Q1 2022 Packaging Corp of America Earnings Call
Thank you for joining packaging Corporation of America's first quarter 2022 earnings results conference call with your host today will be Mark Goldstein, Chairman and Chief Executive Officer of BCE. Upon conclusion of his narrative there will be a Q&A session.
I will now turn the call over to Mr. Goldstein and please proceed when you are ready.
Thank you Patricia good morning, everyone and thank you all for participating packaging Corporation of America's first quarter 2022 earnings release conference call.
I'm, Mark Cola, Zhang Chairman and CEO of PCA and with me on the call. Today is Tom has further executive Vice President who runs the packaging business and Bob Monday, Our Chief Financial Officer.
I'll begin the call with an overview of the first quarter results and then I'm going to be turning the call over to Tom and Bob Who'll provide further details.
And then I will wrap things up and we'll be glad to take questions.
Yesterday, we reported first quarter net income of $254 million or $2.70 per share.
First quarter net income included special items expenses of <unk> per share primarily for certain costs at the Jackson, Alabama mill.
For paper to containerboard conversion related activities.
Details of the special items for both the first quarter of 2022 and 2021 were included in the schedules that accompanied our earnings press release.
Excluding special items first quarter 2022, net income was $256 million.
Or $2.72 per share compared to first quarter 2021, net income of $169 million or $1 77 per share.
First quarter net sales were $2.1 billion in 2022, and $1 $8 billion in 2021 total company EBITDA for the first quarter, excluding special items was $467 million in 2022.
And $342 million in 2020 one.
Excluding the special items, the 95 cents per share increase in first quarter 2022 earnings compared to the first quarter of 2021 was driven primarily by higher prices and mix of $1 83, and volume of 23 cents in the packaging segment.
Higher prices and mix in our paper segment for 15 cents.
A lower share count, resulting from share repurchases for three cents.
And lower interest expenses of two cents.
These items were partially offset by 71 cents of inflation related operating cost increases, particularly with energy.
Fiber chemicals, operating labor and repair labor and materials.
Freight and logistics expenses have now moved higher for seven quarters in a row and there were 27 cents per share above the first quarter of 2021 and converting costs were higher by 11 cents per share driven by labor and materials expenses.
We also had higher depreciation expenses of seven cents.
Lower volume in our paper segment for six cents.
Higher scheduled outage expenses five cents.
A higher tax rate, resulting from some favorable items in last year's tax rate up three cents.
And other costs one cent.
The results were 22 cents above our first quarter guidance of $2 50.
Her share primarily due to higher prices and mix and higher volumes in both our packaging and paper segments.
Operating cost improvements from efficiency and usage initiatives and favorable weather conditions.
Looking at the packaging business EBITDA, excluding special items in the first quarter of 2022 was $464 million.
With sales of $1.960 billion, which resulted in a 23, 6% margin versus last year's EBITDA of $352 million and sales of $1.62 billion or 21, 7% margin.
Demand in the packaging segment remained very strong as sales volume in both our containerboard mills and our corrugated products plants had record setting performances.
The scheduled maintenance outages at our mills went very well and both machines at our Jackson, Alabama mill produce containerboard the entire quarter.
However, with strong internal and external demand we ended the quarter once again with containerboard inventory levels below our targeted and historical levels.
Although we still face unprecedented unprecedented inflationary headwinds and our manufacturing costs as well as freight and logistics expenses, our facilities continue to deliver on numerous cost reduction initiatives.
<unk> improvements integration and optimization enhancements and capital project benefits to maximize our returns and our margins.
I'll now turn it over to Tom who will provide further details on the containerboard sales and corrugated products business.
Thanks Mark.
As Mark mentioned corrugated products and containerboard demand were very strong during the quarter.
We set a new all time total box shipments record as well as a new first quarter shipments per day record total volume in our corrugated products plants was up 2.9% and shipments per day were up 1.3% versus a very strong comp in last year's first quarter, which for us was up approximately.
8% over the prior year in.
In addition to supplying the record internal needs of our box plants, our outside sales volume of containerboard was 46000 tons above the first quarter of 2021, owing to continued strong domestic and export demand.
Outside volume was 26000 tons below the fourth quarter of 2021 in order to help supply our strong internal demand, while managing through the scheduled maintenance outages at our mills.
Domestic containerboard and corrugated products prices and mix contributed $1 60 per share above the first quarter of 2021 and were up 23 cents per share compared to the fourth quarter of 2021.
Export containerboard prices were up 23 cents per share versus last year's first quarter and up a penny per share compared to the fourth quarter of 2021.
