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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Thank you for joining Packaging Corporation of America Second Quarter 2020 Earnings Results Conference Call. Your host today will be Mark Kowlzan, 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. Kowlzan, and please proceed when you are ready.
Good morning, and thank you for participating in Packaging Corporation of America's second quarter 2020 earnings release conference call. 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 second quarter results and then I'll turn the call over to Tom and Bob who will provide more details, after which I'll wrap things up and then we'll be glad to take any questions.
Yesterday, we reported second quarter net income of $57 million or $0.59 per share, excluding the special items, second quarter 2020 net income of $132 million or $1.38 per share compared to the second quarter of 2019 net income of $194 million or $2.04 per share.
Second quarter net income was $1.54 billion in 2020 and $1.76 billion in 2019. Total company EBITDA for the second quarter excluding special items was $299 million in 2020 and $376 million in 2019. Second quarter net income included special items expenses of $0.79 per share related primarily to the impairment of goodwill associated with our Paper segment. Bob will discuss that in more detail in a few minutes.
Special items expenses also included the previously reported closure of our corrugated products facility in San Lorenzo California and costs and expenses associated with the COVID-19 pandemic. Details of all special items for the second quarter of 2020 were included in the schedules that accompanied our earnings press release.
Excluding the special items that we mentioned, the $0.66 per share decrease in second quarter 2020 earnings compared to the second quarter of 2019 was driven primarily by lower prices and mix in our packaging segment of $0.66, and paper segment $0.05, lower volumes in our paper segment $0.40, and higher depreciation expense $0.04.
These items were partially offset by lower operating costs of $0.33 primarily in the areas of labor infringes, repairs, materials and supplies and several fixed cost areas. We also have lower annual outage expenses of $0.10, lower converting costs $0.03, lower freight expenses $0.02, and other costs $0.01.
Looking at our packaging business, EBITDA excluding special items in the second quarter of 2020 of $313 million with sales of $1.4 billion resulted in a margin of 22% versus last year's EBITDA of $349 million and sales of $1.5 billion or 23% margin. We ran our containerboard mills to demand, built some much needed inventory from the historically low levels at the end of first quarter, and maintained the industry leading integration rate by supplying our box plants with the necessary containerboard to establish a new second quarter record for box shipments per day.
We ended the second quarter with inventory still at the relatively low levels, but in adequate position to meet our expected stronger third quarter demand. Our efficiencies and cost control at the mills in corrugated products facilities throughout the quarter were truly remarkable and we continue to see improvements in freight and logistics expenses through the optimization of our trucking operations in geographic footprint of our containerboard supply.
I’ll now turn it over to Tom who will provide more details on our containerboard sales in the Corrugated business.
Thanks Mark.
Demand for our corrugated products was very good in the second quarter, especially during the month of June. As Mark indicated, our corrugated products plants achieved a new second quarter record for shipments per day which were up 1.2% compared to last year second quarter. Total shipments for the quarter were also up 1.2% over last year. As a comparison for the second quarter, the industry was down 1.4% in total and on a work day basis.
Through the first half of 2020, our box shipment volume is up 2.5% on a per day basis versus the industry being up 0.6%. Outside sales volume of containerboard was about 10,000 tons below last year second quarter and 23,000 tons below the first quarter of 2020, as we ran our containerboard system to demand, supply the record needs of our box plants, and positioned our inventory for even higher demand during an expected stronger third quarter.
Domestic containerboard and corrugated products prices and mix together were $0.61 per share below the second quarter of 2019 and down $0.18 per share compared to the first quarter of 2020. Export containerboard prices were down about $0.05 per share versus last year second quarter and flat compared to the first quarter of 2020.
Finally, I'd like to point out that the benefits from our capital spending strategy in the box plants that we spoken about over the last couple of years are continuing to gain traction. As we have said many times this strategy of improving the technology and equipment in various plants, as well as the construction of new box plants is based upon our customer's needs and demands and improving our capabilities to grow with them. We're seeing this in our volume growth with new and existing customers, operating efficiencies and various operating and conversion cost areas.
