Packaging Corporation of America

Thank you for joining Packaging Corporation of America's second quarter 2021 earnings results conference call. Your host for today 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 will now turn the call over to Mr. Colzan. Please proceed when you're ready.

Thank you, Stephanie. Good morning and thank you for participating in Packaging Corporation of America's second quarter 2021 earnings release conference call. I'm Mark Kolzan, Chairman and CEO of PCA, and with me on the call today is Tom Hassfurther, Executive Vice President who runs the packaging business, and Bob Munday, our Chief Financial Officer. I'll begin the call with an overview of our second quarter results and then turn the call over to Tom and Bob who will provide further details. I'll then wrap things up, and then we'd be glad to take questions. Yesterday, we reported second quarter net income of $207 million, or $2.17 per share. Excluding special items, second quarter 2021 net income was also $207 million, or $2.17 per share, compared to the second quarter 2020 net income of $132 million, or $1.38 per share. Second quarter net sales were $1.9 billion in 2021 and $1.5 billion in 2020. Total company EBITDA for the second quarter excluding special items was $397 million in 2021 and $299 million in 2020. Reported earnings in the second quarter of 2021 included special items expense and income rounding to a negligible impact, while last year's second quarter net income included special items expenses of 79 cents per share related primarily to the impairment of goodwill associated with our paper segment. Details of all special items for the second quarters of 2021 and 2020 were included in the schedules that accompanied our earnings release conference, press release. Excluding special items, the 79 cents per share increase in second quarter 2021 earnings compared to the second quarter of 2020 was driven primarily by higher prices in mix of $1.01 and volume 74 cents in our packaging segment higher volume in our paper segment of $0.03, and lower non-operating pension expense of $0.03. These items were partially offset by higher operating costs of $0.57, primarily due to inflation-related increases in the areas of labor and fringes, repairs, materials and supplies, recycled fiber costs, as well as other indirect and fixed cost areas. We also had inflation related increases in our converting costs, which were higher by five cents per share, while annual outage expenses were up 19 cents per share compared to last year. Freight and logistics expenses were higher by 19 cents per share, driven by historically high load to truck ratios, driver shortages, increases in fuel costs, and a higher mix of spot pricing to keep pace with the box demand. Lastly, depreciation expense was higher by one cent per share and paper segment prices and mix were lower by one cent per share. Looking at our packaging business, EBITDA excluding special items in the second quarter of 2021 of $409 million with sales of $1.7 billion resulted in a margin of 24% versus last year's EBITDA of $313 million and sales of $1.4 billion or a 22% margin. Our mills and plants continue to do an outstanding job of meeting our customer needs while managing through certain material and chemical availability issues, a tight labor market, various freight and logistics challenges, as well as the planned maintenance outages at four of our mills during the second quarter. The mill executed the planned outages extremely well, and with the help of the number three machine at our Jackson, Alabama mill, provided our plants the necessary container board to achieve an all-time record for total box shipments. Although we were able to build some much-needed inventory, due to very high demand, we ended the second quarter below our targeted levels and at a new low for weeks of inventory supply for this time of year, and ahead of expected very busy third and fourth quarters. In the second half of the year, we still anticipate a planned outage at our Jackson, Alabama mill later in the third quarter, as well as a significant planned outage at our DeRidder mill in the fourth quarter. Implementation of the previously announced price increases continues to be executed extremely well by our sales organization, while our engineering and technology organization and the employees at all of our mills and corrugated products plants continue to successfully implement numerous initiatives and projects to reduce cost through efficiency, productivity, and optimization improvements. With inflation-driven cost increases across most all areas of our company, coupled with truck, rail, and barge challenges for both incoming and outgoing products and materials at our facilities, these efforts are absolutely critical to our success. In addition, being a primarily virgin fiber-based producer of container board minimizes the impact of significant increases in recycled fiber costs over the last several quarters. I'll now turn it over to Tom, who will provide more details on container board sales and the corrugated business.

