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spk09: Thank you, Holly.
spk12: And good morning, everyone, and thank you for joining us today. I'm Mark Holzan, Chairman and CEO of Packaging Corporation of America, and with me on the call today is Tom Hasfurther, Chief Executive Vice President who runs the packaging business, and Bob Munday, our Chief Financial Officer. I'll begin the call with an overview of our fourth quarter and full year results, and then turn the call over to Tom and Bob who'll provide more details. I'll then wrap things up, and we'll be glad to take questions. Yesterday we reported fourth quarter 2020 net income of $124 million or $1.30 per share. Excluding the special items, fourth quarter 2020 net income was $127 million or $1.33 per share compared to the fourth quarter of 2019's net income of $163 million or $1.71 per share. Fourth quarter net sales were $1.7 billion in both 2020 and 2019. Total company EBITDA for the fourth quarter excluding special items was $293 million in 2020 and $335 million in 2019. Fourth quarter net income included special items of $3 million primarily for facilities closure and restructuring costs. In addition, we also reported full-year 2020 earnings excluding special items of $550 million, or $5.78 per share, compared to 2019 earnings excluding special items of $726 million, or $7.65 per share. Net sales were $6.7 billion in 2020 and $7 billion in 2019. Excluding the special items, total company EBITDA in 2020 was $1.23 billion compared to $1.45 billion in 2019. Details of the special items for both the fourth quarter and full year 2020 and 2019 were included in the schedules that accompanied our earnings press release. Excluding special items, the 38 cents per share decrease in fourth quarter 2020 earnings compared to the fourth quarter of 2019 was driven primarily by lower prices and mix in our packaging segment of 30 cents, the paper segment five cents, lower volumes in our paper segment of 27 cents, and higher scheduled maintenance outage costs of eight cents. High demand for trucks due to low inventories along with driver shortages and rail rate increases drove higher freight expenses of seven cents and our tax rate was five cents per share higher, primarily due to some of the benefits we had in 2019 that were not repeated in 2020. These items were partially offset by higher volumes in our packaging segment of 40 cents per share and excellent management of costs during the quarter, which resulted in lower operating costs of one cent and lower other costs of three cents per share. Looking at the packaging business, EBITDA, excluding special items in the fourth quarter of 2020 of $303 million with sales of $1.54 billion resulted in a margin of 20% versus last year's EBITDA of $303 million and sales of $1.46 billion or a 21% margin. For the full year 2020 packaging segment EBITDA excluding special items was $1.2 billion with sales of $5.9 billion or 21% margin compared to full year 2019 EBITDA of 1.3 billion with sales of $5.9 billion or 22% margin. Demand in our packaging segment remained very strong as sales volumes in both the container board mills and the corrugated products plants set all-time records. Although we were able to replenish some inventory during the quarter by postponing a large discretionary outage at the Derrida Mill and utilizing the Jackson Mill for additional containerboard production, we again ended the period with inventory levels lower than planned and at a new low from a weeks of supply standpoint due to much stronger than expected demand. As we mentioned on last quarter's call, during the fourth quarter, we did begin producing high performance virgin liner board on the number three machine at Jackson, Alabama, to help meet the continued strong demand from our box plant customers and also to build some much needed inventory prior to the year end. The machine's capabilities met our expectations for the quarter, producing excellent quality, lightweight, high performance grades for the months of November and December. Although, as we said previously, these tons are currently at a very high cost, we were able to refine our previous studies and assumptions in order to more accurately estimate the future capital investment and process changes required in a phased approach to fully utilize the potential of the mill to produce container board at an optimal cost and quality. In order for us to address our strategic integrated container board supply needs capable of providing the necessary runway to grow our downstream box plant demand, this analysis, along with other options we've been evaluating, will be reviewed by the Board of Directors in our February meeting. We'll then be able to discuss this further with you. I'll now turn it over to Tom, who'll provide more details on container board sales and the corrugated business.
spk11: Thanks, Mark. As Mark mentioned, our corrugated products plants established new all-time quarterly records for total box shipments up 9.9% compared to last year's fourth quarter, as well as shipments per day up 11.7% compared to last year. Said another way, although there were three less shipping days this quarter compared to the third quarter, our total fourth quarter shipments exceeded the third quarter by 2.2%. For the full year, annual corrugated shipment records were set as well, both in total and per day, up 5.8% and 5.4% respectively, with one more shipping day compared to 2019. Outside sales volume of container board was 16,000 tons below last year's fourth quarter as we ran our container board system to supply the record needs of our box plants. Domestic container board and corrugated products prices and mixed together were 31 cents per share lower than the fourth quarter of 2019 and down 11 cents per share versus the third quarter of 2020 primarily due to a less rich mix as the graphics and point of purchase display business as well as the produce business in the Pacific Northwest tails off during this period. Export container board prices were a penny per share above both the fourth quarter of 2019 as well as the third quarter of 2020. As expected, late in the quarter, we began to see the initial benefit of our recently announced packaging segment price increases. While we don't comment on forward pricing specifics, we would expect to realize the vast majority of the increases during the first quarter of 2021. I'll now turn it back to Mark. Thanks, Tom.
