Paper & Packaging Outlook COVID-19 Edition – Interview with Rick Mitchell, CEO of Mac Papers

What were the first indications that Covid-19 was going to have an impact on Mac Papers?
We knew our business would likely be impacted when stay-at-home and shelter-in-place orders started being issued throughout the Southeast U.S., which is where our customer base is predominantly located. All of our locations, including our envelope converting operation, were deemed providers of essential services based on CISA (Cybersecurity and Infrastructure Security Agency of the U.S. Department of Homeland Security) guidelines, and have remained open throughout the pandemic. Our commercial print, and the majority of our manufacturing customers, were also deemed as essential businesses and remained operational. However, many other segments of our customer base, including most of the businesses served by our printer customers, suffered prolonged closures and loss of business due to the pandemic, notably the hospitality (hotels, restaurants, and bars), travel, tourism and education sectors.

Once you realized that the virus was not going to be contained to Asia and was likely to spread to the U.S., how did the management team proceed?
The safety and wellbeing of our employees is of the utmost importance to us, so we immediately put policies and procedures in place that were in accordance with CDC guidelines, and started a continuous cadence of communications with our team members. Beginning the third week of March, just a few days after the Monomoy acquisition closed, we arranged for the entire corporate office in Jacksonville, over 120 team members, to work remotely from home. Additionally, we implemented business continuity procedures and policies for our locations across the Southeast as well as for our envelope converting operation. Aligned with our core value of Trusted Reliability, continuing to meet our customers’ needs safely and efficiently, regardless of how the unprecedented pandemic would evolve, was a primary focus for us. Accordingly, we were quick to create an all-hands-on-deck crisis management team with members of the senior management team, our Monomoy team and our branch managers that met daily during the early weeks of the crisis. Our first tasks were to flex employment with a much lower level of demand and to build cash, mainly through inventory control in order to preserve liquidity and pay down our acquisition debt. Throughout all of the initial work we put in place to prepare for a reduction in demand, we kept in close communications with our core customers to understand their business projections so that we were aligned going forward.

How have you seen Covid affect your supply chain?
Supply chain disruptions have been minimal and we have been successful in minimizing impacts to our customers due to several factors:

• Our extensive network of company-owned warehouses and private fleet of trucks provides us with a redundancy of assets needed to serve our customers’ needs effectively, from multiple locations.
• Our purchasing teams and business leads remained in close contact with our primary mill partners and key suppliers, offshore and U.S.-based, across all lines of business. This provided us with the latest information on possible supply chain disruptions due to the coronavirus.
• The vast majority of our paper and packaging products are sourced domestically, and inventory is not currently a challenge with the exception of some facility supplies due to the extraordinarily high demand for products such as sanitizers and PPE.

What was the low point for sales over the last two months? What were sales last week? What does next months’ sales picture look like?
Our low point in sales was mid-April, when we experienced a steep drop within a two-week period. At that point, our weekly sales were about 40% below 2019 sales in comparable periods, one of our branches was briefly closed for virus-related reasons, and our envelope converting facility here in Jacksonville was intermittently closed and sanitized whenever we were faced with a potential Coivd-19 case on the property. Overall, weekly sales have been slowly and steadily improving since that time, especially in packaging, wide format media and janitorial and sanitation supplies. We ended the second quarter with sales at less than 20% below 2019. July was our strongest month yet and August is off to a good start, building on July’s upward momentum. In general, we are building back to pre-Covid levels, but slowly. In September, October and November, we should be helped by the election cycle and a partial reopening of schools in the Southeast. At the same time, we are keeping a close watch on the resurgence of the coronavirus in our market, especially in Florida and Georgia.

How have you seen Covid affect your customers/end markets?
The hospitality, travel, tourism and education sectors have been hit quite hard by both the virus and government shutdown orders. The same holds true for brick and mortar retail. A significant decrease in print demand from those markets, as well as extensive school closures, has had a negative impact on commercial printers. Some of our sectors however, have experienced positive growth as a result of Covid-19 notably food packaging, pharmaceuticals (health and beauty), and e-commerce with the significant increase in online shopping. We have experienced healthy growth in our wide format segment due to an increased demand for signage related to social distancing, directional floor graphics, and informational and safety signs. In addition, our facility supplies business segment is up substantially for now in connection with the increased demand for personal protective equipment, cleaning products and disinfectants.

What is the operating status of your facilities? How much of the workforce have you brought back?
As an Essential Business, all of our facilities have remained open to serve our customers throughout Covid-19. In April, we closed our Louisiana branch for a brief period when New Orleans was an early virus hot spot, and we have occasionally (albeit brief) halted operations at our envelope converting facility in Jacksonville in order to conduct thorough cleaning and sanitation. While it was unfortunately necessary to scale back some areas of our workforce in response to business impacts, we have been able to bring back the majority of our hourly staff to a full 40-hour work week. Unprecedented and extensive in scope, a crisis such as this necessitates that businesses undertake a very detailed review of processes and systems. Going forward, we expect to realize longer-term optimization and productivity with leaner and more efficient operations.

