Packaging Co. of America Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 23, 2024

There are 12 speakers on the call.

Operator

Good morning, everyone. Thank you for joining Packaging Corporation of America's 3rd Quarter 2024 Earnings Results Conference Call. Your host will be Mark Colzan, Chairman and Chief Executive Officer of PCA. Upon conclusion of his narrative, there will be a question and answer session. I would now like to turn the conference call over to Mr.

Operator

Colzan. Sir, please proceed when you are ready.

Speaker 1

Thank you, Jamie. Good morning, everyone, and thank you for participating in Packaging Corporation of America's Q3 2024 earnings release conference call. Again, I'm Mark Kowlzan, Chairman and CEO of PCA. And with me on the call today is Tom Hassfurther, Executive Vice President, who runs our Packaging business and Bob Mundy, our Chief Financial Officer. As usual, I'll begin the call with an overview of our Q3 results, and then I'll turn the call over to Tom and Bob, who'll provide further details.

Speaker 1

And then I'll wrap things up and we'd be glad to take questions later. Yesterday, we reported 3rd quarter net income of $238,000,000 or $2.64 per share. Excluding special items, Q3 2024 net income was $239,000,000 or $2.65 per share compared to the Q3 of 2023 net income of $185,000,000 or $2.05 per share. 3rd quarter net sales were $2,200,000,000 in 20.24 $1,900,000,000 in 2023. Total company EBITDA for the Q3, excluding special items was $461,000,000 in 20.24 $388,000,000 in 2023.

Speaker 1

Details of special items for both the Q3 of 20242023 were included in the schedules that accompanied our earnings press release. Excluding special items, the $0.60 per share increase in Q3 2024 earnings compared to the Q3 of 2023 was primarily driven by higher volume of $0.94 and prices and mix $0.03 in the Packaging segment, higher volume in the Paper segment for $0.03 lower freight and logistics expenses of $0.09 lower scheduled outage expenses for 0.06 dollars and lower interest expense for $0.05 These items were partially offset by lower prices and mix in the paper segment for $0.02 higher operating and converting costs $0.51 and higher depreciation expense $0.05 and other expenses $0.02 The results were $0.20 above our Q3 guidance of 2.45 dollars per share, primarily due to higher volume in our Packaging and Paper segments and higher prices and mix in the Packaging segment. Looking at our Packaging business, EBITDA excluding special items in the Q3 of 2024 of $446,000,000 with sales of $2,000,000,000 resulted in a margin of 22.2% versus last year's EBITDA of $374,000,000 with sales of $1,800,000,000 and a 21.3 percent 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 continue to deliver impressive results, setting new all time quarterly records for containerboard production, total box shipments and shipments per day, while meeting the service and quality needs of our customers would not have been possible without a long term well thought out strategic capital spending plan and the hard work and dedication of our employees.

Speaker 1

Even with record production as a result of the strong demand, we were not able to meet our inventory target at the end of the quarter. With some adjustments we made to the DeRidder Mill's scheduled outage plans for this year, plus 2 less corrugated shipping days during the Q4 and with a lighter than average schedule in the first half twenty twenty five, we do hope to reach our target by the end of the year. I'll now turn it over to Tom who will provide further details on containerboard sales and corrugated business.

Speaker 2

Thanks, Mark. The corrugated products demand strengthened throughout the quarter and as Mark mentioned resulted in record breaking performance for our plants. Shipments per day were up 11.1% over last year's Q3 and total shipments with one additional shipping day were up 12.9%. Versus the Q2 of 2024, shipments per day were up 5.8% and total shipments with 1 less shipping day were up 4.1%. Outside sales volume of containerboard was 45,000 tons above last year's Q3 and 7,000 tons above the Q2 of 2024.

Speaker 2

Prices and mix came in ahead of expectations as implementation of our previously announced price increases for containerboard and corrugated products was managed very well. Domestic containerboard and corrugated products prices and mix together were up $0.35 per share versus the Q2 of 2024 and flat compared to the Q3 of 2023. Export containerboard prices were up $0.03 per share compared to the Q2 of 2024 and the Q3 of 2023. I'd like to mention that in addition to ensuring our customers' quality and service needs were met during a record breaking quarter, our employees did not get complacent. They're focused on continuous improvement regarding customer service as well as efficiency, quality, productivity and optimization improvements across our Packaging segment is relentless and drives our industry leading results.

