Q2 2021 Packaging Corp of America Earnings Call
Thank you for joining packaging Corporation of America second quarter 2021 earnings results conference call. Your host for today will be <unk>.
Zhang Chairman and Chief Executive Officer of PCA.
Upon conclusion of his narrative there will be a question and answer session.
I will now turn the call over to Mr. Colson. Please proceed when you're ready.
Some of them.
Thank you Stephanie good morning, and thank you for participating of packaging.
Mark depletion of America's second quarter, 2021 earnings release conference call.
I'm, Mark KOL, Zhang Chairman and CEO of PCA and with me on the call. Today is Tom has further executive Vice President of runs of the packaging business and Bob Mundy, Our Chief Financial Officer.
I'll begin the call with an overview of our second.
Corporate of results and then turn the call over to Tom and Bob Who'll provide further details.
I'll, then wrap things up and then we'd be glad to take questions.
Yesterday, we reported second quarter, net income of $207 million or $2.17 per share.
Including special items second quarter 'twenty 'twenty..1 net income was also $207 million or $2.17 per share compared to the second quarter of 2020 net income of $132 million.
Or $1.38 per share.
Second quarter net sales were $1.9 billion in 2021 and $1.5 billion in 'twenty 'twenty.
Total company EBITDA for the second quarter, excluding special items was $397 million in 2021.
And 2.
$99 million in 2020.
Reported earnings in the second quarter of 2021 included special items expense.
And income rounding to a negligible impact while last year's second quarter. Net income included special items expenses of 79 cents per share.
Related primarily to the impairment of goodwill associated with our paper segment.
Details of all special items for the second quarters of 'twenty 'twenty 1.
And 2020 were included in the schedules that accompanied our earnings release conference our press release <unk>.
Excluding special items.
The 79 cents per share increase in second quarter 2021 earnings compared to the second quarter of 2020 was driven primarily by higher prices and mix of $1.01 and volume 74 cents in our packaging segment.
Higher volume in our paper segment.
<unk> of 3 cents and lower non operating pension expense of.
3.
These items were partially offset by higher operating costs of 57 cents, primarily due to inflation related increases in the areas of labor infringes.
Repairs materials and supplies.
Ms recycled fiber costs as well as other indirect and fixed cost areas.
We also had inflation related increases in our converting costs, which were higher by 5 cents per share.
While annual outage expenses were up 19 cents per share compared to last year.
Freight and.
<unk> expenses were higher by <unk> 19 per share driven by historically high.
Load to truck ratios.
Driver shortages increases in fuel costs, and a higher mix of spot pricing to keep pace with the box demand.
Lastly, depreciation expense was higher by 1.
Share and paper segment prices and mix were lower by 1 cent per share.
Looking at our packaging business EBITDA, excluding special items in the second quarter of 2021 of $409 million with sales of $1.7 billion resulted in a margin of 24%.
Versus last year's EBITDA of $313 million and sales of $1.4 billion or a 22% margin.
Our mills in plants continues to do an outstanding job of meeting our customer needs, while managing through certain material and chemical available availability issues.
A tight labor market.
Various freight and logistics challenges as well as the planned maintenance outages at 4 of our mills during the second quarter the.
The mills executed the planned outages extremely well and with the help of of the number 3 machine at our Jackson, Alabama mill provided our plants of the necessary container but.
To achieve an all time record for total box shipments.
Although we were able to build some much needed inventory due to very high demand. We ended the second quarter below our targeted levels and at a new low for weeks of some weeks of inventory supply for this time of year and ahead of expected.
A very busy third and fourth quarters.
And of second half of the year, we still anticipate of planned outage at our Jackson, Alabama Mill later in the third quarter as well as a significant planned outage at our Deridder mill in the fourth quarter.
Implementation of the previously announced price increases.
<unk> used to be executed extremely well by our sales organization.
While our engineering and technology organization and the employees at all of our mills and corrugated products plants continue to successfully implement numerous initiatives and projects to reduce cost through efficiency.
Productivity and optimization.
Continuance with.
With inflation driven cost increases across most all areas of our company coupled with the truck rail and barge challenges for both incoming and outgoing products and materials at our facilities. These efforts are absolutely critical to our success. In addition, being a primarily.
Virgin fiber based producer of containerboard minimize the impact of significant increases in recycled fiber costs over the last several quarters.
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 indicated.
Improvement or board and corrugated products demand remains very strong across most of all of our end markets. Our plants achieved a new all time quarterly record for total box shipments as well as a second quarter record for shipments per day, both of which were up 9.6% compared to last year's second quarter through.
It can terrorist half of 2021 our box shipment volume is up 9% on a per day basis versus the industry being up 6.8%.
Driven by higher domestic demand outside sales volume of containerboard was about 43000 tons above the second quarter of 2020, but was down slightly.
