Packaging Corp of America. (PKG) Q1 2021 Earnings Call Transcript

Packaging Corp of America. (NYSE: PKG) Q1 2021 earnings call dated Apr. 27, 2021.

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 — BMO Capital Markets — Analyst

Mark Weintraub — Seaport Global Holdings LLC — Analyst

Adam Josephson — KeyBanc Capital Markets Inc. — Analyst

Mark Connelly — Stephens Inc. — Analyst

Gabe Hajde — Wells Fargo Securities — Analyst

Philip Ng — Jefferies — Analyst

Neel Kumar — Morgan Stanley — Analyst

Anthony Pettinari — Citi — Analyst

Kyle White — Deutsche Bank — Analyst

Cleveland Rueckert — UBS — Analyst

Presentation:

Operator

Thank you for joining Packaging Corporation of America’s First Quarter 2021 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. Please proceed when you’re ready.

Mark W. Kowlzan — Chairman and Chief Executive Officer

Thank you. Good morning. And again, appreciate everybody participating today in Packaging Corporation of America’s first quarter 2021 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 first quarter results and then turn the call over to Tom and Bob, who will provide additional details. I’ll then wrap things up and then we’ll be glad to take questions.

Yesterday, we reported first quarter net income of $167 million or $1.75 per share. First quarter net income included special items expenses of $0.02 per share related to closure costs for certain corrugated products facilities and specific costs related to discontinuing paper operations associated with the previously announced conversion of the No. 3 machine at our Jackson, Alabama mill to linerboard. Excluding the special items, first quarter 2021 net income was $169 million or $1.77 per share compared to the first quarter 2020 net income of $143 million or $1.50 per share. First quarter net sales were $1.8 billion in 2021 and $1.7 billion in 2020.

Total company EBITDA for the first quarter, excluding special items was $342 million in 2021 and $311 million in 2020. Details of the special items for both the first quarter of 2021 and 2020 were included in the schedules that were accompanying the earnings press release. Excluding the special items, the $0.27 per share increase in first quarter 2021 earnings compared to the first quarter of 2020 was driven primarily by higher volumes for $0.45 and prices and mix $0.31 in the Packaging segment and lower annual outage expenses for $0.12. The items were partially offset by lower volumes, $0.28, and prices and mix of $0.03 in the Paper segment.

Operating costs were $0.15 per share higher, primarily due to inflation-related increases, particularly in the areas of labor and benefits expenses, and fiber costs and energy. We also had inflation-related increases in our converting costs, which were $0.02 per share higher. For the last three quarters, freight and logistics costs have risen and were $0.12 per share higher in the first quarter compared to last year. Significant increases in fuel costs, high truck supply and a higher mix of spot pricing to keep up with box demand are the primary drivers. And in the first quarter, we had the issues brought on by the winter storms as well. We also had other expenses of $0.01 per share.

Looking at the packaging business. EBITDA excluding special items in the first quarter of 2021 of $352 million with sales of $1.6 billion resulted in a margin of 22% versus last year’s EBITDA of $290 million and sales of $1.5 billion or a 20% margin. Demand in the Packaging segment remained very strong as sales volume in both our containerboard mills and our corrugated products plants set or matched all-time quarterly records. Although we were able to replenish some inventory during the quarter by utilizing the Jackson, Alabama mill for additional containerboard production, we again ended the period with inventory levels lower than planned and at record lows from a weeks-of-supply standpoint due to stronger-than-expected demand.

Our mills and box plants displayed outstanding management of their operations to meet customer commitments in spite of several weather-related events that impacted their operations, created raw material availability issues and presented both inbound and outbound freight and logistics challenges. In addition, our facilities continued to deliver on numerous cost reduction initiatives, efficiency improvements in capital projects and bringing the benefits of those efforts to the bottom line. We also recently completed two high return strategic projects that we’ve mentioned to you before, the OCC project at our Wallula Mill and the boiler project at our Filer mill. The tremendous effort our employees put into these initiatives and projects helps us minimize some of the cost inflation we see every year and especially now with what we’re seeing in the areas I mentioned previously.

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

Thomas A. Hassfurther — Executive Vice President, Corrugated Products

Thank you, Mark. As Mark mentioned, corrugated products and containerboard demand were very strong during the quarter, total volume in our corrugated products plants was up 6.6% versus last year and equal the all-time record for total box shipments that we just set in the fourth quarter of 2020. Shipments per day were up 8.3% over last year, which set a new first quarter record for us. Strong domestic demand drove outside sales volume of containerboard 13% above last year’s first quarter. Domestic containerboard and corrugated products prices and mix together were $0.26 per share above the first quarter of 2020 and up $0.52 per share compared to the fourth quarter of 2020 as we continued to implement our November 2020 announced price increases during the quarter and we began the implementation of our announced March increase. Export containerboard prices were up $0.05 per share versus last year’s first quarter and up $0.04 per share compared to the fourth quarter of 2020.

I’ll now turn it back to Mark.

Mark W. Kowlzan — Chairman and Chief Executive Officer

Thanks, Tom. Looking at our Paper segment, EBITDA excluding special items in the first quarter was $16 million with sales of $165 million or a 10% margin compared to the first quarter of 2020’s EBITDA of $42 million and sales of $217 million or a 19% margin. As expected, sales volume was about 22% below last year as we ran only one machine at the Jackson, Alabama mill this quarter versus both machines running in the first quarter of 2020. First quarter paper prices and mix were almost 3% below last year, however, prices began to move higher in the latter part of the quarter, resulting from the announced paper price increases and averaged 1% higher than fourth quarter 2020 average prices.

