Q2 2022 Packaging Corp of America Earnings Call
Thank you for joining the packaging Corporation of America's second quarter 2022 earnings results Conference call. Your hosts today will be Mark Coulson, Chairman and Chief Executive Officer of PCA.
Upon conclusion of his narrative there will be a Q&A session I will now turn the conference over to Mr. Callison. Please proceed when you are ready.
Good morning, and thank you for participating in packaging Corporation of America's second quarter 2022 earnings release Conference call I'm, Mark holds an chairman and CEO of PCA and with me on the call. Today is Tom has further the executive Vice President who runs our packaging business and Bob Mundy, Our Chief Financial Officer.
I'll begin the call with an overview of our second quarter results and then I'll be turning the call over to Tom and Bob Who'll provide more details.
I'll, then wrap things up and then we'd be glad to take questions.
Yesterday, we reported second quarter net income of $301 million or $3 20 per share.
Second quarter net income included special items expenses of two cents per share primarily.
Primarily for certain costs of the Jackson, Alabama mill for paper to containerboard conversion related activities.
The details of the special items for both the second quarter of 2022 and 'twenty 'twenty. One were included in the schedules that accompanied the earnings press release.
Excluding special items second quarter 2022, net income was $304 million or $3 23 per share compared to the second quarter 2021 that income.
$207 million or $2.17 per share.
Second quarter net sales were $2.2 billion in 2022, and $1.9 billion in 2020 one.
Total company EBITDA for the second quarter, excluding the special items was $533 million in 2022 and $397 million in 2021.
Okay.
Excluding the special items, the $1.06 per share increase in second quarter 2022 earnings compared to the second quarter of 2021 was driven primarily by higher prices and mix of $2.04 and volume 12 cents in the packaging segment.
And higher prices and mix in the paper segment of <unk> 18 cents.
Scheduled outage expenses were favorable by eight cents per share.
Interest expense was lower by three cents.
Lower share count, resulting from 'twenty to 'twenty, one are repurchases was favorable by three.
And other items were favorable three cents per share.
These items were partially offset by 95 cents of inflation related operating costs, particularly with energy.
Fiber.
Chemicals.
Operating labor.
Repair labor and materials and several other indirect and fixed cost areas.
Freight and logistics expenses have now moved higher for eight quarters in a row and we're 25 cents per share above the second quarter of 2021.
We also had inflation related increases in our converting costs, which were higher by 10 cents per share.
Depreciation expense was up eight cents per share over last year.
Volume in our paper segment was lower by six per share compared to last year. When we were still running uncoated freesheet on number one machine at the Jackson, Alabama Mill and our tax rate was higher by one cent per share.
Results were 40 cents above the second quarter guidance of $2 83 per share primarily due to higher prices and mix in the packaging segment.
Lower scheduled outage expenses of seven cents per share, resulting from the postponement of the international falls outage from the second quarter to the third quarter.
And lower fiber and energy costs, resulting from efficiency and usage initiatives.
Looking at the packaging business EBITDA, excluding special items in the second quarter of 2022 of $525 million with sales of $2.1 billion resulted in a margin of 25, 4% versus last year's EBITDA of $409 million.
And sales of 1.7 billion or 23, 8% margin.
We had great execution of our previously announced price increases and demand in our packaging segment was solid with corrugated demand about flat with last year's record second quarter, along with demand out of our containerboard mills generating new second quarter production and sales volume records.
Even with record production from our mills, we still ended the quarter with weeks of containerboard inventory supply below our historical levels due to demand needs from both internal and external customers.
We will be attempting to build some much needed inventory during the third quarter ahead of the significant fourth quarter outage at the Jackson, Alabama Mill for the first phase of the number three machine conversion to Virgin linerboard.
We're still experiencing significant inflationary headwinds in our operating costs as well as freight and logistics expenses.
However, our mills and plans continued to do an outstanding job of meeting our customers' needs, while delivering on numerous cost reduction initiatives efficiency improvements integration and optimization enhancements and capital project benefits to maximize our returns and margins.
I'll now turn it over to Tom who will provide further details on the containerboard sales and our corrugated business.
Thank you Marc.
As Mark mentioned total corrugated product shipments and shipments per day were essentially flat compared to last year's record second quarter, which was up 9.6% versus the previous year outside sales volume of containerboard was about 41000 tons above last year's second quarter, which was our lowest outside vol.
I am quarter for 'twenty, 'twenty, one, but 6000 tons below the first quarter of this year due to the lower export shipments strong internal demand and managing through the scheduled maintenance outages at our mills.
Very good implementation of our previously announced price increases together with profitable revenue growth and mix enhancements delivered significant value for us during the quarter.