Versus the first quarter of this year due to lower export shipments supplying the record requirements of our box plants and the need to position inventory levels ahead of what appears to be a strong second half of the year.
We are getting good realization from the implementation of our previously announced price increases across all product lines.
Domestic containerboard and corrugated products prices and mix together were <unk> 92 per share above the second quarter of 2020, and up 51 cents per share compared to the first quarter of 'twenty 'twenty 1.
Export containerboard prices were up 9 cents per share versus last year's second quarter and.
Up 4 cents compared to the first quarter of 2021.
Finally, I'd like to reemphasize some of what Mark was pointing out regarding the many things we do to help offset inflation and improve our margins beyond just price increases the benefits from our capital spending strategy in the box plants that we've spoken about over the last few.
2 years have been extremely successful and put us in position to serve our customers better than ever before.
Our strategy of improving the technology and equipment in our plants and optimizing our footprint through the construction of new facilities as well as closing certain plants to consolidate business with other locations is based upon.
Customers' needs and demands and improving our capabilities to grow with them. We're seeing this in our volume growth with new and existing customers operating efficiencies and savings and cost reductions in several conversion areas throughout our plants.
Now I'll turn it back to Mark.
Thank you Tom.
Looking at the paper segment EBITDA, excluding special items in the second quarter was $12 million with sales of $142 million or an 8% margin compared to second quarter, 2020, EBITDA of $5 million and sales of $123 million or of 4% margin.
Although about 1% below second quarter 2020 levels prices and mix moved higher for the first and into the second quarter of 2021, as we continued to implement our announced price increases.
Volume was 17% above last year when pandemic issues caused us to take both machines at the Jackson, Alabama mill down.
For 2 months during the second quarter, while this year, we ran the number 1 machine at Jackson on paper and the number of 3 machine ran linerboard.
Now that we have our finished goods inventory at our new optimal level sales volume in the second quarter is fairly reflective of what our production capability is as of 3 machine.
Paper system.
We will continue to assess our outlook for paper demand and we'll run our paper system. Accordingly, I'll now turn it over to Bob.
Thanks Mark.
Cash provided by operations for the second quarter was $228 million with free cash flow of $97 million.
Primary uses of cash during the quarter included capital expenditures of $131 million.
Common stock dividends of $95 million cash taxes of $87 million and net interest payments of $40 million.
We ended the quarter with $972 million of cash on hand.
Point 1 billion, including marketable securities.
Our liquidity at June 30th was just under $1.5 billion.
I'll turn it back to Martin.
Thank you Bob as we move from the second to the third quarter in our packaging segment. We expect continued strong demand for containerboard and corrugated.
Our game products.
With 1 additional day for box shipments paper segment volume should be relatively flat, primarily due to the scheduled maintenance outage at the Jackson mill.
We will also continue to implement our previously announced price increases in both our packaging and paper segments.
Our annual outage costs will be lower.
Lower with 1 outage in the third quarter versus 4 mill outages in the second quarter.
Inflation associated with most of the operating costs as well as freight and logistics expenses is expected to continue.
Energy costs will also be impacted due to higher seasonal usage and wood costs.
In our southern mills will be higher due to wet weather low inventory and high demand considering these items, we expect third quarter earnings of $2.37 per share.
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 today constitute forward looking statements.
<unk>. The 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.
Actual results could differ materially from those expressed in the forward looking statements.
<unk>.
And with that Stephanie I'd like to open the call for questions. Please.
At this time, if you would like to ask a question. Please press Star then the number 1 on your telephone keypad.
Your first question comes from George Staphos with Bank of America Securities.
Thanks, Hi, everyone. Good morning, Thanks for the details I guess maybe to start Mark.
And Tom if you could talk a bit about your early 3 Q bookings book.
And shipments of what what are you seeing and related point, we'd heard from third from some of the trade.
That lack of availability of that impaired.
<unk> converters per ability to ship.
And boxes.
<unk> and into <unk>.
You called it out of an issue.
Shifting to beyond.
What you reported in the second quarter, Alright, Thanks, and I'll have a quick follow up after that most of that.
George This is Tom.
I can tell you that going into the third quarter, our bookings and billings are running about 7% ahead of last year keep in mind that our comps.
Come much tougher so it's not as if volume of slowed down at all it's a it's remained incredibly robust coming right out of the fourth quarter of last year and all the way through this year I think that's why we felt quite a bit more comfortable about giving some sort of guidance going forward.
Also.
So you you asked about the lag some of the lack of supply in the in the second quarter may be bleeding over into the third quarter.
You know, where we're running lead times that are longer than than we're used to and certainly longer than our customers are used to sort of demand remains very high.
Trying to get it out the door is an issue more.
More related to transportation at this stage than it is certainly about paper.
