Packaging Corporation of America Q1 2022 Earnings Report

Packaging Corporation of America EPS Results

• Actual EPS: $2.72
• Consensus EPS: $2.53
• Beat/Miss: Beat by +$0.19
• One Year Ago EPS: $1.77

Packaging Corporation of America Revenue Results

• Actual Revenue: $2.14 billion
• Expected Revenue: $2.05 billion
• Beat/Miss: Beat by +$90.74 million
• YoY Revenue Growth: +18.20%

Packaging Corporation of America Announcement Details

• Quarter: Q1 2022
• Date: 4/25/2022
• Time: After Market Closes
• Conference Call Date: Tuesday, April 26, 2022
• Conference Call Time: 8:03AM ET

Packaging Corporation of America (NYSE:PKG) (NYSE: PKG) is a leading North American manufacturer of containerboard and corrugated packaging products. The company produces a range of paper-based packaging solutions including linerboard, corrugating medium, corrugated shipping containers, retail-ready packaging and point-of-purchase displays. In addition to core packaging products, Packaging Corporation of America offers packaging design, testing and supply-chain services intended to optimize protection, cost and sustainability for customers.

Headquartered in Lake Forest, Illinois, the company operates an integrated network of mills and corrugated manufacturing facilities across the United States and serves customers throughout North America in industries such as e-commerce, grocery and food & beverage, consumer packaged goods and industrial markets. Its operations span production of both recycled-fiber containerboard and virgin-fiber grades, and the company maintains logistics and converting capabilities to support regional and national supply requirements.

Packaging Corporation of America is publicly traded on the New York Stock Exchange under the ticker PKG and has expanded its footprint through investments in manufacturing capacity and strategic growth initiatives. The company emphasizes sustainability and recycling as part of its product and operational strategy, reflecting the cyclical and resource-focused nature of the paperboard and corrugated packaging sector. Packaging Corporation of America is managed by a corporate leadership team and board of directors responsible for executing its manufacturing, commercial and sustainability objectives.

Packaging Corporation of America Q1 2022 Earnings Call Transcript

Key Takeaways

• PCA reported Q1 net income of $254 million ($2.70 per share) and EBITDA excluding special items of $467 million on $2.1 billion in sales, versus $169 million and $342 million a year ago.
• The company incurred $0.71 per share of inflationary operating cost increases from energy, fiber, chemicals, labor, and freight, partly offset by efficiency initiatives.
• In the Packaging segment, demand stayed very strong with record containerboard and corrugated shipments, lifting its margin to 23.6% from 21.7% a year earlier.
• Paper segment EBITDA margin nearly doubled to 18.9% from 9.6% despite a 19% volume drop, supported by price hikes including a $100/ton increase effective May 2.
• The company generated $113 million in free cash flow, held $1.1 billion in liquidity, revised full-year outage costs to $1.04 per share (from $1.13), and sees Q2 EPS of $2.83.

Presentation

[Operator]

Thank you for joining Packaging Corporation of America's Q1 2022 Earnings Result Conference call. Your host today will be Mark Kowlzan, Chairman and Chief Executive Officer of PCA. Upon conclusion of his narrative, there will be a Q&A session. I will now turn the call over to Mr. Kowlzan, and please proceed when you are ready.

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

Thank you, Patricia. Good morning, everyone, and thank you all for participating in Packaging Corporation of America's Q1 2022 earnings release conference call. I'm Mark Kowlzan, Chairman and CEO of PCA, and with me on the call today is Tom Hassfurther, Executive Vice President who runs the packaging business, and Bob Mundy, our Chief Financial Officer. I'll begin the call with an overview of the Q1 results, and then I'm gonna be turning the call over to Tom and Bob, who'll provide further details. I will wrap things up, and we'll be glad to take questions. Yesterday, we reported Q1 net income of $254 million or $2.70 per share.

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

First quarter net income included special items expenses of $0.02 per share, primarily for certain costs at the Jackson, Alabama mill for paper-to-containerboard conversion-related activities. Details of the special items for both the Q1 of 2022 and 2021 were included in the schedules that accompanied our earnings press release. Excluding the special items, Q1 2022 net income was $256 million or $2.72 per share compared to Q1 2021 net income of $169 million or $1.77 per share. First quarter net sales were $2.1 billion in 2022 and $1.8 billion in 2021. Total company EBITDA for the Q1, excluding special items, was $467 million in 2022 and $342 million in 2021.

