Mark W. Kowlzan
Chairman and Chief Executive Officer at Packaging Co. of America
Thanks, Tom. [Technical Issues] million with sales of $143 million, or an 18.4% margin compared to fourth quarter 2020 EBITDA of $10 million in sales of $156 million, or a 6.1% margin. For the full year 2021 Paper segment EBITDA excluding special items was $72 million with sales of $600 million, or a 12% margin compared to full year 2020 EBITDA of $73 million with sales of $675 million, or a 10.8% margin.
As expected sales volume was below last year and third quarter 2021 levels as we did not produce anything for volume at the Jackson mill during the quarter. Average paper prices and mix were 9% above fourth quarter for 2020 and over 3% higher than the third quarter of 2021, as we continued the implementation of our previously announced price increases. While we have currently maintained our capability to produce uncoated freesheet on both machines at Jackson, we will continue to monitor market conditions and run our paper system accordingly.
As we begin the call -- as we begin the year, we anticipate that volume from our Paper segment will be fairly representative of the over 500,000 ton per year capacity at the International Falls mill. The commercial team and the employees at International Falls have done a tremendous job optimizing our inventory, product mix, and cost structure and for 2022 we expect solid EBITDA margins of 15% to 20% from the Paper segment. Finally, I'll mention that last week we notified customers of an $80 per ton price increase effective with shipments beginning February 14th for all office papers, printing papers, and converting papers.
I'll now turn it over to Bob. Thanks, Mark. The lower tax rate benefit in the fourth quarter was a result of favorable state income tax return versus provision adjustments made annually. We expect our tax rate for the first quarter of 2022 to represent a more typical rate of approximately 25%. Cash provided by operations during the quarter totaled $391 million with free cash flow of $152 million. Capital expenditures were $239 million, which was a bit higher than the guidance we gave you on our last -- call last quarter as we were able to get more work completed on projects at several corrugated plants as well as items related to the Jackson number 3 machine conversion than we had anticipated. For the year our total capital spending of $605 million were still below our original guidance range due to the same material equipment and labor availability issues we spoke about last quarter. Other cash payments during the fourth quarter included $189 million for the purchase price of the Advanced Packaging acquisition, dividend payments of $95 million, cash tax payments of $42 million, and net interest payments of $38 million. As we mentioned on our last call, during the third quarter, we issued $700 million of 30-year, 3.05% notes and use the proceeds from these notes to redeem our 4.5% $700 million 2023 notes in early October. This transaction lowered our overall interest rate from 3.9% to 3.5%, lowered our annual interest expense by $11 million per year, and extended our average debt maturity from 8.5 years to 16.3 years. Our gross debt remain unchanged at $2.5 billion. Based on the timing of closing the new bonds in September, our cash balance at the end of the third quarter included the new bond proceeds. However, since the redemption of the old bonds occurred in October, there was a cash outflow in the fourth quarter totaling $756 million, which included a redemption premium for the retired bonds. The final significant cash payment in the fourth quarter was $193 million for repurchasing over 1.4 million shares of our common stock at an average price of $133.79 per share. This provided an earnings per share benefit of approximately $0.01 in the fourth quarter compared to last year and we expect an additional sequential benefit of approximately $0.02 per share in the first quarter of 2022. These repurchases of our outstanding stock, together with $380 million of annual dividend payments, represent over 52% of cash from operations, or 64% of net income that was returned to shareholders in 2021. We ended the year with $765 million of cash including marketable securities and our liquidity at December 31st was just under $1.1 billion. For the full year 2021 cash from operations was $1.1 billion and free cash flow was $489 million. Our recurring effective tax rate for 2021 was 24% and our final reported cash tax rate was 19%. Regarding full year estimates for 2022 of certain key items as we move forward, we expect total capital expenditures to be approximately $800 million and DD&A is expected to be approximately $455 million. With the recent fourth quarter 2021 share repurchases, we expect dividend payments of approximately $375 million and cash, pension, and post-retirement benefit plan contributions of $52 million. Our full year interest expense in 2022 is expected to be approximately $86 million and net cash interest payments should be about $85 million. The estimate for our 2022 combined Federal and State cash tax rate is approximately 20%, and our book effective tax rate approximately 25%. Currently planned annual maintenance outages at our mills in 2022 will result in approximately 35,000 more tons of lost containerboard production compared to 2021, which includes the tons lost during the first phase of the