By the numbers
Q1 net sales: $1.98B
Down 7.5% year over year
Packaging segment income: $268M
Down 26% year over year
Containerboard production: 1.09M tons
Box shipments down 12.7% year over year
- Demand difficulties: “Demand in the packaging segment was well below our expectations for the quarter,” which primarily drove the lower earnings, said CEO Mark Kowlzan on Tuesday’s earnings call. PCA execs noted during their Q4 2022 earnings call that demand at that time was below expectations, and they expected the rate of shipments this quarter to be relatively the same. Executive Vice President of Corrugated Products Tom Hassfurther added: “If you look [at] all those indicators, whether it was consumer demand or the manufacturing index, the Purchasing Managers Index, they all really kind of got more negative as the months went on” and correlated to lower volumes.
- Bigger picture: Execs stressed that although they lost some volumes, they’re not losing market share. Analysts had predicted that PCA would report a decline amid overall weakness in packaging demand. Higher prices partially offset the lower demand, and recycled fiber costs have been lower than in 2022, but operating expenses in Q1 were higher due to inflation and energy pricing. Although down, the earnings weren’t that far off from analysts’ predictions, which is “impressive... despite the large volume miss,” said Kyle White, Deutsche Bank research analyst, in a PCA earnings report.
- Pandemic inventory fallout: Executives noted that volumes went topsy-turvy during the pandemic as consumer purchasing patterns switched from goods to services, and persistent inflation and higher interest rates also have played a role. Certain segments of PCA’s business shot up as much as 200% early in the pandemic and receded significantly since then. “We’ve had to sort through this volume situation a little longer than what we would have hoped,” Hassfurther said, but “we expect the inventory destocking of customer product and boxes to be near completion.”
- Optimization and closures: PCA credits efficiency efforts at mills and corrugated plants with offsetting some negative financial impacts, and it anticipates fewer capital expenditures than in the past. Earlier this year, PCA announced it would close a North Carolina corrugated plant. “These are not knee-jerk reactions to ... a volume demand change or anything like that. These are all part of our capital planning process where we’re trying to optimize our system,” Hassfurther said. That being said, execs did note that certain operational slowdowns occurred after seeing demand deterioration in February and March.
- Containerboard markets: Compared to where they were a few months ago, containerboard prices have stabilized and the outlook is more positive going forward, Hassfurther said. Producers who have excess capacity are either taking downtime or turning to export markets, he said, adding that today’s small open market is different, and more stable, than in the past.
- Economic outlook: PCA expects improved box volumes in Q2. In fact, “there’s been a big turnaround, starting in April,” Hassfurther said, explaining that bookings during the first two weeks of April alone were up 11% over March and 10% over Q1 as a whole. They’re still down 6% compared with April last year, but that was a company all-time record, he said. When an analyst on the earnings call mentioned that PCA’s box shipments were a bit below the rest of the industry in Q3 and Q4 last year, Kowlzan responded: “Just remember back in 2008 into the 2009 period we saw a more rapid downturn in volume than our competitors. And then when we started seeing the improvement in the spring, we came back stronger and faster than our competitors.”
