Q4 2022 Packaging Corp of America Earnings Call
Speaker 2: Ahem.
Speaker 3: Thank you for joining Packaging Corporation of America's fourth quarter and full year 2022 earnings results conference call.
Speaker 4: Your host will be Mark Talazan, Chairman and Chief Executive Officer of PCA.
Speaker 5: Upon conclusion of his narrative, there will be a question and answer session.
Speaker 6: Please also note today's conference call is being recorded.
Speaker 7: At this time, I'd like to turn the call over to Mr. Kalazan. Please proceed when you are ready.
Speaker 8: Thank you, Jamie. Good morning and thank you all for participating in the PACTI Incorporation of America's fourth quarter in full year 2022 earnings release conference call.
Speaker 9: Again, I'm Mark Colzan, Chairman and CEO of PCA, and with me on the call today is Tom Hasfurther, Executive Vice President who runs our packaging business.
Speaker 10: and Bob Mundy, our Chief Financial Officer.
Speaker 11: I'll begin the call with an overview of our fourth quarter and full year results, and then I'm going to be turning the call over to Tom and Bob who will provide further details.
Speaker 12: then I'll wrap things up and we'd be glad to take questions.
Speaker 13: Yesterday, we reported fourth quarter 2022 net income of $212 million or $2.31 per share.
Speaker 14: Excluding special items, fourth quarter 2022 net income was $215 million, or $2.35 per share, compared to the fourth quarter of 2021 net income of $262 million, or $2.76 per share.
Speaker 15: Fourth quarter net sales were $1.98 billion in 2022 and $2.04 billion in 2021.
Speaker 16: Total company EBITDA for the fourth quarter, excluding special items, was $409 million in 2022 and $463 million in 2021.
Speaker 17: Excluding special items, we also reported full year 2022 earnings of $1.04 billion or $11.14 per share, compared to 2021 earnings of $894 million or $9.39 per share.
Speaker 18: Net sales were $8.5 billion in 2022 and $7.7 billion in 2021.
Speaker 19: excluding special items, total company EBITDA in 2022 was $1.9 billion compared to $1.7 billion in 2021.
Speaker 20: Fourth quarter and full year 2022 net income included special items primarily for certain costs at the Jackson Alabama mill for paper to container board conversion related activities.
Speaker 21: Details of all the special items for the year 2022 and 2021 were included in the schedules that accompanied the earnings press release.
Speaker 22: Excluding special items, the $0.41 per share decrease in fourth quarter 2022 earnings compared to the fourth quarter of 2021 was driven primarily by lower volumes in our packaging segment $1.14 and paper segment $0.02.
Speaker 23: We also had higher operating costs of 48 cents, primarily from inflation on energy, chemicals, labor and benefits, supplies, solar tax and gas taxes and hangars.
Speaker 24: repair materials and services and other indirect and fixed costs.
Speaker 25: Freight and logistics expenses were unfavorable, 13 cents, along with higher depreciation expense, 9 cents.
Speaker 26: higher converting costs.
Speaker 27: six cents and higher scheduled maintenance outage expenses of one cent.
Speaker 28: These items were partially offset.
Speaker 29: by higher prices in the packaging segment.
Speaker 30: of $1.18.
Speaker 31: packaging segment and paper segment rather of 21 cents.
Speaker 32: A lower share count resulting from share repurchases, 8 cents.
lower interest expense, four cents, and a lower tax rate.
1 cent.
Results were $0.13 above the fourth quarter guidance of $2.22 per share, primarily due to higher prices and mix in the packaging segment.
lower freight and logistics expenses.
a lower share count resulting from share repurchases, and a lower tax rate.
Looking at our packaging business, EBITDA, excluding special items in the fourth quarter of 2022 of $392 million with sales of $1.8 billion, resulted in a margin of 21.7% versus last year's EBITDA.
$461 million and sales of $1.9 billion or a 24.5% margin.
For the full year 2022, packaging segment EBITDA, excluding these special items, was $1.8 billion with sales of $7.8 billion.
or a 23.8% margin compared to full year 20...
21 of $1.7 billion with sales of $7.1 billion or a 23.9% margin.
Demand in the packaging segment was below expectations for the quarter, causing us to run our container board system to these lower demand levels.
Our employees did a very good job with their cost management and process optimization efforts at these lower production rates to offset the negative volume impact.
Total economic related downtime for the fourth quarter was approximately 231,000 tons.
The scheduled maintenance outage and conversion work at our Jackson, Alabama, mill was completed successfully during the fourth quarter, and we restarted the mill earlier this month after being down as a result of the lower demand.
The No. 3 machine achieved its first phase design capacity and is producing a very high quality virgin liner board.
However, based on current container board demand levels, we've decided to move the second phase of the conversion work from this spring to next year in 2024.
I'll now turn it over to Tom who will provide further details on container board sales and the corrugated business.
further details on container board sales and the corrugated business. Thank you, Mark.
