Packaging Corp of America (PKG) 2022 Q1 法說會逐字稿

Thank you for joining Packaging Corporation of America's First Quarter 2022 Earnings Results Conference Call. Your host today will be Mark Kowlzan, Chairman and Chief Executive Officer of PCA. Upon conclusion of his narrative, there will be a Q&A session.

I will now turn the call over to Mr. Kowlzan, and please proceed when you are ready.

Thank you, Patricia. Good morning, everyone, and thank you all for participating in Packaging Corporation of America's First Quarter 2022 Earnings Release Conference Call. I'm Mark Kowlzan, Chairman and CEO of PCA. With me on the call today is Tom Hassfurther, Executive Vice President, who runs the Packaging business; and Bob Mundy, our Chief Financial Officer.

I'll begin the call with an overview of the first quarter results, and then I'm going to be turning the call over to Tom and Bob, who'll provide further details. And then I will wrap things up, and we'd be glad to take questions.

Yesterday, we reported first quarter net income of $254 million or $2.70 per share. First quarter net income included special items expenses of $0.02 per share, primarily for certain costs at the Jackson, Alabama mill for paper-to-containerboard conversion-related activities. Details of the special items for both the first quarter of 2022 and 2021 were included in the schedules that accompanied our earnings press release. Excluding the special items, first quarter 2022 net income was $256 million or $2.72 per share, compared to first quarter 2021 net income of $169 million or $1.77 per share.

First quarter net sales were $2.1 billion in 2022 and $1.8 billion in 2021. Total company EBITDA for the first quarter, excluding special items, was $467 million in 2022 and $342 million in 2021. Excluding the special items, the $0.95 per share increase in first quarter 2022 earnings compared to the first quarter of 2021 was driven primarily by higher prices and mix of $1.83 and volume of $0.23 in the Packaging segment; higher prices and mix in our Paper segment for $0.15; a lower share count resulting from share repurchases for $0.03; and lower interest expenses of $0.02. These items were partially offset by $0.71 of inflation-related operating cost increases particularly with energy, fiber, chemicals, operating labor and repair labor and materials.

Freight and logistics expenses have now moved higher for 7 quarters in a row and or $0.27 per share above the first quarter of 2021 and converting costs were higher by $0.11 per share driven by labor and materials expenses. We also had higher depreciation expenses of $0.07, lower volume in our Paper segment for $0.06; higher scheduled outage expenses, $0.05; a higher tax rate resulting from some favorable items in last year's tax rate of $0.03; and other costs, $0.01.

The results were $0.22 above our first quarter guidance of $2.50 per share primarily due to higher prices and mix and higher volumes in both our Packaging and Paper segments, operating cost improvements from efficiency and usage initiatives and favorable weather conditions.

Looking at the Packaging business. EBITDA excluding special items in the first quarter of 2022 was $464 million with sales of $1.96 billion, which resulted in a 23.6% margin versus last year's EBITDA of $352 million and sales of $1.62 billion or a 21.7% margin.

Demand in the Packaging segment remained very strong as sales volume in both our containerboard mills and our corrugated products plants had record-setting performances. The scheduled maintenance outages in our mills went very well, in both machines at our Jackson, Alabama mill produced containerboard the entire quarter.

However, with strong internal and external demand, we ended the quarter once again with containerboard inventory levels below our targeted and historical levels. Although we still face unprecedented inflationary headwinds in our manufacturing costs as well as freight and logistics expenses, our facilities continue to deliver on numerous cost reduction initiatives, efficiency improvements, integration and optimization enhancements and capital project benefits to maximize our returns and our margins.

I'll now turn it over to Tom, who will provide further details on the containerboard sales and corrugated products business.

Thanks, Mark. As Mark mentioned, corrugated products and containerboard demand were very strong during the quarter. We set a new all-time total box shipments record as well as a new first quarter shipments per day record. Total volume in our corrugated products plants was up 2.9% and shipments per day were up 1.3% versus a very strong comp in last year's first quarter, which for us was up approximately 8% over the prior year.

In addition to supplying the record internal needs of our box plants, our outside sales volume of containerboard was 46,000 tons above the first quarter of 2021, owing to continued strong domestic and export demand. Outside volume was 26,000 tons below the fourth quarter of 2021 in order to help supply our strong internal demand while managing through the scheduled maintenance outages at our mills.