Industry conditions in the uncoated freesheet market continue to be challenged due to the nationwide responses to help control the spread of the pandemic, however, with the actions we’ve taken in our Paper segment to match supply with our customers’ demand and moving production on the No. 3 machine at our Jackson, Alabama mill from paper to linerboard, we have not only avoided the significant cost issues associated with extended paper market downtime, but we’ve also enhanced our capabilities, as well as the profitability in our Packaging segment. Going forward, we will continue to assess our outlook for paper demand and the optimal inventory levels and will run our paper system accordingly.

I’ll now turn it over to Bob.

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

Thanks, Mark. For the first quarter, we generated cash from operations of $192 million and free cash flow of $107 million. The primary uses of cash during the quarter included capital expenditures of $85 million and common stock dividends of $95 million. We ended the quarter with $983 million of cash on hand or $1.1 billion, including marketable securities. Our liquidity at March 31st was $1.5 billion.

I want to update you on our full year guidance for a couple of items that we provided on last quarter’s call. Current plans and scope of work for the scheduled maintenance outages at our containerboard mills has changed and the new total company estimated cost impact for the year is $0.97 per share. The actual impact in the first quarter was $0.10 per share and the revised estimated impact by quarter for the remainder of the year is now $0.30 per share in the second quarter, $0.16 in the third and $0.41 per share in the fourth quarter. Also, our capital spending estimate for the year has changed to a range of $650 million to $675 million as we have now announced our plans for the conversion of the No. 3 paper machine at our Jackson Mill to linerboard.

I’ll now turn it back over to Mark.

Mark W. Kowlzan — Chairman and Chief Executive Officer

Thanks, Bob. Regarding the conversion of the No. 3 machine at Jackson, Alabama, our current plans are to continue running the machine on linerboard as demand wards in a manner similar as to how we ran in the first quarter until the scheduled first phase outage is taken in the second quarter of 2022. The converted machine is expected to operate at an initial production rate of approximately 75% of its new capacity. The second phase outage work is planned for mid-2023 with the machine reaching its run rate capacity of 2,000 tons per day by the end of 2023. This phased conversion over the next few years will provide much needed internal linerboard supply. This gives us a runway for maintaining an optimal integration level and enables us to further optimize and enhance our current mill capacity and box plant operations.

We’re committed to being fully integrated and we have a track record of ramping up production from machine conversions according to our customers’ demand requirements. We will continue to serve our paper customers with the No. 1 paper machine at Jackson, Alabama and both machines at our International Falls, Minnesota Mill, which is capable of producing all of Jackson’s paper grades. Looking ahead, as we move from the first and into the second quarter, in our Packaging segment, we expect demand to remain strong and we will continue implementing our previously announced paper price increases. We also expect export prices to move higher. In the Paper segment, we expect volumes to be fairly flat with higher average prices and mix as we continue the rollout of our recently announced paper price increase.

The second quarter will be our busiest of the year for planned annual outages in the Packaging segment with work scheduled at four of the mills. Outage expenses are estimated to be approximately $0.20 per share higher compared in the — to the first quarter. We also anticipate continued inflation with freight and logistics expenses as well as most of our operating and conversion costs. However, energy costs should improve as we move into seasonally milder weather.

With that, we’d be happy to entertain any questions. But I must remind you that some of the statements we’ve made on the call constituted forward-looking statements. The statements were based on current estimates, expectations and projections of the Company and involve inherent risks and uncertainties, including the direction of the economy and those identified as risk factors in our annual report on Form 10-K on file with the SEC. Actual results could differ materially from those expressed in these forward-looking statements.

And with that, Regina, I would like to open up the call to questions, please.

Questions and Answers:

Operator

[Operator Instructions] Your first question will come from the line of George Staphos with Bank of America.

George Staphos — Bank of America — Analyst

Hi, everyone. Good morning. Thanks for the details, and congratulations on the progress guys. I guess the first question that I had given that you’re running really tight at least in terms of your prepared remarks, in terms of managing your customer request, the freight and logistics issues, domestically that we’re seeing, I realize you have customers internationally and they’re long-term relationships, but why the increase in export sales in the quarter, why not try to keep some of those tons domestically, if in fact that’s where you need them? And I had a couple of follow-ons.

Thomas A. Hassfurther — Executive Vice President, Corrugated Products

Hey George, this is Tom, I’ll just answer that real quickly.

George Staphos — Bank of America — Analyst

Good morning, Tom.

Thomas A. Hassfurther — Executive Vice President, Corrugated Products

We had a number of export commitments that had to take — they were running over from the previous year that we had to take care of in the first quarter to maintain our relationships, and so we just had to get that taken care of and we knew full well that we’d also be able to supply our box plants, although with a very tight inventory.

George Staphos — Bank of America — Analyst

Okay, I appreciate that. Second question I had, if you can just give us the normal run down, Tom, perhaps that you gave us on bookings and billings early in the quarter and are you seeing any signs at all of customers trying to conserve on corrugated, given the market that you’ve seen or if anything given this — the growth that we’ve been seeing, are you seeing new applications beyond e-commerce for corrugated? So kind of a couple part question there.

Thomas A. Hassfurther — Executive Vice President, Corrugated Products

Hey, good question, George. First of all through 14 days, our bookings were up 16% versus a year ago. So obviously, the volume remains very robust and we’re obviously very pleased with those kind of numbers and the trend that has just continued right — coming right out of the fourth quarter of last year and continued into this year. There is — I don’t — there is no way customers can, in essence, hoard or order ahead or anything like that with the demand we’re having right now and a lot of our customers report business conditions as good as what we’re talking about, and they’re just trying to keep their head above water and we are, obviously — are keeping them supplied with boxes.

