Packaging Co. of America Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 23, 2024

There are 9 speakers on the call.

Operator

Good morning, everyone, and thank you for joining Packaging Corporation of America's First quarter 2024 earnings results conference call. Your host today will be Mark Colzan, Chairman, Chief Executive Officer of PCA. Upon conclusion of his narrative, there will be a question and answer session. And please also note today's event is being recorded. At this time, I'd like to turn the floor over to Mr.

Operator

Kowlzan. Please proceed when you are ready.

Speaker 1

Thank you, Jamie. Good morning, everyone, and thank you for participating in Packaging Corporation of America's Q1 2024 earnings release conference call. Again, I'm Mark Kolzan, Chairman and CEO of Packaging Corporation of America. And with me on the call today is Tom Hassfurther, Executive Vice President, who runs the Packaging Business and Bob Mundy, our Chief Financial Officer. I'll begin the call with an overview of our Q1 results, and then I'll be turning it over to Tom and Bob who will provide further details.

Speaker 1

And then I'll wrap things up and we'd be glad to take questions. Yesterday, we reported 1st quarter net income of $147,000,000 or $1.63 per share. Excluding special items, Q1 2024 net income was $155,000,000 or $1.72 per share, compared to the Q1 of 2023's net income of $198,000,000 or $2.20 per share. First quarter net sales were $2,000,000,000 in 20.242023. Total company EBITDA for the Q1 excluding special items was $333,000,000 in 20.24 $405,000,000 in 2023.

Speaker 1

First quarter net income included special items expenses of $0.09 per share primarily for the certain costs at our Jackson, Alabama mill for the paper to containerboard conversion related activities. Details of special items for both the Q1 of 2024 and 2023 were included in the schedules that accompanied our earnings press release. Excluding the special items, the $0.48 per share decrease in Q1 2024 earnings compared to the Q1 of 2023 was driven primarily by lower prices and mix in the Packaging segment for $1.33 and Paper segment 0 point 0 $8 higher scheduled mill outage expense 0 $0.10 higher depreciation 0 $0.03 higher expenses related to corrugated plant capital projects of $0.02 and other expenses $0.04 These items were partially offset by higher volumes in the Packaging segment for $0.71 and Paper segment $0.06 We also had lower operating and converting costs of $5 driven by very good process efficiencies and control over other usages of fiber, chemicals, energy, materials and labor. Although energy prices were lower versus last year's Q1, they were more than offset by higher recycled fiber prices. In addition, we had lower freight and logistics expenses for $0.04 lower interest expense 0 point 0 $7 and lower tax rate 0 point 0 $9 The results were $0.18 above the Q1 guidance of 1.54 dollars per share, primarily due to the strong volume in both the Packaging and Paper segments, along with the continued emphasis on cost management and process efficiencies across our manufacturing and converting facilities.

Speaker 1

This drove operating and converting costs lower even with the persistent inflation we continue to experience across most of the cost structure. Executing the conversion outage at our Jackson, Alabama mill better than planned resulted in lower scheduled mill maintenance outages expenses and freight and logistics expenses were less than guidance as well. Looking at the Packaging business, EBITDA excluding special items in the first quarter of 2024 of $326,000,000 with sales of $1,800,000,000 resulted in a margin of 18.1% versus last year's EBITDA of $392,000,000 or sales of $1,800,000,000 or 21.7 percent margin. Throughout the quarter, containerboard and corrugated products demand exceeded our expectations. In addition to outstanding operational performance at our box plants and containerboard mills, we were able to service the high demand from excellent execution of the conversion outage at our Jackson Mill.

Speaker 1

This enabled us to restart both machines earlier than anticipated and we completed our work prior to the quarter end rather than in the month of April, which had been the original plan. Despite these efforts, with the higher demand, we ended the quarter at a record low weeks of inventory supply for this time of the year. With just our Filer, Michigan mill having a scheduled maintenance outage in the second quarter, we do expect to build our inventories back to targeted levels by the end of this quarter. I'll now turn it over Tom, who will provide further details on containerboard sales in the corrugated business in general.