Domestic containerboard and corrugated products prices and mix contributed $1.60 per share above the first quarter of 2021 and were up $0.23 per share compared to the fourth quarter of 2021. Export containerboard prices were up $0.23 per share versus last year's first quarter and up $0.01 per share compared to the fourth quarter of 2021.

The benefits of our disciplined approach for the implementation of price increases across our customer mix last year was a significant contributor to this year's first quarter results. Very good execution of the initial implementation of our recent March price increase contributed to results in the first quarter as well.

I'd also like to point out that the capital spending and optimization strategy within our box plant system that we have been focused on over the last few years also plays a key role in our successful implementation process. The investments from this strategy provide the products and service needs that our customers desire and allows them to grow while focusing on the mix of customers we want to align and partner with.

I'll now turn it back to Mark.

Thanks, Tom. Looking at the Paper segment. EBITDA, excluding special items in the first quarter was $29 million with sales of $153 million or an 18.9% margin compared to the first quarter 2021 EBITDA of $16 million and sales of $165 million for a 9.6% margin. As we mentioned on last quarter's call, volume from our Paper segment this year is expected to be fairly representative of the capacity at our International Falls mill. Accordingly, sales volume was about 19% below last year's first quarter when we were producing paper on the No. 1 at our Jackson, Alabama mill.

Paper prices and mix were 14% higher than last year's first quarter and 6% above the fourth quarter of 2021, resulting from our previously announced paper price increases. Also, in late March, we notified customers of $100 per ton price increase effective with shipments beginning May 2 for all office printing and converting papers. The efforts of our employees to optimize the cost structure, inventory and product mix in the paper business help minimize the inflationary increases we're seeing and deliver solid returns in the quarter.

I'll now turn it over to Bob.

Thanks, Mark. For the first quarter, we generated cash from operations of $339 million and free cash flow of $113 million. Key cash payments during the quarter included capital expenditures of $226 million and common stock dividends of $94 million. We ended the quarter with $629 million of cash on hand or $778 million, including marketable securities. Our liquidity on March 31 was $1.1 billion.

I want to update you on a revision to the scheduled mill maintenance outage guidance that we provided on last quarter's call. Current plans in the scope of work has changed, resulting in a revised total company estimated cost impact for the year of $1.04 per share versus the $1.13 per share previously. The actual impact in the first quarter was $0.15 per share and the revised estimated impact by quarter for the remainder of the year is now $0.26 per share in the second quarter, $0.22 in the third and $0.41 per share in the fourth quarter.

I'll now turn it back over to Mark.

Thank you, Bob. Looking ahead, as we move from the first and into the second quarter, we expect demand in our Packaging segment to remain very strong, and we'll continue implementing the previously announced price increases in both our Packaging and Paper segments. Volume in the Paper segment will be lower with the scheduled outage at our International Falls mill. And as Bob pointed out, total scheduled outage costs will be $0.11 higher than the first quarter.

We also anticipate continued inflation with freight, logistics expenses as well as most of our operating costs, although recycled fiber prices should be slightly lower. Considering all of these items, we expect second quarter earnings of $2.83 per share.

With that, we'd be happy to entertain any questions, but I must remind you that some of the statements we've made on the call constituted forward-looking statements. The statements were based on current estimates, expectations and projections of the company and do involve inherent risks and uncertainties, including the direction of the economy and those identified as risk factors in the annual report on Form 10-K and on file with the SEC. Actual results could differ materially from those expressed in the forward-looking statements.

And with that, Patricia, I'd like to open up the call for questions, please.

(Operator Instructions) Your first question comes from the line of George Staphos from Bank of America.

This is actually John Babcock on the line for George. I guess just first of all, I was wondering if you might be able to talk about the cadence on the price increase implementation this time and if there's any reason to believe it might be different relative to some of the hikes last year, that would be great.

Go ahead, Tom.

Yes. The implementation is right on track, just like the others. We have a very disciplined approach. We usually get the pass-through over about a 90-day period. So as I mentioned, we had some that was in the month of March, but the majority of the price increase will be in the second quarter.

Okay. And the next question, just as it pertains to trucking, I was wondering if you could talk about what you're seeing in terms of spot rates for that. Ultimately, some of our contacts suggest that prices might be dropping there. So I just want to get any color that you might have.

Bob, do you want to add a little bit of that?