spk12: Looking at the paper segment, EBITDA excluding special items in the fourth quarter was $10 million with sales of $156 million or 6% margin compared to fourth quarter 2019 EBITDA of $53 million in sales of $244 million or a 22% margin. For the full year 2020, Paper segment EBITDA excluding special items was $73 million with sales of $675 million or an 11 percent margin compared to the full year 2019 EBITDA of $213 million with sales of $964 million or a 22 percent margin. Market conditions in the paper segment continued to be challenged due to the nationwide responses to help control the spread of the pandemic. As expected, sales volume was below seasonally stronger third quarter levels and over 30% below the fourth quarter of 2019. As mentioned previously with the scheduled outage at our International Falls Mill, the Jackson Mill was restarted on white paper in October and produced both paper and container board during the fourth quarter. We'll continue to assess our outlook for paper demand and optimal inventory levels and we'll run our paper system accordingly. Average paper prices and mix were 1% below the third quarter of 2020 and approximately 3% below the fourth quarter of 2019. I'll now turn it over to Bob.
spk15: Thanks, Mark. For the fourth quarter, we generated cash from operations of $271 million and free cash flow of $103 million. The primary uses of cash during the quarter included capital expenditures of $168 million, Common stock dividends totaled $75 million, $51 million for federal and state income tax payments, and net interest payments of $40 million. We ended the year with $975 million of cash on hand, or just over $1.1 billion, including marketable securities. Our liquidity at December 31st was just under $1.5 billion. For the full year 2020, cash from operations was $1.03 billion. We had capital spending of $421 million. Free cash flow was $612 million. Our final recurring effective tax rate for 2020 was 25%, and our final reported cash tax rate was 18%. Regarding full year estimates of certain key items for the upcoming year, We expect total capital expenditures to be between $500 million to $525 million, which excludes any potential capital spending related to the Jackson conversion, since that is still being evaluated, as Mark indicated earlier. DDNA is expected to be approximately $407 million. Pension and post-retirement benefit expense of approximately $2 million, which is net of a non-operating pension benefit of almost $20 million primarily due to our pension asset performance in 2020. We also expect to make cash pension and post-retirement benefit plan contributions of $52 million. Based on the recent 27% increase to our dividend, we expect dividend payments for the year of $380 million. Our full-year interest expense in 2021 is expected to be approximately $95 million, and net cash interest payments should be about $93 million. The estimate for our 2021 combined federal and state cash tax rate is about 20.5%, and for a book effective tax rate, approximately 25%. Currently, planned annual maintenance outages at our mills in 2021 will result in approximately 81,000 less tons of container board production compared to 2020. The annual earnings impact of these outages, including lost volume, direct costs, and amortized repair costs, is expected to be 90 cents per share compared to the 65 cents per share we had in 2020. The current estimated impact by quarter in 2021 is 10 cents per share in the first quarter 25 cents in the second, 13 cents in the third quarter, and 42 cents per share in the fourth. I'll now turn it back over to Mark.
spk12: Thank you, Bob. As they've done through this pandemic, our employees demonstrated tremendous resiliency to overcome adversity in both their personal and work lives to deliver significant accomplishments throughout the company. not the least of which was running our manufacturing and office locations safely during these times of constant change and distraction. Without question, we experienced difficulties and unique challenges during the year. However, our employees never lost the resolve to succeed. Our manufacturing and sales organizations continue to successfully adapt to the needs of our customers during this period of unprecedented demand in our packaging business, and also effectively manage the market challenges in our paper business brought on by the pandemic, as well as working through the impact of multiple hurricanes. Our engineering and technology organization has stayed on track with the key capital projects and process improvements for our box plants and mills, and our corporate staff groups found innovative solutions for remote working conditions to ensure we continue to manage the company effectively. as well as perform all of the necessary administrative activities that are necessary for our employees or are required as a public company. I'm very proud of our accomplishments and the strong partnerships we've built with our customers and suppliers over the many years. Looking ahead as we move from the fourth into the first quarter, our packaging segment demand should remain strong with shipments exceeding those of last year's record first quarter. This will require us to continue producing container board at our Jackson Mill in addition to an appropriate amount of white paper to maintain optimal inventory levels for servicing the paper customers. As Tom mentioned, we expect to realize the majority of our recently announced packaging segment price increases during the first quarter, and we expect average export prices to move higher as well. However, Higher freight costs are expected to continue, and labor costs will be higher with annual wage inflation and timing-related increases to fringes and benefits as we start the new year. Seasonally colder weather will increase energy and wood costs, and we also expect higher prices for recycled fiber. Finally, scheduled outage expenses should be lower, although inflation-related increases with our operating supplies and repair costs are expected to offset much of that benefit. Shelter in place and lockdown conditions are constantly changing across the country. And with a new federal administration in place, we expect that guidelines and requirements will continue to evolve. There continues to be numerous events and actions that could significantly impact our expectations and assumptions for the upcoming quarter in both our packaging and paper segments. This is true not only for the operation of our facilities, but also for the needs of our customers and the availability of services and products we rely on from our suppliers. As a result, we are not able to appropriately quantify our guidance for the first quarter. 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. These 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 our annual report on Form 10-K on file with the SEC. The actual results could differ materially from those expressed in the forward-looking statements. And with that, Holly, I'd like to open up the call to questions, please.
