Packaging Corporation of America (PKG) Earnings Call Transcript & Summary

Hope you all are doing well for day 2, and we're starting off with a bang with Packaging Corporation of America. I've covered PCA, actually, in theory, back to when it was still part of Tenneco, it goes back to the 1990s. And there -- I don't know if there's any company that has kind of your continuity and tenure of management, Mark, in the industry, packaging or paper and forest. Mark Kowlzan, we're delighted the Chief Executive Officer, is here for some formal remarks. He's been with the company 30 years. Kent Pflederer, Chief Financial Officer, has been with the company for 19 years and in the audience today as well as Ray Shirley, EVP of Corrugated. He's been with PCA 30 years as well. So again, not many companies can support that. And Mark, without any further ado, I turn it over to you.

Thanks, George. Appreciate it very much, and welcome, everybody. Thanks for taking the time to be with us this morning. We're going to spend a couple of minutes. We want to update you on the first 2 months of the quarter. So I'm going to read through this like it was like beginning of an earnings call. So you got to bear with me before we get to the Q&A on the fireside chat. So keeping with the spirit of a fireside chat, we're not going to give you a formal presentation with slides today. We have an investor presentation up on our website, and there are copies being made available for investors today. Everything we say today is subject to forward-looking statements disclaimer. And as usual, actual results could differ materially from those included in the forward-looking statements. Before we begin, the interactive portion, as I just said, I want to give you an update on the first couple of months. The only commentary we'll give you on price increase and the recent RISI print is that we have reiterated to the customers this week that we are increasing the containerboard prices by $70 per ton from the January levels, and we intend to fully implement that increase. Our view of the market has not changed from what we communicated in the earnings call, and we did not see lower containerboard pricing, both in terms of what we sold and what we bought. On the Corrugated side, we continue to see solid demand and growth on a per day shipments over last year's level. We are running our mill system full out, and we need the tons ahead of our outage schedule coming up as far as annual outages. And also as we get into the second quarter, which is normally the beginning of the stronger box volume season. We think we have a pretty good view of the market conditions as we operate in a very comprehensive network of box plants and mills. We have 28 sheet plants in the system. And again, we've got from West Coast, East Coast, Gulf Coast up to the New England states, we've got a comprehensive view of what's happening. Our January legacy corrugated shipments, which include disruptions from the winter storms that impacted us during the last week of the month were up 4.5% per day over last year. February is up 3% in the corrugated and sheet plants through the end of last week. Bookings are up 7% to 8% and over both of these months. Bookings remain incredibly strong and the business is very robust in spite of the winter weather phenomena that we've had. We feel good about March and the strong book of business that we're seeing. So nothing's changed as we're getting ready for March. Back to the January winter weather. We estimate that the storm effects were around $6 million or about $0.05 per share. There are corrugated shipments by a little more than 1% in January and caused higher freight and operating costs at some of our mills particularly the Counce Tennessee mill and the Riverville, Virginia mill. The good news is that we operated safely. Our equipment held up, and we did not lose significant production. We came out of it about as good as you could expect. And considering the severity of the ice storm, if anybody saw pictures of what was going on down in Nashville and that whole region, Counce was just as bad. As a matter of fact, Counce was the only entity that had power, the Counce mill probably in that whole part of the world for the better part of the week. So the folks did an incredible job for us. In February, we're seeing benefits of the reliability initiatives in the acquired Greif mills after having kind of a tough month in January with the winter weather and lots of ups and downs in Q4. We are now seeing very strong operational performance on a daily basis, with efficiency starting to meet our expectations and production exceeding our expectations. And with that, I'll start the Q&A, George.

Thank you, Mark. Great rundown. As you think about the markets that you're in, obviously very diverse. Is there any one market that you're seeing, if not shipment growth, but some interesting green shoots not trying to lead the witness, but really the last few years, corrugated has been kind of a flat market. We're waiting for housing. We're waiting for ag. We're waiting for apparel to pick up? What are you seeing to the extent you can share in this way?

