Packaging Corporation of America

Thank you for joining Packaging Corporation of America's third quarter 2021 earnings results conference call. Your host today will be Mark Colzan, Chairman and Chief Executive Officer of PCA. Upon conclusion of his narrative, there will be a Q&A session. I will now turn the conference call over to Mr. Colzan, and please proceed when you are ready.

Thank you, Josh. Good morning, everyone. And again, thank you for participating in Packaging Corporation of America's third quarter 2021 earnings release conference call. I am Mark Colzan, Chairman and CEO of PCA. And with me on the call today is Tom Hasterthy, the Executive Vice President who runs the packaging business, and Bob Munday, our Chief Financial Officer. I'll begin the call with an overview of the third quarter results, and then I will be turning the call over to Tom and Bob who will provide more details. After that, I'll wrap things up and we'd be glad to take any questions. Yesterday, we reported third quarter net income of $251 million, or $2.63 per share. Excluding the special items, third quarter 2021 net income was $257 million, or $2.69 per share, compared to third quarter 2020 net income of $149 million, or $1.57 per share. Third quarter net sales were $2 billion in 2021 and $1.7 billion in 2020. Total company EBITDA for the third quarter, excluding the special items, was $464 million in 2021 and $323 million in 2020. Third quarter net income included special items expenses of $0.06 per share primarily for certain costs at the Jackson, Alabama mill for paper to container board conversion related activities, while last year's third quarter net income included special items expenses of $0.11 per share that were related primarily to the impact of Hurricane Laura on the Derrida, Louisiana mill. Details of all the special items for the third quarter of 2021 were included in the schedules that accompanied the earnings press release. Excluding the special items, the $1.12 per share increase in third quarter 2021 earnings compared to the third quarter of 2020 was driven primarily by higher prices and mix of $1.58 and volume 62 cents in our packaging segment. higher production volume of six cents and prices in mix of five cents in our paper segment, and lower non-operating pension expense, three cents, and lower interest expense, one cent. The items were partially offset by operating costs, which were 84 cents per share higher, primarily due to inflation-related increases, particularly in the areas of labor and benefits expenses, recycled fiber costs, energy, repairs, materials, and supplies, as well as several other indirect and fixed-cost areas. We also had inflation-related increases in our converting costs, which were 10 cents per share higher. For the last several quarters, freight and logistics costs have risen and were 23 cents per share higher compared to last year, driven by significant increases in fuel costs tight truck supply, driver shortages, and a higher mix of spot pricing to keep up with box demand. And finally, scheduled outage expenses were four cents per share higher than last year, and sales volume in our paper segment was lower by two cents per share. Looking at the packaging business, EBITDA, excluding special items in the third quarter of 2021 of $467 million with sales of 1.8 billion, resulted in a margin of 26% versus last year's EBITDA of $324 million, with sales of $1.5 billion and a 22% margin. Packaging segment demand remained strong, and the teams did a tremendous job of implementing their previously announced container board and corrugated products price increases. The container board mills set an all-time quarterly sales volume record, and our box plants set new third quarter records for total corrugated product shipments, as well as shipments per day. By utilizing the capability of both machines at our Jackson, Alabama mill to produce container board, we are able to reach our desired inventory levels to better serve our customer demand, help minimize the transportation challenges we continue to experience, and build some inventory ahead of the DeRidder mill's fourth quarter outage. We manage very effectively the execution of numerous initiatives and capital projects to reduce costs through efficiency, productivity, and optimization improvements across our manufacturing locations. We continue to put tremendous effort into managing certain material, equipment, and labor availability issues to keep our customers supplied and their needs and their capital projects on track. With no relief from the supply chain obstacles that we, our customers and our suppliers continue to face, along with unprecedented inflation-related challenges, the combination of all of these efforts are critical to our success going forward. The improvements in execution our employees deliver constantly across many fronts is what allows us to continuously improve margins. After successfully completing the planned maintenance outage at the Jackson Mill during the third quarter, The mill restarted with the number one machine making corrugated medium rather than uncoated free sheet grades, utilizing a mix of virgin craft and DLK fiber based on the needs of our customers. This was required to help meet continued strong demand from our box plant customers, meet our targeted inventory levels prior to year end, and help supply the needs of our box plant acquisition that we anticipate acquiring later this quarter. Similar to the number three machine at Jackson, the smaller number one machine is highly efficient. It's a versatile machine and with minimal capital required to repurpose a de-inking plant to handle DLK. The machine was very quickly able to produce high quality medium for the box plants. Although still capable of producing uncoated free sheet products, We plan to continue producing medium on the machine over the next several months as our internal and external packaging demands warrants. This gives us the opportunity to further evaluate the machine's capabilities and to process changes that might be required to potentially produce medium permanently in a cost-effective manner. We'll also use the period to further refine our estimates and assumptions to fully understand the potential of the entire mill to produce container board on both machines at their optimal cost and quality. This will also allow us to evaluate our strategic container board supply capabilities for providing the necessary runway to grow our integrated downstream box demand. We're committed to being fully integrated and we have a track record of ramping up our internal capacity according to our customers' demand requirements. The previously announced conversion of the J3 machine to liner board remains on track with no changes to the schedule we discussed on last quarter's call. We'll continue to serve our paper customers with both machines at our International Falls mill, which is capable of producing all of Jackson's paper grades, as well as available inventory produced on the number one machine at Jackson. I'll now turn it over to Tom, who will provide further details on container board sales, our corrugated business, and the box plan acquisition that I mentioned.

