Packaging Co. of America Q4 2024 Earnings Report

Packaging Co. of America EPS Results

• Actual EPS: $2.47
• Consensus EPS: $2.51
• Beat/Miss: Missed by -$0.04
• One Year Ago EPS: N/A

Packaging Co. of America Revenue Results

• Actual Revenue: N/A
• Expected Revenue: $2.13 billion
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Packaging Co. of America Announcement Details

• Quarter: Q4 2024
• Date: 1/28/2025
• Time: After Market Closes
• Conference Call Date: Wednesday, January 29, 2025
• Conference Call Time: 9:00AM ET

Packaging Co. of America (NYSE:PKG) engages in the production of container products. It operates through the following segments: Packaging, Paper, and Corporate and Other. The Packaging segment offers a variety of corrugated packaging products, such as conventional shipping containers. The Paper segment manufactures and sells a range of papers, including communication-based papers, and pressure sensitive papers. The Corporate and Other segment focuses on transportation assets, such as rail cars, and trucks. The company was founded in 1959 and is headquartered in Lake Forest, IL.

Packaging Co. of America Q4 2024 Earnings Call Transcript

Presentation

[Operator]

Good morning, everyone. Thank you for joining Packaging Corporation of America's 4th Quarter and Full Year 2024 Earnings Results Conference Call. Your host for today will be Mark Kolzan, Chairman and Chief Executive Officer of PCA. Upon conclusion of his narrative, there will be a question and answer session. Please also note, today's event is being recorded.

[Operator]

And at this time, I'd like to turn the conference call over to Mr. Kolesan. Please proceed when you are ready.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

Thanks for the introduction, Jamie, and good morning, everyone, and thank you for participating in Packaging Corporation of America's Q4 and full year 2024 earnings release conference call. Again, I'm Mark Kolzan, Chairman and CEO of PCA. And with me on the call today is Tom Hassfurther, Executive Vice President, who runs the Packaging business and Bob Munday, our Chief Financial Officer. As usual, I'll begin the call with an overview of the Q4 and the full year results, and then I'll be turning the call over to Tom and Bob, who'll provide further details. And then I'll wrap things up and we'd be glad to take questions.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

Yesterday, we reported 4th quarter 2024 net income of $221,000,000 or $2.45 per share. Excluding special items, Q4 2024 net income was $222,000,000 or $2.47 per share compared to the Q4 of 2023 net income of $192,000,000 or $2.13 per share. Net sales were 4th quarter record $2,100,000,000 in 20.24 $1,900,000,000 in 2023. Total company EBITDA for the 4th quarter, excluding special items was $439,000,000 in 20.24 $394,000,000 in 2023. Excluding special items, we also reported full year 2024 earnings of $814,000,000 or $9.04 per share compared to 2023's earnings of $784,000,000 or $8.70 per share.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

Net sales were $8,400,000,000 in 20.24 $7,800,000,000 in 2023. Excluding special items, total company EBITDA in 2024 was $1,600,000,000 in both 2024 and 2023. Details of all the special items for the years 2024 and 2023 were included in the schedules that accompanied the earnings press release. Excluding special items, the $0.34 per share increase in Q4 earnings for 2024 compared to the Q4 of 2023 was driven by higher prices and mix, dollars 0.52 and volume $0.40 in the Packaging segment, higher prices and mix $0.02 and volumes $0.02 in the Paper segment. Lower freight and logistics expenses benefited us 0 point 6 dollars These items were partially offset by higher operating costs of $0.48 as inflation remains a significant issue across most of our cost structure.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

In addition, scheduled maintenance outage expenses were higher by 0

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

point 0

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

$8 depreciation expense was also up $0.06 and other expenses were higher by 0 point 0 $6 Results for the quarter were equal to our 4th quarter guidance. Looking at our packaging business. EBITDA excluding special items in the Q4 of 2024 of $426,000,000 with 4th quarter record sales of almost $2,000,000,000 resulted in a margin of 22% versus last year's EBITDA of $385,000,000 and sales of $1,800,000,000 and also a 22% margin. For the full year of 2024, Packaging segment EBITDA excluding special items was $1,600,000,000 with sales of $7,700,000,000 or a 21% margin compared to the full year 2023 EBITDA of $1,600,000,000 with sales of $7,100,000,000 or a 22% margin. The operational benefits of our capital spending program and the continued great focus and execution by our sales, customer service, mill and corrugated products plant employees continues to deliver impressive results while helping to minimize the inflationary impact across most of our cost structure.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

As we've seen throughout the year, demand in our Packaging segment remained very strong during the quarter. Our corrugated products plants delivered record 4th quarter total shipments and an all time record shipments per day. The plants also set new annual records for total shipments and shipments per day. Excellent operations throughout our mill containerboard system set new quarterly and annual production records as well. This allowed us to meet our customer service and quality demand needs in a timely manner as well as build some very much needed inventory ahead of this year's annual mill outage schedule that will take place in the first half of twenty twenty five.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

I'll now turn it over to Tom to provide further details on the containerboard sales and corrugated business.

[Thomas A. Hassfurther, EVP, Corrugated Products at Packaging Corporation of America]

Thank you, Mark. As Mark mentioned, continuing strong demand during the 4th quarter resulted in record breaking performance for our plants and mills. Total shipments and shipments per day were up 9.1% over last year's Q4 versus the previous record breaking Q3 of 2024, shipments per day were up 3.2%. Outside sales volume of containerboard was 9,000 tons above last year's Q4 and down 18,000 tons versus the Q3 of 2024 as we emphasized hitting our year end inventory targets. For the full year, annual corrugated shipment records were set as well, both in total and per day, up 10.5% and 10.1% respectively, with one more shipping day compared to 2023.

[Thomas A. Hassfurther, EVP, Corrugated Products at Packaging Corporation of America]

Domestic containerboard and corrugated products prices and mix together were up $0.46 per share versus the Q4 of 2023. 4th quarter prices and mix, which were impacted by a less rich customer and product mix compared to the 3rd quarter were up $0.05 per share versus the previous quarter. Export containerboard prices were up $0.06 per share compared to the Q4 of 2023 and flat versus the Q3 of 2024. As we've indicated, we have continued to see very strong demand and are continuing to experience inflation across most of our cost base. Beginning January 1, 2025, we began invoicing a $70 per ton increase for linerboard and a $90 per ton increase for medium according to our recent price announcement.