Domestic container board and corrugated products prices and mix together were $1.19 per share above the fourth quarter of 2021 and flat compared to the third quarter of 2022. Export container board prices and mix were down a penny per share compared to the fourth quarter of 2021.
of container board was 131,000 tons below last year's fourth quarter and 38,000 tons below the third quarter of 2022.
The lower demand in our packaging segment was driven by several items.
The inventory correction in both boxes and our customers product has been more prolonged than what we originally anticipated at the start.
Inflationary pressures on the consumers have also added to the problem by reducing the consumer's discretionary spending capabilities.
In addition, consumer behavior changed very quickly as we exited the extreme COVID period, resulting in more of a preference towards travel, entertainment, and experience versus that of tangible goods.
Container board and box demand continues to be negatively impacted from the deterioration in U.S. and global economic conditions, rising interest rates, and a cooler housing market.
As we move from the fourth quarter into the first quarter, we estimate the rate of shipments per day to be fairly similar as we expect many of these conditions to continue. However, there are four additional shipping days in the first quarter, so total actual shipments will be higher when compared to the fourth quarter of 2022.
In spite of the numerous issues currently impacting demand, we continue to perform at levels above pre-COVID and anticipate our first quarter shipments to exceed first quarter of 2019 shipments by approximately 6% on a per day basis.
Now I'll turn it back to Mark.
Now I'll turn it back to Mark. Thanks, Tom.
Looking at our paper segment, EBITDA, excluding special items in the fourth quarter, was $39 million with sales of $154 million, or a 25.7% margin, compared to the fourth quarter of 2021 EBITDA of $26 million on sales of $143 million.
percent margin compared to the full year 2021 EBITDA of $72 million with sales of $600 million or a 12 percent margin.
Prices and mix were up 21% from last year's fourth quarter and moved 3% higher from the third quarter of 2022 as we continue to implement our previously announced price increases.
Sales volume was about 11% below last year's fourth quarter, primarily due to paper sales from the Jackson Mills number one machine, which we included in last year's results, as well as having re-optimized our product and customer mix since that time as we transitioned away from paper.
the employees of the paper business have done a tremendous job over the last several quarters to optimize our inventory, product mix, and cost structure in order to deliver outstanding results for 2022, and I'm confident that we can maintain this momentum through 2023.
I'll now turn it over to Bob.
Thanks Mark. Cash provided by operations during the quarter totaled $420 million.
with capital expenditures of $247 million and free cash flow of $173 million.
Other cash payments during the fourth quarter included dividend payments of $116 million.
cash tax payments of $56 million and net interest payments of $31 million.
We also spent $380 million during the quarter to repurchase just over 3 million shares of our common stock at an average price of $126.70 per share.
That brings our total repurchases over the last five quarters.
to almost 5.5 million shares at an average price of $130.62 per share.
repurchases of our outstanding stock and dividend payments made during the past year.
represents 63% of cash from operations or 91% of net income that was returned to shareholders in 2022.
For the full year 2022, cash from operations was $1.5 billion, capital spending was $824 million.
with free cash flow.
of 671 million.
recurring effective tax rate in 2022 was 24.5%. Our final reported cash tax rate was 20%.
Regarding full year estimates of certain key items for the upcoming year,
We expect total capital expenditures to be approximately $475 million.
And DDNA is expected to be approximately 485 million.
We estimate dividend payments of $450 million and cash pension and post-retirement benefit plan contributions of $53 million.
Our full year interest expense in 2023 is expected to be approximately $72 million and net cash interest payments should be about $74 million.
The estimate for our 2023 book effective tax rate is 25%.
Currently, planned annual maintenance outages at our mills in 2023, including lost volume, direct costs, and amortized repair costs.
It's expected to be in total 67 cents per share versus 99 cents per share in 2022. The current estimated impact by quarter in 2023 is 11 cents per share in the first quarter, 14 cents in the second.
22 cents in the third and 20 cents per share in the fourth quarter.
I'll now turn it back over to Mark. Thank you, Bob.
The hard work of our employees along with strong relationships between us and our customers and suppliers delivered outstanding results for PCA in 2022.
New annual company records were achieved for revenue, cash from operations, net income, and earnings per share. And, as Bob just mentioned, 91% of our net income was returned to our shareholders from dividend payments and stock repurchases.
We successfully completed or substantially completed significant cost reduction and process improvement projects at our Mills
including a 30 megawatt steam turbine and first phase of the number 3 machine conversion to container board at the Jackson Mill.
This effort included fiber flexibility projects at the Wallula and Jackson Mills and many other key initiatives.
We also completed numerous high return and high efficiency improvement projects in our corrugated products plants that will allow us to better optimize our entire packaging business for the future and deliver profitable growth and mix enhancement opportunities for our customers and shareholders.
The significant capital investments we've made during the year had complete involvement of PCA personnel from project conception, preliminary and detailed engineering, all the way through to project implementation and startup.
These projects and initiatives achieve numerous tactical and strategic benefits, while improving our industry-leading return on invested capital to just under 20%.
