Earnings Call Transcript
PACKAGING CORP OF AMERICA (PKG)
Earnings Call Transcript - PKG Q4 2021
Operator, Operator
Thank you for joining Packaging Corporation of America's Fourth Quarter and Full Year 2021 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 Q&A session. I will now turn the conference call over to Mr. Kowlzan, and please proceed when you are ready.
Mark W. Kowlzan, Chairman and CEO
Thank you, Myra. Good morning and thank you all for participating in Packaging Corporation of America's fourth quarter and full year 2021 earnings release conference call. 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. I'll begin the call with an overview of our fourth quarter and full year results, and I'll be turning the call over to Tom and Bob who will provide further details. I'll then wrap things up and after that, we'll be glad to take questions. Yesterday, we reported fourth quarter 2021 net income of $217 million or $2.28 per share. Excluding the special items, fourth quarter 2021 net income was $262 million or $2.76 per share compared to fourth quarter 2020 net income of $127 million or $1.33 per share. Fourth quarter net sales were $2 billion in 2021 and $1.7 billion in 2020. Total company EBITDA for the fourth quarter excluding special items was $463 million in 2021 and $293 million in 2020. Fourth quarter and full year 2021 net income included special items primarily for costs associated with the company's debt refinancing that was completed in October of 2021 and for certain costs at the Jackson, Alabama mill for paper to containerboard conversion related activities. We also reported full year 2021 earnings excluding special items of $894 million or $9.39 per share compared to 2020 earnings excluding special items of $550 million or $5.78 per share. Net sales were $7.7 billion in 2021 and $6.7 billion in 2020. Excluding special items, total company EBITDA in 2021 was $1.7 billion compared to $1.2 billion in 2020. Details of all special items for the years 2021 and 2020 were included in the schedules that accompanied their earnings press release. Excluding the special items, the $1.43 per share increase in fourth quarter 2021 earnings compared to the fourth quarter of 2020 was driven primarily by higher prices and mix of $2.17 and volume of $0.35 in our packaging segment. Higher prices and mix in our paper segment were $0.09, a lower tax rate for $0.04, lower non-operating pension expense $0.03, lower interest expense $0.02, and other items $0.02. These items were partially offset by higher operating costs of $0.68 per share primarily due to inflation-related increases particularly in the areas of labor and benefits expenses, wood and recycled fiber costs, energy, repairs, materials and supplies, as well as several other indirect and fixed cost areas. We had higher freight and logistics expenses of $0.24 per share as diesel prices and fuel surcharges continued to increase along with continuing truck and driver shortages and very low boxcar availability. Scheduled maintenance outage expenses were $0.14 per share above last year, and volumes in our paper segment were lower by $0.11 per share as both our machines at the Jackson mill produced containerboard the entire quarter versus only a portion of last year's fourth quarter. Finally, inflation on pallets and other materials grew, converting costs higher by $0.08 per share, and depreciation expense was higher by $0.04 per share. Looking at the packaging business EBITDA excluding special items in the fourth quarter 2021 of $461 million with sales of $1.9 billion resulted in a margin of 24.5% versus last year's EBITDA of $303 million and sales of $1.5 billion or 19.7% margin. For the full year 2021 packaging segment EBITDA excluding special items was $1.7 billion with sales of $7.1 billion or a 23.9% margin compared to full year 2020 EBITDA of $1.2 billion with sales of $5.9 billion or a 20.8% margin. Demand in our packaging segment remained very strong with record setting shipments from our corrugated products plants. In order to meet the needs of our plants, the mills ran full out producing a record fourth quarter volume of containerboard. The high efficiency of our mill operations along with a very successful scheduled outage at our DeRidder, Louisiana mill and favorable seasonal weather patterns relative to temperatures and precipitation helped to minimize higher inflation-driven operating costs during the quarter. Although we completed the scheduled outage at our DeRidder mill earlier than we planned and we produced containerboard on both machines at the Jackson mill for the entire quarter, we ended the year with inventory including the additional containerboard from our December acquisition of Advanced Packaging, at low third quarter levels. And on weeks of supply basis, we are once again below our targeted and historical levels. Considering the anticipated strong demand and to mitigate potential project risks to supply chain bottlenecks for material and critical equipment deliveries, we have decided to postpone the first phase of the Jackson, Alabama number 3 machine conversion from the spring into the fall of this year. In order to enhance the capabilities for reaching our target inventory levels and with four other mills already scheduled for the first half of 2022 outages, we felt this was a very prudent decision to ensure our customers are supplied with their needs and the quality of our conversion work at the mill meets PCA standards. We plan to continue producing containerboard on both Jackson machines for the foreseeable future and we'll continue to 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. I will now turn it over to Tom, who will provide more details on containerboard sales and the corrugated business specifically.