Good news for us, we have such a diverse book of business. We're seeing good volume growth across the board with the exception of what George just said in terms of housing has been in a stagnant for the last couple of years since interest rates went up. Automobile industry. If you think about the traditional auto industry, gasoline-powered diesel-powered vehicles, there used to be a lot of components that got shipped from plant to plant and in phase operation in various corrugated shipping containers. And so with the push for EV vehicles that took place over the last half dozen years and then now the higher interest rates, the auto industry has been in flux. So we anticipate, though, with more of a, let's just say, a reasonable approach to the auto industry. We would hope that we would start seeing a pickup there. And so with same thing with housing, if you think about all the materials that go into a house, whether it's a remodeling, new home construction, home sales when people buy and sell homes and move all the updates they provide. Think about everything that's in a corrugated container when you go to Lowe's or Home Depot or your local ACE hardware store. And so we would expect if interest rates continue to improve over the next couple of years, we'll see then a normalization from the housing side of demand for corrugated. And so again, we're pretty bullish in that across the board, with our 13,000-plus customers, we've seen good organic growth. And then with the Greif acquisition, it gives us a good platform to lever that growth.

Two questions off of what you were just talking about, Mark. Number one, we heard a discussion yesterday at the luncheon and the imperative ultimately was or the message was the U.S., not only will but needs to reindustrialize quickly for various reasons. Do you believe that's actually going to happen from what you see and from all your talks with your customers, what would that mean for your business? Or is it really going to occur that near-shoring will be less of an effect for you.

Well, I think it happens. It is necessary if we're to be a significant player in the world again, we gave away a lot of our industrial base in the 1980s but the problem is it doesn't come back easy. And so it's not going to happen next year, year after next, but it will start. We're already seeing that. We've seen reshoring going on for the last 7 or 8 years. There's a lot more that goes on in this country than what's taking place 10 years ago. But part of the obstacle, as you can imagine, is the capital cost of any industry. I mean if you think about heavy industry is that it's heavy industry. It's lots of steel, very complex demands on materials, concrete, steel, copper, all the electrical components, the demands on your engineering base. So there's a lot that has to take place. But we're already seeing that. It's probably, in my view, if at the state level and the federal level, there is support and that is clearly defined then that will take place, and that will be very positive for the corrugated products industry.

My other -- I'm sorry, my other comment or question off of your initial comments, you mentioned Greif, you mentioned the reliability is improving. Could you give us a bit more color in terms of how the acquisition is going, how the mill set is doing and from your standpoint, what kind of systems did you find? How is the integration going there? So.

When we closed the deal on September 2, we immediately moved in our technology and engineering people into both mills at Massillon and Riverville. And so as we talked in the January earnings call, we took advantage of this transition period to put the PCA touch on these mills. So in 5 months, we've significantly, I would say, rebuilt the Massillon mill all the way down to pumps and motors and bearings and so that mill is in tiptop shape now, the Riverville mill being a bigger mill, big bonus mill equally in good shape now. And so we've identified longer-term opportunities. What I'm encouraged by when we did the due diligence and we looked at the potential of those 2 mills, in my mind, I said, well, they're producing, say, 600,000 tons combined run rate with how they were running that business. And I looked at that and I said, these 2 mills easily can run at the 800,000 ton plus level to supply our own needs. And in 5 months, we've achieved that. And so those 2 mills are incredibly valuable to us. And so not only is there a matter of the productivity coming out but it's the cost efficiency of those tons. We've improved the cost position and the quality of the product dramatically in this 5-month period of time. And so we've done that all with the Packaging Corporation of America Technology and Engineering group. And so we're in a very good place now, and the mills are doing just what I hope they would do. So and again, as we used to say in terms of the Boise acquisition, it was a gift that kept on giving. So we look at Greif acquisition in the same way. It will be continuing to be the gift that keeps on giving.