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

Excluding the special items, the $0.95 per share increase in Q1 2022 earnings compared to the Q1 of 2021 was driven primarily by higher prices in mix of $1.83 and volume of $0.23 in the packaging segment, higher prices in mix in our paper segment for $0.15, a lower share count resulting from share repurchases for $0.03, and lower interest expenses of $0.02. These items were partially offset by $0.71 of inflation-related operating cost increases, particularly with energy, fiber, chemicals, operating labor, and repair labor and materials. Freight and logistics expenses have now moved higher for seven quarters in a row and were $0.27 per share above the Q1 of 2021, and converting costs were higher by $0.11 per share, driven by labor and materials expenses.

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

We also had higher depreciation expenses of $0.07, lower volume in our paper segment for $0.06, higher scheduled outage expenses, $0.05, a higher tax rate resulting from some favorable items in last year's tax rate of $0.03, and other costs, $0.01. The results were $0.22 above our Q1 guidance of $2.50 per share, primarily due to higher prices in mix and higher volumes in both our packaging and paper segments, operating cost improvements from efficiency and usage initiatives, and favorable weather conditions.

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

Looking at the packaging business, EBITDA, excluding special items in the Q1 of 2022, was $464 million with sales of $1.96 billion, which resulted in a 23.6% margin versus last year's EBITDA of $352 million and sales of $1.62 billion or a 21.7% margin. Demand in the packaging segment remained very strong as sales volume in both our containerboard mills and our corrugated products plants had record-setting performances. The scheduled maintenance outages in our mills went very well, and both machines at our Jackson, Alabama mill produced containerboard the entire quarter. However, with strong internal and external demand, we ended the quarter once again with containerboard inventory levels below our targeted and historical levels.

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

Although we still face unprecedented inflationary headwinds in our manufacturing costs as well as freight and logistics expenses, our facilities continue to deliver on numerous cost reduction initiatives, efficiency improvements, integration and optimization enhancements, and capital project benefits to maximize our returns and our margins. I'll now turn it over to Tom, who'll provide further details on the containerboard sales and corrugated products business.

[Thomas Hassfurther, EVP of Corrugated Products at Packaging Corporation of America]

Thanks, Mark. As Mark mentioned, corrugated products and containerboard demand were very strong during the quarter. We set a new all-time total box shipments record, as well as a new Q1 shipments per day record. Total volume in our corrugated products plants was up 2.9%, and shipments per day were up 1.3% versus a very strong comp in last year's Q1, which for us was up approximately 8% over the prior year. In addition to supplying the record internal needs of our box plants, our outside sales volume of containerboard was 46,000 tons above the Q1 of 2021, owing to continued strong domestic and export demand. Outside volume was 26,000 tons below the Q4 of 2021 in order to help supply our strong internal demand while managing through the scheduled maintenance outages at our mills.

[Thomas Hassfurther, EVP of Corrugated Products at Packaging Corporation of America]

Domestic containerboard and corrugated products prices and mix contributed $1.60 per share above the Q1 of 2021, and we're up $0.23 per share compared to the Q4 of 2021. Export containerboard prices were up $0.23 cents per share versus last year's Q1 and up $0.01 per share compared to the Q4 of 2021. The benefits of our disciplined approach for the implementation of price increases across our customer mix last year was a significant contributor to this year's Q1 results. Very good execution of the initial implementation of our recent March price increase contributed to results in the Q1 as well.

[Thomas Hassfurther, EVP of Corrugated Products at Packaging Corporation of America]

I'd also like to point out that the capital spending and optimization strategy within our box plant system that we have been focused on over the last few years also plays a key role in our successful implementation process. The investments from this strategy provide the products and service needs that our customers desire and allows them to grow while focusing on the mix of customers we want to align and partner with. I'll now turn it back to Mark.

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

Thanks, Tom. Looking at the paper segment, EBITDA, excluding special items in the Q1, was $29 million with sales of $153 million or an 18.9% margin compared to the Q1 2021 EBITDA of $16 million and sales of $165 million for a 9.6% margin. As we mentioned on last quarter's call, volume from our paper segment this year is expected to be fairly representative of the capacity at our International Falls mill. Accordingly, sales volume was about 19% below last year's Q1 when we were producing paper on the number one machine at our Jackson, Alabama mill. Paper prices and mix were 14% higher than last year's Q1 and 6% above the Q4 of 2021, resulting from our previously announced paper price increases.