Thank you, Mark. As Mark indicated, container board and corrugated products demand remains very strong across most of all of our end markets. Our plants achieved a new all-time quarterly record for total box shipments as well as a second quarter record for shipments per day, both of which were up 9.6% compared to last year's second quarter. Through the first half of 2021, our box shipment volume is up 9% on a per-day basis versus the industry being up 6.8%. Driven by higher domestic demand, outside sales volume of container board was about 43,000 tons above the second quarter of 2020, but was down slightly versus the first quarter of this year due to lower export shipments, supplying the record requirements of our box plants and the need to position inventory levels ahead of what appears to be a strong second half of the year. We are getting good realization from the implementation of our previously announced price increases across all product lines. Domestic container board and corrugated products prices and mixed together were 92 cents per share above the second quarter of 2020 and up 51 cents per share compared to the first quarter of 2021. Export container board prices were up 9 cents per share versus last year's second quarter and up 4 cents compared to the first quarter of 2021. Finally, I'd like to reemphasize some of what Mark was pointing out regarding the many things we do to help offset inflation and improve our margins beyond just price increases. The benefits from our capital spending strategy and the box plants that we've spoken about over the last few years have been extremely successful and put us in position to serve our customers better than ever before. Our strategy of improving the technology and equipment in our plants and optimizing our footprint through the construction of new facilities as well as closing certain plants to consolidate business with other locations is based upon our customers' needs and demands and improving our capabilities to grow with them. We're seeing this in our volume growth with new and existing customers, operating efficiencies and savings, and cost reductions in several conversion areas throughout our plants. I'll now turn it back to Mark.

Thank you, Tom. Looking at the paper segment, EBITDA excluding special items in the second quarter was $12 million with sales of $142 million or an 8% margin compared to second quarter 2020 EBITDA of $5 million and sales of $123 million or a 4% margin. Although about 1% below second quarter 2020 levels, prices and mix moved higher for the first and into the second quarter of 2021 as we continue to implement our announced price increases. Volume was 17% above last year when pandemic issues caused us to take both machines at the Jackson Alabama mill down for two months during the second quarter, while this year we ran the number one machine at Jackson on paper and the number three machine ran liner board. Now that we have our finished goods inventory at a new optimal level, Sales volume in the second quarter is fairly reflective of what our production capability is as a three-machine paper system. We'll continue to assess our outlook for paper demand and we'll run our paper system accordingly. I'll now turn it over to Bob.

Thanks, Mark. Cash provided by operations for the second quarter was $228 million with free cash flow of $97 million. Primary uses of cash during the quarter included capital expenditures of $131 million, common stock dividends of $95 million, cash taxes of $87 million, and net interest payments of $40 million. We ended the quarter with $972 million of cash on hand, or $1.1 billion including marketable securities. Our liquidity at June 30th was just under $1.5 billion. I'll turn it back to Mark.

Thank you, Bob. As we move from the second to the third quarter in our packaging segment, we expect continued strong demand for container board and corrugated products with one additional day for box shipments. Paper segment volume should be relatively flat, primarily due to the scheduled maintenance outage at the Jackson Mill. We will also continue to implement our previously announced price increases in both our packaging and paper segments. Our annual outage costs will be lower with one outage in the third quarter versus four mill outages in the second quarter. Inflation associated with most of the operating costs as well as freight and logistics expenses is expected to continue. Energy costs will also be impacted due to higher seasonal usage and wood costs in our southern mills will be higher due to wet weather, low inventory and high demand. Considering these items, we expect third-quarter earnings of $2.37 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 today constitute forward-looking statements. The statements were based on current estimates, expectations, and projections of the company and involve inherent risks and uncertainties, including the direction of the economy and those identified as risk factors in our annual report on Form 10-K on file with the SEC. Actual results could differ materially from those expressed in the forward-looking statements. And with that, Stephanie, I'd like to open the call for questions, please.

At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. Your first question comes from George Staffos with Bank of America Securities.

Thanks. Hi, everyone. Good morning. Thanks for the details. I guess maybe to start, Mark and Tom, if you could talk a bit about your early 3Q bookings and shipments. What are you seeing? And a related point, we heard from some in the trade that lack of availability has actually impaired producers, converters, the ability to ship in boxes in 2Q and into 3Q, you called it out as an issue, but is that preventing you from shipping beyond what you reported in the second quarter? Thanks, and I'll have a quick follow-up after that.

Sure, just Tom. I can tell you that going into the third quarter, our bookings and billings are running about 7% ahead of last year. Keep in mind that our comps become much tougher, so it's not as if volume has slowed down at all. It's remained incredibly robust coming right out of the fourth quarter of last year and all the way through this year. I think that's why we felt quite a bit more comfortable about giving some sort of guidance going forward. Also, you asked about some of the lack of supply in the second quarter, maybe bleeding over into the third quarter. You know, we're running lead times that are longer than we're used to and certainly longer than our customers are used to, so the demand remains very high. Trying to get it out the door is an issue more related to transportation at this stage than it is certainly about paper. We're able to take care of our own plants through our system. So that's not the issue for us. It's more transportation, and I think that's reflective of most of the industry.

