Conference Transcript - PKG 2026-06-10

Gabe Hady, Analyst — Wells Fargo

All right, everyone. Thanks for being here. Gabe Hady, for those of you who may not know Wells Fargo, senior paper and packaging analyst. I'm joined by my colleagues today in the room, Richard Carlson and Bailey Gordon. We'd like to welcome you to the Packaging Corporation of America presentation this morning, representing the company, our chairman and CEO, Mark Kolsand. To my right, and CFO, Kent Flutterer. Mark has been with the company since 1998, I believe I got that right, CEO for the past 16 years and chairman for about a decade. Kent took over as CFO just about a year ago, been with the company for 19 years, and has also served as PCA's general counsel. Many of you in the room are familiar with PCA. They are solely a domestic producer of corrugated products and office printing paper. They've been in the corrugated business. They're the third largest supplier in North America, but often considered best in class for sure from a margin standpoint, balance sheet management perspective, capital allocation. And on that note, I think you guys bumped your dividend last month by about 20%. So, again, thank you all. This is intended to be, you know, interactive. So to the extent there are questions, I think there can be a microphone for that. And with that introduction, I think Mark and Ken, you guys put out a slide deck pretty recently and have a couple of prepared remarks. Yeah, our deck is on our website, too.

Mark Kowlzan, Chairman

And then we want to start the fireside chat with a business update. It'll probably take me five minutes to go through this, but it'll set the stage for a good Q&A after that. So before I begin, I just want to refer everybody to the forward-looking statements, It's a cautionary note that we always make in terms of actual results could differ materially from those expressed in the forward link statement. So with that, we'll get into the good news. Corrugated volume remains robust, and we finished April and went through May at levels consistent with what we told you on the April earnings call. For April and May, corrugated shipments per day were up over 24% compared to last year. On a legacy basis, the shipments were up 4.5% in April, 3.5% in May, so a very healthy period. Bookings were also very strong in both months and continue to be strong in June so far. While macro risks certainly persist, the economy remains resilient and customers are not signaling a slowdown with their ordering patterns. Now some bad news. Freight and recycled fiber are headwinds. Thus far, we've done an excellent job managing the fiber piece of this, and even as recycled prices have escalated more than we planned, we're slightly favorable to guidance for fiber through May, helped primarily by shifting our usage toward virgin and maximizing yields. However, freight is expected to be in the neighborhood of $10 to $12 million, unfavorable to guidance for the quarter. Freight rates continue to increase into May and are still near peak May levels. We did not expect any freight rate relief in June. Additionally, we've had to ship greater distances and utilize more spot freight to keep our box plants supplied in the very tight conditions we're running under. As for pricing, we are right on our forecast through May. Like we told you on the earnings call in April, the first net $50 increase is beginning to be meaningfully recognized and corrugated in June, with substantially all of the rest coming in during the upcoming third quarter. Given our inventory and demand situation, as well as higher freight and other operating costs, costs. We increased container board prices another $50 effective June 1st. This increase is now being implemented and we would also begin to meaningfully show the results in the third quarter. To comment further, container board conditions are very tight and open market supply is hard to find. We drew down over 90,000 tons of inventory in March and April as we had very strong corrugated demand and a heavy annual planned outage schedule. We needed to begin rebuilding box plan inventories in May and June to support a seasonally stronger back half of the year with expected continued corrugated demand growth and more planned liner board mill outages in Q4. We hope to exit the second quarter with inventories at or a little above where we began the second quarter. To help us accomplish this, we've had to reduce or defer some of the export sales in May and June, and we'll see lower outside sales in the second quarter than we had forecasted in April because of that. The acquired gripe operations are having a very good quarter so far, with very strong volumes at the corrugated operations level, supported by excellent performance at the mill level. The mills had a record production month in May, and frankly, there's room to do even better with some more operational consistency. But we're getting there as we had planned, and we're very pleased with what we're seeing. And it's also, as we said in April, we expected, and we're seeing this, it's continuing to contribute to the bottom line now. Even with higher freight and recycled costs, the acquired operations are on forecast, consistent with what we told you on the April earnings call. So where does this leave us now? While we called out freight on favorability against our guidance for the quarter, it should largely be offset by stronger than expected volumes. The resulting efficiencies in the cost structure from running full, as well as favorability in other operating costs. Reducing export sales and building some inventory will hit us for three or four cents in the second quarter, but will ultimately benefit us with higher integrated sales. in the box plant side of the business price is right on plan so far the first increase is proceeding normally and gripe is contributing to the bottom line so where does this put us in q2 to be clear we are not managing to make the guidance that we gave you it on the April earnings call but rather to set this up to serve our customers to the back half of the year in a very tight market condition. That said, a good June could help us achieve the guidance number. What that will require is continued strong corrugated volumes and price realization. That freight and recycled prices don't continue to increase, but stay around the May levels, and we operate at our potential across the mill and box plant system to maximize efficiency and continue to control costs that we can't control. And I think that you can take what I said that the third quarter is in fact setting up very nicely. Obviously demand will be the key to how nicely, but we should have some price tailwinds, higher production with a limited annual planned outage schedule, and appropriate levels of container board supply to satisfy our box plants and customers with continued demand growth and higher seasonal volumes. So that, Gabe, we'll go ahead and just open up for Q&A and discussion between you and any of the investors. Thank you for that