George Staphos — Bank of America — Analyst

Okay, I was really more getting at the point or — if customers are trying to conserve, it sounds like right now, they’re just living hand to mouth and they’ll worry about that or for that matter, the growth outlook once they can kind of catch up. My last question, I know it’s something you might not want to talk too much live mic on, but qualitatively, if we look at where first quartile and a fourth quartile machine might be and containerboard, would it be unduly penalizing to estimate that maybe right now? Jackson is costing you, I don’t know, $10 million a quarter just because of where it is on the cost curve right now relative to where it will be at some point. Thanks guys, and good luck in the quarter.

Mark W. Kowlzan — Chairman and Chief Executive Officer

Yeah, I think everyone could understand that without the capital investment, we are running probably in that high third, low fourth quartile cost portion of a curve. The beauty of it is, it’s very productive, very efficient and providing us the critical tons we need to run the box system. We’ve also — in the last four months, we’ve taken considerable cost out as we’ve learned more about the machine, but the machine has proven to be quite an extremely efficient machine. But the — someone might think about the capital spending that we are undertaking as we speak that will go through next year and the year after. It’s not only the incremental productivity that we’ll capture with the capital spending, but it’s the significant cost reduction that we’ll see over the next two years coming out of that facility. So we have an elegant plan in place and right now, even though the costs are higher, as one would expect, the tons are extremely valuable to our system.

George Staphos — Bank of America — Analyst

Thank you very much, Mark, I’ll turn it over.

Mark W. Kowlzan — Chairman and Chief Executive Officer

Okay, next question please.

Operator

Your next question comes from the line of Mark Wilde with Bank of Montreal.

Mark Wilde — BMO Capital Markets — Analyst

Thanks. Good morning, Mark, and congratulations…

Mark W. Kowlzan — Chairman and Chief Executive Officer

Good morning, Mark.

Mark Wilde — BMO Capital Markets — Analyst

On a very good quarter. Mark…

Mark W. Kowlzan — Chairman and Chief Executive Officer

Thanks.

Mark Wilde — BMO Capital Markets — Analyst

I was wondering — the mill volume was just incredible here in the first quarter, you did about 1.2 million tons and your listed capacity in the K is 4.3 a year. So factoring in Jackson, I wondered if you can just help reconcile at and is this a — if that’s at all sustainable over time?

Mark W. Kowlzan — Chairman and Chief Executive Officer

No one asked us in January what we really produced in Jackson in the fourth quarter, but if you think about what we are producing and what we produced in the fourth quarter and what we produced in the first quarter, the Jackson No. 3 machine on a run rate and looking at its grade mix is producing a little over 100,000 tons a quarter, it’s in that range. And so, on an annualized basis, it’s providing an incremental 400-plus thousand tons a year into the run rate. And part of the reason, again, if you think about the filings, we did not have the machine listed as a true linerboard machine, so we’re still — we still consider it a paper machine, providing us with some much needed linerboard right now. Fast forward, if — to help you with your math, if you assume the 4.3 million, plus the 400,000 tons, you get to — pretty close to your number.

The other factor that will give you a little understanding on is the project I mentioned on the call just a few minutes ago, the Wallula OCC project. Not only was that going to be a fiber flexibility opportunity for the Wallula Mill but anybody that understands fiber physics, recycled fibers of any kind drain and dry much more easily than virgin fiber. And so, by mixing now the OCC in with our virgin kraft fiber at the Wallula Mill, we’re seeing, as we expected, much higher speeds on the machines, and in particular, the No. 3 machine, the drainage pressing, drawing is far superior than it was before. And so, starting in February, when we started the OCC plant up, we’ve been averaging close to 100 tons a day more production on that machine. And so that’s another piece of the incremental first quarter tons that was built in and that you’ll see for the rest of the year also. So that definitely helps…

Mark Wilde — BMO Capital Markets — Analyst

Okay, and then…

Mark W. Kowlzan — Chairman and Chief Executive Officer

Go ahead.

Mark Wilde — BMO Capital Markets — Analyst

Yeah, yeah. That’s good. I was just going to say, I think when you first converted Wallula, you were talking about 400,000 tons there but the potential to get it to fiber 550,000 where would that machine be right now, taking into account the OCC mix?

Mark W. Kowlzan — Chairman and Chief Executive Officer

Well, the whole mill, because don’t forget the No. 2 machine is sitting there making medium. We had talked all along that, that mill had the opportunity to get close to that 6,000 ton annualized run rate for both machines and where they’re essentially right now.

Mark Wilde — BMO Capital Markets — Analyst

Okay, all right, that’s helpful. And just secondly, Mark, is there any way to help us think about the impact of this adverse weather in the first quarter? I would have expected that, that would have caused issues perhaps down at DeRidder and maybe kind of across your converting business.

Mark W. Kowlzan — Chairman and Chief Executive Officer

Let me — I’m just — I’m going to say few things and then Tom and Bob can add to that. We were very fortunate that we were not as severely impacted as some competitors. The DeRidder mill was able to run through this, we had transportation, logistics problems trying to move raw materials in and finished goods out, we had the bigger impact in the Texas region in the Dallas metroplex area with our box plants, we had some of the box plants, obviously, down. Tom, do you want to add a little color to the — let’s say, the two-week period when we had a lot of the severe weather?