Okay, thanks, Tom. My second question, if you could talk to it, or third question, really, is I think last quarter, or going into 2021, you had pointed to a sequential drop-off in maintenance numbers. for the third quarter. Just if you could affirm what your maintenance schedule is for this year versus last year, I think the drop off to Q3 should be about 12 cents. And then lastly on cost, you flagged wood costs, I think particularly in the south. Can you talk a little bit about what you're seeing, what kind of headwind that might be for you in the third quarter and fourth quarter? Obviously the weather's been tough and that's usually what drives higher wood costs. Thanks and good luck in the quarter.

George, I'll take the wood cost. Obviously, we've had a very wet period of time throughout the entire Gulf Coastal region up through the southeastern states through the entire winter and spring into the summer months now. And so coupled with the high demand for pulpwood and the logistics issues with the trucking side of the equation, it's basically... put the situation where it is that pulp prices are up dramatically because of those situations. But again, it's more of a weather-related phenomena than anything else. Bob, why don't you go ahead and talk about the outage cost?

Yeah, George, it's about 11 to 12 cents help going to 2Q to 3Q on outages, which is very similar to our wood costs going the other direction in about the same amount.

Thank you very much, guys. Good luck in the quarter.

Okay. Next question, please.

Your next question comes from Mark Wild with Bank of Montreal.

Morning, Mark. Morning, Tom. Morning. Mark, for my first question, I'd like to just kind of step back a little bit. And I know this is a sensitive issue, but I wondered if you could just discuss kind of plans and process around leadership successions. at Packaging Corp.

Yeah, you know, we've talked about this before, and as you could imagine, that's a board-level matter, but we have got the depth and the breadth of the talent across the board that's been identified, and we continue to develop. We're very confident in the talent pool we have, and the board feels the same way that, again, we've got enormous opportunities with the talent across the entire company.

Okay. The second question I had is if you could just walk us through the steps that you might be making as you downsize the footprint in the white paper business to a smaller capacity base. And, you know, whether this involves shifts in your customer base. I think your filings in the past have pointed to two large customers.

Yeah, as you can imagine, without the Jackson number three machine, we've gone ahead and exited some business over the last six months. And now, as you think about that, as a three machine system, we're going to be supplying a smaller marketplace. So we've been able to rationalize that accordingly. But that has shifted us down to a few companies. bigger customers. But nevertheless, the entire market for us has shifted down over the last eight years since we've run the paper business. And so we're very confident that we'll continue to supply into that market and do it in a meaningful manner as we go forward. And so, again... Go ahead, Mark.

Just to find that on white paper, I just was curious, Mark, is it possible... to think about I-falls as a container board mill at some point. I'm just trying to think about the puts and takes. Typically, you know, upper Midwest, a lot of hardwood, you'd only produce medium up there. But I don't even know whether you think from an engineering standpoint that's an option at I-falls over time.

Well, you know, we've said this for the better part of the last decade, that you can convert anything to do anything, but there's a capital cost. And, you know, their puts and takes with transportation, logistics, and then, you know, what is your intent in terms of product mix. Right now, we have a good market for that paper that's coming out of I-Falls. We'll continue to run to that opportunity. We have the Jackson conversion coming on big next year that will continue to supply us with the necessary container board for the next few years. And I would say this. As long as the paper business offers us an opportunity with the International Falls Mill, we'll continue to take advantage of that opportunity. In the future years, if that was not the case, then we'd have to reassess the situation and look at our optionality with that asset. But trust me, you have to believe that we've already done that and we have the opportunities in the files and know what we would do at any given time. So we're pretty confident that we've got a lot of flexibility.

All right. Well, that Boise paper has been the gift that keeps giving, so I'll turn it over. I'll turn it over.

Next question, please.

Your next question comes from Mark Connolly with Stevens.

Thank you. Two things. Just on white paper, will Jackson be all container board in the second half? I'm just sort of curious how these projects affect the ability to run white there.

Now, Jackson will continue to run with the number three machine on container board. And at the present time, you know, our intent is to run number one machine on paper. Okay. So even during the project. Great.

And secondly, you talked in this call and previous calls about box plant, the bottlenecking project. I'm just curious if with all the activity you've got going on right now and all the COVID, are you doing as many of those projects today as normal or more than normal, less than normal?

