Q3 2022 Packaging Corp of America Earnings Call
Thank you Matt Good morning, and thank you all for participating in packaging Corporation of America's third 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 executive Vice President of runs our packaging business and Bob Monday, our chief financial.
Sure.
I'll begin the call with an overview of our third quarter results and then turn the call over to Tom and Bob will provide further details.
I'll, then wrap things up and then we'd be glad to take any questions.
Yesterday, we reported third quarter net income of $262 million or $2 80 per share.
Excluding special items third quarter 2022, net income was $266 million or $2 83 per share compared to the third quarter of 2021, net income of $257 million or $2 69 per share.
The third quarter net sales were $2.1 billion in 2022 and $2.01 billion in 2021.
Total company EBITDA for the third quarter, excluding the special items was $477 million in 'twenty, 'twenty, two and $464 million in 2021.
Third quarter net income included special items expenses of three cents per share primarily for certain costs at the Jackson, Alabama mill for the paper to containerboard conversion related activities.
Details of all special items for the third quarter of 2022 and 'twenty 'twenty. One were included in the schedules that accompanied the earnings press release.
Excluding the special items, the 14th per share increase in third quarter 2022 earnings compared to the third quarter of 2021 was driven primarily by higher prices and mix in our packaging segment of $1 60, and paper segment 23 cents.
Lower interest expense four cents, a lower share count, resulting from share repurchases four cents and the lower tax rate too.
These items were partially offset by operating costs, which were 70 cents per share higher primarily due to inflation related increases in the areas of energy.
Repairs materials and supplies.
Nicholas Labor and benefits expenses as well as several other indirect and fixed cost areas.
We also had inflation related increases in our converting costs, which were four cents per share higher.
The negative impact of lower volume was 52 per share in our packaging segment and five cents in our paper segment freight and logistics expenses were 20 cents above last year and scheduled outage expenses were 10 cents higher we also had higher depreciation expense of seven cents.
And other expenses of four cents.
The results were three cents above the third quarter guidance of $2 80 per share primarily due to the very sound implementation processes around our previously announced price increases in the packaging and paper segments as well as the continued benefits generated from our mills and plans and process efficiency optimization efforts.
And material usage initiatives looking.
Looking at our packaging business EBITDA, excluding special items in the third quarter 2022 of $467 million with sales of $1.9 billion.
<unk> in a margin of 24.1% versus last year's EBITDA of <unk>.
$467 million with sales of $1.8 billion and a 25.5% margin.
Our teams did a tremendous job of implementing our previously announced price increases however demand in our packaging segment was well below our expectations for the quarter Tom will discuss this further in a moment.
Our containerboard mills operated in an efficient and cost effective manner, and we balanced our supply with current domestic and export demand.
As part of the effort, we began a scheduled maintenance outage in the first phase of the number three machine conversion to containerboard at our Jackson, Alabama Mill, a few weeks earlier than originally planned.
Total economic related downtime for the third quarter was approximately 128000 tons.
The outage and conversion work at Jackson will be completed in the fourth quarter, and we will remain committed to ramping up our internal capacity according to our customers' demand requirements.
Finally, although we are still experiencing experiencing historically high inflation within our operating and converting costs, our mills and plans continued to remain focused on delivering numerous cost reduction initiatives.
Efficiency improvements and integration and optimization enhancements and capital benefit a capital project benefits that helped to minimize the impact.
I'll now turn it over to Tom Who'll provide more details on the containerboard sales and our corrugated business.
Thank you Mark as Mark mentioned, we continue to get excellent realization from the implementation of our previously announced price increases across all product lines domestic containerboard and corrugated products prices and mix together were $1.54 per share above the third quarter of 2021 and.
<unk> 35 per share compared to the second quarter of 2022.
Export containerboard prices and mix were up six cents per share compared to the third quarter of 2021 and up a penny per share compared to the second quarter of 2022.
The lower demand in our packaging segment that Mark spoke of was driven by several items the combined impact of which resulted in our volumes being much lower than we anticipated.
Corrugated product shipments were down 6% in total and per workday compared to last year's third quarter.
