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Packaging Corporation of America produces containerboard, uncoated freesheet (paper that doesn't contain pulp), and other packaging materials.

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One of the country’s largest producers of packaging products, PCA also owns Boise Paper.

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The Packaging Corporation of America (PCA) is one of the largest manufacturers in North America of paper and paper products that are corrugated, or strengthened through ridges and folds. Through a series of mergers, PCA emerged in its modern incarnation in 1959 and went public in 2000. The company manages both paper mills and cardboard factories, among other facilities. PCA’s customers are distributors and retailers, including Office Depot and OfficeMax.

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Q4 2024

Packaging Corp. of America (PKG): Company Profile, Stock Price, News, Rankings

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Packaging Corp. of America

packaging corp. of america

Good morning, everyone. Thank you for joining Packaging Corporation of America's 4th Quarter and Full Year 2024 Earnings Results Conference Call. Your host for today will be Mark Kolzan, Chairman and Chief Executive Officer of PCA. Upon conclusion of his narrative, there will be a question and answer session. Please also note, today's event is being recorded.

And at this time, I'd like to turn the conference call over to Mr. Kolesan. Please proceed when you are ready.

Thanks for the introduction, Jamie, and good morning, everyone, and thank you for participating in Packaging Corporation of America's Q4 and full year 2024 earnings release conference call. Again, I'm Mark Kolzan, 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 Munday, our Chief Financial Officer. As usual, I'll begin the call with an overview of the Q4 and the full year results, and then I'll be turning the call over to Tom and Bob, who'll provide further details. And then I'll wrap things up and we'd be glad to take questions.

Yesterday, we reported 4th quarter 2024 net income of $221,000,000 or $2.45 per share. Excluding special items, Q4 2024 net income was $222,000,000 or $2.47 per share compared to the Q4 of 2023 net income of $192,000,000 or $2.13 per share. Net sales were 4th quarter record $2,100,000,000 in 20.24 $1,900,000,000 in 2023. Total company EBITDA for the 4th quarter, excluding special items was $439,000,000 in 20.24 $394,000,000 in 2023. Excluding special items, we also reported full year 2024 earnings of $814,000,000 or $9.04 per share compared to 2023's earnings of $784,000,000 or $8.70 per share.

Net sales were $8,400,000,000 in 20.24 $7,800,000,000 in 2023. Excluding special items, total company EBITDA in 2024 was $1,600,000,000 in both 2024 and 2023. Details of all the special items for the years 2024 and 2023 were included in the schedules that accompanied the earnings press release. Excluding special items, the $0.34 per share increase in Q4 earnings for 2024 compared to the Q4 of 2023 was driven by higher prices and mix, dollars 0.52 and volume $0.40 in the Packaging segment, higher prices and mix $0.02 and volumes $0.02 in the Paper segment. Lower freight and logistics expenses benefited us 0 point 6 dollars These items were partially offset by higher operating costs of $0.48 as inflation remains a significant issue across most of our cost structure.

In addition, scheduled maintenance outage expenses were higher by 0

$8 depreciation expense was also up $0.06 and other expenses were higher by 0 point 0 $6 Results for the quarter were equal to our 4th quarter guidance. Looking at our packaging business. EBITDA excluding special items in the Q4 of 2024 of $426,000,000 with 4th quarter record sales of almost $2,000,000,000 resulted in a margin of 22% versus last year's EBITDA of $385,000,000 and sales of $1,800,000,000 and also a 22% margin. For the full year of 2024, Packaging segment EBITDA excluding special items was $1,600,000,000 with sales of $7,700,000,000 or a 21% margin compared to the full year 2023 EBITDA of $1,600,000,000 with sales of $7,100,000,000 or a 22% margin. The operational benefits of our capital spending program and the continued great focus and execution by our sales, customer service, mill and corrugated products plant employees continues to deliver impressive results while helping to minimize the inflationary impact across most of our cost structure.

As we've seen throughout the year, demand in our Packaging segment remained very strong during the quarter. Our corrugated products plants delivered record 4th quarter total shipments and an all time record shipments per day. The plants also set new annual records for total shipments and shipments per day. Excellent operations throughout our mill containerboard system set new quarterly and annual production records as well. This allowed us to meet our customer service and quality demand needs in a timely manner as well as build some very much needed inventory ahead of this year's annual mill outage schedule that will take place in the first half of twenty twenty five.