The benefits of our disciplined approach for the implementation of price increases across our customer mix last year was a significant contributor to this year's first quarter results very good execution of the initial implementation of our recent March price increase contributed to results in the first quarter as well.
I'd also like to point out that the capital spending optimization strategy within our box plant system that we have been focused on over the last few years also plays a key role in our successful implementation process. The investments from this strategy provide the products and service needs that our customers desire and allows them to grow.
While focusing on the mix of customers, we want to align and partner with I'll now turn it back to Mark.
Thanks, Tom.
Being at the paper segment EBITDA, excluding special items in the first quarter was $29 million with sales of $153 million or an 18, 9% margin compared to the first quarter 2021 EBITDA of $16 million and sales of $165 million.
Four 9.6% margin as.
As we mentioned on last quarter's call volume from our paper segment. This year is expected to be fairly representative of the capacity at our international Falls mill.
Accordingly sales volume was about 19% below last year's first quarter. When we were producing paper on the number one machine at our Jackson, Alabama Mill pay.
Paper prices and mix were 14% higher than last year's first quarter and 6% above the fourth quarter of 2021, resulting from our previously announced paper price increases.
Also in late March we notified customers of a 100 dollar per ton price increase effective with shipments beginning may the second for all office printing and converting papers.
The efforts of our employees to optimize the cost structure inventory and product mix in the paper business helped minimize the inflationary increases we're seeing and deliver solid returns in the quarter I'll now turn it over to Bob.
Thanks Mark.
For the first quarter, we generated cash from operations of $339 million and free cash flow of 113 million.
Key cash payments during the quarter included capital expenditures of $226 million in common stock dividends of $94 million.
We ended the quarter with $629 million of cash on hand, or $778 million, including marketable securities. Our liquidity on March 31 was $1 $1 billion.
I want to update you on a revision to the scheduled mill maintenance outage guidance, we provided on last quarter's call.
Current plans and the scope of work has changed resulting in a revised total company estimate it cost impact for the year of $1.04 per share versus the $1 13 per share previously.
Previously.
The actual impact in the first quarter was 15 cents per share.
And the revised estimated impact by quarter for the remainder of the year is now 26 cents per share in the second quarter 'twenty.
22 since in the third and 41 cents per share in the fourth quarter.
I'll now turn it back over to Mark.
Thank you Bob.
Looking ahead as we move from the first and into the second quarter, we expect demand in our packaging segment to remain very strong and we will continue implementing the previously announced price increases in both our packaging and paper segments vol.
Volume in the paper segment will be lower with the scheduled outage at our International Falls mill and as Bob pointed out total scheduled outage costs will be 11 cents higher than the first quarter.
We also anticipate continued inflation with freight logistics expenses as well as most of our operating costs, although recycled fiber prices should be slightly lower considering all of these items, we expect second quarter earnings of $2.83 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 constituted forward looking statements. The statements were based on current estimates expectations and projections of the company and do involve inherent risks and uncertainties, including the direction of the economy and those identified as risk factors in the annual report on form.
10-K, and on file with the SEC.
Actual results could differ materially from those expressed in the forward looking statements and with that Patricia I'd like to open up the call for questions. Please.
Thank you and at this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad again that is star one to ask a quick question.
Your first question comes from the line of George Staphos from Bank of America. Your line is open.
Hi, Good morning. This is actually a jumbo pack on the one for George I. Appreciate you taking the time to answer my questions. I guess, just first of all I was wondering if you might be able to talk about the cadence on the price increase implementation. This time and if there's any reason to believe it might be different relative to somebody hikes last year that'd be great.
Go ahead Tom.
Yeah. The the implementation is is right on track just like the others. You know we have a very disciplined approach, we usually get the pass through over about a 90 day period. So as I mentioned, we had some that was in the month of March.
But the majority of the price increase will be in the second quarter.
Okay. Thank you.
And the next question.
Just as it pertains to trucking and I was wondering if you could talk about what you're seeing in terms of spot rates for that and ultimately some of our contacts suggest that prices might be dropping there. So just wanted to get any any color that you might have.
Bob you want to add a little of that.
Yeah, John I'll, just say that we are seeing a little bit of that relative to the spot. The spot market. You know there are various factors going on that that showed a little improvement in the in the first quarter, but.
I think as most people would agree that it's still far from.
Being in an ideal situation and.
And our guidance for the second quarter again, you know we have our freight costs are going up probably another 5% or so so while it's still a lot to be done there I think you need to consider again diesel still sitting at over $5, a gallon and that's one of the predominant cost factors in and although some of the drivers are in the spot market have become more available.
The cost remain at.
Exceptionally high levels.