Gabe Hady, Analyst — Wells Fargo

opening update there on the quarter. A little bit of a sneak attack on us, but I think overall good news. So a couple of things. I want to make sure I got some numbers right. Up four and a half in April, up three and a half year on year in May. And so we always get this question, end markets, I even cringe when I ask this question, but you know, one of the themes that we're hearing from a lot of our peers is we're starting to see this data center build out, and to the extent there are components, whether it's electrical or otherwise, that are going into those, just anything that you would call out, It feels like the industrial aspect of the economy, so less so on the FMCG side, is doing better and showing signs of life we're seeing in the PMIs. Any caller that you can give us by end market? I think what you just said is true.

Mark Kowlzan, Chairman

For us, across the board, our customer base is very strong. Ag is a good example. Different parts of the country had very strong ag season. Some parts of the country had the winter weather in January that impacted them. Florida was a good example of the January freeze. But all in all, ag has been strong. But manufactured goods are very strong. What you're saying about data center buildup, electronic components, even on the automobile side of things. When the world had pushed to go to EV, there were less engine and transmission components. We historically had shipped a lot of product between the auto producers in their production lines, the transmission components, engine components. So that's starting to come back now as more combustion engine production is taking place. So we're seeing pretty healthy activity across the board, even some of the home building, manufactured goods that go into the home building products. we've seen our manufacturing activity there pick up so it's it's a pretty healthy broad pickup with all our customers so you guys made the grief

Gabe Hady, Analyst — Wells Fargo

acquisition I want to kind of continue to build on this it's it from our vantage point positions you well to continue to kind of outgrow the market I had the question situated a little bit differently but as we see this inflection should it persist, how do you feel like from a capitalization standpoint, from a resource standpoint, that you guys are positioned to, should this, again, should it continue, especially with some of your peers in sort of retrench mode, be able to monetize this on a go-forward

Mark Kowlzan, Chairman

I mean, Greif's going to be the, you've heard us use the expression with Boise over the years, that Greif will be the gift that keeps on giving for the next few years. We'll continue to get more production out of the Massillon and Riverville Mill. We're continuing to improve how we go to market on the core choice corrugated side of their business and what we can do with the equipment we have there. So that will be another opportunity that continues to play out well for us. You know, as far as container board production, we've always said this. We've got enough container board in our system with what we're doing for the next couple of years, but that's a high-class problem for us. We're always looking out in the future about how we grow our mill system out, where we get our tons from, but it always provides a challenge slash opportunity for us. But Greif, I'm very pleased with what we're doing. May was a record month in the two mill operations. As a matter of fact, the Massalon Mill had the best month in its history of operation. And that's saying a lot. So, you know, again, I'm very pleased with what we're seeing out of the great business.