I'll now turn it over to Tom to provide further details on the containerboard sales and corrugated business.

Thank you, Mark. As Mark mentioned, continuing strong demand during the 4th quarter resulted in record breaking performance for our plants and mills. Total shipments and shipments per day were up 9.1% over last year's Q4 versus the previous record breaking Q3 of 2024, shipments per day were up 3.2%. Outside sales volume of containerboard was 9,000 tons above last year's Q4 and down 18,000 tons versus the Q3 of 2024 as we emphasized hitting our year end inventory targets. For the full year, annual corrugated shipment records were set as well, both in total and per day, up 10.5% and 10.1% respectively, with one more shipping day compared to 2023.

Domestic containerboard and corrugated products prices and mix together were up $0.46 per share versus the Q4 of 2023. 4th quarter prices and mix, which were impacted by a less rich customer and product mix compared to the 3rd quarter were up $0.05 per share versus the previous quarter. Export containerboard prices were up $0.06 per share compared to the Q4 of 2023 and flat versus the Q3 of 2024. As we've indicated, we have continued to see very strong demand and are continuing to experience inflation across most of our cost base. Beginning January 1, 2025, we began invoicing a $70 per ton increase for linerboard and a $90 per ton increase for medium according to our recent price announcement.

These prices have been accepted by our customers and for our market containerboard purchases, we are paying higher prices to containerboard suppliers that began invoicing us according to their recent announcement. We were very surprised when,

a couple of weeks ago, the RISI Pulp and Paper Week publication did not recognize any increase in the industry's benchmark prices for either linerboard or media. Industry sources and the Pulp and Paper Week publication itself have previously reported that at least 12 or around 90 percent of the top containerboard producers have issued January price increase announcements. The publication even noted that certain box makers have postponed purchases of linerboard this month to avoid the price increase. Yet the publication left the reported prices unchanged. As the industry's open market has shrunk over the years, we believe that the RISI publication is gathering information from a very small sample of the containerboard market and using that to opine on market conditions for the entire industry.

Additionally, the publication often references comments regarding box prices when the relevant product is containerboard. As you know, boxes are highly customized to customer needs and have different pricing attributes. This continues to be a source of frustration not only for us, but for our customers who want predictability in their prices. As mentioned previously, we have been moving off of indexing our prices to the RISI publication as quickly as contracts allow. However, this will take some time to complete.

I'm sure you will have some questions for us on this topic and we'll be happy to discuss them with you shortly. I'll turn it back to Mark.

Thanks, Tom. Looking at the Paper segment, EBITDA excluding special items in the 4th quarter was $39,000,000 with sales of $152,000,000 or a 26% margin compared to the 4th quarter of 2023's EBITDA of $35,000,000 and sales of $144,000,000 or a 24% margin. For the full year 2024, Paper segment EBITDA excluding special items was $154,000,000 with sales of $625,000,000 or 25% margin compared to the full year 2023 EBITDA of $151,000,000 with sales of $595,000,000 or a 25% margin. Prices and mix were up 2% from last year's 4th quarter and up 1 percent from the Q3 of 2024, while volume was 5% above last year and down 5% versus the seasonally stronger Q3 of 2024. Additionally, during the quarter, we notified customers of a $60 per ton price increase, effective with shipments beginning January 13 for all office papers, printing papers and converting papers.

The management team and all employees of the paper business have done a tremendous job optimizing our inventory and product mix and remain highly focused on efficient and cost effective operations in order to deliver outstanding results throughout the year last year. I'll now turn it over

Thanks, Mark. Cash provided by operations during the quarter totaled $325,000,000 and free cash flow was $124,000,000 The primary payments of cash during the quarter included capital expenditures of $201,000,000 dividend payments of $112,000,000 cash tax payments of $82,000,000 and net interest payments of $37,000,000 For the full year 2024, cash from operations was $1,200,000,000 with capital spending of $670,000,000 and free cash flow of $521,000,000 Our year end cash balance, including marketable securities, was $852,000,000 with liquidity of $1,200,000,000 Our final recurring effective tax rate for 2024 was 24.4%. Regarding full year estimates of certain key items for the upcoming year, we estimate dividend payments of $450,000,000 total capital expenditures to be in the range of $840,000,000 to $870,000,000 and DD and A is expected to be approximately $565,000,000 Our full year interest expense in 2025 is expected to be around $56,000,000 and net cash interest payments should be around $65,000,000