Gotcha and then the last question before I turn it over with the I falls, a downtime maintenance downtime that you had this upcoming quarter.
Could you just talk about the normal steps that you take to ensure the customers.
The product they need and ultimately anything that you'll do around inventory build.
Just to just to make sure that you are able to serve their needs.
Yeah, I mean, that's a shutdown that's been planned for the last six months and so it's a week long outage that will take place in June and so you have to assume that we've already.
Preplanned the necessary inventory and how we will take care of customers and so that's it's really not an issue. So it's all part of the shutdown planning.
Okay, great. Thanks, Ken.
Next question please.
We have your next question from the line of Mark Wilde from Bank of Montreal. Your line is open.
Good morning, Mark Good morning, Tom Good morning, Bob.
Mark.
Mark just to start out it seems like there's an awful lot of new investment in corrugated capacity, including new wider coordinators kind of coming into the industry, because we've been very tight for box capacity.
Impact is this having on mills and machine efficiency if any.
Well speaking for us.
It's really not a factor we've we've continued to invest in our own box plants over the at least the half half dozen years now we've added new corrugator.
There are certain optimal size corrugator that we prefer the some a few have gone to the very large 130 inch type corrugator again theirs.
Certain optimal levels I don't think there's.
A real strong relationship to mill efficiency, and corrugator size necessarily telling them you want to add a little color.
I would just say that if you've got if you've got some narrow machines.
That that can create some issues relative to the wider corrugator.
So that's that that to me would be the the largest impact you probably see in the mills is just some scheduling issues on narrow Michelle from the old machine yet.
Okay, Tom and I'm curious you know it seems like over the last 18 months, we've been getting more reports about sort of sub contracting out of con corrugated volumes during the pandemic.
I think there's because of strong demand and the labor shortages have you guys seen any impact from this in your system have you had to subcontract out more.
I think I think mark we have kind of a unique system from the standpoint of we have a you know a lot of corrugated plants and we have a lot of sheet plants. So.
So I think in terms of flexibility, sometimes we have a little bit more than than some of our competitors might end.
And that's where I see a lot of this you know sub contracting as you call. It is probably more in the independent sheet network.
As opposed to as opposed to anywhere else and and like I said, you know, we're able to handle that that type of business. So for US now where are you now where we're cutting up everything that we all are demand internally.
Okay. That's helpful and finally, Mark I wondered if you could give us just an updated timeline.
Ultimate capacity on the conversion, but two machines at Jackson.
Well the primary emphasis at Jackson is the number three machine and as we called out.
Earlier this year, we pushed that outage off to the.
The October period, because of supply chain issues.
<unk>.
When that last phases completed a year from now.
We anticipate that the Jackson number three machine.
Would have 700000 ton a year capacity built into it.
Right now the number one machine, we're not planning on any significant upgrades for you know at this time, we've got studies done as you would imagine.
That would be an opportunity for the future if we choose to move in that direction.
But.
We will have a good opportunity to absorb the full production off number three machine.
Through later next year and into 2024.
But what was the capacity at number one be without the upgrade and then potentially what could that go to if you put some capital it's a ballpark on arms.
Today, if you think about number one machine of Jackson with with no capital investment at somewhere 125000 tons, a year type of run rate.
With the basis weights were running which is which is a pretty good place to be considering we haven't invested in capitalism.
Okay very good and ended over then it's it's like any of it's like any other machine we've talked about over the decades.
It's all a matter of capital how.
How much capital do you want to spend for how much capacity because once you reach a certain critical point, you really get into diminishing returns.
Because now youre getting into the bigger pieces of capital required for backend infrastructure pulping and all of the related pulp capacity requirements. So there's there's certainly an economic analysis that takes place at you quickly reach.
Reach of peaked peak return and then diminish so I think where we are with what we're looking at if you're producing 700000 tons year on number three machine and 120 <unk> hundred 40000 tons year on number one machine that's.
That's a very good place for Jackson, Alabama to be on on a cost and a profit curve.
Okay. That's helpful I'll turn it over Mark Thank you.
Next question please.
And our next question comes from the line of Mark Weintraub from Seaport Research. Your line is open.
Thank you congrats on another well executed quarter.
First two follow ups. One you mentioned that it normally takes about 90, sorry, 90 days to fully implement onboard into box. So so can we conclude that a portion of the pricing will show up.
On an average basis in the third quarter as well that there'll be some additional we'll see a lot of it in the second quarter and then we should see some incremental as we average the numbers from quarter to quarter in the third quarter.
Yeah, Mark this is Tom yeah that that would be that would be a good read them.
Okay.
Yeah go ahead Mark.