I’ll now turn it back to Mark.
Thanks Tom.
Looking at the Paper segment, EBITDA excluding special items in the second quarter was $5 million with sales of $123 million or a 4% margin compared to second quarter 2019 EBITDA of $48 million and sales of $238 million for a 20% margin.
Second quarter paper prices and mix were about 5% below last year and less than 1% below the first quarter of 2020. As expected our sales volume was about 45% below last year and as announced back in April we had our Jackson mill down for the months of May and June to help manage our supply with our demand outlook.
Unfortunately our view of demand as we approach the end of June did not improve to the point of allowing us to restart the mill resulting in us recently announcing that Jackson will also be down for the months of July and August. We'll continue to assess the market conditions for potential September restart of the mill.
And I’ll now turn it over to Bob.
Thanks Mark.
Cash provided by operations for the second quarter was $227 million with free cash flow of $146 million. The primary uses of cash during the quarter included capital expenditures of $81 million, common stock dividends of $75 million, net interest payments of $41 million, and cash taxes of $39 million.
We ended the quarter with $853 million of cash on hand or $977 million including marketable securities. Our liquidity yet June 30 was just over $1.3 billion. During the second quarter, uncoated freesheet market conditions and especially demand for our cut-size office paper products continue to deteriorate rapidly arising from the COVID-19 pandemic. These conditions along with the estimated impact on our paper segment and its projected future results of operations resulted in a triggering event indicating possible impairment of goodwill and the long-lived assets within our Paper segment.
Due to this triggering event and a more likely than not assessment that an impairment of goodwill occurred, an interim quantitative impairment analysis as of May 31, 2020 was performed. Based on this evaluation, we determined that goodwill was fully impaired for the Paper segment and recognized a non-cash impairment charge totaling $55.2 million. The impairment charge is not tax deductible.
We also performed a recoverability test on the long-lived assets within our Paper segment, including long-lived intangible assets, as of May 31, 2020. The results of this test indicated that these assets were 100% recoverable.
Lastly, we are planning to take a - or to make a change to the scheduled outages in our containerboard meals for the fourth quarter of this year versus what we discussed during last quarter's call. Our current plans are to pull forward some recovery borrow work at the DeRidder mill from next year to eliminate the risk of unscheduled downtime and during this period, perform a high return capital project on the number one paper machine real section. The fourth quarter estimate for a scheduled outages is now $0.59 per share and the full year estimate is now a $1.05 per share.
I'll now turn it back over to Mark.
Thank you, Bob.
As in the first quarter, the employees at all of our manufacturing and office locations ran their operation safely in a very cost effective manner, while facing the unprecedented conditions brought on by COVID-19 pandemic. All facilities continued to operate in adherence to CDC guidelines and followed a strict protocol for workplace operations, as well as notification of in response to potential issues.
Although we did experience some challenges during the second quarter, we have not experienced any material disruption in our operations or our supply chain due to the pandemic. The accomplishments by our employees during this period with the help of our customers and suppliers were truly amazing.
Looking ahead to the third quarter, we will stay focused on preserving our financial and balance sheet strength during these uncertain times. We will remain well-positioned to manage whatever lies ahead while ensuring that we take care of the needs and expectations of our employees, customers, suppliers and shareholders. During the unprecedented times, corrugated products demand has performed quite well so far this year and we expect a third quarter to be even stronger.
We began the third quarter with replenished yet still relatively low containerboard inventories and our expectation is that we'll end the quarter at levels below where we started well managing scheduled outages at two of our mills. We've already announced the actions being taken in the paper business and we’ll continue to evaluate the demand for our paper products throughout the third quarter.
However shelter-in-place and lockdown conditions continue to change constantly across the country and such events and actions could adversely impact those expectations in the operations of not only our facilities, but also the availability of services and products we rely upon from our suppliers. As a result we are not able to appropriately quantify our guidance from third quarter.
With that, I’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. These 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 which is on file with the SEC. Actual results could differ materially from those expressed in the forward-looking statements.
