Earnings Call Transcript - PKG Q3 2021

Mark Kowlzan, Chairman and CEO

Thank you, Josh. Good morning, everyone, and again, thank you for participating in Packaging Corporation of America's third quarter 2021 earnings release conference call. I am Mark Kowlzan, Chairman and CEO of PCA. And with me on the call today is Tom Hassfurther, the Executive Vice President, who runs the Packaging business; and Bob Mundy, our Chief Financial Officer. I'll begin the call with an overview of the third quarter results, and then I will be turning the call over to Tom and Bob, who'll provide more details. After that, I'll wrap things up, and we'd be glad to take any questions. Yesterday, we reported third quarter net income of $251 million or $2.63 per share. Excluding the special items, third quarter 2021 net income was $257 million or $2.69 per share compared to third quarter 2020 net income of $149 million or $1.57 per share. Third quarter net sales were $2 billion in 2021 and $1.7 billion in 2020. Total company EBITDA for the third quarter, excluding the special items, was $464 million in 2021 and $323 million in 2020. Third quarter net income included special items expenses of $0.06 per share, primarily for certain costs at the Jackson, Alabama mill for paper to containerboard conversion related activities. While last year's third quarter net income included special items expenses of $0.11 per share that were related primarily to the impact of Hurricane Laura on the DeRidder, Louisiana mill. Details of all the special items for the third quarter of 2021 were included in the schedules that accompanied the earnings press release. Excluding the special items, the $1.12 per share increase in third quarter 2021 earnings compared to the third quarter of 2020 was driven primarily by higher prices and mix of $1.58 and volume $0.62 in our Packaging segment; higher production volume of $0.06 and prices and mix of $0.05 in our Paper segment; and lower nonoperating pension expense, $0.03; and lower interest expense, $0.01. Items were partially offset by operating costs, which were $0.84 per share higher, primarily due to inflation-related increases, particularly in the areas of labor and benefits expenses, recycled fiber costs, energy, repairs, materials and supplies as well as several other indirect and fixed cost areas. We also had inflation-related increases in our converting costs, which were $0.10 per share higher. For the last several quarters, freight and logistics costs have risen and were $0.23 per share higher compared to last year, driven by significant increases in fuel costs, tight truck supply, driver shortages and a higher mix of spot pricing to keep up with box demand. And finally, scheduled outage expenses were $0.04 per share higher than last year, and sales volume in our Paper segment was lower by $0.02 per share. Looking at the Packaging business, EBITDA, excluding special items in the third quarter of 2021 of $467 million with sales of $1.8 billion, resulted in a margin of 26% versus last year's EBITDA of $324 million with sales of $1.5 billion and a 22% margin. Packaging segment demand remained strong, and the teams did a tremendous job of implementing our previously announced containerboard and corrugated products price increases. The containerboard mills set an all-time quarterly sales volume record and our box plants set new third quarter records for total corrugated product shipments as well as shipments per day. By utilizing the capability of both machines at our Jackson, Alabama mill to produce containerboard, we were able to reach our desired inventory levels to better serve our customer demand, help minimize the transportation challenges we continue to experience and build some inventory ahead of the DeRidder mills' fourth quarter outage. We manage very effectively the execution of numerous initiatives and capital projects to reduce costs through efficiency, productivity and optimization improvements across our manufacturing locations. We continue to put tremendous effort into managing certain material, equipment and labor availability issues to keep our customers supplied in their needs and their capital projects on track. With no relief from the supply chain obstacles that we, our customers and our suppliers continue to face, along with unprecedented inflation-related challenges, the combination of all of these efforts is critical to our success going forward. The improvements in execution our employees deliver constantly across many fronts is what allows us to continuously improve margins. After successfully completing the planned maintenance outage at the Jackson mill during the third quarter, the mill restarted with the number-1 machine making corrugated medium rather than uncoated freesheet grades, utilizing a mix of virgin craft and DLK fiber based on the needs of our customers. This was required to help meet continued strong demand from our box plant customers, meet our targeted inventory levels prior to year-end and help supply the needs of our box plant acquisition that we anticipate acquiring later this quarter. Similar to the number-3 machine at Jackson, the smaller number-1 machine is highly efficient. It's a versatile machine and with minimal capital required to repurpose a deinking plant to handle DLK. The machine was very quickly able to produce high-quality medium for the box plants. Although still capable of producing uncoated freesheet products, we plan to continue producing medium on the machine over the next several months as our internal and external packaging demand warrants. This gives us the opportunity to further evaluate the machine's capabilities and to process and the process changes that might be required to potentially produce medium permanently in a cost-effective manner. We'll also use the period to further refine our estimates and assumptions to fully understand the potential of the entire mill to produce containerboard on both machines at their optimal cost and quality. This will also allow us to evaluate our strategic containerboard supply capabilities for providing the necessary runway to grow our integrated downstream box demand. We are committed to being fully integrated, and we have a track record of ramping up our internal capacity according to our customers' demand requirements. The previously announced conversion of the J3 machine to linerboard remains on track with no changes to the schedule we discussed on last quarter's call. We'll continue to serve our paper customers with both machines at our International Falls mill, which is capable of producing all of Jackson's paper grades as well as available inventory produced on the number-1 machine at Jackson.

