Two majors report 24% margins, see ongoing good box demand; PCA may do more deals, IP might sell Orsa

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Two majors report 24% margins, see ongoing good box demand; PCA may do more deals, IP might sell Orsa

October 26, 2018 - 18:18

OAKLAND, CA, Oct. 26, 2018 (PPI Pulp & Paper Week) -Two of the largest US containerboard producers each reported 24% margins for their corrugated businesses in the third quarter and a third major dramatically increased its margin by 30% year-over-year.

The returns for International Paper (IP), Packaging Corp of America (PCA), and KapStone Paper and Packaging resulted from steady to strong box demand, three linerboard price increases in the last two years, and low old corrugated (OCC) costs that all linked up with what has been strong 3% economic growth and ongoing growth in e-commerce packaging. The high margins for the three, which combined manage half of North America's containerboard capacity, occurred despite Hurricane Florence and its damage in the Carolinas last month, and continuing bottlenecks and rate surcharges for trucking.

Executives for IP and PCA reported "healthy … (with) momentum" and "strong" corrugated demand for the fourth quarter.

They also remained active with moves to bolster or add to their businesses.

PCA Exec VP for corrugated Tom Hassfurther told analysts the company just closed on an acquisition, which he termed as "small." He provided no specifics. PCA in the last two years paid $750 million to acquire converters Sacramento Container, TimBar, and Columbus Container.

Industry contacts claimed PCA purchased a sheet plant in the US South and may also be interested in another corrugated business in the upper Midwest.

Looking ahead, Bank of Montreal analyst Mark Wilde suggested eventually a PCA venture with Domtar, the US's largest uncoated freesheet (UFS) paper producer by capacity that is run by a former containerboard company leader John Williams, when he was at SCA in Europe. PCA is the third-largest North American containerboard producer.

Wilde said on Oct. 26 that such a combination "seems the most elegant solution. (PCA) has engineering prowess with conversions and excellent downstream converting. (Domtar) has big, well-capitalized assets, but no existing channel to market."

IP may sell Brazil unit?IP was seeking "strategic options" and the potential sale of its Brazilian corrugated business. The possible offshore exit follows IP's sale in 2016 of its corrugated packaging and boxboard venture business in China and Southeast Asia for $150 million, after losses with the unit. IP purchased the Orsa business in Brazil in 2013 for $605 million. The regional business runs three containerboard mills and four box plants. IP CEO Mark Sutton said the Orsa business had "zero growth" in the last five years.

Also, both IP and PCA moved fast forward on capacity additions.

PCA expected to finish by next week its conversion of an UFS cutsize and specialty pressure-sensitive release liner paper machine, the No. 3, at its Wallula, WA, mill to 400,000 tons/yr of kraft linerboard, and IP said it spent $5 million last quarter and continued engineering work on converting an UFS machine to a more than 450,000 tons/yr white top linerboard and containerboard machine in third quarter-2019 at its Riverdale mill in Selma, AL.

PCA 24.6%, IP 24.1%.PCA's corrugated margin was a North American industry-leading 24.6% in the quarter and IP's was 24.1%, analysts reported. IP leads the market with about 33% capacity share and PCA's share is one-third of IP's.

IP's industrial packaging EBITDA was $807 million on sales of $3.35 billion. The company said it realized 90% of its 10% US box increase in the last five to six months. The firm also reported a 1.5% increase on a "blended basis" of box shipments in the quarter year-over-year. This was all achieved as the company's containerboard mill system ran at an estimated 95% through the first three quarters of this year. That is below the industry's 97.4% average year-to-date. IP reported 496,000 tons of maintenance outages for the first three quarters this year. One recent shut lasted for a little more than a month at its Maysville, KY, containerboard mill, where a project was done to increase capacity, industry contacts said.

The company also said its fastest-growing box businesses were fresh produce, protein meat, e-commerce and shipping, and chemical and pharma industries.

These high profit margins were reported as the market showed slight vulnerability. Industry contacts noted a price decline in US export 42-lb kraft linerboard this month and softish September average-week US box shipments that grew 1.1% on an average-week basis. Box makers described good October demand yet specified that this holiday season so far was less vibrant than last season's big upturn and they expected a stronger e-commerce-led pickup. 

