Thank you for joining Packaging Corporation of America's Fourth Quarter and Full Year 2023 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 question-and-answer session. I'd now like to turn the floor over to Mr. Kowlzan. Please proceed when you are ready.

Thank you, Jamie. Good morning, everyone, and thank you all for participating in Packaging Corporation of America's fourth quarter and full year 2023 earnings release conference call. Again, 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. As usual, I will begin the call with an overview of the fourth quarter and full year results, and then I'll be turning the call over to Tom and Bob, who'll provide further details. After they're done, I'll wrap things up, and then we'll be glad to take questions. Yesterday, we reported fourth quarter 2023 net income of $189 million or $2.10 per share. Excluding special items, fourth quarter 2023 net income was $192 million or $2.13 per share, compared to the fourth quarter of 2022’s net income of $215 million or $2.35 per share. Fourth quarter net sales were $1.94 billion in 2023 and $1.98 billion in 2022. Total company EBITDA for the fourth quarter, excluding special items was $394 million in 2023 and $409 million in 2022. Excluding the special items, we also reported full year 2023 earnings of $784 million or $8.70 per share compared to the 2022 earnings of $1.04 billion or $11.14 per share. Net sales were $7.8 billion in 2023 and $8.5 billion in 2022. Excluding special items, total company EBITDA in 2023 was $1.6 billion compared to the $1.9 billion in 2022. Fourth quarter and full year 2023 net income included special items primarily for certain costs at our Jackson, Alabama mill for the paper-to-containerboard conversion-related activities and the closure and other costs related to corrugated products facilities and design center. Details of all special items for the year 2023 and 2022 were included in the schedules that accompanied our earnings press release. Excluding the special items, the $0.22 per share decrease in fourth quarter 2023 earnings compared to the fourth quarter of 2022 was driven primarily by lower prices and mix of $1.93 in the Packaging segment, lower prices and mix $0.04, and volume $0.03 in the Paper segment and higher depreciation expense $0.10. These items were partially offset by very good volume in the Packaging segment of $1.07 per share. We also had lower operating and converting costs of $0.51 driven by very good process efficiencies and control over other usages of fiber, chemicals, energy, materials and labor as well as lower energy and wood fiber prices. In addition, we had lower scheduled maintenance outage expenses of $0.19, lower freight and logistics expenses $0.03, lower other expenses $0.04 and a lower share count resulting from share repurchases $0.04. The results were $0.37 above the fourth quarter guidance of $1.76 per share, primarily due to higher volumes in our Packaging segment, lower operating and converting costs, lower freight and logistics expenses. Looking at the Packaging business. EBITDA excluding special items in the fourth quarter of 2023 of $385 million with sales of $1.8 billion resulted in a margin of 21.7% versus last year's EBITDA of $392 million and sales of $1.8 billion and also a 21.7% margin. For the full year 2023, Packaging segment EBITDA, excluding special items was $1.6 billion with sales of $7.1 billion or 21.8% margin compared to the full year 2022 EBITDA of $1.8 billion with sales of $7.8 billion or a 23.8% margin. Throughout the quarter, demand in the Packaging segment was stronger than our expectations. This higher volume along with the operational benefits of our capital spending program and continued emphasis on cost management and process efficiencies across the entire manufacturing and converting facility system drove operating and converting costs lower as well. We had an excellent restart of the Wallula, Washington mill and the No. 3 machine during the latter part of October and ran exceptionally well during the November, December period. And that helped us meet the stronger demand and build some needed inventory during the quarter to ensure the customers – that our customers were supplied with their needs. We plan to restart the No. 2 machine at the Wallula mill in this first quarter to help manage our expectations in the first half of 2024 for continued strong demand together with scheduled mill maintenance outages and the final phase of the containerboard conversion of the No. 3 machine at our Jackson, Alabama mill.