Thomas A. Hassfurther, Executive Vice President
Thanks, Mark. As Mark alluded to, in the fourth quarter our corrugated products plants established a new fourth quarter total shipments record and set a new all-time quarterly record for shipments per day, both up 0.1% over the fourth quarter of 2020 which was an all-time record quarter for us and the industry. On a sequential basis, we exceeded third quarter 2021 total shipments even though we had three less shipping days in the fourth quarter. For the full year, annual corrugated shipment records were set as well, both in total up 4.5% and shipments per day up 5% with one less shipping day compared to 2020. In addition to supplying the record internal needs of our box plants, our outside sales volume of containerboard was 36,000 tons higher than the third quarter of 2021 and 91,000 tons above last year's fourth quarter. In addition to the strong domestic market, as we typically do during the second half of the year, we needed to catch up on commitments to our key export customers. As you know, we are not large players in the export market, but we have developed long-term relationships with certain customers over many years, and you can't just turn these relationships on and off based on the relative dynamics in the domestic and global markets. Domestic containerboard and corrugated products prices and mix together were $1.87 per share higher than the fourth quarter of 2020 and up $0.37 per share versus the third quarter of 2021 as we have substantially completed our rollout of last year's price increase announcements. Export containerboard prices were $0.30 per share above the fourth quarter of 2020 and $0.09 per share higher than the third quarter of 2021. Regarding our fourth quarter demand and our current outlook for 2022, as I have mentioned before, the same issues that continue to impact our ability to get more volume out of our box plants also persist with our customers and suppliers. Labor shortages, which had already been an issue for some time, have been even more challenging with the impact of the Omicron variant. Truck and driver availability, the lack of available boxcars to move containerboard from our mills to our box plants, and many other supply chain bottlenecks will continue to be challenges for quite some time. Customers continue to tell us they have higher demand and could ship more if not for these or similar issues. There's no doubt we view demand as strong, and we expect this to continue even with the numerous obstacles most companies are facing. Finally, I would like to add that our acquisition of Advanced Packaging that we spoke about during our last call was successfully completed last month. This acquisition gives us the ability to integrate over 80,000 tons per year and provides several other benefits and synergy opportunities that we will deliver on very quickly. Although there was no meaningful contribution to our fourth quarter results as the transaction closed late in the quarter, we have already made tremendous progress integrating Advanced into our operations and we're off to a great start towards achieving our goals and objectives. This could not have been accomplished without the outstanding effort and dedication of the employees of PCA, including our newest employees from Advanced Packaging. I will now turn it back to Mark.
Mark W. Kowlzan, Chairman and CEO
Thanks, Tom. With sales of $143 million or 18.4% margin compared to fourth quarter 2020 EBITDA of $10 million in sales of $156 million or 6.1% margin. For the full year 2021 paper segment EBITDA excluding special items was $72 million with sales of $600 million or a 12% margin compared to full year 2020 EBITDA of $73 million with sales of $675 million or a 10.8% margin. As expected, sales volume was below last year and third quarter 2021 levels as we did not produce anything for volume at the Jackson mill during the quarter. Average paper prices and mix were 9% above fourth quarter for 2020 and over 3% higher than the third quarter of 2021 as we continued the implementation of our previously announced price increases. While we have currently maintained our capability to produce uncoated freesheet on both machines at Jackson, we will continue to monitor market conditions and run our paper system accordingly. As we begin the year, we anticipate that volume from our paper segment will be fairly representative of the over 500,000 tons per year capacity at the International Falls mill. The commercial team and the employees at International Falls have done a tremendous job optimizing our inventory, product mix, and cost structure, and for 2022 we expect solid EBITDA margins of 15% to 20% from the paper segment. Finally, I'll mention that last week we notified customers of an $80 per ton price increase effective with shipments beginning February 14th for all office papers, printing papers, and converting papers. I will now turn it over to Bob.
Robert P. Mundy, CFO
Thanks, Mark. The lower tax rate benefit in the fourth quarter was a result of favorable state income tax return versus provision adjustments made annually. We expect our tax rate for the first quarter of 2022 to represent a more typical rate of approximately 25%. Cash provided by operations during the quarter totaled $391 million with free cash flow of $152 million. Capital expenditures were $239 million, which was a bit higher than the guidance we gave you on our call last quarter as we were able to get more work completed on projects at several corrugated plants as well as items related to the Jackson number 3 machine conversion than we had anticipated. For the year, our total capital spending of $605 million was still below our original guidance range due to the same material equipment and labor availability issues we spoke about last quarter. Other cash payments during the fourth quarter included $189 million for the purchase price of the advanced packaging acquisition, dividend payments of $95 million, cash tax payments of $42 million, and net interest payments of $38 million. As we mentioned on our last call, 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 lowered our overall interest rate from 3.9% to 3.5%, lowered our annual interest expense by $11 million per year, and extended our average debt maturity from 8.5 years to 16.3 years. Our gross debt remains unchanged at $2.5 billion. Based on the timing of closing the new bonds in September, our cash balance at the end of the third quarter included the new bond proceeds. However, since the redemption of the old bonds occurred in October, there was a cash outflow in the fourth quarter totaling $756 million which included a redemption premium for the retired bonds. The final significant cash payment in the fourth quarter was $193 million for repurchasing over 1.4 million shares of our common stock at an average price of $133.79 per share. This provided an earnings per share benefit of approximately $0.01 in the fourth quarter compared to last year and we expect an additional sequential benefit of approximately $0.02 per share in the first quarter of 2022. These repurchases of our outstanding stock, together with $380 million of annual dividend payments, represent over 52% of cash from operations or 64% of net income that was returned to shareholders in 2021. We ended the year with $765 million of cash including marketable securities and our liquidity at December 31st was just under $1.1 billion. For the full year 2021, cash from operations was $1.1 billion and free cash flow was $489 million. Our recurring effective tax rate for 2021 was 24% and our final reported cash tax rate was 19%. Regarding full year estimates for 2022 of certain key items as we move forward, we expect total capital expenditures to be approximately $800 million, and DD&A is expected to be approximately $455 million. With the recent fourth quarter 2021 share repurchases, we expect dividend payments of approximately $375 million and cash, pension, and postretirement benefit plan contributions of $52 million. Our full year interest expense in 2022 is expected to be approximately $86 million and net cash interest payments should be about $85 million. The estimate for our 2022 combined Federal and State cash tax rate is approximately 20%, and our book effective tax rate approximately 25%. Currently planned annual maintenance outages at our mills in 2022 will result in approximately 35,000 more tons of lost containerboard production compared to 2021, which includes the tons lost during the first phase of the Jackson number 3 machine conversion in the fourth quarter. The annual earnings impact of these outages, including lost volume, direct costs, and amortized repair costs is expected to be $1.13 per share compared to $0.91 per share in 2021. Current estimated impact by quarter in 2022 is $0.15 per share in the first quarter, $0.33 in the second quarter, $0.24 in the third, and $0.41 per share in the fourth quarter. I'll now turn it back over to Mark.