We're able to take care of our own plants through our system. So that's not that's not the issue for us. It's a it's more transportation and I think that's reflective.
Reflective of most of the industry.
Okay. Thanks, Tom.
My second question, if you could.
Talk to her third question really is.
Think of the last quarter or going into 2021.
2 sequential drop off maintenance.
For the third quarter.
Just if you could affirm what your maintenance schedule is for this year versus last year I think the.
The drop off.
The value.
And then lastly on costs.
You flagged what cost.
Particularly in the South can you talk a little bit about what youre seeing what kind of headwind that might be for you in the third quarter fourth quarter, obviously, the weather all of it and that's really what drives it higher.
Wood costs, Thanks, and good luck in the quarter Corp.
George I'll take the other wood cost obviously, we've had a very wet period of time throughout the entire Gulf coastal region of through the.
Southeastern states of who the entire winter and spring into the summer months now and.
And so.
Uh huh.
Coupled with the high demand for pulpwood in the logistics issues with the trucking side of the equation. It's.
Basically put the.
Situation, where it is at a pulp prices were up dramatically because of of those situations.
<unk>, but again, it's more of a weather related phenomenon than anything else Bob 1 of the Yeah go ahead and talk about the <unk> cost.
It's a it's about 11% 12 cents.
He'll go into <unk> on outages, which is very similar to the our wood costs going the other direction.
At the same amount.
Thank you very much guys. Good luck on the quarter.
Okay next question please.
Your next question comes from Mark Wilde with bank of Montreal.
Okay.
Good morning, Mark Good morning, Mark Good morning.
Good morning, Mark I from my first.
Question I'd like to just kind of step back a little bit.
I know that this of sensitive issue, but I wonder if you could just discuss kind of flow.
Fans and process around leadership succession.
Packaging Corp C Corp.
Yeah.
We've talked about this before and as you could imagine.
That's a that's a board level matter, but we have got.
The depth and the breadth of the talent across the board.
That's been identified and we continue to develop we're very confident in.
The talent pool, we have and the board.
Feels the same way that again.
We've got into.
Enormous opportunities with the talent.
Across the entire company.
Okay second question I had is if you could.
Just walk us through the <unk>.
The steps that you might be making of downsize from footprint in the white paper business.
Smaller.
All of our capacity.
Now, whether that's involved as well as shifts in your customer base I think the filings from the past of pointed to 2 large customers customers.
Yeah as you can imagine without the Jackson number 3 machine.
We've gone ahead and exited some.
Some business over the last 6 months and now as you think about that as of 3 machine system.
We're we're going to be supplying.
A smaller marketplace. So we've been able to rationalize that accordingly, but that has shifted us down to a few.
Fewer bigger customers.
But nevertheless, the entire market for us has shifted down over the last 8 years since we've run the paper business.
So we're very confident that we will continue to supply into that market and do it in a meaningful manner.
As we go forward and so and then finally again.
Go ahead of just find out on White paper I. Just was curious mark is it possible possible to think about all of this.
Our containerboard mill at some point I am just trying to think about that.
<unk>.
Typically upper Midwest permit of a lot of hardwood you'd only produce medium up there.
I don't even.
No other than you think from an engineering standpoint, there of some options at eyeballs over time.
Well you know we've said this for for the better part of the last decade that you can convert anything to do anything, but theres a capital cost and other puts and takes with transportation logistics and then.
What is your intent in terms of the product.
Mix.
Right now we have a good market for that paper, that's coming out of I falls.
We will continue to run to that opportunity.
We have the Jackson conversion coming on Big next year that will continue to supply us with the necessary containerboard from the next few years.
I would say this as long as the paper business.
Offers us an opportunity with the international Falls mill.
We'll continue to take advantage of that opportunity in the future years, if that was not the case then we'd have to reassess the situation and look at all of our Optionality with that.
Asset, but trust me. It's you have to believe that we've already done that and we have the opportunities in the files and know what we would do at any given time. So we're pretty confident that we've got a lot of flexibility.
Alright, well Boise paper has been the gift that keeps giving so I'll turn it over.
Sure.
Next question please.
Your next question comes from Mark Connelly with Stephens.
Thank you 2 things just on white paper will actually be all containerboard in the second half I'm just sort of curious how these projects affect the ability to run white there.
No need of <unk>.
Jackson will continue to run with.
<unk> of 3 machine on gone containerboard and and at the present time, our intent is to run number 1 machine on paper.
Okay. So even during the project and then secondly, you talked in this call on previous calls about box plant Debottlenecking projects I'm, just curious if with all of the activity of got going.
The Knowhow and all of the Covid are you doing as many of those projects today as normal or more than normal lesson of normal.
Yes.
Extremely pleased with the rate.
We've been able to execute these projects and I'll give you an example.