Thank you, Mark. We continue to get excellent 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 $1.40 per share above the third quarter of 2020, and up $0.55 per share compared to the second quarter of 2021. Export container board prices were up $0.18 per share compared to the third quarter of 2020 and up $0.06 per share compared to the second quarter of 2021. As Mark mentioned, we achieved a new all-time record for container board shipments with continued strong demand in our box plants as well as our domestic and export container board markets. We had record third quarter corrugated product shipments which were up 2.3% in total and per workday over last year's very strong third quarter. Through the first three quarters of 2021, our box shipment volume is up 6.7% on a per day basis versus the industry being up 4.5%. In addition to supplying the record internal needs of our box plants, our outside sales volume of container board was 73,000 tons above last year's third quarter and 37,000 tons higher than the second quarter of 2021. Regarding our third quarter demand and our outlook, I'd like to reemphasize some points I made on previous earning calls and what Mark alluded to earlier. The same issues that impact our ability to get more volume out of our box plants like labor shortages, truck availability, driver shortages, raw material availability issues, and supply chain bottlenecks also persist with our customers. They are telling us they have higher demand and could ship more if not for these issues. There is no doubt we view demand as strong, and we expect this to continue, even with the economic obstacles most companies are facing. And keep in mind, the fourth quarter will have three less shipping days than the third, and fourth quarter comparisons will be against last year's all-time quarterly record for the industry. Regarding the box plan acquisition Mark mentioned, last week we entered into a definitive agreement to acquire substantially all of the assets of Advance Packaging Corporation. an independent corrugated products producer, and a cash-free transaction. Under the terms of the agreement, PCA will acquire a modern, full-line, 500,000-square-foot corrugated products facility located in Grand Rapids, Michigan. The transaction is structured as a purchase of assets, resulting in a full step of the assets to fair market value. This acquisition is consistent with one of the key strategic focus areas we have discussed many times regarding increasing our vertical integration of container board through organic box volume growth and strategic box plant acquisitions. After completion of the acquisition, our container board integration is expected to increase by almost 80,000 tons. This also will allow for further optimization and enhancement of our mill capacity and box plant operations as well as other benefits and synergies that we expect to begin realizing soon after closing. Although we won't get into financial details at this point, we expect the acquisition to be accretive to earnings immediately with a bottom-line purchase price multiple similar to the average of our last four acquisitions. Closing, subject to certain customary conditions and regulatory approval, is expected later this quarter, and we will finance the transaction with available cash on hand. Advanced Packaging is a well-capitalized, full-service provider of corrugated packaging products, including high-end graphics, retail displays, sustainable shipping containers, and protective packaging. They utilize state-of-the-art technology, structural and graphic design, and engineering capabilities, and an ISTA certified test laboratory to provide customers a solution for nearly any packaging need. With a commitment to continuous improvement, innovation, and safety in their operations, Advanced packaging is a great strategic fit for PCA and our culture with an excellent management team, highly skilled and dedicated employees, and an outstanding reputation in the marketplace. I'll now turn it back to Mark.

