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spk01: Thank you for joining Packaging Corporation of America's first quarter 2021 earnings results conference call. Your host today will be Mark Colson, Chairman and Chief Executive Officer of PCA. Upon conclusion of his narrative, there will be a Q&A session. I will now turn the conference call over to Mr. Colson. Please proceed when you're ready.
spk12: Thank you. Good morning. And again, I appreciate everybody participating today. and Packaging Corporation of America's first quarter 2021 earnings release conference call. 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, and Bob Munday, our Chief Financial Officer. I'll begin the call with an overview of our first quarter results and then turn the call over to Tom and Bob who will provide additional details. I'll then wrap things up and then we'll be glad to take questions. Yesterday, we reported first quarter net income of $167 million, or $1.75 per share. First quarter net income included special items expenses of $0.02 per share related to closure costs for certain corrugated products facilities and specific costs related to discontinuing paper operations associated with the previously announced conversion of the number three machine at our Jackson, Alabama mill to liner board. Excluding the special items, first quarter 2021 net income was $169 million or $1.77 per share compared to the first quarter 2020 net income of $143 million or $1.50 per share. First quarter net sales were $1.8 billion in 2021 and $1.7 billion in 2020. Total company EBITDA for the first quarter, excluding special items, was $342 million in 2021 and $311 million in 2020. Details of the special items for both the first quarter of 2021 and 2020 were included in the schedules that were accompanying the earnings press release. Excluding the special items, The 27 cents per share increase in first quarter 2021 earnings compared to the first quarter of 2020 was driven primarily by higher volumes of 45 cents and prices in mix, 31 cents in the packaging segment, and lower annual outage expenses for 12 cents. The items were partially offset by lower volumes, 28 cents, and prices in mix of 3 cents in the paper segment. Operating costs were 15 cents per share higher, primarily due to inflation-related increases, particularly in the areas of labor and benefits expenses and fiber costs and energy. We also had inflation-related increases in our converting costs, which were 2 cents per share higher. For the last three quarters, freight and logistics costs have risen and were 12 cents per share higher in the first quarter compared to last year. Significant increases in fuel costs, tight truck supply, and a higher mix of spot pricing to keep up with box demand are the primary drivers. And in the first quarter, we had the issues brought on by the winter storms as well. We also had other expenses of one cent per share. Looking at the packaging business, EBITDA, excluding special items in the first quarter of 2021, of $352 million with sales of $1.6 billion resulted in a margin of 22% versus last year's EBITDA of $290 million and sales of $1.5 billion or a 20% margin. Demand in the packaging segment remained very strong as sales volume in both our container board mills and our corrugated products plants set or matched all-time quarterly records. Although we were able to replenish some inventory during the quarter by utilizing the Jackson, Alabama mill for additional container board production, we again ended the period with inventory levels lower than planned and at record lows from a weeks of supply standpoint due to stronger than expected demand. Our mills and box plants displayed outstanding management of their operations to meet customer commitments in spite of several weather-related events that impacted their operations, created raw material availability issues, and presented both inbound and outbound freight and logistics challenges. In addition, our facilities continued to deliver on numerous cost reduction initiatives, efficiency improvements, and capital projects, and bringing the benefits of those efforts to the bottom line. We also recently completed two high-return strategic projects that we've mentioned to you before, the OCC project at our Wallula Mill and the Boiler project at our Filer Mill. The tremendous effort our employees put into these initiatives and projects helps us minimize some of the cost inflation we see every year, and especially now with what we're seeing in the areas I mentioned previously. I'll now turn it over to Tom, who will provide more details on container board sales in our corrugated business.
spk11: Thank you, Mark. As Mark mentioned, corrugated products and container board demand were very strong during the quarter. Total volume in our corrugated products plants was up 6.6% versus last year and equaled the all-time record for total box shipments that we just set in the fourth quarter of 2020. Shipments per day were up 8.3% over last year, which set a new first quarter record for us. Strong domestic demand drove outside sales volume of container board 13% above last year's first quarter. Domestic container board and corrugated products prices and mixed together were 26 cents per share above the first quarter of 2020 and up 52 cents per share compared to the fourth quarter of 2021. as we continued to implement our November 2020 announced price increases during the quarter and we began the implementation of our announced March increase. Export container board prices were up 5 cents per share versus last year's first quarter and up 4 cents per share compared to the fourth quarter of 2020. I'll now turn it back to Mark.
