Packaging Corp Of America (PKG) September 10, 2026 Conference Transcript

All right, guys. Nick's up. We've got Packaging Corp of America. We're excited to have the team here representing the company. We've got Mark Carlinson, the CEO, and Kent, the CFO. Mark, you want to kick things off? Just give us a sense of what you're seeing out there.

Yeah, thanks, Phil. And as usual, I've got probably five minutes of prepared remarks that I want to go through, and then I want to spend more time on the fireside chat piece of this. But, you know, as usual, we'll go through a presentation. We're not going to do the slide-by-slide review. We've posted the presentation on the website, and I have hard copies available if anybody needs anything. Before I begin, though, I do have to remind you about the forward-looking statements disclosure in the presentation. The statements are made as of today, and the actual results could differ materially from any expression in any forward-looking statement. Again, I don't have nearly as much to say as when we were out on the road in the second quarter. So far, 3Q has progressed consistently with what we called out in the July earnings call. We continue to see very tight container board market conditions, and we're in a much better inventory position than what we were coming out of 2Q. We had all of the outages going on during that period of time. We continue to run incredibly well. We've had two excellent operating months now in the mill system in July and August with no maintenance outages or any other meaningful interruptions. and so we've been able to restock our inventory. We had a tough early part of the year trying to take care of our box plants and our customer needs because of the outages and the strong demand. And then where we are right now, even though we're running well, we need to rebuild continuing into the fall right now because we have a significant outage schedule ahead starting actually this month. We've got one of the container board mills down, and then 4Q, we've got three mills down. And so, again, that's against the backdrop of stronger corrugated demand as we go through the holiday season right now, and that's what we're seeing. Through August, we're on track to meet or exceed our third-quarter earnings guidance that we called out on the July earnings call. Costs across the board are favorable to forecast. We took the elevated freight and recycled costs that we're experiencing into account when we built the forecast. So we did anticipate that diesel is an example, OCC, some of those elements would probably continue creeping up. So our forecast and our guidance that we gave on a July call did take that into account, and we're glad we did that. We've done an excellent job implementing our packaging price increases, and we're ahead on forecast in terms of price realization. We are below our initial expectation on corrugated volume. Think about this. Due in part to the expected sales in the ag sector with the drought and then crop effects. Everybody knows most of the news coming at us on a daily basis through a lot of July and August was about some of the ag products and what it was doing to people. So, again, it's been a tough ag summer. And then just the ag year, Florida had a tough winter. They never recovered. The Pacific Northwest, as an example, the apple crop, cherry crop, those were not as big as the expectations. So ag has been a drag on us, but we're still having a strong quarter. But we're just off slightly from what we guided when we talked on a July earnings call. But still, if you put it in perspective year over year with the Greif acquisition, we're up 24% over last year with Greif, but we're down just slightly from what we had hoped to be because of primarily ag and farm-related activity. And then last but not least, white paper. We're having a very good quarter across the board in terms of sales volume, price, and mill operations. And then kind of summarizing, when you are thinking about us for the rest of the year, I want to remind everybody, container board markets remain tight, and we continue with the lower export shipments. Corrugated volume seasonally improves, but mix seasonally gets weaker, just the nature of the business, more e-commerce. And so, but again, volume remains strong in that regard. Corrugated volumes seasonally improve, again, because of, you know, the mix changing. And that's truly, truly just the e-commerce effect of what we always see. And it starts in August, generally. We expect price improvement from the continued implementation of the earlier price increases and the beginning of the realization of the most recent price increase in corrugated later in the fourth quarter. We resume our outage schedule. this month, as a matter of fact, with the Riverville Mill and International Falls, which is a white mill, going down this month. And then DeRitter, Valdosta, and Massillon Mill will be down in Q4. Consistent with what we told you on the earnings call, the earnings impact for the outages is about $0.30 to $0.35 higher sequentially, 4Q over 3Q. And that's, again, just the nature of the accounting with the work we do. We continue to see elevated freight and recycled prices. The question remains, how elevated? We'll obviously have more insight into that when we talk to you on the October earnings call. We'll also get seasonally higher input costs in the mills as the year goes on as the weather simply gets colder. You're always using more energy, more fuels as fall rolls on into the November-December period. White paper should sequentially improve with the completion of the 3Q maintenance outage. So September is the annual outage at I-Falls. So this 3Q in the paper side of the business, when we report earnings, people are going to wonder. Again, the earnings were down in 3Q, but it was just the effect of the outage that we have. We won't guide for 4Q until October, but we remind you that 4Q is normally lower than 3Q in terms of earnings due to the outage, impact, and mix effects, as well as just higher input costs, as I mentioned, with seasonality. Assuming freight is within reason, this year should not be as pronounced as last year, with expected price improvement partially offsetting the cost factors. And with that, Phil, we'll turn it into a chat.