Mark W. Kowlzan, Chairman and CEO
Thanks, Bob. For almost two years now, our employees have displayed tremendous adaptability and energy to overcome any obstacles in both their personal and work lives to deliver significant accomplishments throughout the company. We achieved new records for both containerboard shipments and corrugated product shipments. We have successfully completed or substantially completed significant cost reduction and process improvement projects at our mills, including a new boiler at our Filer mill for utilizing self-generated biogenic sources for energy, fiber flexibility projects at Wallula in Jackson, Alabama, woodyard, head box and shoe press improvements at Wallula Mill, head box and wet end upgrades at the Valdosta mill, real upgrades, pulp mill refining and shoe press improvements at DeRidder, Louisiana, and many others. Along with our recent acquisition of Advanced Packaging, we completed numerous high-return projects in our corrugated products plants that will allow us to continue to better optimize the entire packaging business for the future and deliver profitable growth and mix enhancement opportunities for our customers and shareholders. All the capital improvement projects that I referenced in the mills and corrugated plants have required the complete involvement of PCA personnel from project conception, preliminary and detailed engineering, all the way through to project implementation and start-up. Although it required significant capital investments in order to achieve these important initiatives, we did so while improving our industry-leading return on invested capital to over 19%. We optimize the platform and financial results of our paper business while utilizing the versatility of the Jackson, Alabama mill to produce containerboard with minimal capital spending and delivering over $100 million of profit to our packaging business in 2021. Over 64% of our net income was returned to our shareholders from dividend payments and stock repurchases. In addition, with our recent debt refinancing, we lowered the overall interest rate from 3.9% to 3.5%, lowered our annual interest expense by $11 million per year, and extended the average debt maturity from 8.5 years to 16.3 years. Finally, we ended the year with almost $1.1 billion of liquidity and a strong balance sheet, which maintains the financial flexibility to react quickly to most situations or opportunities in the future. These accomplishments, along with the recently approved $1 billion share repurchase authorization, clearly illustrate our continued commitment to a balanced approach towards capital allocation in order to profitably grow our company and maximize the returns to our shareholders while still adhering to our conservative balance sheet approach, as we've done for many years. I'm very proud of the accomplishments and the strong partnerships that we've built with our customers and suppliers over many years. Looking ahead, as we move from the fourth and into the first quarter, in our packaging segment, we expect to benefit from higher corrugated product shipments with three additional shipping days, and we expect shipments per day to be higher than last year's first quarter, as demand remains very strong, along with slightly higher domestic and export prices and mix. Additionally, in our paper segment, we expect higher prices and mix from our previously announced price increase that was implemented beginning last November. There should also be a small benefit in the first quarter from our most recent uncoated freesheet price increase that was announced last week. Scheduled outage expenses will be lower and we expect a small benefit from our recent share repurchases. However, continued higher inflation across most all operating and converting costs, as well as freight and logistics expenses will more than offset these benefits. We estimate this to be the largest inflation-driven sequential cost increase in our history. In addition to the inflation-related impact, labor and benefits costs will also be higher due to timing-related increases as we start a new year, and seasonally colder weather should increase energy and wood costs. Considering these items, we expect first quarter earnings of $2.50 per share. This does not include any potential benefit from a $70 per ton price increase across all liner and medium grades that we communicated to our customers within the last few days. 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 constituted forward-looking statements. These 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 that are filed with the SEC. Actual results could differ materially from those expressed in these forward-looking statements. And with that, Myra, I'd like to open the call to questions, please.
Operator, Operator
Thank you. Your first question comes from the line of George Staphos from Bank of America. Your line is open. Please go ahead.
George Staphos, Analyst
Thanks. Hi, everyone and good morning. Thanks for the details, and congratulations on the year. I guess my first question to start, can you talk a bit in a little bit more detail on where your shipments and bookings are early in the quarter, and did the tightness in the market and all of the supply constraints that we've seen and heard about in the sector overall, give you any opportunity to optimize your mix in corrugated? Could you provide some color there? And then I have a couple of follow-ons.
Mark W. Kowlzan, Chairman and CEO
We'll let Tom get into that.