Speaker 2

They fully understand that there are always areas that can be improved upon even with record setting performance. Now I'll turn it back to Mark.

Speaker 1

Thanks, Tom. Looking at our Paper segment, EBITDA excluding special items in the Q3 was $43,000,000 with sales of $159,000,000 or 27.0 percent margin compared to the Q3 of 2023 EBITDA of $35,000,000 and sales of $158,000,000 or 22.4 percent margin. Our previously announced price increases were implemented as planned, with average prices and mix up 2% versus Q2 2024 levels and down 2% versus the Q3 of 2023. Volume, which exceeded forecast levels, had very good back to school shipments and strong printing and converting demand. Volume was up 4% versus the Q3 of 2023 and was five percent above the Q2 of 2024.

Speaker 1

Mill operations were managed very well with excellent machine efficiencies and material usage, especially with chemicals and energy. And now I'll turn it over to Bob for more financial

Speaker 3

Thanks, Mark. Cash provided by operations during the quarter totaled $327,000,000 with free cash flow of 180,000,000 dollars The more significant cash payments during the quarter included capital expenditures of $147,000,000 Common stock dividends totaled $112,000,000 $77,000,000 for federal and state income tax payments and $26,000,000 for pension and other post employment benefit contributions. We ended the quarter with $841,000,000 of cash, including marketable securities, and our liquidity on September 30 was approximately $1,200,000,000 Lastly, our planned annual maintenance outage expense for this year has changed slightly due to the adjustments made to the Doritomille outage that Mark referred to earlier. The 3rd quarter outage impact was $0.17 per share or $0.03 unfavorable to our previous guidance. And the new estimate for the 4th quarter is $0.29 per share or $0.04 favorable to our guidance.

Speaker 3

The total estimate for the year is $0.87 per share. I'll now turn it back over to Mark.

Speaker 1

Thanks, Bob. Looking ahead as we move from the 3rd and into the 4th quarter, we expect demand in our Packaging segment to remain strong with corrugated shipments per day continuing to strengthen and slightly higher containerboard volume. However, total shipments for the corrugated business will be impacted by 2 less shipping days and the recent hurricane damage to the strawberry crops in Florida. With current containerboard inventory below our target levels, we will also attempt to build some inventory prior to year end. We expect continued realization from the previously announced price increases and higher export prices, although with a seasonally less rich mix compared to the Q3.

Speaker 1

In our paper segment, shipments will be lower versus the seasonally stronger Q3, while prices and mix should be fairly flat. Operating and converting costs are expected to increase driven by higher seasonal energy costs and chemical costs. Scheduled outage costs are estimated to be $0.12 per share higher than the Q3 and depreciation expense should be slightly higher also. Considering these items, we expect 4th quarter earnings of $2.47 per share. With that, we'd be happy to entertain any questions, but must remind you that some of the statements we've made on the call constituted forward looking statements.

Speaker 1

The statements were based on current estimates, expectations and projections of the company and do involve inherent risks and uncertainties, including the direction of the economy and those identified as risk factors in our 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. With that, Jamie, I'd like to open up the call for questions, please.

Operator

Ladies and gentlemen, at this time, we'll begin that question and answer session.

Speaker 1

First question please.

Operator

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

Speaker 4

Hi, everyone. Good morning. Thanks for taking the question and congratulations on the progress so far. Gentlemen, I guess the first question I had, standard, can you talk a bit about where bookings and billings are to start the Q4 with whatever adjustment you want to make either per workday or actual? And if you could shade or provide some color in terms of what end markets or product lines are seeing the most or least traction?

Speaker 4

Second question I had for you, and you talked about it last quarter, and certainly didn't you had favorable results versus your guidance. Can you talk about how whatever growth you're getting incrementally in the brown market, so to speak, is impacting your overall mix and sort of any implications for the outlook for earnings and EBITDA growth for the future?

Speaker 2

Hey George, it's Tom. I'll take that question. First of all, on a per day basis, our bookings and billings are up just a little over 8% versus 23%. So we continue to be in a very nice growth mode. The end markets involve a little bit about your question regarding growth and mix as well.