spk12: Thanks, Tom. Looking at our paper segment, EBITDA excluding special items in the first quarter was $16 million with sales of $165 million or a 10% margin compared to the first quarter of 2020's EBITDA of $42 million and sales of $217 million or a 19% margin. As expected, sales volume was about 22% below last year as we ran only one machine at the Jackson, Alabama mill this quarter. versus both machines running in the first quarter of 2020. First quarter paper prices in MIX were almost 3% below last year. However, prices began to move higher in the latter part of the quarter, resulting from the announced paper price increases and averaged 1% higher than fourth quarter 2020 average prices. Industry conditions in the uncoated free sheet market continue to be challenged due to the nationwide responses to help control the spread of the pandemic. However, with the actions we've taken in our paper segment to match supply with our customers' demand and moving production on the number three machine at our Jackson, Alabama mill from paper to liner board, we have not only avoided the significant cost issues associated with extended paper market downtime, but we've also enhanced our capabilities as well as the profitability in our packaging segment. Going forward, we will continue to assess our outlook for paper demand and the optimal inventory levels, and we'll run our paper system accordingly. I'll now turn it over to Bob.
spk13: Thanks, Mark. For the first quarter, we generated cash from operations of $192 million and free cash flow of $107 million. The primary uses of cash during the quarter included capital expenditures of $85 million and common stock dividends of $95 million. We ended the quarter with $983 million of cash on hand or $1.1 billion including marketable securities. Our liquidity at March 31st was $1.5 billion. I want to update you on our full year guidance for a couple of items that we provided on last quarter's call. Current plans and scope of work for the scheduled maintenance outages at our container board mills has changed, and the new total company estimated cost impact for the year is 97 cents per share. The actual impact in the first quarter was 10 cents per share, and the revised estimated impact by quarter for the remainder of the year is now $0.30 per share in the second quarter, $0.16 in the third, and $0.41 per share in the fourth quarter. Also, our capital spending estimate for the year has changed to a range of $650 to $675 million as we have now announced our plans for the conversion of the number three paper machine at our Jackson Mill two liner board. I'll now turn it back over to Mark.
spk12: Thanks, Bob. Regarding the conversion of the number three machine at Jackson, Alabama, our current plans are to continue running the machine on line aboard as demand warrants in a manner similar as to how we ran in the first quarter until the scheduled first phase outage is taken in the second quarter of 2022. The converted machine is expected to operate at an initial production rate of approximately 75 percent of its new capacity. The second phase outage work is planned for mid 2023 with the machine reaching its run rate capacity of 2,000 tons per day by the end of 2023. This phased conversion over the next few years will provide much needed internal line of board supply. This gives us a runway for maintaining an optimal integration level and enables us to further optimize and enhance our current mill capacity and box plant operations. We're committed to being fully integrated, and we have a track record of ramping up production from machine conversions according to our customers' demand requirements. We will continue to serve our paper customers with the number one paper machine at Jackson, Alabama, and both machines at our International Falls, Minnesota mill, which is capable of producing all of Jackson's paper grades. Looking ahead as we move from the first and into the second quarter, In our packaging segment, we expect demand to remain strong and we will continue implementing our previously announced paper price increases. We also expect export prices to move higher. In the paper segment, we expect volumes to be fairly flat with higher average prices in mix as we continue the rollout of our recently announced paper price increase. The second quarter will be our busiest of the year for planned annual outages in the packaging segment with work scheduled at four of the mills. Outage expenses are estimated to be approximately 20 cents per share higher compared to the first quarter. We also anticipate continued inflation with freight and logistics expenses as well as most of our operating and conversion costs. However, Energy costs should improve as we move into seasonally milder weather. 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 on file with the SEC. actual results could differ materially from those expressed in these forward-looking statements. And with that, Regina, I'd like to open up the call to questions, please.
spk01: At this time, if you wish to ask a question, press star 1 on your telephone keypad. Your first question will come from the line of George Stappos with Bank of America.
spk06: Hi, everyone. Good morning. Thanks for the details, and congratulations on the progress, guys. I guess the first question that I had, given that You know, you're running really tight, at least in terms of your prepared remarks, in terms of managing your customer requests, the freight and logistics issues domestically that we're seeing. I realize you have customers internationally and their long-term relationships, but why the increase in export sales in the quarter? Why not try to keep some of those tons domestically if, in fact, that's where you need them? And then I had a couple of follow-ons.
spk11: Hey, George, this is Tom. I'll just answer that real quickly. We had a number of export commitments that were running over from the previous year that we had to take care of in the first quarter to maintain our relationships. And so we just had to get that taken care of. And we knew full well that we'd also be able to supply our box plants, although with a very tight inventory.