Thomas A. Hassfurther, Executive Vice President
Hey George, this is Tom. Let me give you some insight into our start for the year. There might be some confusion with the numbers. The FPA treated January 3rd as a full workday, while the PCA considered it a holiday. If we include the FPA number, we’re up about 2% for the month. If we exclude that and only consider PCA days, we’re up 9%. So, blending those figures, we’re likely around 5% to 5.5%. As the quarter progresses, those numbers will balance out. Regarding supply constraints and optimizing our mix, we are continually assessing those factors. At times, we will need to rationalize some business and consider other adjustments. However, I want to emphasize that we have over 16,000 customers with whom we have built long-term partnerships. We are very selective about our business relationships, aiming to work with those who have long-term growth potential so that we can grow together. I hope that addresses your question.
George Staphos, Analyst
Thank you for that. As you mentioned in your release, the positive price mix contributed to the results, compared to your guidance for the quarter. Is there anything else you would like to highlight? My other two questions are about the packaging segment and its benefits from Jackson's focus on containerboard production and if there are additional improvements expected there. Also, in the paper segment, can you explain the advantages gained from not having certain costs previously trapped, since those are now assigned to packaging, and whether there was a benefit from not purchasing open market pulp for the paper business? Lastly, Mark, regarding the share repurchase authorization, which you completed recently, considering the significant cash flow generation, what does the $1 billion authorization indicate about your capital needs, given past projects have shown high returns based on your results when considering future capital allocation? Thank you, and good luck this quarter.
Mark W. Kowlzan, Chairman and CEO
Thanks. Tom and I will handle both the first part of the question. But if you think about Jackson, for the full year we produced probably just almost 450,000 tons of board at the mill. We had a home for all of that through our system. If you look at it another way, if we hadn’t had Jackson, we wouldn’t have been able to grow with the customers in the manner that we had and generate the results. I called out on my portion of the script, Jackson contributed $100 million for the segment for the year. And again, Tom, if you think about Jackson, what it allowed us to do?
Thomas A. Hassfurther, Executive Vice President
Yes, certainly Mark. And George, if you think about it, with the volume that we had and that we were able to grow with our existing customer base, had we not had Jackson, none of that would have materialized for the most part. And so the big jump in improvement really is a result of being able to get that board out of Jackson. And if you recall, I believe we forecast to take about 25% downtime in Jackson in the fourth quarter, which we didn’t do at all, just due to the fact that we had significant demand and that demand is carrying right into the first quarter.
Mark W. Kowlzan, Chairman and CEO
And then Bob, do you want to add to that?
Robert P. Mundy, CFO
Yes, and George, regarding the, I think, your question around the shift of costs from paper segment to packaging relative to Jackson in the quarter. Well, year-over-year, it was probably around $13 million that moved from paper to package of cost and then sequentially, it was probably $6 million, maybe about $7 million that moved from paper to packaging.
Mark W. Kowlzan, Chairman and CEO
Regarding the share buyback, the decision to utilize the remaining authorization was made at the right time to send a strong message. We believe the new authorization for $1 billion is appropriate as we move forward, demonstrating to investors and shareholders that we are committed to providing returns through various means: dividends, share repurchases, capital investments, and company growth, which ultimately supports our earnings. Now, onto the next question, please.
George Staphos, Analyst
Thank you.
Operator, Operator
Our next question comes from the line of Phil Ng from Jefferies. Your line is open. Please go ahead.
Philip Ng, Analyst
Hey guys, congrats on another strong quarter. It's great to see box shipments track really strong out of gate and you do have a little tougher comps. It would be helpful, Tom, maybe give us some perspective how you're thinking about the cadence and the growth profile for this year given some of the challenges you're seeing in supply chain, should we expect more of a normal PCA growth here again?
Thomas A. Hassfurther, Executive Vice President
Yes, I'm very optimistic. We're starting off strong with solid backlogs as we head into the year. It would certainly be beneficial to see a decline in the impact of the Omicron strain. Right now, the significant issue we're facing is labor shortages, which are also affecting our customers. This makes it challenging for us to consistently supply our customers, as the situation is fluctuating almost daily in every box plant across the United States. However, nearly all of our customers have indicated that they could have shipped much more if it weren't for the labor shortages, truck issues, and other supply chain challenges we've discussed.
Philip Ng, Analyst
Got it. That's helpful. And then from a CAPEX standpoint, the $800 million CAPEX, it's a big number. Appreciating there's a lot of capital for Jackson, but any other bigger projects you want to call out that's going to be a nice needle mover, whether it's a box plant or any cost takeout projects you have in place for this year?
Mark W. Kowlzan, Chairman and CEO
For 2021, we worked on 1,060 projects across our mills and box plants. In the box plants alone, we managed over 100 significant projects involving 53 plants. This effort includes equipment replacement, upgrades, corrugated rebuilds, and new corrugators, all part of our ongoing initiatives over the past four to five years, but at a larger scale. Our mills are continually improving cost and efficiency. Just two days ago, we completed the rebuild of the Wallula number 2 paper machine, which included significant updates like a new head box, stock approach, electric drives, and DCS, primarily carried out by our PCA personnel. Additionally, we are finishing the first major phase of the $50 million Woodyard project at Wallula, which commenced last week. Such projects will enhance our capabilities moving forward, and we have a robust portfolio that we manage annually, with numerous enhancements expected throughout the system.
