Good morning, everyone, and thank you for joining Packaging Corporation of America's Third Quarter 2023 Earnings Results Conference Call. Your host for today will be Mark Kowlzan, Chairman and Chief Executive Officer of PCA. Upon conclusion of his narrative, there will be a Q&A session. Please note that this call is being recorded. At this time, I'd like to turn the floor over to Mr. Kowlzan. Please proceed when you're ready.

Thank you, Jamie. Good morning, and thank you all for participating in Packaging Corporation of America's third quarter 2023 earnings release conference call. I'm Mark Kowlzan, Chairman and CEO, PCA, and with me on the call today is Tom Hassfurther, Executive Vice President, who runs our packaging business, and Bob Mundy, our Chief Financial Officer. As usual, I'll begin the call with an overview of the third quarter results, and then I'll turn the call over to Tom and Bob, who will provide further details and then I'll wrap things up and we’d be glad to take questions. Yesterday we reported third quarter net income of $183 million or $2.03 per share. Excluding special items, third quarter 2023 net income was $185 million or $2.05 per share, compared to the third quarter of 2022's net income of $266 million or $2.83 per share. Third quarter net sales were $1.9 billion in 2023 and $2.1 billion in 2022. Total company EBITDA for the third quarter, excluding special items, was $388 million in 2023 and $477 million in 2022. Third quarter net income included special items expenses of $0.02 per share, primarily for certain costs at the Jackson, Alabama mill for paper to container board conversion related activities. Details of all special items for the third quarter of 2023, as well as 2022 were included in the schedules that accompanied our earnings press release. Excluding the special items, the $0.78 per share decrease in third quarter 2023 earnings, compared to the third quarter of 2022 was driven primarily by lower price and mix of $1.33 and volume $0.09 in the packaging segments. Higher depreciation expense $0.11; lower volume in the paper segment $0.04; higher tax $0.02; and other expenses $0.02. These items were partially offset by lower operating costs of $0.58, primarily resulting from lower recycled fiber and energy prices along with outstanding mill and plant operational execution. Other favorable items included a lower share count resulting from share repurchases in the second half of 2022 were $0.11, higher prices and mix in the paper segment $0.04, lower converting costs $0.04, lower scheduled maintenance outage expenses of $0.04, and lower freight and logistics expenses $0.02. The results were $0.17 above our third quarter guidance of $1.88 per share primarily due to higher volume in the packaging and paper segments and lower operating and converting costs. Looking at our packaging segment EBITDA excluding special items in the third quarter of 2023 of $374 million, with sales of $1.8 billion, resulted in a margin of 21.3% versus last year's EBITDA of $467 million, with sales of $1.9 billion, and a 24.1% margin. The operational benefits of our capital spending program and the continued great focus and execution of our mills and corrugated products facilities on numerous process improvement initiatives once again delivered impressive results. This included areas such as machine and equipment efficiencies, fiber, chemical and material usages, internal energy generation and usage, and labor costs. Our approach to cost-effective management of container board supply with demand also delivered the benefits we were anticipating. This was primarily achieved by idling the Wallula mill for the entire quarter, which resulted in a market-related downtime of approximately 174,000 tons. However, with the stronger demand in our packaging segment, we ended the quarter with inventory levels lower than anticipated. Based on our current outlook for improved demand, together with current plans for the first quarter of 2024 for the scheduled mill maintenance outages and completing the final phase of the container board conversion on the number three machine at our Jackson, Alabama mill. We are planning to restart the number three machine at the Wallula, Washington mill during the fourth quarter in order to bring our inventories to desired levels.