[Thomas A. Hassfurther, EVP, Corrugated Products at Packaging Corporation of America]

These prices have been accepted by our customers and for our market containerboard purchases, we are paying higher prices to containerboard suppliers that began invoicing us according to their recent announcement. We were very surprised when,

[Thomas A. Hassfurther, EVP, Corrugated Products at Packaging Corporation of America]

as you are probably aware,

[Thomas A. Hassfurther, EVP, Corrugated Products at Packaging Corporation of America]

a couple of weeks ago, the RISI Pulp and Paper Week publication did not recognize any increase in the industry's benchmark prices for either linerboard or media. Industry sources and the Pulp and Paper Week publication itself have previously reported that at least 12 or around 90 percent of the top containerboard producers have issued January price increase announcements. The publication even noted that certain box makers have postponed purchases of linerboard this month to avoid the price increase. Yet the publication left the reported prices unchanged. As the industry's open market has shrunk over the years, we believe that the RISI publication is gathering information from a very small sample of the containerboard market and using that to opine on market conditions for the entire industry.

[Thomas A. Hassfurther, EVP, Corrugated Products at Packaging Corporation of America]

Additionally, the publication often references comments regarding box prices when the relevant product is containerboard. As you know, boxes are highly customized to customer needs and have different pricing attributes. This continues to be a source of frustration not only for us, but for our customers who want predictability in their prices. As mentioned previously, we have been moving off of indexing our prices to the RISI publication as quickly as contracts allow. However, this will take some time to complete.

[Thomas A. Hassfurther, EVP, Corrugated Products at Packaging Corporation of America]

I'm sure you will have some questions for us on this topic and we'll be happy to discuss them with you shortly. I'll turn it back to Mark.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

Thanks, Tom. Looking at the Paper segment, EBITDA excluding special items in the 4th quarter was $39,000,000 with sales of $152,000,000 or a 26% margin compared to the 4th quarter of 2023's EBITDA of $35,000,000 and sales of $144,000,000 or a 24% margin. For the full year 2024, Paper segment EBITDA excluding special items was $154,000,000 with sales of $625,000,000 or 25% margin compared to the full year 2023 EBITDA of $151,000,000 with sales of $595,000,000 or a 25% margin. Prices and mix were up 2% from last year's 4th quarter and up 1 percent from the Q3 of 2024, while volume was 5% above last year and down 5% versus the seasonally stronger Q3 of 2024. Additionally, during the quarter, we notified customers of a $60 per ton price increase, effective with shipments beginning January 13 for all office papers, printing papers and converting papers.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

The management team and all employees of the paper business have done a tremendous job optimizing our inventory and product mix and remain highly focused on efficient and cost effective operations in order to deliver outstanding results throughout the year last year. I'll now turn it over

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

to Bob.

[Robert P. Mundy, EVP and CFO at Packaging Corporation of America]

Thanks, Mark. Cash provided by operations during the quarter totaled $325,000,000 and free cash flow was $124,000,000 The primary payments of cash during the quarter included capital expenditures of $201,000,000 dividend payments of $112,000,000 cash tax payments of $82,000,000 and net interest payments of $37,000,000 For the full year 2024, cash from operations was $1,200,000,000 with capital spending of $670,000,000 and free cash flow of $521,000,000 Our year end cash balance, including marketable securities, was $852,000,000 with liquidity of $1,200,000,000 Our final recurring effective tax rate for 2024 was 24.4%. Regarding full year estimates of certain key items for the upcoming year, we estimate dividend payments of $450,000,000 total capital expenditures to be in the range of $840,000,000 to $870,000,000 and DD and A is expected to be approximately $565,000,000 Our full year interest expense in 2025 is expected to be around $56,000,000 and net cash interest payments should be around $65,000,000

[Robert P. Mundy, EVP and CFO at Packaging Corporation of America]

The

[Robert P. Mundy, EVP and CFO at Packaging Corporation of America]

estimate for our 20 25 book effective tax rate is 25%. Compared to 2024, the planned annual outages in 2025 include

[Robert P. Mundy, EVP and CFO at Packaging Corporation of America]

all

[Robert P. Mundy, EVP and CFO at Packaging Corporation of America]

of our larger mills with a higher number of outage days, Including lost volume, direct costs and amortized repair costs, we currently expect the outages to total $1.18 per share. The current estimated impact by quarter in 2025 is $0.23 per share in the 1st quarter, dollars 0.32 in the 2nd, dollars 0.18 in the 3rd quarter and $0.45 per share in the 4th quarter. I'll now turn it back over to Mark.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

Thanks,

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

Bob. The hard work of our employees along with strong relationships between us and our customers and suppliers delivered outstanding results for PCA for 2024. In our Packaging segment, new annual company records for shipments and production were achieved in our corrugated products plants and mills. We successfully completed the number 3 machine conversion to containerboard at the Jackson Mill and many other key initiatives throughout the system. We also completed numerous high return and efficiency improvement projects in our corrugated products plants that will allow us to better optimize our entire packaging business for the future and deliver profitable growth and mix enhancement opportunities for our customers and shareholders.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

And we still have many key strategic capital spending opportunities in progress or ahead of us in 2025. 2024 also saw our paper business match the record margins from 2023, reflecting the capabilities of our employees to optimize our product mix, inventory, distribution channels and overhead structure along with running very cost effective and very efficient manufacturing operations. We ended the year with $1,200,000,000 of liquidity and a strong balance sheet which maintains the financial flexibility to react quickly to most situations or opportunities in the future. We remain committed to a balanced approach towards capital allocation in order to profitably grow our company and maximize returns to our shareholders, while still adhering to our conservative balance sheet views as we've done in the past. I'm very proud of our employees, these accomplishments and the very strong partnerships we've built with our customers and suppliers over many years.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

Looking ahead, as we move from the 4th and into the Q1 in our Packaging segment, although seasonally slower, we expect volume in our corrugated products plants to set new first quarter records for total shipments and shipments per day. Containerboard volume will be lower with 2 less operating days and scheduled maintenance outages at the Countess Tennessee Mill and Valdosta Georgia Mills. Domestic prices will be higher with an improved product mix together with our previously announced price increases. Export prices are assumed to be stable. In our Paper segment, we forecast slightly lower volume with 2 less mill operating days and prices and mix to be fairly flat.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

With the exception of recycled fiber prices, we expect price inflation across most of the direct, indirect and fixed operating and converting costs along with a higher cost mix of mill operations. In addition, wood, energy and chemical costs will also increase due to the unusually cold seasonal weather negatively impacting usages and yields for these items. Labor and benefits costs will be higher due to the timing related items that occur at the beginning of a new year for annual increases, the result of payroll taxes and share based compensation expenses. 1st quarter rail rate increases at 3 of our mills will impact freight and logistics expenses, and we expect higher depreciation expense. Lastly, scheduled outage expenses should be slightly lower, and we assume a lower corporate tax rate.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

Considering these items, we expect the Q1 earnings for $2.21 per share. 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 the annual report on Form 10 ks and in subsequent quarterly reports on Form 10 Q filed with the SEC. Actual results could differ materially from those expressed in the forward looking statements. And with that, Jamie, I'd like to go ahead and 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.