Outside sales volume of containerboard was 57000 tons below last year's third quarter, and 61000 tons below the second quarter of 2022.
The ongoing inventory correction in the retail channels is larger than originally thought and significant inflation continues to negatively impact consumer's purchases are both durable and non durable goods. In addition, various events and issues in 2021 and this year, including the recent hurricane in Florida continue to have a negative effect on the.
Agriculture and protein markets.
Demand is beginning to experience headwinds from the cooler housing markets as well these things combined with rising global interest rates deterioration in U S economic conditions economic weakness in China, and Europe , along with China's zero tolerance Covid policy, all negatively impacted domestic containerboard and box demand as.
As we look from the third quarter and into the fourth quarter. We expect the majority of these conditions to continue and in addition, there are four less shipping days in the fourth quarter compared to the third quarter.
Now I'll turn it back to Mark.
Thank you Tom looking at the paper segment EBITDA, excluding special items in the third quarter was $33 million with sales of $165 million or a 20% margin compared to the third quarter of 2021, EBITDA of $18 million and sales of $150 million or.
Or a 12% margin.
Prices and mix were up 21% from last year's third quarter and moved 6% higher from the second into the third quarter of 2022, as we continued to implement our previously announced price increases.
Sales volume was about 9% below last years third quarter, primarily due to this year's scheduled outage at our international Falls mill as well as last year's third quarter that included paper sales from the Jackson Mills number one machine.
The outstanding efforts around implementing our latest price increase together with optimizing the cost structure inventory and product mix delivered excellent margins in the paper business now I'll turn it over to Bob.
Thanks, Mark cash provided by operations and free cash flow set all time quarterly records at $431 million and $251 million respectively.
The primary payments of cash during the quarter included capital expenditures of $180 million common stock dividends totaled $117 million.
77 million for federal and state income tax payments.
Pension and other post employment benefit contributions of $51 million and net interest payments of $4 million.
In addition, we repurchased 1.032 million shares during the quarter at an average price of $137 60 per share for a total of $142 million.
We ended the quarter with $794 million of cash including marketable securities.
And our liquidity on September 30th was $1.1 billion.
Lastly, our planned annual maintenance outage expense for the fourth quarter is now expected to be about 38 cents per share or 11 cents per share higher moving from the third quarter to the fourth quarter.
I'll now turn it back over to Mark.
Thank you Bob.
Looking ahead as we move from the third and into the fourth quarter as Tom mentioned, we see most of the issues and economic conditions and higher global interest rates that impacted third quarter packaging segment demand continuing our box plants, we will have four less shipping days compared to the third quarter and we also expect a seasonally.
Less rich mix in corrugated products as well as lower average export containerboard prices.
We will run our containerboard system based on this demand outlook, along with completing the Jackson mill.
Scheduled annual maintenance outage in the first phase of the containerboard conversion work on the number three machine.
In our paper segment will continue to implement our previously announced $60 per ton price increase on all office printing and converting grades are that took effect on September 6th However, volume will be lower compared with the seasonally stronger third quarter.
As Bob mentioned scheduled annual outage expenses will be 11 cents per share higher than the third quarter.
Lastly, we expect slightly higher operating costs, primarily labor and benefits expenses, along with anticipated colder weather, resulting in higher energy costs, considering all of these items, we expect fourth quarter earnings of $2 22 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 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.
K and subsequent quarterly reports on Form 10-Q filed with the SEC. The actual results could differ materially from those expressed in these forward looking statements and with that Matt I'd like to open up 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 youre using a speakerphone please pick up your handset before pressing the keys. If at anytime you question. That's 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.
Okay.
Our first question will come from George Staphos with Bank of America Securities. Please go ahead.
Hi, This is sandy Leung on behalf of Chuck stuff as he had a small conflict first can you. Please discuss your early for keep booking and billing trends.
And to the extent that you can share them our customers continue to destock in the supply chain. Thank you very much.
Oh Sandy this is Tom good morning.
So far our bookings and billings are running about 5% below last year.