Kent A. Pflederer, CFO

Kent, you want to say anything? Well, also the corrugated operations are having a very, very strong second quarter as well. And we're excited about that, both what they're doing and also what they can do. one yeah you know some some a very good profitable bulk business on top of the sheet feeder business and you know some potential good opportunities down the

Mark Kowlzan, Chairman

road what we can do there yeah April and May were some really good numbers coming out of the core choice side of the business okay one of the things are

Gabe Hady, Analyst — Wells Fargo

two things when we get pushed back sometimes or one of the bare thesis on the industry which I think you don't spend much time thinking about is you You know, hey, they're flashing production here in North America with capacity. That's not a real way to run an industry. It's more on the price side is where I'm going with this, is that by our math, there's been maybe $25 a ton of inflation on freight logistics costs. And now I think, I don't like to pick troughs, but recycled fiber is probably up $20 to $25 a ton. maybe wipes out the first price increase and so now we're sort of on to the second however you want to contextualize it do you feel like with the second price increase that you will have recovered this year's inflation or are

Mark Kowlzan, Chairman

there aspects that we're still chasing I'll let you know as you can tell with what the comments I just made about what the energy costs have done to transportation and it's it's interest when you talk about OCC cost it's not just what it costs to buy a ton of OCC. It's delivering that ton of OCC to your plant, to your mill, the transportation element of that. So OCC is up because it's commanding a higher price and it costs more to get it to your mill, significantly more because of diesel costs,

Kent A. Pflederer, CFO

as an example. But we're doing a very good job managing the cost structure outside of the transportation piece you know we talked a little bit in the prepared remarks about how we've you

Mark Kowlzan, Chairman

know we're doing a good job on the fiber side we've we've always talked about fiber flexibility in pca um it was we even though we have gone up in recycled content with the greif acquisition we still have uh the best positioned mill system in terms of integrated capability with uh you know, wood converted to pulp in our mill, so we take advantage of that, and that is a good example of how we're taking advantage of the integrated virgin craft, and so it's paying

Gabe Hady, Analyst — Wells Fargo

dividends for us. Thank you. One last one on cost. So you called out 10 to 12 million on the freight side. I don't remember off the top of my head the cadence of maintenance expense, but I think it was supposed to go down in the third quarter a little bit yeah yeah okay and then you're talking about ending the quarter I think with flat inventories which suggests I think you said down 90,000 tons so you'll build in the month of

Kent A. Pflederer, CFO

June so we drew down in the straddle months on the quarter March and April you know we went down about 90,000 tons in those two in those two months so we We had to enter build mode again back in May to get us back to where we really need to be at the end of the second quarter to support the back half of the year.

Gabe Hady, Analyst — Wells Fargo

And does that serve as a tailwind is kind of question number one.

Mark Kowlzan, Chairman

If you think about some of the comments I just made, we actually deferred some of our export sales that, you know, we ship to probably 30 some odd countries around the world. We don't ship a lot to any one country, it's a few thousand tons here or there, but because of the domestic demand in our box plants being so high that's our priority that's our highest margin business we actually have deferred uh some of that export sale some of the domestic container board outside sale uh in order to uh accommodate what our box plants need 2q and into 3q and 4q in terms of because three q is always going to be a you know a big a big volume and now with the e-commerce and four q so we're really setting up uh comment i made you know we we've uh you know you know taken a little bit of a potential impact in two q but it's uh for the benefit of the back half of the year um so it's a high class problem to have but think about the number i mean to draw down 90 000 tons of inventory for pca i can't remember the last time that that number's ever been that big you know in a two-month period of time and so uh and even though we had some mills going down for their annual shutdowns we didn't have any extraordinary uh you know it wasn't like we were rebuilding mills and doing conversions this year they were just the annual shutdowns for a week but it speaks to how strong the volume really is that we pulled 90,000 tons out of our out of our inventory system and to the point the box plants are every day it's it's it makes me smile it they're raising their hand needing more more more to take care of what their customers are telling them