Yeah, we're extremely pleased with the rate that we've been able to execute these projects. And I'll give you an example. I mean, we did slow down a little bit last year during the 2020 period. We had to become a little more efficient. targeted in what projects required the attention of the various technical organizations just because of the travel restrictions and the concern for people's well-being. But this year, that was ramped up to full activity. And so we're continuing to execute well across the board. But I can give you an example. If you go back over the last three and a half years, we've executed approximately At 62 of these box plants, $850 million worth of capital project activity. Flexo folder gluers, converting equipment, upgrades, major rebuilds, new corrugators, built the two new plants. And so we're doing this all in-house, but the pace is ramped up in 2021 over some of 2020. So we're very pleased with what we're seeing. And so we currently have... a great deal of activity going on at numerous plants nationwide that will continue to provide the benefits that I spoke about and that Tom spoke about. So we're extremely pleased with the opportunities.

Fantastic. Thank you, Mark.

Next question, please.

Your next question comes from Mark Weintraub with Seaport Research.

Thank you. First, it looks like you're getting really rapid and significant pass-through on the board increases into boxes. Can you give us a sense, A, is it true? Are you getting more than full pass-through? Is this the type of environment where you're able to achieve that? Can you give us a read on how much more is there to come in the third quarter? And I just wanted to confirm, Are you including any of the pending August increase or is that excluded from the guide?

Mark this, Tom. Let me just comment. We say very little about our price increase, but this isn't any different than the price increases we've had in the past. It's a very disciplined approach that we do. We roll them in over approximately in the 90-day period. You know, we have local accounts that go in at maybe a quicker rate than some of our contractual accounts. If you want to look at the three price increases kind of separately, the first price increase, you know, was effectively done, but you do have some bleed over depending on contracts and things like that, timing. Those can be impacted. Second price increase, the same way. It's, you know, it rolls out over a whole 90-day period. Third price increase, you know, hasn't been reflected yet in pulp and paper. It's obviously, you know, we have raised prices to our independent customers and our liner board and medium customers domestically. Those are in place. But the lion's share of the price increase, which goes through boxes, again, that will flow through over a 90-day period. So virtually none of that would be reflected at this stage in the third quarter.

Okay, that's helpful. And lastly, one other question. The impact from volume, you note, I believe it was 74 cents. which is $90 million, $100 million if we think of it pre-taxed, which seems like a really big number relative to an extra 100,000, 120,000 tons of board and boxes being shipped. Just trying to understand how we get to that number. Is there some sort of mix element included in here as well? And I realize this is kind of an esoteric question, but any help there would be appreciated.

Yeah, Mark. Yeah, I mean, for starters, if you just look at the raw volume, I mean, the raw volume is up dramatically. And, you know, as we came out of COVID last year into that fourth quarter, the question mark, and it was a big question mark for everybody, was will that level of volume be maintained, you know, going into 2021 and then throughout 2021? So far, you know, we've maintained very close to those kind of numbers. And I think it's just indicative of what the market is right now and the changes that have taken place from consumer habits. Also, I'll remind you that last year during COVID, of course, you know, from a mixed standpoint, our display business had basically gone to nothing because of the shutdowns and, you know, no shopping in brick and mortar and things like that. So that end of the business had had dried up quite a bit, and that's back now. You know, and then also, you know, we've had, you know, good cost controls in terms of getting this volume out. As we've indicated, a lot of these capital projects are paying off, so we can, you know, we're very comfortable with the number.

Okay, super quarter. Thank you.

Okay, next question, please.

Your next question comes from Adam Josephson with KeyBank.

Mark, Bob, and Tom, good morning, and congrats on a really good quarter as well. Thank you.

Thanks.

Tom, would you mind just elaborating on your demand expectations in the quarter, just embedded in your guidance? You mentioned the comps get a lot more difficult in July. I know for the industry, the comps get particularly difficult in September. Can you just remind us roughly what your comps looked like last year and consequently what

appropriate expectations might be as the quarter uh plays out yeah uh you know we had adam we had some you know really you know it really ramped up in the second half of the year as we've indicated so uh those numbers were uh you know high single uh even the mid-double digit increases by the by the time the fourth quarter rolled around So to be at or above those numbers is a very, very large number and a robust number that we've essentially been able to maintain. And if I look out into the second half of the year, and that's why I say these comps become much tougher, when you're starting to compare to high single and low double-digit numbers, pretty hard to be significantly higher than that given everything that's going on right now and just the difficulty getting it out the door. But interestingly enough, I'll also point out, our customer base is telling us that they could ship a lot more. They have higher demand than what they're able to get out because they're dealing with the same supply chain issues and transportation issues that we're dealing with. So there's You know, I'm bullish because there's some upside even to these numbers that we have so far.

