All right, guys. Next up, we got Packaging Corp of America. We are excited to have the team here representing the company. We got Mark Kowlzan, the CEO, and Kent, the CFO. Mark, you want to kick things off? Just give us a sense of what you are seeing out there.
Yeah. Thanks, Phil, and as usual, I have 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. As usual, we will go through a presentation. We are not going to do the slide-by-slide review. We have posted the presentation on the website, and have hard copies available if anybody needs anything. Before I begin, though, I do have to remind you about forward-looking statements disclosure in the presentation. The statements are made as of today, and actual results could differ materially from any expression in any forward-looking statement. I do not 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 containerboard market conditions, and we are in a much better inventory position than where 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 have had two excellent operating months now in the mill system in July and August with no maintenance outages or any other meaningful interruptions. We have 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. Where we are right now, even though we are 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 have got one of the containerboard mills down, and then 4Q, we have got three mills down. That is against the backdrop of stronger corrugated demand as we go through the holiday season right now, and that is what we are seeing. Through August, we are 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 are experiencing into account when we built the forecast. We did anticipate that diesel, as an example, OCC, some of those elements would probably continue creeping up. Our forecast and our guidance that we gave on the July call did take that into account, and we are 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. Again, it's been a tough ag summer. 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 expectation.
Ag's 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 the July earnings call. 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. 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. Then kind of summarizing, when you are thinking about us for the rest of the year, I want to remind everybody, containerboard 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. Again, volume remains strong in that regard. Corrugated volumes seasonally improve, again, because of the mix changing. That's 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 in International Falls, which is a white mill, going down this month. Then DeRidder, 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- $0.35 higher sequentially 4Q over 3Q.
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 Q4 until October, but we remind you that Q4 is normally lower than Q3 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. With that, Phil, I'll turn it into chat.
Lots to unpack there. Mark, on the demand side, ag season's obviously heavy in July, August. Is it less of a contributor in September? Outside of ags, it sounds like box demand overall is still pretty healthy. Just give us a little perspective on—
Yeah.
—what you're seeing outside of the well-documented salad ag dynamic that did have some choppiness to demand overall.
Yeah. Again, everything we've seen with some of 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. So in general, across the board, if you think about our customer base, we're still seeing 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. So that's a little bit of the volume impact, but very slightly.
I'm feeling really good with where we are. In spite of the world we're living in. If you 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, when I talked about how tight the market is. I'll still use that word today. Containerboard availability is tight. You cannot go out on the market and buy tons. We're fortunate our mill system is running incredibly effectively and efficiently. We've talked about this back before, Phil, about our recapitalization over the last decade. 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. 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. The new plant in Ohio is up and running, and that's our biggest plant now to date. We're incredibly pleased with how that performance is looking. We're in a good place.
A touch light, just to be clear, Mark, you're still talking about probably low to mid single-digit growth, right?
Year-over-year?
Yeah.
Perfect. And then you talked about how, typically, earnings sequentially usually dips from 3Q to 4Q. That is just historical seasonal trend. Is there any other consideration we should think of, just given the June increase box flow through dynamic, those pricing kick in more so that trend is less relevant this year, perhaps?
Yeah. Go ahead, Kent.
Yeah, that is a help and that is going to help counteract some of that sequential three to four normal decline.
Yeah.
Last year, we were about $0.45 difference between 3Q and 4Q, if you take Greif out of the equation. Okay. This year, bad guy would be freight and recycle. That might go against us, but price should more than offset that. So I think we will be a little better than $0.45 different, so—
Okay. Any traction in September increase probably wouldn't have had much contribution into fourth quarter.
It might kick in a little later in the quarter.
Okay. Helpful. You used 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'd love to get your thoughts in terms of your backlog and how extended it is through back half this year.
Yeah. We're running full. If I had to come up with another ton, I don't know where I'm going to come up with another ton of containerboard. The mill systems are running, our PCA nine mills are running incredibly strong. The Greif acquisition, the Massillon mill and Riverville mill. Think about that, we just passed September 2nd last year, we closed the deal. Within a year's period of time, from the accretive opportunities and the integration, we've added probably 160,000, 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. They're incredibly valuable to us. They're incredibly necessary to supply our own internal needs.
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. Add in another outage in 4Q, so you know tight—
Yeah.
—is the name of the game right now.
Okay. Well, maybe on that note, Kent, some of that transition from Wallula and debottlenecking, help us think through availability capacity in 2027 to meet demand and perhaps thinking bigger, longer-term picture, Mark, as well. What are some other avenues you're thinking about in terms of debottlenecking capacity?