As we've discussed on these calls many times before, by the end of 2022, we would be winding down several years of significant strategic capital investments that position us very well to meet the future needs of our many customers in a very cost-effective manner.
We also finalize the optimization of our paper business while delivering excellent financial results that we expect to sustain us well into the future.
As economies around the world continue to deal with numerous issues and uncertainties, virtually every individual and industry is being negatively impacted in some manner. At PCA, we will continue to maintain a strong balance sheet, which provides the financial flexibility to react quickly to most situations or opportunities in the future.
We expect box demand on a per day basis to be similar to the fourth quarter levels, although we expect higher total volume with corrugated products plans having four additional shipping days.
Prices will move lower as a result of recent decreases in the published domestic container board prices, and we are assuming lower export prices as well.
Paper prices should move slightly higher with sales volume fairly flat.
labor costs and certain indirect costs.
will increase as some container board mill operations were temporarily idle during the fourth quarter.
In addition, we anticipate higher labor and benefits costs and other timing related expenses that occur at the beginning of a new year as well as higher prices for many chemicals, particularly starch and caustic soda.
However, we expect lower wood and recycled fiber prices, lower energy prices, and lower scheduled maintenance outage expenses.
Lastly, we expect higher interest in non-operating pension expenses and a higher tax rate, but we will see some benefit from our recent share repurchases.
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 and in subsequent quarterly reports on Form 10-Q filed with the SEC. Additional results could differ materially from those expressed in the forward-looking statements.
And with that, Jamie, I'd like to open the call for questions, please.
Ladies and gentlemen, at this time, we will begin the question and answer session.
To ask a question, you may press star and then one.
To withdraw your questions, you may press star and...
Once again, that is star and then one to ask a question. Our first question today comes from George Staphos from Bank of America Securities. Please go ahead with your question. And one moment while we open George's line. Mr. Staphos, please proceed with your question. Hi, good morning everybody. Thanks for the details. Thank you.
Congratulations on a very good performance in a very, very challenging quarter, at least from our estimation. Mark, my first question, to the extent that you can comment, you took a significant amount of downtime, the production was down sharply, from our own rough calculations, we were down a little bit, but we were down a little bit.
it would seem like your inventories now are fairly well balanced relative to your needs but if you had to qualitatively talk to them would you say your inventories are normal, below normal, above average, how would you have us think about that?
Well, again, it depends on what time period you're looking at. Sure. We're living in a dynamic world right now. If you went back to 2020, let's go back and take a look at what happened there. As the pandemic settled in and we got into the fall of 2020.
demand picked up dramatically in that period of time. We found ourselves at, quite frankly, an unsustainably low level of inventory per our demand. And it took us the better part of 2021 to drive that inventory to a much more comfortable level. Now obviously part of that was the transportation dilemma that was...
we did achieve what we felt were comfortable levels of inventory to supply our system.
the year 2022 rolled on, we also anticipated certain end-of-year activities with annual outages through the year and then different market place conditions into the third and fourth quarter.
What we saw happen obviously in the fourth quarter was the fall off in demand and so we were able to readjust what we didn't believe should be our new inventory targets understanding that demand was falling off.
faster than we had anticipated, but also we had the capacity now with our system improvements and with the Jackson Mill being completed that we had a much higher comfort level that we could supply outside sales and our own box plant needs.
by running to a lower level, which again was a prudent financial decision for us.
Understand.
Okay, anything else, George? A couple more, I'll make them quick. The mix, given our calculations, was quite strong. Is there one thing you would point out or a couple things you'd point out in terms of what allowed you to put up some fairly strong realizations per ton, because in quarter-quarter things can move.
I'll let Tom talk about the mix question, then I can talk about operations. Yeah, well, you know, our mix was solid again, George. You know, of course, we don't, with 18,000 plus customers,
spread across a lot of different industries. You know, it was a relatively strong mix and we were pleased with that. You know, and I would just... Yeah, go ahead. So is that more execution than Tom as opposed to, you know, any one driver? Is that what you're kind of getting at there?
We were incredibly good and performed very well.
You know to that point George
In 2021, with the new organization that we put in place in 2019, and we've been doing all of these capital projects in the mills and box plants, but 2021 we worked on probably 53 of our box plants with various sized capital projects going on from big projects to small projects, but retooling, recapitalizing.
If you look at the cumulative benefit of what Tom just said with the...
the projects that we put in place in the box plants, the ongoing efforts that we continue to perform in our mills, we were able to pivot during the latter part of the year and even though we took machines down and idled the Jackson Mill.
we're able to really wring out some efficiencies because of how we operate day-to-day and how we understand where these opportunities are. Again, it reflects on the organization and how we look at our business 24 hours a day, 7 days a week.
Thanks very much. I'll turn it over.
Okay, thanks George. Next question please. And our next question comes from Mike Roxland from Truist Securities.
Mr. Roxlyn, please go ahead with your question.
Thanks Mark, Bob, Tom, Ted for taking my questions.