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

Also, in late March, we notified customers of a $100 per ton price increase, effective with shipments beginning May the second for all office printing and converting papers. The efforts of our employees to optimize the cost structure, inventory, and product mix in the paper business helped minimize the inflationary increases we're seeing and deliver solid returns in the quarter. I'll now turn it over to Bob.

[Robert Mundy, EVP and CFO at Packaging Corporation of America]

Thanks, Mark. For the Q1, we generated cash from operations of $339 million and free cash flow of $113 million. Key cash payments during the quarter included capital expenditures of $226 million and common stock dividends of $94 million. We ended the quarter with $629 million of cash on hand, or $778 million, including marketable securities. Our liquidity on 31 March 2022 was $1.1 billion. I want to update you on a revision to the scheduled mill maintenance outage guidance that we provided on last quarter's call. Current plans and the scope of work has changed, resulting in a revised total company estimated cost impact for the year of $1.04 per share versus the $1.13 per share previously.

[Robert Mundy, EVP and CFO at Packaging Corporation of America]

The actual impact in the Q1 was $0.15 per share, and the revised estimated impact by quarter for the remainder of the year is now $0.26 per share in the Q2, $0.22 in the third, and $0.41 per share in the Q4. I'll now turn it back over to Mark.

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

Thank you, Bob. Looking ahead, as we move from the Q1 and into the Q2, we expect demand in our packaging segment to remain very strong, and we'll continue implementing the previously announced price increases in both our packaging and paper segments. Volume in the paper segment will be lower with the scheduled outage at our International Falls mill, and as Bob pointed out, total scheduled outage costs will be $0.11 higher than the Q1. We also anticipate continued inflation with freight, logistics expenses, as well as most of our operating costs, although recycled fiber prices should be slightly lower. Considering all of these items, we expect Q2 earnings of $2.83 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.

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

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 the annual report on Form 10-K and on file with the SEC. Actual results could differ materially from those expressed in the forward-looking statements. With that, Patricia, I'd like to open up the call for questions, please.

[Operator]

Thank you. At this time, I would like to remind everyone in order to ask questions, please press star then the number one on your telephone keypad. Again, that is star one to ask for questions. Your first question comes from the line of George Staphos from Bank of America. Your line is open.

[John Babcock, VP and Equity Research Analyst at Bank of America Securities]

Hey, good morning. This is actually John Babcock on the line for George. Appreciate you taking the time to answer my questions. I guess just first of all, I was wondering if you might be able to talk about the cadence on the price increase implementation this time, and if there's any reason to believe it might be different, you know, relative to some of the hikes last year, that'd be great.

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

Go ahead, Tom.

[Thomas Hassfurther, EVP of Corrugated Products at Packaging Corporation of America]

The implementation is right on track just like the others. You know, we have a very disciplined approach. We usually get the pass-through over about a 90-day period. As I mentioned, we had some that was in the month of March, but the majority of the price increase will be in the Q2.

[John Babcock, VP and Equity Research Analyst at Bank of America Securities]

Okay, thank you. The next question, you know, just as it pertains to trucking, I was wondering if you could talk about what you're seeing in terms of spot rates for that. You know, ultimately, some of our contacts suggest that prices might be dropping there. Just wanna get any color that you might have.

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

Bob, you wanna add a little to that?

[Robert Mundy, EVP and CFO at Packaging Corporation of America]

John, I'll just say that, you know, we are seeing a little bit of that relative to the spot market. You know, various factors going on that showed a little improvement in the Q1. I think as most people would agree, that's, you know, it's still far from being in an ideal situation. And, you know, in our guidance for the Q2, again, you know, we have, you know, our freight costs are going up probably another, you know, 5% or so. Still a lot to be done there.

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

I think you need to consider again that, you know, diesel's still sitting at over $5 a gallon, and that's one of the predominant cost factors. Although some of the drivers in the spot market have become more available, the costs remain at exceptionally high levels.

[John Babcock, VP and Equity Research Analyst at Bank of America Securities]

Gotcha. Last question before I turn it over. With the International Falls, downtime, maintenance downtime that you have this upcoming quarter, could you just talk about the normal steps that you take to ensure the customers, you know, get the product they need and ultimately anything that you'll do, you know, around inventory build, you know, just to make sure that you're able to serve their needs?

