Packaging Co. of America Q1 2022 Earnings Call Transcript

Presentation

[Operator]

Thank you for joining Packaging Corporation of America's First Quarter 2022 Earnings Results Conference Call. Your host today will be Mark Kowlzan, Chairman and Chief Executive Officer of PCA. Upon conclusion of his narrative, there will be a Q&A session.

I will now turn the call over to Mr. Kowlzan. And please proceed when you're ready.

[Mark W. Kowlzan, Chairman and Chief Executive Officer at Packaging Co. of America]

Thank you, Patricia. Good morning, everyone, and thank you all for participating in Packaging Corporation of America's first quarter 2022 earnings release conference call. I'm Mark Kowlzan, 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 Mundy, our Chief Financial Officer.

I'll begin the call with an overview of the first quarter results, and then I'm going to be turning the call over to Tom and Bob, who'll provide further details. And then I will wrap things up, and we'll be glad to take questions.

Yesterday, we reported first quarter net income of $254 million or $2.70 per share. First quarter net income included special items expenses of $0.02 per share primarily for certain costs at the Jackson, Alabama mill for paper-to-containerboard conversion-related activities. Details of the special items for both the first quarter of 2022 and 2021 were included in the schedules that accompanied our earnings press release. Excluding the special items, first quarter 2022 net income was $256 million or $2.72 per share compared to first quarter 2021 net income of $169 million or $1.77 per share.

First quarter net sales were $2.1 billion in 2022 and $1.8 billion in 2021. Total Company EBITDA for the first quarter, excluding special items, was $467 million in 2022 and $342 million in 2021. Excluding the special items, the $0.95 per share increase in first quarter 2022 earnings compared to the first quarter of 2021 was driven primarily by higher prices and mix of $1.83 and volume of $0.23 in the Packaging segment; higher prices and mix in our Paper segment for $0.15; a lower share count resulting from share repurchases for $0.03; and lower interest expenses of $0.02. These items were partially offset by $0.71 of inflation-related operating cost increases particularly with energy, fiber, chemicals, operating labor and repair labor and materials.

Freight and logistics expenses have now moved higher for seven quarters in a row and were $0.27 per share above the first quarter of 2021 and converting costs were higher by $0.11 per share, driven by labor and materials expenses. We also had higher depreciation expenses of $0.07, lower volume in our Paper segment for $0.06; higher scheduled outage expenses, $0.05; a higher tax rate resulting from some favorable items in last year's tax rate of $0.03; and other costs, $0.01.

The results were $0.22 above our first quarter guidance of $2.50 per share primarily due to higher prices and mix and higher volumes in both our Packaging and Paper segments, operating cost improvements from efficiency and usage initiatives and favorable weather conditions.

Looking at the Packaging business. EBITDA excluding special items in the first quarter of 2022 was $464 million with sales of $1.96 billion, which resulted in a 23.6% margin versus last year's EBITDA of $352 million and sales of $1.62 billion or a 21.7% margin. Demand in the Packaging segment remained very strong as sales volume in both our containerboard mills and our corrugated products plants had record-setting performances. The scheduled maintenance outages in our mills went very well, and both machines at our Jackson, Alabama mill produced containerboard the entire quarter.

However, with strong internal and external demand, we ended the quarter once again with containerboard inventory levels below our targeted and historical levels. Although we still face unprecedented inflationary headwinds in our manufacturing costs as well as freight and logistics expenses, our facilities continue to deliver on numerous cost reduction initiatives, efficiency improvements, integration and optimization enhancements, and capital project benefits to maximize our returns and our margins.

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

[Thomas A. Hassfurther, Executive Vice President - Corrugated Products at Packaging Co. of America]

Thanks, Mark. As Mark mentioned, corrugated products and containerboard demand were very strong during the quarter. We set a new all-time total box shipments record as well as a new first quarter shipments per day record. Total volume in our corrugated products plants was up 2.9% and shipments per day were up 1.3% versus a very strong comp in last year's first quarter, which for us was up approximately 8% over the prior year.

