Packaging Corp of America (PKG) Q2 2020 Earnings Call Transcript

Packaging Corp of America (NYSE: PKG) Q2 2020 earnings call dated Jul. 29, 2020

Corporate Participants:

Mark W. Kowlzan — Chairman And Chief Executive Officer

Thomas A. Hassfurther — Executive Vice President – Corrugated Products

Robert P. Mundy — Executive Vice President And Chief Financial Officer

Analysts:

George Staphos — Bank of America — Analyst

Mark Wilde — Bank of Montreal — Analyst

Mark Connelly — Stephens — Analyst

Brian Maguire — Goldman Sachs. — Analyst

Mark Weintraub — Seaport Global — Analyst

Neel Kumar — Morgan Stanley — Analyst

Debbie Jones — Deutsche Bank — Analyst

Anthony Pettinari — Citi — Analyst

Adam Josephson — KeyBanc — Analyst

Presentation:

Operator

Thank you for joining Packaging Corporation of America’s 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.

Mark W. Kowlzan — Chairman And Chief Executive Officer

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’ll 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 and fringes, repairs, materials and supplies and several fixed cost areas. We also had 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 the 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 and 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 and geographic footprint of our containerboard supply.

I’ll now turn it over to Tom, who will provide more details on our containerboard sales and the corrugated business.

Thomas A. Hassfurther — Executive Vice President – Corrugated Products

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’s 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 workday 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’s second quarter and 23,000 tons below the first quarter of 2020, and as we ran our containerboard system to demand, supplied 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’s 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’ve 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 customers’ 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.

Mark W. Kowlzan — Chairman And Chief Executive Officer

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 approached 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.

I’ll now turn it over to Bob.

Robert P. Mundy — Executive Vice President And Chief Financial Officer

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 at 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, continued 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 in 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 noncash 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 or to make a change to the scheduled outages in our containerboard mills 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 boiler 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 No. one paper machine real section. The fourth quarter estimate for our scheduled outages is now $0.59 per share, and the full year increment is now $1.05 per share.

I’ll now turn it back over to Mark.

Mark W. Kowlzan — Chairman And Chief Executive Officer

Thank you, Bob. As in the first quarter, the employees at all of our manufacturing and office locations ran their operations safely and in a very cost effective manner while facing the unprecedented conditions brought on by the COVID-19 pandemic. All facilities continue to operate in adherence to CDC guidelines and followed a strict protocol for workplace operations as well as notification of and 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 to the pandemic due to the pandemic. The accomplishments of our employees during this period with the help of our customers and suppliers were truly amazing. Looking ahead to the third quarter we’ll stay focused on preserving our financial and balance sheet strength during these uncertain times.

We remain well positioned to manage whatever lies ahead while ensuring 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 the third quarter to be even stronger. We began the third quarter with replenished yet still relatively low container board inventories and our expectation is that we’ll end the quarter at levels below where we started while 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 in not only our facilities but also the availability of services and products we rely upon from our suppliers.

As a result, we’re not able to quantify our guidance for the third quarter. With that we’ll 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 go ahead and open up the call for questions, please.

Questions and Answers:

Operator

[Operator Instructions] Your first question is from George Staphos of Bank of America.

George Staphos — Bank of America — Analyst

Hi guys, good morning, thanks for taken question

Mark W. Kowlzan — Chairman And Chief Executive Officer

Good morning, George. How you doing.

George Staphos — Bank of America — Analyst

So 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’s tough to guide on paper. 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. Barring any change in pricing, which you can’t comment to anyway, would there be any reason why 3Q earnings could be terribly different from 2Q with that volume outlook?

Mark W. Kowlzan — Chairman And Chief Executive Officer

Let me comment, and I’ll let Bob comment also. Again, 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. 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, etc.. From the financials. Bob, why don’t you comment on what we’d expect to see?

Robert P. Mundy — Executive Vice President And Chief Financial Officer

Yes, George, I would think that you’re probably you’re thinking about things correctly. Based on the assumptions we’ve made and that we’ve stated and if those hold true, then I would think you’re you’re not you shouldn’t be far off.

George Staphos — Bank of America — Analyst

Okay. Second question on paper. And I realize it’s tough to speak to this live, Mike, and we’re still early into this reduce 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, and I’ll turn it over. You mentioned that third quarter demand is looking good. And if things continue obviously, there are no guarantees in life, 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 a 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.

Mark W. Kowlzan — Chairman And Chief Executive Officer

Okay. George, on the first part of your question regarding the impairment. The impairment simply was a technical matter. And so we went through the trigger analysis and it was truly just an SEC trigger requirement, noncash charge cleans up the balance sheet. But don’t forget, if you think about we’ve been operating 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 a very good business for us. If you take this pandemic out of the picture, it’s still 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?