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

Yeah, I mean, that's a shutdown that's been planned for the last six months, so it's a week-long outage that will take place in June. You have to assume that we've already, you know, pre-planned to have the necessary inventory and how we'll take care of customers. So that's really not an issue. It's all part of the shutdown planning.

[John Babcock, VP and Equity Research Analyst at Bank of America Securities]

Okay, great. Thanks again.

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

Next question, please.

[Operator]

We have your next question from the line of Mark Wilde from Bank of Montreal. Your line is open.

[Mark Wilde, Managing Director at BMO Capital Markets]

Thanks. Good morning, Mark. Good morning, Tom. Good morning, Bob.

[Thomas Hassfurther, EVP of Corrugated Products at Packaging Corporation of America]

Morning.

[Robert Mundy, EVP and CFO at Packaging Corporation of America]

Morning, Mark.

[Mark Wilde, Managing Director at BMO Capital Markets]

Mark, just to start out, it seems like there's an awful lot of new investment in corrugating capacity, including new wider corrugators kind of coming into the industry because we've been very tight for box capacity. What impact is this having on mills and machine efficiency, if any?

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

Well, you know, speaking for us, it's really not a factor. We've continued to invest in our own box plants over at least half a dozen years now. We've added new corrugators. You know, there are certain optimal size corrugators that we prefer. Some, a few have gone to the very large 130-inch type corrugators. Again, there's, you know, certain optimal levels. I don't think there's a real strong relationship to mill efficiency and corrugator size necessarily. Tom, you wanna add a little color to that?

[Thomas Hassfurther, EVP of Corrugated Products at Packaging Corporation of America]

Well, I would just say that if you've got some narrow machines, you know, that can create some issues relative to the wider corrugators. That's that to me would be the largest impact you probably see in the mills is just some scheduling issues on narrow machines.

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

From the old machines?

[Thomas Hassfurther, EVP of Corrugated Products at Packaging Corporation of America]

Yeah.

[Mark Wilde, Managing Director at BMO Capital Markets]

Okay, Tom, I'm curious, you know, it seems like over the last 18 months, we've been getting more reports about sort of subcontracting out of corrugated volumes during the pandemic. I think this is because of strong demand and the labor shortages. Have you guys seen any impact from this in your system? Have you had to subcontract out more?

[Thomas Hassfurther, EVP of Corrugated Products at Packaging Corporation of America]

I think, Mark, we have kind of a unique system from the standpoint of we have a lot of corrugated plants, and we have a lot of sheet plants. I think in terms of flexibility, sometimes we have a little bit more than some of our competitors might. That's where I see a lot of this subcontracting, as you call it, is probably more in the independent sheet network, as opposed to anywhere else. Like I said, you know, we're able to handle that type of business. For us, no, you know, we're cutting up everything, all our demand internally.

[Mark Wilde, Managing Director at BMO Capital Markets]

Okay, that's helpful. Finally, Mark, I wondered if you could give us just an updated timeline and ultimate capacity on the conversion of the two machines at Jackson.

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

Well, the primary emphasis at Jackson is the number three machine. As we'd called out earlier this year, you know, we pushed that outage off to the October period because of supply chain issues. When that last phase is completed a year from now, we anticipate that the Jackson number three machine should have a 700,000 ton a year capacity built into it. Right now, the number one machine, we're not planning on any significant upgrades, you know, at this time. We've got studies done, as you would imagine. That would be an opportunity for the future if we choose to move in that direction. You know, we will have a good opportunity to absorb the full production off number three machine through later next year and into 2024.

[Mark Wilde, Managing Director at BMO Capital Markets]

Yeah. What would the capacity at number one be without the upgrade? You know, potentially, what could that go to if you put some capital into it, just ballpark terms?

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

You know, today, if you think about number one machine at Jackson with no capital investment, it's somewhere under 25,000 tons a year type of run rate, with the basis weights we're running. Which is a pretty good place to be considering we haven't invested any capital in them.

[Mark Wilde, Managing Director at BMO Capital Markets]

Okay, very good. I'll turn it over.

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

It's like any other machine we've talked about over the decades. It's all a matter of capital. How much capital do you wanna spend for how much capacity? Because once you reach a certain critical point, you really get into diminishing returns, because now you're getting into the bigger pieces of capital required for back-end infrastructure pulping and all of the related pulp capacity requirements. There's certainly an economic analysis that takes place that you quickly reach a peak return and then diminish.