Tom Hassfurther, Executive Vice President

Thank you, Mark. We continue to get excellent realization from the implementation of our previously announced price increases across all product lines. Domestic containerboard and corrugated products prices and mix together were $1.40 per share above the third quarter of 2020 and up $0.55 per share compared to the second quarter of 2021. Export containerboard prices were up $0.18 per share compared to the third quarter of 2020, and up $0.06 per share compared to the second quarter of 2021. As Mark mentioned, we achieved a new all-time record for containerboard shipments with continued strong demand in our box plants as well as our domestic and export containerboard markets. We had record third quarter corrugated product shipments, which were up 2.3% in total and per workday over last year's very strong third quarter. Through the first 3 quarters of 2021, our box shipment volume was up 6.7% on a per day basis versus the industry being up 4.5%. In addition to supplying the record internal needs of our box plants, our outside sales volume of containerboard was 73,000 tons above last year's third quarter and 37,000 tons higher than the second quarter of 2021. Regarding our third quarter demand and our outlook, I'd like to reemphasize some points I made on previous earning calls and what Mark alluded to earlier the same issues that impact our ability to get more volume out of our box plants like labor shortages, truck availability, driver shortages, raw material availability issues and supply chain bottlenecks also persist with our customers. They are telling us they have higher demand and could ship more if not for these issues. There is no doubt we view demand as strong, and we expect this to continue even with the economic obstacles most companies are facing. And keep in mind, the fourth quarter will have 3 less shipping days than the third and fourth quarter comparisons will be against last year's all-time quarterly record for the industry. Regarding the box plant acquisition Mark mentioned, last week, we entered into a definitive agreement to acquire substantially all of the assets of Advance Packaging Corporation, an independent corrugated products producer, in a cash-free transaction. Under the terms of the agreement, PCA will acquire a modern full-line 500,000 square foot corrugated products facility located in Grand Rapids, Michigan. The transaction is structured as a purchase of assets resulting in a full step-up of the assets to fair market value. This acquisition is consistent with one of the key strategic focus areas we've discussed many times regarding increasing our vertical integration of containerboard through organic box volume growth and strategic box plant acquisitions. After completion of the acquisition, our containerboard integration is expected to increase by almost 80,000 tons. This also will allow for further optimization and enhancement of our mill capacity and box plant operations as well as other benefits and synergies that we expect to begin realizing soon after closing. Although we won't get into financial details at this point, we expect the acquisition to be accretive to earnings immediately with a bottom line purchase price multiple similar to the average of our last 4 acquisitions. Closing, subject to certain customary conditions and regulatory approval is expected later this quarter, and we will finance the transaction with available cash on hand. Advance Packaging is a well-capitalized full-service provider of corrugated packaging products, including high-end graphics retail displays, sustainable shipping containers and protective packaging. They utilize state-of-the-art technology, structural and graphic design and engineering capabilities and an ISTA-certified test laboratory to provide customers a solution for nearly any packaging need. With a commitment to continuous improvement, innovation and safety in their operations, Advance Packaging is a great strategic fit for PCA and our culture with an excellent management team, highly skilled and dedicated employees and an outstanding reputation in the marketplace.