Lots of impact there. Mark, on the demand side, ag season is obviously heavy in July, August. Is it less of a contributor in September? And outside of ag, it sounds like box demand overall is still pretty healthy. Just give us a little perspective on what you're seeing outside of the well-documented salad ag dynamic that did have some chaffiness to demand overall.

Yeah, again, everything we've seen with some of the – our volume being slightly off was really related to the ag and what happened with the impacts of, as you just said, lettuce in particular and some of the other food crops. But the rest of the business is strong. We've seen a huge impact with e-commerce picking up in August, and we expected that. And so, in general, across the board, you know, if you think about our customer base, we're still seeing very, very strong demand. With the pricing activity that we're currently going through, I do want to point out, and we've said this before publicly, we will give up customers. When it comes to price, we'll walk from some customers if that's what it takes. We're not going to deal with certain matters in that regard. And so, you know, that's a little bit of the volume impact, but very slightly. But I'm feeling really good with where we are in spite of the world we're living in. Think about the consternation on a daily basis around the world. Our volume is very strong. Again, I've used this on the July call. Tom and I talked about how tight the market is. I'll still use that word today. Container board availability is tight. You cannot go out on the market and buy tons. And so we're fortunate. Our mill system is running incredibly effectively and efficiently. We've talked about this fact before, Phil, about our recapitalization over the last decade. You know, we got ahead of the curve, and we have the most efficient mill fleet and the most efficient converting fleet in the industry in North America. And so, you know, we just have to plug and play right now. We started up our new box plant in Ohio, actually about a month ahead of schedule. So the new plant in Ohio is up and running, and that's our biggest plant now to date. And we're incredibly pleased with what, you know, how that performance is looking.

So we're in a good place. And a touch light, just to be clear, Mark, you're still talking about by the low to mid-single digit growth, right, year over year? Perfect. And then you talked about how typically earnings sequentially usually dips from 3Q to 4Q. That's just historical seasonal trend. Is there any other consideration we should think of just given the junior increase, buck flow through dynamic, there's pricing kicking more so that trend is less relevant this year perhaps?

That is a help and that's going to help counteract some of that sequential three to four normal decline. Last year we were about 45 cents difference between 3Q and 4Q if you take Greif out of the equation.

This year, bad guy would be freight freight recycle that might go against us but but price should more than offset that so you I I think we'll be a little better than 45 different so okay and any traction in September increase probably wouldn't add much contribution and in the fourth it might kick in a little later in the court but helpful you use the word tight market conditions right when we look at the industry data for 2q operating rates were in the mid 90s and inventory came down dramatically how do you kind of see that playing out the rest of the year i mean love to get your thoughts in terms of your backlog and your how extended as it is through um back out

this year yeah we're running full um if i had to come up with another ton i don't know where i'm going to come up with another ton of container board the mill systems are running you know our PCA 9 mills are running incredibly strong. The Greif acquisition, the Massillon Mill and Riverville Mill, on, you know, think about that. We just passed September 2nd last year. We closed the deal. And so within a year's period of time from the accretive opportunities and the integration, we've added probably 160, 150,000 tons of production on an annualized basis. I'll give you an example. When we closed the deal, the two mills on an annual basis were producing probably 650,000 tons a year. We're over 800,000 tons a year run rate on both those mills right now. And so they're incredibly valuable to us. They're incredibly necessary to supply our own internal needs. And so, go ahead, Kent.

Yeah, let me interject, too. Remember, too, we did the Wallula restructuring at the beginning of the year. And we're just going to be catching up with the effect of that from a supply standpoint, probably 4Q, 1Q. So, you know, and add in another outage in 4Q. So, you know, tight is the name of the game right now.

Well, maybe on that note, Kent, some of that transition from Willula and deep bottlenecking help us think through, you know, availability capacity in 2027 to meet, you know, demand. and perhaps thinking bigger, longer-term picture, Mark, as well. What are some other avenues you're thinking about in terms of de-bottlinging capacity?

I'll start it, and Mark will go into detail on this, okay? So we'll get a little more out of Jackson next year. The Winder Project. The Winder Project was scheduled to add about 140 on an annual run rate basis in 4Q. We probably have a little bit of that going right now. We've run Jackson a little better than we thought, but there's still a little bit more to come there. That winder should start up next month. Yeah, Counts has a couple of projects in the hopper that'll get 30 to 50 out of it in the next, call it, year and a half. And then Mark alluded to Greif continued the reliability and efficiencies and de-bottlenecking there. So there's a little more gas in that tank as well.