In addition to supplying the record internal needs of our box plants, our outside sales volume of containerboard was 46,000 tons above the first quarter of 2021, owing to continued strong domestic and export demand. Outside volume was 26,000 tons below the fourth quarter of 2021 in order to help supply our strong internal demand while managing through the scheduled maintenance outages at our mills.

Domestic containerboard and corrugated products prices and mix contributed $1.60 per share above the first quarter of 2021 and were up $0.23 per share compared to the fourth quarter of 2021. Export containerboard prices were up $0.23 per share versus last year's first quarter, and up $0.01 per share compared to the fourth quarter of 2021.

The benefits of our disciplined approach for the implementation of price increases across our customer mix last year was a significant contributor to this year's first quarter results. Very good execution of the initial implementation of our recent March price increase contributed to results in the first quarter as well.

I'd also like to point out that the capital spending and optimization strategy within our box plant system that we have been focused on over the last few years also plays a key role in our successful implementation process. The investments from this strategy provide the products and service needs that our customers desire and allows them to grow while focusing on the mix of customers we want to align and partner with.

I'll now turn it back to Mark.

[Mark W. Kowlzan, Chairman and Chief Executive Officer at Packaging Co. of America]

Thanks, Tom. Looking at the Paper segment. EBITDA, excluding special items in the first quarter, was $29 million with sales of $153 million or an 18.9% margin compared to the first quarter 2021 EBITDA of $16 million and sales of $165 million for a 9.6% margin. As we mentioned on last quarter's call, volume from our Paper segment this year is expected to be fairly representative of the capacity at our International Falls mill. Accordingly, sales volume was about 19% below last year's first quarter when we were producing paper on the Number 1 machine at our Jackson, Alabama mill.

Paper prices and mix were 14% higher than last year's first quarter and 6% above the fourth quarter of 2021, resulting from our previously announced paper price increases. Also, in late March, we notified customers of $100 per ton price increase effective with shipments beginning May the 2nd for all office printing and converting papers. The efforts of our employees to optimize the cost structure, inventory and product mix in the paper business helped minimize the inflationary increases we're seeing and delivered solid returns in the quarter.

I'll now turn it over to Bob.

[Robert P. Mundy, Executive Vice President and Chief Financial Officer at Packaging Co. of America]

Thanks, Mark. For the first quarter, we generated cash from operations of $339 million and free cash flow of $113 million. Key cash payments during the quarter included capital expenditures of $226 million and common stock dividends of $94 million. We ended the quarter with $629 million of cash on hand or $778 million, including marketable securities. Our liquidity on March 31st was $1.1 billion.

I want to update you on a revision to the scheduled mill maintenance outage guidance that we provided on last quarter's call. Current plans in the scope of work has changed, resulting in a revised total Company estimated cost impact for the year of $1.04 per share versus the $1.13 per share previously. The actual impact in the first quarter was $0.15 per share and the revised estimated impact by quarter for the remainder of the year is now $0.26 per share in the second quarter, $0.22 in the third and $0.41 per share in the fourth quarter.

I'll now turn it back over to Mark.

[Mark W. Kowlzan, Chairman and Chief Executive Officer at Packaging Co. of America]

Thank you, Bob. Looking ahead, as we move from the first and into the second quarter, we expect demand in our Packaging segment to remain very strong, and we'll continue implementing the previously announced price increases in both our Packaging and Paper segments. Volume in the Paper segment will be lower with the scheduled outage at our International Falls mill. And as Bob pointed out, total scheduled outage costs will be $0.11 higher than the first quarter.

We also anticipate continued inflation with freight, logistics expenses as well as most of our operating costs, although recycled fiber prices should be slightly lower. Considering all of these items, we expect second quarter earnings of $2.83 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 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-K and on file with the SEC. Actual results could differ materially from those expressed in the forward-looking statements.

And with that, Patricia, I'd like to open up the call for questions, please.

Questions and Answers

[Operator]

[Operator Instructions] Your first question comes from the line of George Staphos from Bank of America. Your line is open.

[John Babcock, Analyst at Bank of America]

Hey, good morning. This is actually John Babcock on the line for George. I appreciate you taking the time to answer my questions. I guess just first of all, I was wondering if you might be able to talk about the cadence on the price increase implementation this time and if there's any reason to believe it might be different relative to some of the hikes last year, that would be great.