Gabe Hady, Analyst — Wells Fargo

so so we're in a good place um okay so flip gears a little bit i mean i i don't think um the message is pretty clear i think on the 237 guide for for the second quarter is that kind of depends on the rest of of june but i also think folks that invest in pc um don't worry necessarily about the current quarter it's about the medium long term um i'm gonna go back to something you said about the industry being tight um open market tons and, again, some of the supply rationalization that's occurred. Some of the work that we're doing and the feedback and I think some of the bullishness on the industry is that when you think about asset replacement cost or how to recapitalize your system, you guys have done a really good job over the past decade doing that. Mills are getting more expensive to either build fresh, you know, a different market, but $3,000 a ton to build Waco is a pretty high benchmark. So do you think that's driving different behavior in the marketplace in the kind of current near term? And then from your vantage point, what could that do for the industry or margins or however you want to express that sort of over the next five to seven years?

Mark Kowlzan, Chairman

Well, I think, again, it sets up the industry for a very good period of supply, demand and pricing in terms of how everybody has to go to market. But the barriers to entry, if you think about over the decades, people would say, well, we'll build a mini mill. Well, 10, 15 years ago, you could build a mini mill for $300, $400 million. Now to build a mini mill, you're talking well over a billion, you know, to a billion and a half to build a mini mill. And so the barriers to entry have become incredibly financially great. So it's going to create pause in how people think about the potential returns on a very high-risk investment. Because if you build a mini-mill, now you've got to go sell the tons. So it's not always an easy, you know, build a mill and we're going to go move tons out into the marketplace. So I think the industry is in an interesting place right now. We're in a really solid position with our assets. You know, we've been doing this for 30 years. We've been reinvesting, focusing on what we do well. We've been growing our organization capability. And so whether you call it just good fortune slash good planning, but our assets, our organization are in an incredibly capable place right now to take advantage of the market for the foreseeable future. What's the saying? Good luck is good preparedness meeting opportunity.

Gabe Hady, Analyst — Wells Fargo

So I guess sticking with going to mix of business, I think that's evolved a little bit for PCA over the past, call it three years. Can you talk about that, the origination of that, the initiatives to change, or if it was a function of where the growth was, so kind of skating where the puck was going and what that looks like maybe?

Mark Kowlzan, Chairman

Well, we do, you know, on the converted side of the business, we've maintained that flexibility that we grow with our customers. For decades and decades, you know, still, you've heard the number of two-thirds of our business is local account business. Maybe 20 years ago, that was a small local account, and now it's a big, not just a local account, but it may become a national account that at one time was a local account. But we continue to have a very close relationship with the customer base. We remain very nimble in terms of how we can accommodate their growth needs. We work with them in understanding what they're going to do with their investments so that they don't have to worry about where their boxes are going to come from. And the way we run the capital program, we can shift capital needs and capital opportunities in a very short period of time to accommodate what we see happening. As an example, we maintain a standing order with one of the converting producers out there in terms of a converting piece of equipment that we favor. but we have a standing order in with that producer for at least a half a dozen of their converting lines every year. And in some cases, we don't have a designated home for them yet. We just know we're going to be using them when they get delivered in the following year. And so we have that capability ongoing that we're able to bolt these down and get going and take care of the customers. So that's just kind of one simple example of how we were able to take advantage of the engineering organization we have and the marketing and sales prowess that we have that we execute very quickly and take care of the customer and do it in a very profitable manner.

Gabe Hady, Analyst — Wells Fargo

Sure. So on that downstream, the converted box aspect of the business, do you see any opportunity, I mean, I think four or five years or so, we had down shipments. Now we were coming off of an unrealistic peak during the pandemic, but I'm going to say grocery delivery or, again, places where you can deploy capital to capture some of the potential growth areas over the next couple of years. Are you seeing any green shoots there or anything as it relates to new end markets that were not necessarily as big today but could be?