spk06: Okay, I appreciate that. Second question I had, if you can just give us the normal rundown, Tom, perhaps that you would give us on bookings and billings early in the quarter. And are you seeing any signs at all of customers trying to conserve on corrugated, given the market that you've seen? Or if anything, given the growth that we've been seeing, are you seeing new applications beyond e-commerce for corrugated? So kind of a couple-part question there.
spk11: Okay, good questions, George. First of all, through 14 days, our bookings are up 16% versus a year ago. So obviously the, you know, the volume remains very robust. And, you know, we're obviously, you know, very pleased with those kind of numbers and the trend that has just continued, right, coming right out of the fourth quarter of last year and continued into this year. You know, there's, There's no way customers can, in essence, hoard or order ahead or anything like that with the demand we're having right now. And a lot of our customers report business conditions as good as what we're talking about, and they're just trying to keep their head above water, and we obviously are keeping them supplied with boxes.
spk06: Okay. Okay. I was really more getting at the point or if customers are trying to conserve, it sounds like right now they're just living hand to mouth and they'll worry about that or for that matter, the growth outlook once they can kind of catch up. My last question, I know it's something you might not want to talk too much live mic on, but qualitatively, if we look at where a first quartile and a fourth quartile machine might be in container board, would it be unduly penalizing to estimate that maybe right now Jackson is costing you, I don't know, $10 million a quarter just because of where it is on the cost curve right now relative to where it will be at some point. Thanks, guys, and good luck in the quarter.
spk12: Yeah, I think everyone could understand that without the capital investment, we are running probably in that high third, low fourth quartile cost portion of a curve. The beauty of it is, though, it's very productive, very efficient in providing us the critical tons we need to run the box system. We've also, in the last four months, we've taken considerable cost out as we've learned more about the machine. But the machine has proven to be, you know, quite an extremely efficient machine. But someone might think about the capital spending that we are undertaking as we speak that we'll go through next year and the year after. It's not only the incremental productivity that we'll capture with the capital spending, but it's the significant cost reduction that we'll see over the next two years coming out of that facility. So we have an elegant plan in place. And right now, even though the costs are higher, as one would expect, the tons are extremely valuable to our system.
spk06: Thank you very much, Mark. I'll turn it over.
spk12: Okay. Next question, please.
spk01: Your next question comes from the line of Mark Wilde with Bank of Montreal.
spk04: Thanks. Good morning, Mark, and congratulations on a very good quarter. Mark, I wonder, the mill volume was just incredible here in the first quarter. You did about 1.2 million tons, and your listed capacity in the K is 4.3 a year. So factoring in Jackson, I wondered if you can just help reconcile that and You know, is this a pace that's at all sustainable over time?
spk12: You know, no one asked us in January what we really produced in Jackson in the fourth quarter. But if you think about what we are producing and what we produced in the fourth quarter and what we produced in the first quarter, the Jackson number three machine on a run rate and looking at its grade mix is producing a little over 100,000 tons a quarter. It's in that range. And so on an annualized basis, it's providing an incremental 400 plus thousand tons a year to the run rate. And part of the reason, again, if you think about the filings, we did not have the machine listed as a true liner board machine. So we still consider it a paper machine, providing us with some much needed liner board right now. Fast forward, to help you with your math, if you assume the 4.3 million plus the 400,000 tons, you get pretty close to your number. The other factor that we'll give you a little understanding on is the project I mentioned on the call just a few minutes ago, the Wallula OCC project. Not only was that going to be a fiber flexibility opportunity for the Wallula mill, but Anybody that understands fiber physics, recycled fibers of any kind drain and dry much more easily than virgin fiber. And so by mixing now the OCC in with our virgin craft fiber at the Wallula Mill, we're seeing, as we expected, much higher speeds on the machines. And in particular, the number three machine, the drainage, pressing, drying is far superior than it was before. And so starting in February, when we started the OCC plant up, we've been averaging close to 100 tons a day more production on that machine. And so that's another piece of the incremental first quarter tons that was built in. And that you'll see for the rest of the year also. So that really helped.
spk04: Go ahead. Yeah, that's good. I was just going to say, you know, I think when you first converted Wallula, you were talking about 400,000 tons there, but the potential to get it to, you know, 5 or 550. Where would that machine be right now, taking into account the OCC mix?
spk12: Well, the whole mill, because don't forget the number two machine is sitting there making medium. We had talked all along that that mill had the opportunity to get close to that 600,000 ton annualized run rate for both machines. And we're there essentially right now.