Speaker 2

Thanks, Mark. As Mark mentioned, Packaging segment volume for the quarter exceeded our guidance estimates. Corrugated product shipments per workday were up 11% and total shipments with 1 less shipping day were up 9.2% compared to last year's Q1. Compared to the pre COVID period the Q1 of 2019, shipments were up over 10.4% on a per day basis. Outside sales volume of containerboard was 40,000 tons above last year's Q1 and 15,000 tons below the Q4 of 2023.

Speaker 2

Our order backlog remained incredibly strong throughout the quarter and although demand continues to be challenged by constant inflation, higher interest rates and other factors, we expect to continue this positive momentum as we enter the Q2. Domestic containerboard and corrugated products prices and mix together move slightly higher from the Q4 of 2023 levels by $0.01 per share, which was less than we anticipated due to our total announced increase not being recognized in the published benchmark prices. Versus the Q1 of 2023, prices and mix were down $1.19 per share. Export containerboard prices and mix were down $0.01 per share compared to the Q4 of 2023 and down $0.14 per share compared to the first quarter of 2023. I'd like to point out that the capital spending and optimization strategy within our box plant system that we have been continuously focused on over the last few years is providing incredible benefits.

Speaker 2

This has allowed us to focus on the mix of customers we want to profitably grow our revenues with by providing them the product and service needs they desire and allows them to grow. Based on our current demand outlook for this year, this strategy has us on pace to set a new record for box shipments per plant. I'll now turn it back to Mark. Thanks, Tom.

Speaker 1

Looking at the Paper segment, EBITDA excluding special items in the Q1 was $41,000,000 with sales of $164,000,000 or 25 percent margin compared to the Q1 of 2023's EBITDA of $41,000,000 and sales of $151,000,000 or 27% margin. Sales volume, which exceeded our guidance estimates, was 14% above the Q4 of 2023 and 16% above the Q1 of 2023. Demand was very good both from our existing customers as well as incremental volume from some new customers as we acquired towards the end of 2023. Orders remain strong as we enter the 2nd quarter, although volume will be impacted by the scheduled maintenance outage at our International Falls Minnesota mill in June. An improved sales mix moved paper prices slightly above the Q4 of 2023, although prices and mix were down about 6% from last year's Q1.

Speaker 1

This past February, we announced $100 price increase across all of our paper grades and we began implementing these increases on April 1. I'll now turn it over to Bob.

Speaker 3

Thanks, Mark. Cash provided by operations during the quarter totaled $260,000,000 and free cash flow was a 1st quarter record $184,000,000 The primary payments of cash during the quarter included capital expenditures of $77,000,000 and dividend payments of $112,000,000 Excluding the invested cash proceeds from the bond transaction we mentioned on last quarter's call, our quarter end cash balance including marketable securities was approximately $900,000,000 with liquidity of 1,200,000,000 Due to the excellent execution of the conversion outage at the Jackson Mill that Mark spoke of and moving the International Falls Mill outage from the Q3 and into the Q2, we are revising the scheduled mill outage guidance we provided on last quarter's call. The revised total company estimated cost impact for the year is now $0.89 per share versus $0.96 per share previously. The actual impact in the Q1 was $0.24 per share and the revised estimated impact by quarter for the remainder of the year is now $0.18 per share in the 2nd quarter, dollars 0.14 in the 3rd and $0.33 per share in the 4th quarter. I'll now turn it back over to Mark.

Speaker 1

Thanks, Bob. Looking ahead as we move from the first and into the second quarter in our Packaging segment, we expect continued strong demand and higher corrugated products and containerboard shipments. Prices and mix will move higher due to our announced price increases and increase in published domestic index prices as well as higher export prices. Orders in our Paper segment are expected to remain strong however, volumes will be lower due to the scheduled maintenance outage at the International Falls Minnesota mill during the quarter. Although we're implementing our recently announced paper price increases, the average prices and mix are expected to be slightly lower due to the published decrease in index prices earlier this year and how that impacts contract triggers with certain customers.