Mark Kowlzan, Chairman

I'm not going to get into specifics. Our sales and marketing people are always working with the customer base in that regard. And that's one of our, you know, people talk about the secret sauce. That's one of our capabilities that we're able to move very quickly with that type of a customer need and that they can depend that we will take care of them in that regard. So as they're moving very quickly into that new opportunity, we're in lockstep with them taking care of their packaging needs. So it's been a good relationship with a lot of our customer base.

Gabe Hady, Analyst — Wells Fargo

I want to bring up an unfortunate circumstance. Up in the Pacific Northwest, there was a mill incident, and you recently kind of reoriented some of your production up there. I'm curious with with I think NORPAC from our understanding limited running at this point are you seeing any change in your order book up in the Pacific Northwest as a result of that no okay let's see here so you raise the dividend capital allocation are there other opportunities I mean you obviously just a gripe the balance sheet would be back to where you want it to be are there other opportunities that are out there on the M&A side there always are we're

Mark Kowlzan, Chairman

always looking at different things that come available we pass on a lot of things a couple of the announcements that have been made recently we we were aware of we looked at we passed on they just didn't fit that our metrics and and and our financial requirements on returns. So we're always looking, there's always something for sale. But I've been running the company for over 16 years and during this period of time, we've made probably 27 acquisitions. And Boise and Greit for the two biggest, but we've made a lot of acquisitions, grown the company, done it very prudently. and I think the investors appreciate that.

Kent A. Pflederer, CFO

Yeah, we maintain the balance sheet flexibility to do that, but we've also proven that we've gotten very good returns and value generation out of our internal capital spend and we return value to our shareholders and that's an important priority for us as evidenced by the recent dividend increase as well as some share repurchases.

Mark Kowlzan, Chairman

I think it's interesting when you started out on this last question, And if you went back to the 2021 period of time, and then 22, 23, 24, 25, there was a decline in industry volume. PCA, during this period of time, our legacy business is up 7%. And so think about that. The industry is down, but PCA is actually up in volume during this period of time. And so, but if you went back over the last 30 years, it's the same thing. We're probably up 300 on an organic basis. And then the past acquisitions, we're up over 300% volume in our box side of the business. But the industry is, say, down. But yet we just continue to outpace the industry. Now, there's been some quarters where we haven't. Part of that is if you're dealing with a big competitor that makes an acquisition and then they layer on that volume. But over the period of time, we significantly outperform all of our competitors and our box volume growth. And we've done that decade after decade. And the plan is we will continue to do that. That's how we're built. That's how we're organized. And that's how we think. Anything in the audience? Let's just suspect the answer is no. Typically people aren't raising to ask a question.

Gabe Hady, Analyst — Wells Fargo

I suspect I know the answer to this question, but I feel it's a little obligatory. You have a lot of gas in the tank. I know you're passionate about this business. People look up to you in the organization. You spend a lot of time recruiting engineers. That's something I think that's a differentiator for PCA over time. So two-part question. One is, can you talk about that a little bit? and why that's important in the organization. And then kind of the succession planning. I still think you've said you guys still got a couple years left, but just folks in the organization that are chomping at the back.