[George Staphos, Analyst at Bank of America]

Hi, thanks very much. Good morning, everybody. Thanks for the details. Mark, I guess, first thing I want to ask of you, Tom and Bob, can you talk a little bit about bookings and billings to start the quarter, what you're seeing? And given how busy PCA has been over the last couple of quarters, is that influx of volume creating any sort of inefficiencies beyond normal that you would call out and that we should be at least considering in terms of our modeling for you on a going forward basis?

[George Staphos, Analyst at Bank of America]

And I had a couple of follow ons.

[Thomas A. Hassfurther, EVP, Corrugated Products at Packaging Corporation of America]

Hey, George, it's Tom. Bookings and billings are up 8% so far in January. So we're off to a very good start. And we indicated that in our opening statements as well. So that's very good.

[Thomas A. Hassfurther, EVP, Corrugated Products at Packaging Corporation of America]

The volume increase, I think if you take it coupled with the capital initiatives that we have, yes, that has caused some cost inefficiencies quite frankly, because we got a lot of those projects going on, a lot of plants and you're shifting a lot of business around. But again, our people have done a tremendous job handling that and taking care of our customers.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

George,

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

for last year for 2024, we on the converting side, we accomplished 12 major new equipment installations on the converting side. These are major reconfigurations of converting lines. And then on within corrugators, we either had major rebuilds or new corrugator installations at 12 locations. And we finished building up the new Salt Lake City plant and then got ready to build up the new Glendale operation. But we continue at this pace.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

I mean, prior year and then last year, we're on that pace to run 60 major projects within the corrugated business and we'll continue that this year. So along with all the benefit, there is some short term disruption that occurs, but the capability that it gives us is just incredible. We would not be doing what we're doing today if we hadn't been keeping up this pace of spending over the last half dozen years. So it's the gift that keeps on giving.

[George Staphos, Analyst at Bank of America]

We shouldn't call it out because it's what enabling the growth is what you is kind of your answer there, right?

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

Exactly. Yes.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

It's truly the growth engine.

[George Staphos, Analyst at Bank of America]

Now, can you help us a little bit in terms of the sequential move from 4Q to 1Q in terms of some of the cost factors?

[George Staphos, Analyst at Bank of America]

And in

[George Staphos, Analyst at Bank of America]

particular, I'm thinking about whether usage, input costs, what that might be causing you and for that matter on the incentive comp? And then since you had teed it up on pricing, you're out with your price increases effective in January, others are as well. I know it gets a little bit sensitive because you can't talk about what others may or may not be doing or forward looking. But how do you square the circle then if you're raising an effective in January and the arbiters are saying it hasn't happened yet? Are you giving your customers at all any price protection or time delay between when it's effective, when you announce and when you make it effective?

[George Staphos, Analyst at Bank of America]

So two questions there.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

Let's start with Bob.

[Robert P. Mundy, EVP and CFO at Packaging Corporation of America]

Hey, George. Yes, just on some of the cost movements from 4Q to 1Q, if you look at the buckets of what's higher, there's a higher cost of relative to the mill mix. There's just that's a component. Then there's the weather seasonal items that we typically have, but this is sort of exacerbated by this vehicle that the country went through during the month of January.

[Robert P. Mundy, EVP and CFO at Packaging Corporation of America]

And then there are those timing items that we typically talk about relative to wage increases and tax fringe benefits and so forth. So if you say that our costs, round numbers, somewhere between $0.50 $0.60 higher on all operating and converting costs, 65% of those are these items that typically will flip back the other way, not totally, but I would say 70% of that amount is will flip back in the second and third quarters. So that's sort of how we bridge the 4th to the first and then what we expect how much of that we expect to turn around in subsequent quarters.

[George Staphos, Analyst at Bank of America]

Okay.

[Thomas A. Hassfurther, EVP, Corrugated Products at Packaging Corporation of America]

George, this is Tom. Let me see if I can fill you in a little bit on the pricing side. So for starters, let's make the distinction here. We're talking about linerboard and medium.

[Thomas A. Hassfurther, EVP, Corrugated Products at Packaging Corporation of America]

So we're talking about containerboard, all right? And in the containerboard segment, we raised the prices. We're billing at those prices. Our customers are paying will be paying those invoices at those higher prices. And we will be doing likewise on the outside purchases that we have as well.

[Thomas A. Hassfurther, EVP, Corrugated Products at Packaging Corporation of America]

So some of that is comes from overseas because it's a specialty grade that may or may not be made here in the United States or certainly the products that are made here in the United States that we are a net buyer of and we're paying those invoices as we go. So that is in place and that is set, all right? The frustration, as I mentioned in the verbiage that I gave you in the opening statements, is related to discussions around boxes and things like that. Now we've always said our box price increases are between us and our customers. Those aren't publicly announced, but we do have some and it's a relatively sizable amount that are still tied to what happens in RISI and what's reported in RISI.

[Thomas A. Hassfurther, EVP, Corrugated Products at Packaging Corporation of America]

And as I said, we're moving away from that as fast as we possibly can because I think in a lot of ways and I've been at this a long time and if you go back in time, there was a pretty large open market and today it's a very, very small open market. So I think there's become some confusion in terms of how the reporting goes and what the interpretations are. And so we're finding this vehicle a little less useful going forward. And therefore, we're moving away from it as fast as we can. Hopefully that kind of wraps up your question a little bit.

[Operator]

Our next comes from Mike Roslin from Truist. Please go ahead with your question.

[Michael Roxland, MD - Equity Research at Truist Securities]

Yes. Thank you, Mark, Tom and Bob for taking my questions and congrats on a strong year.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

Thanks, Mike.

[Michael Roxland, MD - Equity Research at Truist Securities]

I just wanted to follow-up.

[Michael Roxland, MD - Equity Research at Truist Securities]

Can you give us a sense of the operating rate you're currently at? Would it be fair to say you're running full out given the strong demand you have? And if that's the case, can you help us understand the timeframe over which you expect to add capacity at Counts and Valdosta? You mentioned that, I think you teased that in the last earnings call. When do you think those projects will be operational?

[Michael Roxland, MD - Equity Research at Truist Securities]

What incremental capacity do they add?

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

We've got the opportunity to add capacity as time goes on. As we've always said, we have tremendous flexibility on how we provide containerboard tons into the system. Obviously, we completed the Big Jackson reconfiguration. But nevertheless, we also have a lot of opportunity on how we optimize the 7 mill system right now. Regarding what you mentioned between Counts and Valdosta, those projects, if we go forward with those, would be the next couple of years timing.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

And so again, that's something that we haven't decided to execute. We're studying all opportunities as we always do, and we have tremendous flexibility on how we bring new tons into the system when they're needed. And so that's the beauty of where we are. The high integration and the continuation of our demand growth presents the high opportunity, high return for these projects in our mills as we go forward. So we'll let you know when the decisions get made.