Yeah, no, I appreciate that. And just relatedly, Tom, would you compare this period to anything else you can remember having worked at the company? And if so, what would that period be?

Well, I think a couple things. Number one is I don't think we've ever gone through a time like this, certainly in my career. Yep. where the government has pumped a lot of money into the economy and businesses have just taken off coming out of a shutdown. I don't think anybody would have ever guessed that during a COVID shutdown, an extended COVID shutdown, that people would turn to things like e-commerce very quickly and as rapidly as they did. Those habits are now pretty well entrenched. And so, you know, what may have taken about five years to have occurred took place in a matter of a year. Those demands have certainly helped the corrugated box business. But again, interestingly enough, I mean, I can look across, you know, we've got 15,000, 16,000 customers, and our top 50 accounts are up, you know, in excess of 15%. And when you look at the mix of those those companies across the board, I mean, they're in every segment. Obviously, food and beverage is, you know, the largest one we have in the corrugated box business. But, you know, whether it's home improvement, apparel, like I said, food and beverage, whatever the case might be, they're up dramatically. And most of our customers say they could even be higher.

Yeah. No, I really appreciate that, Tom. Mark, on your cash balance and just your balance sheet situation, obviously you've done a terrific job of maintaining a rock solid balance sheet for a long time and you have over a billion one of cash and equivalents at your disposal. Can you just talk about what your inclination is in terms of repurchase, acquisitions? I know you've got the spending on the project, but you have ample room to do more. You've been reluctant to buy back your stock in recent years and and understandably so, but just can you update us on your thoughts about best uses of cash at this point, or perhaps there may not be any just given where asset prices are.

Yeah, the same thought process continues that we've always used. You know, you can use cash for dividends, acquisitions, buybacks is an example. Organic opportunities with capital spending currently happens to be a very, very big return opportunity for us that we've been taking advantage of for the last few years. We're always looking at opportunities in terms of acquisition opportunities. So that hasn't changed. But I think more than anything, we just remained very prudent in how we go about looking at that use of cash and being mindful that every dollar is extremely valuable. And again, quite frankly, currently, I would rather take a dollar of cash and put it into a good capital project in a box plant or a mill because we get immediate return for it. Low risk, high return opportunity. Same thing with dividends. Dividends being a board level matter, we continue to discuss that periodically and understanding that dividends should be meaningful but sustainable. And then as time goes on, we'll just continue to look at the bigger opportunities, but I think, again, one of our virtues that we've held closely is our patience and that we're an extremely patient group. That's a long answer to your question.

No, I appreciate it. And just one last remark on the labor situation. I know freight is problematic for everyone these days, and there are many other costs that are problematic. Can you talk about labor specifically and what you've experienced there and what you're anticipating along those lines?

Well, again, it's pretty understandable that the demand for labor is high across the board. We've been fortunate through the capital spending programs in the last few years that with a lot of new technology going into box plants, as an example, we've provided enormous tools for the existing workforce to become much more productive. And so that has been a very big benefit to us. But again, we're struggling like everybody else is trying to, you know, Again, look at the workforce. How do you retain and how do you attract people when the demand is so high for the current labor pool in this country? So I think we're in a good place. Our retention rates continue to be high, and so I'm feeling pretty good about it, but we're mindful.

Tom, do you want to add to that? Yeah. Listen, labor is an issue for us. It's an issue for our customers as well. It's a, you know, getting people back into the workforce is going to be incredibly important. But I think it also goes back to, you know, your capital question, Adam, relative to, you know, we think long term about what we're going to be doing and how we run this business. And, you know, one of the things that we've been working on for quite some time now is how to do more with less in terms of labor. just because we knew that it's going to be an issue for us over the long haul. So I think that that in itself has paid off some big dividends for us that Mark alluded to. Really appreciate it, Tom. Thank you.

Next question, please.

Your next question is from Gabe Hodge with Wells Fargo Securities.

Mark, Tom, Bob, good morning. Morning. Morning. I had a question. I mean, not only did you reinstate guidance, but you also made mention of kind of just even second half strength on the packaging side. So I'm curious what you're seeing, kind of the difference maybe than you were before, if there are end markets and end of the time, I think you just called out kind of e-commerce. But what gives you that confidence to make those comments? Yeah. Again, relatively speaking, I think you guys want to be a little bit more conservative on your outlooks.