spk09: Thank you. Once again, if you would like to ask a question, please press star then one on your telephone keypad. And our first question is going to come from the line of George Stavos with Bank of America Securities.
spk06: George Stavos Hi, everyone. Good morning. Hope you're doing well. Thanks for taking my question. I guess the first question I had regarding Jacksonville and the container board that you produced in the fourth quarter. I was wondering if you could give us any kind of additional qualitative or quantitative commentary on the effect in the quarter in terms of additional cost. I know it might be sensitive, but thought you might be able to cover at least a little bit of additional detail there.
spk12: You know, we're not going to give you the exact cost. We called it out as very, very high cost production, as you can imagine, without spending the capital on the mills. that you would normally spend on a conversion that would help you with the pulp yield, as an example, and various features on the paper machine to improve drying capability. You know, you're limited in productivity and also, again, fiber yield. So the costs obviously are the highest in our system, but nevertheless, the machine exceeded our expectations in terms of its productivity, and we're extremely pleased during the quarter the machine accomplished what we needed, and that was providing our box plant system that needed tons to continue supplying the box demand for the quarter and try to build a little inventory. Again, we're extremely pleased. The effort also enabled us to fully understand what we believed would be an appropriate phased approach to consider a conversion of the mill to container board in much the same way we looked at the Derrida Mill and the Wallula Mill. So we'll be going forward with a discussion with the Board of Directors in February on our different options and alternatives on how we want to approach that. But we're very pleased. Again, the machine has performed quite well. And as I also called out in October, that machine is just an outstanding paper machine. And the mill itself has a lot of great opportunity to go forward Bob, you want to add anything?
spk15: No, I'll just say, George, that, you know, from reading, I guess, some of the write-ups that have come out last night and so forth, that, you know, the impact from Jackson is probably what drove that difference that people were noticing in the fourth quarter relative to the cost side on the packaging segment.
spk06: Right. That makes sense. Next question I want to hit on is on costs. to the extent that you can give us a little bit of additional directional guidance. And then my last question will be on kind of what volume you're seeing early in the quarter. So on the items that you could perhaps have some line of sight on, and if we compare it to the year-on-year impact in the fourth quarter, what would you say, well, we have maintenance outages, but on freight and on energy and any other costs that you, again, could talk to, should be the direction versus the fourth quarter year-on-year change when we look at first quarter. So that's question number one. And question number two, Tom, if you can talk about your early shipments and bookings, that would be great. Thank you, guys.
spk15: Yeah, George, I'd say that, you know, just as we look from the fourth to the first, similar to, you know, the comments that Mark made, you know, freight costs, we expect those to stay high and actually move up a bit more and as well as OCC costs. Recycled fiber prices are moving up. Certainly, as we reset a new year, our fringes and benefits on our labor costs as well as any increases in wage rates, that will be an impact as we move from the fourth to the first. And then also on a lot of outside services and material supplies, things of that nature as well. you know, as a headwind as well. But, you know, to your point, you know, outages, maintenance outages will be favorable moving as we move into the first quarter. Of course, the benefits will be on the, as Tom mentioned, the price realization that we got a small piece of that in the fourth, but we expect, you know, the vast majority to come in the first quarter.
spk11: That's it. And George, just Tom, I'll comment on the volume. It remains incredibly strong through 16 days. Our billings are up just slightly over 10%, and our bookings are well north of that. So business remains very robust. I'll also just add on the cost side, you know, with this dramatic increase in volume and shuffling business between plants and having plants cover for each other and things like that, that obviously drives our costs up as well, especially in the area of freight.
spk12: Understood. Thank you, guys. I'll turn it over. Thank you. Next question, please.
spk09: Thank you. Our next question is going to come from the line of Mark Wilde with Bank of Montreal.
spk04: Morning, Mark. Morning, Tom. Morning, Bob. Morning. Morning. I wondered, Mark, just on Jackson, two questions. First, can you give us some sense of, you know, differences between what you might have to do at Jackson versus what you did at DeRidder and Wallula? And then maybe some sense of what other options might be out there for you beyond Jackson.