And can you give us any sense, if we look back historically.
Percentage might typically show up in the.
It is.
That period that would witness case would be the third quarter.
No. It's you know it's you know I think you know as I said I mean, these things roll in over a 90 day period. I mean, there are a few accounts that you know have certain contracts that may go even beyond that but you know for the most part it's the 90 day period and.
We've indicated that there. Some are you know in March and that the bulk will be in the second quarter and yeah, there might be little rollover into the third quarter.
But that's that's the only guidance I can give you okay. So just a little though.
Thank you.
And then you mentioned.
The the Jackson machine go into 700, because it is at about 500000 that what's the production capacity currently Jackson.
You are in that probably 440000 tons a year for 150000 tons a year on that machine.
And again it just depends on the grade mix, we're running and then the you know the 125000 tons.
If you look at last year running the machine for one quarter, we produced 459000 tons for the year.
For the first quarter, we just produced a 136000 tons. So you know you're talking about for the.
Full year run rate if we continue to run at this pace, you're you know somewhere 550000 tons for the year expected out of Jackson.
Okay. Thank you and then lastly, you.
You mentioned.
Packaging demand looking good.
Into the second quarter can you update us on what your bookings were through the first part of August sorry in April .
Yeah from a so far in April we're we're up three 5%.
Over.
And.
You know so you know keep in mind, though that last April we were up 12%. So this is a you know this is a big big jump on top of last April .
Demand still remains very good.
I appreciate all the color. Thank you.
Yes.
We have your next question from the line of Phil Inc. From Jefferies. Your line is open.
Your line is open.
Your next question is from the line of Anthony Pettinari from Citigroup. Your line is open.
Good morning.
Good morning.
Can you maybe talk a little bit more about inventory levels in terms of where you are versus where you'd like to be and maybe potential timeline for getting there and then given supply chain constraints. I mean do you think just structurally you might hold a higher level of inventory than in the pre pandemic period.
And then I guess finally anything that your customers have said about their inventories that's.
Maybe worsened or gotten better or any kind of read from them.
You know.
As we've called out were still below where where we would want to be we're still below our historical target levels and a lot of it obviously has to do with with the pandemic related supply chain.
The inspiration matters and so.
We're into the heavy shutdown period for the year as we come out of that things generally improve.
But I think also part of your question, we would anticipate for the time being trying to hold a higher level.
Then we had historically held prior to the pandemic.
But again with business volume continued to grow at the rate it's growing.
And logistics supply chain issues railroad trucking doing what they've been doing it's very difficult to build to the necessary inventory levels.
Okay. That's that's helpful. And then just on the very strong demand that you've seen is there any finer point you would put on customer groups or end markets that are seeing especially stronger demand or maybe some demand softening a little bit.
And then just broadly I mean are your local accounts or they may be outperforming national accounts or just any.
Any color you can give on what has been extremely strong demand. It seems like it's continuing into April .
Anthony This is Tom I'll I'll handle the demand piece.
You know demand is as I said is very strong.
I think representative of some of that strength is if you just look at our top 50 accounts.
In the first quarter they were up 7%.
On average now that includes some that were up double digits and include some that were down slightly but depending on the business that they're in.
But if you just look kind of broadly across just like I said those 50 accounts I mean, you see that they're in they're in lots of different businesses and and demand remains very strong across all of those businesses.
Relative to local versus national.
You've got you've got the puts and takes you know as I just talked about but.
Generally speaking I think that the the larger accounts have to have a little bit more of an ability to work through some of the issues that are going on perhaps more so than some of the smaller accounts, but.
Again, it's.
Everybody everybody says they can grow a lot more than what they're currently able to grow their just held up by you know all these supply chain issues, primarily in the labor issues that we've talked about in the past.
Okay, that's great color I'll turn it over.
Thank you next question please.
We have your next question from Cleve Rueckert from UBS. Your line is open.
Great. Thanks, everybody for taking my questions and good morning.
Good morning, not don't want to beat a dead horse, but just to follow up quickly on on demand I mean, PCA has done I mean, frankly very impressive job of taking market share in this business over the last 12 to 18 months call. It.
Do you have a sense of whether the growth youre seeing is like end demand market growth or.
Or are you just continuing to execute well and take market share.
Well I would say I would say that you know our long term strategy and I just mentioned it in the in the commentary too is to really.
You know spend a lot of time, making sure we align with the right kind of customers and we've been doing that for decades.
So.
Most the great majority of our growth comes from our existing accounts and their ability to grow and our ability to help them grow in whatever way, we possibly can.
So that's that's the that's the majority of of where PCA as growth comes from.