Any other bigger projects that you guys are thinking about that can unlock further capacity?

You know, I want to talk, it's interesting. We have studied and looked at everything, including new paper machines. But the cost of capital is so high that, and you've seen this in the industry, but specifically, I could not justify putting in a new paper machine now and as well as we do things and as good as we are at engineering and installing a lot of our own equipment the cost of These capital projects has increased so dramatically and I put it in perspective in this regard since 2017 We spent six and a half billion dollars a in the mills and box plants Significant amount of that went into box plants If I had to start doing that today with what I accomplished from 17 till now, the cost would probably be $10 to $12 billion because of the inflationary impacts of all of the capital equipment. Think about copper prices. Copper, all your electronic components, steel, all of the alloys, all of the manufactured components that go into heavy industry. So it's an incredible challenge right now. But we're in a good place, so we don't have to recapitalize. We just have to maintain what we have, and then we will put on, as we grow with our customers, we will bolt in new converting lines, and we'll maintain the converting lines. But we're not in a position where we're having to try to revitalize our fleet, and our mills are running in an incredibly efficient manner because we've taken care of them for 30 years. and so we just have to continue doing what we're doing and part of that is the organization we have in place we have probably 200 people in our corporate technology and engineering organization the mills are heavily staffed the box plants are heavily staffed now with engineers and so we're incredibly strong position to continue just doing what PCA has always done just stay ahead of the curve.

On that note, the fear for this industry has always been at least the last two big runs in terms of the e-commerce growth was capacity coming on, right? The boogeyman is we're going to convert some newsprint mill on code or free sheet mill. But to your point, the cost of capital to build that has increased dramatically. And even the integrated guys are in the marketplace. Mark would love to get your thoughts in terms of, you know, does the industry at large need to recapitize the asset base, whether it's mills or box plants? What does that mean? I mean, I think that's the fear, right? The boogeyman is pricing is awesome. This is going to attract a lot of capacity. That's going to ruin the party. But, I mean, you made the point. Everything costs a lot more now.

The cost to enter this is so extraordinarily high now. if you think you're just going to build a mini mill who are you going to sell your product to the cost to build that mini mill is so extraordinarily high that unless you have already customers lined up and on the box plant side you have customers lined up but if you build a mini mill you have to build box plants and box plants the box plant we just finished in Ohio was about $275 million dollars.

10 years ago, you could build a box plant for $50 million. And Phil, your recycled mini mill that he's talking about is well north of a billion now.

Yeah. You know, 10 years ago, you could build a mini mill for $400 million. I want to put this in perspective, too. The last big integrated container board mill that was built in America was built in 1983 at a cost of $500 million dollars if I had to build that mill today that was built in Louisiana in 1983 it would probably be nine billion dollars to build that mill capacity out so people talk about you know capacity and and the cost to enter this so that's our I look at that that's our barrier to entry and and there's a time factor on this as well it's it's it's a multi-year project three three Even if we said we were going to build just a mini mill, just an OCC-based mill, if we had all our engineering done and we were ready to place orders, you could probably get it done in three years. But if you're going for permitting, engineering, and getting quotes, you're probably a four-year process. And at the same time, prices are escalating. so so again I think that's that's probably the best barrier to entry that we are we're looking at are we at a point in terms of the mill network and box network for the industry at large we're at a recap point or do you have any perspective on that front well again I think you know the individual companies have to deal with what they have to you you're not going to survive in terms of you know i came to pca 30 years ago we had four mills that were old we had 39 box plants that were old so over a 30-year period we've consistently focused on recapitalizing making the mills run better and better and then really extracting all the value we could out of these assets same thing with the box plants people forget this you know we've made since i've been running the company we've made probably 29 acquisitions kent you know 20 something it's yeah it's up 28 29 acquisitions and so that we're running i think with the greif acquisition probably 95 box plants today converting operations yeah low to mid 90s yeah and at the same time we have shut down probably 30 box plants over the last 16 years 17 years so you know we we've rationalized and and focused on what we need to do grew out our business in a very effective manner and uh but again it's uh the the cost to be in this business the capital cost this is heavy industry and people you know it's amazing when we have these discussions people really don't appreciate what it costs to be in this business it's no different if you if you're talking about

steel mills aluminum smelting pulp and paper mills converting operations this is incredibly capital intensive and so and that might just be the answer to my question um i guess obviously the industry's pushed through a $100 container board price increase already year to date, and there is a September increase. What are you telling your customers? I mean, it's a pretty sizable increase, certainly a lot of inflation. Have you seen pushback? Certainly the independent box guys have been pushing back a little bit. But what's the message and what's your philosophy in terms of pricing?