spk12: Yeah. You know, as you could imagine... And let's go back to things we've said for years and years. You can convert any mill to make anything, depending on how much capital you're willing to spend on that conversion. That being said, if you look at a mill like DeRidder and a mill like Wallula, they're all unique. They have their strengths and weaknesses that you have to address with capital. Jackson's no different. What you would be typically looking at is in the pulp mill, hot stock refining, defiberizing, various pumping capabilities that would allow you to raise kappa on the paper machine itself with stock approach, additional refining capabilities, and just mass throughput capabilities with the running container board versus a lightweight fiber. So then you're looking at head box dynamics, drainage formation in terms of a former, and then pressing and drying. and then winder modifications and roll handling. So there's a comprehensive checklist that you have to go through in doing your analysis. But those are the type of things you would look at and those are the items that we now have a really good understanding of the capability and the limitations. So it's helped us refine our expected scope But nevertheless, you're talking about a project at a minimum that's in the hundreds of millions of dollars to convert a Jackson Mill and do it the way PCA would do a conversion. But it would be a good project. And so we have other alternatives, obviously, we're looking at. I don't want to get into those. You can imagine they include everything from from further investments in existing assets to looking at other mills and mill opportunities. So that hasn't changed for years now. So, again, that discussion will be a discussion we have with the board in February.
spk04: Okay, Mark, just if I could uncheck something. That's a newer machine than either Derrida or Walulez, if I'm not wrong. And then also, would there be an option – to actually do something a little different at Jackson, like make white top. I don't think you produce any white top. The market seems to be moving in that direction.
spk12: The machine has the potential to do that. The machine's an extremely modern machine, you know, approximately 1990 vintage machine. It was one of the last big, big machines built during that period of time, 385 inches wide, high speed. You know, we, we, Taking care of it, as you can imagine, it's a really great asset. And that being said, we understand what we would do. As it differs, it's a much better quality machine than what we had at DeRidder and what we had at Wallula in terms of its capability. And so it does provide us a long-term opportunity Again, depending on the scope of work we choose to go forward with right now to become one of our premier machines in the future and also addressing the cost of the production. So we have that opportunity to spend capital and then, as we've done at DeRidder and Willula, provide the necessary container board into our box plant system as needed. Okay. All right.
spk04: And then just finally, Mark, with OCC going up, can you just remind us, if we factor in that OCC system out at Walla Walla, what's your net purchase of OCC? If we exclude the stuff you transfer from your own box plants, how much OCC are you buying right now on the open market on an annual basis?
spk12: I mean, I can't give you that right now. We'll have to get back to you after the call. But probably net around 15% of our total total fiber base into our mills.
spk04: Okay, all right, that's helpful.
spk12: I'll turn it over. I don't want to throw a tonnage purchase number at you, and we'll get that exact number when we talk with you later. Okay, sounds good. We're somewhere around 15% of total fiber furnish.
spk09: Thank you. Our next question will come from the line of Mark Connelly with Stevens.
spk14: Thanks. Mark, we're hearing from a range of companies outside of this industry about operating and logistics problems, really not transportation, that are running full and delivering on time more challenging, especially in the Midwest. I'm curious if you're seeing that from your customer base yet. Most of those comments started to happen in mid-November, and so I wonder if the impact is really more a whole 1Q thing.
spk12: Well, as the positivity rate in the COVID pandemic during that holiday period of November and December was spiking throughout various regions, and the demand was at all-time records from the container board mills to the box plants to the box customers. You can only imagine that when you're a carrier, whether it's a trucking carrier or a rail carrier, And you now have this unprecedented demand along with your workforce that is being challenged with this pandemic. Uh, a direct example of that is at any given time during those few months, uh, we had upwards of, you know, a hundred people in our mill system that, that were out either quarantining, uh, or, or positive and the same thing in the box plan. So it was a challenge and we saw that through the logistics chain. on how our customers were dealing with this and how our carriers were dealing with this and their own workforce capability. And so it was the human factor and the rolling stock factor in terms of trucks and rail in order to move the goods, like say, to meet the unprecedented demand. And as Tom said, in many cases, we were moving product plant to plant and plants were cooperating with one another. So it was a very challenging time in that regard.
spk14: Okay. Mark, you've said in the past that you might have as many as a dozen box plant de-bottlenecking or other projects going on at any one time. I'm curious whether you've shifted that sort of pace and resources whether it's shifted either in the amount of effort or whether you're shifting your priorities to move closer to e-commerce or some other part of your customer base. Has there been a meaningful change in the way you're approaching box plant capacity?
spk12: Tom, I'll let you go ahead and talk about that.
spk11: No, we continue to do our projects on schedule, on time for the most part. providing our suppliers, you know, can give us what we need. We've got a great technology and engineering group that are executing at a very high level. And obviously, you know, we've talked many, many times about the fact that we build our business around our customers and their demands, and we'll continue to do so, Mark. Thank you. Next question, please.
spk09: Our next question will come from the line of Mark Weintraub with Seaport Global.
spk00: Thank you. Um, I was hoping to get more color on the recent demand strength and the, you know, by category or, or by the drivers as you are seeing them. And then, um, would also love to get your thoughts on, um, what happens to demand, how sustainable it is when the economy, uh, eventually reopens more fully.