Yes. John, I will just say that we are seeing a little bit of that relative to the spot market. There are various factors going on that showed a little improvement in the first quarter. But I think as most people would agree, that is still far from being in an ideal situation.

And our guidance for the second quarter, again, we have our freight costs are going up probably another 5% or so. So still a lot to be done there.

I think you need to consider, again, that diesel is still sitting at over $5 a gallon, and that's one of the predominant cost factors. And although some of the drivers in the spot market have become more available, the costs remain at exceptionally high levels.

Got you. And then last question before I turn it over. With the I Falls' downtime -- maintenance downtime that you have this upcoming quarter, could you just talk about the normal steps that you take to ensure that customers get the product they need and, ultimately, anything that you'll do around inventory build just to make sure that you're able to serve their needs?

Yes. I mean that's a shutdown that's been planned for the last 6 months. And so it's a week-long outage that will take place in June. And so you have to assume that we've already preplanned to have a necessary inventory and how we'll take care of customers. And so it's really not an issue. It's all part of the shutdown planning.

We have your next question from the line of Mark Wilde from Bank of Montreal.

Mark, just to start out, it seems like there's an awful lot of new investment in corrugating capacity, including new wider corrugators kind of coming into the industry because we've been very tight for box capacity. What impact is this having on mills and machine efficiency, if any?

Well, speaking for us, it's really not a factor. We've continued to invest in our own box plants over at least a half a dozen years now. We've added new corrugators. There are certain optimal-sized corrugators that we prefer that some -- a few have gone to the very large, 130-inch-type corrugators. Again, there's certain optimal levels. I don't think there's a real strong relationship to mill efficiency and corrugator size necessarily.

Tom, do you want to add little color to that?

I would just say that if you've got some narrow machines, that can create some issues relative to the wider corrugators. So that's -- that, to me, would be the largest impact you probably see in the mills is just some scheduling issues on narrow machines.

From the old machines.

Yes.

Okay. Tom, and I'm curious, it seems like over the last 18 months, we've been getting more reports about sort of subcontracting out of corrugated volumes during the pandemic. I think this is because of strong demand and the labor shortages. Have you guys seen any impact from this in your system? Have you had that subcontract out more?

I think, Mark, we have kind of a unique system from the standpoint that we have a lot of corrugated plants, and we have a lot of sheet plants. So I think in terms of flexibility, sometimes we have a little bit more than some of our competitors might. And that's where I see a lot of this subcontracting, as you call it, is probably more in the independent sheet network as opposed to anywhere else. And like I said, we're able to handle that type of business. So for us, no, we're cutting up everything that we -- all our demand internally.

Okay. That's helpful. Finally, Mark, I wondered if you could give us just an updated time line and ultimate capacity on the conversion of the 2 machines at Jackson.

Well, the primary emphasis at Jackson is the No. 3 machine. And as we called out earlier this year, we pushed that outage off to the October period because of supply chain issues. When that last phase is completed a year from now, we anticipate that the Jackson No. 3 machine should have a 700,000 ton a year capacity built into it.

Right now, the No. 1 machine, we're not planning on any significant upgrades at this time. We've got studies done, as you would imagine, that would be an opportunity for the future if we choose to move in that direction. But we will have a good opportunity to absorb the full production of No. 3 machine through later next year and into 2024.

What would the capacity at No. 1 be without the upgrade? And then potentially, what could that go to if you put some capital in it, just in ballpark terms?

Today, if you think about No. 1 machine at Jackson with no capital investment, it's somewhere 125,000 tons a year type of run rate with the basis weights we're running, which is a pretty good place to be, considering we haven't invested in capital in them. And it's like any other machine we talked about over the decades. It's all a matter of capital. How much capital do you want to spend for how much capacity? Because once you reach a certain critical point, you really get into diminishing returns because now you're getting into the bigger pieces of capital required for back-end infrastructure pulping and all of the related pulp capacity requirements.

So there's certainly an economic analysis that takes place at -- you quickly reach a peak return and then diminish. So I think where we are with what we're looking at, if you're producing 700,000 tons a year on No. 3 machine and 120,000, 140,000 tons a year on No. 1 machine, that's a very good place for Jackson, Alabama to be on cost and a profit curve.

And our next question comes from the line of Mark Weintraub from Seaport Research.

