Packaging Corporation of America (NYSE:PKG) Q4 2022 Earnings Call Transcript
Packaging Corporation of America (NYSE:PKG) Q4 2022 Earnings Call Transcript January 26, 2023
Operator: Good day, everyone. Thank you for joining Packaging Corporation of America's Fourth Quarter and Full Year 2022 Earnings Results Conference Call. Your host will be Mark Kowlzan, Chairman and Chief Executive Officer of PCA. Upon conclusion of his narrative, there will be a question-and-answer session. Please also note today's conference call is being recorded. At this time, I'd like to turn the call over to Mr. Kowlzan. Please proceed when you are ready.
Mark Kowlzan: Thank you, Jamie. Good morning, and thank you all for participating in Packaging Corporation of America's Fourth Quarter and Full Year 2022 Earnings Release Conference Call. Again, I'm Mark Kowlzan, Chairman and CEO of 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. I'll begin the call with an overview of our fourth quarter and full year results, and then I'm going to be turning the call over to Tom and Bob, who'll provide further details. And then I'll wrap things up, and we'd be glad to take questions. Yesterday, we reported fourth quarter 2022 net income of $212 million or $2.31 per share. Excluding special items, fourth quarter 2022 net income was $215 million or $2.35 per share compared to the fourth quarter of 2021 net income of $262 million or $2.76 per share.
Fourth quarter net income -- fourth quarter net sales were $1.98 billion in 2022 and $2.04 billion in 2021. Total company EBITDA for the fourth quarter, excluding special items, was $409 million in 2022 and $463 million in 2021. Excluding special items, we also reported full year 2022 earnings of $1.04 billion or $11.14 per share compared to 2021 earnings of $894 million or $9.39 per share. Net sales were $8.5 billion in 2022 and $7.7 billion in 2021. Excluding special items, total company EBITDA in 2022 was $1.9 billion compared to $1.7 billion in 2021. Fourth quarter and full year 2022 net income included special items primarily for certain costs at the Jackson, Alabama mill for paper to containerboard conversion-related activities. Details of all the special items for the year 2022 and 2021 were included in the schedules that accompanied the earnings press release.
Excluding special items, the $0.41 per share decrease in fourth quarter 2022 earnings compared to the fourth quarter of 2021 was driven primarily by lower volumes in our Packaging segment $1.14 and Paper segment $0.02. We also had higher operating costs of $0.48, primarily from inflation on energy, chemicals, labor and benefits, supplies, repair materials and services and other indirect and fixed costs. Freight and logistics expenses were unfavorable $0.13 along with higher depreciation expense, $0.09, higher converting costs, $0.06 and higher scheduled maintenance outage expenses of $0.01. These items were partially offset by higher prices and mix in the Packaging segment of $1.18 and Packaging segment -- and Paper segment rather of $0.21.
A lower share count resulting from share repurchases $0.08; lower interest expense, $0.04 and a lower tax rate, $0.01. Results were $0.13 above the fourth quarter guidance of $2.22 per share, primarily due to higher prices and mix in the Packaging segment, lower freight and logistics expenses, a lower share count resulting from share repurchases and a lower tax rate. Looking at our Packaging business. EBITDA, excluding special items in the fourth quarter of 2022 of $392 million with sales of $1.8 billion resulted in a margin of 21.7% versus last year's EBITDA of $461 million and sales of $1.9 billion or a 24.5% margin. For the full year 2022, Packaging segment EBITDA, excluding the special items, was $1.8 billion with sales of $7.8 billion or a 23.8% margin compared to full year 2021 EBITDA of $1.7 billion with sales of $7.1 billion or a 23.9% margin.