spk11: Yeah, Mark, this Tom, I'll handle that. Um, you know, our, uh, Our demand strength is basically across all segments with the exception of food service. Obviously, to no surprise, e-commerce is growing at a faster rate than those other segments, but they're all in growth mode, which is great, which also I think signals very clearly that this demand is strong across the board and sustainable going forward. I would contend that a lot of purchasing habits have changed, probably accelerated by five years or more. And those are expected to remain the same. We're also seeing, obviously, the big trends in people moving away from cities, buying homes. When you buy homes, there's a lot of things that go into those homes that are associated with corrugated boxes. And in addition, you've got this trend moving away from plastics. into paper-related products, which is also very positive going forward. So the demand strength, is it sustainable? I'd say absolutely yes.
spk00: Great. Maybe give us a sense as to how much growth you're seeing, for instance, in e-commerce? Yes.
spk11: Well, we don't typically share our numbers per segment. But as I said, it's obviously significant and it's higher than the other segments. But again, all those segments are growing. And of course, we expect food service to come back as well and is already beginning to as states begin to open.
spk00: Great. And it seems like in the last couple of months, we've seen even a new step up from what was already stepped up. And again, that was evenly broadly across everything, or was it more specified to certain areas?
spk11: No, I'd say, again, that is across the board. And keep in mind also that we're hearing from every one of our customers, their inventories are very low. They have not been able to replenish any inventory as a result of the strong demand on their side.
spk00: And one last one. And do you think Even with this latest step up in demand, they're still not replenishing those inventories? Or do you think that part of this 10% plus type of demand growth that we're seeing might represent some replenishing at this point?
spk11: Some may represent replenishing, but we're hearing from our customers they're still desperate to try to replenish any inventory. That's all I can tell you at this stage. Super. Thank you.
spk12: Next question, please.
spk09: Our next question will come from the line of Adam Josephson, KeyBank.
spk03: Thanks. Good morning, everyone. Mark, one question on morning, Mark. Back to Jackson for a second. What would a conversion of the machine there do to your ability to service your large paper customers? And relatedly, what are your expectations for cut size demand this year? Obviously, the pandemic has had a huge impact last year and will likely continue to for the next several months, I would imagine. So I'm just wondering what your outlook for paper demand and specifically cut size demand is just as we go into this year and how that's affecting your thought process about Jackson as well.
spk12: As you can imagine, the demand is still down at the levels we saw throughout last year, this first quarter. is not much better than what we saw in the fourth quarter. I would expect as the economy finally recovers and you have workplaces starting to come to some new semblance of normalcy and schools fully opening up across the country all the way up to higher education, that at some point over the next year, demand will pick up to a new norm. I don't really know what that new norm will be. I do have to believe that there has been now a permanent demand destruction of some number that people have learned working from home, how they do their business. And so Jackson currently affords us the opportunity to short term take advantage of the asset and make, again, a high cost very good quality container board, but at the same time you would have to assume that our box demand grows and our paper demand destruction remains at a certain level that it will be difficult to justify having a very large machine that only is able to fill its orders for a portion of the time in the future years. So we're Looking at that is an opportunity that we have a very strong need for the container board. And as we've always done, we have long-term filled those needs internally rather than going out to the outside market. And even if we wanted to go to the outside market now, there are no tons to be purchased. And so we believe that Jackson ultimately will be a far better asset in the container board side of the business. ultimately. What the timing is, I'm not sure. I'm just thinking over the next couple of years that that timing will play out.
spk03: Yeah, sure. And as you're thinking about the paper business, again, longer term, I know it's really difficult to make forecasts of anything these days, but there's been some permanent destruction, you think. Do you think there's a reason to expect a rebound in cut size demand for the full year or next year? Or do you think that we're just we've established a new lower base and hopefully we hold this base and not go much lower than that.
spk12: Again, I don't know. I just, from my own personal observations and what we see around us, I would have to believe that even post-pandemic, there will be some new lower demand efficiency that businesses and schools and individuals are learning to function with, and that will just continue to play out. So we're in a position that we have the optionality on how we utilize assets, and we're just going to play that optionality out. Again, it's hard for me to start giving you numbers. There's nothing I could base them on.
spk03: Sure, sure, and I fully understand. And just on OCC, your near-term outlook, how much inflation... sequentially are you expecting? And I'm just asking in the context of ocean container availability being exceptionally limited and presumably that having an impact on OCC export volume. So I'm just wondering what's driving your expectation of continued OCC inflation, how sustainable you think that'll be, and the magnitude of the inflation you're expecting sequentially.
spk13: Hey, Bob.
spk15: I'm sorry. Sequentially, it's probably three or four cents as we move into the first quarter based on where we see prices going.
spk03: And just in terms of the drivers of that, just given the lack of availability of containers?
spk12: It's just absolute demand worldwide.