Philip Ng, Analyst
That's great color, Mark. And just one last one, appreciating you're seeing a lot of inflation across the board, but you did mention that it's the biggest sequential improvement, I mean hit, I guess, in terms of operating costs. Are there any big buckets you want to call out? Because at least on OCC nat gas prices, it seems to at least be stabilizing a little bit. So would be helpful kind of buckets in the biggest buckets where you're seeing a step-up sequentially?
Robert P. Mundy, CFO
Yes, Phil, this is Bob. As we mentioned, there’s unprecedented inflation along with normal timing and seasonal factors. Sequentially, the estimate is between $0.55 to $0.60 per share. I would attribute around $0.10 of that to seasonal timing. The remainder reflects the inflation we’re discussing. While OCC seems to have stabilized somewhat, it remains extremely high compared to last year. Additionally, many other costs have increased, including the majority of changes in wood fiber and nearly all chemicals we use. Energy costs are also up, with labor and benefits being significant contributors beyond the timing-related items I noted. It spans various areas, including repairs, materials, and freight, all of which are substantially higher compared to historical levels.
Philip Ng, Analyst
Got it, thanks a lot guys. Really appreciate it.
Mark W. Kowlzan, Chairman and CEO
Thank you. Next question please.
Operator, Operator
Our next question comes from the line of Mark Wilde from Bank of Montreal. Your line is open. Please go ahead.
Mark Wilde, Analyst
Thanks. Good morning Mark, Tom, Bob. Mark, I wondered if you could just help us with a little more in the way of kind of cadence and details around sort of the steps as we go forward at Jackson in terms of generally what you're doing at each phase and what the step-up in capacity will be at each phase, and then what you expect kind of the ultimate capacity at Jackson might look like?
Mark W. Kowlzan, Chairman and CEO
The phase that we talked about moving from the spring time that would be the first really big phase of machine work that will now be done in the fall, that will enhance the capability of the machine itself to significantly produce at a higher speed. We'll be doing some work in the pulp in the back end of the mill to support some of that. We won't fully be able to take advantage of that work until the spring of 2023. So as we come out of this fall shutdown, we will have more capability to produce on a tons-per-day basis incremental capacity. We'll have the OCC plant completed this summer that will allow the utilization of some of that fiber over the machine after the work is done in the fall. But the bigger benefit will come in the spring of 2023 when the final additional dryers are added to the machine, and there's some press work that will be done at that time, that will allow the full benefit of the work to be completed. And then you’ll see the machine capability at the 700,000 ton production rate per year in terms of the final phase. So does that help?
Mark Wilde, Analyst
Yes, that does help. But do you have any insights on the second machine and what you might ultimately be able to produce on it?
Mark W. Kowlzan, Chairman and CEO
We've studied that, and while we can't discuss it extensively in public, the machine is of very good quality. Although the number 1 Jackson machine is not as large as the number 3, it still provides great quality and has an excellent trim. As we analyze the current situation, we assess market conditions, growth opportunities, and our internal needs, and this machine presents significant potential. The amount of capital we choose to invest will determine its output. For instance, with minimal capital, it could produce 500 tons a day, while with appropriate capital investment, it could ramp up to 1,000 tons a day. Ultimately, it hinges on our assessment of market demand and the sources we want to utilize for production, but there's a wealth of opportunity here along with a strong asset base.
Mark Wilde, Analyst
Yes, okay. The other question I had is really more for Tom Hassfurther. Tom, I wondered if you could just give us some sense of sort of inflationary pressures at the box plant level. And also related to that, just sort of what it means for the industry as we move to these bigger and wider corrugators and how that sort of ripples back into the mill system because it seems like most of the new corrugators that are going in are anywhere from 98 to 130 inches?
Thomas A. Hassfurther, Executive Vice President
Yes, Mark. I'll address the last question first regarding the corrugators. The industry has been transitioning to wider corrugators for a while. In my view, this shift has mixed implications for the mills. As Mark mentioned, wider machines provide greater flexibility with the trim pool, which benefits the wider corrugators. To operate a profitable box plant today, having a wider corrugator is essential to efficiently produce the necessary volume. Many narrow corrugators are being combined into larger ones, reflecting the ongoing adjustments in the industry. Our mill system exemplifies this adaptability, as we understand our customers' needs and find efficient ways to meet them. The inflationary pressures at the box plants are significant, particularly due to labor issues and the inefficiencies caused by absenteeism and other COVID-related factors we have faced over the years. Transportation costs are also a major concern, and all signs indicate that these costs are rising dramatically, along with energy expenses. These are our primary challenges.
Mark W. Kowlzan, Chairman and CEO
I want to comment. If you went back to 2019 period, 2018, 2019, and you compare the hundreds and hundreds of projects that we've executed over the last couple of years, all of these from new equipment, equipment upgrades, new box plants, we've improved productivity per unit hour approximately 20% across the packaging system. And so our growth and the results would not be what they are if we had not been able to achieve the capital upgrade and improve all of the asset base in the corrugated packaging side of the business.
Mark Wilde, Analyst
Yes, that's helpful, Mark. Tom, just to be clear on the freight. Would you in the box business, would you carry the cost of freight between the box plant and the customer or does the customer pick that up?
Thomas A. Hassfurther, Executive Vice President
There are various factors and pricing strategies that we utilize. However, we are not in a position to absorb these significant freight increases, and that is influencing some of the price adjustments we have recently implemented.