Again, I think it's just inherently looking at the marketplace and understanding where demand has been now for the last year, understanding what the paper side of the business has been doing and where demand has been going with paper, looking at the pricing side of the equation and understanding how pricing has been holding up for years the corrugated product side of the business, volume, pricing, and then just the success of our own execution and our capital spending as we go forward. I think we're in a pretty good place now. If one assumes that demand does what we think it's going to do, that in and of itself builds a lot of confidence opportunity for us.

All right. Thank you for that. And I guess I know it may be difficult to discern, but is there any way you can park out for us at Jackson sort of the incremental contributions that you're getting maybe in terms of production tons or dollar amount? And then is that being, I guess, reflected as a detriment to the paper business or any inefficiencies? Just trying to understand sort of what a quote-unquote normalized property level like in paper.

As far as Jackson, without going into details, which we won't, but if you think about the productivity, and we've talked about this, I believe, on the April call, for the second quarter, Jackson, number three, produced, I believe, 111,000 tons of liner board, if I'm not mistaken. And we did... explain that that is higher cost production than the rest of our system. And so even at a higher cost at the productivity and efficiencies that that machine is running at, and it's extremely valuable in terms of its contribution to the bottom line and providing us the necessary tons, the cost will come down significantly next year as we go through the first phase of the the conversion, and then through the final phase the following year, you'll see the cost position at Jackson equal to or better than the rest of our container board system. But Jackson currently is a very significant contributor from the number three machine container board side. Okay.

But I guess to be clear, those inefficiencies are booked and kind of reported through packaging, not the paper segment?

Yes.

Okay.

Thank you.

Thank you.

Next question, please.

Your next question is from Phil Ng with Jefferies.

Hey, guys. Congratulations on another impressive quarter in a tough environment. I guess bigger picture, Mark and Tom, you know, the industry is obviously set up for another strong year in box demand. I think many of us have been accustomed to seeing 1% growth in your comps to get a little tougher when we look at 2022. So do you expect the growth profile to kind of be, you know, elevated north that 1% rate? Just any color, how you think about the outlook going forward?

Well, Phil, you know, if, uh, if I could predict that exactly, I'd, I'd be a much wealthier man. I can tell you that. Um, Yes, you're right. We've been more in that one, one and a half percent growth range. We had this giant leap that took place last year. It's continued into this year. So I think just the maintenance of that number has changed the dynamics of this industry dramatically. And I think going forward, I think you'll see some more normalization, but I would guess it will be something a little north of where it traditionally has been, just given the demand we see out there in the marketplace and what we're hearing from our customers.

I think one way I look at it, if you think about what happened in the 1980s and the 1990s in North America in general, we had a lot of offshoring of manufacturing activity that created a decrease in corrugated product demand. At the same time, if you went back over the last 60 years, for many decades up into that 1980s, 1990s period, box demand was strongly correlated to GDP. It wasn't a one-to-one correlation, but there was a high correlation. Through the 1980s into the 1990s, that correlation separated, and again, in the GDP equation, Service industry became a bigger factor in GDP. Manufacturing was less of a component. What we're seeing is more onshoring of manufacturing, more American businesses investing here in the United States in manufacturing. Box demand tied to that factor. And I have to believe that as we go forward into the next few decades, as an example, that you will see on a trend line basis that box demand will have a new, very strong correlation to GDP in general. And that's how I'm going to think about the future.

Okay, super helpful. I mean, that's kind of how we're thinking about it too, so that's great to hear. You know, appreciating weather is having an impact on wood costs. How long do you think this impact is going to linger and any risk that you're going to have, supply shortages that could impact your production in the back out this year?

Well, there's a couple of factors involved. If it was just the wet weather, I'd say, well, sooner than later, it's going to stop raining. We just had an unusually consistently wet winter and spring, and then in the summer, we had that one tropical system that came through in June, came up through the southeast. But we've gone through wet periods before, but what's also a major factor is the availability of The trucking side of the equation in terms of log hauling to a mill is dependent on trucks. And so those truck drivers have a choice. They can go and work over the road hauling various goods or go into the woods and haul logs. And so there's been extreme competition for truck drivers. So I would think, though, that if we get a dry period – or normal weather period in the South, you'll see a significant normalization of wood cost relatively quickly. And then everything else dependent on the economy in terms of labor driver availability on that side of the equation. So it's a, there's two major factors in that equation.