Thank you, Mark. As Mark mentioned, Packaging segment volume for the quarter exceeded our guidance estimates. Corrugated product shipments per workday were up 5.1% and total shipments with one additional shipping day were up 6.9% compared to last year's fourth quarter. Versus the third quarter of 2023, shipments per day were up 5.2% and total shipments were up 3.4%, even though there was one less shipping day. Outside sales volume of containerboard was 88,000 tons above last year's fourth quarter and 17,000 tons above the third quarter of 2023. Our order backlog and containerboard cut-up remained incredibly strong throughout the quarter. Although demand continues to be challenged by persistent inflation, higher interest rates and other factors, we expect our shipments to continue this positive momentum as we enter the first half of 2024. Relative to the published reductions in the industry benchmark grades that occurred in 2023, Domestic containerboard and corrugated products prices and mix together were $1.73 per share below the fourth quarter of 2022 and down $0.40 per share, compared to the third quarter of 2023, which included a richer mix of graphics and point-of-purchase display business. Export containerboard prices and mix were down $0.20 per share, compared to the fourth quarter of 2022 and down $0.01 per share compared to the third quarter of 2023. Beginning January 1, 2024, we began invoicing a $70 per ton price increase for linerboard and $100 per ton increase for medium according to our recent price announcement. As you are probably aware, this past Friday, the RISI Pulp and Paper Week publication did not recognize any increase in the industry's benchmark prices for either linerboard or medium. I'm sure you will have some questions for us on this topic, and we'll be happy to discuss them with you shortly. I'll turn it back to Mark.

Thanks, Tom. Looking at the Paper segment, EBITDA excluding special items in the fourth quarter was $35 million with sales of $144 million or a 24.5% margin compared to the fourth quarter of 2022's EBITDA of $39 million and sales of $154 million or 25.7% margin. For the full year 2023, Paper segment EBITDA, excluding special items was $151 million with sales of $595 million or a record 25.3% margin compared to the full year 2022 EBITDA of $132 million with sales of $622 million or a 21.3% margin. Prices and mix were down 3% from last year's fourth quarter and from the third quarter of 2023, driven by the declines in the index prices that occurred during the year. Although slightly better than our fourth quarter guidance, sales volume was 3% below last year's fourth quarter and down approximately 6% versus the seasonally stronger third quarter of 2023. The management team and all the employees of our paper business have done a tremendous job over the last several quarters to optimize our inventory and product mix, and remain focused on efficient and cost-effective operations in order to continue delivering outstanding results during 2023. I'll now turn it over to Bob.

Thanks Mark. Cash provided by operations during the quarter totaled $335 million and free cash flow was $194 million. The primary payments of cash during the quarter included capital expenditures of $141 million, dividend payments of $112 million, cash tax payments of $59 million and net interest payments of $26 million. For the full year 2023, cash from operations was $1.3 billion with capital spending of $470 million and free cash flow, a record $845 million. Our final recurring effective tax rate for 2023 was 24.5%. During the fourth quarter, we issued $400 million of new 10-year notes. The proceeds from these notes will be used to redeem our $400 million notes that mature in September of 2024. Our net debt is not affected by this transaction and the proceeds from this issuance will be invested in marketable securities at an interest rate exceeding that of the new notes. The new bonds raised our overall fixed interest rate by approximately 30 basis points and extended the overall average maturity of our debt portfolio from 14.1 years to 15.6 years. Excluding the proceeds from this transaction, our year-end cash on-hand balance, including marketable securities, was just over $800 million, with liquidity of $1.1 billion. Regarding full year estimates of certain key items for the upcoming year, we expect total capital expenditures to be in the range of $470 million to $490 million. And DD&A is expected to be approximately $530 million. We estimate dividend payments of $450 million and cash pension and post-retirement benefit plan contributions of $27 million. Our full year interest expense in 2024 is expected to be approximately $53 million and net cash interest payments should be about $60 million. The estimate for our 2024 book effective tax rate is 25%. Currently, planned annual outages at our mills in 2024 including lost volume, direct costs and amortized repair costs is expected to total $0.96 per share. The current estimated impact by quarter in 2024 is $0.26 per share in the first quarter, $0.16 in the second, $0.19 in the third and $0.35 per share in the fourth quarter. These expenses include the volume and cost impact that will be incurred during the completion of the final phase of converting the No. 3 machine at the Jackson mill to containerboard during the first and second quarters. This will negatively impact our first quarter results by approximately $0.16 per share and our second quarter results by $0.08 per share. I'll now turn it back over to Mark.