[Michael Roxland, MD - Equity Research at Truist Securities]

Got it. I appreciate that, Mark. And then, so how much can you just comment then about where the system is right now in terms of operating rate? How much ability or how much flex you have in the system right now to meet what seems to be really growing demand?

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

We are running. I'm not going to say we're running full out. We're running hard, which is a good place to be. We run best when the pressure is on. But again, we've got room to optimize the system and the grade mix.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

And also, as we've always done, we did this back over the years, the ability to buy some open market tons within a region where it makes sense. So we have those opportunities. So again, the ability to really utilize our capacity right now and whether you call it running full out, we always find ways to squeeze more tons out of the system We'll continue doing these projects. These are the high class opportunities we engage with.

[Michael Roxland, MD - Equity Research at Truist Securities]

Got it. And one last question just before turning it over. Can you give us a sense of the volume cadence you're expecting through 2025? Should we expect some more pronounced volume growth in the first half and then maybe lessening as you get towards midyear in the back half, partly due to tougher comps?

[Thomas A. Hassfurther, EVP, Corrugated Products at Packaging Corporation of America]

Well, I'll tell you Mike, the comps are going to get much tougher as the year goes on. And if you look at last year's. So but we see continued volume growth throughout the year, steady growth, but it will be but obviously the numbers come down a little bit on percentages compared when you do a year over year comparison as we move throughout the year. But we have plenty of growth opportunities and lots of things that we're already putting in place and we'll continue to put in place as some of our capital projects come on board and we're able to produce more.

[Michael Roxland, MD - Equity Research at Truist Securities]

Thanks very much, Tom. Good luck in 2025.

[Thomas A. Hassfurther, EVP, Corrugated Products at Packaging Corporation of America]

Thank you.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

Thanks, Mike. Next question?

[Operator]

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

[Gabe Hajde, Analyst at Wells Fargo]

Mark, Tom, Bob, good morning.

[Thomas A. Hassfurther, EVP, Corrugated Products at Packaging Corporation of America]

Good morning, Gabe.

[Gabe Hajde, Analyst at Wells Fargo]

Start with the sequential numbers that you kind of give us on a quarterly basis in terms of the split corrugated price realization and export. And if I'm doing my math right, I'm seeing about $50 a ton of price realization in the Q4 or excuse me, in 2024, which would imply sort of $30,000,000 of unfavorable mix. And that in my mind seems a bit punitive and probably uncharacteristic of how PCA would operate. So I'm just curious if you guys have thought about it that way and if you're still realizing any price in Q1 'twenty five from movements that transpired in 2024 on a sequential basis from Q4 to Q1?

[Robert P. Mundy, EVP and CFO at Packaging Corporation of America]

Yes. Yes, Gabe, this is Bob. Yes, there is some of that that does some things that just move on an annual basis. So there is some movement relative to that as you said regarding these price increases of 2024. But the other thing you have to look at is if you sort of do the math and make sure you account for the inventory change and what's export volume and what's domestic volume, I think it's somewhere around the mid-fifty something dollar a ton change.

[Robert P. Mundy, EVP and CFO at Packaging Corporation of America]

And then you have to compare rather than comparing to $80 which were the 2 increases at the beginning of 2020 4, you have to remember there was a $20 per ton drop late in the year in 2023. So you sort of look at it that way and let's say that's a net $60 a ton. And like I said, I think we're in mid-50s something like that and similar to your math. And then you do have mix changes. You have customer mix, product mix and seasonal mix things like that that weigh into it.

[Robert P. Mundy, EVP and CFO at Packaging Corporation of America]

So we feel good about capturing the price based on those index changes that you referenced.

[Gabe Hajde, Analyst at Wells Fargo]

Okay. Thank you. And I guess for the avoidance of doubt in the Q1, are you telling us that included in the guidance that you gave us 2.21 includes price increases on open market tons and not on the converted box side? Or are you embedding in what was been announced on both the corrugated and

[Robert P. Mundy, EVP and CFO at Packaging Corporation of America]

No, there's definitely some open market. As we've always said, those things happen it happens immediately when there's a price change up or down. But there are some things relative on the box side that regarding those price increases from last year that now will take effect in the Q1. So that's embedded in there too along with what we feel like we'll realize from this year's January price increases. Considering the impact of RISI as Tom was talking earlier, RISI not picking it up in January.

[Robert P. Mundy, EVP and CFO at Packaging Corporation of America]

So if they adjust for that a little bit, but there is some of that in our number as well.

[Gabe Hajde, Analyst at Wells Fargo]

Understood. Okay. And last one on CapEx. You did signal on the Q3 call that it would be up into $25,000,000 It's probably up a little bit more than what we were modeling. I don't know how others are thinking about it.

[Gabe Hajde, Analyst at Wells Fargo]

But the Glendale, I think, box facility, should we sort of pencil in numbers that we see are $240,000,000 to $260,000,000 for a new box plant, depending if it's outfitted with a corrugator? But even if I adjust for that, when I look at maintenance, I think that was also supposed to be down in 2025 and it's actually up. So, Mark, are you telling us there is no incremental capacity on the containerboard side in 2025, no debottlenecking or anything like that in that CapEx number?

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

No, there certainly is. There's work going on in the mills. Again, there's no one big project. There's just a whole host of small projects that we always do every year to enhance what we have. One of the challenges that we've laid out to the team over the last year is that over the last 6 or 7 years of all these conversions that we've done at a very blistering pace, now is the time to step back in and really optimize what we have.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

And so, we were doing these conversions and moving on to the next mill at such a pace, we've never really taken the time to really drill down and make sure we're getting all the benefits from all the spending that was taking place. So now we've got the technology organization stepping back in and engaging with the mills and making sure that what we are doing is extracting all the value we can. So that gives us good return. But as far as the capital spending, this year, if you think about Glendale project down in Arizona, we're finishing out that box plant. And there is some number, 10 years ago, you could build a box plant $50,000,000 and now a big full line box plant, you're talking $200 plus 1,000,000 We've also just this week, we broke ground in Newark, Ohio for another big new box plant.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

That's been in the works for the last few years. We actually bought the land 3 years ago. And so that box plant will be under construction and hopefully have everything ready to run by the end of next year. We also with this 800 high 800 capital call out that we're talking about right now, there's a major rebuild taking place at another plant in the Northeast. It's not a new box plant, but essentially it will be like new and we're done with it inside.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

And then there's another reconfiguration on the East Coast that's a major enhancement, major rebuild of that plant. So there there's 4 big activities going on within the corrugated products side of the business along with a call out right now and I'm probably right there probably another 50 projects going on for the year That will be the smaller projects, the evolves, the single converting line replacements that will just continue forever. And so that's all baked into that capital call out. But there's a good portion of new business growth in that capital along with optimization and just enhancing the business, not just maintenance. Maintenance is a small portion of that capital.