estimate for our 20 25 book effective tax rate is 25%. Compared to 2024, the planned annual outages in 2025 include

of our larger mills with a higher number of outage days, Including lost volume, direct costs and amortized repair costs, we currently expect the outages to total $1.18 per share. The current estimated impact by quarter in 2025 is $0.23 per share in the 1st quarter, dollars 0.32 in the 2nd, dollars 0.18 in the 3rd quarter and $0.45 per share in the 4th quarter. I'll now turn it back over to Mark.

Bob. The hard work of our employees along with strong relationships between us and our customers and suppliers delivered outstanding results for PCA for 2024. In our Packaging segment, new annual company records for shipments and production were achieved in our corrugated products plants and mills. We successfully completed the number 3 machine conversion to containerboard at the Jackson Mill and many other key initiatives throughout the system. We also completed numerous high return and efficiency improvement projects in our corrugated products plants that will allow us to better optimize our entire packaging business for the future and deliver profitable growth and mix enhancement opportunities for our customers and shareholders.

And we still have many key strategic capital spending opportunities in progress or ahead of us in 2025. 2024 also saw our paper business match the record margins from 2023, reflecting the capabilities of our employees to optimize our product mix, inventory, distribution channels and overhead structure along with running very cost effective and very efficient manufacturing operations. We ended the year with $1,200,000,000 of liquidity and a strong balance sheet which maintains the financial flexibility to react quickly to most situations or opportunities in the future. We remain committed to a balanced approach towards capital allocation in order to profitably grow our company and maximize returns to our shareholders, while still adhering to our conservative balance sheet views as we've done in the past. I'm very proud of our employees, these accomplishments and the very strong partnerships we've built with our customers and suppliers over many years.

Looking ahead, as we move from the 4th and into the Q1 in our Packaging segment, although seasonally slower, we expect volume in our corrugated products plants to set new first quarter records for total shipments and shipments per day. Containerboard volume will be lower with 2 less operating days and scheduled maintenance outages at the Countess Tennessee Mill and Valdosta Georgia Mills. Domestic prices will be higher with an improved product mix together with our previously announced price increases. Export prices are assumed to be stable. In our Paper segment, we forecast slightly lower volume with 2 less mill operating days and prices and mix to be fairly flat.

With the exception of recycled fiber prices, we expect price inflation across most of the direct, indirect and fixed operating and converting costs along with a higher cost mix of mill operations. In addition, wood, energy and chemical costs will also increase due to the unusually cold seasonal weather negatively impacting usages and yields for these items. Labor and benefits costs will be higher due to the timing related items that occur at the beginning of a new year for annual increases, the result of payroll taxes and share based compensation expenses. 1st quarter rail rate increases at 3 of our mills will impact freight and logistics expenses, and we expect higher depreciation expense. Lastly, scheduled outage expenses should be slightly lower, and we assume a lower corporate tax rate.

Considering these items, we expect the Q1 earnings for $2.21 per share. With that, we'd be happy to entertain any questions, but I must remind you that some of the statements we've made on the call constituted forward looking statements. The statements were based on current estimates, expectations and projections of the company and involve inherent risks and uncertainties, including the direction of the economy and those identified as risk factors in the annual report on Form 10 ks and in subsequent quarterly reports on Form 10 Q filed with the SEC. Actual results could differ materially from those expressed in the forward looking statements. And with that, Jamie, I'd like to go ahead and open up the call for questions, please.

Our first question today comes from George Staphos from Bank of America Securities. Please go ahead with your question.

Hi, thanks very much. Good morning, everybody. Thanks for the details. Mark, I guess, first thing I want to ask of you, Tom and Bob, can you talk a little bit about bookings and billings to start the quarter, what you're seeing? And given how busy PCA has been over the last couple of quarters, is that influx of volume creating any sort of inefficiencies beyond normal that you would call out and that we should be at least considering in terms of our modeling for you on a going forward basis?

Hey, George, it's Tom. Bookings and billings are up 8% so far in January. So we're off to a very good start. And we indicated that in our opening statements as well. So that's very good.