Speaker 2

So let me talk about the growth

Speaker 5

first

Speaker 2

and where we're seeing some end markets that are growing more than perhaps others. And probably the biggest difference that we're seeing right now is that the e comm area across the board. And of course, I've mentioned many times that we have a lot of e commerce customers and that a lot of our customers got into e com a number of years ago. That segment continues to grow nicely. And that's evidenced by anything you see out there data wise regarding big box stores and some of this other stuff.

Speaker 2

And so a lot of online shopping. And then on the other hand, some of that graphics mix, which is POP related point of purchase displays and things like that, those are pretty flat. So we've got one area growing quite nicely and another area that's been pretty flat over the last few years. And it's the same thing as we talked about in the past because of consumer spending and because of kind of where consumers are right now. The durables certainly haven't performed as well as the non durables, at least from our segments of business that we have.

Speaker 2

So hopefully that gives you enough understanding of kind of where we are and what we're seeing.

Speaker 4

Tom, that's great. I guess my last one, I'll turn it over. Can you talk a little bit about what the crop damage might mean to you in terms of volume? And as you look out to next year, do you need to ramp any investment, whether it's working capital CapEx to keep the growth that you'd like to have, looking out to 2025 given how tough the comparisons are? Thanks and good luck.

Speaker 2

Yes, George. That's a great question. Number 1 is, it's a little unknown how severe the crop damage is going to be. It's spotty all over the state of Florida and of course that's a very big market for us. So, we anticipate that what would traditionally be a full crop that would come in during the Q4 is now going to come in at the end of the Q4 and bleeding into the Q1 of next year, because they're going to have to do a lot of replanting.

Speaker 2

All those plants were quite young. So, that's what caused a lot of the damage. And relative to CapEx and investments, as I've said many, many times, we invest where the customers need us to invest and we're continuing to do that. One of the commentary I said about our employees and what a great job all of our associates have done is because we've had a lot of capital projects going on while we've had this surge in demand. And they've done just an unbelievably great job of making sure that we serviced our customers the way they need to be serviced with the quality products that they demand.

Speaker 1

Yes. And keeping in line with that commentary, George, as we said on the July call, this year we will have worked on at least 60 major projects within our box plant system with new corrugators, major corrugator rebuilds, new converting lines. As we announced in July, we're heavily engaged at this point in building out the new operations in Glendale, Arizona that will start up early next year. And then just going forward, we will talk about this more in the January call, but we've got plans on the books to build out a couple of new big plants over the next 2.5, 3 years also. But we will continue the pace of reinvestment in these plants.

Speaker 1

This has been the it's driven the capability to be where we are today. We said this on the call, I believe in July. If you include this year's capital spending over the last 5 years, we would have spent $2,000,000,000 just on the box plant system, recapitalizing and building out some new plants. And in many cases, in almost all cases, we've either quadrupled or increased even over that the capability of these box plants to produce quality packaging for the customers. And so we're not going to let up on that momentum that we have.

Speaker 1

That's what gives us the ability to grow and take care of our customers.

Speaker 4

Understood. Thanks so much.

Speaker 1

Next question please.

Operator

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

Speaker 6

Thanks Mark, Tom, Bob for taking my questions and congrats on a really good quarter.

Speaker 1

Thanks, Mike. Thanks. Appreciate it, Mike.

Speaker 6

Your volumes continue to outpace the industry and your nearest peers. And how should we think about your volumes and when growth should normalize? Is that something that should occur early next year, second half of next year? Or could this even play out longer given the ongoing health and restructurings that your larger peers are going?

Speaker 2

Mike, we plan to take advantage of every opportunity we get that where we can profitably grow our revenue. And I think right now, we're able to perform in a way that is very desirable for a lot of our customers. Certainly most of our growth comes within our existing customers. And then we get opportunities outside of that as well. But they happen to be looking for something we're able to deliver.

Speaker 2

And I think those opportunities will remain. Now there's no question that starting next year, the comps are going to get tougher. We made a big jump this year. And but we our key objective is profitable revenue growth and we continue we'll continue to go down that path and I'm very confident of it, especially given the fact that as I've mentioned many times, our capital expenditures are not a build it and hope they will come. It's we do it based on what our customers have asked us to do and that provides us

Speaker 1

a lot of opportunities and efficiencies as well. Mike, what Tom just said about the comps, don't forget last year's Q4, I think we were up probably 5.5% to 6% last year's Q4 over the prior year's Q4. So the 8% he's calling up is over a very big comp. So again, if you also look back over the last 20 years, PCA has a track record of significantly outgrowing our customers on the packaging side year over year, decade after decade. And we intend on continuing that trend.