Speaker 1

Operating and converting costs should be slightly lower primarily due to the sequential improvement in seasonal weather and wage and benefit timing expenses that we incurred in the Q1 and scheduled maintenance outage expenses will be lower. Rail rate increases at 6 of our mills during the first and second quarters will result in higher freight and logistics expenses and depreciation expense will be higher. Finally, our tax rate will be sequentially higher due to the tax related benefit of share based compensation that's in the Q1. Considering these items, we expect the 2nd quarter earnings of 2 point 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 constitute forward looking statements. The statements were based on current estimates, expectations and projections of the company and do involve inherent risks and uncertainties, including the direction of the economy and those identified as risk factors in the annual report on Form 10 ks on file with the SEC.

Speaker 1

Actual results could differ materially from those expressed in the forward looking statements. And with that, Jamie, I'd like to open up the call for questions, please.

Operator

Our first question today comes from George Staphos from Bank of America Securities. Please go ahead with your question.

Speaker 4

Hi, everyone. Good morning. Hope you're doing well.

Speaker 5

Thanks for

Speaker 4

the details. I guess the first question, maybe the standard one for all of us. Can you talk to what the early trends are in terms of bookings and billings so far in 2Q? And I had a couple of follow ons.

Speaker 2

George, this is Tom. Yes, bookings remain very strong as I indicated in the call earlier in the script. We're up 8% as of now and we can we expect a strong second quarter and the remainder of the year as well.

Speaker 4

Thanks for that Tom. Can you talk a bit about what your vertical integration was in 1Q and also in 4Q? And if you don't want to provide and we understand an absolute level, can you talk about what the relative trend was? And similarly, can you talk about how the mix of your business was 3rd party and export in 1Q and similarly relative to what you saw in 4Q?

Speaker 2

Bob? Yes. I don't have

Speaker 1

the absolute integration

Speaker 3

in the Q1 was around 90%, almost 93%, George. And slightly below that I think it was in the Q4. Thanks Bob.

Speaker 4

Okay. I guess the last one and I'll please go ahead.

Speaker 1

Yes. Tom, do you want to comment about mix and

Speaker 2

Right. Are you asking about mix of export or what exactly are you asking, George?

Speaker 4

Really, I was asking about how much was export tonnage 1Q either directionally versus 4Q in absolute terms in terms of percentage of tonnage, whatever sort of qualitative or quantitative data you could provide us 1Q and 4Q? And really the last question related to it and I'll turn it over is, for all of the volume, kudos to you in terms the shipment. The operating the EBITDA margin was less than we had been modeling for. And I'm trying to figure out where that loss of margin, at least versus our model, maybe we're just too optimistic, was whether it was mix or something else in terms of the quarter? Thank you.

Speaker 4

I'll turn it over

Speaker 2

there. Let me see if I can tie this together here real quick for you, George. Number 1 is the export in Q1 versus Q4, as I indicated, was down slightly. 4th quarter is a big export time for us. And but on an overall basis, it was pretty flat.

Speaker 2

Relative to the EBITDA margins, I think one of the things that probably you might be missing in the model was the fact that the $20 downturn that took place last year, some of that bled into the 1st of the year because of contract triggers. And of course, we were counting on the $70 being published and the only $40 was published and it was slightly delayed. So, the roll through and the price increase did not occur quite as quickly as we had hoped and not in the same amount because of the index. In addition to that, I just want to remind you that inflation remains very sticky. And I think there's a lot of noise around inflation at the rate of inflation having slowed from that rapid rate during COVID, but it's still going up.

Speaker 2

And it's been going up at the same time, the index has indicated price is going in the opposite direction until this $40 increase. So, I think that's where the margin gap is.

Speaker 1

George, there's a lot of elements within the cost structure that people lose sight of. I mean, if you keep in mind, I mean, things just like general services that a paper mill or box plant relies on, all these associated costs to run the business are up dramatically over the last few years and they're not easing up. Bob, do you want to comment on this? Again, I think people are truly, truly missing that.

Speaker 3

Yes, Mark. I mean, the things and even as we go into the Q2 from the first, obviously recycled fiber would maybe a little bit higher from a price standpoint, electrical rate, even though gas is down, electrical rates are not. Chemicals, whether it be lime, adhesives in the box plants, resins, alum, starch across the board, all hot moving higher. And again, we typically talk about all the direct type of costs and which is only about 40% of our cost base. You have the other 60% which are as Mark referenced, there are maintenance services, repairs, materials, operating material supplies, property taxes, rent, warehouse costs, insurance leases.