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

I think where we are with what we're looking at, if you're producing 700,000 tons a year on number three machine and 120,000-140,000 tons a year on number one machine, that's a very good place for Jackson, Alabama to be on a cost and a profit curve.

[Mark Wilde, Managing Director at BMO Capital Markets]

Okay, that's helpful. I'll turn it over, Mark. Thank you.

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

Okay. Next question, please.

[Operator]

Thank you. Our next question comes from the line of Mark Weintraub from Seaport Research. Your line is open.

[Mark Weintraub, Senior Analyst and Head of Business Development at Seaport Research Partners]

Thank you. Congrats on another well-executed quarter. Quick first two follow-ups. One, you mentioned that it normally takes about 90 days to fully implement from board into box. Can we conclude that a portion of the pricing will show up on an average basis in the Q3 as well, that there will be some additional we'll see a lot of it in the Q2, and then we should see some incremental as we average the numbers from quarter to quarter in the Q3?

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

Yeah, Mark, this is Tom. Yeah, that would be a good read in.

[Mark Weintraub, Senior Analyst and Head of Business Development at Seaport Research Partners]

Okay.

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

[crosstalk] I don't have anything else. Yeah, go ahead, Mark.

[Mark Weintraub, Senior Analyst and Head of Business Development at Seaport Research Partners]

Can you give us any sense, if we looked back historically, what percentage might typically show up in that period that would in this case be the Q3?

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

No, it's you know, it's. You know, I think you know, as I said, I mean, these things roll in over a 90-day period. I mean, there are a few accounts that you know, have certain contracts that may go even beyond that. You know, for the most part, it's the 90-day period. You know, we've indicated that there's some you know, in March and that the bulk will be in the Q2. Yeah, there might be a little rollover into the Q3. That's the only guidance I can give you.

[Mark Weintraub, Senior Analyst and Head of Business Development at Seaport Research Partners]

Okay. Just a little, though. Okay. Thank you. You mentioned the Jackson machine going to 700. Is it about 500,000 now? What's the production capacity currently at Jackson?

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

You're in that, you know, probably 440,000 tons a year, 450,000 tons a year on that machine. It just depends on the grade mix we're running. 125,000 tons, you know, if you look at last year, you know, running the machine for one quarter, we produced 459,000 tons for the year. For the Q1, we just produced 136,000 tons. You know, you're talking about a full year run rate, if we continue to run at this pace, you're, you know, somewhere 550,000 tons for the year expected out of Jackson.

[Mark Weintraub, Senior Analyst and Head of Business Development at Seaport Research Partners]

Okay. Thank you. Lastly, you mentioned the packaging demand looking good into the Q2. Can you update us on what your bookings were through the first part of April?

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

Yeah. So far in April, we're up 3.5%, you know. You know, keep in mind, though, that last April, we were up 12%. This is, you know, a big jump on top of last April. Demand still remains very good.

[Mark Weintraub, Senior Analyst and Head of Business Development at Seaport Research Partners]

I appreciate all the color. Thank you.

[Operator]

We have your next question from the line of Phil Ng from Jefferies. Your line is open. Phil Ng, your line is open. Your next question is from the line of Anthony Pettinari from Citigroup. Your line is open.

[Anthony Pettinari, Research Analyst at Citigroup]

Good morning.

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

Morning, Anthony.

[Anthony Pettinari, Research Analyst at Citigroup]

Mark, can you maybe talk a little bit more about inventory levels in terms of, you know, where you are versus, you know, where you'd like to be and maybe potential timeline for getting there? You know, given supply chain constraints, I mean, do you think just structurally you might hold a higher level of inventory than in the pre-pandemic period? I guess, finally, anything that your customers have said about their inventories that's maybe worsened or gotten better or any kind of read from them?

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

You know, as we've called out, we're still below where we would want to be. We're still below our historical, you know, target levels. A lot of it obviously has to do with the pandemic-related supply chain, transportation matters. You know, we're into the heavy shutdown period for the year. As we come out of that, things generally improve. I think also part of your question, we would anticipate for the time being, trying to hold a higher level than we had historically held prior to the pandemic. With business volume continuing to grow at the rate it's growing, and logistics, supply chain issues, railroad trucking doing what they've been doing, it's very difficult to build to the necessary inventory levels.