Thank you, Bob. I'm very proud of the outstanding results PCA delivered in 2023 under very challenging demand conditions. We successfully completed numerous cost reduction and process improvement projects along with other key strategic initiatives at the containerboard mills and corrugated products plants. Our dedicated sales and customer service organizations continue to be extremely motivated and understand the business of our customers. They were very responsive to our customers' needs and worked proactively to help them with their solutions to their opportunities and their challenges. These combined efforts allowed us to enhance our entire packaging business and deliver profitable growth opportunities for our customers and shareholders now and into the future. 2023 also saw our paper business deliver record margins reflecting the capabilities of our employees to optimize our product mix, inventory, distribution channels and overhead structure, along with running very efficient manufacturing operations. These accomplishments helped us to achieve a new all-time annual record free cash flow. We ended the year with over $1.1 billion of liquidity and extended the overall average debt maturity to almost 16 years. We continued our commitment to a strong balance sheet and a balanced approach towards capital allocation. This allows us to profitably grow the company and to maximize returns for our shareholders, while maintaining the financial flexibility to react quickly to situations and opportunities. None of these things would be possible without the hard work of the talented employees and strong partnerships we’ve built with our customers and suppliers over many, many years. Looking ahead, as we move from the fourth and into the first quarter, as Tom indicated in our Packaging segment, we expect continued positive momentum in demand, along with two additional shipping days in the first quarter to drive higher total corrugated product shipments. Despite restarting the No. 2 machine at the Wallula mill, containerboard volume will be lower due to the downtime associated with the conversion of the No. 3 machine at the Jackson mill and a scheduled maintenance outage at the Counce, Tennessee mill. Prices and mix should be slightly higher with the implementation of our announced January price increases partially offset by a decrease in the published benchmark prices that occurred late in 2023 with export prices fairly flat. In our Paper segment, we expect an improved mix to move prices slightly higher with flat sales volume. Recycled fiber and energy prices will be higher and unusually cold seasonal weather will negatively impact usages and yields for energy, wood, and chemicals, along with higher operating costs associated with the restart of the full operations at the Wallula mill compared to the fourth quarter operations. Labor and benefits costs will have seasonal timing-related increases that occur at the beginning of a new year related to annual wage and benefit increases, the restart of payroll taxes and share-based compensation expenses. And finally, as Bob mentioned, scheduled outage expenses will include the significant first quarter impact of the conversion outage at the Jackson mill, which is estimated to be $0.16 per share. Considering these items, we expect the first quarter earnings of $1.54 per share. And with that, Jamie, I’d like to open the call for questions. And we can proceed as you call it out. Thanks, Jamie.

Our first question today comes from Mark Weintraub from Seaport Research Partners. Please go ahead with your question.

Thank you. First, congrats on another really strong year in a challenging environment. So you say in the press release that you are expecting slightly higher pricing despite the $20 decrease in November. And obviously you’re including some from the January increase, which as you mentioned, we’re going to have questions undoubtedly. Is that fair to say that you’re including a little bit more than $20 on average in the 1Q? How should we think about that?

Yes, Mark, this is Tom. Yes, it’s slightly above the $20. We’ve got the follow-through on that published $20 down. And as I said, we put the linerboard of medium price increase into effect January 1. And we’re invoicing accordingly and getting paid accordingly. And I might also add that as a net buyer, we also have accepted the $70 increase on the buy side and have been paying invoices accordingly.

Okay. And sorry, just to clarify, so when you said net $20, was that the increase minus the impact of the $20, or was that that you’re effectively, because of the way the lags work, et cetera, as you push it through into box prices, that the impact of the $70 that’s been announced is slightly more than $20 in the first quarter? I apologize for the question, but just clarify.

Yes, you’re pretty much right. And you got to also think about it is, is the $20 is factoring into the box business right now given contract triggers.

Got it. Understood. And lastly and I’ll turn over. Could you sense how demand is shaping up in January so far for the business?

Yes, demand remains very strong. We’re currently booking and billing about 8% above a year ago, and we see that trend continuing through the quarter.

Thank you, Mark. Next question.

Our next question comes from Sandra Liang from Bank of America Securities. Please go ahead with your question. Sandra, your line is live. Is it possible your phone may be on mute?

Jamie, let’s move to the next question.

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

Yes. Thank you, Mark, Bob, and Tom for taking my questions. Congrats on a really good quarter.

Thank you.

Thanks.