Thomas A. Hassfurther — Executive Vice President, Corrugated Products

Yeah. Mark, we obviously lost significant production time in those box plants, we made up for a lot of that in the subsequent month but it was a very, very difficult month. The ag crop obviously down, and down the Rio Grande Valley was dramatically impacted, which also impacted our volumes in that area. In addition, you may be aware, the impact of the chemical plants that provide the chemicals that make up our glues and adhesives was — it was definitely impacted and we’ve been suffering shortages of that product across all the companies and we’ve had to take some extraordinary measures to make sure that we can continue to run at much higher expense to do so.

Mark Wilde — BMO Capital Markets — Analyst

Okay, all right. That’s really helpful. I’ll turn it over, guys. Thank you.

Mark W. Kowlzan — Chairman and Chief Executive Officer

Okay. Thanks, Mark. Next question, please.

Operator

Your next question comes from the line of Mark Connelly with Stephens.

Mark W. Kowlzan — Chairman and Chief Executive Officer

Good morning, Mark. Hello?

Operator

Mark, you may be on mute. And our next question will come from the line of Mark Weintraub with Seaport Global.

Mark Weintraub — Seaport Global Holdings LLC — Analyst

Thank you. I believe you said that the impact from pricing in your domestic business was $0.52 from the fourth quarter to the first quarter, was that right, did I hear that right?

Mark W. Kowlzan — Chairman and Chief Executive Officer

Yes, Mark.

Mark Weintraub — Seaport Global Holdings LLC — Analyst

So if I translate that into kind of millions of dollars, it sounds like $60 million plus, which if you’re making 1.2 million tons of containerboard on an integrated basis, it seems like $50 per ton. So is that — and if that’s the case, have you already gotten the lion’s share of that November increase or is part of that mix and there is still a decent amount to come?

Thomas A. Hassfurther — Executive Vice President, Corrugated Products

Hey, Mark, this is Tom. We have gotten most of the increase from November in the first quarter. We do have some that trails into the second quarter and even into the beginning of the third quarter just based on contracts, but the lion’s share is — has been accomplished in the first quarter.

Mark Weintraub — Seaport Global Holdings LLC — Analyst

Okay, thank you.

Operator

Our next question…

Mark W. Kowlzan — Chairman and Chief Executive Officer

Next question, please.

Operator

Will come from the line of Adam Josephson with KeyBanc. Please go ahead.

Adam Josephson — KeyBanc Capital Markets Inc. — Analyst

Thanks, good morning, everyone, and congrats on a really good quarter.

Mark W. Kowlzan — Chairman and Chief Executive Officer

Good morning, Adam. Thanks.

Adam Josephson — KeyBanc Capital Markets Inc. — Analyst

Good morning, Mark. Couple of questions on guidance, obviously, pre-pandemic, you gave quarterly guidance, you haven’t resumed doing so since, even though you’re — you put up really good numbers in this quarter and the outlook seems pretty good. Has your philosophy changed about providing quarterly guidance and — or if not, when do you intend to resume giving guidance?

Mark W. Kowlzan — Chairman and Chief Executive Officer

I think the way we would answer that is that there is still so much uncertainty in the world around us. If you think about the number that Tom just gave you for the volume, if a year ago somebody told you that volume is going to be up 16% year-over-year and on a given month, no one would believe you. And so, until the pandemic winds down and we come back to some early sense of what we think the new world normalcy will be, we believe it’s in our best interest and the shareholders’ best interest to not give guidance.

Adam Josephson — KeyBanc Capital Markets Inc. — Analyst

Yeah, no, I completely understand. You stole my thunder, I was going to ask you, I mean — and I think, in 2019, your per day shipments were up about 1%, in the first quarter, they were up 8.3% and you’re talking about bookings up 16%. So it’s — is there any way for you to separate with the impact of the pandemic and all the stimulus and talk about what you think normalized demand even is or is it just impossible to do?

Thomas A. Hassfurther — Executive Vice President, Corrugated Products

Hey, Adam, this is Tom.

Adam Josephson — KeyBanc Capital Markets Inc. — Analyst

Hey, Tom.

Thomas A. Hassfurther — Executive Vice President, Corrugated Products

It’s virtually impossible to do, let me tell you, because our customer base across the board with the exception of a few are up dramatically. And so, it’s not just e-commerce as an example, being the only segment that’s really driving this, it’s a lot of segments that are going on and I think obviously the stimulus is — it helps and has been a plus for us. But again, as Mark said, we’ve got to wait until things settle down to really be able to get our arms around what’s really going on in the world.

Adam Josephson — KeyBanc Capital Markets Inc. — Analyst

And Tom, why — any explanation for April? I mean, it’s just — it’s so outsized, it’s just — it’s mind-blowing, is there any logical explanation that you can come up with?

Thomas A. Hassfurther — Executive Vice President, Corrugated Products

Well, I think it’s — I think what we’re seeing is, we’re seeing the exact same thing that we saw starting in the fourth quarter. Fourth quarter was up dramatically and rolled right into the first quarter and now it’s rolling right into the second quarter. So I’m — to try to predict it would have been difficult to do, and we expect it just like a lot of other people expected that the fourth quarter that things might slow down a little bit from the fourth quarter, but they just haven’t. So it remains incredibly robust and I think we’ve got a lot of customers that are way behind on their shipments as well. So I think it will continue going forward for a while.