[Robert P. Mundy, EVP and CFO at Packaging Corporation of America]

And Gabe, relative to

[Robert P. Mundy, EVP and CFO at Packaging Corporation of America]

your question on the maintenance expense, thinking it was down. If you're recalling something from the last quarter's call, there was a question about what's normal relative to what we had as outages in 2024. But it was not an indication of what our plan was for 2025 regarding outages. And the reality is, there's a couple of things. One is we have more larger mills with more days down in this year's plan versus last year, larger meals, more expensive, more days down, so on and so forth.

[Robert P. Mundy, EVP and CFO at Packaging Corporation of America]

The other thing is, in the second half of twenty twenty two, all of twenty twenty three and then for the first part of 2024, certainly in the Q1 of 'twenty four, we were still taking running to demand. So we had market downtime. And the way we sort of bucket our variances, if you're in market downtime and you have a maintenance outage, you would not include the profit per ton of those in your you wouldn't penalize your outage for that because your market downtime, you couldn't sell the ton anyway. So those the negative impact of that shows up in your volume variances that we talk about. Whereas this year, we have none of that.

[Robert P. Mundy, EVP and CFO at Packaging Corporation of America]

So that profit per ton is in our outage calculations for every ton that's down. That's another reason it's going to be higher relative to 2024, if you follow me.

[Gabe Hajde, Analyst at Wells Fargo]

I do. Thank you guys for all the detail and appreciate the investment in Ohio.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

Good deal. Next question.

[Operator]

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

[Mark Weintraub, Senior Analyst and Head of Business Development at Seaport Research Partners]

Hi. Thanks.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

Good morning, Mark.

[Mark Weintraub, Senior Analyst and Head of Business Development at Seaport Research Partners]

Good morning. So to the extent you can help us, just trying to understand how much of the higher box prices that would come as a part of the containerboard price increase initiative that's been announced for January would is incorporated in your 1Q guidance? Just really trying to understand how much additional upside there could be through the balance of the year if the price increase gets fully implemented?

[Thomas A. Hassfurther, EVP, Corrugated Products at Packaging Corporation of America]

Yes, Mark, this is Tom. What happens is it's a timing issue, especially relative to the contracts that we have left that relate to RISI. So we got to take a relatively conservative approach in the Q1 to what to how those contracts would roll through. However, we are implementing right now the non contractual business we're going ahead and putting in place. But again, those amounts and those sorts of things is between us and our customers when it comes to boxes.

[Thomas A. Hassfurther, EVP, Corrugated Products at Packaging Corporation of America]

So we take a we don't publicly come out and announce some of those things that those agreements that we've got with our customers. But I think what you're really referring to is the index and what's left tied to the index. Like I said, that rolls through at a different rate. And until that index indicates the price is a line or medium going up, it won't trigger some of those contracts.

[Mark Weintraub, Senior Analyst and Head of Business Development at Seaport Research Partners]

So is it fair to say,

[Mark Weintraub, Senior Analyst and Head of Business Development at Seaport Research Partners]

and again, I'm really trying to get potential upside beyond the 1Q, but another way to maybe ask the same question is, so if for whatever reason RISI didn't publish the containerboard price increase in February or March, how significant an impact would that have on what you provided in the guidance versus what you then would expect, if that's a question you can ask?

[Thomas A. Hassfurther, EVP, Corrugated Products at Packaging Corporation of America]

Well, again, I mean, as I said, we're taking a pretty conservative approach here. So is there upside going forward? Yes. I mean, there's no question about it once this is indicated in RISI.

[Mark Weintraub, Senior Analyst and Head of Business Development at Seaport Research Partners]

Okay.

[Mark Weintraub, Senior Analyst and Head of Business Development at Seaport Research Partners]

And then can you give us any more color in terms of like the process of moving customers off the indexes and or

[Mark Weintraub, Senior Analyst and Head of Business Development at Seaport Research Partners]

what type

[Mark Weintraub, Senior Analyst and Head of Business Development at Seaport Research Partners]

of variables are being put in place? Or is it just like a negotiation each time or is it being tied to various costs or things like that? Just to help us begin to understand as we want to kind of be able to forecast in the future what might happen to your pricing, etcetera.

[Thomas A. Hassfurther, EVP, Corrugated Products at Packaging Corporation of America]

Well, it's going to be it's probably going to be a little more of a mixed bag. As I mentioned, our customers have been very, very frustrated with this process and so have we. So and I think at the end of the day, it's more of a discussion with our customers about what's going to happen going forward with pricing and an agreement that we come to. There's we've not found any other indicator out there that we feel comfortable with. So I think it's going to be it's going to take a little time to unwind.

[Thomas A. Hassfurther, EVP, Corrugated Products at Packaging Corporation of America]

But we feel very comfortable in our discussions with our customers about where we're going to end up going forward. And it's going to be a little different per customer, but I think that the discussions have gone very well.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

Mark, our customers, they

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

are undergoing the same inflation that we undergo and the same cost pressures. They appreciate what we're talking about every day. They also appreciate and they understand the capital spending that we do and we expect the return for our capital spending. And capital spending provides incredible benefits for the customers in terms of quality and on time delivery. So there's that discussion is truly a customer driven discussion 1 on 1.

[Operator]

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

[Anthony Pettinari, Analyst at Citigroup]

Good

[Anthony Pettinari, Analyst at Citigroup]

morning. Just following up on Mark's question, is it possible to say just kind of order of magnitude what percentage of customers you've moved off of refi? Is it 5% or 25%? And then given the turnover of customer contracts, like how long it might take for you to get maybe a large majority of customers off the index?

[Thomas A. Hassfurther, EVP, Corrugated Products at Packaging Corporation of America]

Well, Anthony, this endeavor didn't start 5 years ago. It started about a year ago. So this is as I said, this is going to take some time to unwind those contracts. Some of those are long term contracts. And obviously, as we've stated many, many times, I mean, we've dealt with these customers for decades and we've got long, long term relationships.

[Thomas A. Hassfurther, EVP, Corrugated Products at Packaging Corporation of America]

So we're very sensitive to those relationships and we're making sure that we're doing what is in the best interest of ourselves and our customers as we move forward. So this is going to take a little time to unwind. I'm not going to give you percentages of how this is going to sequentially fall into place here. But it's going to take some time, but we're moving in that direction.

