Packaging Corporation of America (NYSE:PKG) Q3 2023 Earnings Call Transcript

Packaging Corporation of America (NYSE:PKG) Q3 2023 Earnings Call Transcript October 24, 2023

Operator: Good morning, everyone, and thank you for joining Packaging Corporation of America’s Third Quarter 2023 Earnings Results Conference Call. Your host for today will be Mark Kowlzan, Chairman and Chief Executive Officer of PCA. Upon conclusion of his narrative, there will be a Q&A session. Please note that this call is being recorded. At this time I’d like to turn the floor over to Mr. Kowlzan. Please proceed when you’re ready.

Mark Kowlzan: Thank you, Jamie. Good morning, and thank you all for participating in Packaging Corporation of America’s third quarter 2023 earnings release conference call. I’m Mark Kowlzan, Chairman and CEO, PCA, and with me on the call today is Tom Hassfurther, Executive Vice President, who runs our packaging business, and Bob Mundy, our Chief Financial Officer. As usual, I’ll begin the call with an overview of the third quarter results, and then I’ll turn the call over to Tom and Bob, who will provide further details and then I’ll wrap things up and then we’d be glad to take questions. Yesterday we reported third quarter net income of $183 million or $2.03 per share. Excluding special items, third quarter 2023 net income was $185 million or $2.05 per share, compared to the third quarter of 2022’s net income of $266 million or $2.83 per share.

Third quarter net sales were $1.9 billion in 2023 and $2.1 billion in 2022. Total company EBITDA for the third quarter excluding special items was $388 million in 2023 and $477 million in 2022. Third quarter net income included special items expenses of $0.02 per share, primarily for certain costs at the Jackson, Alabama mill for paper to container board conversion related activities. Details of all special items for the third quarter of 2023, as well as 2022 were included in the schedules that accompanied our earnings press release. Excluding the special items, the $0.78 per share decrease in third quarter 2023 earnings, compared to the third quarter of 2022 was driven primarily by lower price and mix of $1.33 and volume $0.09 in the packaging segments.

Higher depreciation expense $0.11; lower volume in the paper segment $0.04; higher tax $0.02; and other expenses $0.02 cents. These items were partially offset by lower operating costs of $0.58, primarily resulting from lower recycled fiber and energy prices along with outstanding mill and plant operational execution. Other favorable items included a lower share count resulting from share repurchases in the second half of 2022 were $0.11, higher prices and mix in the paper segment $0.04, lower converting costs $0.04, lower scheduled maintenance outage expenses of $0.04, and lower freight and logistics expenses $0.02. The results were $0.17 above our third quarter guidance of $1.88 per share primarily due to higher volume in the packaging and paper segments and lower operating and converting costs.

Looking at our packaging segment EBITDA excluding special items in the third quarter of 2023 of $374 million, with sales of $1.8 billion, resulted in a margin of 21.3% versus last year’s EBITDA of $467 million, with sales of $1.9 billion, and a 24.1% margin. The operational benefits of our capital spending program and the continued great focus and execution of our mills and corrugated products facilities on numerous process improvement initiatives once again delivered impressive results. This included areas such as machine and equipment efficiencies, fiber, chemical and material usages, internal energy generation and usage, and labor costs. Our approach to cost-effective management of container board supply with demand also delivered the benefits we were anticipating.

This was primarily achieved by idling the Wallula mill for the entire quarter, which resulted in a market-related downtime of approximately 174,000 tons. However, with the stronger demand in our packaging segment, we ended the quarter with inventory levels lower than anticipated. Based on our current outlook for improved demand, together with current plans for the first quarter of 2024 for the scheduled mill maintenance outages and completing the final phase of the container board conversion on the number three machine at our Jackson, Alabama mill. We are planning to restart the number three machine at the Wallula, Washington mill during the fourth quarter in order to bring our inventories to desired levels. I’ll now turn it over to Tom, who will provide further details on container board sales in the corrugated business.

Tom Hassfurther: Thank you, Mark. Packaging segment volume for the quarter exceeded our guidance estimates. Corrugated product shipments per workday were up 1.9% and total shipments with two less shipping days were down 1.3%, compared to last year’s third quarter. Versus the second quarter of 2023, shipments per day were up 3.9% and total shipments were up 2.3% even though there was one less shipping day. Outside sales volume of container board was 33,000 tons above last year’s third quarter and 5,000 tons above the second quarter of 2023. Demand headwinds from a shift of consumer buying preferences towards more service-oriented spending, persistent inflation, and higher interest rates continue to negatively impact consumers’ purchases of both durable and non-durable goods.

However, we mentioned last quarter that many customers were telling us the inventory de-stocking of boxes and their products was behind them and we were hopeful that, that would translate to improving volume throughout the second-half of the year. We saw that occurring during the third quarter and we expect that momentum to continue into the fourth quarter although there is one less shipping day, compared to the third quarter. Relative to the published reductions in the industry benchmark grades that occurred late last year and earlier this year, domestic container board and corrugated products prices and mixed together were $1.12 per share below the third quarter of 2022, and down $0.45 per share, compared to the second quarter of 2023. Export container board prices and mix were down $0.21 per share, compared to the third quarter of 2022 and down $0.03 per share, compared to the second quarter of 2023.

A containerboard factory with a display of multi-color boxes at the entrance.

And now I’ll turn it back to Mark.