And we've demonstrated that not just in the recent past, but certainly over the long term.
Okay. That's clear and then just a couple of quick follow ups.
First I want to follow up on John's question about freight and trucking, we're seeing the same things about spot pricing, but we've also heard that some of the logistics is moving out of the spot market and into the contract market I'd just be curious to know if you're changing your strategy at all especially.
As it relates to the trucking market.
No.
We're not necessarily changing strategy were taking advantage of some of the availability improving but but there's no major change in strategy time, you want to add anything now we've we've been we've you know we've been under contracts for the most part and we.
We don't we don't use that much spot tell you the truth.
Yeah, Okay. That's clear and then just on on labor productivity and I think we heard pretty broadly last quarter that that labor.
Especially in the box system was kind of a constraint to production and constrained productivity. I mean, you guys, obviously burnt inventory this quarter, but I'd just be curious to know if that's if that's easing at all or if theres any sort of bottleneck on on the labor side, that's holding you back on the productivity side.
Again keep in mind.
You think about commentary we've made over the last year with our capital investment in the last few years, we've been able to to make significant improvements in the.
Productivity in our box plants.
Continue to grow our capability in terms of our productivity per unit man hour employed but that being said.
With the labor market, there, there's still an incredible amount of stress.
On the on the labor pool in the converting side and the mill side Kombucha add a little color to that.
Yeah. There's no question I mean, our labor situation improved as a result of the Covid, especially the omicron variant.
You know going down some so that that was a help to our to our labor situation, but on the other hand.
Trying to trying to hire new people and replace retirees et cetera is still a bit of a challenge and will remain so if you just look at any of the statistics and our you know the 8 million jobs that are sitting there open the highest labor participation rate in decades.
We you know we've got certainly I think everybody in any industry would attest to the fact that labor is a real challenge.
That is all very clear thanks for answering the questions I appreciate it guys.
Next question please.
Thank you and again to ask a question. Please press star one on your telephone again Thats Star one on your telephone we have your next question from the line of Mike Willoughby from Bank of Montreal. Your line is open.
Thanks, a couple of follow ups. One is it possible for you to just to help us differentiate kind of the level of inflation youre seeing at the mill level versus what youre seeing at the converting level. It it does seem like <unk>.
Converting plants are seeing more cost pressure than I've ever seen in my career between labor Starches pilots you know energy other issues.
Yeah, I think again, it's relative mark up across the board you would have been.
Understand that everything is under tremendous inflationary pressure, but what you. Just said is correct. Tom do you want to go ahead and add some detail to that well I'm just going to agree wholeheartedly with Marc I have never seen anything like the across the board inflation, we're dealing with in box plants.
Talk about some of the big numbers transportation those sorts of things, but when you start talking about all the things you. Just mentioned are the labor the starts to pallets to ink the dies are.
Any equipment repairs any of those sorts of things. It's just these are numbers that.
I've never seen before upwards of as much as 200% in some cases.
Okay, and then Mark the other question I had is you know you've created a lot of incremental benefits by taking advantage of conversion opportunities of greater than one.
Alice Jackson.
Is there anything at international falls that would prevent you from doing the same kind of thing there at some point in time.
No as a matter of fact.
Hi falls as well.
Another example of a mill that.
If the market dictated a we could take.
Advantage of in a very very good way.
As far as paper market and then how that plays into our growth in our corrugated products business.
Again as you've heard US talk about we were always studying and planning and looking at opportunities and we get the plans put in the file on what we'd want to do someday. If if the market conditions were such that are dictated we needed to make a decision about I falls, but keep in.
Mind that the the big machine at I falls, the I one machine.
Is quite frankly.
A better version of what we have at Jackson on J three it's a they were both essentially sister machines installed at the similar time frame.
A few decades ago and there are tremendous.
Capability the mill infrastructure at I falls has tremendous capability to support conversion.
But again, it's all about box demand versus paper demand and profitability. So we have that opportunity but.
Yes, I I falls is another another one of the opportunities that's sitting there that could be taken advantage of someday.
Okay. It would just be fair to assume mark given that its.
Primarily a hardwood mill right now that you'd be more likely to take that towards corrugated medium rather than liner borders is that not a good assumption.
That's a bad assumption.
Okay. Good enough. Thanks.
No.
Next question please.
Yes.
Mr Goldstein.
Any more questions do you have any closing comments.
Again, thanks, everybody for joining us today on the call and we look forward to talking with you at the latter part of July have a good day everybody. Thanks.
Yeah.
And this concludes today's conference call. Thank you all for participating you may now disconnect.
Okay.
[music].
Okay.
[music].