[Anthony Pettinari, Analyst at Citigroup]

And then just switching to the CapEx guide, I think you talked about 4 big box plant projects, Ohio, Glendale and then 2 maybe reconfigurations

[Anthony Pettinari, Analyst at Citigroup]

in the East Coast.

[Anthony Pettinari, Analyst at Citigroup]

Is it possible to say what of the 840 to 8 70, how much of that is those 4 big box plant projects? And are there any that you would call out, whether it's Ohio or Glendale or others as being especially large component of the 840?

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

Yes. Hold on one second. Let me get some numbers here. Probably $250,000,000 is going to that this year.

[Anthony Pettinari, Analyst at Citigroup]

Got it. Is the Ohio greenfield the largest roughly or

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

Yes.

[Anthony Pettinari, Analyst at Citigroup]

Okay. Great. That's very helpful. I'll turn it over.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

I mean, there's again, there's another one of the projects is it's about a $70,000,000 project to reconfigure one of our plants. And that's a discrete project that we'll see this year also that's in that number.

[Anthony Pettinari, Analyst at Citigroup]

Got it. Thank you.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

And again, just to remind you of the $445,000,000 that was allocated to the corrugated side for 2024, dollars 370,000,000 of the $445,000,000 was for growth opportunities. So again, most of the capital spending that's going on is to enhance our capability to go to market and work with the customer.

[Thomas A. Hassfurther, EVP, Corrugated Products at Packaging Corporation of America]

And

[Thomas A. Hassfurther, EVP, Corrugated Products at Packaging Corporation of America]

let me remind you, Anthony, also that as we've said many, many times, these are already growth opportunities that are in place. These aren't we're not expanding or doing any of those sorts of things in hopes that we get more business. This is growing with the existing customer base we have.

[Anthony Pettinari, Analyst at Citigroup]

Thank you.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

All right. Next question?

[Operator]

Your next question comes from Philip Bain from Jefferies. Please go ahead with your question.

[Phillip Tran, Investment Banking Associate at Jefferies Financial Group]

Hey, guys.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

Good morning, Philip.

[Phillip Tran, Investment Banking Associate at Jefferies Financial Group]

Exciting times with all

[Phillip Tran, Investment Banking Associate at Jefferies Financial Group]

these growth projects. Mark, I guess perhaps help us think through how the contribution kicks in. I know the Phoenix, Arizona box plant at least was scheduled to come on I think late 1Q, 2Q. That's probably going to be contributing this year, but the other projects you've called out, the reconfiguration Ohio, help us size up what that could actually drop to the bottom line. Do we see any of this year or is this more of a 2025 event where you could accelerate growth?

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

Yes, the Arizona project should start up this spring as scheduled and that new project will take the place of 3 we've been running a business down in Phoenix for years. But to run that business, we've been operating out of 3 different locations within the kind of the neighborhood, so to speak. It's not the most effective way to run a business. And so this new plant will allow us to consolidate all the operations to one state of the art high efficiency operation. In terms of unit labor efficiencies, it will add tremendous efficiencies, probably triple or quadruple the production capability of the region down there now coming out of this one plant.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

And again, the quality, cost structure, we'll see immediately this year. I'm not going to attempt to give you a number, but it's it will be immediately accretive to the system when we bring the plant on and we exit the old operation. And the employees are moving over from the existing operation right into the new operation.

[Phillip Tran, Investment Banking Associate at Jefferies Financial Group]

And then the ramp up

[Phillip Tran, Investment Banking Associate at Jefferies Financial Group]

of some of these other projects you called out, New Jersey, the reconfiguration

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

There's a New York and a Pennsylvania project going on. And they'll again, those will be more disruptive type of projects that Tom spoke of and that I spoke of. Those are the type of projects that you suffer a little bit of pain while you're doing them. But then once they're done, they provide incredible opportunities for the next 10 years for us.

[Phillip Tran, Investment Banking Associate at Jefferies Financial Group]

But any color on the timing of that ramp, Mark? Is that at 25 years?

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

Well, just again, we'll finish those projects this year and then get them running and get the bugs worked out. And then again, we'll see immediate benefits out of those also.

[Thomas A. Hassfurther, EVP, Corrugated Products at Packaging Corporation of America]

Yes. Philip, I'll add just a couple of things to this. Don't forget that any one of these projects, we're building in, as Mark mentioned, a lot of efficiency in these projects, including closures of inefficient box plants and things like that where we can consolidate some operations into 1. But in addition, it gives us a lot more capacity to satisfy those customers that I talked about earlier who want to do business with us, want us to supply them, have agreements for us to supply them, including different markets that we haven't been in, especially when you consider Phoenix because we had a smaller 3 building operations that couldn't didn't have a lot of reach. This will give us provide us a lot more opportunities.

[Thomas A. Hassfurther, EVP, Corrugated Products at Packaging Corporation of America]

And the one in Ohio is the same, I mean, which we where we've got a very large footprint. And this will be able to consolidate that footprint a little bit in terms of numbers of plants, but also more importantly, create a lot more efficiency and a lot more reach for us in terms of our customer base.

[Phillip Tran, Investment Banking Associate at Jefferies Financial Group]

Super. And then from a demand standpoint, Tom, you guys talked about box events in 'twenty four and that momentum sounds like it continued into January so far.

[Phillip Tran, Investment Banking Associate at Jefferies Financial Group]

Can you

[Phillip Tran, Investment Banking Associate at Jefferies Financial Group]

help us think through

[Phillip Tran, Investment Banking Associate at Jefferies Financial Group]

some of this? I mean, some

[Phillip Tran, Investment Banking Associate at Jefferies Financial Group]

of it's obviously the market's recovering, but clearly outpacing the market, you're taking share, called out some share gains on the ground side of things. Certainly, still a lot of disruption in the marketplace with consolidation in the making. Do you see that as a big driver and that's a catalyst in terms of momentum you've seen thus far this year? Like how should we think about share gain opportunities this year for you guys?

[Thomas A. Hassfurther, EVP, Corrugated Products at Packaging Corporation of America]

Well, I think as I mentioned many times, I said we've got our core customer base. If you're a if you position yourself as the best supplier and the most reliable supplier to that customer base, there it presents many internal opportunities for you to continue to grow your volume. And I think traditionally a lot of corrugated customers have split their business and done other things because they just couldn't get comfortable with sole suppliership and things like that. But that's changing dramatically over time. And we're proving in a lot of cases that we're just we're a great supplier, incredibly reliable, got the best we consider the best quality and the best service of anybody in the business.

[Thomas A. Hassfurther, EVP, Corrugated Products at Packaging Corporation of America]

And we're great partners for our customers. And we position our business around those customers and about their game plans. So that's I think that gives us a competitive advantage. And fortunately, we've got the financial flexibility to be able to expand at a rapid rate, to be able to do some things quicker than maybe some others can do it. And I see nothing but solid runway for those opportunities going forward.