And with that, Shelby, I’d like to open up the call for questions, please.
[Operator Instructions] Your first question is from George Staphos of Bank of America.
I wanted to ask a couple of questions on paper and then I'll do one on packaging and turn it over. So shorter term and recognizing it it’s tough to guide on paper. You know it sounds like demand really hasn't changed much from your commentary. It looks like at a minimum right now Jackson will be down about the similar amount as it was down this past quarter. You know barring any change in pricing, which you can't comment to anyway, would there be any reason why 3Q earning could be terribly different from 2Q with that volume outlook?
Let me comment and I’ll let Bob comment also. Again you know the sales have picked up somewhat for cut-size. The problem is they haven't picked up enough that you can justify starting the mill and running full.
Yes.
And so it's not economical to do that. So we're running out of inventory and running out of what the I Falls Mill can produce. And the volume pickup we're seeing is what you'd expect with the reopening of various states and businesses, some of the back-to-school reordering, some of the big box stores planning on some of their volume that would be moving out into school activity. And so everything hinges on what truly happens to the economy in terms of how stable is this reopening and how fast does it occur et cetera. From the financials, Bob why don't you comment on what we’d expect to see?
Yes George I would think that you probably you know you're thinking about things correctly you know based on the assumptions we've made and that we've stated and if those hold true then I would think you're not you shouldn't be far off.
Okay. Thanks for that, Bob. Second question on paper, and I realize it's tough to speak to this live mic and we're still early into this reduced trend, but how does the goodwill impairment. How does the demand decline that we've seen change if at all your view on the paper assets both in terms of their current operating stance and how you might be able to use those assets longer term either in their current form or in a different form.
And then my last question I'll turn it over. You mentioned that the third quarter demand is looking good and if things continue, obviously, there are no guarantees in life. You know inventories wind up lower. What are your customers telling you though? What concerns might they have about the phase out or lowering of that $600 week additional unemployment payment that people have been getting and how it might relate to consumption, if you have any Intel or view on that? Thank you guys. Good luck in the quarter.
Okay. George on the first part of your question regarding the impairment, impairment simply was a technical matter. And so, we went through the trigger analysis and it was truly just an SEC trigger requirement, you know non-cash charge cleans up the balance sheet. But don't forget, if you think about we've been operating our paper business for about eight years now, and the paper business has probably generated I’d estimate $1.1 billion of EBITDA during the time, it's been on a very good business for us.
If you take this pandemic out of the picture, it's still you know is a good business. And so, who knows again how fast the economy recovers and demand recovers. Nevertheless, we have a lot of optionality in how we utilize the paper business and the assets within the paper business. Tom, do you want to talk about demand?
Yes, as indicated George, currently we're starting out quite well in demand you know typical question that it gets asked is, where are we at this point in time through 17 days we’re up just under 1%. And you know and that's against a very tough comp, a year ago I believe, we were up about 3.9% on a per workday basis.
So, you know that's a good start to the quarter. You know you asked a question about our customers and are - what are their effects from the $600 or the potential effects from the $600 unemployment. I think most of that we've got some customers who are concerned about getting employees back, because in some cases they are making more money probably on unemployment than they would be working. But there I think for the most part people want to work and they want to get back to work. And so our customers that are continue to grow they expect to continue to bring their employees back.
Your next question is from Mark Wilde of Bank of Montreal.
I've got a couple of questions. The first one just kind of back on Jackson. I'm just curious whether there are any issues in serving kind of your primary customers that just a single mill and then whether the extended downtime there makes it difficult to retain skilled workers at that site?
First part of the question we've got complete flexibility between the I Falls portfolio capability and the Jackson capability. And so it's just a matter of you know what does the demand look like and then where is it appropriate to make. So, we're okay for the time being.
Again your question regarding employee retention and talent retention, obviously that's always a concern. And so it's really a matter of how long this goes on. But don't forget this is taking place throughout the paper industry. And so we had spent quite a bit of time during that period of late May and June going through the mill from top to bottom really putting the assets in great condition. And so, the mill sits there ready to run. The employees know that. And so again, we're just going to evaluate market conditions and at the right time that mill can run in and will run when necessary.