Domestic containerboard and corrugated products prices and mix together were $1.89 per share above the second quarter of 2021 and up 76 cents per share compared to the first quarter of 2022.
Export containerboard prices were up 15 cents per share versus last year's second quarter and up slightly compared to the first quarter of 2022.
As it pertains to our converting facilities I'd like to reemphasize some of what Mark was pointing out regarding the many things we do to meet our customers' needs help offset inflation and improve our margins beyond just price increases.
Our operations improvement in capital spending strategies in the corrugated plants have been extremely successful and put us in a position to serve our customers better than ever before.
Even against the backdrop of unprecedented supply chain and logistical challenges improving the processes technology and equipment in our plants and optimizing our geographical footprint is driven by our customers' needs and improving our capabilities to grow with them. This strategy also improves our operating income.
Routing efficiencies and delivers cost savings in several areas throughout our facilities.
Now I'll turn it back to Mark Thanks.
Thanks, Tom looking at our paper segment EBITDA, excluding special items in the second quarter of $32 million with.
With sales of $150 million or 21% margin compared to second quarter, 2021, EBITDA of $12 million and sales of $142 million or an 8.2% margin.
Sales volume was about 12% below last year's second quarter. When we were still producing paper on the number one machine at the Jackson, Our Jackson, Alabama mill versus producing corrugated medium in this year's second quarter.
Paper prices and mix were 19% higher than last year's second quarter, and 5% above the first quarter of 2022, resulting from our previously announced paper price increases.
Also as mentioned earlier, we had to postpone the maintenance outage scheduled at the International Falls, Minnesota Mill from the second quarter.
To the third quarter of this year due to access a flooding in the area during the weeks prior to the outage.
The outstanding efforts around implementing our latest price increase together with optimizing the cost structure inventory and product mix delivered excellent margins in our paper business for this quarter.
I'll now turn it over to Bob.
Thanks, Mark for the second quarter, we generated cash from operations of $324 million in free cash flow of $135 million.
Key cash payments during the quarter included capital expenditures of $189 million common stock dividends of $94 million cash taxes of $127 million.
And net interest payments of $35 million.
We ended the quarter with $667 million of cash on hand, or 811 million, including marketable securities.
Our liquidity on June 30th was $1.1 billion.
Primarily due to the postponement of the international falls scheduled outage from the second quarter, because the third quarter.
Our scheduled outage expense will increase from 20 cents per share in the second quarter.
227 cents in the third quarter.
And we are estimating 44 cents per share in the fourth quarter.
This results in the total company estimate it cost impact for the year totaling to $1.06 per share.
I'll now turn it back over to Mark.
Thanks, Bob.
Looking ahead as we move from the second into the third quarter in our packaging segment, although the majority of our previously announced price increases were recognized in the second quarter. The remaining portion will be implemented during the third quarter and our paper segment. We will continue implementing our previously announced price increases.
And yesterday, we notified our customers of an additional $60 per ton price increase on all office printing and converting grades effective with shipments beginning September 6th.
As I mentioned previously we began the quarter with containerboard inventories below our target.
We plan to build some inventory ahead of the fourth quarter outage at the Jackson, Alabama mill when it will begin that first phase of the number three machine conversion to Virgin linerboard.
With economic conditions, continuing to be negatively impacted by broad based inflation in aggressive interest rate increases we see corrugated products growth is softening in the quarter, but demand still firm as certain end markets work through their current supply of inventory.
We expect continued inflation in most all of our operating and converting costs to be primarily driven to be the primary driver of the third quarter results.
Higher gas purchased electricity and chemical prices, along with a very tight labor market and contractual wage increases driving labor costs higher are expected to be the key areas during the quarter.
However, we also still have particularly high inflation driven cost in repair labor and materials.
Pallet costs property rents outside services and many other indirect and fixed cost areas.
Although we are beginning to see improvements in truck and driver availability as well as some moderating diesel costs continued rail service challenges along with rail fuel surcharges that typically lag diesel fuel prices by 30 to 60 days should also result in higher freight and logistics expenses.
And finally as Bob indicated scheduled outage costs will be seven cents per share higher due to the international falls mill outage that was postponed from the second to the third quarter.
Considering these items, we expect the third quarter earnings of $2 87 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 constitutes forward looking statements. 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 the annual report.
<unk> Form 10-K on file with the SEC actual results could differ materially from those expressed in the forward looking statements and with that Matt I'd like to open the call for questions. Please.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys. If at anytime you question has been addressed and you would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
And our first question will come from George Staphos with Bank of America Securities. Please go ahead.
Hi, Thank you good morning, everybody.