[Phillip Tran, Investment Banking Associate at Jefferies Financial Group]

Got it. And John, one quick one. Mix was a modest drag last year on the Brown side. Do you anticipate mix being much of a good guy or bad guy when you think about 25?

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

The 4th quarter, we had that mix impact. There was a lot more e commerce activity quite frankly in the Q4. That's done now. And so I think the comment was made during the call earlier that we expect an improved richer mix 1Q versus 4Q. And so we'll probably see that better mix through the first half of this year.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

And then as the year rolls on, we'll see more e commerce into the Q4 again, I expect.

[Thomas A. Hassfurther, EVP, Corrugated Products at Packaging Corporation of America]

Yes, I think our mix is pretty steady compared

[Thomas A. Hassfurther, EVP, Corrugated Products at Packaging Corporation of America]

to what it's always been.

[Operator]

Next question comes from Charlie Muir Sands from BNP Paribas. Please go ahead with your question.

[Charlie Muir-Sands, Equity Research Analyst at BNP Paribas]

Yes. Good morning, guys. Thank you very much for taking my questions. Just returning to the capital expenditure. I wondered if you could give us an estimate at all as to how much you would consider to be genuine maintenance CapEx within the overall budget for this year?

[Robert P. Mundy, EVP and CFO at Packaging Corporation of America]

Yes, Charlie, this is Bob. Typically that's about it runs 60%, 65% of our total spend. I think that's probably just a good way to think about it. Year to year it's different, but I'd say that's

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

This year we've got a few bigger Yes, they go a little less. Yes, it's going to be on a percentage basis, it will be less this year because we've got 4 big discrete projects going on in the packaging side of the business. But as I said earlier, the bulk of the spending is going towards growth opportunities and not just maintaining what we have. We've been fortunate that over the decades, we've done a good job of maintaining our assets and continuing to make sure we stay on top of the asset preservation. So we're not playing catch up.

[Charlie Muir-Sands, Equity Research Analyst at BNP Paribas]

Yes, very clear. And on the weather impacts that you called out, I recall that January 2024, there was some pretty severe cold weather as well. But I'm not sure if it was you, but I think some of the other box makers called that out as an impact in Q1 last year. So just I just wondered, is the weather you're talking about here something that you see as adverse just on a quarter on quarter basis or also more challenging, incurring more cost than last year?

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

Yes. Let me comment and then Bob can tell. Obviously, we've just gone through the month of January, we're wrapping up here, but we've had a couple of weeks of severe weather and not just severe normal weather, but we've had more colder snowy weather in the very deep south region. As you all know, last week along the Gulf Coastal area, Interstate 10 was shut down from Houston all the way over to Florida for a couple of days. And so that was very disruptive.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

So it wasn't just the cold weather impacting energy usage and raw material consumption and yield, but it was actually impacting business in general, commercial activity. So there'll be a volume impact there with the cold weather. But again, we just had it in generally without a colder winter right now. We're running well. Operationally, we're running very well, but it's more expensive to run well under these conditions.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

And again, last week in particular, we saw some volume impact from that weather.

[Charlie Muir-Sands, Equity Research Analyst at BNP Paribas]

Thanks very much.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

Next question please.

[Operator]

The next question comes from Ryan Fox from Bloomberg. Please go ahead with your question.

[Ryan Fox, Analyst at Bloomberg News]

Hey, good morning. Good morning. I know Gabe, I think asked this question, but maybe he asked it a different way. I was hoping you could clarify. So if we look at the revenue per produced ton in 'twenty three versus 'twenty four, it looks like 'twenty four is down about $50 per ton, even while the index is up about $35 a ton, creating a margin of about $85 How do you how can you help us understand that?

[Robert P. Mundy, EVP and CFO at Packaging Corporation of America]

Run that say that again, Ryan.

[Ryan Fox, Analyst at Bloomberg News]

Yes. So revenue if we look at revenue compared to the produced tonnage year over year, that number is down about $50 per ton, even while the index has gone up for containerboard.

[Robert P. Mundy, EVP and CFO at Packaging Corporation of America]

For which period are you

[Robert P. Mundy, EVP and CFO at Packaging Corporation of America]

talking hey Ryan, which period are you talking about that it's gone down $50 a ton?

[Ryan Fox, Analyst at Bloomberg News]

$23 to $24 so full year 2023 to full year 2024.

[Robert P. Mundy, EVP and CFO at Packaging Corporation of America]

Yes. Well, if you adjust, I think what you're doing using produced tons, so you have to account for inventory change. But directionally, I'd say it's probably closer to 40, not 50, but go ahead.

[Ryan Fox, Analyst at Bloomberg News]

Okay. Well, I guess just in light of the fact that there were 2 price increases last year for about $80 and I realized that there was a $20 slide at the end of 2023. But if you look just to look at the averages containerboard over those 2 years, even that's up. So there's about an I call it $85 could be a little bit less than that. But there's a differential where prices are going the opposite direction of where the index is going.

[Ryan Fox, Analyst at Bloomberg News]

I'm just trying to figure out how do we square that?

[Robert P. Mundy, EVP and CFO at Packaging Corporation of America]

Yes. There's also in the way you're looking at that is there's export, a good chunk of export volume in that. And during that period, I think export was definitely going down. So that's sort of getting into your math a little bit. I think if you sort of accommodate for that, as well as some inventory change thing and some mixed things, I think we're right there where we would expect to be based on

[Robert P. Mundy, EVP and CFO at Packaging Corporation of America]

how that index moves.

[Thomas A. Hassfurther, EVP, Corrugated Products at Packaging Corporation of America]

And let me just add another element to this too, because if we don't actually sell tons, we sell MSF. And if the basis weight is working its way down on MSF, that's going to trigger a different situation in tons. And so there's a lot of variables that go into this. And again, that's a whole another subject that we could get into.

[Thomas A. Hassfurther, EVP, Corrugated Products at Packaging Corporation of America]

But here again, we've got it we have an industry that is measuring something they don't even sell, which is tons. And here we sell MSF. So when you're factoring everything around a ton, there are a lot of variables that go into that and that have to be taken into consideration.

[Robert P. Mundy, EVP and CFO at Packaging Corporation of America]

Yes. And just lastly, Ryan, as you know, price started moving down at the end of 2022 throughout a good part of 2023 and all the way into late 2023. And just the way those that affects our box, that's you've got to overcome all that. Prices come up $80 since then, but it was down $110 with all those decreases. So it's just the way the timing and the way those things when they start to appear, is sort of impacting what you're doing, which is just taking up high level revenues by tons.