spk04: Okay. All right. That's helpful. And just secondly, Mark, is there any way to help us think about the impact of this adverse weather in the first quarter? I would have expected, you know, that that would have caused issues perhaps down in DeRidder and maybe kind of across your converting business.
spk12: I'm going to say a few things and then Tom and Bob can add to that. We were very fortunate that we were not as severely impacted as some competitors. The DeRitter Mill was able to run through this. We had transportation logistics problems trying to move raw materials in and finished goods out. We had the bigger impact in the Texas region in the Dallas Metroplex area with our box plants. We had some of the box plants obviously down. Tom, do you want to add a little color to for the two-week period when we had a lot of the severe weather?
spk11: Yeah, Mark, we obviously lost significant production time in those box plants. We made up for a lot of that in the subsequent month, but it was a very, very difficult month. The ag crop, obviously, down the Rio Grande Valley was dramatically impacted, which also impacted our volumes in that area. In addition... As you may be aware, the impact of the chemical plants that provide the chemicals that make up our glues and adhesives was definitely impacted, and we've been suffering shortages of that product across all the companies. And, you know, we've had to take some extraordinary measures to make sure that we can continue to run at much higher expense to do so.
spk04: Okay. All right. That's really helpful. I'll turn it over, guys. Thank you.
spk12: Okay. Thanks, Mark. Next question, please.
spk01: Your next question comes from the line of Mark Connolly with Stevens.
spk12: Morning, Mark. Hello?
spk01: Mark, you may be on mute. Our next question will come from the line of Mark Weintraub with Seaport Global.
spk07: Thank you. I believe you said that the impact from pricing in your domestic business was 52 cents from the fourth quarter to the first quarter. Was that right? Did I hear that right?
spk13: Yes, Mark.
spk07: So if I translate that into kind of millions of dollars, it sounds like 60 million plus, which if you're making 1.2 million tons of container boards, on an integrated basis, seems like $50 per ton. And if that's the case, have you already gotten the lion's share of that November increase, or is part of that mix and there's still a decent amount to come?
spk11: Hey, Mark, this is Tom. We have gotten most of the increase from November in the first quarter. We do have some that trails into the second quarter and even into the beginning of the third quarter just based on contracts. But the lion's share has been accomplished in the first quarter. Okay. Thank you.
spk01: Our next question will come from the line of Adam Josephson with KeyBank. Please go ahead.
spk14: Thanks. Good morning, everyone. Congrats on a really good quarter. Morning, Adam. Thanks. Morning, Mark. Questions on guidance. Obviously, pre-pandemic, you gave quarterly guidance. You haven't resumed doing so since, even though you put up really good numbers this quarter and the outlook seems pretty good. Has your philosophy changed about providing quarterly guidance? Or if not, when do you intend to resume giving guidance?
spk12: I think the way we would answer that is that there's still so much uncertainty in the world around us. if you think about the number that Tom just gave you for the volume, if a year ago somebody told you that volume was going to be up 16% year over year on a given month, no one would believe you. And so until the pandemic winds down and we come back to some at least sense of what we think the new world normalcy will be, We believe it's in our best interest and the shareholders' best interest to not give guidance.
spk14: Yeah, I completely understand. You stole my thunder. I was going to ask you. I mean, I think in 2019, your per day shipments were up about 1%. In the first quarter, they were up 8.3%, and you're talking about bookings up 16%. So is there any way for you to separate the impact of the pandemic and all the stimulus and talk about what you think normalized demand even is, or is it just impossible to do?
spk11: Hey, Adam, this is Tom. It's virtually impossible to do, let me tell you, because our customer base across the board, with the exception of a few, are up dramatically. And, you know, so it's not just e-commerce, as an example, being the only segment that's really driving this. It's a lot of segments that are going on. And I think, obviously, you know, the stimulus helps and, you know, has been a plus for us. But, again, as Mark said, you know, we've got to wait until things settle down to really be able to get our arms around what's really going on in the world.
spk14: And, Tom Malone, why any explanation for April? I mean, it's so outsized, it's mind-blowing. Is there any logical explanation that you can come up with?
spk11: Well, I think what we're seeing is we're seeing the exact same thing that we saw starting in the fourth quarter. Fourth quarter was up dramatically. It rolled right into the first quarter, and now it's rolling right into the second quarter. So to try to predict it would have been difficult to do, and we expected, just like a lot of other people expected, that the fourth quarter, that things might slow down a little bit from the fourth quarter, but they just haven't. So, you know, it remains incredibly robust. And I think we've got a lot of customers that are way behind on their shipments as well. So I think it will continue going forward for a while.