Mark W. Kowlzan, Chairman and CEO
Thank you. Next question please.
Operator, Operator
Our next question comes from the line of Mark Weintraub from Seaport Research. Your line is open. Please go ahead.
Mark Weintraub, Analyst
Thank you. First, congratulations on an outstanding quarter and a great year. I was trying to gain a better understanding of how you approach the market, especially when it comes to raising prices for customers, as you recently did with containerboard. Your internal performance has been exceptional. Many have been examining industry data and questioning if it's the right time to increase prices. You all seem very thoughtful in your approach, and I would appreciate hearing your perspective on this if you're open to sharing.
Thomas A. Hassfurther, Executive Vice President
No. Mark, this is Tom. We don't discuss forward-looking pricing or our thoughts on it, so that's all I'm going to say about that.
Mark Weintraub, Analyst
Okay. Let me follow up on that a bit. One of the questions people have is that inventories seem to be increasing. You likely have a clearer understanding of the situation and the factors at play, and I'm sure that's influencing your business outlook and market perspective. Is there anything specific you could share? For instance, I noticed you mentioned boxcars being an issue. Could that possibly have contributed to an increase in mill inventories, even if it's not as much at the box plants? Any insights you could provide would help us understand the unusual dynamics in the business that might not be obvious to those on the outside.
Mark W. Kowlzan, Chairman and CEO
Mark, when the AF&PA data came out recently, there was a lot of confusion. You're looking at mill data. And if you think about the way the holidays fell and you think about how the mills were running, trying to get a truck or a boxcar at the mill, even if you could get a boxcar at the mill switched, the likelihood of getting it taken away from the mill was unlikely, hoping that trucks would show up. Again, it was a hope. So it was the most difficult period in the history of PCA trying to move containerboard during the holidays, and we saw the largest increase of our mill inventory since I've been here for almost 26 years in terms of the holiday build at the mill. On the other hand, we saw the opposite at the box plants. We saw the inventory drop to that low level as the mills built to the high level. And so not being able to speak for the industry, though, I believe we are probably all in a similar situation where we share a lot of the same railroads. We share a lot of the same trucking industry. And so it will be interesting when FPA comes out with their data. Tom, do you want to add a little color to that?
Thomas A. Hassfurther, Executive Vice President
I completely agree with you, Mark. Many people tend to jump to conclusions quickly based on mill inventory. As Mark mentioned, our box plants currently have very low inventory levels, and we need to maximize output from those mills. The demand curve remains unchanged, as I previously mentioned. We also trade paper and observe similar issues arising from other mills as we do from our own. Therefore, focusing solely on the low inventory snapshot at the mill level and seeing those numbers rise may create a misunderstanding about the current inventory levels in the industry.
Mark W. Kowlzan, Chairman and CEO
Mark, if you go back before the pandemic and you think about a normal holiday, you could count on a rail switch one switch a day, even through the holidays. You'd have trucks still showing up as scheduled. Now we’ve just experienced a holiday where we didn’t see trains for days to come and bring empty cars in and take your loaded cars away. And because of Omicron in particular, and what it was doing to the availability of drivers and rail crews, we had to deal with that. We were close to, in a few cases, running out of room to put containerboard on the floor at mills. And so it was an extremely challenging holiday period. So again, that’s our take on that.
Mark Weintraub, Analyst
I really appreciate all that additional color. Just are you seeing any easing on those issues yet or are they still as difficult as they were a few weeks back?
Mark W. Kowlzan, Chairman and CEO
It's improved significantly, but it's improved to where we were before the holidays, which was not very good to begin with. I mean it's really the pandemic-related impacts of labor availability for everybody out there, whether it’s the trucking industry, railroads. And so we have our inventories now headed back at the mill level into a more normal balance and getting containerboard out to the box plants and our outside customers. But again, every day is still a challenge. When you look at the winter weather and how that now impacts storm to storm. So again, it’s improved, but we still have all eyes on what's happening 24 hours a day, trying to make sure we don’t fall behind.
Mark Weintraub, Analyst
Thank you. Good luck on the quarter.
Mark W. Kowlzan, Chairman and CEO
Alright. Thank you. Next question.
Operator, Operator
Our next question comes from the line of Gabe Hajde from Wells Fargo. Your line is open. You may now ask your question.
Gabe Hajde, Analyst
Good morning Mark, Tom, Bob. I was hoping maybe to get a little bit of insight in terms of kind of your mill system. We can obviously look at it and understand it's predominantly virgin-based. But as some of your customers, I guess, become increasingly focused on environmental initiatives, and want to incorporate more recycled content, could this cause you to rethink or at least consider having a little bit more recycled containerboard exposure in your mill system over time?
Mark W. Kowlzan, Chairman and CEO
Tom, why don’t you go ahead?
Thomas A. Hassfurther, Executive Vice President
Hey Gabe, listen, our customer base and primarily, I mean I think the industry has done a very good job of educating our customer base, consumers, etcetera with the fact that we have a sustainable product. And you can’t have a recycled product without starting with a virgin product. So I think that most people now and certainly our customers, and we’ve done a good job educating our customers to the fact that virgin fiber performs very well. It gives us a lot of flexibility in terms of the amount of fiber we have in the sheet. We constantly are working on those sorts of things. And that creates the recycled stream down the road. So they get the closed loop system; they get the sole sustainability story around containerboard grades. And we’ll continue to do what we see as the best things to do for our company and for our mills and for our cost structures going forward. And we really believe in fiber flexibility, and I think that’s proven to be very good for us in the long term.