Mark Kowlzan, Chairman and CEO

Thanks, Tom. Looking at the Paper segment, EBITDA, excluding special items in the third quarter, was $18 million with sales of $150 million or a 12% margin compared to third quarter 2020 EBITDA of $17 million and sales of $178 million or 9% margin. Prices and mix were up 4% from last year's third quarter and also moved 4% higher from the second and into the third quarter of 2021 as we continue to implement our previously announced price increases. As we mentioned last quarter, with finished goods inventory now at optimal levels for the Paper business, sales volume, which was 19% below last year's level, is fairly reflective of our production capability. As I said earlier, while the Jackson number-1 machine is running medium, we will continue to service our paper customers' needs from both of the International Falls machines, which are capable of producing all of the Jackson paper grades. While we've maintained our capability to produce uncoated freesheet on both machines at Jackson, we'll continue to monitor market conditions and run our paper system accordingly.

Bob Mundy, Chief Financial Officer

Thanks, Mark. Cash provided by operations during the quarter totaled $284 million, with free cash flow of $134 million. The primary payments of cash during the quarter included capital expenditures of $150 million, common stock dividends totaled $95 million, $68 million for federal and state income tax payments, pension and other post-employment benefit contributions of $51 million and net interest payments of $7 million. During the third quarter, we issued $700 million of 30-year 3.05% notes and used the proceeds from these notes to redeem our 4.5%, $700 million 2023 notes in early October. This transaction will lower our average annual cash interest rate from 3.8% to 3.4%, lower our annual interest expense by $11 million per year and extend our average debt maturity from 8.5 years to 16.3 years. Based on the timing of closing the new bonds in September and the redemption of the old bonds occurring in October, our quarter-end cash on hand balance included the new bond proceeds. Excluding this transaction, our quarter-end cash on hand balance was just over $1 billion or $1.2 billion, including marketable securities, with liquidity at September 30 of $1.5 billion. Our planned annual maintenance expense for the quarter is still expected to be about $0.41 per share or about $0.06 per share, primarily due to the DeRidder mill outage. This will result in a negative impact of $0.25 per share moving from the third quarter to the fourth quarter and $0.18 per share higher than last year's fourth quarter. Finally, as Mark mentioned previously, we continue to put tremendous effort into managing certain material equipment and labor availability issues to keep our capital projects on track. While we are managing to keep the key milestones of our more significant projects on schedule, our capital spending across the entire company is now expected to come in below the range we provided previously. We currently expect to end the year with total capital spending around $550 million.

Mark Kowlzan, Chairman and CEO

Thank you, Bob. Looking ahead, as we move from the third into the fourth quarter, we'll continue to implement our previously announced price increases for domestic containerboard, corrugated packaging and paper. And we'll also expect average export containerboard prices to move higher. Packaging segment volume will be lower due to 3 less shipping days as well as the scheduled outage at our DeRidder mill and Paper segment volume would be lower as the Jackson mill is not expected to produce any paper grades. With higher energy prices and anticipated colder weather, energy costs will increase. Wood costs, especially in our Southern mill system, will be higher due to the previous wet weather. Low inventory and high demand will also impact wood. We also expect inflation to continue with most of the other operating converting costs, along with higher freight and logistics expenses. And lastly, as Bob mentioned, we expect scheduled outage costs to be approximately $0.25 per share higher than the third quarter. Considering these items, we expect fourth quarter earnings of $2.04 per share. With that, we'd be happy to entertain any questions, but I must remind you that some of the statements we've made on the call constitute forward-looking statements. The statements were based on current estimates, expectations and projections of the company and involve inherent risks and uncertainties, including the direction of the economy and those identified as risk factors in our annual report on Form 10-K and in 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, Josh, I'd like to open up the call for questions, please.