Thanks, Tom. Looking at the paper segment, EBITDA excluding special items in the third quarter was $18 million with sales of $150 million or a 12% margin compared to third quarter 2020 EBITDA of $17 million and sales of $178 million or 9% margin. Prices and mix were up 4% from last year's third quarter and also moved 4% higher from the second and into the third quarter of 2021 as we continue to implement our previously announced price increases. As we mentioned last quarter, we finished goods inventory now at optimal levels for the paper business Sales volume, which was 19% below last year's level, is fairly reflective of our production capability. As I said earlier, while the Jackson No. 1 machine is running medium, we'll continue to service our paper customers' needs from both of the International Falls machines, which are capable of producing all of the Jackson paper grades. While we've maintained our capability to produce uncoated free sheet on both machines at Jackson, we'll continue to monitor market conditions and run our paper system accordingly. With that, I'll turn it over to Bob.

Thanks, Mark. Cash provided by operations during the quarter totaled $284 million with free cash flow of $134 million. The primary payments of cash during the quarter included capital expenditures of $150 million, common stock dividends totaled $95 million, $68 million for federal and state income tax payments, pension and other post-employment benefit contributions of $51 million and net interest payments of $7 million. During the third quarter, we issued $700 million of 30-year 3.05% notes and used the proceeds from these notes to redeem our 4.5% $700 million 2023 notes in early October. This transaction will lower our average annual cash interest rate from 3.8% to 3.4%, lower our annual interest expense by $11 million per year, and extend our average debt maturity from 8.5 years to 16.3 years. Based on the timing of closing the new bonds in September and the redemption of the old bonds occurring in October, our quarter-end cash on hand balance included the new bond proceeds. Excluding this transaction, our quarter in cash on hand balance was just over $1 billion, or $1.2 billion, including marketable securities, with liquidity at September 30th of $1.5 billion. Our planned annual maintenance expense for the quarter is still expected to be about $0.41 per share, or about $0.06 per share, primarily due to the Derrida mill outage. This will result in a negative impact of 25 cents per share moving from the third quarter to the fourth quarter and 18 cents per share higher than last year's fourth quarter. Finally, as Mark mentioned previously, we continue to put tremendous effort into managing certain material, equipment, and labor availability issues to keep our capital projects on track. While we're managing to keep the key milestones of our more significant projects on schedule, Our capital spending across the entire company is now expected to come in below the range we provided previously. We currently expect to end the year with total capital spending around $550 million. I'll now turn it back to Mark. Thank you, Bob.

Looking ahead as we move from the third into the fourth quarter, we'll continue to implement our previously announced price increases for domestic container board, corrugated packaging, and paper. and we'll also expect average export container board prices to move higher. Packaging segment volume will be lower due to three less shipping days as well as the scheduled outage at our DeRidder mill, and paper segment volume will be lower as the Jackson mill is not expected to produce any paper grades. With higher energy prices and anticipated colder weather, energy costs will increase. Wood costs, especially in our southern mill system, will be higher due to the previous wet weather. Low inventory and high demand will also impact wood. We also expect inflation to continue with most of the other operating and converting costs, along with higher freight and logistics expenses. And lastly, as Bob mentioned, we expect scheduled outage costs to be approximately 25 cents per share higher than the third quarter. Considering these items, we expect fourth quarter earnings of $2.04 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 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. and in subsequent quarterly reports on Form 10-Q filed with the SEC. Actual results could differ materially from those expressed in the forward-looking statements. And with that, Josh, I'd like to open up the call for questions, please.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from George Stappos with Bank of America. You may proceed with your question.