Speaker 3

So it's there's constant inflation and all the people that supply those things, they have the same inflation going on in their business and they don't eat it. They pass it on to us. So a lot of that just gets overlooked, I think, George.

Speaker 4

I appreciate all the color guys. I'll turn it over. Thank you very much.

Speaker 1

Thank you. Next question please.

Operator

Our next question comes from Michael Roxlin from Truist. Please go ahead with your question. Thank you, Mark, Tom and Bob for taking my questions. This is Nico Pacini on for Mike. I guess just realizing that demand has improved across the board, are there any particular sectors or end markets where you saw more notable improvement and then anything lagging?

Speaker 2

I can tell you, the demand improved across the board, believe it or not. When we look at the various segments, whether it's e comm, ag, food, even in the heavier manufacturing area, we had significant improvement across the board.

Operator

Got it. Thank you. And then just following up, since roughly 2019, you spent like a deal of time and money recapitalizing your box plants. Can you comment on maybe if there's anything left to do there, realizing there's always some level of work to be done?

Speaker 1

We've got this momentum going right now that we started a good 5 or 6 years ago. And quite frankly, as we've done in the mill side now, the opportunity to continue to capitalize on the box plant opportunity will continue infinitum for us. That's part of our growth strategy. That's how we'll continue to provide value for our customer base. And so again, Tom, again just

Speaker 2

Well, I think it's a good reminder always that our capital plans in the box plants are built around our customers. And our customers that we're aligned with are in growth mode and that's a big benefit to us and we'll continue to invest around those customers.

Speaker 1

Again, I think I commented on the January call in the last 5 years since 2019. We've installed 69 new converting machines. We've replaced or completely upgraded 25 of our corrugators. We built 4 new plants, Marshfield, Richland, Landisville and Salt Lake City Specialty. In Salt Lake City, we just started up in the last month.

Speaker 1

So that's our newest one. And so we continue to do this as Tom mentioned that it's all done to grow with the customer and take care of what the customer needs are. But we have this capability and it's again, we'll continue to capitalize on the strength.

Operator

Understood. Thank you very much for the commentary.

Speaker 1

Next question, please.

Operator

Our next question comes from Mark Weintraub from Seaport Research Partners. Please go ahead with your question.

Speaker 5

First, are you now done with the Jackson project conversion? Is that now fully set?

Speaker 1

Yes. Everything that we had scoped out 4 years ago is complete and that project has turned out as you can imagine, we're more pleased than we thought we were going to be at this time. The original phase of work that we just completed was originally a 58 day schedule. We completed that 2 weeks ahead of time, started up the day before Easter and had been running extremely well ever since. And as I've talked over the last year, I expected that machine to be producing over 2,000 tons a day and we've been doing that for the getting that mill stretched out now, getting getting that mill stretched out now and getting everybody used to running at these high production rates, but the good news is we need every ton that we can produce and this is all high performance grade lightweight linerboard coming off that machine.

Speaker 1

And so it's doing everything we expected it to do and more.

Speaker 5

Congrats on that. So now with Jackson up and running, I think in the Q2 you produced a little under 1,200,000 tons. Maybe on an annualized basis, what would your full production potential be assuming the demand is there for you to run full?

Speaker 1

If you include the 7 mill system, we'd be a little bit over 5,000,000 tons. If you round off 5,000,000 ton system, a little over 5,000,000 tons, 5,200,000 or so.

Speaker 5

Okay.

Speaker 1

Depending on the grade mix that you're running as far as lightweights basis weight, dollars 5,000,000 to $5,200,000 is a good number going forward on a run rate basis.

Speaker 5

Excellent. And then lastly, just want to come back to the up 8%, at least in April, etcetera. If I look at where your Q1 daily shipments were relative to your 2nd quarter 23 daily shipments. They were up about 8% as well. And I realize we're talking about different time periods when you're referencing April specifically.

Speaker 5

But so the question is, I mean, are you still seeing momentum of demand getting stronger in the current environment? Or is it more that you have this uptick, you gain business and it's sort of stable at those higher levels?

Speaker 2

Mark, it's still going up. It's going up at a lesser rate, but still we're going up. And but Q2 is always an interesting one for us versus the 3rd 4th, which are more predictable because we have we take seasonality is kind of a little more iffy in the second quarter, but we still see that momentum going up and then we expect it to continue to go up again in the 3rd Q4 of the year. Okay.