And if I could just ask on Jackson one other thing Mark, is there anything from just from an engineering standpoint that would make it difficult to produce other products at Jackson. It’s a fairly new machine as I recall kind of a late 1990s vintage machine?
We have total flexibility and optionality with the Jackson assets and anybody that knows us would have to assume that we have studied all potential options and we have as we've done, as an example at Wallula into Ritter. We could take those assets if need be and you know apply them to a containerboard, if need be. But in the meantime, we don't see that happening. Again, there is always a capital cost and capital varies from mill asset to mill asset. But to your point, the big machine at a Jackson is one of the biggest cut size uncoated machines in North America. So, it's a really good paper machine and the mill you know in general is a very good mill asset.
So again, it's got tremendous optionality for the future and - but just keep in mind that you know if anybody is thinking that you just convert it tomorrow think about all of the capital that it’s you know we have employed over the years to bring on the efficiencies at a mill like Wallula, it doesn't happen overnight, and there's a phased approach. But again you know I am betting on the fact that, demand will pick up for the paper business and we'll see that come back.
Okay. All right. The other question I had Mark is just in terms of dry powder, I mean, you've got over $10 a share of dry powder. I wondered, if you can just give us some sense of the parameters for you know what you might do on the acquisition side, or what you might not do, I think in the past you've said, you weren't interested in going south from the U.S. It didn't sound like Europe was really an interest. So just frame for us kind of if you could, where you would be willing and where you wouldn't be willing to use that capital over time?
I think the best choice is that we continue to make the smaller bolt-on acquisitions on the box plant side of the business. Highly accretive opportunities that would come along, we would certainly be in a position to take those on and put them in the portfolio. That's always the primary driver and then we'll always figure out where we're going to supply containerboard into that system.
If the high class problem arose that we had more demand than the capability to produce, we've got the optionality on how we go about our short-term and long-term, short-term we could buy tons on the outside market, long-term, we could figure out how to produce them internally. And so, I think it still holds, we have no desire to go offshore with any investment. We will stay in the lower 48 states as seen in our volume year-to-date in our volume in the second quarter.
Our very diverse customer base pays-off quite well for us in terms of what we can service across the United States and our customers recognize that. So, we will continue to invest in the existing asset base to enhance the capability. And that - quite frankly that's our highest return opportunity right now is to continue to allow Tom and the box plants to reinvest in their capabilities we've been doing over the last couple of years. And we've seen tremendous results from that.
Your next question is from Mark Connelly of Stephens.
Thanks. Mark, it sounds like you're fine with your inventories now, but I'm curious whether you did see any significant cost or inefficiency either because your inventories were lower because your customers orders were unpredictable and I'm worried - I'm wondering whether that lack of predictability or logistics might be a bigger issue in Q3?
No, I think again everything we've been doing over the last couple of years to simplify our portfolio in terms of our containerboard inventory - the SKUs what Tom uses in terms of the basis weights and we've gone primarily to a high performance mix of containerboard that we use. We keep that internal with our nationwide logistics capability and regional supply. We've been able to minimize the inventory requirements there.
As far as customer and uncertainties again, we can pretty well produce what we need we're in - not in the - again I don't see any problems in this third quarter that would be related to uncertainties. Tom, do you want to comment on where we are at I think what took place.
No, and I agree with you. I mean and quite frankly I mean given our customer base and the way we operate, we're up for any uncertainty that comes along.
That's a good answer. Just one question on freight rates, we're starting to see freight rates pick up again after a dip earlier this year and I can't remember when you redo your contracts. But do you have a view on how rising freight rates are going to affect you in the next year?
Well again, I think you know with - based on demand, as the economy started opening up, we definitely saw some tightening up on both truck and rail. And so in some ways, we'll deal with that, that’s a healthy sign. But again the fact is that with the diversified production portfolio nationwide, we can manage the logistics costs better than we've ever been able to do. And so, but - we are seeing some upward pressure. I’ll talk to you more on that.