Got it. But Mark, it doesn't sound like you're expecting any real shortages where you can't produce. I mean, it's ongoing bottlenecks you've kind of experienced. Is that fair, Mark?

Well, yeah. I mean, speaking for PCA, we're okay day to day. We are looking at it carefully, as you can imagine. But currently, barring any unforeseen hurricane, big tropical systems that come up through the southern states right now, we're okay for the time being. I do watch the weather consistently because of that. But, again, that's something we can't control, so you do the best you can. But currently we're okay with where we are. We're just, again, I'll point out the industry typically at this time of year would be starting their winter wood build. And so mills across the southern region would be starting to stockpile wood in their lay-down yards, in their wet storage areas, satellite wet storage areas, for the upcoming what would traditionally be a wet late fall, wet winter period. So you compound the problem right now that the inventories across the mill system in the south and southeast have been depleted. We're running... basically day-to-day short inventories. We're also not able to start our winter wood build as an industry, as you can imagine. So it's going to be important that we do get a dry period because we have to set ourselves up for the late fall and winter when you really get the weather systems coming through with the traditional lows that come out of the Gulf of Mexico and move up through. So that's the longer-term concern.

Got it. And just one quick one. I think Mark tried to tease this question earlier, but it looks like your drop-through incremental margins on your volumes just really popped into queue. I know the previous two quarters may be challenges with how strong demand is on these bottlenecks. Maybe the drop-through wasn't as good. Anything that stood out in the quarter, and do you think that is sustainable in the back half of the year, those great incremental margins you saw in the quarter?

Well, you know, again, if you think about the richness of the book of business in general that we have, the operating efficiencies, we executed extremely well in the mills and the box plants. These capital projects, and I called it out just in 2018, 19, 20, and then the half of 2021, we spent $852 million on significant improvements in two-thirds of our box plant fleet across the country in massive capital opportunity for the employees to be significantly more productive, and that's paid off in a big way for us. And so, again, it's pretty simple. Great book of business and operate extremely efficiently equals high margins.

That's super helpful. Thank you. I really appreciate it, guys.

Okay, next question, please.

Your next question comes from Neil Kumar with Morgan Stanley.

Thank you. For corrugated, can you just talk about the cadence of the 9.6% volume growth through a second quarter by month? And then can you also just touch on what you're seeing in terms of demand trends for your values and markets? Maybe what's the price both positively and negatively during the quarter? Sure.

I can give you the volume trends through the quarter. April was up 12, May was up 11, and June was up 6. And as I indicated, July, we're rolling about 7 over last year. Again, I'll remind you that it's not as if volume went down. Volume continues to improve, but it's against a much tougher comp.

Right. And then could you just maybe touch on end markets, how they perform relative to your expectations?

Well, our end markets have performed as expected. I mean, it just, you know, as I think I indicated earlier that, you know, our top accounts are up in double digits and have plenty of opportunities to continue to grow. They're hindered a little bit by, you know, those same things we talked about, which supply chain issues, freight issues, labor issues, those sorts of things. So I think that, you know, the The trend remains very good.

Okay, and then in paper, can you just discuss what you're seeing in terms of demand trends so far in July? I mean, what your expectations are for back-to-school demand this year?

I'm sorry, I couldn't quite hear you.

Yeah, I was just saying for paper, can you just talk about your demand trends so far in July and your expectations for back-to-school demand this year?

Paper, as you could imagine, the trend line has moved up, and it's for that very reason. School openings, business openings that are starting to, you know, people got to restock. But we, you know, explained that because of the Jackson machine coming out of the system, we've reached a new equilibrium in our ability to go to market and serve the market. So we've intentionally brought that marketplace to a new point with PCA. So, you know, we're up, but we're up to a new level that we can manage to and supply into. So we're not representative of the industry at large because of what we've done at Jackson.

Great. Thank you.

Okay. Next question, please.

Your next question comes from Kyle White with Deutsche Bank.

Hey, good morning. Thanks for taking the question. You already discussed what fiber costs for 3Q quite a bit, but curious what your expectation is for recovered fiber costs and what's embedded in the guidance going forward. I understand it's not as impactful to you as other peers, but just any thoughts there would be helpful.