Adam Josephson — KeyBanc Capital Markets Inc. — Analyst

Yeah, no, thanks. I mean, Mark, one on uncoated freesheet. So just as part of your decision to convert No. 3, how are you thinking about demand trends in that business this year and longer term, do you expect any rebound this year or thereafter? And relatedly, how did that affect your conversations with your large customers communicating this decision on your part and — or do they express any concerns about supply as a consequence?

Mark W. Kowlzan — Chairman and Chief Executive Officer

Regarding the first part of the question, until again — if you think about the biggest demand for cut-sized paper would be office, activity in schools, business activity. Until again at such time as businesses resume more of a normal pattern of in-office activity, you won’t see cut-size demand pick up dramatically. As schools come back and go back to a more normalized school, they function, more cut-size use will take place in schools. So I would expect starting in the fall semester for the new school year that more demand will take place.

I can’t quantify that for you, I would just say that it should move up positively, we do think ultimately there the pandemic has created a new opportunity for people that they’ll work from home, they’ll work part days. I mean, people are in the business world are obviously trying to understand how we will all run our businesses in the future and whether we’ll have people in the office, full-time, part-time, flex time. And so, paper demand will go along with that. We are anticipating that there will be some permanent demand destruction that comes out of the pandemic, we also understand that because of our demand for containerboard and the opportunity we have with Jackson, that as we’ve always looked at the paper business that it was the right decision to make for all the reasons we talked about over the last six months to utilize the asset and exit some of this market. And regarding our customers, I’ll answer that question by just saying, we are running to the demand of our customers, large and small. And I’ll leave it at that.

Adam Josephson — KeyBanc Capital Markets Inc. — Analyst

Thank you so much, Mark.

Mark W. Kowlzan — Chairman and Chief Executive Officer

Next question, please.

Operator

Your next question comes from the line of Mark Connelly with Stephens.

Mark Connelly — Stephens Inc. — Analyst

Thank you. Hopefully, you can hear me this time.

Mark W. Kowlzan — Chairman and Chief Executive Officer

Yeah. Good morning, Mark.

Mark Connelly — Stephens Inc. — Analyst

Great, thanks. Sorry about that. So just a question about maintenance and the changes you made. Some competitors are telling us that it’s gotten harder to estimate the cost of maintenance because of changes the way projects are being scheduled. Is that a factor or is this just a change in your plans?

Mark W. Kowlzan — Chairman and Chief Executive Officer

The increase in cost is related — we — it goes back to — we actually added the DeRidder No. 3 machine to this second quarter’s outage plan,that was not in the original plan and so, it’s not an escalation or an inflationary matter. It’s just that we absolutely added an additional outage into this year’s plan that did not exist in January. And the DeRidder No. 3 machine work came about during the pandemic year last year. A lot of work — we avoided some work. We pushed off some work. Some work, we thought we could get by, by not having to do even this year, but as January and February wore on, as an example, we observed some opportunity, shall we say, on the DeRidder No. 3 machine that we felt needed to be addressed and we have the resources and the materials available. So we went ahead and took the machine down for the better part of the week, last week, as a matter of fact, and addressed opportunities and the requirements on that machine and put it in good shape. And so that machine has gone through its outage but that would be the qualifying difference in the number that Bob’s going to talk to you about. Bob, do you want to add a little color to the number?

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

Okay, anything else?

Mark Connelly — Stephens Inc. — Analyst

That’s super. So just one question on the headwinds, obviously, last quarter headwinds were more of a — an overall challenge than they were this quarter, and yet you’ve got some headwinds that got worse. I was hoping you could put some of these headwinds in context for us and tell us which are still getting worse and where you’re getting some relief.

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

Yeah, Mark, this is Bob. It’s sort of as I think we said in our prepared remarks, the headwinds continue pretty much as we look from first quarter to second quarter, we expect them to continue in almost all cost areas, except maybe energy, as we said, and that’s really because of our improved usage, not so much from prices getting — going lower. But in recycled fiber, even certain chemicals, repairs, materials, outside services, I mean, you name it, they all have converting cost, they all have an inflationary component that we see continuing into the second quarter. That and, of course, freight. Freight is another one that is not — that just — for all the reasons that Mark had mentioned earlier, there are several things driving it, but that is not going to slow down at all as we go to the — from the first to the second. So it’s pretty much across the board.

Mark Connelly — Stephens Inc. — Analyst

Certainly, that’s unfortunate. Thanks.

Mark W. Kowlzan — Chairman and Chief Executive Officer

Next question, please.

Operator

Your next question comes from the line of Gabe Hajde with Wells Fargo Securities.

Gabe Hajde — Wells Fargo Securities — Analyst

Mark, Tom, Bob, good morning.

Mark W. Kowlzan — Chairman and Chief Executive Officer

Good morning, Gabe.

Gabe Hajde — Wells Fargo Securities — Analyst

You mentioned a heavy maintenance quarter this period, and obviously, ended the March quarter with pretty low inventories. I appreciate its volume-dependent, but as it sits today, assuming, I guess, some persistence on the demand side, would you say, it probably wouldn’t be until the end of the third quarter before you can kind of get your inventory position sort of normalized? And I’m somewhat asking, I mean, the best analogy I can come up with is sort of an accordion of cars going down the freeway and we haven’t had stock-outs in the grocery aisles, but it sounds like some of your — maybe some of your industrial customers are behind on their inventories last delivery. So I’m kind of curious just as you replenish inventories across the system that it could take even longer than what maybe some folks are anticipating.