Speaker 5

And then one last quick one. So if I read it right, your cap spend was pretty low, I think like $72,000,000 or something in the Q1. What are you expecting full year on CapEx? And maybe depending on the number, if it's I thought you were going to be spending fairly sizable amounts still this year and maybe help us with Jackson now done, what these new monies are going to be spent on?

Speaker 1

Yes, Mark, that was a timing issue as far as just how the invoicing is done against the projects. We called out that somewhere in that higher 400 level and we'll give you some updates in July. We always reserve the right as an example if new opportunities come along. We move forward with these opportunities. And so right now we're in that high $400,000,000 area.

Speaker 1

But again, we'll give you some update. If there's any change, we'll update you in July.

Speaker 5

Thank you. I'll get back in queue.

Operator

And our next question comes from Gabe Hajde from Wells Fargo. Please go ahead with your question.

Speaker 6

Mark, Bob, Tom, good morning.

Speaker 1

Good morning. Thanks for

Speaker 6

all the detail. I wanted to ask and I guess revisit the price question, which I know is a little tricky sometimes. But going back to the Q4 call, you've made some comments, Mark, that you were going to try to these are my words, kind of decouple from RECE indices to the extent you're able to. And then now we're reading on a sequential basis that we got the $40 a ton that posted in February. We'd expected $70 And so it feels like a headwind relative to what you were expecting or maybe we all were expecting, going back to the kind of the price cost squeeze that we all miss modeled in the Q1.

Speaker 6

So I'm curious if that is proving more challenging. And I'm just asking in the context of this is kind of blazing your trails relative to what we're used to when analyzing this industry. So that's part number 1. And then part number 2, not asking about future price increases, but given what you've described and history of implementing price increases, is it fair to say that the January 1 price increase is now again, I know it's resi and what they do, but commercially speaking, if you deemed it appropriate going forward that you would have to nominate something new? Thank you.

Speaker 2

Gabe, this is Tom. It's a great question you have, especially relative to the decoupling from RISI. As I indicated in our last call, this would not be an easy task and it's going to take some time. But, we're still pressing forward with that, driven again by our customers' frustration over what is going on and what gets reported these days. If you just

Speaker 7

work through at least from PCA's perspective, if you

Speaker 2

look through the its peak and medium a little bit more. Its peak and medium a little bit more. We would need to have a significant recovery to get back to those kind of levels. And as I also indicated, inflation continues to take place. So there's a even customers have said to us that if things had just remained the same from the peak, they would have they'd almost prefer that just because they just don't like these roller coaster rides.

Speaker 2

And they're trying to get off of that down and then up and then down and then up and these sorts of things. So and over a long period of time, we could have managed that in a much smoother fashion. So these are the kind of discussions we're having with our customers. Our customers are very open to alternatives and different methods. But you got to remember, a lot of these contracts are long term contracts.

Speaker 2

They have different trigger points. They have different times when we're negotiating them. And so we are where we are at this point in time. And the other thing that we talked about was is that when we announced this increase, the increase was on containerboard. And it wasn't the announcement wasn't on boxes.

Speaker 2

That's between us and our customers, but we announced it on the open market of containerboard and we implemented it. It didn't get reported quite that same way, but that's part of our frustration. I think that relative to future pricing, we don't really discuss future pricing or we don't make any indication of what we're going to do in the future. But you could probably read through where we are and some of the inflationary pressures that are taking place. And the last reminder is that it's there all increases aren't set strictly on supply and demand.

Speaker 2

Sometimes they have to do just costs and costs in general and some costs that we're trying to minimize as much as we possibly can, but in lots of cases we can't. So, hopefully that gives you a good indication of where we are.

Speaker 6

No, crystal clear. Thank you, Tom. Maybe just, I don't know, Bob, if you can quantify, I think kind of standard repricing for rail occurs in and around April 1. You called it out, I think roughly 2 thirds or so of your parent rolls get shipped around rail and then the majority of converted product is mostly trucks. So just maybe can you frame up maybe what the increases were or what portion of your transport spend is rail specifically?