Do have a significant - part of your transportation on an annual contract with - a reset at this time of the year?
No, no.
Your next question is from Brian Maguire of Goldman Sachs.
Just hoping to get a little bit more color on the third quarter volume outlook for corrugated. I know you spoke many times both in the press release and in the comments about expecting much better trends. Could you clarify is that better than the sort of 2.5% year-to-date trend you were talking about? And then, recognizing it's a tough comp in the July number being up a little bit less than 1% maybe not, quite hitting that you know 2.5% bogey, if that is the bogey?
So are you seeing - are there some new customers that are coming in later in the quarter that you're expecting to kind of ramp up or are you just seeing the order book start to accelerate now into late July and August that you expect the trends to improve as the quarter progresses?
Brian, this is Tom, I'll take that question. Of course we were up - we've been up the 2.5% as we talked about. We're building on that going into July. Our forecast will continue to build on that through the quarter and have a very good quarter providing. As Mark indicated earlier, we don't have some shutdowns as a result of the pandemic or anything like that, that occurs as long as the economy continues to open, I think the trends will be quite good.
The comps do get a little easier as the quarter goes on. As I indicated, July was our largest increase last year. So things are pretty positive and I'll also add as I discussed on the last quarter call, the food service business had really been hurt quite badly and the Ag business that supplies the food service side had been hurt quite badly in the quarter. And that's beginning to come back now as restaurants open up and schools open up.
We'll see more of that activity which is good, and the durables business has started to come back. And as you saw the durables numbers were quite good. So that's - those are good accelerators for us in the third quarter.
And then Mark, you didn’t mention, but I'm going to assume they're still doing great is e-commerce. And so my next question is just, as the industry start - continues to shift toward the e-commerce and it seems like there's maybe a bit step function change as a result of COVID here. Do you see that as a good thing or a bad thing for PCA?
Is that - are you guys uniquely positioned within the industry to take advantage of that or not or do you think there could be any positives or negatives specific to the mix shift regardless of how it kind of impacts volume growth in general?
No e-commerce is a good thing, it's a good thing for PCA and it's a good thing for the entire industry. And also as we see it continuing to grow and I think there's a big consumer shift that's already taken place and even as the economy opens. I think people will continue to participate in e-commerce category quite heavily.
Okay. And just last one from me. And I know you expect to give figure guidance and you're not able to give it because of the lockdowns. But if we just kind of froze things where they are, and didn't see any more rollback in the lockdowns. There's been everything going it seems like third quarter EPS you would have been able to guide to something - it would have been quite a bit better than where 2Q was given the exit rate on all these trends and sort of what I'm hearing about the volume outlook in packaging?
Well, Brian, when George asked a question earlier I think it sort of gave an indication that there are some things that are positive certainly on the volume side. But there will be some seasonal cost that that can go the other way. So all things being equal, we would - if based on our assumptions it should be we would expect it to be fairly similar. There's also some mix things and we talked about freight just from a mix perspective like freight as an example.
It’s not that, there's a little bit of upward pressure, but there's also I guess some mix related things that cause freight cost to go up from 2Q to Q3 some of that would be like for my pause in our paper business we have to still get some paper down in the part of the country that we have the mill down. So things like that and there's some things going on, on the containerboard side you know drive that up.
As well as certainly, energy usage during this part of the - this time of the year is a lot higher and our outages based on the numbers we gave you on guidance you know outages. If you look at what we've said that’s $0.07 a share so right there so.
Your next question is from Mark Weintraub of Seaport Global.
Just a question on the pull forward of the DeRidder recovery boiler project. So in 2018 and 2019, maintenance expense have been order of magnitude $0.61. And now this year given that pull forward you're guiding to about a $1.05 for this year. As we think about next year, does - a starting point. Does it make sense to be at the $0.60 level or is the DeRidder pulling forward so that next year all things equal that it could be lower than the $0.61?