The you you asked about stocking and some inventory issues I will tell you that.
I think the good news is as well first of all we didn't predict that it would last as long as it is in terms of this inventory issue. There was obviously coming out of the pandemic, our retailers and other customers Sox stocked up significantly to attempt to try to meet the record breaking demand that they saw and one.
Under domain wanted to maintain that and of course that demand has now waned some are in.
<unk> well you know we find that they ordered excessive amount of boxes as well to meet that kind of demand. So so where we are going through this period right now of a pretty severe inventory adjustment, that's where we're seeing primarily in these down volume numbers.
And.
You know that's going to take a while to work through the system. We we thought that it was going to work through the system in about 30 or 60 days, but this looks like it's gonna be a probably a couple of quarters to get through this completely.
Thank you.
Next question please.
Our next question will come from Mark Weintraub with Seaport Research partners. Please go ahead.
So following up on that the demand questions.
Hum.
Could you ballpark and I realize this is just judgment, but yours is certainly going to be in as good or better than anybody else's, how much that inventory destock.
Might have contributed to the down 6%. Realizing there are other factors you highlighted as well.
Yeah.
Mark This time again.
It's it's significant Theres no question about it and you know it's a it's the primary number.
You know, it's it's quite interesting that are just really you know as of yesterday as a matter of fact, I mean, we had a fairly large customer one of our plants.
Who are you know sent an email in and said you know I I have finally run down my excessive inventory.
I'm now ready to order again.
So are you know, we probably lost in a in a lot of cases, one or two of the typical order cycles that some of these customers would go through as they went through this destocking of inventory.
And then you mentioned you thought, whereas originally 30 fixed days, maybe it's going to be a couple of quarters. So is that your best.
Is it right to interpret that as meaning we had it in the third quarter and you're hopeful that one will be done with it through the fourth quarter or might it go beyond there and do you anticipate it's gonna be.
At as high a level as what we saw.
And certainly that the latter part of the third quarter.
Well you know, obviously I can't I can't predict the future, but I can tell you that I believe that when you look at our fourth quarter as I mentioned, there are a lot of other factors going into the fourth quarter and including this destocking. So if you. If you look at those numbers and you think about those you.
Would see that the trend is probably where it will begin to work our way out of this.
Inventory issue, but we've got some other headwinds as well as I mentioned, especially like the AG business in the south that was impacted by the hurricane and that those crops are either going to be delayed or in some cases lost completely. So we are you know I I the only I've never experienced this.
To be honest with you in the in my entire career. So you know this the severity of this building the inventories the lead times that box plants got to in the you know and kind of in some cases, almost a panic buy our boxes because they couldn't ship their products without it obviously, so you know it's it's.
It's just going to take a little while to work through this I look back at the great recession, and it was kind of interesting there because of the great recession that took a couple of quarters for the for the for the cycle to finally turn in the business to really turn up beginning it still wasn't equal to the previous year that took a little it took a few more quarters, but at a the first two quarters where the.
You know where the big jumps. So that's the only thing I've really got it to compare to and so I I think you know when you think about how many how many boxes somebody can store or how much product. They can have and get rid of I would think that through this through this Christmas season, you'll see you'll see a lot of destocking take place.
Great color.
Our next question will come from Adam Josephson with Keybanc capital markets. Please go ahead.
Thanks, so much everyone hope you're well.
Tom just one more.
<unk> about that alright.
Are you seeing it at the retail level at your customers to your point I, just I wouldn't think that your customers could store would have room to store that many boxes. So I'm, just a little perplexed as to where exactly that.
Stocking is taking place in and how much longer it's.
It could last for.
Well, let me get specific on that Adam I mean, what what we're talking about Destocking is we're talking about customers that built their own inventories of their own products to hopefully continue to meet the demand curve that was the you know that was quite steep and quite good for them and all of a sudden when that demand leveled out there sitting on a lot of their own inventory.
That coupled with the lead times that got out in boxes. They had to you know they had to store more boxes. As a result of those lead times and those lead times are now come back down to a more normal level. So just be about coming that back down to a normal level. You can met you can miss a whole order cycle.