Hey, good morning. This is actually John Babcock on the line for George. You know, the first question I just wanted to touch on, you know, I was wondering, it looked like your price realizations in 3Q were a bit higher than we had expected. You know, I was just wondering, you know, especially given that, given the timing of the last increase, you know, obviously, you know, primarily in August, you know, I was just wondering, you know, if you might be able to, you know, kind of comment on how much realization you had in the quarter, you know, from that August increase.

Tom, why don't you go ahead with that one?

Yeah, well, you know, keep in mind the third quarter included, you know, some bleed in from the second increase plus the timing of the third increase. Nothing really has changed in our timing. You know, we typically roll these in over a 90-day period, but in this particular case, given the timing, yes, we probably did realize a little bit more in the third quarter for this particular increase.

Okay, great. And then could you provide some color on how the early 4Q bookings look so far?

The bookings are coming in right now about flat to a year ago, but keep in mind a year ago we were up 13%. So I think we're off to a very good start in the fourth quarter and maintaining volume levels that were exorbitantly high last fourth quarter.

All right, great. And then the last question before I turn it over, I was just wondering if you could talk about the impact that labor and supply chain shortages have had on your demand and inventory trends.

Well, it's hard to put it in exact numbers. As I said, demand remains very good and very strong. However, a lot of our customers, along with ourselves, are suffering from what really is an American commerce issue related to labor, transportation, supply chain issues, et cetera. And it's a mixed bag. I mean, we've got some segments of our customer base who are more impacted by materials or chemicals or resins or whatever the case might be, as well as the labor issue. We, of course, as I mentioned, are suffering from many of the same things. And, you know, even some of our suppliers have indicated that they're concerned about their ability to keep up with our demand. So, you know, it's something that's going on across the entire American landscape as well as, quite frankly, the global landscape.

Okay.

Thank you.

Thank you. Next question, please.

Thank you. Our next question comes from filming with Jeffrey. You may proceed with your question.

Hi, this is John Dunn again on for Phil. Hope you're all doing well. Um, I was wondering if you could comment on, on how much meaning in the J one mill can produce, uh, per year now and how much, uh, unquoted free produce on the mill, either in 2020 or just first half of this year. And then you noted, Mark, that there would be maybe some further investments required to permanently produce the medium on the J-1 and possibly make it more efficient. Could you just provide a little bit more color on that and maybe discuss if there's any more increase in medium capacity after those investments if you do decide to do it?

You know, currently on an annualized basis with what we're doing on J-1, it's capable of producing about 100,000 tons a year of medium capacity. in that range based on the fiber availability we have with the DLK that we have and then the balance of the craft fiber. We've obviously, as we've done many times, we've studied these things years in advance. We have a pretty good idea of what we would do under different circumstances if we chose to ramp the machine up in the future. But I think, as I said earlier on the call, the fact that we're actually running medium right now is a really good opportunity for us to study all of the unit operations around the paper machine within the mill system to look at the entire balance of the mill and how it would play out in the future with the work we're doing on J3 machine and where ultimately the Jackson mill goes in terms of producing container board. Right now, we also mentioned we have not given up the capability to produce paper on either machine. The J3 machine, once it undergoes its outage next spring, will not be able to go back to paper after that, but the J1 machine remains a flexible machine, and we'll just look at our market opportunities and utilize that machine as it is. Again, the machine is an extremely highly efficient, very good quality machine. and has a lot of opportunity to help us provide our future needs for our customers as we grow with our box plant customers in the future. I'm not going to talk about capital estimates. Again, I consider that more of a proprietary situation.