We did slow down a little bit.
Right here during the 2020 period, and we have become a little more of.
Targeted and what projects required the attention of the various technical organization just because of the.
Travel restrictions and the concern for people, who are all being but this year that was ramped up.
2 full activity and so we're.
Lash and Ewing to execute well across the board, but I can give you. An example, if you go back over the last 3 and a half years.
We've.
Executed approximately.
At 62 of these box plants $850 million worth of capital.
<unk> project activity.
Flexo folder <unk> converting equipment upgrades major rebuilds, new corrugator is built of 2 new plants and so we're doing this all in house, but the pace is a ramped up in 2021 over some of 2020. So we're very pleased with what we're seeing and so we.
Capital apparently have a.
A great deal of activity going on at numerous plants nationwide that will continue to provide the benefits that I spoke about net Tom Tom spoke about so we're extremely.
Pleased with the opportunities.
Fantastic. Thank you Mark.
Next question please.
Our next question comes from Mark Weintraub with Seaport research.
Thank you.
First of it.
It looks like you're getting really rapid and significant.
Pass through on the board increases into boxes.
Can you give us a sense as the true are you getting more than forecast.
Pass through.
Type of environment, where you're able to achieve that.
Can you give us a read on.
How much more is there to come in the third.
Third quarter and just wanted to confirm.
Are you, including any of the <unk>.
Pending August.
Kris or is that excluded from the guidance.
Mark this time.
Let me just let me just comment we did we say very little about our price increase but you know this.
This isn't any different than the price increases we've had in the past its a very disciplined approach that we do.
We roll them in over approximately in the 90 day period.
We have we have local accounts that go in at a maybe a quicker rate than some of our contractual accounts Ah. If you want to look at the the 3 price increases kind of separately.
The first price increase was effectively.
Staying on and but you do have some bleed over depending on contracts and things like that timing.
Can be impacted second price increase the same way it's.
It rolls out over a whole 90 day period.
Third price increase hasn't been reflected yet in pulp and.
<unk>. It's obviously a you know we have raised prices to our.
Independent customers, and our AR, and our linerboard and medium customers domestically.
Those are in place, but the lion's share of the price increase which goes through boxes again that'll flow through over a 90 day period. So.
On paper actually none of that would be reflected at this stage in the third quarter.
Okay. That's helpful and lastly, 1 other question the impact from from volume.
Note I believe it was 74 cents.
Which is $90 million to $100 million, if we think that pretax which seems like a really big number relative to net.
Extra of 100, 120000 tons of board and boxes being shipped just trying to understand.
How how we get to that number or is there some sort.
Ex elements included in here as well or.
And I realize it's a kind of of esoteric question, but any help there would be appreciated.
Yeah Mark.
Yeah. It's I mean, just for starters. If you just look at the raw volume I mean, the raw volume is up dramatically and you know as we came out.
[noise] of Covid last year into that fourth quarter of the question Mark and it was a big question Mark for everybody was.
Will that will that level of volume be maintained.
Going into 2021, and then throughout 'twenty 'twenty 1.
So far we've you know we've maintained very close to those kind of those kind of numbers.
Sort of man.
I think it's a I think it's just indicative of what the market is right now and the changes that have taken place from.
Consumer habits.
Also I'll remind you that last year during Covid of course, you know from a mix standpoint.
Our display business had basically gone.
No nothing.
Because of the shutdowns and.
No shopping in brick and mortar and things like that sort of that so that end of the business said had dried up quite a bit and that's back now.
And then and then also you know we've had a good cost controls in terms of getting this volume out as we've indicated.
Decade, a lot of these capital projects are paying off so we can.
We're very comfortable with the number.
Okay Super quarter. Thank you.
Okay next question please.
Your next question comes from Adam Josephson with Keybanc.
Mark oftentimes.
Tom Good morning, and congrats on a really good quarter as well.
Thank you thanks.
Tom would you mind, just elaborating on your demand expectations in the quarter just embedded in your guidance you mentioned the comps get a lot more difficult in July I know for the industry, the comps get particularly difficult.
In September can you just remind us roughly what your comps looked like last year and consequently, 1 of.
Appropriate expectations might be as the quarter.
It plays out.
Yeah.
You know we had Adam we had some you know really it really ramped up in the second.
Half of the year as we've indicated so are those.
Those numbers were.
High single.
Even the mid double digit increases by the by the time the fourth quarter rolled around so you know to be at or above those numbers is a is a very very large number and a robust.
Number that we've essentially been able to maintain and if and if I look out into the second half of the year and that's why I say these comps become much tougher.
Yes.
You know we you know when you are starting to compare it to high single and low double digit numbers.
Pretty hard to be significantly.
Bigger than that given everything that's going on right now in the AR and the just the difficulty of getting it out the door.