The message we give to our customers is what I just told you. What we do to stay in business costs a lot of money and you've heard me say this on earnings calls we expect an appropriate return for these investments on behalf of our shareholders and we're going to be responsible in that regard and so and then we demonstrate to our customers that we can provide the service that they need and we're up we're always there for them and that's you know that that's yeah that's our the world has changed dramatically.

I know we had a lot of fun earlier in the year when there was moving up and down RECI prices and that led to some choppiness in terms of implementing the box price increase. As long as I've covered in this industry I've never seen such wide dispersion in terms of a price increase for September. Does that create any friction in terms of execution and just some of the minutiae around implementing the box price increase?

I'll just speak for us we we we called out our price increase we rate September 1st, we raised the price. Okay.

Perfect. The integration of Greif has been a little choppy, at least early on, but you seem to be...

You killed me with that choppy term. I told Kent that. I said, choppy. When we acquired Greif last September, we made the conscious decision to go fix those assets very quickly. And so we took advantage of the market. I'll accept you're choppy, but we took advantage of the market at the time. And also the ability we had, think about this, the day we closed on that acquisition, we had our engineering forces in the parking lots that morning ready to go in and start fixing the mills. And I called Kent and our people and I said, have we legally closed? It was like 9 o'clock in the morning. and they said we are closed and I called up my my people and I said we own that you can go in now and we started and the good news is we expected to find what we found we had a great workforce that was willing to really jump in there with us so we took advantage of the time so through the fall into the early winter we capitalized on the ability of my team before we got into the annual outage period this year you know the fall is always you go through a little quieter period we didn't have as many outages last fall and so we fixed the riverville mill and the massillon mill and took care of the converting operations and so that's the choppiness you saw in our the january earnings call from the fourth quarter and then the uh the april earnings call but we also when when you think about the April earnings call to the July earnings call, the creative opportunity that now we're reflecting. So we're getting all the value out of it, and that's going to be, as the Boise acquisition did, the Greif acquisition is going to be the gift that just keeps on giving.

Well, Mark, you spoiled us over the years, you know, so that's why I'm using words like choppy, but I mean, you got it to like a $30 million synergy number that, you know, gives us an update how you are tracking towards that, but any new finds in terms of things to unlock value that perhaps you didn't appreciate going in now that you've owned the company for about a year now?

No, nothing really new. We did what we said we were going to do, improve the reliability of the mill and get additional production and more consistent production, squeeze some costs out by just running better, and integrating some of the outside sales that they were making into our system.

And, you know, all three of those were well ahead of that 30 for this year target well and keep in mind when we called out the the accretive opportunities we didn't anticipate what was gonna happen with OCC and diesel this year so you know so in spite of that we're we're doing quite well and we're well ahead of the the accretive delivery on what we're seeing out of that operation any color in terms of under your ownership some of the things you guys have done from a production or reliability standpoint um any metrics you could give us to kind of size up how it was before versus perhaps exiting this year yeah i'll he'll he'll get into more details okay uptime and reliability you know about 80 mid 80s when we bought it now you know getting in getting into the mid to high 90s and again as i said earlier still a little more gas in the tank yeah i mean when we go in we focus on all the fundamentals it's not not glamorous but it's it's you know they're big electromechanical yeah it's bearings bushings pumps process control and so you know we have a good Mike my standard is is 99% uptime efficiency and quite frankly we weren't a lot of our operations 98 and a half 99% through the summer months now we've seen both Massillon and Riverville, they're hitting the 96, 97, 97.5% uptime efficiency. And yet, you know, it's the basic blocking and tackling. It's like taking an old car and rebuilding it from the wheel bearings up. And so, you know, rebuilding the transmission, rebuilding the engine, and putting in the right oil and the right grease and having the right driver in place. And so we do all of that holistically. And so, you know, the little Massillon mill, you know, it's delivering quite well, and it's not only just delivering tons, but think about this. The quality of the tons we're producing, the 800,000 tons a year annual production I'm getting out of both those mills, the quality is dramatically improved. So what the box plants are seeing and what our customers are seeing is dramatically better than it's ever been. And that plays heavily into our ability on how we're going out into the market, our pricing, our customer, you know, satisfaction in what we do.