Mark Kowlzan, Chairman

Tom asked for the right of the same age, and Tom just celebrated his 49th year at PCA. And I've been in the industry as long as that, and I don't have enough hobbies to occupy my time, time, so I like doing what I do. This is my sport of choice, and I think I'm pretty good at it, but I also enjoy it, and Tom feels the same way, but we've actually, from a succession point of view, we've built an incredible organization around us, and that's what we've concentrated on over the years, to give the folks around us that opportunity to learn the way we learn, to have the same opportunities and you know so that when the day comes that we do want to retire we get hit by lightning the organization doesn't doesn't miss a beat and part of that is if you think about we've been you know for decades we've been consistent in how we execute operationally and how we go to market right and so the playbook is really simple it's a couple of pages and so So there's no reason to think that the people that we have hired over the years that have been part of our organization, that we have trained the way we were trained, won't just take that same simple playbook and continue to do what we've done. So I feel really good about the group, you know, on the operational side. I'll give you an example on the mill side. Most of the people that are in the senior ranks running the mill organization, they're all chemical engineers with MBAs. And so, you know, we all think the same. We've all been through the same activities. The box plant side now has been reorganized over the years. You know, Ray Shirley is a good example. I hired Ray 30 years ago. Ray's a chemical engineer. He's got a Vanderbilt MBA. And, you know, when I hired him 30 years ago, and I told him this, I said, you come with us. We're going to teach you more about running mills and box plants than anyone will ever teach you in the world, and you'll never leave us. And so, you know, we have this diverse group of younger talent base around us, and so it reaches all the way down to the college level. This year, over the last month, with interns and full-time, we've brought in 185 engineers into the PCA, North American organization. There's like, I want to say, 85 to 90 full-time that started over the last month, and then the rest are interns and co-ops that are working, and so we're continually rotating this type of huge number of engineers into the organization and off the college campuses for interns and co-ops, and many of them end up getting hired. and they come to work for us, and if they choose not to come to work for us, they get five years. And so we have a lot of these young men and women, when they come in, they might be sophomores and they're coming in for the summer or coming in for an intern period of time. If they're really good at what they're doing and we establish a relationship with them, we send them back to school with an agreement. Their tuition, room and board, all their costs are paid until they graduate. if they had debt we pay their debt and they come to work for us and if they choose not to come to work for us they get five years to pay us back most of them come to work for us but we now now we captured them at a young age and so they come back the next summer and they work again and so we actually start teaching them when they're 19 years old as an example and bring them in and it also in some ways we wean out the ones that aren't just going to make it with us so we do that early on and so we have the people that you know are a young young leaders of the future that's inspiring and quite frankly

Gabe Hady, Analyst — Wells Fargo

differentiated from what I hear at least from a lot of industrial companies so I think that's a really positive thing last one for you you have a couple of energy projects I think to Ritter you went garage sailing I think is what you in the past. Opportunistically. You talk about targeting at least 20 percent, I think, RRs on kind of high return projects like that or cost savings. I don't think you've given us a dollar amount on what the capex outlay will be. If you're willing to update us in terms of, you know, where those projects are at, timeline, and expected spend? Yeah, as we've done over the decades, we've

Mark Kowlzan, Chairman

purchased a lot of steam turbines from mills that have been shut down and redeployed them into our assets for pennies on the dollar. We've also, it dawned on us with the data center build out that was taking place over the last couple of years, we needed to become even more independent. And so I located three gas turbines that were at a mill that had been installed a few years back that were not used very much, but these are big 50-megawatt units. So I bought three of them, and we currently actually decommissioned them, demobilized them, and have shipped them to the three mills of the Riverville Mill in Virginia, the Jackson Mill in Alabama, and the Derrida Mill in Louisiana. But over the course of the next year and a half, those three gas turbine installations will help basically create three more mills that are energy independent off the grid, give us those type of double-digit return projects, but it gives us, we'll end up with four mills that are truly independent of the utilities and self-generating. That's a really huge, huge opportunity, but we'll do it at a fraction of the cost. If I had to buy a new 50-megawatt Siemens gas turbine today, it would probably be, you know, I'll just use an example, probably $100 million purchased. I bought these three gas turbines for $5 million. So it presents a good opportunity.

Gabe Hady, Analyst — Wells Fargo

You couldn't get it even if you wanted it until 2030.

Mark Kowlzan, Chairman

Yeah, it'd be four or five years to get delivered, so we do a lot of things. It's like he said, you know, junk pickers here.

Gabe Hady, Analyst — Wells Fargo

Garage selling. It's not junk. All right. With that, I think it wraps it up. Thank you, guys. Appreciate it very much.

Mark Kowlzan, Chairman

Appreciate everybody attending.