And and but interestingly enough I'll also point out.
Our customer base is telling us that.
They could ship a lot more there that you know they they have higher demand.
Really hot and what they're able to get out because they're dealing with the same supply chain issues and transportation issues that we're dealing with.
So there is there.
I'm bullish because theres some upside even even to these numbers.
We have so far.
Yeah, No I appreciate that and just Relatedly Tom.
Would you compare this period to anything else you couldn't remember.
Having worked at the company and if so what would that period.
Okay.
Well I think of couple of things is not number 1 is I don't think we've ever gone through of time like this.
Certainly in my career, where our where the government is pumped a lot of money.
And of the economy.
And and businesses of just taken off coming out of a shutdown.
I don't think anybody would have ever guessed that during a COVID-19 shutdown an extended COVID-19 shutdown that people would turnover turned us things like E Commerce.
Very quickly and as rapidly as they did those habits are now pretty well entrenched and so what may have taken about 5 years 2 of occurred to took place in a matter of the year.
Those demands have certainly helped helped the corrugated box business, but again interestingly enough I mean, I can look across.
We've got 15.16000 customers in are top of our top 50 accounts are up are you know in excess of 15% ex.
And when you look at the mix of those those companies across the board I mean, they're in every every segment, obviously food and beverage as you know the largest 1 we have.
Just in of corrugated box business, but.
Whether it's <unk>, whether it's home improvement of apparel.
Like I said food and beverage whatever the case might be there theyre up dramatically and most of our customers say they could even be higher.
Yeah, No I really appreciate that Tom Mark on your cash balance and just your balance sheet situation obviously.
You've done a terrific job of maintaining a rock solid balance sheet for a long time, then you of over 1 billion 1 of cash and equivalents at your disposal can you just talk about what.
Your inclination is in terms of repurchase acquisitions I know you've got that.
Spending on the project, but you.
We'll have ample room to do more of you have been more reluctant to buyback your stock in recent years and understandably. So but just can you update us on your thoughts about best uses of cash at this point or perhaps there may not be any just given where asset prices are.
At the same.
Of that process continues that we've always used.
You can use cash for dividends acquisitions.
Buybacks as an example.
Nick opportunities with capital spending currently happens to be a very very big.
Return opportunity for us that we've been taking advantage of for the last few years.
We're always looking at opportunities in terms of acquisition.
<unk>, so that Hasnt changed.
But I think more than anything we just.
Remained.
Very.
Barry.
Prudent in how we go about looking at that.
Use of cash and being mindful that every dollar is extremely valuable.
Uh huh.
Again quite frankly currently I would rather take a dollar of <unk>.
Cash and put it into a good capital project in our.
Big plant or a mill.
Because we get immediate return for it.
Low risk high return opportunity.
Same thing with dividends dividend being aboard board level of matter, we continue to discuss that periodically and.
Understanding of the dividend should be meaningful but sustainable.
And then as time goes on we will just continue to look at the bigger opportunities, but I.
I think again, 1 of our virtues that we've held closely as our patients.
And that we're extremely patient group.
Yep.
Long answer to your question no I appreciate.
Box, but just 1 last from Mark on the Labor Sichuan I know of freight is problematic for every 1 of these days and there are many other costs that are problematic can you talk about labor specifically of what you've experienced there and what youre anticipating along those lines.
Well again it's.
Pretty.
Understandable that.
Demand for labor is high across the board.
We've been fortunate through the capital spending programs in the last few years that with.
A lot of new technology going into our box plants as an example.
Provided enormous.
Tools.
With the existing workforce to become much more productive.
So that has been a very big benefit to us, but again, we were struggling like everybody else is trying to.
Again.
Look at the workforce Howdy, how do you retain and how do you attract people when.
The demand is so high for the current labor pool in this country. So I think we're in a good place a retention rates continued to be high and so I'm feeling pretty good about it but we're mindful of phone you want to add to that.
Yeah, you know listen labor as labor is an issue for us it's an issue for our customers as well.
It's a.
You know getting getting people back into the workforce is going to be incredibly important but I think it also goes back to.
Your capital question, Adam relative to we think long term about what we're going to be doing and how we run this business.
And you know 1 of.
Of the things that we've been working on for quite some time now is how to do more with less in terms of labor.
Just because we knew that.
It was going to be it's going to be an issue for us over the long haul. So I think that that that in itself has paid off some big dividends for us that.
That mark alluded to.
Really appreciate the time thank you.
Okay next question please.
Your next question is from Gabe <unk> with Wells Fargo Securities.
Mark Tom Bob Good morning.
Good morning, good morning.
I had a question I mean, not only thank you.
Guidance.
But you also made mention of kind of of course.
Second half strength.
On the packaging side.