And we're on track on the systems integration piece of this. Obviously, the sooner the better. The sooner we have the day-to-day management insight to the acquired operations that we had at PCA, the more effective we're going to be. And we have a heavy lift here over the next 6, 7 months to do it, but we're on track and these are going to be running as PCA plants very soon.

What's the heaviest piece of that and to the extent that you can comment?

Yes. Well, it's going from what was a more centralized environment at Greif to a decentralized entrepreneurial environment of PCA.

Any questions from the audience for PCA. All right. Well, we'll keep forging ahead as you guys are taking up your questions. Mark, over the years, PCA was known for -- is remains known for its focus on the local account market. From what we see, there seems to have been a bit more willingness to take on some of the larger national accounts, not that it was ever a black and white, we only do this, we only do that. We get it. But would you agree with that point? And can you talk about if that's a true statement, the evolution in your operating stance and you're converting that's allowed for that and how it's impacted your business?

Yes, absolutely. I mean, 8 years ago, it's not that we did not want to do, say, the e-commerce, but the plants were not ready to take that, call it, the go and blow business, the plain brown box business. And interrupt what would be a more profitable, high-margin local account business, the specialty box business. But since 2019, the recapitalization of our assets and the introduction of all of the converting lines, the new corrugators. We now have the tools in our box plants to run the entire gamut from the go and blow business to the complex business on any given day. And so we have plants now that might be taking care of 200 orders for customers on any given day, but we can easily slot in the e-commerce side of that equation. And you've heard me on the earnings calls in the last year, talk about this, that there's nothing wrong if we're running 26%, 28% EBITDA margin business part of the day, and then you slot in some of the 17% EBITDA margin business, and you end up on average at 24%, 23%. That's not a bad place to be. But we couldn't do that prior to, say, 2018 because we literally did not have the capability in these plants. So think about that. And since 2017, PCA spent about $5.2 billion in the box plants and the mills to be where we are today to service the customer base in an incredibly efficient, effective, high-quality, low-cost position. Nobody else that can do that.

And I'll add 1 thing, George. We go where the growth is. And the growth is both growing with our existing customer base and staying ahead of them and anticipating their needs and putting capital towards that objective. And there's opportunities to profitably serve national accounts, additional local customers, yes, we do it. So it's all in furtherance of profitable growth.

Yes. There's a lot of business that we'll look at with one particular customer. If you have a large e-commerce customer that has nationwide presence. There are pieces of the business we won't do. It's just -- it's not economical for us. It doesn't make sense. And again, we're very cognizant of that.

And, how does it change the working capital stance, if at all, for the company? Does it change much?

No, not really. I mean we watch it, but no, not really. It's not a material.

Any questions from the audience? Mark, have you gotten -- how do you continue to track how you're doing with your traditional customers? Like do they come back to you and say, "Hey, Mark, I noticed that you're busy with other accounts. I noticed box plant XYZ is operating really, really full. Do you watch -- and I worry about whether you'll take care of me, do you track Net Promoter Scores? Do -- are there other KPIs to make sure that you're doing well or it's just say, hey look, the margin, the volumes, they're all the KPIs that we...

We still have the largest number of sales people in the industry. We have an incredible close relationship with these customers. And so we work hand in hand with the customers on what their needs are, what their future needs are. The relationship we have at that customer level is such that we're talking about what their plans are, what they're going to be doing, what they want to do, what they're investing in. And then we were able to plot the course to be able to be ready to service them to their future growth. That's something we've done for decades now. But it works very well, and that's one of the reasons that the customers know that they can count on us and we're always there to take care of their needs.

Mark, switching gears a bit on pricing since it's been so topical and demand trends. And again, obviously, go where you can and don't go where you can't. You're out with a March price hike on paper. Are you out to customers with box price increases as well? Help us understand how that office again typically would work? And would you expect any nuances with this cycle?

The normal flow through is that when an announcement is made on containerboard and then the sales organization starts working with the customer base. It's really a one-on-one relationship that you start moving the pricing historically, if you went back over the last 25 years, within 3 or 4 months, we've always captured that full price and the yield loss factor through the box plant side of the business so.

