Q2 2023 Packaging Corp of America Earnings Call
This was not a reaction to any change in our views on demand, but rather our thoughtful approach to manage containerboard supply as economically as possible the.
The mill remains temporarily curtailed and we will continue to monitor any potential changes to the strategy along with our outlook for demand during the second half of the year.
I'll now turn it over to Tom will provide more details on containerboard sales and our corrugated business.
Thank you Mark.
Total prices and mix in the packaging segment came in where we anticipated with domestic containerboard and corrugated products prices and mix together 32 cents per share below the second quarter of 2022, and also 32 cents per share below the first quarter of 'twenty twenty-three export containerboard prices were down 15.
<unk> per share versus last year's second quarter and down seven cents per share compared to the first quarter of 2023 and as Mark indicated packaging segment volume for the quarter also came in where we expected corrugated product shipments were down nine 8% in total and per workday.
Compared to last year's second quarter outside sales volume of containerboard was 62000 tons below last year's second quarter, and 33000 tons above the first quarter of 2023.
With last year's box volume, tying our shipments per workday second quarter record. We knew this would be a tough comparison period as we said on last quarter's call. The same variables that have impacted demand. The last few quarters would continue into the second quarter the shift of consumer buying preferences more towards service oriented spending persist.
Inflation and higher interest rates continue to negatively impact consumer's purchases of both durable and non durable goods inventory destocking, both in boxes and at our customers' products also continued to varying degrees across our customer bases and the manufacturing index has remained in contraction territory for eight months.
In a row now.
However, as we talked about last quarter, we expected some improvement relative to the inventory destocking of both customer product and boxes as well as improvements based on certain customers feedback regarding their business and that is what helped the second quarter shipments improved almost 3% compared to the first quarter. We expect continued positive momentum this.
Quarter, although there is one less work day compared to the second quarter I'll now turn it back to Mark.
Thanks, Tom.
Looking at the paper segment EBITDA, excluding special items in the second quarter was $39 million with sales of $143 million for 27% margin compared to the second quarter of 2022 EBITDA of $32 million and sales of $150 million or 21% margin.
Paper prices and mix were 12% higher than last year's second quarter, and less and less than 1% below the first quarter 2023.
Paper demand remains soft with our sales volume just over 14% below last year's second quarter, which also included some sales from our Jackson, Alabama Mill.
Where there was no volume in this year's second quarter, we ran our international falls mill to match supply with demand as well as to build some additional inventory during the quarter to prepare for the nine day planned outage maintenance outage, that's coming up this third quarter.
Similar to the comments I made regarding the packaging business and for many of the same categories employees in our paper business remained focused on efficient and cost effective operations as they also balanced supply according to demand and delivered outstanding margins for the quarter I'll now turn it over to Bob.
Thanks, Mark for the quarter regenerated, New second quarter records for cash from operations of $360 million.
Well as free cash flow of 233 million T.
Key cash payments during the quarter included capital expenditures of $126 million.
Common stock dividends of $112 million.
Cash taxes of $83 million and net interest payments of $30 million, we ended the quarter with $630 million of marketable securities and cash on hand with liquidity of almost $1 billion.
Now I'll turn it over to Mark.
Thanks, Bob looking ahead as we move from the second and into the third quarter.
In our packaging segment, although there is one less shipping day for the corrugated business, we expect shipments per day to improve versus the second quarter. However prices will be lower as a result of previously published domestic containerboard price decreases.
Along with slightly lower export prices, we expect seasonally stronger volumes in our paper segment from back to school shipments although prices are expected to trend lower based on the recent declines in index prices.
Operating and converting costs should trend slightly higher primarily due to higher recycled fiber prices and seasonal energy cost.
Scheduled outage expenses will be higher by approximately six cents per share driven by the scheduled maintenance outage at our international Falls, Minnesota Finally, we estimate our depreciation expense and tax rate to be slightly higher as well.
Considering these items, we expect the third quarter earnings of $1.88 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.
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 on Form 10-K on file with the S. E C. The actual results could differ materially from those expressed in the forward looking statements.