Thank you, Mark. Packaging segment volume for the quarter exceeded our guidance estimates. Corrugated product shipments per workday were up 1.9% and total shipments with two fewer shipping days were down 1.3%, compared to last year's third quarter. Versus the second quarter of 2023, shipments per day were up 3.9% and total shipments were up 2.3% even though there was one less shipping day. Outside sales volume of container board was 33,000 tons above last year's third quarter and 5,000 tons above the second quarter of 2023. Demand headwinds from a shift of consumer buying preferences towards more service-oriented spending, persistent inflation, and higher interest rates continue to negatively impact consumers' purchases of both durable and non-durable goods. However, we mentioned last quarter that many customers were telling us the inventory de-stocking of boxes and their products was behind them and we were hopeful that it would translate to improving volume throughout the second half of the year. We saw that occurring during the third quarter and we expect that momentum to continue into the fourth quarter although there is one less shipping day, compared to the third quarter. Relative to the published reductions in the industry benchmark grades that occurred late last year and earlier this year, domestic container board and corrugated products prices and mix together were $1.12 per share below the third quarter of 2022, and down $0.45 per share, compared to the second quarter of 2023. Export container board prices and mix were down $0.21 per share, compared to the third quarter of 2022 and down $0.03 per share, compared to the second quarter of 2023. And now I'll turn it back to Mark.

Thank you, Tom. Looking at our paper segment, EBITDA excluding special items in the third quarter was $35 million with sales of $158 million or a 22.4% margin, compared to the third quarter of 2022’s EBITDA of $33 million and sales of $165 million or a 19.7% margin. Seasonally stronger cut size and printing and converting volumes were 13% higher than the second quarter levels and down almost 8% versus the third quarter of 2022 with about 40% of the decline being driven by no paper sales from our Jackson mill in this year's third quarter. Prices and mix were up about 3.5% from last year's third quarter and down 2% from the second quarter of 2023, due to the declines in the index prices that occurred earlier in the year. Our International Falls mill managed their nine-day planned maintenance outage very well, and similar to the packaging facilities, the mill remained focused on efficient and cost-effective operations, delivering great results for the quarter. I'll now turn it over to Bob.

Thanks, Mark. Cash provided by operations during the quarter totaled $339 million, with free cash flow of $250 million. The more significant cash payments during the quarter included capital expenditures of $90 million, common stock dividends totaled $112 million, $63 million for federal and state income tax payments, and $51 million for pension and other post-employment benefit contributions. In addition, we repurchased just over 286,000 shares of our stock during the quarter at an average price of $144.81 per share for a total of about $42 million. We ended the quarter with $726 million of cash, including marketable securities and our liquidity on September 30th was approximately $1.1 billion. Lastly, our planned annual maintenance outage expense for the third quarter was just over $0.22 per share and the fourth quarter is now expected to be about $0.19, bringing the 2023 full year total to $0.72 per share. I'll now turn it back over to Mark.

Thanks, Bob. Looking ahead as we move forward into the fourth quarter, in our packaging segment we expect less market-related downtime as we build our inventories back to appropriate levels, along with higher shipments per day in our corrugated products facilities, although our plans will have one less shipping day compared to the third quarter. We also expect lower average prices primarily due to the majority of the May decrease in the published benchmark index grades being realized throughout the third quarter, as well as a seasonally less rich mix. In our paper segment, volume will be lower compared to the seasonally stronger third quarter and prices and mix are assumed to trend lower with declines in the index prices. Operating and converting costs will increase driven by higher recycled fiber prices, seasonal energy costs, and the restart of the Wallula mill. Depreciation expense is estimated to be slightly higher and scheduled maintenance outage expenses will be lower. Considering all of these items, we expect the fourth quarter earnings of $1.76 per share. With that, I would be happy to entertain any questions, but I must remind you that some of the statements we made on the call constituted forward-looking statements. These 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 the 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.

Ladies and gentlemen, at this time, we'll begin the question-and-answer session. Our first question today comes from George Staphos from Bank of America Securities. Please go ahead with your question.

Hi, it's George Staphos. How is everyone? Congratulations on the quarter. I'm participating in two conference calls at this time. Once again, congratulations on the performance. Can you discuss the factors you listed regarding the lower operating and converting costs? Mark, I know you have various projects, but were there any specific ones that contributed to the improved performance? There will be some seasonal pickup in the fourth quarter with higher OCC, but how much will carry forward and what is the potential for further improvement in both operating and converting costs as we look ahead to 2024 from our current position? If you could provide some insight on that, I would appreciate it.