[Mark W. Kowlzan, Chairman and Chief Executive Officer at Packaging Co. of America]

Go ahead, Tom.

[Thomas A. Hassfurther, Executive Vice President - Corrugated Products at Packaging Co. of America]

Yes, the implementation is right on track, just like the others. We have a very disciplined approach. We usually get the pass-through over about a 90-day period. So as I mentioned, we had some that was in the month of March, but the majority of the price increase will be in the second quarter.

[John Babcock, Analyst at Bank of America]

Okay, thank you. And the next question, just as it pertains to trucking, I was wondering if you could talk about what you're seeing in terms of spot rates for that. Ultimately, some of our contacts suggest that prices might be dropping there. So I just want to get any color that you might have.

[Mark W. Kowlzan, Chairman and Chief Executive Officer at Packaging Co. of America]

Bob, do you want to add a little to that?

[Robert P. Mundy, Executive Vice President and Chief Financial Officer at Packaging Co. of America]

Yes, John, I will just say that we are seeing a little bit of that relative to the spot market. There are various factors going on that showed a little improvement in the first quarter. But I think as most people would agree, that is still far from being in an ideal situation. And our guidance for the second quarter, again, we have our freight costs are going up probably another 5% or so. So still a lot to be done there.

[Mark W. Kowlzan, Chairman and Chief Executive Officer at Packaging Co. of America]

I think you need to consider again that diesel still sitting at over $5 a gallon and that's one of the predominant cost factors, and although some of the drivers in the spot market have become more available, the cost remain at exceptional high levels.

[John Babcock, Analyst at Bank of America]

Got you. And then a last question before I turn it over. With I Falls' downtime -- maintenance downtime that you have this upcoming quarter, could you just talk about the normal steps that you would take to ensure the customers get the product they need and ultimately anything that you'll do around inventory build, just to make sure that you are able to serve their needs.

[Mark W. Kowlzan, Chairman and Chief Executive Officer at Packaging Co. of America]

Yeah, that's a shutdown that's been planned for the last six months. And so, it's a weeklong outage that will take place in June. And so, you have to assume that we've already preplanned to have a necessary inventory and how we'll take care of customers and so it's really not an issue to our part of the shutdown planning.

[John Babcock, Analyst at Bank of America]

Okay, got it. Thanks, again.

[Mark W. Kowlzan, Chairman and Chief Executive Officer at Packaging Co. of America]

Next question, please?

[Operator]

We have your next question from the line of Mark Wilde from Bank of Montreal. Your line is open.

[Mark Wilde, Analyst at Bank of Montreal]

Thanks. Good morning, Mark. Good morning, Tom. Good morning, Bob.

[Thomas A. Hassfurther, Executive Vice President - Corrugated Products at Packaging Co. of America]

Good morning.

[Mark W. Kowlzan, Chairman and Chief Executive Officer at Packaging Co. of America]

Hey, Mark.

[Mark Wilde, Analyst at Bank of Montreal]

Mark, just to start up, it seems like there is some awful lot of new investment in corrugating capacity including new wider corrugators kind of coming into the industry because we've been with very tight for box capacity. What impact is this having on mills and machine efficiency if any?

[Mark W. Kowlzan, Chairman and Chief Executive Officer at Packaging Co. of America]

Well, speaking for us, it's really not a factor. We continue to invest in our own box plants over at least the half dozen years now. We've added new corrugators. There are certain optimal size corrugators that we prefer that some -- a few have gone to the very large 130-inch type corrugators. Again, there is certain optimal levels. I don't think there is a real strong relationship to mill efficiency and corrugator size necessarily.

Tom, do you want to add a little further?

[Thomas A. Hassfurther, Executive Vice President - Corrugated Products at Packaging Co. of America]

Well, I would just say that if you got some narrow machines, that can create some issues relative to the wider corrugators. So that's -- that to me would be the largest impact you probably see in the mills is just some scheduling issues on narrow machines.

[Mark W. Kowlzan, Chairman and Chief Executive Officer at Packaging Co. of America]

From the old machines, yes.