PCA packaging sales for the quarter were $1.535 billion, up 14%, and EBITDA was $378.2 million, up 10.3%. PCA CEO Mark Kowlzan said the unit achieved third-quarter records for containerboard and box shipments. PCA reported a 6.5% increase in third-quarter shipments on a per-day basis (compared with third-quarter 2017 shipments).

Bank of Montreal's Wilde said the box shipment growth should cause PCA to be "fully integrated by late 2019/early-2020" even with the Wallula conversion.

The KapStone margin surge came just as industry contacts claimed WestRock will soon gain US Dept of Justice backing to complete a $4.9 billion purchase of KapStone, North America's fifth largest containerboard producer by capacity. WestRock is second largest.

KapStone record 3Q.KapStone reported a record third quarter, with its paper packaging margin surging up from 13.9% through the first three quarters of 2017 to 18.2% through the first three quarters of 2018. Third-quarter packaging revenue was $652.6 million, up 2.2%, and operating income was nearly $109.7 million, up 77.3%. Sales from distribution was $261.18 million, up 4%, and the unit's operating income was $11.79 million, up 104%. The company's packaging paper includes primarily containerboard and corrugated with a 65% share of total production by the company, along with kraft paper and saturating kraft paper, and unbleached packaging and unbleached folding cartonboard for the other about one-third of production.

KapStone sales through three quarters totalled $1.9 billion in paper packaging and $757.5 million in distribution, meaning that the company's full-year sales are on track to an estimated $3.58 billion. The WestRock $4.9 billion offer for KapStone was about 10x KapStone's estimated annualized EBITDA.

New capacity, China discussed.With an estimated 4.3 million tons of additional US containerboard capacity that on average would add 2.8%/yr in capacity from 2018 through 2021, Sutton, the top executive of the largest pulp and paper company in the world, and Kowlzan, RISI North America's CEO of the Year in 2017 and this year's RISI International Containerboard Conference CEO of the Year, sounded unfazed about coming capacity in the next three years during their calls with analysts this week. They sounded equally unperturbed about the arrival of two of the three largest Chinese containerboard companies on US soil for running, for the first time, US paper and board mills in America's heartland. 

Kowlzan noted that most of the capacity additions would be by integrated producers. Of the 4.3 million tons, two-thirds, 66%, has been or is to be added by integrateds. The rest, about 1.44 million, has been and is to be started by non-integrateds and newcomers.

Both leaders told of the difficulty finding customers in a highly-integrated US corrugated marketplace. PCA's Hassfurther expects Chinese firms Nine Dragons Paper and Shanying International will primarily ship their US-made containerboard back to fiber-short China.

"They're talking about shipping pulp back. They're talking about shipping a limited amount of containerboard back with what they can convert. It's expensive to do. But given the situation over there, they need fiber, and so that's all going over to China as we see it," he said.

Hassfurther told of a "very, very limited open market to sell to" in the USA.

"It's such a limited (market) opportunity," Kowlzan added. "If you have somebody that's going to try to produce a product in this country, they are very constrained within a geographic region (and by) transportation cost phenomena."

"I guess we will have to see how things transpire over the next couple of years, but I feel really confident about the supply chain (and) the value of integration because it's what addresses the customers' need," IP CEO Mark Sutton told analysts.

 Packsizeintroduced a new M1-on-demand box-making machine, which it said requires less labor, can produce right-sized and custom corrugated boxes in various sizes, Compelo reported. The M1 includes a multi-bay z-Fold infeed system, four to eight corrugated bales across a two-track system that can be used concurrently, and allows for high-resolution printing, according to Packsize.

 Bennett Packagingstarted running a second digital print press at its corrugated plant in Lee's Summit, MO, next to Kansas City, according to a Thinking Bigger Business Report. The 48-in-wide large-format, single-pass, direct-to-corrugated Jetmaster operates with the firm's 2-year-old 66-in Jetmaster.Barberanmade both Jetmasters. Digital printing of US corrugated is slowly growing, corrugators toldPPI Pulp & Paper Weekrecently. The main demand so far is from large brand companies wanting fast, customized runs, they said.