Speaker 6

Got you. That's great color. It sounds like Bartom, based on what you just said that you could probably outgrow your peers probably at a faster rate than you had historically given some of the moving pieces that are happening in the industry.

Speaker 2

I don't want to Mike, I don't want to really compare ourselves to our competitors because we just basically stay focused on what our opportunities are and we stay focused on our customers and what their demands are. And that kind of that takes us forward.

Speaker 6

Got you. And then one quick follow-up. Just Mark, you said you put out a teaser, more you mentioned some new plans you're looking to build out over the next few years. You mentioned more details in January. Anything you could share with us now on those new plans, particular regions?

Speaker 6

And Mark, is there anything you could share regarding what you're looking to accomplish with those new box plants over the next 2 to 3 years?

Operator

No.

Speaker 1

We'll give you more details in January.

Speaker 6

Perfect. Sounds great. Thanks a lot guys.

Speaker 1

Thanks. Next question please.

Operator

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

Speaker 7

Mark, Tom, Bob, good morning and congrats on the good quarter.

Operator

Good morning, Gabe.

Speaker 2

Thank you. I wanted

Speaker 7

to dig in a little bit on a comment you made about a lighter maintenance outage schedule in H1 'twenty five, marrying that up with, again, comments about having a little bit of difficulty seemingly rebuild inventories. And of course, that's a function of the performance.

Speaker 5

But it seems like

Speaker 7

to us in the outside world, I mean, maybe that's a little bit of marginal contribution on the production side, I don't know, 50,000 tons or something like that. 2 part question. 1 is, can you give us a sense for maybe the swing, H1 versus H2 on the maintenance outage? And second, Mark, you guys have been really diligent about investing in the system and the business. You've talked about before being okay, being over integrated, but you're seemingly kind of hitting red line right now in terms of your ability on the core or containerboard side, excuse me.

Speaker 7

How long could you buy paper in the open market or maybe some thought there in terms of what the plan could be?

Speaker 1

Gabe, I think you asked 10 questions in that one question.

Speaker 6

First of

Speaker 1

all, as far as the outage schedule, where we're calling it lighter for next year. Don't forget, we had that massive annual outage at Jackson to finish up the last phase of rebuild work at Jackson that was about 40 some odd days worth of effort. And then just a learning curve through the springtime to get the machine up where we wanted it to be. But for the 2025 year, we won't have those types of outages at any of our mills. But frankly, we're planning on just the normal routine annual outages where you take the mills down, clean, inspect routine boiler work, turbine work, machine efforts.

Speaker 1

So it ought to be a significantly lighter year in that regard without calling out a lot of details. But that's what we were implying in that. As far as the containerboard supply into the market, never underestimate us. We have long term plans on how we will take care of our customers after the discussion that we have internally every day. So I'm confident that for the next few years, we're going to be in a really great place to grow and take care of our customers' needs.

Speaker 1

That's all I want to say about that.

Speaker 7

Okay. And then I guess maybe Bob on the you didn't mention any sort of share repurchase, the eight $51,000,000 I think on the balance sheet, but just good leverage position. What opportunities do you see for the capital on a go forward basis?

Speaker 8

Well, Mark may be the better one to answer that Gabe, but as you know, we always evaluate our how we allocate capital, looking for the biggest return for the shareholders, what makes sense for our strategic capital spending plans. And that's again and be as opportunistic as we can with share repurchases. So Mark, unless you have something different, I think that's how we'll continue. Yes. I think if you look at

Speaker 1

our capital spend, this year we called out, I think the original number was $470,000,000 And then when we identified the opportunity down in the Phoenix area, which specifically Glendale, that number went up plus we saw some other opportunities within some of the plants for new corrugators and some converting lines. So the call out for the rest of the year, I believe is up closer to $700,000,000 right now. It's $680 some odd million as we sit here. But these are going into high return very, very valuable accretive opportunities within the system. And we've got a runway and a portfolio of those opportunities we're going to continue to take advantage of.