Mark, it's hard - think about the reason we want to pull this outage up is to take advantage of the fact that we have to take DeRidder down for part of its annual outage anyways and we’re doing the DeRidder number one machine annual during that fourth quarter. And in the work we're doing on D1 we had recognized an opportunity to significantly upgrade the winder capability and go to a fourth set real automatic conveyor of reals into the winder back stance and really enhance the efficiencies of the machine.
So, we have a very high return of capital project, which is taking a couple of weeks of downtime opportunity. We also recognize that the recovery boiler was going to be requiring a superheater replacement next year, which typically is in most cases about a three week outage type of job depending on the work, three weeks, three-and-a-half weeks of work. And we looked at it and said, well, we're going to take a longer outage on the big paper machine in the fall. And we know that within six months, you're going to have to take another longer outage that you know is the recovery boiler, which you know impacts cost.
And we thought well, there are some uncertainties about the economy not knowing what demand is doing and where the world is going to be in the fourth quarter. We thought it was probably prudent to go ahead and pull up the outage, get the work done on the paper machine, get all of this work done on the recovery boiler, and put that behind us.
And so, that without quantifying what that does to the annual shutdown cost next year, obviously, it eliminates that cost next year. And so, you not only eliminate that shutdown cost next year, but you see immediate results from the paper machine upgrade work and the reliability that you bring to bear with the boiler work that we're doing. So I don't want to try to quantify what that means for 2021s maintenance outage expenses.
And maybe one help if you could. Would the Recovery Boiler project would have that been a once every seven year type thing, which is exceptional or would that be in kind of the normal course?
No it's probably once a decade type of opportunity in the superheaters you know quite frankly superheaters you change out probably every 25 years.
Got it.
But you typically it varies to work you're doing on a power boiler or a recovery boiler. The most complex work you do would be work such as a generator suction tubes and or a superheater suction tubes. In this case, we felt it was prudent to just go ahead and move this up, take advantage of this and there was no reason to wait. But it costs us. But it's an boiler would cost for next year.
Yes. Is there any help you can provide at this stage for us as you have done the analysis on the options at Jackson of order of magnitude what type of capital to achieve what type of end result would be entailed recognizing that it's still a process under consideration as opposed to anything that's been determined?
You know as again you would have to believe that we have in our files a various listing of opportunities and the costs of those opportunities and what could be done in that over what period of time. That being said if you look at our history over the last three decades whenever we've done big projects and big conversions we do it in phases. I don't want to try to quantify what that cost would be. It's not proper to do that, but it is a significant cost. I'll leave it at that.
Okay.
To do it right, to do it properly, it would be a significant cost, but if that were to play out that way that would mean that we have a significant opportunity.
Your next question is from Neel Kumar from Morgan Stanley.
On a same-day basis, your corrugated shipments were up 1.2% versus the industry, which is down 1.4% for the quarter. What allowed you to outperform relative to industry volume, would you attribute that your end market or geographical mix or perhaps having more local first national kind of exposure?
Neel, this is Tom. I think our performance is really just you know where we're aligned with thousands of customers. We're still primarily local and regional, although we have a decent national footprint as well. And I think, we were fortunate to be able to grow with the customers that we have. In addition, we did pick up some new customers as well, just where the opportunities presented themselves.
And you know it's kind of a continuation of what we do and what we do so well and the way we execute, and operate so efficiently, and it's also obviously a result of the capital that we talked about, that we invested in our businesses to be able to do that. So you know we had in – some cases, we had customers who were expanding and wanted to grow and wanted to grow with us, and you know we made the investments to be able to do that. So you know that's been our strategy for a long time and will continue to be our strategy.
Great. That's helpful. And can you just also talk a little bit about what you're seeing in the export markets, prices look like they've come down, but the board recently in Europe and Central South America, and there seems to be some softness maybe in China as well. So generally speaking how has demand geared in some of your key export regions versus the domestic market over the last several months?