spk14: Yeah, no, thanks. I mean, Mark, one on uncoated free sheets. So just as part of your decision to convert number three, how are you thinking about demand trends in that business this year and longer term? Do you expect any rebound this year or thereafter? And relatedly, How did that affect your conversations with your large customers communicating this decision on your part? And did they express any concerns about supply as a consequence?
spk12: Regarding the first part of the question, until, again, if you think about the biggest demand for cut-sized paper would be office activity in schools, you know, business activity. Until, again, at such time as businesses resume more of a normal pattern of in-office activity, you won't see cut-size demand pick up dramatically. As schools come back and go back to a more normalized school day function, more cut-size use will take place in schools. So I would expect starting in the fall semester for the new school year, that more demand will take place. I can't quantify that for you. I would just say that it should move up positively. We do think ultimately the pandemic has created a new opportunity for people that they'll work from home, they'll work part days. I mean, people in the business world are obviously trying to understand how we will all run our businesses in the future. and whether we'll have people in the office full-time, part-time, flex time. And so paper demand will go along with that. We are anticipating that there will be some permanent demand destruction that comes out of the pandemic. We also understand that because of our demand for container board and the opportunity we had with Jackson, that as we've always looked at the paper business, that it was the right decision to make for all the reasons we've talked about over the last six months to utilize the asset and exit some of this market. And regarding our customers, I'll answer that question by just saying we are running to the demand of our customers, large and small. And I'll leave it at that. Thanks so much, Mark. Next question, please.
spk01: Your next question comes from the line of Mark Connolly with Stevens.
spk05: Thank you. Hopefully you can hear me this time.
spk12: Good morning, Mark.
spk05: Sorry about that. Just a question about maintenance and the changes you made. Some competitors are telling us that it's gotten harder to estimate the cost of maintenance because of changes the way projects are being scheduled. Is that a factor or is this just a change in your plans?
spk12: The increase in cost is a related we'd It goes back to we actually added the deritter number three machine to this second quarter's outage plan that was not in the original plan. And so it's not an escalation or an inflationary matter. It's just that we absolutely added an additional outage into this year's plan that did not exist in January. And the deritter number three machine work came about during the pandemic year last year, a lot of work. we avoided some work, we pushed off some work, some work we thought we could get by by not having to do even this year. But as January and February wore on as an example, we observed some opportunity, shall we say, on the Derrida number three machine that we felt needed to be addressed, and we had the resources and the materials available, so we went ahead and took the machine down for the better part of a week last week, as a matter of fact, and addressed the opportunities and the requirements on that machine and put it in good shape. And so that machine has gone through its outage. But that would be the qualifying difference in the number that Bob's going to talk to you about. Bob, do you want to add a little color to the number? Okay. Anything else?
spk05: That's super. So just one question on the headwinds. You know, obviously last quarter headwinds were more of an overall challenge than they were this quarter, and yet you've got some headwinds that got worse. I was hoping you could put some of these headwinds in context for us and tell us which are still getting worse and, you know, where you're getting some relief.
spk13: Yeah, Mark, this is Bob. You know, it's sort of as I think we said in our prepared remarks, you know, the headwinds continue. Pretty much, you know, as we look from first quarter to second quarter, we expect them to continue in almost, you know, all cost areas, except maybe energy, as we said, and that's really because of improved usage, not so much from prices getting, you know, going lower. But in, you know, recycled fiber, even, you know, certain chemicals, you know, repairs, materials, you know, outside services, I mean, you name it, they all have converting costs. They all have an inflationary component that we see continuing, you know, into the second quarter. You know, that, of course, freight. You know, freight is another one that is not, that's just, you know, for all the reasons that Mark had mentioned earlier, there are several things driving it, but that is not going to slow down at all as we go from the first to the second. So it's pretty much across the board.
spk05: Very helpful, unfortunately. Thanks.
spk12: Next question, please.
spk01: Your next question comes from the line of Gabe Havstee with Wells Fargo Securities.
spk06: Mark, Tom, Bob, good morning. Morning, Gabe. You mentioned a heavy maintenance quarter this period and obviously ended the March quarter with pretty low inventories. I appreciate it's volume dependent, but As it sits today, assuming, I guess, some persistence on the demand side, would you say it probably wouldn't be until the end of the third quarter before you can kind of get your inventory position sort of normalized? And I'm somewhat asking, I mean, the best analogy I can come up with is sort of an accordion of cars going down the freeway. And, you know, we haven't had stockouts in the grocery aisles. but it sounds like maybe some of your industrial customers are behind on their inventory slash delivery. So I'm kind of curious just as you replenish inventories across the system that it could take even longer than what maybe some folks are anticipating.