Just on Jackson, how do you plan to operate that mill going forward? Obviously, the first phase is behind you. You've postponed now the second phase to 2024. Given that demand remains challenging as you've noted, you operate that convert line and you have the flexibility if the matter remains challenging to operate white paper on it.
given still strong white paper markets.
No, you know, the Jackson Mill now is a container board operation. That mill...
you know, for all intents and purposes will not make any white paper ever again. It's truly the work we just completed.
in terms of the scope of work that we set out has achieved everything that the first phase was supposed to.
We are now running very efficiently, very effectively. We started up just the week before last and we ran last week, and we've been producing grade A paper, converting it in our box plants.
But we'll be able to take advantage now of the project's cost benefit opportunities.
to take advantage now of the project's
The work that was done, and we talked about this last year, would help us on the input cost side of the equation with energy usage, labor type impacts, fiber yield, and so we will see those benefits. Now it depends also on how much...
production we see on the big machine.
We're also ramping up the machine as we speak. The machine for the last year and a half from when we converted it in 2021 and ran through 2022, we were producing probably 1,275 tons a day average in that range and you know right now currently we're somewhere in that 1,300 ton of...
to running, but we're also going to look at what the opportunity is.
The second phase of work that we can choose to do when the timing is right involves 23 new additional high-pressure dryer cans, a new four-set reel at the dry end of the paper machine, and then a new shoe press in the press section to enhance pressing and improve the drying.
That
will take place when we need the tons. So that's to be determined, but we have the luxury of deciding that when we need to decide that.
But the first phase of the work has been done extremely well. We're very pleased with what we see. So now we'll take advantage of what we have in place. And as we've done for many years, we'll wring out these benefits and these efficiencies.
from day to day here, so I'm pretty optimistic on what we have at Jackson. The number one machine, the smaller machine, is down. It's idle temporarily. It would be available if demand determines that we should run that. So again, I think...
the current times, we will continue to run to demand the entire system. We also have the annual outages coming up starting next month with our derritor and counts mills, so we have to think about where we need to be with inventory levels and what we have to do to supply our box plant needs.
in that regard.
think you know Jackson's in a good place but a lot of opportunity there. Just quickly as Jackson started and running obviously meeting or exceeding expectations have you adjusted your operating posture elsewhere just to account for the for the demand environment and then just my last question is we know with inputs coming off as you noted have you seen any
high quality container board into that southeastern region, but it also means, as you could well assume, the rest of the system.
will run as we need to run it, but keeping in mind what I just said that we have our big annual outages coming in at our two biggest mills being de-ritter in Counts, Tennessee, so our plans were to run a little bit extra inventory build over the next couple of months to ensure that as we go through these big outages
we will supply our needs appropriately.
Good luck in the balance of the year.
And our next question comes from Mark Weintraub from Seaport Research Partners. Please go ahead with your question.
Thank you. Following up on George's question to some extent, you had talked about how the capital projects...
really helped on the cost side and capital particularly the converting operations. You've also talked about how your your price mix was really strong in the fourth quarter and you know frankly it's been really good the last like two years you've just been doing extraordinarily well price mix. Have the capital projects...
helped you improve the mix in terms of more higher value added packaging that you are providing your customers? Or has your extraordinary performance been kind of just execution also your focus on smaller more local accounts?
Hey Mark, this is Tom, I'll handle that. I mean keep in mind that we've always said that you know our customers drive what we do and especially in the box plants they drive our capital investments.
So we grow with them and we adapt to whatever they need and what they're looking at. And we try to align ourselves with customers that are going to grow going forward, whether they're small or large. So I think that all of that kind of comes together and our objectives are not only from a cost standpoint but to satisfy those customers.
and selling to the customer has changed much? Or it's really – so the mix has sweetened that way over the last couple of years? Or it's just that you've been very, very successful in getting higher pricing? Well, I'll give you an example. Our customers are continually having to change to be successful in the marketplace. And if you look at the retail market as an example –
You know, it's very different today than what it was even five years ago. And, you know, during COVID, a lot of things, a lot of things occurred, especially inside the big box stores, as an example. How do we get the customer back in there? What are they buying? What are they looking for? How do I promote my products and things like that?
So there's been a lot of changes and we assist a lot of our customers in helping make those changes and keeping track of what those trends are.
Okay, great. And then lastly, obviously, demand kind of
To me, at least, it's been astoundingly weak in the last couple of quarters. You've pointed out the various drivers. Do you have any sense as to how impactful, in particular, say the inventory correction possessed may occur in this situation?
has been in terms of the magnitude of decreases? Are you getting any clarity from customers where we might be in that process? Because it sounds like we're going to continue to see weakness in the first quarter at a minimum. And then, tough question, but...
Are you getting any indications from your customers as to what to expect for the full year, or is it just not enough visibility?
Okay, let me tackle a couple of these at a time. I think first of all, let's see if we can help get ourselves calibrated here properly. You know, we're coming out of COVID now, which had a tremendous amount of government stimulus pumped into a market which created, in my opinion, you know, quite a bubble.
in terms of demand. If you look back historically and you look at box demand historically, it was always pretty level at that 1% to 2% range per year. And all of a sudden, you know, we're jumping up into now double digits and some other things during the COVID years.