And with that Jamie I'd like to open the call up for questions. Please.
Ladies and gentlemen at this time, we'll begin the question and answer session.
I'd like to ask a question. Please press star and then one using a touchtone telephone.
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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.
Hi, everyone. Good morning, Thanks for the details and congratulations on the operating performance in the quarter.
Mark I'm, Bob Tom My first question.
The excellent from our vantage point operating performance in <unk>, I guess that 34 centers, so and lower operating costs, how much of that is embedded in your third quarter guidance.
Is there any chance.
Within reasonable probabilities that you could.
Given all the efforts that your employees have underway find further efficiencies and benefits such that there.
There might be some upside tell to your guidance. So how have us think about how operations might be able to benefit and what's baked into your third quarter guidance.
You know, Georgia is as we always do we continue to focus on.
365 days, a year continuous improvement operational excellence.
One thing we.
We commented on last year, as we were moving into 2020 three and we are winding down a lot of the major capital projects.
We're going to take the approximately 150 engineers and technology, our personnel and our corporate technology group and really let them focus now on unit operations optimization and.
Really work with the box plants and mills on a lot of the new equipment quite frankly that had been installed in the last couple of years, but really take that to a new level of performance and execution and and that's paid off for us. This year as you can see so my answer is we will continue in that effort.
Nothing is guaranteed but we do obviously performed quite well in general and I would expect to see similar results going forward.
You know Tom Bob.
Yeah, Mark it's Bob George It I'll say that you know from the from the operating cost perspective.
We will hold onto the really the performance we had in the second quarter. You know if you just you just assume that that production volume in the mills is similar to the second maybe up a little bit we'll see.
Yet we think our cost per ton stays relatively flat. So you know to be able to hold on to that even though we know OCC prices are will be higher if you just take the average they moved up from the end of the second quarter.
And new supply that across the third quarter, they were up like 12 or 14%.
So we'll overcome that plus we have the seasonal electricity rates, you know that that that hits you as well as some seasonal usage items. So in effect, we'll pretty much be offsetting that by continuing the excellent operating cost performance in the mills and in the box plants.
At Georgia, Tom I would I would just add one last thing.
Very obvious that you know a lot of this a lot of this extensive groundwork has taken place and as our volume increases going forward.
You know, we're gonna be able to take advantage of this cost position, we're in and it will it will it will be quite dramatic I think going forward is as the business conditions change and get more positive.
Okay.
Very very helpful. So let me just Oh, please George let me add Mark George Let me add one thing.
If you looked at our quarter and you looked at you know month by month.
We were running.
And not just one mill, but most of the mill system, we were pushing 99% uptime efficiency operational efficiency in our mills I mean, that's unheard of in the industry.
Month of June we had most of the mills in that category and we had a we had one mill in particular that was.
Basically 90, 999% uptime efficient it had no no paper brakes and and so.
You know, we're we're in a level now it's obviously.
Not many of our competitors are there, but that's what we strive to do every day and and make it better and better and so I'm confident we'll continue to see good results.
It's a great run down and obviously something we'll all know tried to continue to remember going forward two last one for me and I'll turn it over.
To some degree kind of the obligatory.
When we think about the two Q index pricing changes.
Roughly roughly.
How much of that is baked into your third quarter guidance percentage wise and what would be left.
And fourth quarter.
And then you know Tom or Bob or Mark you know back to the closures that you mentioned in corrugated in the design centers are.
I mean, it's it's kind of self explanatory, but what was if there was a common denominator, what where you are looking to achieve with the whatever reconfiguration you were doing thank you guys.
George I'll take the closure piece and then I'll turn it over to Bob and he can comment on on the you know the pricing changes going forward, but.
Are you now on our on the closure side listen we you know we can we have continuously you know tried to you know make sure that we're right sized for the for the business and that are we have we have very efficient operating methods.
Methods and part of our whole capital investment has been around making sure that we're as efficient as we possibly can in the plants that make the most sense. So you know that's been a that's been an ongoing process. This is nothing really new were just announcing it because it took place in the quarter, but there that you know this is small facilities and its consolidation.
