North American pulp and paper industry profit margin at 4.2% in 1Q 2023 with 8.3% drop in revenue

Industry leaders said low demand, high inflation and changing consumer spending are to blame as profit margins reach lowest point since 1Q 2012

North American pulp and paper companies’ profit margins dipped to 4.2% in the first quarter of 2023, which was significantly down from a 10% margin in the first quarter of 2022 and an 8% margin in the first quarter of 2021, when pulp and paper prices were touching high mark levels. The industry margin before the pandemic was at 4.9% in the first quarter of 2020 and 6% in the first quarter of 2019.

In the last decade, the lowest margins for a first quarter were 3.5% in 2012, 4% in 2011, and 1.7% in 2010, according to Fastmarkets’ PPI Pulp & Paper Week data.

Total earnings for the 21 largest pulp and paper firms in North America surveyed by P&PW in the first quarter of 2023 decreased 59.4% to $1.17 billion compared with first-quarter 2022 earnings. The industry’s first quarter profit margin was also 18.9% lower than its fourth quarter margin.

Also, industry revenues declined 8.3% to $27.95 billion year-over-year and was flat compared with fourth-quarter 2022 sales.

A “difficult and challenging” quarter for pulp and paper

Pulp and paper executives on first quarter earnings calls told of lower demand for their products, high inflation, and shifting consumer spending as drivers for a “difficult” and “challenging” quarter.

Packaging Corp of America (PCA) CEO Mark Kowlzan said on the company’s earnings call late in April that its packaging segment demand was below expectations for the quarter.

Consumer spending continues to be negatively impacted by higher interest rates, persistent inflation and skewed consumer preferences towards services v.s. durable and non-durable goods.
Mark Kowlzan, CEO, PCA

WestRock CEO David Sewell said on the firm’s earnings call May 4 that “their corrugated packaging and global paper segments remained impacted by lower demand, high inflation, and shifting consumer spending.”

“While we faced difficult year-over-year comparisons in the quarter, we executed very well in a challenging environment,” Sewell said.

WestRock was No. 1 in first quarter revenue among the 21 publicly traded companies on the P&PW list. WestRock sales for the first quarter 2023 totaled $5.22 billion, 2.9% lower than the same quarter last year.

International Paper (IP) was No. 2 in revenue this quarter, with sales at $5.02 billion, or 4.1% lower than a year ago, followed by Graphic Packaging, with $2.43 billion in sales, PCA with $1.98 billion, and Sonoco with $1.73 billion.

“We continue to navigate a challenging demand environment as our customers and the broader supply chain work through elevated inventories of their products,” IP CEO Mark Sutton said on the company’s earnings call on Apr. 27. “We also believe consumer priorities remain focused on services, as well as non-discretionary goods, which has been influenced by inflationary pressures, rising interest rates, and the pull forward of goods during the pandemic. Margins were also under pressure from lower prices across our portfolio, partially offset by additional benefits from lower input costs.”

Mill closures and downtime

Most paper companies extended their maintenance outages during the first quarter to try to adjust production to demand and avoid price decreases for their products, pushing the industry operating rates to low levels. Due to downtime, most mills’ costs increased in the quarter, putting pressure on their margins.

The inventory destocking in North America was still on course in the first quarter and is expected to go into the second quarter, according to firms. Also, several paper companies announced “less-efficient” mill or machine closures, while a few started up new capacity especially in containerboard.

Sewell mentioned that WestRock is in the process of closing four of its “less efficient converting sites” across both corrugated and consumer segments.

“With these moves, we are consolidating our production into other more efficient facilities and improving our throughput to enable us to better serve our customers.”

On the mill side, Sewell noted that WestRock last year closed its Panama City, FL, kraft linerboard and pulp mill, and eliminated corrugating medium production in St. Paul, MN. “Earlier this week, we announced the closure of our North Charleston, SC, (linerboard, boxboard, and saturating kraft) mill,” he said.

“We intend to continue these mill evaluations with a focus on driving growth with our most efficient assets,” Sewell said on May 4.

Graphic Packaging CEO Michael Doss told analysts on May 2 that the company would shut down its Tama, IA, coated recycled boxboard machine in the second quarter, due to increased output on its Kalamazoo, MI, mill and Tama’s high operating cost.

Doss noted that, amid a challenging macroeconomic backdrop, Graphic Packaging was able to drive continued net organic sales growth and margin expansion during the first quarter.

“This performance is a testament to the resiliency of our business model, as well as the strong and growing consumer demand for renewable recyclable fiber-based packaging,” Doss said.

Graphic Packaging increased its revenue by 8.6% to $2.43 billion in the first quarter and its profits increased 59.1% to $237 million.

Pactiv Evergreen decided to close its “low-margin” Canton, NC, 620,000 tons/yr boxboard and uncoated freesheet (UFS) paper mill by June “to ensure the company remains competitive.” The company is also closing a converting facility in Olmsted Falls, OH, and looking into “strategic alternatives” for its Pine Bluff, AR, paperboard mill, as well as its Waynesville, NC, converting facility.

Printing and writing paper continue to be affected by inventory destocking

In printing and writing, producers operated at 76% of their capacity in the first quarter due to weak demand, according to industry statistics.

UFS producer Sylvamo CFO John Sims said on the earnings call on May 9 that the company’s first quarter paper volume reflected “continued inventory destocking and the worse than expected seasonal demand slowdown in Latin America.”

Sylvamo is the No. 2 uncoated freesheet (UFS) producer by capacity in North America, after Domtar. Sylvamo’s UFS sales in North America were flat at $505 million in the first quarter of 2023 over a year ago, while its operating profit increased 56.5% to $97 million.

Tissue sees better revenue

In tissue, Kimberly-Clark and KP Tissue reported higher revenues in the first quarter, driven by higher prices. Even though KP Tissue reported a net loss in the quarter, Kimberly-Clark had a 40.4% increase in its earnings to $240 million.

Wood products face demand challenges

On the wood products side, West Fraser Timber reported again lower sales in the quarter, at $1.63 billion, and a net loss of $42 million. “In the first quarter of 2023, we faced challenging demand markets due in part to seasonal effects as well as higher mortgage rates that continued to moderate new home construction activity in the US,” West Fraser CEO Ray Ferris said in the company’s earnings report.

Canfor, which is in the lumber market, as well as in pulp and paper, also reported a 41.4% decline in its first quarter sales and a net loss of $107 million.

“This was another challenging quarter for our lumber business,” Canfor CEO Don Kayne said in the company’s earnings report. “In addition, we announced and began implementing a restructuring of our British Columbian lumber operations to better align manufacturing capacity with the available long-term fibre supply. Despite improved earnings, this was also a difficult quarter for our pulp business, driven by the wind down of the pulp line at the Prince George Pulp and Paper mill.”

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Cost of goods sold

Graphic Packaging climbed to the first position with the lowest cost of goods sold (COGS) as a percentage of sales rank among the 10 North American forest products industry firms analyzed by P&PW in the first quarter 2023. Graphic Packaging’s rate was 77.0%, followed by PCA with 78.2%. Both companies reported margins of almost 20% or higher than 20% for the quarter. Sonoco was third in COGS with a 78.4% rate. WestRock’s rate was 82.6%.

This article was first published in PPI Pulp & Paper Week, the industry’s most trusted pulp and paper market news and prices for North America. Speak to our team to find out more about our news and market analysis services.

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