You know, it's the benefit of the continuous improvement that we've had in place year after year. And as we've said over the years, we're constantly doing hundreds and hundreds of projects a year. Some are small, some are large, but nevertheless, it's an ongoing, continuous process across the board. And if you think about the box plants and the mills, there's daily activity with the technology organization in concert with the local operational management focused clearly on cost reduction and operational excellence. This has been going on for a number of years and will continue to go on. Tom, I think, you know, you've got great examples in the box plants that we just continue to execute.

Yes, I think George, this is really, you know, an effort to really realize the deployment of the capital that we've done in all the box plants and to streamline those box plants and to really get those box plants right-sized for the growth we've got coming and what the existing volume is right now. So we're very pleased. We're very, very pleased with the results.

You know, George, as far as next year, as you could expect, we're already and have been talking about what’s on the horizon for next year, what are the opportunities. We've got a very solid plan in place on where we're going after these cost reductions and continued operational improvements, along with just being able to look at what the market requirements will be in terms of customer needs and addressing that. And while we address that, we're always looking at how we're deploying that capital and how that impacts the operation in terms of labor cost and energy and input conversion cost. So we've got a good plan for next year also.

Sounds like it wouldn't be surprised by that, Mark. So to Wallula, and again I know it's hard to talk about some of this live mic. But the restart for the fourth quarter, what does it mean about what your customers are saying for 2024? I realize you need to rebuild inventories and we know PM3 at Jackson's going to be down for the last part of the conversion. But what does it mean in terms of your demand outlook, what your customers are saying? And hopefully this isn't the case, but if things wind up being from a macro standpoint a little bit softer, how quickly could you maybe pull back on Wallula if need be? And then my last question I'll turn over. Can you talk to us a bit about how your early fourth quarter bookings and billings are? And how we should again think about how those map to actual volumes? Thanks and good luck in the quarter, guys.

Thanks, George. Yes, you know, as far as Wallula, as we've always said, we're going to run to demand. And Wallula is just one of the opportunities we have to move the needle on our needs. And so by getting number three started up, you know, over the course of the next couple of weeks, it will fulfill our current needs. We'll anticipate that through next year. If demand just holds on the trajectory that it is right now, we'll need Wallula running through the year and so we will look at the opportunity to supply the marketplace. We've got our own internal targets on what we want our inventories to be to minimize transportation and logistics issues. But we can flex the system up and down and as we've always done, we will always run to demand. So that's how I'll answer that. And then Tom, why don't you go into the current box cut-up?

Yes, let me first just kind of tag along with what Mark just said relative to running to demand. You know, that is what we do. If we didn't have the demand, we wouldn't be talking about restarting Wallula, pure and simple. Now to calibrate that a little bit, George, I think you need to really look at our low point was the first quarter of 2023 in terms of demand. Our demand currently is, you know, just in a couple of quarters is now 8% higher than that number and going higher going forward. So, you know, that’s the real reason why we need the cut-up in Wallula. It's really being driven on the box side of the business more than anything else. And relative to the bookings and the billings, again, our bookings are up 14% for this at the beginning. And again that’s, you know, you've got to take that number because we've had high numbers and then we come in a little low, you know, we come in significantly lower for the actual quarter, because a lot of these bookings are for quite a ways out. But I think the key here is that the backlog remains incredibly strong, and our cut-up demand is also very strong. So we feel very good about where we are on the fourth quarter and certainly entering into next year.

Thank you very much.

Next question please.

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

Thank you. Tom, just following up, you mentioned an 8% reference to your demand now versus, I think, first quarter. So is that sort of what you're expecting in the fourth quarter on an average day basis? Because I was sort of trying to do a little bit math and again, is that how to think about what that number you just mentioned?

Yes, Mark. I mean, our trend still remains positive. So we'll be up. And again, I think it's really important to get calibrated kind of the correct way to some extent. And because when we look at the fourth quarter, compared to the fourth quarter of 2022, in 2022 we had an extra day in there given the way the FBA holidays fell. So we were actually up a couple of percent in the fourth quarter of 2022 over the third quarter of 2022. But then, of course, in the first quarter of 2023 is when we really hit what I call rock bottom in terms of demand. And as I said, we're up just in a couple of quarters, 8%, and we look at that number going up again in the fourth quarter.