Speaker 1

And quite frankly, that's the best use of our excess cash right now. And I do believe our investors tend to agree and they do support the way we handle our cash.

Speaker 7

I would agree with that. Thank you, guys.

Speaker 1

Good deal. Next question?

Operator

The next question comes from Mark Weintraub from Seaport Research Partners. Please go ahead with your question.

Speaker 9

Thank you. Congrats on another great quarter. So I just got maybe a little bit following up along the lines of containerboard production, etcetera, and opportunities increase. Where were you in terms of operate in the Q3? Were you pretty full out?

Speaker 9

Was Wallula up and running full in the Q3?

Speaker 1

Yes. All the mills were up and running. Last year, if you'll recall, we brought Wallula back up. And then in January, I think we finished the start up of Wallula with the complete start up of the mill. So essentially, we've run Wallula fallout this year.

Speaker 1

And then again, don't forget that we had the big shutdown at Jackson. So that was a big disruption. And so but as you could expect, we never sit still. We're always working on optimization opportunities at all of the mills. And so these will continue.

Speaker 1

But I think the good news is that we continue to run-in a very effective, very efficient manner of taking advantage of our assets. And then planning out into the future years where tons where I should say containerboard will come from to supply the customers' needs on the corrugated side. And I'm very confident we've got a good plan for the next few years.

Speaker 9

Understood. And are there potentially significant internal Jackson type opportunities? Or is it more at least internally going to be smaller projects across the board perhaps?

Speaker 1

It's a combination. We've got a few projects identified right now, quite frankly. We've got some paper machines in the system that time goes by pretty quickly. Counts Mill received the lion's share of capital spending in the 1990s and the early 2000s. That's 25 years ago.

Speaker 1

And so we've got opportunities to look at count's number one machine as an example and really do some things to that machine to get good incremental capability out of that. Valdosta is another example of a machine that has incremental opportunity. And then depending on how much capital you want to spend in the future years, in terms of adding another paper machine if we had to in the future years. But right now for the next few years, we're in a very good place on how we take care of the customers with the containerboard supply.

Speaker 9

Right. And just because it deserves a little attention, the paper segment did phenomenally in the quarter, the EBITDA margins. I guess it's now just Ifalls and that's always been a great facility for you. How much of it is that everything that's now going through Ifalls versus what else might have been going on that you basically at least based on my numbers were as strong as you've ever been margin wise in the paper segment?

Speaker 1

Yes. I believe we had 1 quarter a couple of years ago that was at that same 27% level. But no, we have I Falls. It's the 1 mill. It's producing close to the 500,000 tons a year of uncoated free sheet production.

Speaker 1

That's a blend of the converting grades and probably 75% of that is cut size for copy machine type paper. But that mill is hitting on all 8 cylinders and it's in a great place and well capitalized and great management, great employees. So we rationalize that paper business as we were converting the Boise assets. And we're in a good place with the market and we'll just continue to take advantage of that.

Speaker 9

Super. Appreciate it. Just one last real quick one. I think you mentioned $0.87 for maintenance outage this year. If I heard you right, you're saying that might be lower next year.

Speaker 9

What would normal be for annual maintenance outages?

Speaker 4

Yes, Mark.

Speaker 8

It's normal I don't know. This year, obviously, with Jackson included in that, it was higher than normal. But yes, we've anticipated and Mark sort of touched on it earlier with just incremental volume next year, if you just look at it from a change in our outage schedule this year to next year. Right now at a high level, there's probably close to 100,000 tons of additional production next year. So using that as sort of a way to get out what's normal would take that off of the $0.87 and that's probably a good ballpark.

Speaker 9

Okay. Super. Appreciate it. Thank you.

Speaker 1

Thank you. Next question please.

Operator

Our next question comes from Phil Ng from Jefferies. Please go ahead with your question.

Speaker 10

Hey guys. Congrats on another strong quarter. You're certainly lapping tougher year over year comps, but operating costs stepped up noticeably. Any color, Bob, I guess, perhaps what you're seeing, where it's a little bit more elevated? And are you starting to see that level off?

Speaker 10

And then I think you guys called out how Jackson and maybe some of the inefficiencies and shutdowns was a drag this year. When we kind of look at the 2025, could this flip and be a good guy?