Just wanted to get a sense from you regarding the mix in 4Q. Box prices looked like they were notably down sequentially year-over-year. Now, aside from lower price, were there any one-time mix issues as well? And I recall that in 3Q, you called out weaker building products, lower graphics from softer retail, UAW strike. I’m wondering if that had an impact in 4Q as well, and whether you expect that to fade in 2024.

Mike, our fourth Q mix was about what we expected it to be. At the end of the third quarter, we had a little more graphics business that came in, which was positive. But our mix in the fourth quarter followed pretty much true to form. And going into this year, I think that with some of those headwinds that you talked about behind us, especially the destocking, which was very unpredictable that we incurred during 2023, it’s steady as she goes in 2024.

Got it. Thank you, Tom. So would it be fair to say that in 4Q, some of those issues you mentioned in 3Q last time continued a little bit in 4Q and that…

Yes, they did a little bit into 4Q. They did. But then they began to settle out towards the end of the year.

Okay. Got it. Thank you for that. And then just of the $1.93 in lower prices and mix, is there any way to parse how much was price versus mix? And then in terms of your – the $1.54 guide, what’s embedded for price and mix separately?

Well, I think it’s mostly price, obviously, but then it does get impacted by mix and that kind of varies back and forth. So we try to do the best we can to forecast that.

Got it. So Tom, would it be fair to say you’re expecting – given destocking coming to an end, given some of these issues mentioned previously in my question. Probably you expect a better quality, a high quality mix in 2024 versus 2023.

I think our mix will be traditional to what we typically have.

Got it. And for my last question before we move on, could you share your thoughts on the future growth plans for PKG? You're completing the Jackson project, and you still have the I Falls facility. Considering that I Falls is a valuable, modern asset that generates significant cash flow, do you plan to operate it as it is? What do you see as the next phase of growth for PKG after this?

Yes. Mike, you know, obviously you don’t know what the future is going to hold. But we’ve got a lot of optionality in what we’re doing. All of the capital spending that we continue to do in the box plants, as an example, continues to create incredible opportunity to grow with our customers. Just this year alone, for 2024, we planned over 30 strategic projects at 26 of our box plants. And this is major converting equipment installations, corrugators, corrugator rebuilds and upgrades of significant magnitude. This past year it was the same situation. Number of rotary die cutters, corrugators, new plant in Pennsylvania, the start of a new plant out in Salt Lake City. And so we will continue to build in the internal organic capability to grow with the marketplace. Mills have the runway to continue providing that over the next few years. And then you have to assume, as we have always done, we can grow the containerboard supply as we need to, whether it’s adding capacity in an existing mill or if we had to go out and buy a mill or build a mill. There’s a lot of optionality in the future that we have the ability to proceed with. But that’s never been an issue for us. And I don’t expect it to be an issue in the future. But right now, the key is that we have tremendous capability within the converting side of the packaging unit and the mill system to provide the containerboard to grow for the next number of years. So I’m very, very encouraged by where we are.

That’s great, Mark and very good call. I really appreciate it. And best of luck in 2024.

Thanks, Mike. Next question.

Our next question comes from George Staphos from Bank of America Securities. Please go ahead with your question.

Yes. Hi, good morning. This is actually Cashen Keeler sitting in for George. He had an internal conflict this morning. So I guess just back to the pricing discussion. Are you able to comment at all in terms of what percent of your customer base you’re invoicing at those higher prices in both containerboard and boxes?

Well, with regard to linerboard and medium, I’m talking about linerboard of medium here. It’s 100% of our customers, outside customers on linerboard of medium and trade partners as well. So that’s where that stands. And I just like to add, we’re having no customer dispute us on these price increases or anything. And obviously we’re disappointed that it didn’t show up in the trade publication, as I mentioned earlier. And right now we have customers that are incredibly frustrated with the mechanism right now and feel that there’s a disconnect between what they see going on in the market and what’s being reported. Now maybe some of that is because the outside market has shrunk so severely that it’s quite small now. And we don’t want the tail wagging the dog here, but we’ve got customers now both on the liner and the box side that are asking us to look for alternatives. And we’ll be exploring any and all alternatives going forward, including maybe not even using an index, but we’ll kind of give you some color on that going forward as that progresses. But I just wanted to make you aware of where our customer base is and how they feel about certain things at the moment.