Speaker 3

I think in total spend, Gabe, it's like 65% or so is rail, I believe.

Speaker 6

Okay. And one last one, very subjective, but given the fact that your 2 largest competitors right now are pursuing transatlantic combinations, do you see any opportunity, Mark, either organically or potentially if there's a required divestiture to pick up business along the way? Again, appreciating it. I know it's a sensitive topic. Thank you.

Speaker 1

Yes. I don't have any comment regarding that. That's some places I won't go. But as you can imagine, we take advantage of opportunities as they come along.

Speaker 6

Thank you.

Speaker 1

Next question please.

Operator

Our next question comes from Anthony Pettinari from Citi. Please go ahead with your question.

Speaker 4

Good morning.

Speaker 1

Good morning.

Speaker 8

On the last call, you talked about expectations for, I think, dollars 0.35 sequential headwind in 1Q on seasonal costs that I think were mostly labor and benefits related and maybe being able to get 60% of that coming back in 2Q. If I got that right, I'm just wondering how given where you shook out in 1Q and the 2Q guidance, how that kind of played out versus expectations?

Speaker 3

Yes, Anthony, I think it played we did a little better I think on what the impact was in 1Q. But in our 2Q guidance, what I indicated, I think like you said, I think it was 60% of those seasonal or one time items on the wage side of the cost. We are seeing those in our guidance for the Q2.

Speaker 8

Got it. Got it. And then just following up on Gabe's earlier question on pricing mechanisms. A lot of packagers have contracts where they get kind of an automatic pass through on their primary raw material, whether that's aluminum or polyethylene. I'm just wondering kind of conceptually big picture, would it be possible to structure contracts where fiber is just passed through automatically, whether that's OCC or Virgin Fiber?

Speaker 8

Or is there something about Kraftliner, testliner boxes where maybe there's too many SKUs or there's too many customers or it just makes that kind of automatic pass through more difficult.

Speaker 2

I think it's a Yes, Tom,

Speaker 1

go ahead.

Speaker 2

I don't want to add Anthony, I think it's a fair question, but far more complicated than I think you have in a lot of other materials. And I'd also like to add that in containerboard, not every sheet is the same. And you have a lot of variance between everything between 100% virgin and 100% recycled and a lot of technology in between there on performance liners, etcetera. So there's just a whole myriad of things that go into the process that would have to be taken into account. And it's not as simple as just taking the raw fiber or something like that as your single material.

Speaker 1

Yes. I just wanted to emphasize that, that maybe once upon a time, when a decade ago, things were more stable in general with inflationary activity and fiber would move up and down. But now the last number of years, we're in a world where inflation is back on track the way it was decades ago. And you're seeing across the board all your input costs up dramatically. And as Tom said, it would be too complex to try to tie that into some type of mechanism.

Speaker 1

But don't forget again, 25 years ago, transportation was a very minimal cost factor in moving containerboard and paper products around the country. Now transportation factors in as a major very significant major element to the cost, just that one component.

Speaker 8

Got it. Got it. I'm just wondering in kind of previous periods of very strong inflation or maybe going back to the 70s or was the paper industry using things like surcharges? I'm just trying

Operator

to think about other kind

Speaker 8

of pricing mechanisms that have been used historically, obviously not talking about any kind of future actions. But Bob listed out that those categories that are all seeing inflation. I'm just wondering as you look at the history of the industry, were there sort of other ways that producers were able to pass those along?

Speaker 2

Anthony, this is Tom again. We're exploring all the potentials and we're doing it in detail with our customers. And so I think we'll just see where this unfolds over time. But and we're learning a little bit too on our side because we're getting it from all our suppliers and we're getting all of the above from all of our suppliers. And that's part of the inflation problem and the cost problem that we're incurring.

Speaker 2

So we're taking everything into account and but this will be solved directly with our customers. Yes. Suffice it to

Speaker 1

say, we'll be far better off going forward.

Speaker 8

Understand. Appreciate it and appreciate it's a difficult question to answer in this kind of format, but appreciate the color. Thank you.

Speaker 1

Thank you. Next question please.

Operator

Our next question comes from Philip Ng from Jefferies LLC. Please go ahead with your question.