[Mark Wilde, Analyst at Bank of Montreal]

Okay. Tom, and I'm curious, it seems like over the last 18 months, we've been getting more reports about sort of subcontracting out of corrugated volumes during the pandemic. I think this is because of strong demand and the labor shortages. Have you guys seen any impact from this in your system that you have that subcontract out more?

[Thomas A. Hassfurther, Executive Vice President - Corrugated Products at Packaging Co. of America]

I think, Mark, we have kind of a unique system from the standpoint of we have a lot of corrugated plants and we have a lot of sheet plants. So, I think in terms of flexibility, sometimes we have a little bit more than some of our competitors might. And that's where I see a lot of this subcontracting as you call it is probably more in the independent sheet network as opposed to anywhere else. And like I said, we are able to handle that type of business. So, for us, now we are cutting up everything that we -- all our demand internally.

[Mark Wilde, Analyst at Bank of Montreal]

Okay. That's helpful. Finally, Mark, I wonder if you could give us some updated timeline and ultimate capacity on the conversion to two machines at Jackson.

[Mark W. Kowlzan, Chairman and Chief Executive Officer at Packaging Co. of America]

Well, the primary emphasis at Jackson is that's the number three machine and as we called out earlier this year, we pushed that outage off to October period because of supply chain issues. When that last phase is completed a year from now, we anticipate that the Jackson number three machine should have 700,000 ton a year capacity built into it. Right now, the Number 1 machine, we are not planning on any significant upgrades at this time. We've got studies done as you would imagine. That would be an opportunity for the future if we choose to move in that direction. But we will have a good opportunity to absorb the full production of number three machine through later next year and into 2024.

[Mark Wilde, Analyst at Bank of Montreal]

What was the capacity at Number 1 be without the upgrade and then potentially what could that go to if you put some capital in, just in ballpark terms?

[Mark W. Kowlzan, Chairman and Chief Executive Officer at Packaging Co. of America]

Today, if you think about Number 1 machine at Jackson with no capital investment, it's somewhere under 25,000 tons a year type of run rate with the basis which we are running, which is a pretty good place to be considering we haven't invested any capital in.

[Mark Wilde, Analyst at Bank of Montreal]

Okay. Very good. I'll turn it over.

[Mark W. Kowlzan, Chairman and Chief Executive Officer at Packaging Co. of America]

It's like any other machine we talked about over the decades, it's all a matter of capital, how much capital do you want to spend for on which capacity, because once you reach a certain critical point, you really get into diminishing returns, because now you are getting into the bigger pieces of capital required for back end infrastructure pulping and all of the related pulp capacity requirements. So, there is certainly an economic analysis that takes place that you quickly reach a peak return and then diminish. So, I think where we are with what we are looking at, if you are producing 700,000 tons a year on number three machine, and 120,000, 140,000 tons a year on Number 1 machine, that's a very good place for Jackson, Alabama to be on a cost and a profit curve.

[Mark Wilde, Analyst at Bank of Montreal]

Okay. That's helpful. I'll turn it over, Mark. Thank you.

[Mark W. Kowlzan, Chairman and Chief Executive Officer at Packaging Co. of America]

Okay. Next question, please?

[Operator]

Okay. And our next question comes from the line of Mark Weintraub from Seaport Research. Your line is open.

[Mark Weintraub, Analyst at Seaport Research Partners]

Thank you. Congrats on another well-executed quarter. First two follow-ups, one, you mentioned that it normally takes about 90 days to fully implement from board into box. So, can we conclude that a portion of the pricing will show up on an average basis in the third quarter as well that there will be some additional we'll see a lot of that in the second quarter and then we should see some incremental as we average the numbers from quarter-to-quarter in the third quarter?

[Thomas A. Hassfurther, Executive Vice President - Corrugated Products at Packaging Co. of America]

Hey, Mark, this is Tom, yeah, that would be a good read in.

[Mark Weintraub, Analyst at Seaport Research Partners]

Okay.

[Thomas A. Hassfurther, Executive Vice President - Corrugated Products at Packaging Co. of America]

Go ahead, Mark.