Demand in the Packaging segment was below expectations for the quarter, causing us to run our containerboard system to these lower demand levels. Our employees did a very good job with their cost management and process optimization efforts at these lower production rates to offset the negative volume impact. Total economic-related downtime for the fourth quarter was approximately 231,000 tons. The scheduled maintenance outage and conversion work at our Jackson, Alabama mill was completed successfully during the fourth quarter, and we restarted the mill earlier this month after being down as a result of the lower demand. The number three machine achieved its first phase design capacity and is producing a very high-quality virgin linerboard. However, based on current containerboard demand levels, we decided to move the second phase of the conversion work from this spring to next year in 2024.
I'll now turn it over to Tom, who will provide further details on containerboard sales and the corrugated business.
Thomas Hassfurther: Thank you, Mark. Domestic containerboard and corrugated products prices and mix together were $1.19 per share above the fourth quarter of 2021 and flat compared to the third quarter of 2022. Export containerboard prices and mix were down $0.01 per share compared to the fourth quarter of 2021 and down $0.02 per share compared to the third quarter of 2022. Corrugated product shipments were down 8.7% per work day and down 10.2% in total with 1 less workday compared to last year's fourth quarter. Outside sales volume of containerboard was 131,000 tons below last year's fourth quarter and 38,000 tons below the third quarter of 2022. The lower demand in our Packaging segment was driven by several items. The inventory correction in both boxes and our customers' product has been more prolonged than what we originally anticipated at the start.
Inflationary pressures on the consumers have also added to the problem by reducing the consumers discretionary spending capabilities. In addition, consumer behavior changed very quickly as we exited the extreme COVID period, resulting in more of a preference towards travel, entertainment and experience versus that of tangible goods. Containerboard and box demand continues to be negatively impacted from the deterioration in U.S. and global economic conditions, rising interest rates and a cooler housing market. As we move from the fourth quarter into the first quarter, we estimate the rate of shipments per day to be fairly similar as we expect many of these conditions to continue. However, there are 4 additional shipping days in the first quarter, so total actual shipments will be higher when compared to the fourth quarter of 2022.
In spite of the numerous issues currently impacting demand, we continue to perform at levels above pre-COVID and anticipate our first quarter shipments to exceed first quarter 2019 shipments by approximately 6% on a per day basis. Now I'll turn it back to Mark.
Mark Kowlzan: Thanks, Tom. Looking at our Paper segment. EBITDA, excluding special items in the fourth quarter was $39 million with sales of $154 million or a 25.7% margin compared to the fourth quarter of 2021 EBITDA of $26 million on sales of $143 million or an 18.4% margin. For the full year 2022, Paper segment EBITDA, excluding special items, was $132 million with sales of $622 million or 21.3% margin compared to the full year 2021 EBITDA of $72 million with sales of $600 million or a 12% margin. Prices and mix were up 21% from last year's fourth quarter and moved 3% higher from the third quarter of 2022 as we continue to implement our previously announced price increases. Sales volume was about 11% below last year's fourth quarter, primarily due to paper sales from the Jackson Mill's #1 machine, which we included in last year's results as well as having -- we optimized our product and customer mix since that time as we transitioned away from paper volume at Jackson mill.
As expected, volume was down approximately 11% versus the seasonally stronger third quarter of 2022 and that also included the remaining inventory from the Jackson mill. The management team and all of the employees of the Paper business have done a tremendous job over the last several quarters to optimize our inventory, product mix and cost structure in order to deliver outstanding results for 2022, and I'm confident that we can maintain this momentum through 2023. I'll now turn it over to Bob.
Robert Mundy: Thanks, Mark. Cash provided by operations during the quarter totaled $420 million with capital expenditures of $247 million and free cash flow of $173 million. Other cash payments during the fourth quarter included dividend payments of $116 million, cash tax payments of $56 million and net interest payments of $31 million. We also spent $380 million during the quarter to repurchase just over 3 million shares of our common stock at an average price of $126.70 per share. That brings our total repurchases, over the last 5 quarters, to almost 5.5 million shares at an average price of $130.62 per share. Repurchases of our outstanding stock and dividend payments made during the past year, represent 63% of cash from operations or 91% of net income that was returned to shareholders in 2022.