spk11: Yeah, I'll add. Let me add a couple things there, Adam. You know, we've talked... you know, for a long time about the need for fiber around the world. And, you know, we, it took a while to digest, you know, China's exclusion of OCC and moving to other, moving to other fiber. And, you know, as you see, pulp is up dramatically and being shipped over there, as well as liner board being shipped directly over to China as an example. So, You know, they're just gaining their fiber in some other form other than OCC. OCC has then found markets elsewhere around the world. The global outlook is very strong, and we know it will continue to be so. So, you know, as we said, it found its bottom. It's moved up dramatically from that point, and we expect it will move up as well going forward strictly just based on supply and demand. Thanks a lot, Tom. Next question, please.
spk09: And our next question will come from the line of Gabe Haday with Wells Fargo Securities.
spk05: Good morning, Mark, Bob, Tom. Good morning, Gabe. I think the CapEx figure, at least relative to what I was expecting, is a little bit higher. And I was just curious if there were any kind of discrete projects in there that you would like to call out for us. I recognize that there's probably some either preparation work or ongoing maybe projects at Jackson to continue producing container board or swinging between the two grades. But I'm more thinking down on the converting operations. And then there was that Derrida project that you guys had kind of pushed out. So if there's anything you can call out for us, that would be helpful.
spk12: No, you know, there's nothing of significance in terms of anything unique right now besides we've got dozens and dozens of of great projects that we're working on in the box plants. We've got projects that we're addressing in the mills that will address cost and efficiencies. And so it's just an entire category and host of projects, numerous projects in our box plant system that the group is working on. But it's not like building a new Richland box plant that's taking up the bulk of the capital. It's dozens and dozens of, in many cases, new converting equipment installations, modifications, again, mill equipment installations that will address some opportunities we have, which is the good news. These are low-risk, high-return, quick-return type opportunities that we're addressing. Again, things that we're good at doing.
spk05: Thank you, Mark. So to be clear, there's nothing in there for a potential Jackson conversion? Not at this time. Okay. And then maybe, Tom, I know it's difficult sometimes to speak to the competitive landscape, but given what we read on the outside world in terms of new capacity coming in, are there particular – grades or end markets where customers are saying, um, you know, Hey, we'd like you to add capabilities, um, here because you don't necessarily have it. And maybe that's a competitive threat and maybe that plays into what some of Mark's talking about in terms of new converting capabilities. I'm just trying to understand where you guys are best positioned, I guess.
spk11: Well, uh, let, let me, let me kind of, you know, start at the beginning a little bit here, Gabe. Um, You might start with the question of, again, why Jackson and why do what we're doing at Jackson? And as we alluded to earlier, the fact is I can't buy any tons in the open market. We have great volume demand. We have great need. If anything, our customers are concerned that we have enough supply, even as an industry. So consequently, we... We were fortunate to be able to have this great asset, as Mark alluded to, that's not going to produce at its normal rate because of the destruction of demand in the white business. And we were able to convert it. And yes, it's at a high cost, but great quality. It kept us going. It gave us the ability to grow, gave us the ability to satisfy our customers, and was incredibly integral to our ability to continue this growth trend. So, you know, now when it comes to white and some other things, you know, we have trade agreements. We've got some other arrangements where we're in good shape there, so we're not really that concerned about that. But, you know, these, again, what you see, and I think it's important to point out that what's going on, what we observe at least in the marketplace, and, you know, our inability to buy any additional tons, we would have only bought those for a short period of time anyway because we intend to be fully integrated. and supply our own tons. And I would assume others might think the same way. But it's important to note that some of these projects that are continually mentioned out there that are the one-offs, somebody's going to put a mill in with no downstream cut-up. Very difficult to do. I don't know where they get the customer base. Again, I can only speak for ourselves. We're going to supply ourselves. We're not buyers in the open market. So, you know, I'm not – we have to take care of ourselves. I guess that's the point. And you see very few of these one-offs ever come off. I can name one that did, and it's now shut down. So I'm not really concerned about that. We have to take care of ourselves, and we have to figure out our own supply.
spk05: Very much appreciate it.
spk11: Hopefully that gives you a little – hopefully that gives you an answer that you can digest.
spk12: It does. Thanks. All right. Thank you. Next question, please.
spk09: Our next question will come from the line of Neil Kumar, Morgan Stanley.
spk01: Hi, good morning. Um, in terms of a freight, you mentioned it being a seven cents headwind for you year over year and your expectation of it staying pretty elevated. Uh, just can you give us a sense of the magnitude of inflation you're seeing in freight rates year over year? Is it in a low double-digit percent level? And then can you just remind us how your freight expenses is split between trucking versus rail?
spk15: Yeah, Neil, you know, I'd say it's, you know, the year-over-year increase in our costs as we look out, you know, 2021 versus 2020 is, I wouldn't, right now I don't think it's that high. It's certainly, you know, the higher single digits, as a percent, but not into the double digits, at least not what we see right now. And, you know, our split of as far as rail versus truck, you know, roughly it's, you know, 70% the cost, 70% rail, 30% truck, but, you know, but obviously, you know, box plants typically use, you know, trucks to deliver their products and mills are using rail, but that's sort of the breakdown of the cost.