[Mark Weintraub, Analyst at Seaport Research Partners]

And can you give us any sense if we look back historically what percentage might typically show up in that period within this case would be the third quarter?

[Thomas A. Hassfurther, Executive Vice President - Corrugated Products at Packaging Co. of America]

No, it's -- I think, as I said, I mean, these things rolled in over a 90-day period. I mean, there are few accounts that have certain contracts that may go even beyond that, but for the most part, it's the 90-day period and we have indicated that there is some in March and that the bulk will be in the second quarter and yeah, there might be a little rollover into the third quarter. That's the only guidance I can give you.

[Mark Weintraub, Analyst at Seaport Research Partners]

Okay. So just a little up, though. Okay, thank you. And you mentioned the Jackson machine going to 700, but is it about 500,000 that -- what's the production capacity currently at Jackson?

[Thomas A. Hassfurther, Executive Vice President - Corrugated Products at Packaging Co. of America]

You are in that, probably 440,000 tons a year, 450,000 tons a year on that machine and again it's just tons on the Grade Metro running and then the 125,000 tons. If you look at last year, running the machine for one quarter we produced 459,000 tons for the year for the first quarter we just produced 136,000 tons. So you are talking about for the full year runrate with which we continue to run at this pace somewhere 550,000 tons for the year expected out of Jackson.

[Mark Weintraub, Analyst at Seaport Research Partners]

Okay. Thank you. And then, lastly, you mentioned the packaging demand looking good into the second quarter, can you update us on what you are looking for in the first part of August -- sorry, April?

[Thomas A. Hassfurther, Executive Vice President - Corrugated Products at Packaging Co. of America]

Yeah, from -- so far in April, we are up 3.5% over and so, keep in mind though that last April, we were up 12%. So, this is a big, big jump on top of last April. So demand still remains very good.

[Mark Weintraub, Analyst at Seaport Research Partners]

I appreciate all the color, thank you.

[Operator]

We have your next question from the line of Phil Ng from Jefferies. Your line is open. Phil Ng, your line is open.

Your next question is from the line of Anthony Pettinari from Citigroup. Your line is open.

[Anthony Pettinari, Analyst at Smith Barney Citigroup]

Good morning.

[Mark W. Kowlzan, Chairman and Chief Executive Officer at Packaging Co. of America]

Good morning, Anthony.

[Anthony Pettinari, Analyst at Smith Barney Citigroup]

Can you maybe talk a little bit more about inventory levels in terms of where you are versus where you'd like to be and maybe potential timeline for getting there. And then, given the supply chain constraints, I mean, do you think just structurally you might hold a higher level of inventory than in the pre-pandemic period? And then, I guess, finally, anything that your customers have said about their inventories that's maybe worsened or gotten better or any kind of read from them?

[Mark W. Kowlzan, Chairman and Chief Executive Officer at Packaging Co. of America]

As we called out, we are still below where we would want to be. We are still below our historical target levels and a lot of it obviously has to do with the pandemic-related supply chain, transportation matters. And so, we are into the heavy shutdown periods of a year as we come out of that. Things generally improve. But I think also part of your question, we would anticipate for the time being trying to hold a higher level than we had historically hold prior to the pandemic. But again with this volume continuing to grow with the rate it's growing and logistics, supply chain issues, railroad trucking doing what they've been doing, it's very difficult to build to the necessary inventory levels.

[Anthony Pettinari, Analyst at Smith Barney Citigroup]

Okay. That's helpful. And then, just on the very strong demand that you've seen, is there any finer point you'd put on customer groups or end-markets that are seeing, especially stronger demand or maybe some demand that's softening a little bit? And then just broadly, I mean, are your local accounts, are they maybe outperforming national accounts or just any color you can give on what has been extremely strong demand, it seems like it's continuing into April.

[Thomas A. Hassfurther, Executive Vice President - Corrugated Products at Packaging Co. of America]

Anthony, this is Tom. I'll handle the demand piece. Demand is, as I said, is very strong, I think representative of that strength is, if you just look at our top 50 accounts in the first quarter, they were up 7% on average, now that includes some that were up double-digits, that includes some that were down slightly, but depending on the business that they are in. But if you just look kind of broadly across just, like I said, those 50 accounts, you see that they are in lots of different businesses and demand remains very strong across all of those businesses.