Understood. And this one, again, who knows what will happen. You can't comment, but you don't see anything that's sort of nuanced or different about this one versus the past? And I'm not talking about the recent price drop by the index just in general in terms of...

Again, as I stated, and we talked about this on the January call, we're feeling very confident in terms of the demand for our product, the year-over-year growth. If you think about our 2025 volume, even though we were essentially flat for the prior year, 2024s growth was double digit. We were up 12% in 2024 over 2023. That's incredible. Think about that. We were up 12% in 2024 over the prior 2023. And then even though all the consternation with tariffs and everything going on in the world, we held flat through 2025 with that volume and now we're into January and February and the numbers I just told you, we're up significantly over last year's and 2024s level, and the book of business is stronger than the actual daily cutoff. So we're feeling good that our customers are in a good place. We're seeing this nationwide. And what gives me a better feeling is that not only we do good currently, but there's upside with opportunity, as I said, with housing, with the protein side of the business with beef. We all know beef herds are at 70 some-odd-year lows. So over the future years, if the beef herds are built back up and that takes place. So there's a lot of upside that will take place. Also at a time when the industry hasn't recapitalized at the rates that we have so you have to question the industry capacity that's available to continue to grow with the economy.

There was a comment -- thank you for that, Mark. There was a comment over the last day or so about past utilization, if you can measure it in the converting network and I don't know if you could share where you're at or what you think the average player in the market is at. But the point that was made is, say, if you have even a little bit of growth in corrugated markets over the next couple of years, the corrugated supply side could be tighter surprised by that because I always maybe I'm wrong. But over the years, I've always thought there's plenty of capacity in converting. It's always the mills where you have the issues.

Historically, if you went back over the last 40 years, the industry used to run 55%, 65% of its converting capacity. Maybe think about that. 20 years ago, 30 years ago, box plant might be running 2 8-hour shifts. It had plenty of capability to run over time. In some places, we're running one 12-hour shift. Over time, people started adding personnel, adding shifts, running 3 shifts a day. There's a lot of overtime. But at the same time, there was not a lot of reinvestment in the assets, in the converting asset. So I use the analogy of a race car. You had a race car 30 years ago, it was a good race car. If all you did was race that every day for the last 30 years and hopefully change the oil at least, employ on new tires. The problem is it's still a 30-year-old race car competing with new race cars. And with all the new technology available. I don't care what you're doing, okay, how good a 30-year-old equipment is, it's not going to compete with the capability of the new capital equipment that's available. And think about the workforce. The workforce is aged. We have a new workforce. And so the difficulty of acquiring labor because in the old days, people would just say, we'll put another -- put the other shift on who will work Saturday and everyone is working over time. Don' worry about downtime with your equipment. If we have mechanical failure or electrical failures, we'll just make up for it later on the evening shift or will come in on a weekend. Those days are done. You can't run your business that way. And so we recognize that 9 years ago when we put in place this recapitalization effort. And so we don't measure utilization per se but we know, in fact, and you've heard me say this on earnings calls, with the work we've done since 2018, '17 period, that was accelerated from 2019 to date, we've, in many cases, quadrupled our unit labor productivity per hour. So in a plant with no more people, we have 4x the productivity that we had 7 years ago at much lower cost, higher quality. And so it's imperative. If you're going to grow, you have to spend the money. Otherwise, your equipment becomes less effective, the quality is not good, and you can't grow with a customer. Customer is looking at you saying, "I'm investing in my business, can you grow with me?" And if you haven't invested in your converting assets, what are you going to do? So that's one of the -- why people say, what is PCA, why do we capture all this volume in the marketplace? Why over the last few years, have we grown the volume that we've grown. I think one of the things of data that you have in the deck that you did submit since 2017, where we have about 30 -- legacy basis 30% with the acquisition, 40% on an aggregate basis and on compound annual 3% growth. So think about that over that period of time, box volume cut up is up over 30%. But the industry is down, and we're part of the industry number. And we were talking at dinner last night, and this is something we've said before publicly, but if you went back to 2020 when we became the new PCA, new public company, and you looked at our volume growth then, it's probably 275%, 300% volume growth, box volume growth. The industry is down. Our numbers are in the industry and the industry is down. We're the only company that has grown in that manner than with profitable growth. And so it's imperative that you have the capability with your equipment to do this.