For the full year 2022, cash from operations was $1.5 billion. Capital spending was $824 million, with free cash flow of $671 million. Our final recurring effective tax rate in 2022 was 24.5%, and our final reported cash tax rate was 20%. Regarding full year estimates of certain key items for the upcoming year, we expect total capital expenditures to be approximately $475 million, and DD&A is expected to be approximately $485 million. We estimate dividend payments of $450 million and cash pension and post-retirement benefit plan contributions of $53 million. Our full year interest expense in 2023 is expected to be approximately $72 million and net cash interest payments should be about $74 million. The estimate for our 2023 book effective tax rate is 25%.
Currently, planned annual maintenance outages at our mills in 2023, including lost volume, direct costs and amortized repair costs, it's expected to be in total, $0.67 per share versus $0.99 per share in 2022. The current estimated impact by quarter in 2023 is $0.11 per share in the first quarter, $0.14 in the second, $0.22 in the third and $0.20 per share in the fourth quarter. I'll now turn it back over to Mark.
Mark Kowlzan: Thank you, Bob. The hard work of our employees, along with strong relationships between us and our customers and suppliers delivered outstanding results for PCA in 2022. New annual company records were achieved for revenue, cash from operations, net income and earnings per share. And as Bob just mentioned, 91% of our net income was returned to our shareholders from dividend payments and stock repurchases. We successfully completed or substantially completed significant cost reduction and process improvement projects at our mills including a 30-megawatt steam turbine and first phase of the #3 machine conversion to containerboard at the Jackson mill. This effort included fiber flexibility projects at the Wallula and Jackson Mills and many other key initiatives.
We also completed numerous high return and high efficiency improvement projects in our corrugated products plants that will allow us to better optimize our entire packaging business for the future and deliver profitable growth and mix enhancement opportunities for our customers and shareholders. The significant capital investments we've made during the year had complete involvement of PCA personnel from project conception, preliminary and detailed engineering, all the way through to project implementation and start-up. These projects and initiatives achieved numerous tactical and strategic benefits while improving our industry-leading return on invested capital to just under 20%. As we've discussed on these calls many times before, by the end of 2022, we would be winding down several years of significant strategic capital investments that position us very well to meet the future needs of our many customers in a very cost-effective manner.
We also finalized the optimization of our paper business while delivering excellent financial results that we expect to sustain us well into the future. As economies around the world continue to deal with numerous issues and uncertainties, virtually every individual industry is being negatively impacted in some manner. At PCA, we will continue to maintain a strong balance sheet which provides the financial flexibility to react quickly to most situations or opportunities in the future. We will also continue our commitment of a balanced approach towards capital allocation in order to maximize our profitability and returns to our shareholders. Looking ahead, as we move from the fourth and into the first quarter in our Packaging segment, as Tom mentioned, we expect box demand on a per day basis to be similar to the fourth quarter levels, although we expect higher total volume with corrugated products plants having 4 additional shipping days.
Prices will move lower as a result of recent decreases in the published domestic containerboard prices and we're assuming lower export prices as well. Paper prices should move slightly higher with sales volume fairly flat. Labor costs and certain indirect costs will increase as some containerboard mill operations were temporarily idled during the fourth quarter. In addition, we anticipate higher labor and benefits costs and other timing-related expenses that occurred at the beginning of a new year as well as higher prices for many chemicals, particularly starch and caustic soda. However, we expect lower wood and recycled fiber prices, lower energy prices and lower scheduled maintenance outage expenses. Lastly, we expect higher interest and nonoperating pension expenses and a higher tax rate, but we will see some benefit from our recent share repurchases.
Considering these items, we expect first quarter earnings of $2.23 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 involve inherent risks and uncertainties, including the direction of the economy and those identified as risk factors in our annual report on Form 10-K and in subsequent quarterly reports on Form 10-Q filed with the SEC. Actual results could differ materially from those expressed in the forward-looking statements. And with that, Jamie, I'd like to open the call for questions, please.
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