spk11: We are, Neil and Tom, I'd also add that we are a little bit concerned about rail costs going up going forward as a result of this new administration's, you know, taking out the pipeline and being less interested in piping oil, which could lead back to the shortage of boxcars that we had at one time when the rail industry all went to shipping oil. Oil and congestion. Yeah.
spk01: Okay. Great. That's very helpful. And then I just had a couple of questions on the scope of M&A opportunities you would consider, just given that your balance sheet affords you a lot of optionality. Are you largely interested in small bolt-ons or box plants? Or would you be open to something larger? And is there a specific size cutoff? And just given your track record in pursuing paper conversions, the container board, Would you consider opportunities to acquire paper mills for a conversion opportunity, or do you see too many unknown variables in doing that?
spk12: As far as M&A activity, as we've always done, we look at all opportunities, both on small acquisition as well as larger opportunities are always considered and looked at. As far as any other opportunities, again, it just depends on on the specifics. You would always have to consider if you were talking about spending X dollars to convert a current asset as opposed to being able to buy a mill asset from somebody and what's the differential in the ultimate total investment. So that's always a consideration. So I would say that all of the above are always on the table to evaluate and consider. All right, thank you. Thank you. Next question.
spk09: And our next question will come from the line of Anthony Pettinari with Citi.
spk02: Good morning. In white paper with the 30% sequential decline in shipments, you know, you obviously had the conversion at Jackson and the outage at I-Falls. I think you referenced weaker market demand as well. I'm just wondering, of those lower white paper volumes, you know, how much was sort of planned and expected versus maybe unexpected market weakness? Or sort of how did volumes hold up versus maybe what you expected going into the quarter?
spk12: I mean, rounding off, you know, when the pandemic started in the March-April period, when we saw the massive decline, you know, we're down, say, on average 30% for the year. And that's what we saw. going, you know, through the December period. And even as we look at the first quarter now, we're probably in that 25 to 30 percent demand destruction in terms of, you know, our business from where it was a year ago. It's not declining further, but it's not getting better, you know, in any significant manner. Bob?
spk15: Yeah, yeah, Anthony, I'll just add a you know, relative to the quarter, you know, one thing to keep in mind as far as the results in the paper segment, you know, the volumes were, you know, about where we thought they would be. But, you know, one of the things that impacted paper was, you know, our outage costs that we had for the quarter. You know, there's like 10 cents negative impact year over year in paper. You know, packaging not, you know, it was actually a slight positive, I believe, but But that was a big hit on our paper results in the fourth quarter.
spk02: Okay, that's very helpful. And then, Bob, is it possible to quantify or put a finer point on the level of wage inflation and timing increases for fringes of benefit that you see step up, you know, in the new year, either on a percentage basis or maybe sort of relative to what you saw last year?
spk15: Well, you know, right now it's, you know, in that 3% to 4% range is what we see, and Um, and that's, and that's, you know, and that's coming off of actually, as Tom, I think alluded to, you know, especially in the fourth quarter, you know, um, our, um, our labor costs, um, just to run, to, to get the volume out of our box plants and the converting costs and so forth. We had to pay a lot of overtime and we were running really, really hard. And so, you know, our, our wages and what have you in the fourth quarter were, were high and they've been high, you know, they've been like that pretty much the most of the year to, to meet the demand. So, Those percentages I'm giving you are off a year that had very high labor costs to begin with.
spk02: Okay, that's very helpful. And then just one final one, if I could. I think your participation in the export market is very small now. With Jackson, assuming you pursue a larger conversion and understanding this is potentially far off, is that mill close enough to the Gulf Coast that you could potentially export?
spk12: export if you needed to as a safety valve or is that something that's not possible just kind of wandering down the road on export side of jackson let me answer it this way if i were to invest to convert jackson i would not be considering an export opportunity in the savings calculus a conversion at jackson would be fully to supply our own needs and that is how we would look at a conversion. We have no desire to build capacity and then have to move it offshore. Our own capacity will move through our own box plant system.
spk02: Understood. That makes sense. I'll turn it over.
spk12: Okay. Next question, please.
spk09: Our next question will come from the line of Kyle White with Deutsche Bank.
spk08: Hey, good morning. Hope everyone's doing well. Thanks for taking questions. Most of the outages are weighted to the fourth quarter of this year. And just curious if we should kind of read into this at all in terms of how you anticipate demand playing out for the year. Do you anticipate 4Q kind of getting back to those normalized levels, which kind of allows you to have a higher outage that quarter?
spk12: Yeah, I'll let Bob finish this up. But one of the big factors this year, we have the outage that we had planned at the DeRidder mill that was originally going to be executed in the fall of 2020. We postponed that because originally it had been considered in the spring and then we pushed it off. But because of demand, we've now moved that work plus the annual work into the fourth quarter of this year. So the work that will be done at DeRidder will be the normal annual work that has to be done, along with the discretionary opportunity work that we have on the recovery boiler and the number one machine. And so that's why, that's just one factor in why the four-quarter number is higher. Bob, do you want to add some color to that?