John Babcock, Analyst

This is actually John Babcock on the line for George. The first question I just wanted to touch on. I was wondering, it looks like your price realizations in 3Q were a bit higher than we had expected. I was just wondering especially given the timing of the last increase, obviously, primarily in August. I was just wondering if you might be able to kind of comment on how much realization you had in the quarter from that August increase?

Mark Kowlzan, Chairman and CEO

Tom, why don't you go ahead with that one?

Tom Hassfurther, Executive Vice President

Yes. Well, keep in mind, the third quarter included some bleed-in from the second increase plus the timing of the third increase. Nothing really has changed in our timing. We typically roll these in over a 90-day period. But in this particular case, given the timing, yes, we probably did realize a little bit more in the third quarter for this particular increase.

John Babcock, Analyst

Okay. Great. And then could you provide some color on how the early 4Q bookings look so far?

Tom Hassfurther, Executive Vice President

The bookings are coming in right now about flat to a year ago. But keep in mind, a year ago, we were up 13%. So I think we're off to a very good start in the fourth quarter and maintaining volume levels that were exorbitantly high last fourth quarter.

John Babcock, Analyst

All right, great. And then the last question before I turn it over. I was just wondering if you could talk about the impact that labor and supply chain shortages have had on your demand and inventory trends?

Tom Hassfurther, Executive Vice President

Well, it's hard to put it in exact numbers. As I said, demand remains very good and very strong. However, a lot of our customers, along with ourselves, are suffering from what really is an American commerce issue related to labor, transportation, supply chain issues, et cetera. And it's a mixed bag. I mean we've got some segments of our customer base who are more impacted by materials or chemicals or resins or whatever the case might be as long as the labor issue. We, of course, as I mentioned, are suffering from many of the same things. And even some of our suppliers have indicated that they're concerned about their ability to keep up with our demand. So it's something that's going on across the entire American landscape as well as, quite frankly, the global landscape.

John Dunigan, Analyst

This is John Dunigan in on for Phil. I hope you're all doing well. I was wondering if you could comment on how much medium can the J1 mill can produce per year now? And how much uncoated freesheet produced on the mill either in 2020 or just first half of this year? And then you noted, Mark, that there will be maybe some further investments required to permanently produce the medium on the J1 and possibly make it more efficient. Could you just provide a little bit more color on that and maybe discuss if there's any more increase in medium capacity after those investments if you do decide to do it?

Mark Kowlzan, Chairman and CEO

Currently, on an annualized basis with what we're doing on J1, it's capable of producing about 100,000 tons a year of medium, in that range, based on the fiber availability we have with the DLK that we have and then the balance of the craft fiber. We've obviously, as we've done many times, we've studied these things years in advance. We have a pretty good idea of what we would do under different circumstances if we chose to ramp the machine up in the future. But I think, as I said earlier on the call, the fact that we're actually running medium right now is a really good opportunity for us to study all of the unit operations around the paper machine within the mill system to look at the entire balance of the mill and how it would play out in the future with the work we're doing on J3 machine. And where, ultimately, the Jackson mill goes in terms of producing containerboard. Right now, we also mentioned we have not given up the capability to produce paper on either machine, the J3 machine. Once it undergoes its outage next spring, we'll not be able to go back to paper after that. But J1 machine remains a flexible machine, and we'll just look at our market opportunities and utilize that machine as it is. Again, the machine is an extremely highly efficient, very good quality machine and has a lot of opportunity to help us provide our future needs for our customers as we grow with our box plant customers in the future. I'm not going to talk about capital estimates. Again, I consider that more of a proprietary situation.

John Dunigan, Analyst

Understood. I appreciate the details. Could you discuss what percentage of your energy is produced internally? I recognize that you rely more on virgin-based sources compared to some of your competitors. Additionally, could you provide insight into your exposure to natural gas and whether you have any hedges in place or typically implement?