Okay. Appreciate that color. And then in terms of production, was the cost of production in 4Q where you had anticipated in packaging? I know you commented that you had lower operating converting costs year-over-year. But just interested if there were any items that were higher than you expected kind of in there? And as you look out for the rest of 1Q, any kind of cost items or lines that might give you pause. I know you commented on the fiber and energy and chemist, but since shutdown those items.

Yes. This is Bob. I would just say, relative to 4Q, maybe OCC prices that was probably a little higher than what we had baked in. But maybe there were some, what we call, other fixed type costs around some services and equipment rentals, some outside, things like that, maybe just a touch higher. But all in, it was certainly a very good quarter from a cost perspective relative to what we had guided to. As far as the first – going to the first quarter from the fourth, there are some moving parts there. Some of them are just not what we normally see. Obviously, we pointed out the big significant change that we’re being impacted by relative to the Jackson conversion, which is on a sequential basis, is $0.16 per share. But outside of that, if you look at all of our other costs, there’s probably 60% or so of those are what we call seasonal or timing type cost increases. Those would be weather-related, which are actually a little more severe going 4Q to 1Q this year, because of so much cold weather down in the southern mills and the box plants, which typically we don’t see much of a change relative to usages and things that get impacted by cold weather down there. And then the wages and benefits. The base – that base gets larger every year. You never have deflation with your wages and benefits. So the annual increases that we experienced going from 4Q and to start a new year in 1Q, it just gets higher and higher, the dollar impact of that. Plus this year, our medical costs alone, they were up probably over 12% to 15%. However, on a sequential basis, the weather-related items should flip back the other way as we move from 1Q to 2Q and 2Q to 3Q, as should about half of the – those wage-related timing items. Those start to flip back the other way on a sequential basis. You have to sort of keep that in mind going forward. And I’d say the balance of well, I guess one other item is we talked about bringing Wallula on in the first quarter and taking Jackson down, so we’re replacing low-cost tons with very high cost tons. That’s a – that’s probably a $0.10 hit in and of itself right there, exclusive of the outage impact that $0.16. And then the balance of that is just inflation related things that don’t get talked about a lot. For all these cost increases we incur, believe me, anyone who provides a part, a good product service to us, they’re experiencing those same increases. So there’s a lot of outside services, equipment rentals, rents, property taxes even. You can go on and on and on. All that is – it’s a lot of money that we have to absorb especially on – you see it mostly in a sequential nature going from 4Q to 1Q. So, I hope that gives you a little color about what’s in those numbers for the – for our guidance.

Great. Thanks for the details.

Next question please.

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

Mark, Tom, good morning. Thanks for taking the question.

Morning, Gabe.

I wanted to ask a little bit on the demand side. Historically speaking, you guys have done a good job of kind of outperforming the industry or even exceeding that kind of the GDP-type growth. But this quarter was seemingly pretty pronounced relative to what we’re reading maybe in the green markets report or REFI. So, I’m just curious if there’s anything that you can talk about, I mean, I know historically, you guys haven’t talked about like a vitality index or something like that. But just maybe new business wins that you all are excited about or change incentive structure for your sales folks to go out and win new business.

Gabe, the majority of our increase in volume came from our existing customers. As we’ve said many, many times, I mean, that’s our main growth engine. And we tried to align with the right kind of customers who, over the long haul, will grow. And I think that’s been a big plus for us. Are we winning any new business? Yes. We win some new business, some other business goes the other way. It’s over time, we do come out ahead. But as you mentioned, I mean, historically, we have outperformed the industry, and we plan to do so going forward. But we did lag as you probably know, for a number of quarters. Over the last couple of years, there were times when we did lag. And it’s because of some of the segments that we were in. And I mentioned before, as an example, I mean, building products went crazy during COVID and then suddenly that came to a screeching halt. And so some of these segments that we’re in did hold us back, but they’re coming back now nicely and that’s a big part of our growth.

Okay. Thank you. And then maybe two questions on the Jackson conversion. It sounds like – I know sometimes that they’re not always directly linked in terms of when the costs flow through and the guidance that you gave us, Bob, in terms of the $0.26 and the $0.16. But is that happening? Is it straddling in March, April from a timing standpoint? And then I’ll ask a question. I don’t know if you guys will answer, but on a sequential basis, if the $70 and $100 a ton is going through, and by our math, that’s, to your point, Mark, maybe $25 a ton is being reflected in Q1, then is it fair that the extra $50 a ton incremental should be on a sequential basis embedded into the second quarter?