Mark W. Kowlzan — Chairman and Chief Executive Officer

Yeah. You could look at it that way. Again, I would hope that we get our inventories in a more comfortable position by the — say, the end of the third quarter, but don’t forget, we also have a big outage in the fourth quarter at DeRidder, which we called out last year, that is the DeRidder No. 1 machine, which is a long outage. And we got boiler work, we got a lot of recovery boiler work we’re doing. And in the machine itself and opportunities on the machine, and so that will take a significant amount of tons out in the fourth quarter. That’s part of the maintenance cost for the maintenance for the year, but also it impacts how we end the year. Tom?

Thomas A. Hassfurther — Executive Vice President, Corrugated Products

Gabe, we have a very, very intense and specific plan in place, understanding that our inventories are going to be extremely tight all the way through the year given these outages that we have, if, in fact, the volume doesn’t drop off dramatically. The volume drops off dramatically, we got a chance of catching up a little bit, but I think it’s important to plan ahead and to plan for what you see as the realistic scenario. We’re doing so, we have to do these outages, we have no choice. As you know, the — not only ourselves, but some others in the industry, avoided some outages last year and we just have no choice but to do them this year and we’ll manage through them and our customers understand, our box plants understand, and we’ve got a great plan in place. So I’m very confident that we’ll be able to manage through it, but it’s going to be a while before we can catch up on those inventories.

Gabe Hajde — Wells Fargo Securities — Analyst

All right, thank you guys for the detail. I guess, the second question. And again, appreciate you guys don’t dictate what the publication does, but to the extent you can comment, were you surprised at all in terms of the phased sort of recognition on benchmark prices and then, more importantly, I suspect that realization kind of as you see it flow through your system would be kind of similar to the November hike and that maybe limited impact in Q2 mostly realized by Q3 and then fully by Q4, is that a fair way to think about it or anything different that you’d guide us towards?

Thomas A. Hassfurther — Executive Vice President, Corrugated Products

We know, Gabe, we do — we don’t comment much on our pricing other than to say we have a very disciplined approach to the — to our price increase. Across the customer base, that’s 15,000-plus, we have a variety of contracts, agreements, etc., which roll in typically over about a 90-day period. So you can — the — what occurred for pulp and paper, I mean, I understand where — somewhat where they’re coming from, it’s now fully in place. So I think you can kind of take that and take what I told you about the 90-day period and kind of roll that out and that will give you an indication of when that gets — when that price increase gets fully implemented.

Gabe Hajde — Wells Fargo Securities — Analyst

Thank you.

Mark W. Kowlzan — Chairman and Chief Executive Officer

Next question, please.

Operator

Your next question comes from the line of Phil Ng with Jefferies.

Philip Ng — Jefferies — Analyst

Hey, guys, congratulations on a…

Mark W. Kowlzan — Chairman and Chief Executive Officer

Good morning, Phil.

Philip Ng — Jefferies — Analyst

Strong quarter. Box demand was obviously really strong this year and it’s been pretty impressive. Any color on the makeup of the end markets and if that profile on the growth side have changed much since perhaps the back half of last year versus how things are kind of shaping up this year?

Mark W. Kowlzan — Chairman and Chief Executive Officer

I didn’t hear the second half of the question, Phil, can you repeat that again?

Philip Ng — Jefferies — Analyst

Yeah, I’m just trying to get a better feel for the end market profile growth that you’re seeing versus second half of 2020 versus now, is it more broad-based, were there any end markets that stood out this year versus, let’s say, the second half of 2020?

Thomas A. Hassfurther — Executive Vice President, Corrugated Products

Well, I think the number 1 market that probably stands out more so than any was e-com, but it’s — and e-com is spread out along all sorts of product lines today and all sorts of different companies. So that’s obviously one of the trends, we talked about it last time that it’s become apparent that the consumer preference for e-commerce has accelerated. We’re seeing something that probably would have taken three to five years to take place, that’s now compressed into six months or a year, because of the pandemic, that’s one of the drivers, but I got to tell you that across the board, with this broad customer base of 15,000-plus customers, with the exception of just a few small industries, it’s incredibly busy and demand is very high. So it’s — I’m very, very, very pleased with the trends we’re seeing and I think that’s kind of an indicator of the potential going forward as well.

Philip Ng — Jefferies — Analyst

So Tom, are you starting to see like an uptick, let’s say, into these manufacturing end markets that weren’t as obvious last year. I’m just trying to get a feel to mix, I know the e-com piece is going to be strong, is it a little more broad-based? I mean, I assume it has to be just given how strong demand is.

Thomas A. Hassfurther — Executive Vice President, Corrugated Products

No, it’s — yeah, you’re absolutely right, it is broad-based, no question about it. It’s broad-based and in fact, we’ve got customers who could be even busier, if they could get their — if they could get supplied with some of their products, they’ve got very tight supplies on their part as well of either ingredients or parts that go into their products. And otherwise, they’d be even busier. So there is even a good backlog building.

Philip Ng — Jefferies — Analyst

Got it. And then, you mentioned earlier that inventory is going to be pretty tight throughout the year, is that going to be a governor in terms of your ability kind of supply boxes to your customer or you have it in a pretty good spot in terms of being able to kind of supply that inventory.

Thomas A. Hassfurther — Executive Vice President, Corrugated Products

No, when I talk about inventories being tight, we won’t have some of the comfort level that we might like to have but we’ll certainly have enough inventory to supply all of our customers with their needs.

Philip Ng — Jefferies — Analyst

Okay, that’s helpful. And just one last quick one for me. Appreciating Jackson, now it’s fully ramped up and the capital is not in yet, do you see from an operating cost standpoint as you kind of continue to run this year, does that come down a little bit this year or is that going to be more of a 20 — a ’22 event once you have it full — ramping to that second phase?