Gabe Hajde, Analyst
Okay. Thank you. And then if you can give us a little bit of sense quantitatively kind of an integration rate exiting 2021 and then is there, I don’t want to say a formal target, but bandwidth that you think is comfortable for PCA to operate within, and once you get to the low end or the high end or if you're making outside purchases, when you might want to think about more mill capacity?
Mark W. Kowlzan, Chairman and CEO
I'll answer that, and I'm sure Bob or Tom are going to weigh in on this. As far as integration, we look at ourselves as fully integrated. We continue to move a minimal amount of product to some outside customers. That balance is going to stay normalized. Tom mentioned earlier on his part of the script that export sales in particular, we've had that customer base for many decades. But we rather than calling out an exact number, whether it’s 92% or 94% or 95% or 98%, we are in a situation where we say we're fully integrated with the business as we run through and looked at last year, the year before and into 2022. Tom or Bob, do you want to add to that?
Thomas A. Hassfurther, Executive Vice President
I don’t have much to add. This is how we view our business. The small outside customer base has decreased over time due to our acquisitions and those in the industry. The recent acquisition in Advanced was significant and is now fully integrated. Despite having fewer outside customers, we maintain long-term relationships and contracts with them, leading us to treat that small percentage of customers as if they are fully integrated.
Mark W. Kowlzan, Chairman and CEO
I also want to address your question about needing to purchase containerboard from the external market. We do not anticipate that necessity. As we look ahead to the coming years and the growth in packaging, we are prepared to meet that demand. We have internal strategies we can implement to manage this, and we feel confident about achieving the growth we expect over the next three to five years.
Gabe Hajde, Analyst
Thank you guys. Congrats and good luck.
Mark W. Kowlzan, Chairman and CEO
Thank you. Next question.
Operator, Operator
Our next question comes from the line of Adam Josephson from KeyBanc. Your line is open. Please go ahead.
Adam Josephson, Analyst
Thanks. Good morning Mark, Bob, and Tom, congratulations on a really fine quarter. Mark, I think George asked you about this earlier, but just back to the buyback, you mentioned that you felt like now was a good time. And I'm just wondering why now as opposed to any time over the previous year or so, I mean the stock has been pretty range bound over the past several months obviously, you didn’t buy back any stock in 2020 so I guess, why did you think now was the appropriate time as opposed to over the past preceding year or two and what signal were you trying to send to investors?
Mark W. Kowlzan, Chairman and CEO
We believed it was the right time to reaffirm our commitment to our investors and deliver value in various ways. We have been providing dividends and generating high returns through our capital spending, which enhances profitability and ultimately benefits our shareholders. Considering the cash available and the stock's trading range, we thought it was a fair price to buy and the right time to proceed with the buyback. It really might be as straightforward as that.
Adam Josephson, Analyst
Sure. No, I appreciate that. And just one on guidance, I mean you refrained from giving guidance at the outset of the pandemic for several quarters and then you reinstated it a few quarters ago. And obviously, you beat your guidance by $0.72 or 35% in the fourth quarter, which is outstanding, but it just makes me wonder how much visibility you still have in your business given these significant deviations versus your guidance. So how would you characterize your visibility into what's coming over the next several weeks or this quarter for that matter, compared to what it's been over the past several quarters and pre-pandemic for that matter?
Robert P. Mundy, CFO
Hey Adam, this is Bob. I understand you were interested in us quantifying again after we stopped, but there are currently more uncertainties than when we ceased giving guidance right after the pandemic began in 2020. Numerous factors have contributed to this, including people leaving the workforce, the complications arising from COVID variants, and an increasingly complex supply chain, among other obstacles. The issues that arose after the pandemic have just continued to worsen, leading to greater uncertainty for us compared to when we halted guidance. Our results indicate that we've been conservative with our guidance, which is partly why we've been able to exceed expectations. However, as Tom mentioned, the challenges we face are also being experienced by our customers. They may place orders for containers and boxes, but then find themselves lacking the labor to fulfill those orders. This situation impacts our forecasting and planning. It's not that we suddenly lost our ability to manage this; we have always been fairly accurate in our predictions, but there are significantly more unknowns now than there were when we started this in early 2020.
Adam Josephson, Analyst
No, understood. Thanks a lot Bob. Best of luck.
Mark W. Kowlzan, Chairman and CEO
Okay, thank you. Next question please.
Operator, Operator
Our next question comes from the line of Michael Roxland with Truist Securities. Your line is open. Please go ahead.
Michael Roxland, Analyst
Thank you very much. Hi Mark, Bob, Tom. I appreciate you taking my questions. Congratulations on a strong quarter and year. Most of my questions have already been addressed, but I have one quick question regarding inventory. Can you provide insight into your approach to inventory management moving forward, particularly considering the supply chain logistics you've highlighted? How do you perceive inventory levels shifting as you come out of this situation? Do you expect them to be 5% or 10% higher? There has been a significant emphasis on just-in-time inventory over the past couple of decades; does that approach remain, or are you planning to adjust it due to the current challenges you’re facing?