The volume increase, I think if you take it coupled with the capital initiatives that we have, yes, that has caused some cost inefficiencies quite frankly, because we got a lot of those projects going on, a lot of plants and you're shifting a lot of business around. But again, our people have done a tremendous job handling that and taking care of our customers.

for last year for 2024, we on the converting side, we accomplished 12 major new equipment installations on the converting side. These are major reconfigurations of converting lines. And then on within corrugators, we either had major rebuilds or new corrugator installations at 12 locations. And we finished building up the new Salt Lake City plant and then got ready to build up the new Glendale operation. But we continue at this pace.

I mean, prior year and then last year, we're on that pace to run 60 major projects within the corrugated business and we'll continue that this year. So along with all the benefit, there is some short term disruption that occurs, but the capability that it gives us is just incredible. We would not be doing what we're doing today if we hadn't been keeping up this pace of spending over the last half dozen years. So it's the gift that keeps on giving.

We shouldn't call it out because it's what enabling the growth is what you is kind of your answer there, right?

Now, can you help us a little bit in terms of the sequential move from 4Q to 1Q in terms of some of the cost factors?

particular, I'm thinking about whether usage, input costs, what that might be causing you and for that matter on the incentive comp? And then since you had teed it up on pricing, you're out with your price increases effective in January, others are as well. I know it gets a little bit sensitive because you can't talk about what others may or may not be doing or forward looking. But how do you square the circle then if you're raising an effective in January and the arbiters are saying it hasn't happened yet? Are you giving your customers at all any price protection or time delay between when it's effective, when you announce and when you make it effective?

Hey, George. Yes, just on some of the cost movements from 4Q to 1Q, if you look at the buckets of what's higher, there's a higher cost of relative to the mill mix. There's just that's a component. Then there's the weather seasonal items that we typically have, but this is sort of exacerbated by this vehicle that the country went through during the month of January.

And then there are those timing items that we typically talk about relative to wage increases and tax fringe benefits and so forth. So if you say that our costs, round numbers, somewhere between $0.50 $0.60 higher on all operating and converting costs, 65% of those are these items that typically will flip back the other way, not totally, but I would say 70% of that amount is will flip back in the second and third quarters. So that's sort of how we bridge the 4th to the first and then what we expect how much of that we expect to turn around in subsequent quarters.

George, this is Tom. Let me see if I can fill you in a little bit on the pricing side. So for starters, let's make the distinction here. We're talking about linerboard and medium.

So we're talking about containerboard, all right? And in the containerboard segment, we raised the prices. We're billing at those prices. Our customers are paying will be paying those invoices at those higher prices. And we will be doing likewise on the outside purchases that we have as well.

So some of that is comes from overseas because it's a specialty grade that may or may not be made here in the United States or certainly the products that are made here in the United States that we are a net buyer of and we're paying those invoices as we go. So that is in place and that is set, all right? The frustration, as I mentioned in the verbiage that I gave you in the opening statements, is related to discussions around boxes and things like that. Now we've always said our box price increases are between us and our customers. Those aren't publicly announced, but we do have some and it's a relatively sizable amount that are still tied to what happens in RISI and what's reported in RISI.

And as I said, we're moving away from that as fast as we possibly can because I think in a lot of ways and I've been at this a long time and if you go back in time, there was a pretty large open market and today it's a very, very small open market. So I think there's become some confusion in terms of how the reporting goes and what the interpretations are. And so we're finding this vehicle a little less useful going forward. And therefore, we're moving away from it as fast as we can. Hopefully that kind of wraps up your question a little bit.

Our next comes from Mike Roslin from Truist. Please go ahead with your question.

Yes. Thank you, Mark, Tom and Bob for taking my questions and congrats on a strong year.

Can you give us a sense of the operating rate you're currently at? Would it be fair to say you're running full out given the strong demand you have? And if that's the case, can you help us understand the timeframe over which you expect to add capacity at Counts and Valdosta? You mentioned that, I think you teased that in the last earnings call. When do you think those projects will be operational?

We've got the opportunity to add capacity as time goes on. As we've always said, we have tremendous flexibility on how we provide containerboard tons into the system. Obviously, we completed the Big Jackson reconfiguration. But nevertheless, we also have a lot of opportunity on how we optimize the 7 mill system right now. Regarding what you mentioned between Counts and Valdosta, those projects, if we go forward with those, would be the next couple of years timing.