spk12: You could look at it that way. Again, I would hope that we get our inventories in a more comfortable position by the, you know, say the end of the third quarter. But don't forget we also have a big outage In the fourth quarter at DeRidder, which we called out last year, that is the DeRidder number one machine, which is a long outage, and we've got boiler work. We've got a lot of recovery boiler work we're doing, and then the machine itself and opportunities on the machine. And so that will take a significant amount of tons out in the fourth quarter. That's part of the maintenance cost for the maintenance for the year, but also it impacts maintenance. how we end the year. Tom?
spk11: Gabe, we have a very, very intense and specific plan in place, understanding that our inventories are going to be extremely tight all the way through the year, given these outages that we have, if, in fact, the volume doesn't drop off dramatically. If the volume drops off dramatically, we've got a chance of catching up a little bit. But, you know, I think it's important to plan ahead and to plan for what you see as the realistic scenario. We're doing so. We have to do these outages. We have no choice. You know, as you know, not only ourselves, but some others in the industry avoided some outages last year. And, you know, we just have no choice but to do them this year. And we'll manage through them. And our customers understand, our box plants understand, and we've got a great plan in place. So, I'm very confident that we'll be able to manage through it, but it's gonna be a while before we can catch up on those inventories.
spk06: All right, thank you guys for the detail. I guess the second question, and again, I appreciate you guys don't dictate what the publication does, but to the extent you can comment, were you surprised at all in terms of the phase sort of recognition on benchmark prices, and then more importantly, Um, I suspect that, um, realization kind of, as you see it flow through your system, um, would be kind of similar to the November hike in that maybe limited impact in Q2, mostly realized by Q3 and then fully by, by Q4. Is that a fair way to think about it or anything different that you, you've got as tours?
spk11: Well, you know, Gabe, we do, we do, we don't comment much on, on our pricing other than to say we have a very disciplined approach to the, uh, to our price increase. You know, across the customer base that's 15,000 plus, we have a variety of contracts, agreements, et cetera, you know, which roll in typically over about a 90-day period. So you can, you know, the, what occurred for pulp and paper, I mean, I understand, you know, where it's somewhat where they're coming from. You know, it's now fully in place. So I think you can kind of take that and take what I told you about the 90-day period and kind of roll that out, and that'll give you an indication of when that price increase gets fully implemented.
spk06: Thank you.
spk12: Next question, please.
spk01: Your next question comes from the line of Phil Ng with Jefferies.
spk10: Hey, guys. Congratulations on a strong quarter. You know, box demand was obviously really strong this year and it's been pretty impressive. Any color on the makeup of the end markets and if that profile on the growth side have changed much since perhaps the back half of last year versus how things are kind of shaping up this year?
spk11: I didn't hear the second half of the question, Phil. Can you repeat that again?
spk10: Yeah, I'm just trying to get a better feel for the end market profile growth that you're seeing versus second half of 2020 versus now. Is it more broad-based? Were there any and markets that stood out this year versus, let's say, the second half of 2020?
spk11: Well, I think the number one market that probably stands out more so than any is e-com. And e-com has spread out along all sorts of product lines today and all sorts of different companies. So that's obviously one of the trends. We talked about it last time that it's become apparent that the consumer preference for e-commerce has accelerated significantly. we're seeing something that probably would have taken three to five years to take place that's now compressed into six months or a year because of the pandemic. That's one of the drivers. But I got to tell you that across the board, with this broad customer base of 15,000 plus customers, with the exception of just a few small industries, it's incredibly busy and demand is very high. So, you know, it's, you know, I'm very, very, very pleased with the trends we're seeing. And I think that's kind of an indicator of the potential going forward as well.
spk10: But, Tom, are you starting to see like an uptick, let's say, in some of these manufacturing end markets that weren't as obvious last year? I'm just trying to get a feel of the mix. I know the econ piece is going to be strong. Is it a little more broad-based? I mean, I assume it has to be just given how strong demand is.
spk11: No, it's, yeah, you're absolutely right. It is broad-based. No question about it. It's broad-based. And in fact, we've got customers who could be even busier if they could get supplied with some of their products. They've got very tight supplies on their part as well of either ingredients or parts that go into their products. And otherwise, they'd be even busier. So there's even a good backlog building.
spk10: Got it. And then you mentioned earlier that inventory is going to be pretty tight throughout the year. Is that going to be a governor in terms of your ability to kind of supply boxes to your customer, or you have it in a pretty good spot in terms of being able to kind of supply that from an inventory level?