Congrats on another well-executed quarter. First, 2 follow-ups. One, you mentioned that it normally takes about 90 days to fully implement from board into box. So can we conclude that a portion of the pricing will show up on an average basis in the third quarter as well that there will be some additional -- we'll see a lot of it in the second quarter, and then we should see some incremental as we average the numbers from quarter-to-quarter in the third quarter?

Yes. Mark, this is Tom. Yes, that would be a good read in.

And can you give us any sense if we look back historically, what percentage might typically show up in that period that within this case would be the third quarter?

No. It's -- I think, as I said, I mean, these things roll in over a 90-day period. I mean there are a few accounts that have certain contracts that may go even beyond that. But for the most part, it's the 90-day period. And we've indicated that there's some in March and that the bulk will be in the second quarter. And yes, there might be a little rollover into the third quarter, that's -- but that's the only guidance I can give you.

Okay. So just a little, though. Okay. And then you mentioned the Jackson machine going to 700,000. Is it about 500,000 now? What's the production capacity currently at Jackson?

You're in that probably 440,000 tons a year, 450,000 tons a year on that machine. And again, it just depends on the grade mix we're running. And then the 125,000 tons -- if you look at last year, running the machine for 1 quarter, we produced 459,000 tons for the year. For the first quarter, we just produced 136,000 tons. So you're talking about the full year run rate if we continue to run at this pace, somewhere 550,000 tons for the year expected out of Jackson.

Okay. And then lastly, you mentioned the packaging demand looking good into the second quarter. Can you update us on what your bookings were through the first part of August -- sorry, April?

Yes. From -- so far in April, we're up 3.5% over -- and so keep in mind, though, that last April, we were up 12%. So this is a big, big jump on top of last April. So demand still remains very good.

We have your next question from the line of Phil Ng from Jefferies.

Your next question is from the line of Anthony Pettinari from Citigroup.

Mark, can you maybe talk a little bit more about inventory levels in terms of where you are versus where you'd like to be and maybe a potential time line for getting there?

And then given supply chain constraints, I mean, do you think just structurally, you might hold a higher level of inventory than in the pre-pandemic period?

And then I guess, finally, anything that your customers have said about their inventories that's maybe worsened or gotten better or any kind of read from them?

As we've called out, we're still below where we would want to be. We're still below our historical target levels. And a lot of it obviously has to do with the pandemic-related supply chain transportation matters. And so we're into the heavy shutdown period for the year. As we come out of that, things generally improve.

But I think also part of your question, we would anticipate for the time being, trying to hold a higher level than we had historically held prior to the pandemic. But again, with business volume continuing to grow at the rate it's growing and logistics supply chain issues, railroad trucking doing what they've been doing. It's very difficult to build to the necessary inventory levels.

Okay. That's helpful. And then just on the very strong demand that you've seen, is there any finer point you'd put on customer groups or end markets that are seeing especially stronger demand or maybe some demand that's softening a little bit?

And then just broadly, I mean, are your local accounts? Or they maybe outperforming national accounts? Or just any color you can give on what has been extremely strong demand. It seems like it's continuing into April.

Anthony, this is Tom. I'll handle the demand piece. Demand is, as I said, is very strong. I think representative of some of that strength is if you just look at our top 50 accounts in the first quarter, they were up 7% on average. Now that includes some that were up double digits. It includes some that were down slightly, but depending on the business that they're in.

But if you just look kind of broadly across, just like I said, those 50 accounts, I mean you see that they're in lots of different businesses, and demand remains very strong across all of those businesses. Relative to local versus national, I mean you got the puts and the takes as I just talked about. But generally speaking, I think that the larger accounts have a little bit more of an ability to work through some of the issues that are going on, perhaps more so than some of the smaller accounts.

But again, it's -- everybody says they can grow a lot more than what they're currently able to grow. They're just held up by all these supply chain issues, primarily in the labor issues that we've talked about in the past.

We have your next question from Cleve Rueckert from UBS.

I don't want to beat a dead horse, but just to follow up quickly on demand, I mean, PCA has done, I mean, frankly, a very impressive job of taking market share in this business over the last 12 to 18 months, call it. Do you have a sense of whether the growth you're seeing is like end demand market growth? Or are you just continuing to execute well and take market share?

Well, I would say that our long-term strategy, and I just mentioned it in the commentary, too, is to really spend a lot of time making sure we align with the right kind of customers. And we've been doing that for decades. So most -- the great majority of our growth comes from our existing accounts and their ability to grow and our ability to help them grow in whatever way we possibly can. So that's the majority of where PCA's growth comes from. And we've demonstrated that not just in the recent past but certainly over the long term.