Yeah.
Got it, okay, and but but even though they've come back to normal lead times are they're still sitting on it seems like.
Much too much inventory for them in some cases.
Yeah in some cases, yes, I just told you about a big a large customer one of our plants that is now you know ordering again, but they.
They didn't order we've got I'll give you. Another example, a a very large account of ours.
Through mid year was up about a little over 3%.
And suddenly the next month it was down 50%.
Now this isn't lost business. This isn't anything other than you know just they've got they have excessive inventory that they're going to have to work off for a while so we got to get through the cycle.
Yeah, no I appreciate that.
Bob just on the guidance can you just walk me through the implied sequential change that the 60 cent decline I believe you said maintenance is going to be 11 cents higher sequentially. So that leaves another.
Call. It 50 sense can you help me with how much is inflation how much is lower containerboard export how much is the the Jackson <unk>.
<unk> work et cetera, and then within that Bob how much would you consider essentially one time items for instance, you know elevated maintenance relative to normal et cetera, If you catch my drift.
Yeah, Adam I'll say, you know as Mark mentioned in the in the in his comments, we expect to run our containerboard system, you know similar to <unk>.
With the same types of issues, we had in the third.
So.
When you consider that you know, let's say about half of that sequential movement will end up in the in the in the volume side.
Aside of so and then the balance of that no. The the items that are probably higher versus what we would normally see going from third quarter to fourth quarter really a couple of buckets, primarily energy for obvious reasons and labor and benefits again for for for some obvious reasons as that continues to.
<unk> increase.
With the situation with the Labor force.
That's a one on one other item that might be a little bit different as well as on the freight side. We certainly are seeing some improvement in our you know when the in the freight world right now, but when you're matching supply with demand. You know you are not always able to optimize your routes and he may be shipping things more on one mode.
Versus the other than normal or for longer distances. So that is a reason that you know that we expect that to be up a bit going from three Q4 Q.
Yeah, no I appreciate that.
And Mark just on the buyback I correct me, if I'm wrong, but I think the average price of 137 was comparable to what what you did in four Q of last year.
Were you doing that.
As the man like before after demand did what it did and I'm just wondering about your thoughts about.
Where the stock is now versus what you've been paying for buybacks in recent quarters in light of the recent demand weakness and otherwise.
You know as we as we went through the third quarter.
We saw an opportunity based on where the stock price was at the time.
That it was it was a good value for us to buy back in the <unk>.
We look at it as a conviction opportunity that we see the value there we had the cash.
And took advantage of it it is historically in line with what we did last year at this same time in the fourth quarter.
And long term.
I think you know under the circumstances, we will continue to take advantage and be opportunistic in the same manner.
Just one last one on that Mike.
If you were to compare potential acquisitions to further buybacks is there one at this juncture, that's looking more attractive to you than the other or not necessarily.
Not necessarily again I think again.
We see value.
Right.
In terms of the stock buyback during the third quarter.
And so you would have to imagine where the stock is today, we have that same type of conviction and so we'll update you on the January earnings call them on what we actually did but I think you have to understand.
If if we do hit the $2 22 set number that we're guiding to we're going to have an $11 earnings year, and so it's going to be a record year for us once again, and so again I'm going to use the term conviction. We believe strongly that there's a much higher value in the embedded in the stock valuation.
Yeah.
Thanks, so much mark.
Thank you next question please.
Our next question will come from Philip <unk> with Jefferies. Please go ahead.
Hey, Mark Tom Bob This is John Dunigan on for Phil.
Appreciate the color.
I want to start off with with their own inventory levels I mean, it ticked up sequentially ahead of the J three outages as you're planning, but obviously the demand outlook is worse than quite a bit can you just give us some color on how you're viewing your own internal inventory levels on the containerboard side and is there any economic downtime baked into your guidance.
Yeah, you know what when we went into the third quarter we are.
Historically third quarter is always a robust quarter people are getting ready for holiday activity and so you also come out of the second quarter, which is traditionally a bigger annual outage quarter, when you've taken mills down and you run your inventory down to the lower side. So you will always try to start building back up during that July August .