Some things like that so you know that's it's it's kind of more than normal course of business for us.
Yeah, George regarding the price you know I guess the way to think about it as you know in the first quarter. There were there were two drops in prices that occurred during the quarter on on the on the benchmark grade for $30 a ton and in the second and in the you know the impact of that is as we are.
Say it pretty much runs through over a 90 day period. So the bulk of that was reflected in our in our second quarter numbers. So if you think about what occurred in the second quarter, where there was a 20 dollar drop you sort of ratio that with what happened in the in the first with a with a $30.
The drop you can sort of get up the impact of price in the in the third quarter is that does that makes sense.
Yeah, I guess, so I mean, I guess, what I'd say ask is just how much you know again not trying to be too precise I know you can't be how much of a residual would be left.
Of that and for the fourth quarter.
You know, 5%, 30% below the fourth for the fourth quarter you know most of it will be from the latest drop will be in the third and in the impact will be like I said, if you sort of compare that to what happened in the first we gave you the impact.
Yeah in the second quarter and then so when you would think in the no. Other changes the fourth should be you know you shouldn't see much of an impact if if if things sort of hang out where they are right now.
That's perfect. Thank you Bob I'll turn it over.
Next question. Please next question.
Our next question comes from Mark Weintraub from Seaport Research Partners. Please go ahead with your question.
First second quarter record cash flow from operations pretty interesting in this challenging environment and one of the things obviously is your capex.
Has been coming down after all those big projects can you sort of just update us on where your thoughts for Capex for this year and preliminarily Ah if the environment remains challenging what type of Capex you might bracket for next year.
Yeah, you know mark over a year ago actually we we started.
Getting people.
Thinking about the fact that the heavy projects, where we're winding up the big projects that we had been involved in over the last 10 years were really really coming to fruition in that 2023 would be a year that we wound that capital down in the 400 million range last year were $824 million of capital <unk>.
Lending.
And we'd again, we alerted everybody that this year would be in that 400 level and that's where we are I fully expect us to finish the year somewhere in that 400 million area and then we're already talking about the 'twenty 'twenty four capital spending plan.
And I'm looking at our needs and the opportunities we feel comfortable right now that the number will continue to be in that 400 million area unless some opportunity came along that were so outstanding that we felt compelled that we wanted to to direct our capital into that opportunity. So we have that.
Love story, right now, but I think for the benefit of of running the business in the uncertain times. We're in $400 million range is a good range to be in and it supports our business improvement opportunities along with our maintenance capital spending within the mills and box plants.
<unk>.
Great and.
And even at that 400 do you still have runway I think you're referencing to still get some of these operating improvements that we've been seeing in the last couple of quarters or does that start running out pretty quickly if the capex doesn't go higher.
No. That's that's the beauty of it we were continuing to execute every every week on a number of opportunities within the box plants, new equipment installations are new equipment are you know significant rebuilds on modifications on a lot of the production lines.
So this is not stopping.
The mills.
As we talked about we wound up most of the big work at well Lula mill last year and the woodyard work in the OCC plant Jackson, Alabama. Most of that work is wound up we're just waiting for the opportunity to move into the final phase of our the number three machine at Jackson.
But again, we can do all of that and still keep the capital spending in this 400 million range.
That provides us an opportunity to really just move forward as we as we look at what these are you know.
Whether it's a customer driven opportunity or or or a cost take out.
Efficiency energy efficiency labor efficiency, we continue to see those opportunities.
And where we are right now I'd say barring some big one off opportunity.
Some some 400 million dollar number keeps us moving forward with the taking advantage of this Bob.
Just one other thing Mark is you know a lot of the the operating cost improvement and and you know things that you're seeing.
It's not necessarily capital related you know, it's it's it's just doing things.
Within the process.
Watching usage watching your routines behaviors practices, improving upon where you've been before and a lot of that is not you know it's not capital driven it's just.
You know there is a huge benefit of our operating costs.
As is manage you know just by by those things as well you know mark over the last few years.
We were doing hundreds of projects in our box plants and mills on an annual basis.