spk08: Got it. That was actually going to be my follow-up on DeRiver. I wasn't curious, but I'm curious kind of just following up on this in terms of your visibility on demand and what kind of confidence that you have that this demand that we're seeing right now is sustainable. Obviously, backlogs are up and customers need to restore their inventories at some point, but from an underlying demand standpoint, what kind of confidence and visibility do you have there for the back half of this year?
spk11: I can't. It's hard to predict what the back half of this year is going to be, Kyle, but I would just say that our demand levels will be higher for sure than they were in 2020 throughout the entire year. We're starting out incredibly strong and we're not waiting any mill outage based on supposed demand being less in the fourth quarter than it is in the first quarter. It's very hard to predict, but But everything I'm hearing and all the indicators we get from our customers in the various segments, it's going to be very strong all year.
spk08: All right, perfect. Thank you. Good luck in the air. Thank you. Thanks, Kyle.
spk09: Once again, if you'd like to ask questions, we do. And as a reminder, task a question, star one. And our next question is going to come from the line of Phil Ng with Jefferies.
spk10: Hey, good morning, everyone. Sorry, I got cut off a little bit, so if I'm repeating this question, I apologize in advance. Demand, obviously, very, very strong. Just curious, how extended are your backlogs at this point, and do you expect Inventory to improve sequentially in being able to better service all of your customers in the first quarter?
spk11: You know, we're not going to, we don't get into backlogs. Most of our orders are on a very short lead time, and we're able to meet those demands at the moment. We're very fortunate because we've made some significant investments throughout the years. We've been very consistent doing that, and it allowed us to respond accordingly to this demand. And, you know, as I said before, it's going to remain strong, and I feel very confident we're going to be able to meet all the requirements of our customers. That's helpful, Collar.
spk10: And as the vaccination process ramps up, is that an opportunity for you guys, and do you have any exposure on that front?
spk12: In what terms? Is box supply? Yeah, box supply.
spk10: I would assume that if there's a lot of vaccines being transported through the country, there might be increased usage.
spk11: Yeah, Phil, we're participating in this and proud to do so. It's very important that these vaccines get out, and we're proud to be a part of the packaging side of distributing those vaccines.
spk10: And do you envision that being a pretty meaningful contributor or just part of the ongoing growth story?
spk11: No, it's just a part of the ongoing. It's part of the ongoing, and it's going to have a start and then an end eventually. But it's one of those areas where we take great pride in being able to contribute to hopefully putting an end to this pandemic.
spk10: Got it. That's helpful. And just one last question. You know, your largest customer on paper could be merging with a competitor. Is there a change of control provision in your supply agreement? Any call would be really helpful.
spk12: I know the contract runs through next year. And so I can't, I don't know the details in that regard. I would doubt there's a change of control clause. we can check on that and get back with you. But we're good through the end of next year.
spk10: Okay, that's helpful. And just one last one, and if you're able to share any color. You mentioned, Mark, that if you do ramp up Jackson, it's probably more of a phased approach. And with that process, would you be able to continue to produce board? And could that help your cost profile throughout the year? Thanks a lot, and good luck on the quarter.
spk12: Again, right now, with what we're producing, you know, we have a home for all of these tons in our own system. Now, the bigger opportunity with the capital investment at Jackson over the next, say, 24 months would be to address not only additional incremental productivity off the asset, but also a major cost reduction from the asset. So, in that regard, we will continue to run to demand. If demand dictated that container board was not needed and paper was needed for the time being, we could make paper. So we haven't eliminated the capability of making paper on the machine at this time. It's just that the overwhelming demand for container board far outweighs the opportunities for paper. Got it. Super helpful, guys.
spk10: Thank you.
spk12: Thank you. Any other questions, please?
spk09: And we do have a follow-up question, and that'll come from the line of Mark Wilgie, Bank of Montreal.
spk04: Go ahead, Mark. Just a quick follow-up for Tom. Tom, there were a couple of foreign players that put a lot of capacity into central Indiana. I know that's not too far from where Tim Barr was headquartered. Can you just talk about sort of any impact you might be feeling from all of that new converting capacity?
spk11: Uh, I would just say, Mark, we've had zero impact from that, from that capacity.
spk12: Okay.
spk11: I can only speak for us. Okay.
spk12: Good deal. All right. Operator, I think we're, we're about out of time.
spk09: Yep. Um, Mr. Coleson, I see that there are no more questions. Do you have any closing comments?
spk12: Uh, yes. I just want to thank everybody for joining us today. And, uh, Stay well, be safe, and I look forward to talking with you in the April call. Thank you very much.
spk09: Once again, we'd like to thank you for joining today's Packaging Corporation of America's fourth quarter and full year 2020 earnings results conference call. You may now disconnect.
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