Mark Kowlzan, Chairman and CEO

I don't have the current numbers. Traditionally, we're around 70% if you include black liquor and wood waste within a mill, which is typical in the industry for a fully integrated mill with black liquor and wood waste capability using combination boilers. Natural gas is currently a significant factor both in the country and globally, and we are also affected by this. Bob, would you like to provide any insights on the natural gas aspect? However, there isn't much to add regarding its impact on us.

Bob Mundy, Chief Financial Officer

I'm sorry, it's a big number going from the third quarter to the fourth quarter. Obviously, it's probably close to $0.10 hit and it's primarily due to prices that everyone is aware of, but you also have an impact from the seasonal aspect from colder months in the latter part of the year.

Alex Liscum, Analyst

This is Alex Liscum sitting in for Mike Roxland this morning. Just a quick question on virgin wood costs. Given the wet weather and the lack of transportation or increasing costs around transportation, you noted on your last call in 2Q that you haven't been able to start your winter wood build yet. Have you made any progress over 3Q? And if you can quantify it, where do your inventories stand right now? And how much more are you paying relative to last year?

Mark Kowlzan, Chairman and CEO

I believe we're experiencing some improvement in the Louisiana and the Mississippi, Tennessee wood Basin compared to this summer. However, the Southeast, particularly the Georgia, Florida, and Southern Alabama wood baskets, continues to face challenges due to wet weather and increasing demand. The winter wood build has progressed better than I anticipated in Louisiana and at our Counce mill in Tennessee. Although we are not at our desired level for this time of year, we have made significant progress since three months ago. For instance, the Valdosta and Jackson mills still have work to do. There is considerable competition in these wood baskets, but I'm not going to share specific numbers. It has been a long time since I've seen the entire system in the southern states under this much pressure at this time of year.

Mark Weintraub, Analyst

First, regarding the Jackson mill, can you provide any additional insights on its current production status compared to your expectations? Also, if we set aside the smaller machine for now, how much additional production do you anticipate as you progress with the project? I understand you faced high costs initially—where do you currently stand in terms of reducing those costs towards your targets? Any details on this would be greatly appreciated.

Mark Kowlzan, Chairman and CEO

Yes, we've consistently mentioned the J3 machine in terms of meeting our needs while managing higher input costs. Annually, the J3 machine is producing around 400,000 tons, which averages about 100,000 tons per quarter. This figure is useful for your calculations. If you include the annual production from the number-1 machine, that adds another 100,000 tons. So, on an annual basis, Jackson is now producing 500,000 tons of containerboard at the mill. While I won’t discuss specific costs, we have effectively reduced costs we can control within our unit operations. The significant cost reductions will occur next spring when we undertake major work on the machine conversion, which will significantly improve productivity. When this enhancement happens, you will notice a considerable step change in cost reduction. The final step change will come the following year when we complete the work on J3. Regarding J1, its implications depend on future medium requirements. For over a decade and a half, we have maintained that conversions are possible, but they come with capital costs. At present, producing 100,000 tons is feasible with the right capital investment, allowing us to supply a substantial amount of incremental medium in the future if we decide to invest. I see Jackson as a remarkable opportunity. We have previously stated that once the work on J3 is completed, the J3 machine will be positioned as a capable asset producing around 700,000 tons per year in the coming years. This would enable the number-1 machine to support our growth in the box plant system. Currently, if we are producing 100,000 tons annually and expect to scale up, Jackson could emerge as a major containerboard producer if we choose to align with our demand. It also holds great potential to become one of our low-cost mills in the future with the right capital investments.