Right. Well, we’re in the midst of discussing all that with our customers, especially on the box side and what the roll through will be, et cetera. So, as I mentioned, we got the increase in place for the linerboard medium. And we’ll see where things roll through, but we expect it to be a traditional roll through.

Thank you.

Thank you. Next question please.

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

Hi Good morning.

Good morning, Anthony.

Hey, following up on your earlier comments, I’m wondering, is there some percentage of your box contracts that are not on Pulp and Paper Week? And I guess, looking at other paper grades, there were some boxboard producers we didn’t feel like the index was really reflecting what was really happening in the market, and they were able to move some customers off a Pulp and Paper Week. Is that something that you potentially could do? Or you think some customers might welcome? Just wondering if you – to the extent you can discuss how you think about that?

Well, Anthony, as I mentioned, I mean, we do have a high level of frustration both with customers, both on the liner and on the box side. With Pulp and Paper, and feel that there’s a disconnect there to what they see in the market and what’s being reported. As I’ve said for a number of years now, as this independent market continues to shrink and what we really consider to be a real open market gets into the mid-single digits. And if that’s all that’s being reported on, that becomes quite a – can cause that disconnect, in my opinion. So our customers have asked us to look at a lot of different alternatives in which we are doing, along with them, and we’ll see where we end up. Have we moved some people off of that? We don’t really like to get into those kind of details just because that’s between us and our customers. So, I’ll leave that one aside, because we’re not going to really get into those discussions other than I just will tell you, we are looking at any and all alternatives.

Okay. That’s very helpful. And then just switching gears on the CapEx guidance for 2024. I think you said $470 million to $490 million CapEx. Is it possible to break that down between maintenance, discretionary and then Jackson? And is there any kind of finer point in terms of the run rate capacity add from Jackson when that conversion is completed?

Yes. As far as I would say Jackson will be $30 million to $40 million of that amount. The balance, I’d say 65% or so would be sort of that nondiscretionary must-do type maintenance-type capital spending. And Mark, you talked about?

Yes, I mean we’re probably spending close to $250 million just in the box plants alone this year. And that’s all of the 30 strategic projects we’re working on the box plants and building the new plant out in Salt Lake City and finishing that up. And then the rest will be just in the smaller one-off projects in the mills. And then obviously, we’ve got the maintenance-type capital that goes on. But the bulk of its – quite frankly, the bulk of its in the box plants. And then finish up the Jackson conversion.

Okay. And is there a final number on the Jackson capacity add in terms of how much – how many tons that you would expect that to add when it’s completed?

The machine certainly ought to be able to add approximately 175,000 to 200,000 more incremental tons a year when we’re done with this phase of work. I believe the number for 2023 is production of that machine was somewhere around 537,000 tons of production for 2023. So if you add 200,000 more tons that you’re up in that 700,000 tons capability. But again, it all depends on our demand. And so we’re going to run to demand, as we always have, but that’s the necessity of being able to build this runway that our customers can depend on and they know they can grow with us and we can supply them the product and the value they need. And so the Jackson machine is going to have that capability to ramp up and ramp down, and provide all the grades we need at an incredibly attractive cost position.

Got it. Got it. I’ll turn it over.

Okay. Next question please.

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

Hey guys, congrats on a really strong quarter. Your business is relatively a shorter cycle business, but it certainly seems pretty confident on the demand outlook for the first half with capacity bringing back online. What are your customers selling? Are there any pockets of end markets that kind of really stand out where you’re seeing demand kind of bounce back in a bigger way? And are you seeing any restocking after a year’s worth of destocking effectively?

Phil, I think the demand outlook obviously remains good. It’s pretty much across the board. There’s no one industry that stands out more than the other, other than maybe e-commerce. Because you still see the brick-and-mortar stores continue to struggle a little bit, but that’s more than offset by the e-commerce side of the business. So that remains quite good. And I think relative to restocking, I would say that the restocking has been quite conservative to date. Nobody jumped up and said, 'I’m going back to where I was during COVID' or anything like that, they’re trying to be reasonably conservative going forward. And – but – so I think we saw a little bit – we probably saw a little bit of a jump as a result of that, but nothing like we saw on the destocking side.