spk11: No, when I talk about inventories being tight, we won't have some of the comfort level that we might like to have, but we'll certainly have enough inventory to supply all of our customers with their needs.
spk10: Okay, that's helpful. And just one last quick one for me, appreciating Jackson's not fully ramped up and the capital's not in yet. Do you see, from an operating cost standpoint, as you continue to run this year, does that come down a little bit this year, or is that going to be more of a 2022 event once you have it ramping into that second phase?
spk12: As I said earlier, just in the last six months, we've taken a significant amount of cost out. and, you know, opportunities that were discovered on a daily basis. And that will continue through the year. And, you know, like I say, we've learned a lot of things about the machine, but the machine right from the get-go has been an extremely efficient, productive machine for us. And we've made hundreds and hundreds of changes in the process from the pulp mill and the liquor cycle and wood yard and on and on and on that have helped us grow. take some cost out of the finished product. So we're very pleased with where we are today, and we expect to continue that effort and get the setup for the first major phase outage next year.
spk10: Okay. Super. Thank you, guys.
spk12: Thank you. Next question.
spk01: Your next question comes from the line of Neil Kumar with Morgan Stanley.
spk09: Hi. Good morning. Thanks for taking my question. I know you touched on increases in recycled fiber prices earlier, but I was just curious whether you've seen any inflation in your virgin fiber baskets. Are there any large differences in terms of those virgin fiber prices by region across your network mills?
spk12: You know, that's been fairly flat. You see the weather-related phenomena that impacts prices. you know, pulpwood. But in general, it's up slightly, but nothing significant like some of the other factors that we talked about. Again, it's primarily weather-related events, not demand, absolutely demand-related.
spk09: Great. That's helpful. And then in paper, can you just discuss what you're seeing in terms of demand trends so far in April? And how should we generally think about the flow through of the price increases for uncoated free sheet? Is there a lag similar to what we've seen corrugated of about a quarter or so?
spk12: No, I think, again, what was reported in the index Friday night pretty well sums it up in terms of how much of the price increase has been picked up. And, you know, we would agree with what the index is saying with where we are with our cut size pricing and uncoated free sheet pricing. And then as far as, again, demand, it's, you know, we gave you our absolute volume and where we are, but the price is moving up accordingly. And I think it's reflected well in what the index is reporting.
spk09: Gotcha. And my question on the unquoted free sheet pricing was actually more of when it flows through from the index to your customer pricing. Is there a lag similar to what you've seen corrugated?
spk12: Yeah, I mean, there's always that little bit of a lag that takes place from the time you announce it and then the time that the index actually calls it out and picks it up and, you know, your deliveries and your invoicing and billing, et cetera.
spk09: Great. Thank you.
spk12: But you're talking about, you know, you're talking about a couple of months of lag-type activity. Next question, please.
spk01: Your next question comes from the line of Anthony Petaneri with Citi.
spk03: Good morning. Regarding the increase in CapEx guidance for what you talked about in the previous quarter, is that all due to Jackson or are you pulling forward or accelerating any other kind of high return projects or any other areas that you'd call out? And then understanding you're not giving, you know, poor guidance, but is there a way to think about what normalized CapEx for PCA would be, you know, when you get finished at Jackson?
spk12: The first part of your question is, yes, Jackson is the primary mover that's increasing the CapEx for the year. The second part of your question, as far as what's normal in the new world, I can't answer that. We're always mindful of what opportunities we have and We were very fortunate that a few years back we undertook a heavy reinvestment in the box plants and recapitalizing the opportunities in a lot of our plants and taking care of the mills in the manner that we do. So if you look at our capital effectiveness and the returns on our capital spending, we're very pleased with the returns that we see. Capital is a matter of affordability and opportunity. And obviously, I don't ever see us not having opportunities. And then it becomes a matter of affordability. And so I think that's the way you have to look at it. But for the most part, we always have a portfolio of opportunities identified in the box plants and the mills that we go after short-term and long-term and that's what's giving us this opportunity to be able to take care of the volume growth that you're seeing.
spk03: Okay, okay, that's very helpful. And then, Tom, you know, earlier you talked about raw material availability issues, and I think you specifically called out adhesives and glue. You know, understanding the cost headwinds are continuing into 2Q. In terms of outright shortages or just not being able to secure the raw materials, Has that gotten materially better as some of these Gulf Coast plants have come back online or is that still a nagging issue and is it something that's impacted sales or orders or any kind of color you can give there?
