivity off of the assets, but also.
A major cost reduction from the asset so in that regard we will continue.
To run to demand.
If demand dictated that.
Containerboard was not needed and.
Paper was needed for the time being we could make paper. So we haven't eliminated the capability of making paper on the machine at this time.
It's just that the overwhelming demand for containerboard far outweighs the opportunities for paper.
Got it Super helpful guys. Thank you.
Thank you Annie.
Any other questions. Please I think simple.
And we do have a follow up question and that will come from the line of Mark will the bank of Montreal.
Go ahead, Mark quick follow up quick follow up for Tom Tom.
There were a couple of our foreign players that put a lot of capacity in the central Indiana I know, that's not too far from where Tim borrowers headquartered can you just talk about sort of the any impact you might be feeling from all of that new converting capacity.
I would just say Mark we've had zero impact from that from that capacity.
Okay. That's the only I can only speak for us okay.
Good deal.
Alright, operator, I think we're about out of time.
Yep and Mr. Paul when I see that there are no more questions do you have any closing comments.
Yeah. So I just want to thank everybody for joining us today, and the stay well be safe and the look forward to talking with you in the April call. Thank you very much.
Once again, we'd like to thank you for joining today's packaging Corporation of America fourth quarter and full year 2020 earnings results Conference call you may now disconnect.
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