I'll start it and Mark will go into detail on this. 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.
Yeah.
There's still a little bit more to come there.
Yeah. That winder should start up next month.
Yeah. Counce has a couple of projects in the hopper that will get 30 to 50 out of it in the next, call it, year and a half.
Mark alluded to Greif continued the reliability and efficiencies and debottlenecking there. So there is a little more gas in that tank as well.
Okay. Any other bigger projects that you guys are thinking about that could unlock further capacity?
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. 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. I put it in perspective in this regard. Since 2017, we've spent $6.5 billion, say, in the mills and box plants. A significant amount of that went into box plants. If I had to start doing that today with what I accomplished from 2017 till now, the cost would probably be $10 billion-$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. It's an incredible challenge right now, but we're in a good place. We don't have to recapitalize, we just have to maintain what we have. 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. Our mills are running in incredibly efficient manner because we've taken care of them for 30 years. 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. We're in an 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, uncoated freesheet 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 does the industry at large need to recapitalize the asset base, whether it's mills or box plants? What does that mean? You think that's the fear, right? The boogeyman is pricing's awesome, this is going to attract a lot of capacity, that's going to ruin the party. But 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. Box plants, the box plant we just finished in Ohio was $275 million. 10 years ago, you could build a box plant for $50 million.
Phil, your recycled mini-mill that he's talking about is well north of $1 billion now.
Yeah. 10 years ago, you could build a mini-mill for $400 million. I want to put this in perspective, too. The last big integrated containerboard mill that was built in America was built in 1983 at a cost of $500 million. If I had to build that mill today that was built in Louisiana in 1983, it'd probably be $9 billion to build that mill capacity out. People talk about capacity and—
Yeah
—the cost to enter this. I look at that's our barrier to entry.
And there's a time factor on this as well.
Yeah.
It's a multi-year project.
Oh
Three to five years.
Even if we said we were going to build just a mini-mill, just an OCC-based mill, four years. 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. At the same time, prices are escalating. Again, I think that's probably the best barrier to entry that 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, the individual companies have to deal with what they have to. You're not going to survive. I came to PCA 30 years ago. We had four mills that were old. We had 39 box plants that were old. 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. Since I've been running the company, we've made probably 29 acquisitions, Kent?
Yeah. 20-something.
Yeah. It's up 28, 29 acquisitions. We're running, I think, with the Greif acquisition, probably 95 box plants today, converting operations and we own that.
Yeah. Low to mid-90s. Yeah.
At the same time, we have shut down probably 30 box plants over the last 16 years, 17 years. So, we've rationalized and focused on what we need to do, grew out our business in a very effective manner. But again, the cost to be in this business, the capital cost, and this is heavy industry. 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're talking about steel mills, aluminum, smelting, pulp and paper mills, converting operations. This is incredibly capital intensive.
That might just be the answer to my question. I guess obviously the industry's pushed through a $100 containerboard price increase already year to date, and there is a September increase. What are you telling your customers? 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 just what I just told you. What we do to stay in business costs a lot of money. You've heard me say this on earnings calls. We expect an appropriate return for these investments on behalf of our shareholders. We're going to be responsible in that regard.
We demonstrate to our customers that we can provide the service—
Yeah.
—that they need, and we're always there for them, and that's our bargain.
The world has changed dramatically.
Yeah. I know we had a lot of fun early in the year when there was movement up and down recycle 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 minutiae around implementing the box price increase?
I'll just speak for us. We called out our price increase. 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 in—
You kill 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. We took advantage of the market. I'll accept your 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. I called Kent and our people and I said, "Have we legally closed?" It was like 9:00 A.M. And they said, "We are closed." I called up my people and I said, "We own that. You can go in now." 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. 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. The fall is always, you go through a little quieter period. We didn't have as many outages last fall. We fixed the Riverville mill and the Massillon mill and took care of the converting operations. That's the choppiness you saw in the January earnings call from the fourth quarter. Then the April earnings call, but when you think about the April earnings call to the July earnings call, the accretive opportunity that now we're reflecting.
We're getting all the value out of it, and as the Boise acquisition did, the Greif acquisition is going to be the gift that just keeps on giving.
Well, Mark, you've spoiled us over the years, so that's why I'm using words like choppy. You got it to like a $30 million synergy number. Give us 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 cost out by just running better, and integrating some of the outside sales that they were making into our system and all three of those were well ahead of that $30 million for this year target.