Okay. That’s helpful. And then I guess a question for Bob. If I look at your last two quarters, operational and converting costs were down pretty sharply, which is impressive, especially with Wallula coming back on. Preaching the first half of the year you’re going to have some outage expense of Jackson. But some of the gains you saw in the back half, is that pretty sticky, and that’s still to come? And I know you guys talked about all these different projects you guys are working on the box side of things. So kind of help us think through that driver potentially good or bad this year.

I’m sorry, what did you say was sticky feel? I didn’t catch that part.

The operational and converting cost, that came down pretty nicely in the back half of 2023. I’m just trying to gauge should we expect follow-through in 2024, especially with some of the investments you’re making in the box plants? Is that a good guy as well?

No, absolutely. I mean, as we’ve said many times, that never stops. It’s not just capital projects. It’s things that don’t – it’s just changing behavior, a technique, a process. It doesn’t cost money compared to others new things, new technologies, new ideas, and those thousands of those things are going on every year. And that is really what drives those reductions that we’ve talked about historically, and that certainly will continue in the future.

One good example of that, and we don’t talk about a lot, our transportation capability. Over the last decade, we’ve built an incredibly strong transportation logistics group within the company, and it’s nationwide now. We’ve got a very large fleet of tractors and trailers running the country, taking care of not only containerboard, but a lot of our packaging to the customer. And so that capability of having our own trucking in-house has provided enormous flexibility in cost management on the transportation side of the equation. So that’s just one example of how we go about looking at our business and then executing.

Super. Just one last one for me. I think on the prepared remarks, you called about $1.1 billion of liquidity. Mark, you highlighted being balanced in terms of capital deployment. Any opportunities perhaps to play a little offense in a market that’s a little more distressed, especially some of the capacity that’s come on. Is that an opportunity? You guys are obviously growing pretty nicely and generate a ton of free cash flow here.

I’ll let you know when it happens. That’s the beauty of having that firepower. We can not only continue to look at share buyback and dividends. But if an opportunity comes up on a one-off on the packaging side to buy an existing business, we can easily move into that. If something on the mill side came up that we found attractive, we can move into that and not worry about how we finance it or how it affects the balance sheet. And so the other thing I want to remind everybody, back when we called out the 2023s capital, and we – the 2022 capital up over $800 million. And we reminded everybody that the 2022 capital would be going down into a much more manageable level, much more reasonable level in that $400 million range. Just keep in mind, we did that, and we accomplished an incredible amount of high-return projects and impact projects that benefit our customers and our shareholders alike. But also this year, we continued that trend. The $400 million range of high-return, high-impact projects affords us again an incredible opportunity with the balance sheet because all that operating cash that we’re generating goes into free cash and can be deployed appropriately. And so we’re in a very good place. Over the last 10 years, we’ve done all the heavy lifting to get the mills and the box plants in very, very efficient condition. And so now it’s much more manageable about how we go about with these projects. And so with the fact that we have the internal capability with the engineering and technology organization to manage the bulk of all this work. We’re in a much better position than we’ve ever been and we’ll continue that. But again, all optionality is open for us on how we look at the world.

Okay. Appreciate that.

Thank you. Next question?

Our next question is a follow-up from Mark Weintraub from Seaport Research Partners. Please go ahead with your follow-up.

Thank you. So can you share with us the types of alternatives on pricing structures that might be contemplated? Would they be more cost tied? Would they be more macro or data tied? Would it be more just going and negotiating with counterparties, some combination? Or any color as to kind of where the bias might be from your perspective?

Mark, it’s nice that you’re thinking about it, and I appreciate all your options that you just presented, but I’m not going to get into that at all because, as I told you before, that’s between us and our customers. And we’ll work those out as we go forward. So, I’m sorry, I can’t give you anything, but that’s the way we do business.

Totally understood. Is there anything that may have been missing that would have been in the list recognizing there’s going to be a whole bunch of things that you’re going to be talking about with your customers…

Nice try, but I’m going to ditto again. Okay.