Speaker 7

Hey guys. Your box shipments were obviously really strong during the quarter. It seems like you're outpacing the market handily. Tom, you kind of talked about some of the investments you've made on the box side in market. I think you talked about kind of building there.

Speaker 7

Has that been like a big area of differentiation that's kind of helped you take share a little faster and grow a little faster than your peers? Anything you want to call out in terms of these investments you've made that makes PCA even more competitive than years past?

Speaker 2

Well, I think, Phil, yes, it's been a big plus for us. There's no question about it. Otherwise, we wouldn't have embarked on it. I've said many times, we don't build it and hope they will come. We do what our customers need us to do and invest where they need us to invest.

Speaker 2

That's what we've been doing. And it's coupled with making our system more efficient, getting ourselves aligned properly in the right marketplaces, getting ourselves aligned with the right customers. And that's I think that's a huge plus. Now in addition to that, I think what helps us a lot is the fact that we're building a better quality product every day. We're able to turn much faster and meet demands and work as a complete system.

Speaker 2

Makes a huge difference for us and our customers definitely appreciate it. And I think that's showing up in the business that we're capitalizing on.

Speaker 1

If you went back over the last 5 years, if you think about labor input cost and labor unit applied per square foot of product or ton of product, we've significantly improved the productivity and cost structure of every one of these converting facilities and full line box plants. We're producing we quadrupled in many cases, doubled the productivity on average out of a box plant. And so it's given us incredible flexibility on how we grow with these customers and the capability to service these customers and do it in a very efficient manner. And that's where, again, we're able now to continue that momentum and we're not playing catch up. We're in very good all of our box plants, our paper mills, we're in very good position as far as our cost structure and efficiencies to compete.

Speaker 1

And so we just lay in the new investments that as Tom has said, we grow with the customer. And so again, but we've been doing this for decades. There's nothing that we just came up with the idea 5 years ago we're going to do this. We've been working at this for a couple of decades and we've been fine tuning this and making it better. And it's just in the last 5 years, we focus heavily within the box plant system with this organizational change we made in 2019.

Speaker 7

Super. That's helpful. And I guess a question on the pricing side of things. Since only $40 to the $70 line and board increase got reflected in the index, Just from a logistics standpoint, are you issuing rebates to your customers? And then I guess separately, the trade publication kind of reported maybe perhaps on the independent box makers were a little reluctant to push price given a more mixed demand backdrop for them.

Speaker 7

How is the box price increase progressing? Do you kind of expect it to proceed like normal?

Speaker 2

Relative to the box price increase, it's going to flow through as normal over a 90 day period. Lag into the mid year because we do have some contracts that have triggers in the mid year. But the lion's share of it as usual will roll in over a 90 day period. We are not I'm not going to discuss what we do individually with our customers or anything like that, but we did put the $70 price increase through and on containerboard as I indicated last time and that's been done for quite some time. And that's basically what we expect now.

Speaker 2

Relative to an independent or whatever, talking about supply demand or whatever the case might be, I mean, that's part of the whole frustration of the model that exists right now because as I've indicated many times, the open market is incredibly small today. And when I hear things about 70% of the surveyed the survey says X or Y, that's 70% of what, 1% or something? I don't know what the how those percentages work out. And there's no indication of that. So that's why we've, as I indicated last time, some of the need to have some consideration for perhaps some other mechanisms.

Speaker 7

Okay. If I can sneak one more in, your 2 larger competitors in U. S. Are obviously merging with European counterparts. Historically, the industry has had mixed track record being international.

Speaker 7

But Mark, Tom, team, I'm just curious, how do you kind of see that perhaps changing the competitive landscape and how you may compete and how you proceed with some of your customers going forward?

Speaker 1

I don't even think about it as a significant change here in the domestic marketplace. This is a they're doing it for their own reasons. But again, Tom, you want

Speaker 2

to comment on that? I don't have any comment at all relative to our competitors or what they're attempting to do or trying to do. We know what we need to do in our marketplace and that's what we go and

Speaker 1

we've grown our business we've grown our business significantly over these last few decades here in the United States and we'll continue to do so. And we've outgrown the rest of the industry by doing that and we'll continue to do that.

Speaker 7

Okay. Appreciate the color. Thank you.

Speaker 1

Next question.