So that's why I drew the correlation with what happened in 2000, you know, how we compare now to 2019 and being 6% or maybe slightly above 6% compared to 2019 being up, you know,
clearly some of the errors come out of that bubble, but not all by any means.
So it's still a quite healthy demand in my opinion, you know, when you compare it to pre-COVID. And relative to the inventory correction, yeah, there was a huge inventory correction, and that's still continuing to some extent as a combination of two things. Still, the supply chain is a big issue for our customers.
And as you know, China just recently reopened.
So there is still an enormous backlog of products waiting to be shipped and just waiting for parts. Whether it's in the auto sector or any other consumer product sector, there's quite a big backlog.
We're still waiting for that to correct. I thought it would have been corrected a little bit sooner than what it appears and that's why we're taking a relatively conservative approach to our to our forecast for the first quarter because we really can't predict when that's going to catch up to some extent.
But I would say overall our customers feel pretty good about where they are and about the full year. If we may have a mild recession, we hopefully have a soft landing, those sorts of things. And hopefully the Fed backs off a little bit on the interest rate increases. Those are all, I think, important to our success.
in 23 and we'll just have to wait and see what happens. But overall, I think when you really compare it to pre-COVID. Take a look.
We're still in a pretty healthy position.
Okay, thank you.
Next question, please.
And our next question comes from Adam Josephson from KeyBank Capital Markets. Please go ahead with your question.
Thanks. Good morning, everyone. Hope you're well.
Mark, one more on the conversion delay. When did you arrive at that decision and why, you mentioned you're postponing the second phase by a year. Yeah.
Why a year as opposed to, I don't know, six months, nine months, 15 months or just indefinitely and whenever demand gets better, we'll do it as opposed to we're planning to do it a year from now.
You know Adam, if demand picked up next month and all of a sudden we needed the tons, we could pull the plug on that project and we could do it in the springtime if we wanted to. That's the luxury that we have. We have all the equipment in our hands sitting in the warehouse at the mill. We have all the engineering done.
When we need the tons, we will do that project and that's the benefit.
that we have there. So there's no secret formula, there's no magic in terms of what's driving this decision except the marketplace and our customers. And as Tom mentioned a few minutes ago, we grow with our customers' demands and we're in a good place to do that.
but also being mindful of our uses of cash and our capital spending. There's no need to spend the remaining portion of that capital on a project that's not earning any return currently, as opposed to perhaps another use of that cash this year.
Sure. Adam, this is Tom. Let me just add something here real quick because I think this is really important and we've been very, very consistent about this. You know, we're not a company that builds it and hopes they will come. You know, hope is not our strategy, it's never been our strategy. Our strategies are built around our customers and what we do is we build our strategy.
what they see and what they need. So you know that's that's never going to change and we see the reality of the marketplace out there and you know as we've said many times there's not a there's not a huge open market the export markets are under some duress right now around the world.
There's not an immediate place to go to with these tons. And so we're going to be flexible and adapt to whatever the market conditions are. And our customers appreciate the fact that we will always be there for them, and we'll be prepared, and we're ahead of the curve.
You know Adam, if now, you know what what Tom just said in this plays into what we've always done
Our competitors typically would have done one big project, gotten the entire project done at one time, and had all of this capacity and had all of this complexity to deal with. We determined, you know, two years ago we would do this project in phases. And if you go back decades, go back 20 years.
We've always done our projects in multi-phases. Now there's reasons for that. Besides capital effectiveness and uses of cash and prudent management of our cash, there's also risk mitigation and then growing with our customers' needs.
So it all plays into our historical behavior on how we go about projects and how we grow our business. Yeah, makes perfect sense Mark. Thank you. Tom, just back to the box demand issue. So you said you're running about 6% above 2019 1Q19 levels on a per day basis.
It sounds like demand is not at particularly depressed levels for you. So when you talk about per day shipments expecting those to be flat as sequentially.
Is there a lot of de-stocking in there that you can see or do you think that that's a reasonably quote normalized level of demand for you if you get my drift.
That's the million dollar question right there. Let me tell you. I'd like to be able to predict that.
perfectly. Obviously I can't. As I said, I said that we're taking a pretty conservative approach in the first quarter to our projections because we really don't know when this de-stocking is going to end. I think we're we're clearly past the
past the midpoint in that. I know that for a fact and I can feel that, but to what extent it goes further I really can't tell you. But I think even with this conservative approach my point about comparing to 2019 was it's still pretty solid compared to 2019. Just to get us all calibrated as to where we are.
Right, and just to be clear, when you talk to your customers, you don't have a firm sense of...
Whether they've done 90% of whatever de-stocking they're going to do or 70%, it's just not clear.
Well, I think some of, you know, when we talk to specific customers, I mean, we get kind of a mixed bag is what we get. Some have completely, you know, some are completely destocked and others still have, you know, significant inventories and significant issues.