[Ryan Fox, Analyst at Bloomberg News]

Yes. My other question for you is you've talked a little bit about how your customers are frustrated. Are you referring to box customers or containerboard customers?

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

Both.

[Ryan Fox, Analyst at Bloomberg News]

Both.

[Ryan Fox, Analyst at Bloomberg News]

Interesting. Okay. I guess last question, help me understand, I mean in the U. S, the mill operating rates are about 90%. We are I mean we're going to be on pace to export nearly 5,000,000 tons in 24.

[Ryan Fox, Analyst at Bloomberg News]

Why would an open market somebody who maybe doesn't have a mill, why would they be wanting to pay higher prices for containerboard with such overcapacity?

[Thomas A. Hassfurther, EVP, Corrugated Products at Packaging Corporation of America]

You'll have to ask them. I can tell you that our customers, our customers don't see it the same way you're calling it out. Again, I'm going to refer to something that you're measuring in terms of tons, but we don't sell many tons, we sell MSF. So there's a large disconnect in my opinion to what's really going on in the marketplace and what exists out there in terms of numbers. I'll give you another example.

[Thomas A. Hassfurther, EVP, Corrugated Products at Packaging Corporation of America]

There's a relatively large mill that produces that is producing everything they can produce and their output is about 50% of what is projected for that particular mill. So the projections and the realities are very different as well. And although we can buy some tons in the open market, the type of tons that we need to produce the boxes that our customers require is very limited. And we've had long term relationships to be able to do that. If those relationships did not exist, I would have some difficulty buying the proper tons.

[Ryan Fox, Analyst at Bloomberg News]

Yes. Obviously, with the lighter basis weights, that definitely creates some disparity in the contribution per machine hour on your mills. Is that lighter weight, Is that a thing that you're going to continue to see in the future where it's going to be a drag there?

[Thomas A. Hassfurther, EVP, Corrugated Products at Packaging Corporation of America]

Well, I wouldn't call it a drag. I just think it's a fact of life.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

I say,

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

I mean, it becomes an opportunity. We're making more product with less fiber. And that's part of the capital investment over the last decade is to run these mills on a lighter weight grade mix much more efficiently. And so it hasn't impacted the mill profitability and the mill capability.

[Ryan Fox, Analyst at Bloomberg News]

Great. Thank you so much.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

Thank you. I think I know we're out of time, but I know there was one more question. I think George Staphos may have had a question, if you're still on, George.

[Operator]

Yes, sir. Our next question is a follow-up from George Staphos. Please go ahead with your follow-up.

[George Staphos, Analyst at Bank of America]

Thanks, guys. I'll try to make it painless, Mark. Thanks for taking it. Just to wrap up all the pricing discussion, when we look at Q4 last year, Q4 this year, prices are up per ton. They're not down.

[George Staphos, Analyst at Bank of America]

They're up about 43, recognizing it's tons produced. And what you're saying is when we consider the price drop that entered last year and in fact you're building back from that and you look at mix, you're pretty much where you expect to be. Is that a fair statement?

[Robert P. Mundy, EVP and CFO at Packaging Corporation of America]

Yes, George. In my math, I would say we're closer to $55 a ton, something in the mid-50s rather than 40. But go ahead.

[George Staphos, Analyst at Bank of America]

Understood. Okay. And then the other question I had, aside from fiber, where are you seeing the most cost inflation? Because when we look at cost per ton, it's been trending steadily higher over time, despite the fact that you are spending a good amount of capital to become more productive, more efficient. So looking at your return on capital history over time, you don't spend bad dollars, so you're being coming up more efficient.

[George Staphos, Analyst at Bank of America]

Where are you seeing the most pressure on your cost? And what are you going to do about that on a going forward basis? What kind of products do you have that will take bend the curve back the right way on cost per ton? Thanks guys. Good luck.

[George Staphos, Analyst at Bank of America]

Good luck.

[George Staphos, Analyst at Bank of America]

Good luck. So

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

the Q1 energy is obviously a glaring factor. But don't forget, over time, fiber has become less of a component. You've got all of your labor, medical benefits, all of that element. Transportation is another example. All of your service costs, services in general, all the lease expenses, everything is up dramatically.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

We called this out on the call earlier. We've got rail increases taking place, significant rail increases again taking place this Q1. And so the fact that we are fortunate in the ability to effectively spend capital, it helps us maintain a position, but it certainly is not able to overcome all of your inflation. And so that's why you have to have price along with a very, very effective capital spending program to stay ahead of the curve here. But energy right now is probably the biggest Yes.

[Robert P. Mundy, EVP and CFO at Packaging Corporation of America]

In energy as far as your direct items, George, I mean even chemicals, the chemicals are going to be up and you look at just pretty much across the board for the types of chemicals we use, we're seeing price increases in the Q1 and those will stay with us throughout the year. But as Mark alluded to, 65 the majority of the inflation we're seeing is in those items below all your direct costs. The things that Mark was referring to, that's where the biggest hit will be.

[George Staphos, Analyst at Bank of America]

But also means you need to be given the expense inflation on labor, medical services, rail, which you can't control necessarily. You've got to be very, very precise, very strategic about where you put that next box plant so that you optimize around those various factors. But

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

And George, that's what we've been doing. I mean, think about the rate of spending over the last 7 or 8 years now, especially the last 6 years. The benefits that we've gained from this activity are immense. It's allowed us to do what we do and be where we are. Now, good news is we're going to continue at this pace and we'll continue to take advantage of this.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

But nevertheless, with this comprehensive inflation across the board, it doesn't matter how much capital you spend. You will never unless you see appropriate pricing, you can't keep up with all of the inflation. Thank you. Thank you. Appreciate it.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

Jamie, I think that may be wrapping things up. Do you want to conclude this?

[Operator]

Absolutely. Mr. Colzan, I do see that there are no additional questions. If you have any closing comments, feel free to proceed at this time.

[Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America]

Thank you everybody for joining us and look forward to talking with everybody at the end of April. Take care. Have a good day. Bye bye.

[Operator]

And ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your

[Operator]

lines.

Participants

Executives

• Thomas A. Hassfurther, EVP, Corrugated Products
• Robert P. Mundy, EVP and CFO

Analysts

• Mark W. Kowlzan, Chairman and CEO at Packaging Corporation of America
• George Staphos, Analyst at Bank of America
• Michael Roxland, MD - Equity Research at Truist Securities
• Gabe Hajde, Analyst at Wells Fargo
• Mark Weintraub, Senior Analyst and Head of Business Development at Seaport Research Partners
• Anthony Pettinari, Analyst at Citigroup
• Phillip Tran, Investment Banking Associate at Jefferies Financial Group
• Charlie Muir-Sands, Equity Research Analyst at BNP Paribas
• Ryan Fox, Analyst at Bloomberg News