And in times like these, particularly important, it's freight advantaged.

I mean, the Massillon Mill in Ohio is literally, from the newer plant, it's like 79 or 80 miles away. So it's shuttle truck distance away. We've got the big Ashland, Ohio box plant. It's 42 miles away. So most of the tons that come out of Massillon are being consumed in a very close radius.

Mark, you and Tom obviously have shepherd company for your long career, and I didn't expect many more years from you and create a ton of value. And now Kent is actually the young man in the room, but any other executives internally that you want to highlight? and just give us a little more thought in terms of how you guys think about succession planning.

Yeah, I laughed when I saw that. We just hit our stride. So I think about Berkshire Hathaway, you know, Buffett and Munger didn't hit their stride until they were in their 70s. And so I think about, you know, we've just finally, Tom and I finally just learned how to do what we're doing. You know, Tom's, think about this. Tom is going into his 50th year now at PCA. I'm over 30 years now at PCA, but I've been in the industry as long as Tom's been in the industry. But we're just hitting our stride. And as you can tell by the smile on my face, we love doing what we do. This is like my sport of choice. I had nothing else to do in terms of hobbies, so this is my sport of choice. We have an incredible organization around us, and that's one of the things I do. I spend a lot of time this time of the year recruiting, and we've done that for decades and decades. so you know Kent's generation and younger we have an incredible depth and breadth in the organization of young men and women that we have hired brought in and the deal was he come be with us you can make a lot of money we're gonna teach you more than anybody else is gonna teach you in this industry you're gonna have incredible job opportunities and you'll never leave us and that's how played out so you know I think one of the it's one individual will call out is Ray Shirley and Ray's running the box playing side of the business now under Tom Thomas you know that's the title president and Ray I hired him over 30 years ago he's chemical engineer MBA from Vanderbilt I mentored him from the time we hired him and I told him that he come come with us you're gonna learn more you're gonna make more money gonna have more job opportunity but he was instrumental in recapitalizing all of the box plant system from 2019 and he's a mill guy and yet he did such a great job on the box plant side through all that recapitalization Tom picked him out and recognized his capability and said i want to have this guy have an opportunity and uh you know so so we've got all of these young men and women in these places now and so they're they're highly motivated and engaged and and uh tom and i are just you know we're kind of like the uh we're the enablers we know we know we've made enough mistakes in our career to know what shouldn't be done but we also know how to enable of the team around us to go do all the cool stuff. So that's my story, and I'm sticking to it.

Mark, you've talked at length about the cost of doing business, the capital intensity. Does that open a door for, like, more M&A opportunities, just some of these independent box guys that are struggling probably to continue running their business? They're not integrated. And some of the new entrants that added container board capacity that did conversions probably are having a tough stress right now. So help us kind of think through that.

Yeah, I think people have to reach a point of capitulation when they decide, can I keep doing what I'm doing and generating a forward turn? And I just throw good money after bad. And so they have to reach a decision point where do you continue doing what you're doing or do you do something different, which includes do I sell my business uh and move on um and so there's there's going to be a lot of that taking place because people um again it's all about the returns and this is it's not just having the cab cash slash capital available you got to have the organization that can take that capital and actually run the business, know how to implement the opportunity, do the projects, and this is where some companies can get into trouble. I told you, we've got the largest engineering organization. We do a lot of the projects ourselves. We install a lot of the equipment ourselves. We maintain tight control from pre-engineering all the way to startup of the equipment with our own personnel. It's an incredible advantage to us to be able to do that and not be dependent on vendors or the equipment suppliers or outside engineering firms. And so you have to be in a better control of that specific because things cost so much today and so are you getting more calls more people you know we i wouldn't say we're getting more calls but we're we're we're hearing more discussions and we're seeing seeing some things play out that people are starting to starting to look at you know reflect on what what they're going to do with their assets and and we assess things like we always have yeah um bigger bigger isn't always better and internal focus and the way we do things has been a pretty good roadmap for value creation so and Kent you got a strong balance sheet so you have a plenty of optionality and we've always we've always prided ourselves in maintaining that optionality and flexibility to take advantage of opportunities whether internal or external okay I think you know we we get credit on how effective we are at capital execution we also get credit on whether it's time of dividends share buyback how we take care of the investor so you know every dollar that we we generate is incredibly precious to us but we recognize it it's it's there for the benefit of the investors so as long as Tom and I are around we'll maintain that that mindset well what a great way to close things thank you so much both thanks thank you phil thanks uh phil and everybody for attending this morning thanks have a good day bye