Mark W. Kowlzan — Chairman and Chief Executive Officer

As I said earlier, just in the last six months, we’ve taken a significant amount of cost out and opportunities that were discovered on a daily basis, and that will continue through the year. And we — let’s say, we’ve learned a lot of things about the machine, but machine right from the get-go has been an extremely efficient productive machine for us and we’ve made hundreds and hundreds of changes in the process from the pulp mill, and the liquor cycle, and wood yard, and on, and on and on that have helped us take some cost out of the finished product. So we’re very pleased with where we are today and we expect to continue that effort and it gets us setup for the first major phase outage next year.

Philip Ng — Jefferies — Analyst

Okay, super. Thank you, guys.

Mark W. Kowlzan — Chairman and Chief Executive Officer

Thank you. Next question.

Operator

Your next question comes from the line of Neel Kumar with Morgan Stanley.

Neel Kumar — Morgan Stanley — Analyst

Hi, good morning. Thanks for taking my question.

Mark W. Kowlzan — Chairman and Chief Executive Officer

Good morning.

Neel Kumar — Morgan Stanley — Analyst

I know you touched on increases in recycled fiber prices earlier, but I was just curious whether you’re seeing any inflation in your virgin fiber baskets? I mean, are there any large differences in terms of those virgin fiber prices by region across your network of mills?

Mark W. Kowlzan — Chairman and Chief Executive Officer

That’s been fairly flat. You see the weather-related phenomenon that impacts pulpwood but in general, it’s up slightly, but nothing significant like some of the other factors that we’ve talked about. Again, it’s primarily weather-related events, not demand — absolutely demand-related.

Neel Kumar — Morgan Stanley — Analyst

Great, that’s helpful. And then, in paper, could you just discuss what you’re seeing in terms of demand trends so far in April? And how — I mean, generally, think about the flow through of the price increases for uncoated freesheet, is there a lag similar to what we’ve seen corrugated of about a quarter or so?

Mark W. Kowlzan — Chairman and Chief Executive Officer

No, I think again the — what was reported in the index Friday night, pretty well sums it up in terms of how much of the price increase has been picked up and we would agree with what the indexes saying with where we are with our cut-size pricing and the uncoated freesheet pricing. And then, as far as — again demand, it’s — we gave you our absolute volume and where we are, but the price is moving up accordingly. And I think, it’s reflected well in what the index is reporting.

Neel Kumar — Morgan Stanley — Analyst

Got you. And my question on the uncoated freesheet pricing was actually more of when it flows through from the index to your customer pricing, is there a lag similar to what you see in corrugated?

Mark W. Kowlzan — Chairman and Chief Executive Officer

Yeah, I mean, there is always that little bit of a lag that takes place from the time you announce it and then the time that the index actually calls it out and picks it up and your deliveries and your invoicing and billing, etc.

Neel Kumar — Morgan Stanley — Analyst

Great, thank you.

Thomas A. Hassfurther — Executive Vice President, Corrugated Products

But it’s — as you’re talking about a couple of months of lag type of activity.

Mark W. Kowlzan — Chairman and Chief Executive Officer

Next question, please.

Operator

Your next question comes from the line of Anthony Pettinari with Citi.

Anthony Pettinari — Citi — Analyst

Hey, good morning.

Mark W. Kowlzan — Chairman and Chief Executive Officer

Morning.

Anthony Pettinari — Citi — Analyst

Regarding a — regarding the increase in capex guidance for what you talked about on — in the previous quarter, is that all due to Jackson or are you pulling forward or accelerating any other kind of high return projects or any other areas that you’d call out? And then, understanding you’re not giving forward guidance, but is there a way to think about what normalized capex for PCA would be when you get finished with Jackson?

Mark W. Kowlzan — Chairman and Chief Executive Officer

The first part of your question is, yes, Jackson is the primary mover that’s increasing the capex for the year. The second part of your question, as far as what’s normal in the new world, I can’t answer that. We’re always mindful of what opportunities we have and we’re very fortunate that a few years back, we undertook a heavy reinvestment in the box plants and recapitalizing the opportunities in a lot of our plants, and in taking care of the mills in the manner that we do. So if you look at our capital effectiveness and the returns on our capital spending, we’re very pleased with the returns that we see. And so, capital is a matter of affordability and opportunity, and obviously, I don’t ever see us not having opportunities and then, it becomes a matter of affordability, and so I think that’s the way you have to look at it, but we — for the most part, we always have a portfolio of opportunities identified in the box plants and the mills that we go after short term and long term, and that’s what’s giving us this opportunity to be able to take care of the volume growth that you’re seeing.

Anthony Pettinari — Citi — Analyst

Okay, okay, that’s very helpful. And then, Tom, earlier you talked about raw material availability issues and I think you specifically called out adhesives and glue, understanding the cost headwinds are continuing into 2Q. In terms of outright shortages or just not being able to secure the raw materials, has that gotten material — materially better as some of these Gulf Coast plants have come back online or is that still a nagging issue and is it something that’s impacted sales or orders or any kind of color you can give there?