<unk>.
Which is what we did obviously the AR the demand did not materialize. So we course corrected and ran to demand.
And so we will continue to do this.
I think as far as inventory targets.
We don't have a specific target as such.
We're looking at what Tom is is.
No.
Understanding about what the market is doing on his side of the business.
And in what we would imagine we would need to supply that and we will continue to run our mills in that regard who are to meet the demand we got a lot of flexibility.
We will be finishing up the Jackson work sometime in November and then we will will again using the term run to our demand.
Understood I guess I guess, leading up this quarter you had you had talked about being still pretty tight on inventories. Obviously it was a course correction I'm sure there are.
Little bit of a moving target in terms of the inventory levels, but I guess my takeaway is that you are you feeling comfortable with your inventory levels. Now there is some big destock that you feel like you have to do yourself with the pullback on the demand side.
No. We're we're in a good place and again, where we're at a place now we can we can move the tons and inventories, where we where we see we need to move them. So we're in a healthy place great. Okay, and then just shifting over to the paper side.
My expectation I talked from from last quarter was that paper volumes would be.
About flat sequentially in the third quarter.
Obviously, it came in much higher seasonally stronger quarter.
Was there any anything that kind of stood out on the paper side for drivers.
You know that we should expect maybe going forward.
No. It was just again it was it was a good a good quarter first we've also right sized the business. We've got the international falls are running in a manner now in terms of it's split between cut size and offset converting type grades and so we're in a good place there we worked off the.
Final inventory from the Jackson production that was produced last year. So.
We see the market is in a balanced.
Place right now and where we're capable of supplying the nationwide demand we have.
Excellent. Thank you for the color and I'll turn it over.
Next question please.
Again, if you have a question. Please press Star then one our next question will come from Anthony Pettinari with Citi. Please go ahead.
Good morning.
Morning, Mark.
You know we've seen a big step down in OCC over the last couple of months and you know on understanding you have more kind of a virgin leverage system I.
You've made some investments in recent years to add flexibility. There I'm. Just wondering if you can remind us how much OCC you can consume how much you can swing into potentially to take advantage of some of these low costs.
Any thoughts there.
The best way to look at it as on a percentage basis, if you think about.
The total capacity of our mill system, we'd still be around that 20% low 20% capability of a fiber ring up our mills and so it's you know whether are at a point in time with pricing youre running 15% recycled through the system or taking advantage of opportunities on price and availability and ramping it.
Up into the lower 20% recycle I think that's that's how we look at it and that's the kind of capability we have.
Okay, that's very helpful.
And then you know there there are some competitor capacity projects that maybe will come online by the end of the year or early next year I think some of those have explicitly targeted independent box market.
You know you have a very high integration rate I, you know I guess to the extent that you can are you seeing any of that new capacity in the market or entering discussions or does your integration rate kind of insulate you from that just any thoughts about.
Some of these new projects and.
<unk> on the market, whether you're seeing it or not.
Well I'll, let Tom comment on that Anthony what number one as you summarized it correctly based on our integration level. That's a you know that's that's been a target of ours, a very high integration level, that's where we come from a what and and we've said many many times you know what other people decide to do and the investments they decided to make that strictly <unk>.
Up to them and you know we've talked about what we see the independent market being where they are the or the quote unquote open market and what's happened to acquisitions over over the last decade or more.
That's that market has changed quite dramatically in terms of size.
So.
I I I would just say that it's you know, it's really it's where we're a little bit ambivalent to what others decide to do.
Okay. That's helpful I'll turn it over.
Thank you next question.
Our next question is a follow up from Adam Josephson with Keybanc capital markets. Please go ahead.
Thanks, So much everyone. Tom I was just one more thought which is in <unk> shipments were down sex and you're talking about excuse me yeah.
And for Q, you're talking about.
Bookings and billings down about five can you just remind me how that compares to 2019 levels and you know what you think a reasonable expectation for demand is at this juncture relative to 19 levels. There have been obviously somebody distortions at the onset of the pandemic and thereafter I'm just wondering.