Thanks for all the details Mark Tom and Bob first question I had if you could give us a bit more color.
To the volume and end market trends that Youre seeing youre, saying you expect.
Both to soften should we take that as actually we should see lower volumes three Q versus <unk>.
How would you sort of guide us give guardrails around that and you mentioned some end markets working through some inventory.
You could perhaps give us some color on which end markets in which <unk>.
Inventories are being worked on as it finished goods inventories for your customers at retail or is it their inventories of paper and perhaps boxes and then I had a couple of quick follow on.
Hey, George This is Tom Let me, let me say Tom good morning.
Good morning, So let me see if I can answer that that.
That question, which is going to take a little while to work through but.
Right now just to give you a little a little color on where we are where we are but where we're now billing about 2% below.
You know a year ago, and but the bookings trends are starting to go up a little bit so.
I think will be you know third quarter. You know is going to be you know flattish probably as we said a which is maybe to down just a little bit, but where are you know we're we're feeling good about the amount of volume that we have and you know that we're basically retaining all of those gains.
We that took place during the Covid years.
Right now I think we're going through we've been going through a cycle, probably the last 30 days in N and leading into another short term period going forward, where our customers have excessive amounts of inventory and this is not inventory of boxes. This is inventory of their finished products got it.
Almost to a company they've they've said that they built inventory.
Just on the demand curve that took place during the COVID-19 years and that demand curve has now flattened, they're not saying that their business is going to be down but that it's just flattening and I think those are good I think those are that's a good trend quite frankly in a good trend for our business because it was kind of fits where we were hoping to be.
And that was to retain all those significant gains we had over the last couple of years.
And they feel like and they feel very confident that you know once they work through these inventory issues, which I think is really our short term problem at the end of the second quarter, leading into the third quarter are once they come out of that they're going to go back to demand trends that are there.
More equivalent to where they were last year.
Tom Thanks for that my two quick follow ons I appreciate all the color.
Is there a way Bob or Mark to bridge <unk> to <unk>, we obviously have the outage swapping call it seven cents.
Would it be fair to say you know the <unk>.
40, <unk> total sequential change from <unk> to <unk> that maybe.
Volume and the decremental margins are maybe 15 to 20 cents and then the higher costs that you cited are the residual in terms of getting to that 40, and then recognizing you don't want to give up too much.
Color here can you talk about what went particularly well in terms of your execution on pricing and mix such that you were better than your expectations going into the quarter. Thanks, and good luck in the quarter.
Yeah, Hey, Bob why don't you go ahead and start that and then we can let Tom finish it yeah, Yeah, Yeah, Hey, George Yes, Youre pretty close George if you look at it you know as Tom's comment.
Comments regarding third quarter volume in and as we've indicated we still have a little bit of a tailwind from the latest price increase that will work through into the into the third quarter.
Net of that is certainly a positive a positive number between those two but it's the it's the inflationary components and the ones that we pointed out.
In the release with with freight costs and logistics costs, because you know primarily on the rail side and chemicals, you know starch lime soda ash resins, all up again this quarter.
But you know that the largest hit is it with a natural gas and purchased electricity, we went up almost 30% <unk> and <unk> to <unk>, it's another like 26% higher.
And then you throw in the labor we have some contractual wage increases that are that come through this quarter in the in the mills and the box plants.
And then you look at you know supplies and materials in.
Operating you know operating items and so forth.
The suppliers, we get those from you.
They had the same issues that we're dealing with around their cost and their labor and whatnot. So that gets priced into what we buy from them and so it becomes a you know a rather large number that offsets that positive that we see between.
The price tailwind and the and the volume that Tom spoke to.
Understood.
And on.
Pricing execution, what went better.
Yes, I think everything across the board went very well and the price execution and continues to be so you know I would add in addition, you know where and when it comes to volume.
Now when you go through a price increase I mean, you have to be prepared to.
Yeah, you know to perhaps lose some volume as a result of of raising prices or improving your mix or whatever the case might be which you know as we've said in the past we've always been prepared to do and we will continue to be prepared to do George you also asked about end markets and I'll give you I'll give you just a little a little color on <unk>.
We see some of those end markets and simply put E. Commerce is still a is still going up not at the growth rate. It was but it's still growing food and beverage has held its own and has been it's been very steady.
The the biggest decline has come in the durables area, which you would have expected if if volume's jumped you know lets say, 15% to 30% over the last couple of years and some of these are durable markets.
All of the all of those customers expected.
Their volumes to go back down to 2019 levels and the and the moderate Ah. So that's no that's no big surprise to us, but certainly an end market.
That is not going to retain all of the all of the gains in there and the rate going forward, but it's one of the smaller segments for us.