Mark W. Kowlzan, Chairman and CEO
Let me respond by saying that when we transitioned from 2020 to 2021, we urgently needed to build our inventory, and we successfully achieved that, putting ourselves in a good position through the summer and into the third quarter. However, as we've indicated, our inventories have now fallen to a much lower level than is desirable. We're currently in our annual shutdown schedules, which means we will go through winter and spring with very low inventory levels. I won't provide a specific target number, but I can say that this year, similar to the past few years, will continue to present challenges in ensuring that our mills are producing enough to supply the box plants. While this is a high-class problem to have, it’s clear for PCA that our previous inventory levels were optimal, but we've lost some ground due to logistics and transportation issues. Tom, would you like to add anything?
Thomas A. Hassfurther, Executive Vice President
I would just mention that one important thing to consider is that as our business has continued to grow, the inventory needs to align with that growth. We haven't been able to fully catch up. As Mark mentioned, we reached a decent position last spring and summer, but now as we start this year, we are facing a substantial backlog; demand has increased again, and we have mill outages on the horizon. It’s all hands on deck not just to produce everything we can at the mill level, but also to ensure it’s shipped to the box plants and some of our other customers. On a positive note, our export business is strong in the second half of the year, especially in the fourth quarter, which will help ease some of the pressure, but we still have a lot of work ahead to restore our inventory levels.
Michael Roxland, Analyst
I appreciate the color. Just as things normalize, you get past COVID, how do you think about inventories then, will you keep let’s say relative to what’s been the historical trend, will you look to have a larger amount of inventory, just in case conditions like these new supply chains reoccur, are you going to be a little more cautious with inventory management, I guess, on a go-forward basis?
Thomas A. Hassfurther, Executive Vice President
Yes, that really depends, Mike. What we’d really like to do is we could get back to some normality here. We like to operate with lean inventories if we can, providing we’ve got the whole transportation system and supply chain in place to be able to do that. Unfortunately, right now, we’re still a long way away from that. But if and when that time returns, we’ll operate incredibly efficiently, because that’s a cost area that we’d like to avoid, if we could.
Michael Roxland, Analyst
Thanks very much. Good luck in the quarter.
Mark W. Kowlzan, Chairman and CEO
Thank you. Next question please.
Operator, Operator
Our next question comes from the line of Anthony Pettinari from Citigroup. Your line is open. Please go ahead.
Anthony Pettinari, Analyst
Hi, good morning. Mark or Tom, you mentioned delaying Jackson's conversion phase from Spring to Fall to address the significant demand you're experiencing. Can you provide any estimates on how many tons this adjustment allows for this year, if I'm understanding that correctly?
Robert P. Mundy, CFO
Anthony, this is Bob. I’ll just say that compared to when it was originally scheduled in the spring, the volume we expected from Jackson this year is really about the same. Since we started that machine up, we’re actually getting more production and efficiency from it than we originally anticipated. So even though we won’t be at that higher ramp as early in the year because we moved it from spring to fall, the additional efficiency we’ve been achieving means we’ll end up getting about exactly what we thought we would get before we postponed that outage.
Anthony Pettinari, Analyst
Okay. Okay. That’s helpful. And then on the containerboard price increase, not asking for any forward-looking view but historically, can you kind of remind us with previous price hikes, how many quarters or months those have sort of typically taken to be reflected or flow through to the bottom line?
Thomas A. Hassfurther, Executive Vice President
Yes. We typically, from the time of formal announcement to completion, we typically will roll that out over about a 90-day period.
Anthony Pettinari, Analyst
Okay, that’s helpful. I will turn it over.
Mark W. Kowlzan, Chairman and CEO
Thank you. Next question please.
Operator, Operator
Our next question comes from the line of Kyle White. Your line is open. Please go ahead.
Unidentified Analyst, Analyst
Hi, good morning. Thanks for taking the question. I just wanted to go back to the labor challenges that you're experiencing and the industry is experiencing. Is there any way to give us the sort of order of magnitude in terms of how many workers at the box plants were typically out per week back in December and what that level kind of looks like today?
Thomas A. Hassfurther, Executive Vice President
I wish it were as predictable as that question suggests. We might have a significant portion of our workforce present in one location, while another location could have a considerable number of employees absent. The situation varies across the country. If you observe the impact of the Omicron variant, it aligns closely with national trends. However, the disruptions are substantial. At times, an entire crew may be unavailable on a specific machine center, which affects our capacity to meet the existing demand. Additionally, what complicates the labor situation further is that our customers are facing the same challenges, resulting in widespread disruption as they navigate these issues.
Unidentified Analyst, Analyst
Got it. That makes sense. It is definitely an unprecedented time. It is difficult to quantify. On the buyback, given your healthy balance sheet, is there a time line that you expect to fully use that authorization that you just announced?
Mark W. Kowlzan, Chairman and CEO
No. As we've done in the past years, we have it available, and we'll just leave it at that.
Unidentified Analyst, Analyst
Sounds good. I will turn it over and good luck in the year.
Mark W. Kowlzan, Chairman and CEO
Thank you. With that Myra, I believe we're out of time and out of questions.
Operator, Operator
Yes, Mr. Kowlzan, we have no more questions. Do you have any closing comments?
Mark W. Kowlzan, Chairman and CEO
I’d like to thank everybody for taking the time to join us today, and we look forward to talking to you in April to review the first quarter earnings results. Take care. Have a good day.
Operator, Operator
This concludes today's conference call. Thank you all for participating. You may now disconnect. Have a great day.