Mark Kowlzan: Thank you, Tom. Looking at our paper segment, EBITDA excluding special items in the third quarter was $35 million with sales of $158 million or a 22.4% margin, compared to the third quarter of 2022’s EBITDA of $33 million and sales of $165 million or a 19.7% margin. Seasonally stronger cut size and printing and converting volumes were 13% higher than the second quarter levels and down almost 8% versus the third quarter ‘22 with about 40% of the decline being driven by no paper sales from our Jackson mill in this year’s third quarter. Prices and mix were up about 3.5% from last year’s third quarter and down 2% from the second quarter of 2023, due to the declines in the index prices that occurred earlier in the year.

Our International Falls mill managed their nine-day planned maintenance outage very well, and similar to the packaging facilities, the mill remained focused on efficient and cost-effective operations, delivering great results for the quarter. I’ll now turn it over to Bob.

Bob Mundy: Thanks, Mark. Cash provided by operations during the quarter totaled $339 million, with free cash flow of $250 million. The more significant cash payments during the quarter included capital expenditures of $90 million, common stock dividends totaled $112 million, $63 million for federal and state income tax payments, and $51 million for pension and other post-employment benefit contributions. In addition, we repurchased just over 286,000 shares of our stock during the quarter at an average price of $144.81 per share for a total of about $42 million. We ended the quarter with $726 million of cash, including marketable securities and our liquidity on September 30th was approximately $1.1 billion. Lastly, our planned annual maintenance outage expense for the third quarter was just over $0.22 per share and the fourth quarter is now expected to be about $0.19, bringing the 2023 full year total to $0.72 per share. I’ll now turn it back over to Mark.

Mark Kowlzan: Thanks, Bob. Looking ahead as we move forward into the — from the third into the fourth quarter, in our packaging segment we expect less market-related downtime as we build our inventories back to appropriate levels, along with higher shipments per day in our corrugated products facilities, although our plans will have one less shipping day, compared to the third quarter. We also expect lower average prices primarily due to the majority of the May decrease in the published benchmark index grades being realized throughout the third quarter, as well as a seasonally less rich mix. In our paper segment, volume will be lower compared to the seasonally stronger third quarter and prices and mix are assumed to trend lower with declines in the index prices.

Operating and converting costs will increase — driven by higher recycled fiber prices, seasonal energy costs, and the restart of the wool of the mill. Depreciation expense is estimated to be slightly higher and scheduled maintenance outage expenses will be lower. Considering all of these items, we expect the fourth quarter earnings of $1.76 per share. With that, I would be happy to entertain any questions, but I must remind you that some of the statements we made on the call constituted forward-looking statements. These 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 the subsequent quarterly reports on Form 10-Q filed with the SEC.

Actual results could differ materially from those expressed in the forward-looking statements. And with that, Jamie, I’d like to go ahead and open up the call for questions, please.

Operator: Ladies and gentlemen, at this time, we’ll begin the question-and-answer session. [Operator Instructions] Our first question today comes from Garrison Keillor from Bank of America securities. Please go ahead with your question.

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Q&A Session

George Staphos: Hi, it’s George Staphos. How are you everybody? Congratulations on the quarter.

Mark Kowlzan: Good morning, George.

George Staphos: I just — how are you doing? Doing dueling conference calls today at this time. So again, congratulations on the performance. Can you talk to the — you enumerated a number of factors in terms of the lower operating and converting costs. I know, Mark, it’s always a number of projects, but were there any in particular that were sources of the improved performance? Yes, there’s going to be some pickup in the fourth quarter seasonally and you have OCC higher, but how much do you carry forward and what’s the room for further improvement on both operating and converting costs as we look out to ‘24 from where we’re at right now. If you can talk a little bit to that.

Mark Kowlzan: You know, it’s the benefit of the year-after-year continuous improvement that we’ve had in place. And as we’ve said over the years, we’re constantly doing hundreds and hundreds of projects a year. Some are small, some are large, but nevertheless it’s an ongoing, continuous process across the board. And if you think about the box plants and the mills, there’s a daily activity with the technology organization in concert with the local operational management focused clearly on cost takeout and just operational excellence. And this has been going on for a number of years and will continue to go on. Tom, I think, you know, you’ve got great examples in the box plants that we just continue to execute.

Tom Hassfurther: Yes, I think George, this is really, you know, an effort to really realize the deployment of the capital that we’ve done in the — in all the box plants and to streamline those box plants and to really get those box plants, you know, right-sized for the growth we’ve got coming and what the existing volume is right now. So we’re very pleased. We’re very, very pleased with the results.

Mark Kowlzan: You know, George, as far as next year, you know, as you could expect, we’re already and have been talking about, you know, what’s on the horizon for next year, what are the opportunities. And so we’ve got a very good, solid plan in place on where we’re going after these cost takeouts and continued operational improvements, along with just being able to look at what the market requirements are going to be in terms of customer needs and addressing that. And while we address that, we’re always looking at how we’re deploying that capital and how that impacts the operation in terms of labor cost and energy and input conversion cost. So we’ve got a good plan for next year also.

George Staphos: Sounds like it wouldn’t be surprised by that Mark. So to Wallula, and again I know it’s hard to talk about some of this live mic. But the restart for the fourth quarter, what does it mean about what your customers are saying for ‘24? I realize you need to rebuild inventories and we know PM3 at Jackson’s going to be down for the last part of the conversion. But what does it mean in terms of your demand outlook, what your customers are saying? And hopefully this isn’t the case, but if things wind up being from a macro standpoint a little bit softer, how quickly could you maybe pull back on Wallula if need be? And then my last question I’ll turn over. Can you talk to us a bit about how your early fourth quarter bookings and billings are? And how we should again think about how those map to actual volumes. Thanks and good luck in the quarter, guys.