Granted a lot of them are smaller projects, but literally we had had our entire.
Workforce move.
Moving to make improvements in hundreds and hundreds of areas.
Every year.
And now that we've been able to slow this process down we're able to take advantage of that.
Now the personnel can really take a much closer look and a deeper dive and how is that equipment running.
And from a unit operations, our effectiveness and efficiency.
The operating personnel at the plants and the mills. The technology organization are now really stepping back and looking at all of the new converting lines. The projects at the mills and really assessing a are these projects doing with what we expected them to do and if not how do we make it do what we.
We expect it to do and if they are optimizing and fine tuning and and the benefits are what we've seen in the second quarter is a great example, and we'll continue to do that.
Appreciate that and I'd say, it's certainly showing just one if I could go.
Go back to the bridge from the second to third quarter and make sure that I understood I mean, it sounded like there wasn't going to be any negative pickup in and operating costs and I guess, you alluded to like a 6% increase in maintenance outages.
So if we look at the 231 and we go to a $1 88 that that would seem to be like a 30.
Seven cent other you know if we take off the six cents for the maintenance.
So is that primarily impact from price or are there other variables to be conscious of when when doing that bridge because it seemed kind of high on the port for a price number.
Yeah no.
I think you're pretty close.
If you looked at those two items on the well just look at the price and the outages maybe saw a little bit different than what you were saying, but you know, there's almost probably 90% of the delta right. There and then on the on the operating cost side. If you. If you take in some of the other things that offset the higher.
Recycled fiber prices in the energy costs that we spoke of.
Hopefully it will be pretty pretty close to a push and so what you're left with or just a.
A couple of cents here and there we talked about depreciation we put that in our release and that just has to do higher depreciation from the second quarter just has to do with the timing of placing our assets and service based from our capital spending program and we had some benefits in the in the second quarter that won't repeat in the third.
On the tax side, there were just some favorable tax.
Items from the.
The vesting of stock and performance units as well as some state tax law changes that gave us a benefit.
But don't read you know don't repeat themselves. So those you know those are the other few items that you know that gets us to that to that 40 43 cent change.
Okay. Appreciate the color. Thank you.
Next question please.
Our next question comes from Gabe <unk> from Wells Fargo. Please go ahead with your question.
Oh My God. This is Alex on for Karen.
Quick question here.
I was hoping you could give me some color on the bookings in July .
I'm doing compared to G&A.
And just thinking about the Q3 volume pickup.
I was wondering if you can help parse out how much of that is seasonality.
Underlying demand.
Okay. Alex this is Tom.
You know our bookings for July through about halfway through the month as you know very robust up 15%, which is great a good start to.
For the quarter.
The other thing that we're seeing is I think that's pretty important and I want to point out is that a lot of our customers are telling us that some of this destocking is now over.
With their products and that's and that's very important so hopefully that will translate are you know throughout the quarter and certainly going into the fourth quarter.
For some for some volume that is a what I would call more predictable.
We still do a I'll just go ahead point this out right now we do have some challenging segments still that we're dealing with a you know which indicates some of our decline in volume.
The AG business, Florida had the worst citrus season, they've had since the 13th or 14th.
You know, we had the hurricanes down there, which completely wiped out some of the tomatoes, and all of the strawberries for for a cycle.
We've had flooding in northern California, which has caused a lot of problems. They are yes.
Easter famine, there and I guess in terms of moisture, but and and then in an eastern Washington also they had some pretty serious droughts. So that that segment has been has been a drag on us.
The building products segment was you know it was booming during COVID-19.
With a lot of remodeling going on and all those sorts of things and that slowed down dramatically and now because of high interest rates. It's really slowed down housing starts. So that's been a that's been a drag on us as well as single use plastic products manufacturers. So those are the those are the segments that have a that have.
Impacted us on a negative.
The AG will recover for sure.
The E comm in the food and beverage those those segments have held up significantly better, but you know I think the I think the key takeaway here going into the second half of the year is the fact that a lot of this destocking has now finally, taking place and I think we'll have more predictability going forward relative to volume.