Mark W. Kowlzan — Chairman and Chief Executive Officer

Well, Anthony, I think, we’re fortunate we got ahead of this early in the equation. We took some measures to make sure that we would not be cut as short as maybe perhaps some others. We’re still hearing from suppliers, some are saying that things should be back to a more normalized rate by the third quarter, some others are saying now maybe not so much, the plants, the chemical plants are back up at some of these — some of the chemicals that they make that go into the adhesives are what I’d say less important to those chemical plants than other chemicals. So we’re planning to do what we need to do throughout the year to make sure that we’re taking care of and that we don’t have any customers that don’t have boxes because of adhesive, we’ll be able to satisfy all those needs. But it’s going to be — it’s more costly to do it, there is no question about it. And I think we’ll continue to have that headwind, probably through the year, at least that’s what we’re planning on. But again, we’ve got the contingency plans in place to take care of that.

Anthony Pettinari — Citi — Analyst

Okay, that’s very helpful. I’ll turn it over.

Mark W. Kowlzan — Chairman and Chief Executive Officer

Thank you. Next question, please.

Operator

Your next question will come from the line of Kyle White with Deutsche Bank.

Kyle White — Deutsche Bank — Analyst

Hey, good morning. Thanks for taking the question. I know you talked about recycled fiber costs in general increasing from these current levels, but could you provide a specific near-term outlook and assumptions for OCC going forward?

Mark W. Kowlzan — Chairman and Chief Executive Officer

Yeah, Kyle. Certainly, expecting they’ll move up in the second quarter and for the full year, we usually don’t go out that far, but they could be up close to 50% over last year’s average, something in that ballpark is what it seems like right now.

Anthony Pettinari — Citi — Analyst

Got it. With the containerboard price increase in November, another — the recent one here in March and April, I assume it’s expected to fully offset the increased inflation headwinds you’re seeing or expect going forward and do you think this new pricing level reflects for how tight the market is?

Mark W. Kowlzan — Chairman and Chief Executive Officer

And again it’s — I think the pricing is a reflection of the demand in the market for the product, and then obviously there are inflationary factors that weigh into a producers position and how they have to operate, but the — but demand is the overall driver of what’s moving the — these two price increases.

Thomas A. Hassfurther — Executive Vice President, Corrugated Products

And I’d also add that demand is up significantly worldwide, not — this isn’t just domestic, this is around the world.

Kyle White — Deutsche Bank — Analyst

Got it. I’ll turn it over. Good luck for the year.

Mark W. Kowlzan — Chairman and Chief Executive Officer

Thank you. Next question.

Operator

[Operator Instructions] Your next question comes from the line of Cleve Rueckert with UBS.

Cleveland Rueckert — UBS — Analyst

Great, thanks very much for taking the questions. And just two quick ones for me. I’m wondering if you can give, maybe just a little clarity, end of Q1 was pretty dynamic with the weather and everything, but how did volumes trend in corrugated shipments on a per day basis versus that 8.3% that — they grew through the quarter. I’m just wondering how the quarter developed from a demand perspective.

Thomas A. Hassfurther — Executive Vice President, Corrugated Products

Well, January was obviously up, February was — slowed down a little bit and it was all weather-related, and then, March, it was incredibly high again because we were catching — not only the demand in March, but also we were catching up some of what we did get shipped in February.

Cleveland Rueckert — UBS — Analyst

Okay. So would you — I mean, would you say, demand was kind of flat around that and low in February and catch up in March?

Thomas A. Hassfurther — Executive Vice President, Corrugated Products

Demand was — demand obviously was up significantly during the quarter and it was pretty much steady January, February, March. It’s just that as our numbers would have been significantly higher for March, because of the weather-related issues down in Texas, as an example, where we have a large footprint, we didn’t get as — we didn’t get all the volume out the door in the month and it tracked over into March. So I’m just kind of giving you a little flavor. January, very strong, February would appear to be not quite as strong, but it still was very strong. It just looked like it wasn’t quite as strong because we didn’t get the shipments. And then, March jumped up dramatically, but that was driven primarily by some of the shipments we didn’t have in — we didn’t get done in February. So overall, when I look back, I say, the demand was — as we said, coming out of the fourth quarter with incredibly high demand, it remained essentially very close to that going out — going through the entire first quarter, and now you’re seeing same indications starting into the second quarter.

Cleveland Rueckert — UBS — Analyst

That’s very clear. Thanks for that color. And I know you touched on it a bit earlier but I just — I want to ask a little bit more directly, given the tightness in the corrugated market, I mean, are you seeing any customers or maybe box buyers more generally, not specifically your customers, switching away from paper-based packaging because they simply can’t get enough?

Thomas A. Hassfurther — Executive Vice President, Corrugated Products

No, it’s quite the opposite to tell you the truth, because of our sustainability story that we have in our business, because of the way we operate this business, the 90-plus-percent of the boxes to get recycled, etc. People want to be in paper, they don’t want to be in plastic anymore. So as an example, we’ve got some customers that had been shipping in plastic pouches, their e-commerce in plastic pouches, and they want to move back to boxes. So there is — and that’s — I mean, that’s a huge segment that’s going out and plastic pouches, as an example. So I think there are great opportunities going forward for paper-based packaging.

Cleveland Rueckert — UBS — Analyst

That’s it for me. Thank you very much for the questions. Appreciate it.

Mark W. Kowlzan — Chairman and Chief Executive Officer

Thank you. Next question.

Operator

Mr. Kowlzan, I see that there are no further questions. Do you have any closing comments?

Mark W. Kowlzan — Chairman and Chief Executive Officer

Yes. Everyone, thank you for joining us, and look forward to talking with you in July for the second quarter earnings call. Everyone, stay safe and be well, talk to you in July. Have a good day. Buh-bye.

Operator

[Operator Closing Remarks]