Thomas A. Hassfurther — Executive Vice President – Corrugated Products

Yes. The as indicated, George, currently, we’re starting out quite well in demand. A typical question that gets asked is where are we at this point in time through 2017 days, we’re up just under 1%. 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 that’s a good start to the quarter. You asked a question about our customers and are the what are there effects from the $600 or the potential effects from the $600 unemployment. I think most we’ve got some customers who are concerned about getting employees back because in some cases, they are making more money probably on unemployment, then 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 continuing to grow, they expect to continue to bring their employees back.

George Staphos — Bank of America — Analyst

Okay, thank you very much, I’ll turn it over

Mark W. Kowlzan — Chairman And Chief Executive Officer

Okay, next question please

Operator

Your next question is from Mark Wilde of Bank of Montreal.

Thomas A. Hassfurther — Executive Vice President – Corrugated Products

Good morning, Mark.

Mark Wilde — Bank of Montreal — Analyst

Good morning, Tom. Morning, Bob. Good morning all remarks 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 out of just a single mill. And then whether the extended downtime there makes it difficult to retain skilled workers at that site?

Mark W. Kowlzan — Chairman And Chief Executive Officer

The 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 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 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 and will run when necessary.

Mark Wilde — Bank of Montreal — Analyst

Okay. And if I could ask, just on Jackson, so 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.

Mark W. Kowlzan — Chairman And Chief Executive Officer

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 and DeRidder, we could take those assets if need be and apply them to a containerboard, if need be. But in the meantime, we don’t see that happening. Again, there’s always a capital cost and capital varies from mill asset to mill asset. But to your point, the big machine at Jackson is one of the biggest cut size uncoated machines in North America. So it’s a really good paper machine. And the mill, 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 if anybody’s thinking that you just convert it tomorrow, think about all of the capital that 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, I am betting on the fact that demand will pick up to the paper business, and we’ll see that come back.

Mark Wilde — Bank of Montreal — Analyst

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 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’d be willing and where you wouldn’t be willing to use that capital over time?

Mark W. Kowlzan — Chairman And Chief Executive Officer

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 that 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 are 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 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 as we’ve been doing over the last couple of years, and we’ve seen tremendous results from that. Well, it’s worked well over time.

Mark Wilde — Bank of Montreal — Analyst

That’s it for me. Mark, I’ll turn it over

Mark W. Kowlzan — Chairman And Chief Executive Officer

Okay, next question please.

Operator

Your next question is from Mark Connelly of Stephens.

Mark Connelly — Stephens — Analyst

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?

Mark W. Kowlzan — Chairman And Chief Executive Officer

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 skews, 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 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…

Thomas A. Hassfurther — Executive Vice President – Corrugated Products

No, I agree with you and quite frankly, I mean, given our customer base and the way we operate, we’re up we’re up for any uncertainty that comes along.

Mark Connelly — Stephens — Analyst

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?

Mark W. Kowlzan — Chairman And Chief Executive Officer

Well, again, I think 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 cost better than we’ve ever been able to do. And so but we are seeing some upward pressure.

Mark Connelly — Stephens — Analyst

Do you have a significant part of your transportation on an annual contract with a reset at this time of year?

Mark W. Kowlzan — Chairman And Chief Executive Officer

No. No.

Mark Connelly — Stephens — Analyst

Thank you.

Mark W. Kowlzan — Chairman And Chief Executive Officer

Okay, next question.

Operator

Your next question is from Brian Maguire of Goldman Sachs.

Brian Maguire — Goldman Sachs. — Analyst

Hey, good morning guys. One 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. Just want to 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, the July number being up a little bit less than 1%, maybe not quite hitting that 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 trends to improve as the quarter progresses?

Thomas A. Hassfurther — Executive Vice President – Corrugated Products

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. I forecast, we’ll 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 have 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 those are good accelerators for us in the third quarter.

Brian Maguire — Goldman Sachs. — Analyst

And then Mark, you didn’t mention, but I’m going to assume it’s still doing great, is e-commerce. And so my next question is just as the industry continues to shift towards e-commerce, it seems like there’s maybe a step function change as a result of COVID here. Do you view 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 positive or negative specific to the mix shift, regardless of how it kind of impacts volume growth in general?

Mark W. Kowlzan — Chairman And Chief Executive Officer

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 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.

Brian Maguire — Goldman Sachs. — Analyst

Okay. Just last one for me. I know it’s tough to give guidance in United 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 on the lockdowns spending everything case. It seems like third quarter EPS, you would have been able to guide to something that 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.

Mark W. Kowlzan — Chairman And Chief Executive Officer

Well, Brian, when George asked a question earlier, I think I sort of gave an indication that there are some things that are positive, certainly on the volume side. But there will be some seasonal costs that can go the other way. So all things being equal, we would if based on our assumptions, we should be we would expect it to be fairly similar. There’s also some mix things. I know we talked about freight. Just from a mix perspective, like freight as an example. It’s not that where there’s a little bit of upward pressure, but there’s also just some mix related things that caused freight cost to go up from 2Q to Q3.