Speaker 8

Well, I think your first question, Phil, to answer that, we said on the last quarter's call and it played out that way that sequentially costs, we didn't see a lot of increase, obviously sort of somewhat stable, slightly higher, but obviously at a very high level with all of the inflation that's been going on for several quarters. If you're referring to year over year, you have to keep in mind that Q3 of last year, we did not run Wallula and we did this year. So this year we brought in our highest cost direct variable mill along with a lot of indirects and things that you don't incur when you're shut down. You bring that on and there's probably close to $30,000,000 of cost just for that alone Q3 this year versus last.

Speaker 10

Okay. And when you think about 2025 with all that kind of level set and as you kind of pointed out, you're starting to see that level off. Could that operating cost be a good guide next year?

Speaker 8

I mean, we'll have to see. Obviously, keep in mind, the Q1 was always you'll see a big jump because as we talk about every year with sort of the reload of a lot of the fringes and benefits on the salary side of things, you have increases that go into effect in that Q1. So you'll expect a jump for that reason alone 4th to 1st. But right now, obviously, we don't get too far ahead of ourselves regarding guidance. But hopefully, if we don't see a lot of costs going down, but hopefully, they have moderated for a while for the next few quarters and that would bode well for us next year.

Speaker 9

Okay. And just some of

Speaker 10

the big inputs, OCC has come down a little bit. Energy has been a little more favorable. Anything else to call out in terms of costs that you're seeing good or bad trend wise?

Speaker 8

No. As I said, other than the 2 you mentioned, things are seem to be fairly somewhat stable right now, Phil.

Speaker 10

Okay. That's great. And when we think about your 3Q price mix, as you can pointed out, was better than we expected, I think a little better than you anticipated as well. Was that more mix? Or is that more box price realization coming through perhaps a little quicker than you expected?

Speaker 10

In the Q4, per year guidance, you pretty much have all the box price increases fully implemented by now?

Speaker 2

Phil, this is Tom. Relative to the box price increase, I'm going to remind everybody here because there was some discussion about this earlier. We have a very disciplined approach to our box price increase and we do it by customer, by item and we track every single one of them and make sure that they get implemented properly. And the timing of that hasn't changed. It's the same timing we've always gone through.

Speaker 2

We will have the lion's share of it through the Q3. We will have some tracking into the 4th quarter and actually a couple of contracts that trigger annually. So we'll have it pretty much implemented certainly by the end of the Q4. And it's, that certainly has had an impact. And I think our mix, we've done a very, very good job of as this mix has changed a little bit, figuring out how to produce that very effectively and efficiently.

Speaker 2

And that's helped us as well.

Speaker 10

And Tom, these annual contracts triggering, did that trigger in 3Q or that triggers in the Q4? Just want to make sure I understand that comment.

Speaker 2

The couple of annual ones are on a calendar year. So they'll trigger at January 25.

Speaker 10

Got you. Okay. Thank you. Appreciate all the color.

Speaker 1

Yes. Thank you. Next question.

Operator

Our next question comes from Anthony Pettinari from Citigroup. Please go ahead with your question.

Speaker 5

Hi, good morning. Good morning. Tom, you talked about growth and maybe some business wins in e commerce. And I'm curious, historically, PCA has been really virgin weighted, but you have the ability to swing into recycled. Is this new business like a bit more recycled based than your existing business?

Speaker 5

And as you think about adding maybe some incremental tons or debottlenecking over the next few years, do you think about kind of virgin versus recycled mix maybe differently than you would have 5, 10 years ago? Or just kind of wondering if you can comment on that and maybe just that industry trend in the U. S, whether that the kind of mix in the lightweight recycled has really taken hold or maybe is overhyped or how you're positioned there?

Speaker 2

Anthony, we really we look at whatever the performance is that any customer needs. And we have done as we've talked about in the past, we've done some significant things in the mills to put us in a much better position to be able to run even lightweights and things like that. And that's been important to us. Now, we don't take that directly to any particular market or anything like that. We just are able to now react very well to whatever the customer needs and whatever their demands are.

Speaker 2

And we're able to do it on a performance basis that is most important. And that really has always set us apart from the recycled industry, the 100% recycled boards. And I think gives us somewhat of a competitive advantage. But again, it's not a we're not purposeful about taking a particular grade or anything like that to the market. We actually work the other way and do whatever the customer needs and meet those needs.