Got it. Okay, thank you. And just on the Jackson project, could you just remind us what the end result is going to be? Is it happening in the fourth quarter and the first quarter? Okay, just color on that would be great.

Yes, no, you know, the work will be done next year, late first quarter into the second quarter. It's a longer outage, but it will be the final phase of the completion work necessary to take care of the big machine. But you're talking about '23 additional high-pressure dryer cans, modifying the press section, we’re removing the fourth press, installing the new shoe press, a number of modifications in that regard to enhance the speed, the drying capability. But it's that final phase that gets the productivity up, but also some of the work in the back end of the mill is related to the cost position of the mill. So when this work is done, depending on the demand coming out of that mill, that mill will be, as far as cost competitive position, it will be right in there with the DeRidder and Counce in Valdosta.

Great. And if you just remind, I think it was like a 265,000 ton per year, this part, or correct me what that number was and if there's a way for it to calibrate the amount of cost per ton or whatever the best way to look at it, what you're expecting to achieve with this last phase would be helpful too.

You know, I'm not going to answer that right now because I don't want to say the wrong thing. I'm going to let Bob, if he recalls. But at the end of the day, the machine, you know, if you think about where we've been running the machine on a daily basis, you know, the machine's been flexing anywhere from 1,200 tons a day to 1,800 tons a day, depending on what we needed. But when we're done with this project, the capability of that machine will be well over 2,000 tons a day. The target is 2,400 tons a day when we're done with this. So if you use a 352 day a year, you'll get your annual tons.

Yes, Mark, and the improvement from where we are today versus where we will be when we hit that run rate after the completion of the second phase, it's close to $40 a ton. That benefit coming from most of your direct variable type costs and you're getting all this additional volume with no increases in your, obviously indirect costs or any fixed costs. So you get a nice, huge benefit once this project is completed.

Great. And so we can just take the 2,400 times 350 or whatever, or 360.

Just for simple math, you can use either 2,000 or 2,200, but the ultimate goal among myself and my colleagues is that the machine will eventually reach a capacity of 2,400 tons a day when we finish fine-tuning it. To my knowledge, it would be the most productive and low-cost linerboard machine in the Western Hemisphere.

Super. One last quick one. I'm curious, was mix much of a factor in terms of the $1.33, I guess, is $1.12 domestic. But was mix much of a factor in the corrugated? Or was that just mostly price?

Mix plays a significant role in determining the final pricing, influenced by end uses and basis weights. As I pointed out previously, the building products segment, which is important for us, is still struggling due to the impact of higher interest rates on housing starts. The graphics segment and the changes in brick-and-mortar retail are also feeling the effects. Additionally, our automotive sector is now being affected by the UAW strike. All these segments are typically higher-priced. However, we have many other segments performing well, and our exposure to price changes has been minimal, aside from what you've seen in the publications.

Okay, super. Thank you.

Thank you. Next question.

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

Thank you, Mark, and Bob for taking my questions. Congrats on another solid quarter despite tough environment.

Thank you. Thanks, Mike.

Could you please provide more details about the shipment patterns during the quarter? I'm particularly interested in the performance of different end markets. We received some good insights regarding building products and the automotive segment in the previous question, but any additional information on the shipment cadence throughout the quarter and which end markets experienced significant growth would be greatly appreciated.

In terms of end markets, when conditions started to improve, I believe I addressed most of your inquiries. Besides the previously mentioned markets, I want to point out the agriculture sector, where we faced numerous challenges, particularly with weather, but those issues have largely subsided. We are anticipating a strong agricultural season ahead, which should provide a boost. Additionally, e-commerce continues to capture a larger portion of the corrugated market, and that trend looks promising. Generally, we are seeing robust sales in food and beverage, as well as various other sectors, which are either stable or showing positive signs for the future. The most encouraging aspect is that the situation has become more predictable now that we have cleared out excess inventory and our customers are operating with leaner stock. This makes it easier to forecast developments in many of these segments.