And so again, that's something that we haven't decided to execute. We're studying all opportunities as we always do, and we have tremendous flexibility on how we bring new tons into the system when they're needed. And so that's the beauty of where we are. The high integration and the continuation of our demand growth presents the high opportunity, high return for these projects in our mills as we go forward. So we'll let you know when the decisions get made.

Got it. I appreciate that, Mark. And then, so how much can you just comment then about where the system is right now in terms of operating rate? How much ability or how much flex you have in the system right now to meet what seems to be really growing demand?

We are running. I'm not going to say we're running full out. We're running hard, which is a good place to be. We run best when the pressure is on. But again, we've got room to optimize the system and the grade mix.

And also, as we've always done, we did this back over the years, the ability to buy some open market tons within a region where it makes sense. So we have those opportunities. So again, the ability to really utilize our capacity right now and whether you call it running full out, we always find ways to squeeze more tons out of the system We'll continue doing these projects. These are the high class opportunities we engage with.

Got it. And one last question just before turning it over. Can you give us a sense of the volume cadence you're expecting through 2025? Should we expect some more pronounced volume growth in the first half and then maybe lessening as you get towards midyear in the back half, partly due to tougher comps?

Well, I'll tell you Mike, the comps are going to get much tougher as the year goes on. And if you look at last year's. So but we see continued volume growth throughout the year, steady growth, but it will be but obviously the numbers come down a little bit on percentages compared when you do a year over year comparison as we move throughout the year. But we have plenty of growth opportunities and lots of things that we're already putting in place and we'll continue to put in place as some of our capital projects come on board and we're able to produce more.

Thanks very much, Tom. Good luck in 2025.

And our next question comes from Gabe Hajde from Wells Fargo. Please go ahead with your question.

Start with the sequential numbers that you kind of give us on a quarterly basis in terms of the split corrugated price realization and export. And if I'm doing my math right, I'm seeing about $50 a ton of price realization in the Q4 or excuse me, in 2024, which would imply sort of $30,000,000 of unfavorable mix. And that in my mind seems a bit punitive and probably uncharacteristic of how PCA would operate. So I'm just curious if you guys have thought about it that way and if you're still realizing any price in Q1 'twenty five from movements that transpired in 2024 on a sequential basis from Q4 to Q1?

Yes. Yes, Gabe, this is Bob. Yes, there is some of that that does some things that just move on an annual basis. So there is some movement relative to that as you said regarding these price increases of 2024. But the other thing you have to look at is if you sort of do the math and make sure you account for the inventory change and what's export volume and what's domestic volume, I think it's somewhere around the mid-fifty something dollar a ton change.

And then you have to compare rather than comparing to $80 which were the 2 increases at the beginning of 2020 4, you have to remember there was a $20 per ton drop late in the year in 2023. So you sort of look at it that way and let's say that's a net $60 a ton. And like I said, I think we're in mid-50s something like that and similar to your math. And then you do have mix changes. You have customer mix, product mix and seasonal mix things like that that weigh into it.

So we feel good about capturing the price based on those index changes that you referenced.

Okay. Thank you. And I guess for the avoidance of doubt in the Q1, are you telling us that included in the guidance that you gave us 2.21 includes price increases on open market tons and not on the converted box side? Or are you embedding in what was been announced on both the corrugated and

No, there's definitely some open market. As we've always said, those things happen it happens immediately when there's a price change up or down. But there are some things relative on the box side that regarding those price increases from last year that now will take effect in the Q1. So that's embedded in there too along with what we feel like we'll realize from this year's January price increases. Considering the impact of RISI as Tom was talking earlier, RISI not picking it up in January.

So if they adjust for that a little bit, but there is some of that in our number as well.

Understood. Okay. And last one on CapEx. You did signal on the Q3 call that it would be up into $25,000,000 It's probably up a little bit more than what we were modeling. I don't know how others are thinking about it.

But the Glendale, I think, box facility, should we sort of pencil in numbers that we see are $240,000,000 to $260,000,000 for a new box plant, depending if it's outfitted with a corrugator? But even if I adjust for that, when I look at maintenance, I think that was also supposed to be down in 2025 and it's actually up. So, Mark, are you telling us there is no incremental capacity on the containerboard side in 2025, no debottlenecking or anything like that in that CapEx number?