Mark Weintraub, Analyst

That's very helpful. I want to shift focus to understanding the transition from the third quarter to the fourth quarter. Clearly, you performed well in the third quarter compared to your initial expectations and those of others. In the fourth quarter, you're indicating a reduction in earnings of about $0.65. You've highlighted $0.25 due to maintenance, and Bob mentioned about $0.10 linked to energy costs. There are also various other expenses like wood and freight. I would have expected to see some additional pricing benefits from the August containerboard impacting box sales. Can you provide further insight into why the decline in the fourth quarter is so significant compared to the third quarter? I assume most of it is due to costs. If that's the case, could you help clarify how much of this might be related to seasonal factors, especially in this unusual environment? I'm curious about the potential for recovery as we move into more favorable seasonal periods versus any more permanent changes we need to monitor.

Bob Mundy, Chief Financial Officer

Yes, Mark, this is Bob. As you know, there is usually a decline from the third quarter to the fourth quarter, which has been consistent over time. This is largely influenced by seasonal factors related to wood, energy, and other elements. In this quarter, we anticipate some price improvements from the previously announced price increases in the Packaging segment. However, we are facing a slightly unfavorable volume situation, especially due to the outage at DeRidder, and we expect our inventories to decrease instead of increase. This inventory change affects our costs and cost absorption. Freight costs are currently higher than usual for this time of year, and operating costs related to energy and wood fiber are also up, particularly as we compete with other forest products producers for resources and drivers to transport wood to the mill. We expect a similar increase in costs to those of energy. We foresee increased activity in our box plants during the fourth quarter, but like many companies, we are struggling with labor availability. We are paying more overtime and doing what’s necessary to meet volume demands, resulting in higher than normal costs. Additionally, repair and material costs along with fixed costs are also elevated. We've never experienced a situation quite like this. We've noted that maintenance outages have a $0.25 per share negative impact, and we have capital spending projects in our box plants that will result in a bit more noncapital implementation expense in the fourth quarter, but this is for a good purpose. When we consider all of these factors, it amounts to $0.65, which aligns with our expectations. For the second half of the year, we anticipate finishing $0.25 better than consensus estimates, though the timing between quarters may have caused some discrepancies. There may have been more pricing appreciation realized in the third quarter than people understood, with continued gains in the fourth quarter. That's how we view the sequential numbers.

Adam Josephson, Analyst

Congratulations on another very good quarter. Bob, just one follow-up on Mark's previous question about the 3Q and the beat versus your guidance of $0.32. Can you help us with how much of the third increase you realized? And consequently, how much more you're expecting in the fourth quarter per your guidance?

Bob Mundy, Chief Financial Officer

No, I don't think we'll get into that level of detail. You just have to consider what Tom mentioned. There was certainly more than what people were assuming, and we've consistently done a great job of executing and translating that price impact to the bottom line quickly. It was just a fantastic effort during the quarter.

Adam Josephson, Analyst

Got it. I appreciate that, Bob. On OCC, can you talk about your expectations for the fourth quarter? I know your buying is limited compared to some peers, but I assume you're anticipating a decline. Is that just seasonal, or is there something more at play in the OCC market right now?

Bob Mundy, Chief Financial Officer

Yes, Adam, if you compare the average performance between the third and fourth quarters, the fourth quarter is likely to be stronger. This is due to starting the fourth quarter with higher costs. However, as the quarter progresses, the costs or prices should remain relatively stable, possibly even slightly decrease. Overall, this does present a challenge from the third quarter to the fourth quarter.

Tom Hassfurther, Executive Vice President

Yes. I'd like to add that on the demand side, our box demand continues to be strong, along with the changing preferences of consumers pushing lighter-weight cartons and fewer plastic materials in the packaging. Well, Adam, as I mentioned, it's a problem that affects us nationally and internationally. If I could predict exactly when this would end, I would probably be doing something different. What makes it so difficult to forecast is that every company is facing this challenge, including ours, our customers, and other industries. We're all competing in a very tight labor market. Additionally, we're competing with the government, which complicates matters further. There are shortages everywhere, and the demand remains very high. Whether this situation will end in the short term depends on how you define "short term," but I don’t see it resolving anytime soon. It's likely to continue well into next year, and I’m unsure where it will ultimately stabilize. One clear observation is that consumer habits have changed significantly, which has been beneficial for our business and is unlikely to revert. Furthermore, we have customers seeking alternatives to their plastic products, presenting a strong opportunity for the industry, though we have faced challenges in addressing this demand due to other pressing needs. Overall, if you examine the trends, they look very positive moving forward.