Well, again, your guess is as good as mine. We're fortunate that, again, we've, you know, you have to believe with the current trends, it's going up, and there's nothing that indicates it's going to go down anytime soon. where some of the latest data that's come out indicates record low nationwide inventory levels of recycled fiber availability, all-time demand for all recycled fibers across the board. And so unless something happens to the marketplace in the world, I don't see that changing. But again, I think for PCA, We've always considered ourselves, you know, we don't have a crystal ball. We don't know where the world's going, so we build ourselves around flexibility, and we still remain the lowest dependent on OCC as an example compared to the rest of the industry. We can take advantage of it, but, again, we are always mindful of maintaining our flexibility and fiber utilization.

Got it. And then going back to Neil's question on some of the end markets, what are you seeing in agriculture? Do you have any exposure to or any impacts from some of the fires over in the Pacific? And then on e-commerce, are you seeing any kind of signs of any slowdowns as markets reopen and people aren't at home as much?

Kyle, this is Tom. Regarding ag, we have not had any impact on our ag end markets so far. The majority of the large fires out west are on the Oregon-California border. So those Northern California ag markets, those fires are quite a bit north of them. Regarding e-com, no, we have seen zero slowdown in e-com. In fact, I think everybody in the business of any sort is trying to figure out how they can use that. e-comm to better grow their business. And consumer preference still remains very strong in the e-comm area.

Got it. Thank you. Good luck in the bounce of the air.

Thank you. Thank you. Next question, please.

Again, if you would like to ask a question, please press star, then the number one on your telephone keypad. That is star one to ask a question. Your next question is from Cleve Ruckert with UBS. UBS.

Hey, good morning, everybody. Thanks for taking the question. I just had one follow-up on container board production. With the mills coming off maintenance in Q3 and your outlook on demand, how much do you think container board production could grow sequentially in the quarter? And when do you think you'll be in a position to have inventories more normalized in line with your target?

Well, again, we're in a much better place than we were earlier in the second quarter because of all the outages we were dealing with. But as we mentioned on the call, on a weeks of supply basis in terms of weeks of supply inventory, we're at an extremely low level compared to what our needs are. And so even though we built some inventory, we're not where we need to be or should be. Our productivity out of our container board mill system will be much better in the third quarter. Production will be up. I'm not going to give you the number. You can run the math on what you currently have for mills in the system, but we expect to build in terms of our productivity, but we also expect third quarter to be a very high demand quarter for that container board through our box plant system. It's probably not the answer you wanted, but I'm not going to give you exact quantitative numbers.

Do you have latent capacity in the box plant system? Could you run the box plants harder if you needed to?

I wish. I talk about that all the time. We'd be in big trouble if we had not undertaken a few years back the capital program that we did and also the organizational changes that took place back in 2019 with the technology and engineering groups and how we manage the business day to day. Yeah, I wish we had a lot more productivity opportunities in the box plants, but we're building that in every day with the execution of more capital spending and projects that we're doing. So we're in a good place, but it's like we've always talked about in our mills also, and I see this in the box plants. Box plants and mills run really well when they're under pressure, and I will continue to believe that going forward. And we have, you know, plans, longer-term strategic plans on how we will continue to build out our opportunities and anticipate what our customer requirements will be because it's all about the customer and understanding what the needs are and being able to react and respond in any part of the country and within a region to meet that market demand.

That's fair enough. And one quick follow-up, you know, you did mention earlier in the prepared remarks that you're outgrowing the industry through the first half in, in packaging, which obviously is implying market share gain. Do you have a sense of where you're gaining share, whether either in markets or, or in product types? And that's it for me. Thank you.

You know, it's, that's, that's a very complex question and, uh, Where do we gain share? I think we have a long tradition of having a much broader customer base than most of our major competitors. We have corrugated plants plus sheet plant network that we deal with. We have tried to align with customers that have a very good growth trend and good opportunities. And, of course, you know, we've got a customer base spread over 16,000 customers, all trying to win in their marketplaces. So I think those are the – and, of course, you know, I think our ability to be able to, as we've talked about, you know, over and over here relative to capital, our ability to expand as our customers at needs and as they grow. So those are the key elements to why we have traditionally – gotten more market share than our competitors.

Thanks very much.

Thank you. Next question, please.

Mr. Kolzin, I see there are no more questions. Do you have any closing comments?

Thank you, Stephanie. I would like to thank everybody for taking the time today to be with us on the call, and I look forward to talking with you in October for the third quarter earnings call. Stay well, stay safe, have a nice day.

Thank you. This concludes today's conference call. You may now disconnect.