It does. Very helpful. Thank you. As you consider bringing Wallula back, could you discuss any challenges that your other mills might encounter? Last quarter, you mentioned that with Wallula being down, you were able to optimize production at your remaining mills, resulting in a benefit of $150 per ton. Are there any challenges you expect or anticipate for your other mills once they are fully operational?

Well, no, again, currently, because of the inventory situation, we'll have to run the entire mill system to capacity. And so the six mills that ran during the third quarter, we'll have to continue running full out, and then Wallula number three, we'll have to come up and perform equally as efficiently.

One final question, I guess, squeezing in here. Mark, can you help us think about how you're thinking of growing the business once you're past the phase, the conversion of number three in Jackson next year? Where does growth come from mix? Is the conversion of I Falls, the resumption of M&A? How should we think about you growing the business, let's say, post 2024?

Well, if you look at over the decades, we've always grown with our customers. And we still have the most diverse, broad book of business nationwide with local accounts and we'll continue to grow with those accounts and help enhance their business. So that's where a lot of the opportunity always comes from. Tom, do you want to elaborate on that?

I believe that the segments currently experiencing a decline will eventually recover and return. We will strive to demonstrate the best value in the market for our entire customer base, allowing us to grow our business accordingly. We are continually exploring opportunities and understanding customer demands, ensuring we remain well aligned with their needs. This focus is what is driving the Wallula project at this time.

Got it. Thank you very much, and good luck for the quarter.

Thank you. Next question, please.

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

Hey. This is Alex on for Gabe. Thanks for taking my question. So just thinking about the inventory level, can you maybe just kind of comment on what your targeted inventory looks like for year-end or when thinking about the Jackson outage?

We never give absolute numbers, but I can tell you, when we started out the third quarter, the targets we had in mind, we were dramatically lower than what our goals were for the ending inventory, and that's a positive situation to be in especially when we have the opportunity to get Wallula started back up and satisfy that demand. But we have a number in mind, and what will influence that number, of course, is the shutdown schedule we have in plans for the Jackson conversion and then the other annual shutdowns that will take place in the first six months of the year in the rest of the containerboard system. And so without giving you an absolute number, we have some work to do to get our inventory up where it needs to be to get us into the new year and then get us through the first six months of the year.

Okay, thanks. And just thinking about Wallula. Does anything change with the cost structure that we see as the mill restarts in variable or fixed?

Again, Wallula, it's no surprise, is our higher cost mill because of the fiber basket and the energy situation in the Pacific Northwest. But it remains a critical mill to us because of the local with our Pacific Northwest box plants. And in that regard, the cost position won't change. We're taking advantage of running the big machine. We don't currently need the number two machine running, but that could change. So again, we will run to demand. we will satisfy what we need.

Yes. I would just add that with Wallula mill operating in a very large market for us, it certainly gives us a lot more flexibility in a box plant to react and respond quicker to the marketplace as that continues to rebound. And of course, that's heavy ag up there as well. So this will give us some advantage in terms of flexibility in that marketplace.

Yes, Alex, I would like to add that when we restart Wallula in the fourth quarter, we will be comparing it to the third quarter. As Mark mentioned, it is our most expensive mill. While we prepare to restart the machine at the beginning of November, we have been incurring labor costs and other expenses with no production. However, there are no significant cash costs associated with the restart. There may be some non-cash costs, such as raw material write-offs and obsolescence, but nothing major. When comparing to the third quarter, nearly half of the increase in our operating costs is due to restarting Wallula and bringing those costs back online.

Great. Okay, that's good. And I guess, my last question is just thinking about 2024, maybe can you just kind of frame how you're thinking about '24? I understand we still have another quarter to date, but just for the high levels of percentages, how you are thinking about '24? Thanks.