Thank you, Mark. On the subject of investment over the last year, 2 years, you've announced Greif, that's going to cost you $1.8 billion you'll get -- if you hit your numbers so far, you feel comfortable $300 million, including synergies. You are realigning right now have been in the North American system. You shut Wallula PM2, you're moving capacity to Counce into Jackson that I think saves you $75 million. You've had 3 or 4 larger box projects from my count, including Ohio and Glendale. On my math, maybe close to triple-digit return on that in terms of dollars of EBITDA, would that be fair? So and then you have the energy projects. So a, what do you think the total return on all of that might be, we have our number? And talk to us a little bit about the energy project investments that you're doing? What's your number? I think you will have added, including Greif's the biggest piece of that $0.5 billion of EBITDA from all those projects. Yes. Those listening Mark said, yes so.

I think that's reasonable. I mean the -- reason for the growth that you're in the ballpark.

Yes. So talk to us about the energy projects.

Well, I think everybody in this room understands what electric rates are doing and the demand for electricity. And it's all electricity-driven. We've seen this happening over the last few years. And the more and more I was looking on a daily basis, weekly basis, monthly basis, what was happening nationwide to our electric costs and the activity around where all our plants and mills are located. It dawned on me we needed to -- we actually needed to be proactive and figure out what we were going to do to insulate ourselves out of this situation. And so earlier last year, it's almost a year ago. We determined that the best solution for us would be gas turbine installations. So we are fortunate that we located 3 big 50-megawatt turbines. We bought them for pennies on the dollar and we're in the process of getting them ready to move. And so we'll be installing one of the units at the Riverville mill, 1 unit would go to Jackson, Alabama and 1 unit would go to DeRidder mill. When we're done, that will give us 4 out of our 10 mills that will be essentially independent of the grid, and we'll be able to produce all of our own electricity. And it's -- and that's part of also the reason why we made the decision to shut the Wallula #2 machine down that in a 2-year period of time, electric rates in the Washington state were up 89%. And it's unsustainable, and this is home rates, industrial rates. And so we started seeing that around the country. So again, if you don't have a plan for what you're doing to improve your electricity position, you're going to be in a significant -- it's going to be pretty tough to overcome that type of cost increase.

Thank you, Mark. Thank you, Kent. Any questions from the audience? Okay. We'll keep moving on here. We talk about investments. Tell me a little bit about how -- last night at dinner, we were talking about power boilers, talk about your fiber lines. What do you feel you're in good shape there? Any investment that you need to be doing or I guess, lightweighting kind of helps sort of take away into...

Through all this approach year after year, we've always addressed the capability of our unit operations from the woodyard through pulp mills, OCC plants, chemical recovery systems. So our mills are in very good condition. From a holistic point of view, we've always maintained these assets in very, very good running condition. So there's nothing that has to be done right now. There's nothing extraordinary that we would look at from a capital need point of view. It's just maintain what you have for your craft operations, maintain the OCC plants. So again, we're in a good place right there. Okay. I mean within the next couple of years, the bulk of the capital will go towards these energy type projects, which are high-return projects. And so that will be part of the -- this whole premise of how do we maintain our margins? Well, part of this is to an incredibly effective capital spending program, you're able to overcome a lot of your annual inflation. That being said, at some point in time, you do have to get a price increase to continue that margin momentum. But one of the keys to PCA success on the earnings side and the margin side has been this capability to deploy capital in a very efficient manner.