Okay. That's clear. And then just a couple of quick follow-ups. First, I want to follow up on John's question about freight and trucking. We're seeing the same things about spot pricing, but we've also heard that some of the logistics is moving out of the spot market and into the contract market. I'd just be curious if you're changing your strategy at all, especially as it relates to the trucking market.

No. We're not necessarily changing strategy. We're taking advantage of some of the availability improving, but there's no major change in strategy. Tom, do you want to add anything?

No. We've been under contracts for the most part. And we don't use that much spot, to tell you the truth.

Yes. Okay. That's clear. And then just on labor productivity, I think we heard pretty broadly last quarter that labor, especially in the box system, was kind of a constraint to production and constrained productivity. I mean you guys obviously burned inventory this quarter, but I'd just be curious to know if that's easing at all or if there's any sort of bottleneck on the labor side that's holding you back on the productivity side.

Yes. Again, keep in mind, if you think about commentary we've made over the last year with our capital investment in the last few years, we've been able to make significant improvements in the productivity in our box plants and continue to grow our capability in terms of the productivity per unit, man-hour employed. But that being said, with the labor market there, there's still an incredible amount of stress on the labor pool and the converting side and the mill side.

Tom, why don't you add a little color to the converting side?

Yes. There's no question. I mean, our labor situation improved as a result of the COVID, especially the Omicron variant going down some. So that was a help to our labor situation. But on the other hand, trying to hire new people and replace retirees, et cetera, is still a bit of a challenge and will remain so if you just look at any of the statistics and the 8 million jobs that are sitting there open, the highest labor participation rate in decades. We've got, certainly, I think, everybody in any industry would attest to the fact that labor is a real challenge.

(Operator Instructions) We have your next question from the line of Mark Wilde from Bank of Montreal.

I've got a couple of follow-ups. One, is it possible for you to just help us differentiate kind of the level of inflation you're seeing at the mill level versus what you're seeing at the converting level? It does seem like converting plants are seeing more cost pressure than I've ever seen in my career between labor, starches, pallets, energy, other issues.

Yes. I think, again, it's relative, Mark. Across the board, you'd have to understand that everything is under tremendous inflationary pressure, but what you just said is correct.

Tom, do you want to go ahead and add some detail for that...?

Well, I'm just going to agree wholeheartedly with you, Mark. I've never seen anything like the across-the-board inflation we're dealing with in box plants. We can talk about some of the big numbers, transportation, those sorts of things. But when you start talking about all the things you just mentioned, the labor, the starch, the pallets, the ink, the dies, any equipment repairs, any of those sorts of things, it's just -- these are numbers that I've never seen before, upwards of as much as 200% in some cases.

Okay. Then Mark, the other question I had is you've created a lot of incremental benefits by taking advantage of conversion opportunities at DeRidder and Wallula, now at Jackson. Is there anything at International Falls that would prevent you from doing the same kind of thing there at some point in time?

No. As a matter of fact, I Falls is another example of a mill that if the market dictated, we could take advantage of in a very, very good way as far as paper market and then how that plays into our growth in our corrugated products business. Again, as you've heard us talk about, we're always studying and planning and looking at opportunities. And we've got the plans put in the file on what we want to do someday if the market conditions were such that it dictated, we needed to make a decision about I Falls. But keep in mind that the big machine at I Falls, the I1 machine is, quite frankly, a better version of what we have at Jackson on J3. It's -- they were both essentially sister machines installed at the similar time frame a few decades ago. And there are tremendous capability. The mill infrastructure at I Falls has tremendous capability to support conversion. But again, it's all about box demand versus paper demand and profitability. So we have that opportunity. But yes, I Falls is another one of the opportunities that's sitting there that could be taking advantage of some day.

Okay. And would it just be fair to assume, Mark, given that it's primarily a hardwood mill right now that you'd be more likely to take that toward corrugating medium rather than linerboard? Or is that not a good assumption?

That's a bad assumption.

Mr. Kowlzan, I'm not seeing any more questions. Do you have any closing comments?

Again, thanks, everybody, for joining us today on the call, and we look forward to talking with you at the latter part of July. Have a good day, everybody. Thanks.

And this concludes today's conference call. Thank you all for participating. You may now disconnect.