Relative to local versus national, I mean, you've got the puts and the takes as I just talked about, but generally speaking, I think that the larger accounts have a little bit more of an ability to work through some of the issues that are going on. Perhaps, more so than some of the smaller accounts, but again, it's -- everybody says that can grow a lot more than what they are currently able to grow. They are just held up by all these supply chain issues primarily and the labor issues that we've talked about in the past.

[Anthony Pettinari, Analyst at Smith Barney Citigroup]

Okay. That's great color. I'll turn it over.

[Mark W. Kowlzan, Chairman and Chief Executive Officer at Packaging Co. of America]

Thank you. Next question, please?

[Operator]

We have your next question from Cleve Rueckert from UBS. Your line is open.

[Cleve Rueckert, Analyst at UBS Group]

Great. Thanks everybody for taking my questions. Good morning.

[Mark W. Kowlzan, Chairman and Chief Executive Officer at Packaging Co. of America]

Good morning.

[Cleve Rueckert, Analyst at UBS Group]

I don't want to beat a dead horse, but just a follow-up quickly on demand. I mean, PCA has done, I mean, frankly very impressive job of taking market share in this business over the last 12 to 18 months, call it. Do you have a sense of, whether the growth you are seeing is like end demand market growth or are you just continuing to execute well and take market share?

[Mark W. Kowlzan, Chairman and Chief Executive Officer at Packaging Co. of America]

Well, I would say, I would say that, our long-term strategy and I just mentioned it in the commentary too, is to really spend a lot of time making sure we align with the right kind of customers. And we've been doing that for decades. So, most -- the great majority of our growth comes from our existing accounts and their ability to grow and our ability to help them growing whatever way we possibly can. So, that's the majority of where PCA's growth comes from. And we've demonstrated that not just in the recent past but certainly over the long term.

[Cleve Rueckert, Analyst at UBS Group]

Okay. That's clear. And then, just a couple of quick follow-ups. First, I want to follow-up on John's question about freight and trucking. We are seeing the same things about spot pricing, but we've also heard the -- some of the logistics is moving out of the spot market and into the contract market. I'd just be curious if you are changing your strategy at all, especially as it relates to the trucking market?

[Mark W. Kowlzan, Chairman and Chief Executive Officer at Packaging Co. of America]

No, we are not necessarily changing strategy or taking advantage of some of the availability improving, but there is no major change in strategy. Tom, do you want to add anything?

[Thomas A. Hassfurther, Executive Vice President - Corrugated Products at Packaging Co. of America]

No, we've been under contracts for the most part and we don't use that much spot trade-through.

[Cleve Rueckert, Analyst at UBS Group]

Yeah, okay. That's clear. And then, just on labor productivity, I think we heard pretty broadly last quarter that the labor, especially in the box system was kind of a constraint to production and constrained productivity. I mean, you guys obviously burned inventory this quarter, but I'd just be curious if that's easing at all or if there is any sort of bottleneck on the labor side that's holding you back on the productivity side?

[Mark W. Kowlzan, Chairman and Chief Executive Officer at Packaging Co. of America]

Yeah, again, keep in mind, if you think about a commentary we've made over the last year with our capital investment in the last few years, we've been able to make significant improvements in the productivity in our box plants and then continue to grow our capability in terms of productivity per unit, man hour employed. With that being said, with the labor market there, there is still an incredible amount of stress on the labor pool in the converting side and the mill side.

Tom, do you want to add a little color to it?

[Thomas A. Hassfurther, Executive Vice President - Corrugated Products at Packaging Co. of America]

Yeah, there is no question. I mean, our labor situation improved as a result of the COVID, especially the omicron variant going down some. So, that was a help to our labor situation. But on the other hand, trying to hire new people and replace retirees etc., is still a bit of a challenge and will remain so. If you just look at any of the statistics and the 8 million jobs that are sitting there open, the highest labor participation rate in decades, we've got certainly I think everybody in any industry would attest to the fact that labor is a real challenge.