Thanks, Okay, and I guess as a follow up question I'm just curious on your cost buckets I can really talk about which side of the costs are still being pressured and sunk cost buckets that are there.
Yeah.
Well again, you know who you are.
Always concerned about fiber costs in energy.
The inspiration, especially on the rail rail rates continue.
Continue to move move up so it's and then you know as we go through the third into the fourth will be getting into the seasonal cooler months and no energy usage, along with with the cost pressure from the usage. So.
Wood cost is always a factor depending on weather conditions.
So it's a continuing whole host of of all your input and what's happening at any given time.
Okay, Yeah, I'll turn it up thank you.
Okay next question please.
Our next question comes from.
From Phil <unk> from Jefferies. Please go ahead with your question.
Good morning, Mark Tom This is John Dunigan on for Phil.
I just I wanted to start off around the box shipments I mean, you guys have lagged the last few quarters.
Market, which.
Yeah generally surprising given your solid track record.
Would you consider that more of a factor of that the local customers.
And then filling more of their pension you've kind of called out.
Fire.
Or is it you're maybe seeing a little bit more pressure from from customers on pricing and you're walking away from some of that business.
John This is Tom I'll take this one.
I would say that you know there are a couple of reasons why our numbers looked like they do number one is we had unbelievably tough comps from a year ago and if you go back I mean, you know we were significantly higher than the industry, even even much higher than our normal trend and I think that's because as I mentioned, even back then you know the.
The wide segment of business and wide swath of different businesses, whether they're local national or what segments. They are in all were up significantly during.
During the Covid period.
And as I, just mentioned a while ago a number of those have come down significantly and I'm talking when I say significant we haven't lost any we haven't lost any of these customers, but we have some that are down 50 plus percent are still at this rate just because there was so much demand during COVID-19 and that demand has shrunk so significantly.
So you know those those are the those to me are the main reasons why you know why it looks as if were lagging the industry are probably more so than than and and the numbers look so much different than they than they have in the past.
Okay.
And.
Just with the pricing that we've seen.
Already come out and said already realized $90 per ton on the containerboard side are you seeing.
Prices erode, maybe a little bit quicker on the box side or are there you're seeing generally in line with historical trends.
I'll be like.
I got a temper this a little bit in terms of you know discussing this but.
What what we're seeing is no I would say no way is as you know is box is the box trend.
You know worst than the linerboard or medium trend in fact, I would even say that you know are our observations and what we've heard from our customers are they've been quite surprised that of any linerboard or medium reductions that have taken place and and I would say on the box side.
It's a it's very much the same thing.
Okay, that's very helpful and if I could just squeeze one more in.
The box demand progression in the second quarter seemed to get worse from what you had called out month to date on the last earnings call through the <unk>.
The rest of the quarter.
Could you kind of just give us a breakdown of maybe what you were seeing during the quarter and then you know if things had weakened was there.
Any material economic downtime that you guys took to kind of help offset that.
You know what.
The our volume was pretty much what we expected it to be with which was slightly improving in June quite frankly was very strong.
So we felt pretty good as.
As the quarter moved move through the months and again, we saw that in June and we're continuing to see that in July .
So I'm not sure.
Yeah, I would just I would just add that I would just add that you know we were we were up about 3% Q2 over Q1, and our you know the trend the trend line continues to look a look quite favorable.
So you know well and you know the beauty of the beauty of what we've done and what we talked about you know on the operating side is that we can flex now however, we need to and to whatever the demands are and do it very cost effectively.
And I'll just add that you know that.
All the downtime was pretty much what we had anticipated it to be so you know there was no no no change there from what we were assuming.
Okay.
I mean, that's.
Flat in terms of a 10 percentage quarter over quarter.
On a on a on a per ton on a per day basis.
Yeah, it's up so.
I think Tom made some comments about what he's seeing at source trends now and so forth. So you know hopefully you know that.
That means from a on a total basis, even though there's one less day that you know that could be something that there's some tailwind there that hopefully we can we can realize on our numbers.
Apologies I to clarify what I meant was the economic downtime on a tons basis.