Thank you very much guys. Good luck in the quarter.
Thank you next question. Please our next question will come from Mike Rock slammed with Truest. Please go ahead.
Thanks, very much congrats guys on a very good quarter.
Thanks.
Just wanted to follow up Tom on the comment you just made in response to George's question in terms of durables and one of the smaller ones.
Small segments for Pag is there any way to quantify.
What percentage durables represents a peak of just overall mix.
Yeah, we don't really get into that are in that kind of detail, Mike, but just Oh Trust me. It's a it's it's one of the smaller segments.
Got it and then just following up on the on the mix.
Can you talk about some of the mix improvement that helped drive the beat during the quarter and then Tom you also mentioned maybe being prepared to walk away from some business. So how much of the mix improvement was PK G being proactive and walking away from business versus customers, just being upset with higher prices.
Well I think I think we've got an ability because of the a because of the setup of our box plants and sheet plants too to make sure that we ran the business where it needed to be run a we took advantage of our entire system as opposed to just trying to focus on few plants and.
And and it listen it was it was very difficult in that high demand curve business that we've been dealing with over the last few years with the incredibly tight labor market to satisfy all of our customers' needs. So are you know we had to be.
We had to be very focused on making sure that we were doing all the right things and that at the same time, we were getting paid appropriately for all those things that we were doing and you know so all in all Mike I mean, it's a very complex set of.
Logistical challenges scheduling challenges et cetera that we had to implement and the team did an incredibly good job, making sure that we were as efficient as we possibly could satisfied all the customers' needs and and captured those opportunities that presented themselves.
Got it and just one final question.
Press release, you called out lower fiber and energy costs, resulting from efficiency and youth usage initiatives. Just wondering if you could provide a little more color on what those initiatives are and whether they've been fully deployed through the mill and box plant system or if theres more one way for you to deploy them to drive costs lower and I asked this question realizing that you have.
Really focused on optimizing your box plant system. The last few years. Following your authorization of your mills and so I'm just wondering if there's any further runway ahead in your in your box plants.
Yeah. Mike. This is something we do every day and again over the last five years half dozen years, we've accelerated that process across the box plants, along with the mills and so it's it's something that goes on every day seven days a week and we will continue to go on and we will always.
Find opportunities to to make improvements with that's one of the advantages of the organization we have.
About 150 engineers and technology specialists that are dedicated to assisting with the mills and the box plants seven days, a week and so that will be an opportunity that continues.
To go on Forever.
Got it thanks, very much and good luck in the quarter.
Alright, Thanks, Mike next question please.
Next question will come from Mark Wilde with Bank of Montreal. Please go ahead.
Yeah.
Thanks, Good morning, Mark.
Good morning, Mark could we could we just start by maybe getting an update on sort of cost and and cadence of the Jackson conversion efforts because you're.
I think going to be doing some work in the fourth quarter, you mentioned that I think theres more work scheduled for next year. So if you can just help us with how the expenses on that are going to run and then sort of how the capacity at the mill will actually ramp up over time.
You know just to call out the whole project were talking them approximately $450 million of capital for now.
Not just the machine, but all of the associated work at the mill.
And we're still on track with that.
I think this year, we're probably somewhere in that 160 million dollar type spend.
Next year, we'll wrap that up with about $100 million of a final spend on the spring outage that we've got scheduled or you know that.
The final phase of that will take care of that machine, but we're on track.
For the original callout of about $450 million of total capital at the mill.
And Marc when that's done what will the capacity of the mill B just in general terms all of fiber mix look like between kind of Virgin fiber and recycled.
Well again.
We've talked that that machine theoretically would have a capacity of just round. It off 700000 ton a year type of capability are under the optimal grade mix.
As far as the fiber mix will as we've done with all of our mills, we built in a lot of flexibility, we're getting ready to start up the new OCC plant.
This summer and so that will give us a tremendous opportunity to to flex the Virgin fiber to the OCC and some D. L K.
So I don't want to get into the specifics, it's it'll be very similar to what we do at Deridder.
And counts mills as far as being able to move that fiber.
Nick's around and take advantage of the marketplace.
Okay.
I just wanted to talk a little bit about the converting business I'm just curious from a broad perspective, the impact on kind of productivity and cost you can see from kind of new corrugator is a new converting.
Equipment going in across the industry very similar to I think what you've just done up in Washington.
Because it seems like just an unprecedented period for me when I kind of when I look across the industry broadly.
The amount of investment that's going on in converting I don't know, whether you would agree with that statement.
I would say that I would say that it's you know it's.