Well, as we talked about many times you know we don't have a large export footprint, but the one we do have is with long, long-term customers who have been in the business obviously you know and for a long time. And are good players in their marketplace. The demand has been relatively flat. The pricing had come down. It stayed flat for a while. And you know who knows what's going to happen down the road, I'm not going to speculate on that. But our demand on the export side has been steady and you know that's what we continue to expect and maybe even up a little depending on how things open up around the rest of the world.
Your next question is from Debbie Jones of Deutsche Bank.
I wanted to ask if you are buying a material amount of board outside your own system currently I think in the past you've been willing to provide that. And if so you know it is advance stage study and you do this project in the fourth quarter taking linerboard now down for a bit. Do you need to buy more tons to support your system?
Yes. Debbie, on the first part of the question. The only board we buy on the outside right now currently is specialty type grade white top would be a good example. And then there is some specialty products that we use. That's essentially what we've been buying for the last couple of years.
As far as in the fourth quarter with the outage, obviously, we got some flexibility in as we go through the third quarter and we look at what the fourth quarter end looks like. We’ll figure out how we run the system. We've got great opportunities, we could and in a worst high-class situation, you could go by some board on the outside market, if you had to. But we're not anticipating that right now. So, it just requires us to manage our business well as we go into the month of October and November.
And can you just touch cost earlier. I was wondering, if you could just talk a bit more about what fiber OCC cost and how that's trying to reiterate you in Q2 and into Q3?
Would fiber costs in general we're seeing flat, I mean, there is nothing. It's typically what you’d see with weather-related phenomenon and on seasonal-related phenomena with tied to weather events, but nothing unusual.
Your next question is from Anthony Pettinari of Citi.
This is actually Randy Toth sitting in for Anthony. Can you just quick update us on the OCC plant bill at Wallula. I think originally, it was expected to be completed by a year-end, has the timeline changed at all due to that pandemic? And then just bigger picture, has you're thinking about virgin versus recycled fiber mix changed at all over the past nine months or so [technical difficulty]? Thank you.
Regarding the project we're still on schedule to the end of the year and it hasn't changed our view in the entire premise and investing the money into a new OCC plant in Wallula was to provide complete optionality of fiber opportunities in that mill. That mill if you can imagine being in the Pacific Northwest is the highest wood cost basket for paper mills in North America.
And so, having the ability to utilize OCC and various wood fibers gives us the optionality we need there. So it's still something we would believe is a good thing to do and important thing to do to fiber that mill up for the future. So it hasn't changed our outlook on where we are.
Your next question is from Adam Josephson of KeyBanc.
Tom, in terms of your box demand outlook for the balance of the quarter, and this year has been somewhat of a rollercoaster ride. Obviously there's the panic buying surge in March and then the economy shutdown, some industry box demand obviously went down in April and May. And then June and July have been much better, I assume because of inventory restocking, correct me, if you think otherwise?
So just given these big swings up and down, what would you say your visibility and confidence level is for the balance of the quarter and for that matter in 4Q. And you've always said the box demand is tied to the economy and when you're talking about the paper business, you said look depends on the reopening et cetera? Does the same apply to your box business?
Yes Adam, the second part of your question, yes some of that does depend on the box business. You know if suddenly we had a big surge in the United States of COVID and we had certain businesses closed back down or big, big regions closed down. Some of those segments we talked about like food service that would be impacted. However, the indicators are that that's not going to be the case and that we've got the potential to continue to open up the economy.
And if that takes place, we're quite bullish. The ups and downs, I think are when you say inventory restocking, I would say that most of our customers have kept their inventories at very low levels period. And so the surge is more demand-related than it is investor stocking-related and that requires because I can - you can really feel it in the short turnaround timeframes that we've got to - that we've got to produce the boxes.
And this is what our customers are telling us likewise. So, they're sitting there with lower inventories, trying to manage their business, but also wanting to take advantage of every opportunity they have as this economy continues to open up.
And just on 3Q, Bob I think you mentioned that in response to George's question that paper earnings could be expected to be relatively similar sequentially. And it sounds like you have pretty good confidence on box demand for the balance of the quarter. So, I guess back to the guidance question, why - don't you feel comfortable giving 3Q guidance, given that box demand will presumably be good and given your - it seems the likelihood of the paper earnings will be flattish sequentially?