Operator

Our next question is a follow-up from George Staphos from Bank of America Securities. Please go ahead with your follow-up.

Speaker 4

Hi, thanks for taking the follow on. Recognizing that for years, Packaging Corp. Has hired its team of engineers and has focused on productivity, both at the mill level and the box plant level. And you said, Mark, earlier that the projects and the programs will continue to add infinitum. Is there any fade in terms of the net benefit we should expect to Packaging Corp's P and L over time from these programs?

Speaker 4

Recognizing they're going to continue, basically has a lot of lower hanging fruit been consumed? Or do you think you can continue with I think you said last quarter you're spending $150,000,000 in the box plants this year. Obviously, we'll get an update in June or July that you can continue to have that same rate of return on these programs and we can continue to see that benefit to the P and L as we've been seeing over the last couple of years? Thank you.

Speaker 1

That will never end. If a company does not have the capability that we do, you will not be able to function efficiently going forward. The technology capability that we bring to bear 24 hours a day, 7 days a week, We take care of our operational matters in real time, whether it's a box plant issue or a mill issue. We don't depend on vendors to take care of our needs. And so this technology engineering group is not only working on capital investments, but they're working on process efficiency, process improvement on a real time 20 fourseven basis and that will never end.

Speaker 1

And that's been one of the benefits that has differentiated PCA for many years now and we just continue to make it better and better. And the opportunities that the organization, whether you take individual box plant or a mill and you take the operating group and the technology engineering group, together they see new opportunities continuously. And then you're able to identify new technology that can be applied and then we implement that new technology and again how that rolls into the relationship with growing what our customer needs are.

Speaker 4

So Mark, recognizing you can't give us a schedule in terms of benefit this quarter, next quarter, next year, 3 years from now. In your mind's eye, you see as the efforts will continue, as you just said, the return and the benefit to the P and L should be roughly what we've been seeing in the last few years on a going forward basis at PCA. Would that be right?

Speaker 1

Absolutely. That's one of the differentiating factors that will continue to provide the type of benefits that you see at PCA.

Operator

Thanks, Mark.

Speaker 1

Thanks, George.

Speaker 5

Any further questions?

Operator

We do have an additional question from Ryan Fox from Bloomberg. Please go ahead with your question.

Speaker 8

Good morning, gentlemen. In Q4 of 2023, we saw that you outperformed the broader industry by a very wide margin. Just curious if you felt like in the Q1 we're going

Speaker 1

to see a similar performance? Well, again, we just reported that in our Q2. Tom had called up fact that our trend continues into the Q2.

Speaker 3

So, Bob, go ahead. No, I mean, Tom, you're referring to the industry numbers, I think, that will come out at the end of the week versus our performance. Right.

Speaker 2

I think we'll outperform the industry. But I would think that the industry will be up as well.

Speaker 8

And why do you think you've outperformed the industry by such a great margin in the last 2 quarters?

Speaker 2

Well, one reason is that we've been very, very focused on, as I said, our existing customers. Our CapEx has been around those existing customers. And some of those customers, as I indicated in the past, coming out of COVID, we had a large customer base that had really gone through some very significant destocking of inventory and they were kind of slow to recover. And they have now recovered at a very rapid rate. And so that's been very helpful to us because if you look at our it's no secret.

Speaker 2

I mean, we had a pretty easy comp a year ago. And we're so the number looks very, very good. But as you look at last year, 2nd, 3rd, Q4 of 2023 all improved and kept improving. And so in order to keep up pace, we're going to have to keep improving throughout the year, which we seek happening. But it's a whole myriad of things, but also we've got some real lift from a couple of significant customers that had really lagged coming out of COVID.

Speaker 8

Brilliant. Thank you so much.

Speaker 1

Thank you. Any further questions?

Operator

And sir, at this time, I'm showing no additional questions. I'd like to turn the floor back over to you, Mr. Colzan, for any closing comments.

Speaker 1

I'd like to thank everybody for joining us today and look forward to talking with you later at the end of July to give you the Q2 results and spend some time with you then. Have a good day. Take care. Thank you.

Operator

Ladies and gentlemen, that does complete today's

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Earnings Conference Call
Packaging Co. of America Q1 2024
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