Curious what youre seeing in front of of different maybe than more of.
Before.
I think their end market demand.
Oh about e-commerce.
But what gives.
But the mix of those comments.
But again relatively speaking of it.
Oh of a more conservative on your on your outlooks.
Again, I think it's just inherently looking at the.
Of the marketplace of understanding where demand has been now from last year.
Understanding.
What the paper side of the business has been doing of where demand has been growing with paper.
Looking at the pricing side of the equation and understanding of how pricing has been holding up for.
Corrugated product side of the business volume pricing and then just the success of our own execution of our capital.
You see that as we go forward I think we're in a pretty good place now if 1 assumes that demand does what we think it's going to do.
That ended up itself Bill.
Builds a lot of confidence of opportunity for us.
Yeah.
Alright, thank you for that and I guess.
I know maybe difficult for the firm.
Is there any way you can parse out for us of pump jacks and.
Sort of incremental contribution that youre getting.
Maybe in terms of the production tons.
All of the dollar amount and then.
I guess, what's the level of depth.
Detriment to the paper business.
Okay.
I'm, just trying to understand sort of.
A quote unquote normalized profitability levels.
On paper.
Yes.
As far as Jackson.
Without going into details, which we won't but if you think about.
Productivity and we've talked about this I believe on the April call.
For the second quarter Jackson number 3 produced I believe of 111000 tons of of liner board of if I'm not mistaken and we did explain that that is higher cost production than the rest of our system.
And so even at a higher cost at the productivity and efficiencies at that machine is running at.
Extremely.
Valuable in terms of its contribution to the bottom line and providing us the necessary tonnes.
The cost will come down.
System Difficultly next year as we go through the first phase of the.
Conversion and then to the final phase.
Following year Youll see the cost position of Jackson.
Equal to or better than the.
The rest of our containerboard system, but Jackson currently is.
A very significant contributor from the number of 3 machine containerboard side.
Okay.
To be clear of those inefficiencies are booked in and kind of reported through packaging not the paper segment.
Yes.
Okay. Thank.
<unk>.
Next question. Please your next question is from Phil <unk> with Jefferies.
Hey, guys congrats on 1 of filters and.
Press of quarter in a tough environment, I guess bigger picture Mark and Tom.
History is obviously set up for another strong year and box demand.
Many.
Of us had been accustomed to seeing 1% growth in your comps do get a little tougher when we look at 2022. So do you expect the growth profile to kind of be.
Elevated north of that 1% rate.
Just any color of how you're thinking about the outlook going forward.
Well, Phil you know, if if I could predict that exactly.
It'd be a much wealthier man I can tell you that.
It's.
Yes, you're right we've been more in that 115% growth range. We had this giant leap that took place last year. It's continued into this year.
So you know.
I think I think just a maintenance.
So of that number has.
Has changed the dynamics of this industry dramatically.
And I think going forward I think you'll see some more normalization, but I would guess it will be something a little north of where it traditionally has been just given the demand we see out there in the marketplace and what we're hearing from our customers.
I think 1 way I look at it if you think about what happened in the 19 eighties and of 19 nineties in the North America in General we had a lot of off shoring of manufacturing activity that.
<unk> created a decrease in our corrugated products demand.
At the same time if you.
So we went back over the last 60 years for.
Many decades up into that 19, <unk> 19 nineties period box demand was strongly correlated to GDP.
It wasn't a 1 to 1 correlation but there was a high correlation to.
The ninth.
<unk> and <unk> into the 19 nineties.
Correlation.
Separated and again.
In the GDP equation service industry became a bigger factor in GDP manufacturing was less of a component.
What we're seeing is.
It's more onshoring of manufacturing more American businesses investing here in the United States in manufacturing.
Box demand tied to that factor.
And I have to believe that as we go forward into the next few decades as an example.
Net you'll see on a trend line basis of box demand will have a.
New very strong correlation to GDP in general and that's how I'm going to think about the future.
Super helpful. I mean, that's kind of how we're thinking about it too so that's great to hear.
I appreciate it.
<unk> is having an impact on wood costs, how long do you think this impact is going to linger and any risk that you're going to have supply shortages that could impact your production in the back half of this year.
Well, there's a couple of factors involved its not.
If it was just the wet weather I'd say well sooner than later is going to stop raining. It's we've just had.
Usually consistently wet winter and spring and then in the summer we have that 1 tropical system that came through in June.
It came up through the southeast.
But.
We've gone through wet periods before but what's also a major factor is the availability.
Of the trucking side of the equation in terms of.
Log.
Hauling 2 of mill.
It was dependent on trucks and so those truck drivers have of choice. They can go in and work over the road.
Hauling various goods.
Or go.
I'll go into the woods and haul logs and so there has been extreme competition for truck drivers. So I would think though that if we get a dry period.