[Anthony Pettinari, Research Analyst at Citigroup]

Okay. That's helpful. Just on the, you know, very strong demand that you've seen, is there any finer point you'd put on, you know, customer groups or end markets that are seeing, you know, especially stronger demand or maybe some demand that's softening a little bit? Just broadly, I mean, are your local accounts, are they maybe outperforming national accounts? Or just any color you can give on, you know, what has been extremely strong demand. Seems like it's continuing to April.

[Thomas Hassfurther, EVP of Corrugated Products at Packaging Corporation of America]

Anthony, this is Tom. I'll handle the demand piece. You know, demand is, as I said, very strong. You know, I think representative of some of that strength is if you just look at our top 50 accounts in the Q1, they were up 7% on average. Now, that includes some that were up double-digits, and it includes some that were down slightly, but depending on the business that they're in. If you just look kind of broadly across just, like I said, those 50 accounts, you see that they're in lots of different businesses, and demand remains very strong across all of those businesses.

[Thomas Hassfurther, EVP of Corrugated Products at Packaging Corporation of America]

Relative to local versus national, I mean, you know, you've got the puts and the takes, you know, as I just talked about. Generally speaking, I think that the larger accounts have a little bit more of an ability to work through some of the issues that are going on, perhaps more so than some of the smaller accounts. Again, it's everybody says they can grow a lot more than what they're currently able to grow. They're just held up by, you know, all these supply chain issues primarily, and the labor issues that we've talked about in the past.

[Anthony Pettinari, Research Analyst at Citigroup]

Okay. That, that's great color. I'll turn it over.

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

Thank you. Next question, please.

[Operator]

We have your next question from Cleve Rueckert from UBS. Your line is open.

[Cleve Rueckert, Executive Director at UBS]

Great. Thanks, everybody, for taking my questions. Morning.

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

Morning.

[Cleve Rueckert, Executive Director at UBS]

I don't wanna beat a dead horse, but just to follow up quickly on demand. I mean, PCA has done, I mean, frankly, a very impressive job of taking market share in this business over the last 12-18 months, call it. Do you have a sense of, you know, whether, you know, the growth you're seeing is like end demand market growth, or, you know, are you just continuing to execute well and take market share?

[Thomas Hassfurther, EVP of Corrugated Products at Packaging Corporation of America]

I would say that you know our long-term strategy and I just mentioned it in the commentary too is to really you know spend a lot of time making sure we align with the right kinda customers, and we've been doing that for decades. You know the great majority of our growth comes from our existing accounts and their ability to grow and our ability to help them grow in whatever way we possibly can. You know that's the majority of where PCA's growth comes from. We've demonstrated that not just in the recent past, but certainly over the long term.

[Cleve Rueckert, Executive Director at UBS]

Okay. That's clear. You know, just a couple of quick follow-ups. You know, first, I wanna follow up on John's question about freight and trucking. You know, we're seeing the same things about spot pricing, but, you know, we've also heard the, you know, some of the, you know, logistics is moving out of the spot market and into the contract market. I'd just be curious to know if you're changing your strategy at all, you know, especially as it relates to the trucking market.

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

No. You know, we're not necessarily changing strategy. We're taking advantage of some of the availability improving, but there's no major change in strategy. Tom, you wanna add anything?

[Thomas Hassfurther, EVP of Corrugated Products at Packaging Corporation of America]

No. We've been under contracts for the most part, and we don't use that much spot, tell you the truth. Yeah.

[Cleve Rueckert, Executive Director at UBS]

Yeah. Okay. That's clear. You know, just on labor productivity, I think we heard pretty broadly last quarter that labor, especially in the box system, was kind of a constraint to production and constrained productivity. I mean, you guys obviously burned inventory this quarter, but I'd just be curious to know if that's easing at all or, you know, if there's any sort of bottleneck on the labor side that's holding you back on the productivity side.

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

Yeah. Again, keep in mind, if you think about commentary we've made over the last year with our capital investment in the last few years, we've been able to make significant improvements in the productivity in our box plants and continue to, you know, grow our capability in terms of the productivity per unit man-hour employed. But that being said, with the labor market there's still an incredible amount of stress on the labor pool in the converting side and the mill side. Tom, why don't you add a little color to the converting side?