And even on their side, they've got a lot of product of their own sitting there in warehouses, you know, that was prepared for a COVID environment and now we're post-COVID and it's a different environment. So they're making their adjustments as well. And I did mention the supply chain issues that a lot of them are still dealing with.
Yeah, I appreciate that. Just one last one for me on the wood cost issue. Can you help me with what magnitude of declines you're seeing sequentially in wood costs? I appreciate that it's regional, so it varies by mill. But overall, what you're seeing, how much is transport related, how much is weather related.
Just any percentage decline you're experiencing, any, if you can flesh that out, because it's not the most transparent of issues for us. Hey, Adam, this is Bob. What we said in our release and in our prepared remarks is we were talking about wood prices, not necessarily wood costs. So maybe just start with the wood stock.
sequentially, it's fairly flat because you typically, as you go into the much colder months, your wood yields and so forth aren't as good, so you see some usage going the other way. But the pricing improvement that we're seeing is, it was a bit drier than normal, the weather cooperated as far as wood supply goes.
jump around a lot and it's but I do think you know overall for the year we think it'll be you know should be down slightly on a on a on a price basis and and maybe cost fairly you know fairly flat for the full year.
a lot, but I do think overall for the year, we think it should be down slightly on a price basis, and maybe cost fairly flat for the full year. Thanks so much, Bob.
Next question, please. And our next question comes from Gabe Hyde from Wells Fargo. I'm going to go ahead with your question.
Good morning.
I just had one on cap allocation and I know that you reserve the right to spend as is warranted in terms of returns and things like that but you made the comment that you've come out of a couple years of elevated spend. This year's cap X is $475.00.
Is it appropriate for us to sort of think about a
I don't know, $450 to $500 million in CapEx as normalized.
And then on the capital allocation side, Mark, you also said, hey, we want to take a balanced approach.
but I can't help but look at history when you guys have been aggressive buyers of your shares. It seemed to be opportune and give you a nice return. So can you just talk a little bit about how you internally think about returns on
capital as it relates to projects versus share repurchases.
You know, first of all, starting off, for the last five or six years, we've had historically high capital spending to retool primarily our box plant system and then take care of the mill big conversion projects and some of these big efficiency opportunities.
but in my prepared statements I commented that we've
made clear to the investment community that this year in particular would be a reset down to more normalized levels of capital.
coming off those big highs. And so as we look at this year, you know, we're coming down probably 350 million dollars off of last year's 824 million dollar capital spend. And so as we get into the 400 million dollar area, I think for the next couple of years that's going to be the...
the range we're into. We've got some work to finish up in the box plants. We've got some big opportunities we're finishing this year as an example.
And then when we finish up Jackson, that will be one piece. It's not an extraordinarily large amount of capital, but it will finish up. But I think we're in a very comfortable period of time going forward now that.
We will be able to maintain our assets in very good condition. We'll be able to continue to take care of customer growth opportunities with capital installations on converting pieces of equipment. We have obviously the capacity in our mill system to supply that growth.
a very, very cost-effective manner. So I think again the new capital trend going forward is significantly lower than it has been, which bodes well again for what we do with the cash and how we deploy cash to provide return to our shareholders.
then in terms of how we look at returns on investment, you know we've always had probably the highest hurdle rate in the industry in terms of what we set internally as our target.
of acceptable returns for projects.
Now, some of these projects, obviously, you're growing with customers, but you're growing with valuable, high profitable added box business. But again, I'm not going to give you the return targets we set, but you can...
You can assume, and we've always said this, that we set some very high hurdle rates on our expectations on a dollar spent and what we expect for that return. And that reflects itself in the return on invested capital number. It's not only the highest in the industry, but...
manufacturing industrial sector alone it ranks amongst the highest. That help you? Okay it does absolutely does and then maybe the low-hanging fruit just to make sure we kind of have math calibrated right if I extrapolate out the comment that you guys made.
It seems to imply maybe 16 billion square feet for the first quarter or down 4 to 5 percent or so on a year-over-year basis. I'm assuming that, you know, whatever your experience has been thus far in January went into that calculation and it's the best estimate in terms of backlogs and what you have.
maybe 16 billion square feet for the first quarter or down four to five percent or so on a year-over-year basis. I'm assuming that that you know whatever your experience has been thus far in January went into that calculation and it's the best estimate in terms of backlogs and and what you have you know want to fight to.
Yeah, that's a fair assumption, Gabe. Thank you. Good luck. OK, thank you. Next question, please.
Our next question comes from Cleve Rookert from UBS. Please go ahead with your question.
Hey, good morning. Thanks for taking my question. Just a couple of follow-ups. I wanted to just ask more specifically on the work that you're doing at Jackson. I'm wondering does that change PCA's capability and product offering at all? In other words, are there new market opportunities from that project or is it more just about...
the big short-term objective and then you know obviously we talked about the longer-term objective in phase two being that ability to grow with our customers.