Speaker 5

Okay. That's helpful and that makes a lot of sense. On inventories, you talked about you plan to build inventory in 3Q ahead of the October DeRidder outage, but you talked about inventories kind of still below target levels. I just want to make sure I understand like was is that really driven just by stronger than expected demand? Were there any other operational issues, technical issues that led to that kind of shortfall relative to maybe earlier expectations on inventories?

Speaker 1

Yes. I mean, it was driven by demand. We did not expect to see the kind of growth this year that we have experienced. And we've been talking about building inventory all year and we've not yet succeeded in coming anywhere near close to where we should be. And so in some ways though, it's not a bad place to be with lower inventories, it keeps everybody on their toes and that's not a bad place to be.

Speaker 1

Everybody knows how critical every minute of machine production is to the system. So everybody's fully engaged.

Speaker 5

Okay. That's very helpful. I'll turn it over.

Speaker 1

Thank you. Any other questions, please?

Operator

And our next question comes from Charlie Muiristan from BNP Paribas. Please go ahead with your question.

Speaker 11

Good morning. Thank you very much for taking my questions. I've just got one remaining actually. You touched a little bit on it earlier, but just in terms of the strength of volumes sequentially and particularly quarter on quarter, Could you share any insight as to whether that is in particular coming from existing clients, existing business or existing clients, new business or indeed new clients? I appreciate we haven't obviously got the industry data yet or your peers haven't reported either.

Speaker 11

I just want to get some color around where that incremental growth is coming from you think?

Speaker 2

Charlie, I will tell you that number 1 is it comes from our existing customers and growing within our existing customers. That's our primary target. But we have been fortunate enough to add other clients as well. And that's played very important because I think that our reputation we have in the marketplace is such that customers really do recognize the value you bring when you produce a quality product and you actually deliver it when you say you're going to be there.

Speaker 11

Okay. Thank you.

Speaker 1

Thank you. Any other questions, please?

Operator

And our final question today comes from Ryan Fox from Bloomberg. Please go ahead with your question.

Speaker 1

Good morning, guys. Can you maybe elaborate a little bit more about the higher operating cost and converting costs? I think you had mentioned majority of that may have come from Wallula, but that may have only attributed to maybe 2 thirds of that. Just curious to see what else was hanging out there.

Speaker 8

Yes, Ryan. Obviously, the other pretty much is, high OCC cost versus last year. That's a large number. And then labor and benefits would be another component. And those things that don't get talked about a lot that are part of building rentals, professional fees, all that outside any outside service costs.

Speaker 8

They incur higher costs as well and they pass those on to us and on a lot of fronts, insurance, taxes, a lot of those types of things or that would be the other component.

Speaker 1

Got it. And I guess lastly, seems like a record quarter for containerboard production, almost 1,300,000 tons. How much more do you have available per quarter, kind of theoretically? We won't get into that. Just suffice it to say that we've got plenty of capability to take care of our customers for the next few years.

Speaker 1

Excellent. Thank you very much. Thank you.

Operator

And we do have a follow-up question from George Staphos from Bank of America. Please go ahead with your follow-up.

Speaker 4

Hi, guys. A quick one. Thanks for letting me sneak in to the extent that you can comment. If we think about the next 2 years and you had a stack rank where you do expect to be able to get the paper to serve the growth and we think about 3 or 4 categories, existing optimization and productivity across your mills like you said with counts in Valdosta, conversions or outside purchases, how would you stack rank those in terms of how you'll supply the paper? Thanks guys and good luck in the quarter.

Speaker 1

For the next year, it will be just optimizing what we currently have. And then over the next few years, it's doing some bigger projects within our system. And so again, we've got a good runway for the next few years that we've already thought out here.

Speaker 4

Thank you, Mark.

Speaker 1

Okay. With that, I believe if there are any more questions, we've got time. But Jamie, if there's anybody else out there?

Operator

Mr. Colzan, I see there are no more questions at this time. Do you have closing comments?

Speaker 1

Yes. Thank you for joining us today. I really appreciate everybody's time and look forward to talking with you at the end of January when we review the full year 2024 and Q4. Have a good rest of the day and a great holiday season. Thank you.

Operator

Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.

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Earnings Conference Call
Packaging Co. of America Q3 2024
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