[Cleve Rueckert, Analyst at UBS Group]

That's all very clear. Thanks for answering the questions. I appreciate you guys.

[Mark W. Kowlzan, Chairman and Chief Executive Officer at Packaging Co. of America]

Okay. Next question, please?

[Operator]

Thank you. [Operator Instructions] We have your next question from the line of Mark Wilde from Bank of Montreal. Your line is open.

[Mark Wilde, Analyst at Bank of Montreal]

Thanks. Start with a couple of follow-ups. One, is it possible for you to just to help us differentiate the level of inflation you are seeing at the mill level versus what you are seeing at the converting level? It does seem like converting plants are seeing more cost pressure than I have ever seen in my career between labor, starches, pallets, energy, other issues?

[Mark W. Kowlzan, Chairman and Chief Executive Officer at Packaging Co. of America]

Yeah, I think, again, it's relative, Mark, across the board you have to understand that everything is under tremendous inflationary pressure. What you just said is correct. Tom, do you want to go ahead and add some detail for that last point?

[Thomas A. Hassfurther, Executive Vice President - Corrugated Products at Packaging Co. of America]

Well, I am just going to agree wholeheartedly with you, Mark. I have never seen anything like the across the board inflation we are dealing with in box plants. We can talk about some of the big numbers, transportation, those sorts of things. But when you start talking about all the things you just mentioned, the labor, the starch, the pallets, the ink, the dyes, any equipment repairs, any of those sorts of things, it's just, these are numbers that I've never seen before upwards of as much as 200% in some cases.

[Mark Wilde, Analyst at Bank of Montreal]

Okay. And then, Mark, the other question I had is, you've created a lot of incremental benefits by taking advantage of conversion opportunities at DeRidder, at Wallula, at Ala, Jackson, is there anything at International Falls that would prevent you from building the same kind of thing there at some point in time?

[Mark W. Kowlzan, Chairman and Chief Executive Officer at Packaging Co. of America]

No, as a matter of fact, the I Falls is another example of a mill that it's a market dictated, we could take advantage of in a very, very good way as far as paper market and then how that plays into our growth in our corrugated products business. Again, as you heard us talk about, we are always studying and planning and looking at opportunities and we've got the plants, putting the file on what we want to do some day if the market conditions were such that it dictated we needed to make a decision about I Falls.

But keep in mind that the big machine at I Falls, the I1 machine is quite frankly a better version of what we have at Jackson on J3. They were both essentially sister machines installed at a similar timeframe few decades ago and they have tremendous capability. The mill infrastructure at I Falls has tremendous capability to support conversion. But again, it's all about box demand versus paper demand and profitability. So, we have that opportunity, but I Falls is another one of the opportunity that's sitting there that could be taken advantage of some day.

[Mark Wilde, Analyst at Bank of Montreal]

Okay. And would it just be fair to assume, Mark, given that it's primarily a hardwood mill right now that you'd be more likely to take that towards corrugating medium rather than line of borders, is that not a good assumption?

[Mark W. Kowlzan, Chairman and Chief Executive Officer at Packaging Co. of America]

That's a bad assumption.

[Mark Wilde, Analyst at Bank of Montreal]

Okay. Good enough. Thanks.

[Mark W. Kowlzan, Chairman and Chief Executive Officer at Packaging Co. of America]

Yeah. Next question, please?

[Operator]

Mr. Kowlzan, I am not seeing any more questions. Do you have any closing comments?

[Mark W. Kowlzan, Chairman and Chief Executive Officer at Packaging Co. of America]

Again, thanks everybody for joining us today on the call and we look forward to talking with you at the latter part of July. Have a good day everybody. Thanks.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Mark W. Kowlzan, Chairman and Chief Executive Officer
• Thomas A. Hassfurther, Executive Vice President - Corrugated Products
• Robert P. Mundy, Executive Vice President and Chief Financial Officer

Analysts

• John Babcock, Bank of America Co.
• Mark Wilde, Bank of Montreal
• Mark Weintraub, Seaport Research Partners
• Anthony Pettinari, Smith Barney Citigroup
• Cleve Rueckert, UBS Group AG