What does the demand picture look like going forward and how are you modeling that? When do you think demand in your business will return to pre-Covid levels?
We continue to model a modest, but steady, recovery in our business until schools reopen partially or completely and the travel and leisure sectors recover. We anticipate that our fine papers business overall will not be back to pre-Covid levels until the pandemic is reasonably under control and that is not the case yet in the Southeast. At the current recovery rate for the business as a whole, we expect to approach pre-Covid sales levels by the end of the year. Our business will probably emerge from the pandemic with a different, and improved, product mix. Certain parts of our paper distribution business may never fully recover to pre-Covid levels given the shift to working from home and the substitution of e-commerce for brick and mortal retail. However, other segments of our business, specifically packaging and wide format, will see continued growth through the year. On balance, this mix shift should make Mac Papers a healthier and more profitable business going forward.

What specific areas of your business are performing well during this challenging time?
Two key areas of our business, packaging and wide format, have performed well despite market challenges. In packaging, several markets we serve continue to grow: food packaging, pharmaceuticals (health and beauty), and e-commerce. With stay at home directives and safety concerns, consumer demand for home deliveries has dramatically increased. In parallel, cold chain supplies (coolers, liners, and gel packs) necessary to ensure safe shipping of perishable food and medications, as well as small parcel corrugated, have also been in heavy demand. We’ve also seen an uptick in labels and seals as there has been additional need to ensure delivery tracking, proper sealing, identification and safety, and hygiene messaging. According to industry data, e-commerce is anticipating to grow 18% in 2020 amid the pandemic, with heavy growth seen in mailers (poly and paper). This surge has led to longer lead times and supply issues. The same holds true for plastics due to the pronounced increase in orders for plastic containers from start-ups, as well as manufacturers that have pivoted their production to service higher demand for hand sanitizers.
With regards to wide format, our business has experienced a significant uptick for floor graphic materials and adhesive media. This is largely due to the heightened need of businesses to employ signage that conveys important Covid-related health and safety processes and instructions (social distancing, hand washing, etc.) to employees and patrons. Dye sublimation papers have also been a top performer due to the increased need for custom-printed face masks and signage in the partially-open retail sector. Our wide format group has hit it out of the park over the past three months, and we expect great things from wide format in the future.

How are changing consumer behaviors impacting your packaging business?
The biggest change in consumer behavior is the expectation to have most purchases, including groceries and medications, delivered to the doorstep. Shopping habits and the retail environment continue to shift dramatically. Luxury spending, and therefore, potentially luxury packaging, is expected to decline, and the reduction in business and recreational travel, lodging, in-restaurant dining and live events will also have a negative impact on the packaging business overall, as well as on facility supplies (Jan-San). All of these negatives, however, should be offset by the overall growth of e-commerce and our packaging group is heavily focused on large, medium and smaller e-commerce customers throughout the Southeast.

How has Covid-19 impacted your wide-format printing customers?
A high percentage of our wide format customers shifted from producing traditional products and applications to those needed to address the increased need for directional and safety signage as well as personal protective equipment, such as face masks. Accordingly, we have experienced a surge in demand for wide format media for floor graphics, banners and rigid signage as well as dye sublimation papers and equipment needed for the production of facemasks. Wide format printers and sign shops have adapted at a rapid pace, investing in equipment and new inventory needed to effectively and quickly support the new high demand applications. They have contributed significantly to the safe reopening of businesses. We believe the wide format segment represents the future of graphics printing, and we need to ensure that Mac Papers continues to grow its wide format business in excess of industry growth levels.

How will the business operate differently going forward?
We will continue to have a heightened focus on the hygiene and safety of our employees. Sanitizing products, masks and certain personal protective equipment will likely become standard procedure for our operators, truck drivers and field personnel. Additionally, with the now proven capability to effectively conduct meetings remotely, travel will likely be curtailed, resulting in improved work productivity. Of course, we will continue to have in-person meetings with our customers, which we value greatly and are essential to serve their needs fully.
At the same time, we have learned through the crisis that the Company can be more nimble at almost every level of the organization. We have made several, surgical reductions in corporate overhead, logistics and staffing that should generate permanent cost reductions, and stronger profitability for the business. In addition, with the help of our Monomoy team, we are learning how to more efficiently manage working capital on a daily basis and to optimize systems and processes throughout the company.

What were some lessons or insights you gathered over the past few months that will stay with you going forward?
Primarily, the crisis confirmed what we’ve known all along about Mac Papers: there is a strong sense of pride among our team members in the services we provide; our people are extremely dedicated to serving our customers; and we have a great team of leaders here at Mac Papers throughout all levels of our organization who can pull together in times of crisis and change. I have never been more proud of this organization and it is a true privilege to work with this team. We’re extremely grateful for the partnership and support from Monomoy, which has helped us navigate the sudden downturn and position Mac Papers for long-term success. We look forward to growing our business and optimizing the services and solutions we bring to our customers. The key to growth for us is to take the cross-department communication across departments and analytic support we developed during the first wave of Covid-19, and apply it to every aspect of our business.

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