Yes. I did try. And then Bob, you had mentioned about 60% of the costs increased from 4Q to 1Q seasonal or timing. Could you sort of put a number on that? Would that be like $0.20 per share? And if it we were just – had that 6% come back in the second quarter?

Mark, it’d be closer to 35%, maybe a little more per share.

Right. Okay. Thank you so much.

Okay. Thank you, Mark. Any other questions, please?

Our next question is a follow-up from Gabrial Hajde from Wells Fargo. Please go ahead with your follow-up.

Tom, Mark, I’m going to try one more time. So, I apologize in advance, but it’s more trying to understand the thought process. And I think the price discovery process that we’ve seen over the past 25 years, what we’re hearing is maybe is not as bulletproof or as useful as it maybe once was. And so maybe really what we’re hearing is and something I think is misunderstood in the industry, is that you guys sell boxes that are made to a spec that service a customer’s needs as opposed to selling a customer a parent roll of paper. And so is it fair that maybe what’s going on behind the scenes is the value that you’re bringing to your customers is really what you’re trying to understand and work with them to help them understand ultimately and move the pricing structure to something like that.

Well, Gabe, you described it very well. I got to be honest with you. There is a linerboard and medium market, and then there’s a box market. And the box market is all custom-made. Lots of different things go into it, and there’s a value created accordingly. So you – as I’ve said before, I’m not going to get into all the optionality and all those other sorts of things, those things we’ll discuss with our customers. But you do describe it accurately, I think, especially from our customers’ point of view, that what gets reported is quite different than what they see in the marketplace. And just as an example, I mean, even when the prices went down over the past 18 months or so. There isn’t a customer who said, I see that there’s a need for that or that they saw that in the marketplace. So we’ve got – what we’re hearing from our customers is very different than what’s getting published. And that disconnect, we’ve got to figure out how to solve that disconnect, I guess, is probably the best way to put it.

Very much appreciated. Thank you and good luck.

Thank you.

Thank you. Any other questions, Jamie?

Our next question comes from Charlie Muir-Sands from BNP Paribas. Please go ahead with your question.

Hi, Good morning, gentlemen. Thank you very much for all the good answers so far given us a lot to think about. Just had one question on the Jackson mill. You’ve obviously very helpfully quantified the temporary cost drag that we should expect in Q1 and Q2. But can you just talk about the cost benefit that we should see from the mill once it fully ramps up and perhaps contextualize how much more efficient this mill is compared with the rest of your network?

Yes. We talked about this for the last couple of years and that when we were done with all of this work because the work that’s going on that will start next month and then finish up. It’s about a 58-day outage at the mill, but it involves more than just the paper machine. Once again, in and of itself is a lot of work with dryer cans real press section rebuild, but it’s also power plant work. We’re going to be reconfiguring a lot of the power plant steam flows, steam pressures will be – ultimately, we’ll be producing more megawatts off the power plant in the back end of the mill and providing more high pressure, higher efficient steam into the paper machine. And so net-net, the mill when it’s done, will have the capability to produce linerboard and be at or amongst our lowest cost in the system. So if you think about Valdosta, DeRidder and Counce, Jackson should be as good or better, quite frankly, than Counce and DeRidder. And probably get Valdosta to run for its money. And so the huge opportunity is in the, in the cost savings as we go forward, that will flow through in the future. Bob, do you want to add to that?

Yes, Charlie. And what Mark is describing, if you sort of quantify that, we’re looking somewhere between $35, $40 a ton once all that work is completed, and that machine is fully operational.

Many Thanks.

Thank you. Any other questions, please?

And we have an additional question from Richard Bourke from Bloomberg Intelligence. Please go ahead with your question.

Thank you for taking the time to answer my question, gentlemen. I was just wondering with your announced price increase, to be effective January 1, if you maybe saw some demand get pulled forward into the fourth quarter by customers attempting to get that price increase?

No, we did not see that, Richard.

Thank you. Any other follow-up questions, Jamie?

And sir at this time, I’m showing no additional questions.

All right. Why don’t we go ahead and conclude this. If there are no questions, I’d like to thank everybody for joining us on the call, and we look forward to talking with you in April. Thank you. Everybody, have a good day.

Ladies and gentlemen, with that, we’ll conclude today’s conference call and presentation. We thank you for joining. You may now disconnect your lines.