Some of that would be like for I Falls 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 some things going on in the containerboard side, drive that up as well as certainly energy usage in the during this part of this time of the year is a lot higher. And our outages. Based on the numbers we gave you on guidance, outages, if you look at what we’ve said, that’s $0.07 a share or so right there. So.

Brian Maguire — Goldman Sachs. — Analyst

Got it. Okay, thanks very much guys

Mark W. Kowlzan — Chairman And Chief Executive Officer

The quarter thank you. Next question

Operator

Our next question is from Mark Weintraub of Seaport Global.

Mark Weintraub — Seaport Global — Analyst

Thank you. Just a question on the pull forward of the DeRidder recovery boiler project. So in 2018 and 2019, maintenance expense had been order of magnitude, $0.61. And now this year, given that pull forward, you’re guiding to about $1.05 for this year. As we think about next year, does as 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, it could be lower than the $0.61?

Mark W. Kowlzan — Chairman And Chief Executive Officer

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 No. 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 four-set real automatic conveyor of reels into the winder back stand and really enhance the efficiency of the machine. So we have a very high-return 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 super heater replacement next year, which typically is, in most cases, about 3-week outage type of job, depending on the work, three weeks, 3.5 weeks of work.

And we looked at it and said, well, if 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 is the recovery boiler, which 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 2021’s maintenance outage expenses.

Mark Weintraub — Seaport Global — Analyst

Fair enough. 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?

Mark W. Kowlzan — Chairman And Chief Executive Officer

No. It’s probably once a decade type of opportunity. I mean the super heaters quite frankly, super heaters you change out probably every 25 years. But you typically have various tube work you’re doing on a power boiler or a recovery boiler. The most complex work you do would be work such as generator section tubes and/or super heater section tubes. In this case, we felt it was prudent to just go ahead and move this up, take advantage of this, and there is no reason to wait. But it costs us, but it’s an avoiding cost for next year.

Mark Weintraub — Seaport Global — Analyst

Understood. 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?

Mark W. Kowlzan — Chairman And Chief Executive Officer

No. As again, you would have to believe that we have in our files a various listing of opportunities and the cost of those opportunities and what could be done in 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. 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.

Mark Weintraub — Seaport Global — Analyst

Okay, thank you

Mark W. Kowlzan — Chairman And Chief Executive Officer

Okay, next question please.

Operator

Our next question is from Neel Kumar of Morgan Stanley.

Neel Kumar — Morgan Stanley — Analyst

Great, thanks for taking my question. On same-day 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 volumes? Would you attribute that to your end market or geographical mix or perhaps having more local versus national kind of exposure?

Thomas A. Hassfurther — Executive Vice President – Corrugated Products

Neil, this is Tom. I think our performance is really just we’re aligned with thousands of customers. We’re still primarily local and regional, although we have a decent national footprint as well. And we 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 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 we had, in some cases, we had customers who were expanding and wanted to grow and want to grow with us. And we made the investments to be able to do that. So that’s been our strategy for a long time and will continue to be our strategy.

Neel Kumar — Morgan Stanley — Analyst

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 the containerboard 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 fared in some of your key export regions versus the domestic market over the last several months?

Thomas A. Hassfurther — Executive Vice President – Corrugated Products

Well, as we talked about many times, 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, 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 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 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.

Neel Kumar — Morgan Stanley — Analyst

Great, thanks.

Mark W. Kowlzan — Chairman And Chief Executive Officer

Next question please

Operator

Next question is from Debbie Jones of Deutsche Bank.

Debbie Jones — Deutsche Bank — Analyst

Hi, good morning. Thanks for taking my question. 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, if demand stays steady and you do this project in the fourth quarter, it’s taking a LIBOR than all down for a bit. Do you need to buy more tons to support your system?

Thomas A. Hassfurther — Executive Vice President – Corrugated Products

Yes. Debbie, on the first part of the question, the only board we buy on the outside right now currently is specialty type grades, white top would be a good example. And then there’s some specialty products that we use. That’s essentially all we’ve been buying for the last couple of years. As far as the fourth quarter with the outage, obviously, we’ve got some flexibility. And as we go through the third quarter and we look at what the fourth quarter looks like, we’ll figure out how we run the system. We’ve got trade opportunities. We could in a worst, high-class situation, you could go buy 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.

Debbie Jones — Deutsche Bank — Analyst

Okay. And you did touch on costs earlier. I was wondering if you could just talk a bit more about wood fiber, OCC costs and how those have trended for you in Q2 and into Q3.