How you're thinking about that issue.
Yeah, well, Adam will still be will still be a you know quite a bit above 2019 levels. So you know in spite of this and I think that a big portion of this is is as I said inventory restocking. So I haven't changed I really haven't changed my viewpoint, even from the last call we.
Had in terms of you know that we will we will retain a quite a bit of the gains that took place during the pandemic going forward. This isn't a this isn't a you know severe demand destruction or anything like that obviously inflations have you know taking some toll but you know this this is more of a you know a couple of quarter phenomenon I think.
Regarding regarding these excessive inventories.
And what gives you confidence in that that you would hold some of the the volume you gained post 2019, just again given that.
Yeah, there was extraordinary surge with all the government stimulus you name it and now we're seeing the other side of that so I guess, what would give you confidence that you would hold those those post 2019 gains if you will.
Well a couple of things no different from you having a discussion with me about my viewpoints I have the same discussions with our customers about their business and about what they project going forward and are you now.
Based on based on their forecast.
Forecast and what they see and what they expect to be doing in their business the capital investments, they're making in their businesses et cetera, I have a high degree of confidence. The other thing that gives me some confidence is regarding the the consumer themselves you know consumer spending and and the consumer relative to savings and other.
Things like that has held up pretty well.
In spite of this are you now.
A big step up in inflation so.
No I think I think some of these things some of these phenomenons, we're dealing with here in the short term are going to wane.
And you know, it's gonna be a it's going to be relatively positive going forward.
I appreciate it just one I think you mentioned that the impact that Covid lockdowns are having covered lockdowns in China excuse me are having on domestic demand can you just talk about just give your perspective as to the impact on the U S economy from what's happening in China.
Well interestingly enough are you know we set are the all time record for onshoring of manufacturing.
Just in the last quarter in the U S. A.
Not talked about very much and it's a little subtle, but certainly very impactful for our business.
And you know I think that'll continue to be the case I can tell you that supply chains are still a big problem.
It's a it's been a it continues to be a problem for our customers, who rely on certain parts or or chips or whatever the case might be coming from China, and the and the continuous disruption of that supply.
That's that's beginning to really drive more onshoring not only here in the United States, but in Mexico and other related countries, you know that that border that border. The U S, which will which will be much more beneficial going forward for our box business.
Thanks, so much Tom.
I guess next question.
Again, if you have a question. Please press Star then one our next question will come from Mark Weintraub with Seaport Research partners. Please go ahead.
Firstly, just a clarification you had mentioned that.
It is I think we're going to be about 11 cents higher than you had previously anticipated in the fourth quarter did I hear that right. What does that number kind of on a per share basis is expected to be in the fourth quarter versus the third quarter.
In the fourth quarter.
Mark.
Mark It's 11 since going from the third quarter to the fourth quarter. Okay got it. So it was like 26 sensors, though in the third quarter go into 37 that.
It was yeah. It was like 20, yeah, Yeah, 'twenty six 'twenty seven cents yep, Okay, alright, good and then the other question I have is.
The Jackson project.
I mean, one of the things that was also going to do was reduce your costs meaningfully.
And hopefully under a certain environment that would show up in 2023.
Is that dependent on demand getting back to strong levels or are there ways. You can run your system, but that benefit is going to show up regardless do you think or again is it that it'll show up but we'll have to wait until that demand is back to a stronger level.
Yeah, you you just answered your own question when when you run the mill the way, it's designed and the way, we're finishing up the work that we're doing it will be a low cost operation for us.
So we built that capability into it and we'll be able to take advantage of it but as as we standby the.
Position that will run the entire system to demand.
And that means rationalizing from.
From a nationwide point of view, where we need the tons to come from.
Yeah.
Okay. So so basically for the full benefit obviously, you need demand to get stronger.
That's the right conclusion.
Yes, okay. Thank you.
Mr. <unk> I see there are no more questions do you have any closing comments.
Yes.
You for joining us on the call today, and we look forward to talking with you in January for the full year fourth quarter our earnings event.
Take care have a good holiday.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.