Okay, that makes sense. And then just a couple of quick follow-ups.
inventories, we talked about them a couple of times, I just explicitly, like where are inventories relative to where you would like them versus your plan in container board.
Well, we never give absolute numbers. Again, we drop down 60-some odd thousand tons from the third quarter to the end of the fourth quarter. We're going to build again, you know, some extra inventory in January , February period to get ready for the outages at the DeRitter, Louisiana mill and the Counts Tennessee mill.
range of where we need to be now going forward with the next phase of the pandemic.
with what we're seeing in the marketplace demand and in our capabilities now. So this lower inventory certainly meets the current requirements, but with this little bit extra build to get us through these big outages. You know, annual outages are always an uncertainty. You never know what could happen.
Obviously, we're very good at what we do, but we always plan, try to mitigate some risks, and the risk mitigation comes in a little bit of an insurance policy with some extra inventory on hand to make sure the box plants are well taken care of and are outside customers.
Right, I think that makes a lot of sense and that's very clear. And then, I know you said the number one machine is down at Jackson's, idle temporarily.
I mean are you expecting to take any other economic downtime in Q1 or is it really more about maintenance in the first quarter?
I'll let you know in April what we did.
Good luck guys, thanks very much. Alright, next question, thanks.
Our next question comes from Anthony Petinari from Citi. Please go ahead with your question.
Good morning. Morning Anthony. Just a couple follow-ups, Mark or Tom, you know the second phase of the Jackson conversion that you're postponing from spring maybe till next year or beyond. Sorry if I missed this. Is there a capacity number that you would...
kind of associate with that second phase or any kind of finer point you can put on that? Well, you know, I'll go by historically what we've said in the last two years.
The ultimate project at Jackson would, on paper, get us a 2,000 ton a day container board machine. It would be one of the largest machines in the Western Hemisphere in terms of productivity. And if you could understand and appreciate.
our efficiencies, it will not only be one of the largest, most productive Virgin Craft lander board machines in the western hemisphere, but it will be one of the lowest cost machines.
I said we started up last week. We're in that 1,300 ton a day rate right now. Obviously, we will probably push the machine and see what we, you know, it's like having a new toy. We're going to see what it will do for us over the next month or two. What are the limitations? And making sure we haven't missed anything from a process, you know, point of view.
And if we missed anything, then we have ample time to correct it over the course of the months ahead of us. But ultimately, the final phase will give us the extra drying and the speed on the paper machine to take us from, let's just say we could run 1,500 tons a day right now with the machine we have.
the last phase of work gets us that extra 500 tons a day just to help you with some math.
Okay, that's very helpful. And then just another quick question, you talked about the fiber flexibility projects, and with those done, where does that put your fiber mix or your ability to maybe flex?
from Virgin to OCC. And then just maybe a related question. I mean, I think, you know, historically you've talked about, you know, the customer preference and the benefits of craft liner. It seems like the price spread between craft liner and recycled has kind of moved up a bit.
or moved out a bit. Are your customers, do you see any specific trend in terms of
you know, increased demand for recycled or vice versa or just kind of how is that dynamic playing out and what are your capabilities look like now to move between the two.
I'll answer part of that and I'll let Tom answer part of that. We talked about some of these fiber flexibility projects, the biggest ones at the Wallula Mill we, you know, we...
over two and a half year period we added a big OCC plant out there and then did you know completely rebuilt the woodyard and improved our chip handling chip screening and fiber yield capability in the woodyard but now Wallula has the ultimate flexibility to to push OCC
at very high rates if the price and availability is there. And then we just finished up the big OCC project at Jackson in conjunction with the rest of the work at the mill. And so Jackson, Counts, DeRitter, Wallula.
In terms of our liner board mills, primarily liner board, even though the Ritter and Jackson and Wooloo can make medium, but they have
incredible opportunity to flex the amount of
OCC, DLK that goes into the furnish depending on pricing and opportunities to take advantage of various fiber sources.
And so I think if you did the math, and I don't have this right now, Bob might have this, but we're probably still around 20% in total of our total, you know,
makeup of what would be OCC, DLK, and virgin fiber, but we have now improved significantly by mill what we can use at any given day.
I'll just add Anthony from a customer point of view, what do our customers want? They want the same thing we want and that is performance. And one of our advantages being primarily Virgin.
is that we have a lot more opportunity to hit the performance numbers at particular basis weights that I think give us a distinct advantage so that we can take advantage of all this fiber flexibility that we have.
and we can also minimize some chemical use and some other things in that process. So, you know, that's really how we view our, you know, what our output from our mills is performance-based, and I mentioned some proprietary products that we have, and those are all based around performance.
Okay, that's very helpful. I'll turn it over. Thank you. Next question.
And our next question comes from John Donegan from Jefferies. Please go ahead with your question.
Hey guys, it's actually Phil. I guess a quick question. Good morning. Great results and a tough backdrop. I guess my first question is, normal cadence of prices moving higher on the container-ward side, we kind of have a good feel for how that kind of flows through your P&L.