Mark W. Kowlzan — Chairman And Chief Executive Officer

Wood fiber costs in general are staying flat. I mean, there’s nothing it’s typically what you’d see with weather-related phenomenon and seasonal related phenomenon with tied to weather events. But nothing unusual.

Debbie Jones — Deutsche Bank — Analyst

Thank you very much, much turnover

Mark W. Kowlzan — Chairman And Chief Executive Officer

Thank you. Next question.

Operator

Your next question is from Anthony Pettinari of Citi.

Anthony Pettinari — Citi — Analyst

Good morning, guys. This is actually Randy Toth sitting in for Anthony. Can you just quickly update us on the OCC plant built at Wallula? I think originally, it was expected to be completed by year-end. Has the time line changed at all due to the pandemic and then just bigger picture, has your thinking about virgin versus cycled fiber mix changed at all over the past nine months or so given what has occurred?

Mark W. Kowlzan — Chairman And Chief Executive Officer

Regarding the project, we’re still on schedule for the end of the year. And it hasn’t changed our view in the entire premise on investing the money into a new OCC plant, and 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 an important thing to do to fiber that mill up for the future. So it hasn’t changed our outlook on where we are. next question.

Operator

Next question our next question is from Adam Josephson of KeyBanc.

Adam Josephson — KeyBanc — Analyst

Thanks, good morning everyone. Tom, in terms of your box demand outlook for the balance of the quarter, I mean, this year has been somewhat of a roller coaster ride. Obviously, there is the panic buying surge in March and then the economy shutdown, so 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 that box demand is tied to the economy. And when you’re talking about the paper business, you said, look, it depends on the reopening, etc.. Does the same apply to your box business?

Thomas A. Hassfurther — Executive Vice President – Corrugated Products

Yes, Adam. The second part of your question, yes. Some of that does depend on the box business. 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 inventory stocking related. And that requires because I can you can really feel it in the short turnaround time frames 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.

Adam Josephson — KeyBanc — Analyst

Got it. 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’re 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 that paper earnings will be flattish sequentially?

Robert P. Mundy — Executive Vice President And Chief Financial Officer

Yes. It’s just for the same reasons 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 if our supply chain or our how our customers are impacted, then all bets are off. But usually, we have our crystal ball is not as cloudy. So 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 that you tried to warn that things can change quickly. So it’s just better to do it the way we’re doing it right now.

Adam Josephson — KeyBanc — Analyst

I appreciate it. And 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 one-time in 2Q?

Robert P. Mundy — Executive Vice President And Chief Financial Officer

No, I do not.

Adam Josephson — KeyBanc — Analyst

Okay, thank you.

Operator

Your next question it’s a follow-up from Mark Wilde.

Mark Wilde — Bank of Montreal — Analyst

Yes, just had a few kind of quick ones for you. The box shipment numbers that you gave, the 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?

Thomas A. Hassfurther — Executive Vice President – Corrugated Products

Mark, the 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 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 has done. And obviously, they made some contribution to that increase.

Mark Wilde — Bank of Montreal — Analyst

Okay. And then the second one, Tom. Any impact that you’ve seen so far from the dollar starting to weaken?

Thomas A. Hassfurther — Executive Vice President – Corrugated Products

Not at the moment, Mark.

Mark Wilde — Bank of Montreal — Analyst

And if it continues to weaken, would you expect some, particularly around sort of export volumes or export pricing?

Thomas A. Hassfurther — Executive Vice President – Corrugated Products

It could. It could. I mean, that’s obviously, currency is a big part of the export market. So and 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.

Mark Wilde — Bank of Montreal — Analyst

And are you seeing any impact from the resilience being a little more aggressive? I mean, they’ve got a very weak currency and extra capacity right now?

Thomas A. Hassfurther — Executive Vice President – Corrugated Products

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 the snapshot as of right now.

Mark Wilde — Bank of Montreal — Analyst

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?

Mark W. Kowlzan — Chairman And Chief Executive Officer

We don’t quantify 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 as the second quarter was unfolding, and 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 slow down 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. I’d rather just leave it at that.

Mark Wilde — Bank of Montreal — Analyst

Yes. Okay. And I guess just related to that market, it did sound to me like over time, both DeRidder and Wallula, you had some ability to kind of stretch those conversions in terms of capacity over time. If possible to get a sense of kind of where

Mark W. Kowlzan — Chairman And Chief Executive Officer

Yes. Wallula has been a really great success for us. Essentially, we’re running the mill full out right now, the No. 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 No. 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 a few years ago that there was probably depending on the grade mix, you present the mill, there 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. Any other questions?

Operator

[Operator Instructions] Mr. Kowlzan, I see there are no further questions. Do you have any closing comments?

Mark W. Kowlzan — Chairman And Chief Executive Officer

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.

Operator

[Operator Closing Remarks]