Well, just on a macro level, we're going to continue to do what we do run to demand. But the other thing is if I were an investor, which I am, but I would be looking at this on how we use our cash and where we're deploying cash. We talked about this a little bit at the July call for next year, and we would anticipate the capital spending discipline to continue in the trend that it's been, we'll be in that $400 million level this year and plans call for next year to continue that pace of capital deployment, which if you then think about the excess cash being generated, where that goes. There are other opportunities to take advantage of that and bring value to the shareholders. So we'll, again, continue to take advantage of the benefits of all the capital spending that we've been bringing to bear, get Jackson completed and then continue to look at more opportunities and execute and work with our customer base and taking care of our customers.

Perfect. Okay, I’ll turn it over. Thank you.

Alright. Next question?

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

Good morning.

Good morning.

We've seen a large amount of new recycled capacity being added to the market this year. I guess some integrated, some non-integrated. And I just had two questions. I guess, first, could you talk about the impact on the market that you've seen or maybe haven't seen? And then second, maybe for more big picture perspective, how should we think about PCA's mix? Historically, you've been a virgin board producer. Are there some opportunities to add recycled capacity? I guess, what we look and process OCC? Or do you still see Virgin playing this kind of unique role in the U.S. market? How do you think about that maybe over the next decade?

We have primarily focused on producing virgin linerboard medium. Our mills have the flexibility to adapt, and we've made significant investments over the last ten years in conversion projects at DeRidder, Wallula, the Jackson mill, Counce, and the Northern Mills, all of which have recycled capacity. However, we will not concentrate solely on recycled products. We leverage these opportunities, allowing us to adjust fiber costs depending on the time of year and availability. Looking ahead, I believe that ten years from now, our fiber balance will remain largely unchanged from what it is today.

Anthony, the market impact of the unique situations we're facing and some integration at these mills is unfolding as I predicted. With a very limited open market, we've seen almost no effect from these mills; they'll need to find alternative outlets. The integrated mills will focus on demand and are not attempting to sell into the open market, while the standalone ones might try. However, our domestic customers prefer to stick with PCA because we offer high-quality linerboard and medium, provide excellent customer service, and they have shown no inclination to switch suppliers. I believe this sentiment holds true across the industry. To add to what Mark mentioned, we value our fiber flexibility. Historically, PCA operated as a heavyweight mill system, and we have successfully adapted to current market needs. We can customize our liners to meet our customers' requirements, which gives us a significant competitive edge.

One of the factors, if you think about recycled versus virgin fiber, virgin fiber prices and input costs, conversion costs have been very stable over the decades. Relatively speaking, if you're solely dependent on OCC, DLK, the price and cost input swings have been wild high, low, high, low. And so trying to anticipate what your conversion cost is not a good place to be if you're 100% recycled. So we like where we are. We will continue with this model.

Okay, that’s very helpful. Thank you.

Next question.

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

Good morning. Mark, Bob, Tom. This is John diving on for Phil. I wanted to start off with the implied fourth-quarter guide box shipments. I mean, I know you said so far, bookings are up 14%, but bookings aren't actually billed. So if I'm just reading your press release being up on a per-day basis in the fourth quarter quarter-over-quarter on the shipping day. It seems to imply that in the fourth quarter, at least for the guide is up about 14.5% or so, 15%. Is that the right way to think about it? Any kind of extra color you could give on that?

No, that's not the right way to think about it, Phil. But I'm going to turn it over to Bob and see if he can walk you through this just a little bit.

Well, I'm not sure I can, Tom. No, Phil. I’m not sure maybe we'd talk afterwards, but it's not sure how you're arriving at that certainly from anything that we said we put out. But that obviously would be a tremendous thing if that were to happen, but I just don't see how you're getting there. Maybe if you could just talk off-line.

Sounds good. Regarding expectations for the fourth quarter, it seems that things are progressing well, even if not at mid-teens growth rates, and there's more visibility. This appears to contrast with what was mentioned about generally expecting softer holiday demand. I understand that this varies by customer and doesn't represent the entire market. Are you seeing holiday demand in the fourth quarter coming through stronger than expected?

Yes. I would say the holiday demand is going to be strong, yes.

Great. And just one last quick clarification. The 174,000 tons of economic downtime that you called out, was that just for Wallula or the whole company is incorporated to that for the economic downtime?

That was the Wallula downtime. Thank you, next question.