Does that dynamic from a timing perspective accelerate when prices fall? In this current environment have you seen more business actually put up for bid lately?
The answer to that is no, that does not accelerate when prices fall. In fact, it probably is the other way around. And our feedback from our customers is that they haven't been anticipating it and they're not...
They're interested in being aligned long term. This is not a short term play or anything like that. So we haven't seen any uptick in bids or anything like that either. Yet.
That's really encouraging. It's great to see you guys take such a disciplined approach in terms of running your mills. Tom, I think you were talking about the macro. There's a lot unknown right now. Let's assume it's more of a soft landing backdrop. There's a decent amount of capacity coming on in the next 12 months.
How do you see that playing out for the industry? More importantly, how do you see PCA navigating through that backdrop?
Well number one is the capacity ads that are coming on really have very little impact for us you know and I think you have to look back historically and see what happened in the past when when there's been ads of capacity that have come on. I think about the Verso mill up in J Main when they converted
the open market is very small in the in the US and so those that those that add they're going to have to look outside the United States for the most part. This is a you know a very very integrated market the open market that does exist is under long-term contracts typically.
or certain relationships like we have with our outside market buyers. So that has very little impact in my opinion. So when you hear us say we're running to demand, and demand is what it is, and just to produce additional board for the sake of producing it.
is basically like a death wish and it doesn't do you any good.
So I hope that gives you a little flavor for where we're coming from.
I hope that gives you a little flavor for where we're coming from. That's a great color. Really appreciate it.
Okay, next question, please. Our next question comes from Kyle White from Deutsche Bank. Please go ahead with your question.
Hey good morning, thanks for taking the question. I just wanted to go back to Boxers and Demand and just wanted to give us a little bit more details on what you're seeing by in market in that business. Any in markets that are really still working to the de-stocking and a bit weaker that we should really monitor here versus other in markets that have gone through this impact already? Well you know the only thing I could say about some of these end markets obviously...
The other thing that has impacted us is in the ag business. Florida is an example with the two hurricanes, I mean, have wiped out some seasonal crops. The Pacific Northwest has had a lot of difficulty. You've got droughts in some other places. So the ag business took a pretty big hit this year. The
But that will definitely bounce back, and that should bounce back in pretty good shape. Other than that, across all of our segments and sectors, there's all sorts of puts and takes. Some are in better shape than others, and that's kind of the normal seasonal activity that takes place anyway.
And then you are fairly active in sharing purchases this past quarter. Can you just talk about your thought process there and should we expect you to continue to be active throughout the 2023 given your Healthy Balance Sheet and maybe just how you weigh those decisions versus any potential acquisitions?
Again, we'll be opportunistic as we've always been looking at these opportunities, whether it's a great acquisition came along and it made sense to us. We have the ability and the flexibility to take advantage of that type of use of cash.
Same thing with share repurchase and dividends. We'll continue to be something we keep in front of us and look at how do we provide the best return for our shareholders and also at the same time be in a position to take care of our customer needs. So again, as I said in my prepared comments, as we go forward we're in a great position.
to maintain the flexibility with our uses of cash and maintain a very strong balance sheet. So none of that's changed. It's just part of our norm every day.
Sounds good, I'll turn it over.
Okay, I think we might have time for one more question, please. And our final question today will come from Mark Weintraub from Seaport Research Partners. Please go ahead with your question.
When he asked about the cadence of how price adjustments flow through the P&L, I think you suggested that it was not faster on the way down than it is on the way up. So I guess that kind of begs the question, so of the $50 that has already been reflected by PPW.
Is a significant share of that anticipated to already be showing up in the box prices in the first quarter, or is a meaningful portion of that yet to come in the second quarter if we were just to assume prices were in PPW flat from here?
Well, Mark, as you can well imagine, the $50 has come in increments. Those increments may or may not hit a rate at which the price would change based on the contracts. The contracts are very different and have very different timing mechanisms.
So, you know, that's why I said it's, there's no, you can't say that it's going to go down faster than it went up or vice versa. I mean, it's just, it is what it is. And as these things cycle in, they'll cycle in, you know, uniquely, we've got some customers who have even asked us just to hold off.
differently than I'd say on the way up, just because of the small incremental moves that take place.
Is there any color you can help us with in terms of the proportion based on you know what you're seeing now you would think would show up in the first quarter versus what might slide into the second, recognizing situations can change. I'll let Bob handle that. Hey, Mark, Bob, so you know I would use sort of a
as Tom was indicating, based on how these things flow through, and there's obviously different timing mechanisms and so forth. However, I'd say roughly a third or so you would see in the first, and then two-thirds of what's happened so far showing up in the second quarter. Okay, thanks very much.
Thanks Mark. Jamie, I think that concludes our questions.
Sir, that does conclude today's Q&A session. Do you have any closing comments? I'd like to thank everybody for taking the time and look forward to talking with you with Tom and Bob and I in the April call. Take care. Have a good day.oho
Ladies and gentlemen, with that we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.