Yes Adam it’s just for the same reasons you know that Mark mentioned and Tom just touched on as well. And not that dissimilar from a paper you put out not that long ago about this thing can turn really quickly. And if it does or our supply chain or our - how our customers are impacted and all bets are off. But you know usually we have our crystal ball as not as cloudy.
Right.
So, we do the best we can, but these things can change so rapidly and if we have a number out there and that happens. It just, it's hard to recover from that because the perception is what people happen to read that day and they forget about you know that you tried to warn that you know things can change quickly.
Yes.
So it's just - to do it the way we're doing it right now.
I appreciate. But just one last question Bob on the COVID costs are you expecting a similar level of COVID costs in 3Q and perhaps beyond or do you think those are?
No.
One-time in 2Q?
No, I do not.
Your next question - it's a follow-up from Mark Wilde.
Yes, I just I had a few kind of quick ones for you, the box shipment numbers that you gave up 1.2%. What was the impact of Richland on those numbers? And can you give us a sense of where Richland is producing right now?
Mark I mean Richland obviously had an impact and you see we've got some puts and takes here too. I mean we closed the San Lorenzo. We've opened - the Richland, Richland has ramped up very nicely. I don't go into details as to exactly what they're running, but I will just say that we're pleased with what Richland’s done. And obviously they made they made some contribution to that increase.
And then the second one, Tom any impact that you've seen so far from the dollar starting to weaken?
Not at the moment, Mark.
And if it continues to weaken would you expect some particularly around sort of export volumes or export pricing?
It could, I mean that's obviously currency is a big part of the export market. So, it can drive it up, drive it down drive prices one way or the other. So yes, depending on what happens. I still think it's in a range right now where it's not quite as impactful, but if it does drop some more that could definitely create a change.
And are you seeing any impact from the Brazilians being a little more aggressive. I mean they've got a very weak currency and extra capacity right now?
Not right now. We're not seeing that right now. I can't, I mean that could change tomorrow, but I'm just giving you a snapshot as of right now.
Yes, that's all I'm looking for. The last one I had. Is it possible to get any sense of sort of what the economic slow back might have amounted to in Q2 or how much extra fuel you have in the tank potentially across the mill system?
We don't quantify that - you know in terms of what we did as far as running to demand it's obvious. We did using the term run to demand and what we saw happening if you think about is the second quarter was unfolding. In April folded into May and we saw some big businesses shutting down, the protein side of the business going down. We had to make some decisions in terms of what we believe, we would end up with.
And so part of that decision making was to literally slowdown some of our machines and run to demand, not knowing where some of our output was going to have to go. But knowing that we could always ramp that back up, but there was some slowing down that took place in a few of our paper machines that caused us not to run full out. And I'd rather just leave it at that.
Yes, okay. And I guess just related to that Mark, it did sound to me like over time both the Ritter and Wallula, you had some ability to kind of stretch those conversions in terms of capacity over time, possible to get a sense of kind of where?
Yes, Wallula has been a really great success for us. Essentially we're running the mill full out right now. The number two machine which has always been a medium machine is running to its limits, and then all of the work that was done to support number three machine. We've seen all of the success there, based on the grade mix we're running as far as a high performance grade mix, the mill has been through this year running to its capacity.
That being said, with the OCC plant and the opportunity with some recycled fiber in the sheet, with some future capital spending, if we chose to, again we said this few years ago that there was probably depending on the grade mix you present the mill. It could be another 50,000 tons of opportunity coming out of that mill. But again, it would require a capital analysis and some decision making on whether or not that was the right thing to do. But right now, the mill is running at capacity and we're quite pleased with what it's doing.
[Operator Instructions] Mr. Kowlzan, I see, there are no further questions. Do you have any closing comments?
Yes thanks Shelby. Everybody, thank you so much for joining us today and stay well. We look forward to talking with you in October for the third quarter call. Have a nice day. Bye-bye.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.