I wouldn't call it unprecedented necessarily mark I think it seems like that probably because there are so few suppliers to this industry anymore and the lead times are so far out that youre seeing announcements that are coming about but if you really take into account when they're actually going to go into place you're looking at 18 to 24 months from now.
Yeah.
And in terms of like just when you think about things like that.
The project out in Washington, recently, what kind of.
Productivity or cost benefits you'd get from kind of these newer bigger corrugator is and also the new downstream converting equipment.
Well, we get there there's no question I mean, you know this equipment is of you know provides provides better cost structures and provides more productivity, but again I think it's just I think you have to use it based on and you have to think of it based on what your mix is the type of customers, you're dealing with and what your expectations are.
Or to be able to service those customers.
You know, it's oh, they're incredibly expensive investments.
And.
It's it's it's something that I think the from P. C. I can only speak from PCA standpoint from Pca's point of view, we've we've consistently reinvested in our box plants and our mills, obviously, we've we've hardly missed a beat in any given year no matter whats happening in the economy and I think.
That served us very well, but again our investments are all based on what our customers are telling us they need and what they want us to do and how they need us to provide the products to them in a timely manner.
Yeah, Okay and the last one this is Lee.
Lead you to kind of pivot away from it all from the.
Use of sheet plants that you've had over time, I mean, I think that you've probably had a higher proportion of specialty cheap plants than the rest of the industry.
Well I don't know I don't see any you know for us we're not pivoting away from that by any means a in fact, you know again, where we're adjusting to the customer needs even in those facilities. So that we can satisfy you know a complete array of our customers demands as opposed to just a segment of their demands.
So you know it's still a it's still a very critical piece to to how we go to market.
Mark I think about the investments we've made in the sheet plants, we've not only increase their productivity, but are there efficiencies in their capability in terms of what Tom was talking about to satisfy whatever the customer needs and do it in a very efficient effective fashion.
Okay very good thanks, a lot guys I'll turn it over.
Thank you next question please.
Our next question will come from Mark Weintraub with Seaport Research partners. Please go ahead.
Thank you first just trying to understand the increase in sequential costs et cetera, third quarter versus second quarter would that be similar in magnitude to what.
You're expecting a similar in magnitude to what you experienced first quarter to second quarter is there any slowing you're seeing or.
Any specificity there you could provide.
Yep Yep.
Mark This is Bob you, it's it's it's extremely similar.
To what we saw.
First quarter to second quarter.
But actually on the on the energy side is where it's it's a significantly higher.
Because like I said.
<unk> went up in the first or second.
Almost 30% and now there's another 26 plus percent on top of that so that's that's probably the main difference from up from a cost perspective, but you know freight in and so on and so forth are hum very similar.
So.
Not too far off.
And he started because if I look back last 10 years I think all but one year you were up third quarter versus second quarter. Obviously, you typically don't have this experience have as big of an increase in cost second or third quarter.
Are you are you.
And would you typically be getting some seasonal tail wins, which are sort of not factoring in this time around.
Well one thing that's different is any time, you know that Tom mentioned, it's on you know on the volume side because typically if you go back that many years that you've referred to you wouldn't see volume flat to down a little bit so.
So that's a big difference too cute or <unk> versus what we've done historically that that I would say that stands out and the inflation of course that you mentioned.
Okay that makes sense alright, thanks, so much.
Okay. Next question. Please our next question will come from Adam Josephson with Keybanc capital markets. Please go ahead.
Mark Bob Tom Good morning, Thanks, Al It any other way.
Good morning, Mark Tom would you mind, just walking me through so on the last call. I think you said your your bookings in April up about three and a half.
For the quarter. Your shipments were about flat can you just help me with your shipment trends you're booking trends. However, whatever you want to talk about how they trended throughout the quarter and then into July and then I think George asked about July and you mentioned that I think billings are down a couple percent, but that bookings are starting to turn up.
So can you just help us understand the distinction between all of these are terms that you're throwing out to measure demand.
Sure sure no problem.
You know in April .
Believe I told you on the call that we were up about three 5% at the time and we ended up just shy of that at three 2% in April .
As you went through the quarter, we started to we started to see that decline and we started to hear from those customers as I mentioned earlier that they were in a are in a pretty severe inventory situation and they needed to work off some of that inventory.
So we've been we've been seeing that and had been experiencing that over that over the last 90 days or so.
And I think you know it it looks as if maybe perhaps we're coming to the end of that.
It's almost in timing and in concert with what some of the customers had to say.
However, you know as you can probably well imagine are are we in a recession or were not in a recession. All these other things that are being talked about from an economic point of view.
It it it leads us to take a fairly conservative approach to our you know to forecasting at this point in time.
And in addition.