More normal weather period in the south.
You'll see significant normalization of wood cost.
Relatively quickly and.
And everything else dependent on the economy in terms of labor driver availability.
That side of the equation. So it's a it's a.
There's 2 major factors in in that.
Equation.
Got it but mark of it doesn't sound like you are expecting any real of shortages, where you can't produce it.
And then it's ongoing.
Bottlenecks, you've kind of experience is that sort of mark well.
For PCA, where okay day to day, where we are looking at of carefully as you can imagine.
But barring currently barring any unforeseen.
Hurricane Big tropical systems that come up through the.
The Southern States right now were okay for the time being I do watch the weather consistently because of that.
But again of something we can't control. So you do the best you can book currently where we're okay with where we are we're just again.
I'll point out the industry typically.
Yeah.
At this time of year would be starting their winter wood build and so mills across the southern region would be starting to stockpile wood.
In their lay down yards in their wet storage areas.
Out of late wet storage areas.
For the upcoming.
<unk>, what would traditionally be a wet late fall wet winter period.
So you compound the problem right now that.
The inventories across the mill system in the south and southeast.
Been depleted.
We're running.
<unk> basically day to day short inventories.
We're also not able to start our winter wood build as an industry as you can imagine so.
It's going to be important that we do get a dry period, because we have to set ourselves up for the late fall and winter when you really get.
The weather systems coming through with.
The traditional Lowe's that come out of the Gulf of Mexico and move up through <unk>.
Got it that's a longer term concern got it and just 1 quick 1 it looks like and I think Mark tried to cheeses question earlier, but it looks like your drop through incremental margins on your volume just really.
Popped into Q I know the previous 2 quarters maybe.
Challenges with how strong demand in some of these bottlenecks maybe the drop through of wasn't as good anything that sit out and end of quarter and do you think that.
It is sustainable in the back half of the year. It does great incremental margins you saw in the quarter.
Again.
If you think about the <unk>.
Rich niches of the book of business in general that we have.
The operating efficiencies, we executed extremely well in the mills and the box plants. These capital projects and I called it out of just didn't.
2018, 1920, and then the half of 'twenty 'twenty 1.
Spent.
$852 million on significant improvements in 2 thirds of our box plant fleet across the country and massive capital opportunity for the employees to be significantly more productive and that's paid off of big way.
And so again if you if you again, it's pretty simple great book of business and operate extremely efficiently.
Equals high margins.
That's super helpful. Thank you really appreciate it guys.
Okay. Next question. Please your next question comes from Neel Kumar with.
Morgan Stanley.
Thank you.
Our corrugated could you just talk about the cadence of the 9.6% volume growth through the second quarter by month.
And then can you also just touch on what Youre seeing in terms of the demand trends for your various end markets.
What's the price both positively and negatively.
During the quarter.
Sure.
I can give you the volume trends through the quarter April was up 12 May was up 11 and June was up 6.
And as I indicated July we're rolling about 7.
Over last year.
Again.
I'll remind you that it's not as if volume went down volume continues to improve but it's so it's against a much tougher comp.
Right and then can you just maybe touch on end market outdated performed relative to your expectations.
Well our end markets of performed as expected.
I just you know as I think I indicated earlier that are our top accounts are up in double digits and.
And have plenty of opportunities to continue to grow their hindered a little bit by those same things, we talked about which are supply chain issues freight issues labor issues those sorts of things. So so I think that you know.
The trend remains very good.
Okay, and 1 of them paper can you just discuss what youre seeing in terms of the demand trends. So far in July I mean, whats your expectations are for lack of school demand issue.
This paper.
I'm sorry.
Couldnt quite hear you.
Yes, I'm just saying for paper can you just talk about your demand trends so far in July and you are.
Our back to school of demand.
Paper as you could imagine.
Trend line has moved up.
For that very reason the school openings business openings that are star.
The 2.
People who've got a restock.
But.
<unk>.
Explain that because of the Jackson machine coming out of the system, we've reached a new equilibrium and our ability to go to market and serve the markets. So so we've intentionally.
Starting that marketplace 2 of Newport.
Bluepoint with PCA, So we're up but we're up to a new level that we can manage to and supply into.
So were not representative of the industry at large.
Because of what we've done of Jackson.
Broadway Thank you.
Okay next question please.
Your next question comes from Kyle White with Deutsche Bank.
Hey, good morning, Thanks for taking the question.
You already discussed our wood fiber costs were 32 quite a bit but curious what your expectation is for recovered fiber costs and what's embedded in the guidance going forward.
Sorry.
Thank you as other peers, but just any thoughts there would be helpful.
<unk>.
Again of your guess is as good as mine.
We're fortunate that would again.
You have to believe with the current trends, it's going up and there's nothing that indicates it's going to go down anytime soon.