Maybe a couple of last questions here, Mark, as we wrap. You've grown, you've outgrown the industry. The industry itself, when we look at square footage, we've talked about this in our past research, has not grown. And on a BFS basis it's not lightweighting. We're at 2017 levels. Now there's some -- and I think the FBA and the AF&PA they all do -- they do their best and do a good job, but there's some tracking invariably, there's some put up that might, in theory, should count as a box, but it's not. But it's a pretty wide gap or it's pretty stark that we're still flat or down versus 2016, 2017 levels. In your view, what's been happening? Why is the -- you're growing, but why is the industry not growing?

I think there's no one answer to that. Part of the answer is just box efficiency. If you think about e-commerce, what's been happening on that side of the equation, they want just the right size box. And so there's been a lot of efficiency on the customer side of that equation that they're only using just what they need to use to get their product out of the Amazon warehouse or the Walmart distribution center. And you also have seen and everybody in this room sees it, if you're ordering something that is not -- it doesn't require a box. It's probably coming in a kraft pouch -- kraft envelope. And so that's taking the place of what was a box. And in some cases, we've even seen the plastic word, something -- they're throwing something even in a plastic pouch and dropping it off at your door. But there have been different uses for containerboard, but part of it is just the customer base has gotten more demanding to just rightsize their box.

You go into the miller business by any chance?

We're in a good place with our corrugated boxes right now, but it's a complex discussion about things aren't the way they are.

I was kidding, but -- next to line, Mark, if you are planning on doing that. I meant what I said at the beginning, there are not many companies, if any, that have had your continuity and leadership team and that's a credit to your organization, to your Board, to you and Paul, Eric. How do you maintain that succession planning and that continuity. As you evaluate your career, if you talk to people publicly, how long do you continue to see yourself running the ship here and keeping the schedule that you keep up that you relay.

Best part of your question. Ray Shirley is an example of the younger generation of leadership that we have in the organization. We have a number of people like Ray that are with us that we hired from the college campuses that have come with us over the years that we've actually -- we passed that knowledge on. We are fortunate enough in our early careers that somebody meant toward us passed on incredible knowledge to us. We've hired every year, we're on the college campus as we recruited probably 55 to 60 universities and colleges in the United States. And we're continually bringing -- we hire -- we started this in 2019. We hire engineers into our box plants. And so now we have this incredible capability in our box plants with the grid engineers moving up now and being promoted through. So we have a lot of capability. And I'll just add, we had a Board meeting this week. And half the seats in the boardroom were taken up with the younger generation that were there participating with us, and these are the future leaders of the company. But they've been taught by us over many years so whenever I get hit by a bus or lightning or I do decide that I'm done with this, and I'm sick and tired of being harassed by ham over there. My problem is I don't have enough hobbies to want to go do something different. So this is my sport of choice. And so in that regard, we have an incredible mid-level management group that's ready to run the business, and they are running big pieces of the business right now for us. So we're in a very good position in terms of the organization and the capability. I gave a speech at Core Expo in 2018. I've got 3 minutes here. And one of the things I said in Core Expo in Denver in 2018 was that over the next 20 years, if this industry, if you were not prepared to take care of your own technical and engineering needs, your own capital spending needs, you would be out of business probably in 20 years. So that was, say, 8 years ago and look what's happening to the industry. When I was starting out here 30 years ago, I was running 4 of the mills for PCA. I had 10 people in the technology group when we run those mills. Now we have upwards of 165, 170 people in the engineering technology organization in PCA running not just the 10 mills, but the box plants. And all of the leadership, myself, the Vice President, the Senior Vice Presidents, the Executive Vice Presidents on the operational side are all chemical engineers with MBAs. And they've been with us and they've been taught by us so this is the gift that keeps on giving in terms of knowledge and wherewithal and so we're in an incredibly strong position to continue this. And we just continue to hire and hire goes back to Massillon and Riverville mills. On day 1, we had approximately 100 PCA personnel that went into each of those mills and camped out of those mills for a couple of months, 7 days a week to reconfigure these mills. So that's all we've got for today.

We hope you don't develop any hobbies there, Mark.

Anyway, thanks for joining us today.

Thanks for joining. Thank you PCA.