You know we just we came out of a price increase are you know during that period of time as well and we were implementing that price increase and in some cases as I as I mentioned earlier, you've got to be prepared to put some business on the line to do so.
So you know the prices, obviously, a bigger lever for us.
And that's that that was an important part of our strategy to go execute.
So that's that's that's the best I can tell you as to as to you know the forecast going forward and where we are and where we've come through.
I know I appreciate that and just to clarify that the July so if billings are down 2% month to date can.
Can you help clarify that bookings comment that you made that more recently they've started to go up just help us understand the distinction between the two and why they might seemingly be moving in different directions in July .
Well I think you know because billings or billings or for what happened already bookings are looking out you know a few weeks to even a month in some cases and so you know you start to.
Determine what's what's the correlation there and I'm talking about on a volume point of view not on a prior you know obviously not a revenue point of view. So so that's that's the big difference is I'm just looking at what happened already to date from the billings point of view are yet from a booking standpoint, I can I can see a trend that's looking out another two and four wheel.
And see it and that's and that's getting better than the trend we saw in the bill.
And so based on that I think you said risk.
Spots one of charges other questions is that for the quarter, you're thinking flattish to down a bit year on year in terms of shipments as Adam is that right right correct got it Okay and also Tom just on the inflation.
You mentioned freight I think having gone up for eight consecutive quarters and all all other matter of course had been highly inflationary for the last two years for reasons were all well.
Well aware of if in fact, we do go into a recession what is your view as to what will happen.
To that inflation, how embedded do you think certain aspects of that inflation or versus energy and in other costs that may be less so.
Well I I think I I think a lot of that inflation is embedded and I'll tell you why because we took this big jump in in volume and the economy took a big jump over these last few years unexpected, especially in our business.
And I don't see us I don't see us going down to 2019 levels or even 'twenty levels anytime soon.
I think we'll maintain a lot of that.
And you know given what we've had and what we're dealing with right now, especially like you take labor shortages. As an example, labor shortages are impacting us there impacting the freight business are impacting every business and I don't see that subsiding anytime soon either so I think a lot of those I think a lot of those costs are embedded now energy on the.
Other hand in some of these others they they can change.
You know on a dime, given demand and things like that but.
Some of these other things certainly in the box business are quite embedded.
I appreciate that and Tom or Bob just three Q4 Q just to make sure. We're on the same pages can you help me with historically cost are up sequentially <unk> to <unk> as well.
Whether thats called or et cetera use more energy et cetera, and then you have the Jackson project going on is there anything we should keep in mind in terms of how much higher one could reasonably expect cost to be <unk> to for Q.
Seasonally or otherwise that related to the Jackson project.
Well, yes, certainly for the Jackson project that you'll see a lot of that is in the is in the.
That scheduled outage.
Sequential movement, Adam It goes I think I said 44 cents in the fourth quarter. So that's a lot of where you'll see the Jackson impact.
But as far as the other costs I mean, we.
We don't expect them to be to move sequentially.
Like we like what we're seeing we expect to see between the second and third.
And frankly energy actually usually gets a little better because the temperatures are are a little bit milder in the in the in the fourth quarter.
Versus the hot summer months. So you expect some of your usages in some of your you know your chemicals and energy and some of the wood wood yields and things like that.
It typically gets gets a little little better actually so we would hope that you don't see near as large a sequential movement in costs going from three Q4, Q, but we'll see.
Got it thanks very much Rob.
Thank you next question.
Our next question will come from Philip <unk> with Jefferies. Please go ahead.
Hey, guys good.
Good morning, I guess good morning.
With the macro backdrop, a little less clear at this point any change in how youre thinking about phasing in.
Tax and ramp and how much confidence do you have those tons being sold out effectively when it comes online next year.
Well again I think it's important that we get this.
This phase in the fall done because it's not just a matter of of our incremental tons, but its significant cost reduction opportunity.
And so.
Along with next set the final phase that will occur next year. That's another step in not only the productivity on the machine, but another big piece of the cost improvement that comes out of the mill. So it's imperative that we get these projects done.
And then going into the future as we always do we will run to demand and we'll optimize our system.
And appreciating once it's fully ramped up you know from our cost profile.
<unk> enhanced but remind us how that all plays out just because you are taking the mill down its probably not operating.
Dealing.
Throughout next year, but from an EBITDA contribution should we expect it to be up year over year.
Flat down just wanted to make sure. It directionally, we're thinking about it at least the right way.
2023 over 2022 yes.
You would expect it to be up okay, alright, that's why I thought.
The reason I said that not only the productivity incremental tons, but the significant cost reduction.
Okay Super.