spk11: Well, Anthony, I think we're fortunate we got ahead of this early in the equation. We took some measures. to make sure that we would not be caught as short as perhaps some others. We're still hearing from suppliers. Some are saying that things should be back to a more normalized rate by the third quarter. Some others are saying, no, maybe not so much. The chemical plants are back up, but some of the chemicals that they make that go into the adhesives are, what I'd say, less important to those chemical plants than other chemicals. We're planning to do what we need to do throughout the year to make sure that we're taken care of and that we don't have any customers that don't have boxes because of adhesive. We'll be able to satisfy all those needs, but it's more costly to do it. There's no question about it, and I think we'll continue to have that headwind probably through the year. At least that's what we're planning on. But again, we've got the contingency plans in place to take care of that. Okay, that's very helpful.
spk12: I'll turn it over. Thank you. Next question, please.
spk01: Your next question will come from the line of Kyle White with Deutsche Bank.
spk08: Hey, good morning. Next question. I know you talked about recycled fiber costs in general increasing from these current levels, but did you provide a specific near-term outlook and assumption for OCC going forward?
spk13: Yeah, Kyle, you know, certainly expect them to move up in the second quarter. And, you know, for the full year, you know, we usually don't go out that far. But, you know, they could be up, you know, they could be up close to 50% over last year's average. Something in that ballpark is what it seems like right now.
spk08: Got it. With the container board price increase in November and now the recent one here in March and April, I assume it's expected to fully offset the increased inflation hit when you're seeing or expect going forward. And do you think this new pricing level reflects for how tight the market is?
spk12: You know, again, it's I think the pricing is a reflection of the demand in the market for the product. And then. Obviously, there are inflationary factors that weigh into a producer's position in how they have to operate, but demand is the overall driver of what's moving these two price increases.
spk11: And I'd also add that demand is up significantly worldwide. This isn't just domestic. This is around the world.
spk08: Scott, I'll turn it over. Do it in the air.
spk12: Thank you. Next question.
spk01: Once again, for any questions, please press star 1. Your next question comes from the line of Cleve Rukud with UBS.
spk02: Great. Thanks very much for taking the questions, and just two quick ones from me. I'm wondering if you can give maybe just a little clarity. I know Q1 was pretty dynamic with the weather and everything, but... How did volumes trend in corrugated shipments on a per-day basis versus that 8.3% that they grew for the quarter? I'm just wondering how the quarter developed from a demand perspective.
spk11: Well, January was obviously up. February slowed down a little bit, and it was all weather-related. And then March, it was incredibly high again because we were catching not only the demand in March, but also we were catching up some of what we didn't get shipped in February.
spk02: Okay. So would you, I mean, would you say demand was kind of flat around that and, you know, low in February and catch up in March?
spk11: No, demand, demand was, you know, demand obviously was up significantly during the quarter and it was pretty much steady January, February, March. It's just that as you know, our numbers would have been significantly higher for March because of the weather related issues down in Texas, as an example, where we have a large footprint and, we didn't get all the volume out the door in the month, and it tracked over into March. So I'm just kind of giving you a little flavor. January, very strong. February would appear to be not quite as strong, but it still was very strong. It just looked like it wasn't quite as strong because we didn't get the shipments, and then March jumped up dramatically, but that was driven primarily by some of the shipments we didn't get done in February. So overall, when I look back, I say, The demand was, as we said, coming out of the fourth quarter with incredibly high demand. It remained essentially very close to that going through the entire first quarter. And now you're seeing the same indication starting into the second quarter.
spk02: That's very clear. Thanks for that, Collar. And I know you touched on it a bit earlier, but I want to ask a little bit more directly. Given the tightness in the corrugated market, Are you seeing any customers or maybe box buyers more generally, not specifically your customers, switching away from paper-based packaging because they simply can't get enough?
spk11: No. It's quite the opposite, to tell you the truth. Because of our sustainability story that we have in our business, because of the way we operate this business, the 90-plus percent of the boxes to get recycled, etc., people want to be in paper. They don't, you know, they don't want to be in plastic anymore. So as an example, we've got some customers that have been shipping in plastic pouches, their e-commerce in plastic pouches, and they want to move back to boxes. So, you know, there's, and that's, I mean, that's a huge segment that's going out in a plastic pouch as an example. So I think there are great opportunities going forward for paper-based packaging. That's it for me. Thank you very much for the questions.
spk02: Appreciate it.
spk12: Thank you. Next question.
spk01: Mr. Coles and I see that there are no further questions. Do you have any closing comments?
spk12: Yes, everyone. Thank you for joining us, and I look forward to talking with you in July for the second quarter earnings call. Everyone stay safe and be well. Talk to you in July. Have a good day. Bye-bye.
spk01: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
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