Well, and keep in mind, when we called out the accretive opportunities, we didn't anticipate what was going to happen with OCC and diesel this year. So in spite of that, we're doing quite well and we're well ahead of 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, any metrics you could give us to kind of size up how it was before versus perhaps exiting this year?
Yeah, he'll get into more details. Uptime and reliability—
Yeah.
—about mid-80s when we bought it. Now—
Now 90s.
—getting into the mid to high 90s. Again, as I said earlier, still a little more gas in the tank.
When we go in, we focus on all the fundamentals. It's not glamorous, but they're big electromechanical. It's bearings, bushings, pumps, process control. My standard is 99% uptime efficiency. Quite frankly, we run a lot of our operations 98.5%, 99%. Through the summer months now, we've seen both Massillon and Riverville mill, they're hitting the 96%, 97%, 97.5% uptime efficiency. Yet, it's the basic blocking and tackling. It's like taking an old car and rebuilding it from the wheel bearings up. Rebuilding the transmission, rebuilding the engine, and putting in the right oil and the right grease and having the right driver in place. We do all of that holistically.
The little Massillon mill 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. That plays heavily into our ability on how we're going out into the market, our pricing, our customer satisfaction in what we do.
In times like these, particularly important, it's freight advantaged.
Yeah.
Okay.
The Massillon mill in Ohio is literally from a newer plant, it's like 79 mi or 80 mi away, so it's shuttle truck distance away. We've got the big Ashland, Ohio box plant. It's 42 mi away. Most of the tons that come out of Massillon are being consumed in a very close radius.
Mark, you and Tom obviously have shepherded company for your long career, and I expect many more years from you and create a ton of value. Kent is actually the young man in the room, but any other executives internally that you want to highlight? 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. I think about Berkshire Hathaway. Buffett and Munger didn't hit their stride until they were in their 70s. I think about Tom and I finally just learned how to do what we're doing. Think about this. Tom is going into his 50th year now at PCA. I'm over 30 years now with PCA, but I've been in the industry as long as Tom's been in the industry. But we're just hitting our stride. As you can tell by the smile on my face, we love doing what we do. This is like my sport of choice. I have 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. 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, "You come be with us, you're going to make a lot of money, but we're going to teach you more than anybody else is going to teach you in this industry. You're going to have incredible job opportunities and you'll never leave us." That's how it's played out. I think one individual we'll call out is Ray Shirley.
Okay.
Ray's running the box plant side of the business now under Tom. Tom's got the title president. Ray, I hired him over 30 years ago. He's a chemical engineer, MBA from Vanderbilt. I mentored him from the time we hired him, and I told him that. "You come with us, you're going to learn more, you're going to make more money, you're going to have more job opportunity." He was instrumental in recapitalizing all of the box plant system from 2019. 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." We've got all of these young men and women in these places now, so they're highly motivated and engaged.
Tom and I are just, we're the enablers. We've made enough mistakes in our career to know what shouldn't be done, but we also know how to enable 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 the door for more M&A opportunities? Just some of these independent box guys that are struggling probably to continue running their business, they're not integrated. Some of the new entrants that added containerboard capacity that did conversions probably are having a tough stretch right now. So help us 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 poor return? I just throw good money after bad." 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 and move on? There's going to be a lot of that taking place because people, again, it's all about the returns. It's not just having the cash/capital available. You've got to have the organization that can take that capital and actually run the business, know how to implement the opportunity, do the projects. 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. You have to be in a better control of that specific because things cost so much today.
Are you getting more calls? More people coming to you?
I wouldn't say we're getting more calls, but we're—
Okay.
—we're hearing more discussions, and we're seeing some things play out that people are starting to look at and reflect on what they're going to do with their assets and
We assess things like we always have.
Yeah.
We're always, bigger isn't always better, and internal focus and the way we do things has been a pretty good roadmap for—
Yeah.
—value creation.
Kent, you've got a strong balance sheet so you have—
Yeah.
—plenty of optionality to do what you guys want.
We've always prided ourselves in maintaining that optionality and flexibility to take advantage of opportunities, whether internal or external.
Okay.
I think we get credit on how effective we are at capital execution. We also get credit on whether it's talking about dividends, share buyback, how we take care of the investor. So, every dollar that we generate is incredibly precious to us, but we recognize it. It's there for the benefit of the investors.
Well—
As long as Tom and I are around, we'll maintain that mindset.
Well, what a great way to close things. Thank you so much, both.
Yeah. Thanks.
Thank you, Phil.
Thanks, Phil, and everybody for attending this morning. Thanks. Have a good day. Bye-bye.