And then for my Energy standpoint, you know I appreciate gas prices have really kind of perked up and that's hard to predict can you remind us how much gas Nat gas and electricity you can see them from a cost standpoint, any any hedges that you have in place.
Yeah, we do hedge.
Don't hedge all of our volume.
It's a certain percentage of our volume and we constantly are monitoring that you know sometimes you're on the right side of that and sometimes you're not in but we've always done that and.
We'll continue to do that going forward, but we supply about 70 plus percent of our internal needs for for energy when the balance of that that other 30, I'd say, 80% to 85% of that is tied to gas. So.
Yes.
That's how it works got.
Gotcha and just one last quick one for me.
Perhaps a question for Tom Yeah.
Appreciating that getting that mix gains and <unk> was very complicated a lot of moving pieces should we expect those gains to be pretty sticky throughout the rest of the year.
Give me the second half of that I didn't quite hear you fill them should we expect the mix gains that you saw in <unk> to be pretty sticky in the back half of this year.
Yeah, I think the mix change will be you know I mean, our our mix always changes a little bit in the third and fourth quarter again.
And I think you'll see some of that are some of the same issues as I said going into the third quarter, especially around inventory. That's what's that's what's creating some of our some of our issues at the moment, but I thought I think that'll smoothed out so I think that'll be that'll be a plus for us.
Third and fourth quarters, Okay. Thank you.
Okay. Next question. Please our next question will come from Gabe Haiti with Wells Fargo. Please go ahead.
Mark Tom Good morning.
Good morning, I had a question.
About kind of tightness in the freight markets I guess, both trucking and rail that you guys have referenced.
Are you still inclined kind of to carry more inventory or safety stock to maintain acceptable customer service levels.
And are you running behind this.
Level or what you would historically have considered kind of comfortable.
Destock, if you will.
And then maybe I don't know I came up with you guys kind of process call. It 14000 tons per day across your whole system.
Quantify the inventory levels that you would expect to build in in the third quarter.
Going into this this big outage at Jackson.
Well, let me answer it this way if you think about the last two years, we've been struggling to achieve an adequate level of containerboard inventory through the system.
We hope to get through this third quarter and actually pre build some inventory to get ready for this big outage at Jackson and the fourth quarter.
But again for the last two years, it's been a struggle now that being said even though.
There is some incremental improvement in truck.
And driver availability the rail side of the equation remains very inefficient.
And so it behooves us to.
Try to build more inventory, we don't have the luxury of the short transportation times that we saw prior to two.
2020, and so you have to think that.
In terms of a lead time of getting a ton of containerboard bromine mill toy box plant.
<unk> remains a challenge and so essentially that has not improved significantly from where we were and so we continue to be very mindful of our of what we do with our our inventories and making sure that we have adequate containerboard stock.
Satisfy with the box plants need to take care of their customers.
Bob you want to add anything well I would just add mark that that's that those are the efficiency of those are part of the efficiencies that you alluded to when you talked about the Jackson conversion in.
In addition to the Jacksonville operating it also creates opportunities for us to be more cost efficient in terms of the way we're operating from a transportation point of view and also making sure that we have the.
Correct stock and each each of our facilities to service our customers.
Okay.
And.
I'll try to take a stab one more time not interested in quantifying the.
The level of inventory and they're trying to build.
No.
As far as inventory level.
We don't generally talk about.
Absolute numbers, but if you think about the outage in November .
It's approximately a 30 day outage, that's probably 35 or 40000 tons of impact that will.
That will have to deal with so it would behoove us to try to accomplish.
Accomplish a significant build this quarter to get through the fourth quarter.
So.
If you think about where we've been and again not achieving.
The adequate levels.
I think if you think about 30 40000 tons of incremental containerboard inventory <unk> going into <unk> would be our desired goal.
Bob you want to anything.
Hmm.
Okay. Thanks for that Mark.
And then my second question.
I suspect you'll you'll probably.
Differ but when I when I look across your converting system you do have a pretty good representation in the northeast.
But your mill system is kind of southeast and obviously, Michigan, Tennessee et cetera.
Any thought process or.
I want to say guidance, but.
View for potentially having a mill in the northeast.
The three to five year planning horizon.
No comment.
[laughter], Thanks have a good one.
[laughter] take care next question please.
Again, if you have a question. Please press Star then one our next question will come from John <unk> from John Tumazos very independent research. Please go ahead.
Thank you.
So a lot of literature about the consumer backing out of big brands because they are strapped.
Generic brands does it matter to PK G.
Which brands.
Consumer buys because you sell the containerboard anyway.
Generally speaking it doesn't matter certainly to some individual customers it might it might matter, but as far as as far as we're concerned we've got it you know.