Anthony Pettinari, Analyst

When you finish the work at J3 and then maybe factoring in the acquisition, is it possible to say where your integration rate in containerboard could shake out at? And sort of how you would think about that versus maybe an optimal run rate integration rate for PCA?

Mark Kowlzan, Chairman and CEO

The easiest way to think about it is to assume that our goal is always to be fully integrated. What does being fully integrated mean? For several years, we have moved some tons to the outside market both internationally and domestically, and we will likely continue to do that in the future. Tom, could you provide some additional insights?

Tom Hassfurther, Executive Vice President

Yes, Anthony, the way to view this is that we will respond to demand as we have always said. Our integration level will remain mostly unchanged. While there is additional demand in the export market, the domestic market has contracted so significantly that it's not simply a matter of selling to a large number of domestic customers. There is hardly any domestic market available. Those who supply it will likely retain their existing customers, just as we plan to do. We are not a significant player in the export market and have been working with the same customers for many years, which is our intention moving forward. We will develop our capabilities accordingly, and as Mark mentioned, we will still be able to produce white at the mill. If our paper demand requires it, we could revert to that production. Therefore, as Mark said, our objective remains the same: to be a fully integrated company.

Anthony Pettinari, Analyst

Okay. That's very helpful. And then, Tom, you made an interesting comment on plastic substitution. And obviously, probably not the biggest part of your business and you may not be able to even sort of meet that demand given some of the constraints you and customers are facing, but can you just talk a little bit about what plastic products customers are looking at substituting out of or what customers or end markets these opportunities are cropping up in? Just any kind of general commentary would be helpful.

Tom Hassfurther, Executive Vice President

I'll give you a quick example. When you receive apparel packaged in a plastic bag through e-commerce, these items often arrive in poor condition. Consumers have become aware of the environmental impact of plastics and their limited recyclability, and there are efforts to address these issues. However, the amount of plastic used is quite minimal compared to corrugated materials, which are perhaps the best sustainability option available. As a result, companies are exploring ways to replace plastics in response to consumer expectations, which often exceed their own. This is just one illustration of the ongoing changes, but all companies that sell to consumers are increasingly aware that customers desire recyclable packaging and a credible sustainability narrative, and they aim to be responsible toward the environment. Therefore, we expect to see more opportunities for these types of transitions in the future.

Cleve Rueckert, Analyst

Most might have been asked and answered. I just wanted to quickly sort of on a higher level on costs. We calculated about a 2% sequential decline in packaging costs ex G&A on a per ton basis. Did you get some relief in the quarter? I mean, I know you talked about running more efficiently and I'm just wanting to sort of more broadly if there are any areas of improvement.

Bob Mundy, Chief Financial Officer

Yes, Cleve, this is Bob. I'm not sure how you calculate your cost. I mean, our cost actually went up. So I really don't know how to answer that question. You've got to be careful when you look at costs, if you're taking them at a high level and just if you like subtracting EBITDA from sales or whatever you may be doing, you also have to take into consideration inventory change tons that were going on between the 2 periods that you're comparing. So you get your denominator right. So again, I really don't know how to answer because our costs went up.

Mark Kowlzan, Chairman and CEO

Yes, we have reached our preferred level of weeks of supply, similar to the average over the last five years. If we disregard the exceptionally low level from September of last year, which was not typical, we achieved the desired weeks of supply thanks to the Jackson mill. However, we are facing a significant outage at the DeRidder mill in the fourth quarter. Demand is expected to be robust, so our inventory levels are likely to decrease by the end of the year. I'd like to thank everybody for joining us today on the call, and I look forward to talking with everybody at the end of January for our full year and fourth quarter call. Stay well, stay safe and have a nice holiday season.

Operator, Operator

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.