Jackson number 3 machine conversion in the fourth quarter. The annual earnings impact of these outages, including lost volume, direct costs, and amortized repair costs is expected to be $1.13 per share compared to $0.91 per share in 2021. Current estimated impact by quarter in 2022 is $0.15 per share in the first quarter, $0.33 in the second quarter, $0.24 in the third, and $0.41 per share in the fourth quarter. I'll now turn it back over to Mark. Thanks, Bob. For almost two years now, our employees have displayed tremendous adaptability and energy to overcome any obstacles in both their personal and work lives to deliver significant accomplishments throughout the company. We achieved new records for both containerboard shipments and corrugated product shipments. We have successfully completed or substantially completed significant cost reduction and process improvement projects at our mills, including a new boiler at our Filer mill for utilizing self-generated biogenic sources for energy, fiber flexibility projects at Wallula in Jackson, Alabama, Woodyard, head box and shoe press improvements at Wallula Mill, head box and wet end upgrades at the Valdosta mill, real upgrades, pulp mill refining and shoe press improvements at DeRidder, Louisiana and many others. Along with our recent acquisition of Advanced Packaging, we completed numerous high-return projects in our corrugated products plants that will allow us to continue to better optimize the entire packaging business for the future and deliver profitable growth and mix enhancement opportunities for our customers and shareholders. All the capital improvement projects that I referenced in the mills and corrugated plants, have required the complete involvement of PCA personnel from project conception, preliminary and detailed engineering, all the way through to project implementation and start-up. Although it required significant capital investments in order to achieve these important initiatives, we did so while improving our industry-leading return on invested capital to over 19%. We optimize the platform and financial results of our paper business while utilizing the versatility of the Jackson, Alabama mill to produce containerboard with minimal capital spending and delivering over $100 million of profit to our packaging business in 2021. Over 64% of our net income was returned to our shareholders from dividend payments and stock repurchases. In addition, with our recent debt refinancing, we lowered the overall interest rate from 3.9% to 3.5%, lowered our annual interest expense by $11 million per year, and extended the average debt maturity from 8.5 years to 16.3 years. And finally, we ended the year with almost $1.1 billion of liquidity and a strong balance sheet, which maintains the financial flexibility to react quickly to most situations or opportunities in the future. These accomplishments, along with the recently approved $1 billion share repurchase authorization, clearly illustrate our continued commitment to a balanced approach towards capital allocation, in order to profitably grow our company and return -- and maximize the returns to our shareholders, while still adhering to our conservative balance sheet approach, as we've done for many years. I'm very proud of the accomplishments and the strong partnerships that we've built with our customers and suppliers over many years. Looking ahead, as we move from the fourth and into the first quarter, in our Packaging segment, we expect to benefit from higher corrugated product shipments with three additional shipping days, and we expect shipments per day to be higher than last year's first quarter, as demand remains very strong, along with slightly higher domestic and export prices and mix. Additionally, in our Paper segment, we expect higher prices and mix from our previously announced price increase that was implemented beginning last November. There should also be a small benefit in the first quarter from our most recent uncoated freesheet price increase that was announced last week. Scheduled outage expenses will be lower and we expect a small benefit from our recent share repurchases. However, continued higher inflation across most all operating and converting costs, as well as freight and logistics expenses more than offset these benefits. We estimate this to be the largest inflation-driven sequential cost increase in our history. In addition to the inflation-related impact, labor and benefits costs will also be higher due to timing-related increases as we start a new year, and seasonally colder weather should increase energy and wood costs. Considering these items, we expect first quarter earnings of $2.50 per share. This does not include any potential benefit from a $70 per ton price increase across all liner and medium grades that we communicated to our customers within the last few days. 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. These statements were based on current estimates, expectations, and projections of the company, and involve inherent risks and uncertainties, including the direction of the economy and those identified as risk factors in our Annual Report on Form 10-K, and in subsequent quarterly reports on Form 10-Q that are filed with the SEC. Actual results could differ materially from those expressed in these forward-looking statements. And with that, Myra, I'd like to open the call to questions, please.