16000, plus customers were dealing with from very large to to quite small.
Somewhere along the way those that customer base is supplying those brands you mentioned, so so for us and the broad base of customers. We have it doesn't it doesn't really impact us that much.
Thank you for the good results.
You're welcome next question please.
Our next question will come from Cleve Rueckert with UBS. Please go ahead.
Oh, great. Good morning, Thanks for taking my question everybody.
Nice job warnings.
Another very strong performance is impressive.
I just wanted to dig in a little bit on the comments about you know maybe being willing to give up some business, while you're trying to push it a price hike through them.
I was just curious if youre seeing competition increasing.
In the domestic U S market for for your containerboard products.
We generally don't we generally don't talk much about competition or some of the things that are going out in the market, but let's just put it this way that.
The market as you can tell the the volume in the market place in total remains very strong.
In spite of the fact that I've mentioned, a little bit of pullback because if you look at the gains we had over the last few years.
That put tremendous strain on on the entire industry. So the entire industry. As you know remains in my opinion very healthy.
That's pretty much all I'm going to comment on.
Okay. Yeah, that's fair enough I was just wanted to follow up.
And then you know we were talking about sort of the order book and in bookings and in Adam asked it.
Several questions about it I'm just curious about what the lead time is on your your order book and in those bookings not necessarily for containerboard the box plants, but you know for figures and box customers. How much visibility do you have there and maybe how is that different versus what you saw in Q1 and Q.
You too.
Well, our lead times have come down which is actually good because they got they got way too far out as a result of the demand that you know that we suddenly incurred along with the labor shortages, we had the freight issues other supply chain issues as you can well imagine so our lead times lead times.
Had gotten out out there quite a ways.
We typically we typically operate on very short lead times.
Based on whatever our customers' needs and we're not we're not back to that yet and we're working to get back there, but again you know we're still dealing with a lot of those same issues labor related freight related whatever it might happen to be we're still dealing with a lot of those issues and those are still impacting.
Those lead times, but they have come down.
Yeah, Yeah, Okay, alright that makes sense and maybe finally, sorry, if I missed it earlier, but could.
Could you just could you tell us again, what the incremental capacity you expect to get out of Jackson is and when that comes on is that is that going to be sort of in the middle of next year. After the spring outage I'm just wondering what the ramp up schedule is there.
Oh.
If you think about the production currently on the machine.
The work that's being done in November we will provide an opportunity, but it's probably about 125000 tons of a year of extra opportunity on a machine from its current situation.
That's that's total once you're finished it's 120 no no. That's definitely this november's project again, so from where we are today and going through the project in November we'd get about 125000 tons of annualized opportunity on the machine.
And then the final project next year, you get about 140000 tons more of a productivity opportunity on the final phase because you're talking about dryer additional dryer cans and drawing capacity in particular got it got it and you get you get.
But keep in mind again, thats significant cost reduction that goes along with it right.
Right, which falls right to the bottom line.
Okay that does it for me. Thank you very much I appreciate it.
Okay. You're welcome next question. Please our next question will come from Kyle White with Deutsche Bank. Please go ahead.
Hey, Good morning, I was wondering in the question.
Yes. Good morning, I wanted to go back to Phil's question on energy just curious has the dynamics in the energy markets. This year caused you to make any changes to your energy policy and how you manage this.
I recognize you're not as exposed to Nat gas some other producers, but curious what levers you have to manage this risk.
No you know again, we we've.
The box plants, essentially use natural gas across the board mills have the advantage of a burning black liquor wood waste and minimal amount of natural gas it would be primarily used in our lime kilns as an example.
But we don't have a lot of flexibility in that regard you tied to natural gas in the box plants and then.
Minimal amount in the mills so it.
It is what it is you have to buy that and whether you hedge a portion or all or or how you manage that but no. The the balance hasn't changed and again, how we manage it quite frankly.
Is the same today as we've looked at it probably over the last 10 years.
Got it and then I think I missed this in the prepared remarks, but did you repurchase any shares during the quarter.
How are you thinking about buybacks with the recent authorization you announced at the beginning of this year and then also given the pullback of the equity value since the end of last quarter.
Yeah, No we didnt did not buyback any shares this recent quarter and as far as how we look at it.
The keyword is opportunistic.
And so amongst ourselves, we know where we we would be choosing to buy at any given time and we'll just leave it at that.
Alright sounds good I'll hand, it over.
Okay next question please.
Again, if you have a question. Please press Star then one.
Yeah.
Mr. Callison I see that there are no more questions do you have any closing comments.
Yes, I'd like to thank everybody for joining us today on the call and I look forward to speaking with you in the latter part of October with the third quarter results have a nice day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.