Where some of the latest data that's.
It's about indicates.
Record low.
<unk> wide inventory levels of recycled fiber availability.
All time demand.
No.
For all of recycled fibers across the board and so unless something happens to the.
Come out of place in the World I don't see that changing.
But again I think for PCA, we've always considered ourselves.
We don't have a crystal ball, we don't know where the world's going so we build ourselves around flexibility and we still remained the lowest.
Pendant.
Mark on OCC as an example, compared to the rest of the industry, we can take advantage of it.
But again, we we're always mindful of of maintaining our flexibility and fiber utilization.
Got it and then going back to Neil's question on some of the end markets.
What are you seeing in agriculture, do you have any exposure to or any impacts from some of the fires over in the Pacific and then on E. Commerce are you are you seeing any kind of signs of any slowdown as markets reopen and people aren't that's all of them as much.
Carl This is Tom regarding AG.
We have not had.
Any impact in our AG end markets so far.
The majority of the large fires out west Europe on the Oregon, California border.
So northern California AG markets.
That those fires are quite a bit north of them.
On regarding E com now.
We haven't seen zero slowdown in E com in fact.
I think I think everybody in the business of any sort is trying to figure out.
How they can how they can use that E com to better grow their business and.
Consumer preference still remains very strong in the E comm area.
Got it thank you and good luck in the balance of the year.
Thank you next question please.
Again, if you would like to ask a question. Please press Star then the number 1 on your telephone keypad that is star 1 to ask a question.
Your next question is from Cleve Rueckert with UBS.
Hey, good morning.
Everybody. Thanks for taking my question Mark.
Just kind of 1 follow up on <unk>.
Containerboard production with the mills coming off of maintenance in Q3, and your outlook on demand how much do you think containerboard production could grow sequentially in the quarter.
When do you think it will be.
Positioned to have inventories more normalized in line with the target.
Well again, we're in a we're in a much better place than we were earlier in the second quarter because of all of the outages, we were dealing with but as we mentioned.
On the call.
1 of weeks of.
Supply basis in terms of weeks of supply inventory, we're at an extremely low level compared to what our needs are and so even though we built some inventory, we're not where we need to be or should be.
Our productivity out of our corrugated containerboard mill system.
We will be much better in the third quarter.
Production will be up I'm not going to give you. The number you can run the math on what.
What you currently have from for Mills.
In the system.
But we expect to build.
In terms of our productivity.
And also we also expect third quarter to be a very high demand quarter for that containerboard through our box plant system.
No.
So.
That's probably not the answer you wanted but I'm not going to give you exactly.
And of quantitative now you have.
Did you have latent capacity in the box plant system.
You run the box plants harder if you needed to.
I wish I.
I talked about that all the time.
You know.
We'd be in big trouble, if we had not undertaken a few.
Kevin you buy back the capital program that we did and also the.
The organizational changes that took place back in.
2019, with the technology and engineering groups and how we manage the business day to day, but.
Yeah, I wish we had a lot more productivity opportunities in the box plants.
Few years, we're building that in every day with the with the execution of more capital spending and projects that we're doing so.
We're in a good place, but it's like we've always talked about at our mills also and I see this in the box plants box plants and mills run really well when they're under pressure.
But and.
I will continue to believe that going forward and we have.
Plans longer term strategic plans on how we will continue to build out our opportunities.
Anticipate what our customer requirements will be because it's all about the customer and understanding what the needs are and.
And to react and respond.
In any part of the country and within a region to meet that market demand.
That's that's fair enough and 1 quick follow up.
You did mention earlier in the prepared remarks.
You're outgrowing the industry through the first half.
In packaging, which.
He is implying market share gain of data.
A sense of where you are gaining share where they're either in markets or in product types.
That's it for me thank you.
That's a very complex question and.
Where do we gain share I think.
And being able to now we have a we have a long tradition.
Of having a much broader customer base than most of our major competitors.
We have a we have corrugated plants plus sheet plant network that we deal with.
We have tried to align with customers that have a have a very.
Good growth trend and good opportunities and and of course, you know, we've got a customer base spread over 16000 customers.
All of all trying to win in their marketplaces. So I think those of the N and of course, you know I think our ability to be able to as we've talked about over and over here relative to capital.
Capital of.
Our ability to expand as our customers' it needs and as they grow so are those of those of the key elements to why we have traditionally.
Gotten more market share.
Than our competitors.
Thanks.
So much bigger.
Next question please.
Mr calls and I see there are no more questions do you have any closing comments.
Thank you Stephanie.
I would like to thank everybody for taking the time today to be with us on the call and I look forward to talking with you in October for the third quarter earnings.
Earnings call.
Stay well stay safe and have a nice day.
Thank you. This concludes today's conference call you may now disconnect.
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