No, there certainly is. There's work going on in the mills. Again, there's no one big project. There's just a whole host of small projects that we always do every year to enhance what we have. One of the challenges that we've laid out to the team over the last year is that over the last 6 or 7 years of all these conversions that we've done at a very blistering pace, now is the time to step back in and really optimize what we have.

And so, we were doing these conversions and moving on to the next mill at such a pace, we've never really taken the time to really drill down and make sure we're getting all the benefits from all the spending that was taking place. So now we've got the technology organization stepping back in and engaging with the mills and making sure that what we are doing is extracting all the value we can. So that gives us good return. But as far as the capital spending, this year, if you think about Glendale project down in Arizona, we're finishing out that box plant. And there is some number, 10 years ago, you could build a box plant $50,000,000 and now a big full line box plant, you're talking $200 plus 1,000,000 We've also just this week, we broke ground in Newark, Ohio for another big new box plant.

That's been in the works for the last few years. We actually bought the land 3 years ago. And so that box plant will be under construction and hopefully have everything ready to run by the end of next year. We also with this 800 high 800 capital call out that we're talking about right now, there's a major rebuild taking place at another plant in the Northeast. It's not a new box plant, but essentially it will be like new and we're done with it inside.

And then there's another reconfiguration on the East Coast that's a major enhancement, major rebuild of that plant. So there there's 4 big activities going on within the corrugated products side of the business along with a call out right now and I'm probably right there probably another 50 projects going on for the year That will be the smaller projects, the evolves, the single converting line replacements that will just continue forever. And so that's all baked into that capital call out. But there's a good portion of new business growth in that capital along with optimization and just enhancing the business, not just maintenance. Maintenance is a small portion of that capital.

your question on the maintenance expense, thinking it was down. If you're recalling something from the last quarter's call, there was a question about what's normal relative to what we had as outages in 2024. But it was not an indication of what our plan was for 2025 regarding outages. And the reality is, there's a couple of things. One is we have more larger mills with more days down in this year's plan versus last year, larger meals, more expensive, more days down, so on and so forth.

The other thing is, in the second half of twenty twenty two, all of twenty twenty three and then for the first part of 2024, certainly in the Q1 of 'twenty four, we were still taking running to demand. So we had market downtime. And the way we sort of bucket our variances, if you're in market downtime and you have a maintenance outage, you would not include the profit per ton of those in your you wouldn't penalize your outage for that because your market downtime, you couldn't sell the ton anyway. So those the negative impact of that shows up in your volume variances that we talk about. Whereas this year, we have none of that.

So that profit per ton is in our outage calculations for every ton that's down. That's another reason it's going to be higher relative to 2024, if you follow me.

I do. Thank you guys for all the detail and appreciate the investment in Ohio.

Our next question comes from Mike Weintraub from Seaport Research Partners. Please go ahead with your question.

Good morning. So to the extent you can help us, just trying to understand how much of the higher box prices that would come as a part of the containerboard price increase initiative that's been announced for January would is incorporated in your 1Q guidance? Just really trying to understand how much additional upside there could be through the balance of the year if the price increase gets fully implemented?

Yes, Mark, this is Tom. What happens is it's a timing issue, especially relative to the contracts that we have left that relate to RISI. So we got to take a relatively conservative approach in the Q1 to what to how those contracts would roll through. However, we are implementing right now the non contractual business we're going ahead and putting in place. But again, those amounts and those sorts of things is between us and our customers when it comes to boxes.

So we take a we don't publicly come out and announce some of those things that those agreements that we've got with our customers. But I think what you're really referring to is the index and what's left tied to the index. Like I said, that rolls through at a different rate. And until that index indicates the price is a line or medium going up, it won't trigger some of those contracts.

and again, I'm really trying to get potential upside beyond the 1Q, but another way to maybe ask the same question is, so if for whatever reason RISI didn't publish the containerboard price increase in February or March, how significant an impact would that have on what you provided in the guidance versus what you then would expect, if that's a question you can ask?

Packaging Corp. of America (PKG) Q4 2024 Earnings Call Transcript

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