Staying there wasn't any change well you know again, well we'll have to see you know that that's always a moving target, but I would say you know in total because we do have less.
Scheduled outages as far from a ton perspective, so we get tons back from that in the in the third versus the second Theres, an additional day of and the mills. So you get another day there. So theres another 15000 tons or so so and we'll just manage the economic downtime commiserate with.
That pickup that we're seeing from the second quarter.
Okay. Thank you very much I'll turn it over.
Thank you next question please.
And ladies and gentlemen, before we'd do you take that question I just want to remind everyone that in order to join the question you May Press Star and then one to withdraw your question you May press Star and chip.
And our next question comes from Anthony Pettinari from Citi. Please go ahead with your question.
Hi, good morning.
Good morning, Tom Hey, just following up on the July trends that you discussed the 15%.
Up 15% is that month over month or year over year, and then you talked about just destocking, maybe you know kind of running its course or maybe being closer to the end in terms of your own inventories I mean, you talked about inventories down 11000 tonnes from <unk> just wondering.
Where your inventories are broadly kind of relative to target levels or comfort levels.
Yeah.
Questions.
Okay Anthony.
Relative to the July trends lets the you know the one thing we we've typically started out most quarters, you know up quite a bit year over year and no different no different this quarter.
But there's there's a little more predictability in these numbers than what we've had in the past and I'm seeing I'm seeing our customers' trends of order patterns starting to come more in line with where they had been.
Prior to all this destocking and this big change from that after Covid. So so that that's that that's that's the best I can tell you about the July trends I'm feeling better about these trends than than in the past and you know these numbers up and don't forget I mean, you know when its bookings youre talking about not just in the month.
Of July Youre talking about you know August September probably you know kind of out through the quarter and so but again. These these patterns seem to be seem to be much more predictable.
Relative to the relative to the inventories you know we didn't talk about export exports still a moving target and you know it's a it's certainly something that we're trying to get our arms around in it and it seems to change almost on a daily basis.
Ah you know in this in this global demand. So I think we feel comfortable with where inventories are.
And.
But again, we've got the ability to flex some depending on depending on what the demand curves are.
Okay. That's helpful and the 15% it was year over year not month over them, yes, yes, yes.
Great and then I guess.
Is there any way to frame kind of the financial impact of the curtailment and.
Understanding this is in line with matching supply to demand any kind of just broader thoughts on that decision.
As we go through the year.
You know as we were running through the first quarter and into the second quarter, we were running our mills and.
In many cases slowed back and just kind of throttling our way through demand.
As we got into the spring time, and we had had our outages are taking place we were into the Lula outage.
And we didn't see the improvement at that time back in April .
With demand and so we quickly reassessed our position and realize that it was far better to take the six mills that we currently have running and run them very very efficiently and then in order to do that you had to take with Lula and keep it.
Down. So we were we had when we went down to the annual outage. So we finish that work in and decided to just temporarily idled at mill for the time being as we watched the demand situation, but by doing that it allowed us to take the six other containerboard mills, and really optimize them and speed them up to the.
Optimum point on their production curve and take advantage of that and that's another part of the benefit we saw in the second quarter earnings.
Yeah.
And just to frame it up a little you know it's.
As Mark that you take out the highest call.
Cost mill in our system and then you run your lower cost mills more more full out even though there is a freight penalty from Lula is the lowest cost from a freight perspective, because where it shifts to and so you will do have a freight penalty by operating that way, but you know it's <unk>.
Close to <unk>.
$15 a ton of benefit operating that way versus if we had tried to manage it across the entire system rather than isolate and volatile.
Okay. That's very helpful I'll turn it over.
Next question please.
And ladies and gentlemen, with that it's showing no additional questions I'd like to turn the floor back over to Mr. Colds and for any closing remarks.
Again, thank you for joining us today on the call and look forward to talking to you when we wrap up our third quarter and have our call in October .
Have a good day. Thank you.
And ladies and gentlemen, with that we'll be wrapping up todays conference call and presentation. We thank you for joining you may now disconnect your lines.