[Thomas Hassfurther, EVP of Corrugated Products at Packaging Corporation of America]

Yeah, there's no question. I mean, our labor situation improved as a result of, you know, the COVID, especially the Omicron variant, you know, going down some. That was a help to our labor situation. On the other hand, trying to hire new people and replace retirees, et cetera, is still a bit of a challenge and will remain so. If you just look at any of the statistics and, you know, the eight million jobs that are sitting there open, the highest labor participation rate in decades, we've got certainly, I think everybody in any industry would attest to the fact that labor is a real challenge.

[Cleve Rueckert, Executive Director at UBS]

That is all very clear. Thanks for answering the questions. I appreciate you guys.

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

Okay. Next question, please.

[Operator]

We have your next question from the line of Mark Wilde from Bank of Montreal. Your line is open.

[Mark Wilde, Managing Director at BMO Capital Markets]

Thanks. I've got a couple of follow-ups. One, is it possible for you to just help us differentiate kind of the level of inflation you're seeing at the mill level versus what you're seeing at the converting level? It does seem like converting plants are seeing more cost pressure than I've ever seen in my career between, you know, labor, starches, pallets, you know, energy, other issues.

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

Yeah, I think again, it's relative, Mark. Across the board, you'd have to, you know, understand that everything is under tremendous inflationary pressure, you know. What you just said is correct. Tom, you wanna go ahead and add some detail to that?

[Thomas Hassfurther, EVP of Corrugated Products at Packaging Corporation of America]

Well, I'm just gonna agree wholeheartedly with you, Mark.

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

Yeah.

[Thomas Hassfurther, EVP of Corrugated Products at Packaging Corporation of America]

I've never seen anything like the across-the-board inflation we're dealing with in box plants. You know, we can talk about some of the big numbers, transportation, those sorts of things, but when you start talking about all the things you just mentioned, the labor, the starch, the pallets, the ink, the dyes, any equipment repairs, any of those sorts of things, it's just. These are numbers that I've never seen before, upwards of as much as 200% in some cases.

[Mark Wilde, Managing Director at BMO Capital Markets]

Okay. Mark, the other question I had is, you know, you've created a lot of incremental benefits by taking advantage of conversion opportunities at DeRidder, at Wallula, now at Jackson. Is there anything at International Falls that would prevent you from doing the same kind of thing there at some point in time?

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

No. As a matter of fact, the International Falls is another example of a mill that, if the market dictated, we could take advantage of in a very, very good way, as far as paper market and then how that plays into our growth in our corrugated products business. Again, as you've heard us talk about, you know, we're always studying and planning and looking at opportunities, and we've got the plans put in the file on what we'd wanna do someday if the market conditions were such that it dictated we needed to make a decision about International Falls. But keep in mind that the big machine at International Falls, the I1 machine is, quite frankly, a better version of what we have at Jackson on J3.

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

They were both essentially sister machines installed at the similar timeframe, you know, a few decades ago. They're you know tremendous capability. The mill infrastructure at I Falls has tremendous capability to support conversion. Again, it's all about box demand versus paper demand and profitability. We have that opportunity. You know, yes, I Falls is another one of the opportunities that's sitting there that could be taken advantage of someday.

[Mark Wilde, Managing Director at BMO Capital Markets]

Okay. Would it just be fair to assume, Mark, given that it's primarily a hardwood mill right now, that, you know, you'd be more likely to take that toward corrugating medium rather than linerboard? Or is that not a good assumption?

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

That's a bad assumption.

[Mark Wilde, Managing Director at BMO Capital Markets]

Okay. Good enough. Thanks.

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

Yeah. Next question, please.

[Operator]

Mr. Kowlzan, I'm not seeing any more questions. Do you have any closing comments?

[Mark Kowlzan, Chairman and CEO at Packaging Corporation of America]

Again, thanks, everybody, for joining us today on the call, and we look forward to talking with you at the latter part of July. Have a good day, everybody. Thanks.

Participants

Executives

• Mark Kowlzan, Chairman and CEO
• Robert Mundy, EVP and CFO
• Thomas Hassfurther, EVP of Corrugated Products

Analysts

• Anthony Pettinari, Research Analyst at Citigroup
• Cleve Rueckert, Executive Director at UBS
• John Babcock, VP and Equity Research Analyst at Bank of America Securities
• Mark Weintraub, Senior Analyst and Head of Business Development at Seaport Research Partners
• Mark Wilde, Managing Director at BMO Capital Markets