Understood. Appreciate the details. And one more, just If you could maybe talk about what percentage of your energy is produced internally, obviously recognizing that you're a lot more virgin-based than some of your peers, and then maybe give us some idea of how exposed you are to nat gas and if you have any hedges in place or typically implement.

I don't have the current numbers. If you think about traditionally, we're in that You know, somewhere around 70% if you include black liquor and wood waste within a mill, and that's traditionally what you're going to see in the industry with a fully integrated mill that's got black liquor and wood waste capability with combination boilers. Natural gas, obviously, is the big play that the country is seeing right now and, quite frankly, the world, and we're exposed to that also. Bob, do you want to add any color on the natural gas piece? But again, it's, you know, it's not a lot to add, but, you know, that is impacting us.

I'm sorry, it's a big number going from the third quarter to the fourth quarter. Obviously, it's, you know, probably close to 10 cent hit, and it's primarily gas. you know, due to prices that everyone's aware of, but you also have an impact from the seasonal aspect from, you know, colder months in the latter part of the year.

Understood. Okay. Thank you very much.

All right. Thanks, John. Next question, please.

Thank you. Our next question comes from Michael Roxland with Truist Securities. He may proceed with your question.

Good morning, guys. This is Alex Liskum sitting in for Mike Robson this morning. Just a quick question on virgin wood costs. You know, given the wet weather and the lack of transportation or increasing costs around transportation, you noted on your last call to Q that you haven't been able to start your winter wood build yet. Have you made any progress over 3Q? And if you can quantify it, where do your inventories stand right now And how much more are you paying relative to last year? Thanks so much.

I think we're seeing some relief in the Louisiana, in the Mississippi, Tennessee wood basin right now compared to where we were this summer. The southeast in particular, the Georgia, Florida, southern Alabama wood baskets remain under pressure from from the wet weather and also the demand because of that. The winter wood build has proceeded a lot better than I had hoped in the Louisiana and at our council mill in Tennessee. We're nowhere near where we want to be or should be at this time of year, but we're much improved from where we were three months ago. Again, Valdosta is an example and Jackson Mill is an example. have a ways to go. And again, there's a lot of competition in those wood baskets, but I'm not going to get into the actual numbers except to say that it's been a long time since I've seen the entire system in the southern states under this much pressure at this time of year. Great. Appreciate the call. Thanks, guys. I'll pass it on. Okay. Next question, please.

Thank you. Our next question comes from Mark Weintraub with Seaport Research. You may proceed with your question.

Thank you. First, just on the Jackson Mill, is there any more color or help you can give us as to where the mill is now from a kind of a total production versus what you've laid out? And maybe we'll keep the smaller machine to the side right now. How much incremental production when you move forward on the project you might get? And also, I know you had high costs initially. Where are you in terms of getting the costs relative to where they eventually can get? And any color there would be very appreciated.

I think, you know, we've talked all along, J3 machine, in terms of supplying what we needed and trying to balance the input costs because they were higher, on an annualized basis, the J3 machine has been producing useful 100,000 tons is a good number if you want to. probably about 100,000 tons a quarter, give or take. And so that's probably a good number to use for your math. If you want to add the annualized production of number one machine, that would be 100,000 tons. So again, on an annualized basis, Jackson's producing 500,000 tons of container board now at the mill. Again, I'm not going to get into specific costs. We have reduced in a very appropriate manner The cost that we can control with the unit operations that we have to work with, the big cost takeout will come next spring as we do the really big phase work on the machine conversion and get the productivity up significantly. And when that improvement is made, you'll see a rather big step change in cost reduction. And then the final step change will come in the final phase the following year when we finish up the work on J3. Now, again, as we look at J1 and we understand what that would imply, it depends on how much medium you would need in the future. And this goes back to what we said for the better part of the last decade and a half You can convert anything to do anything, but there's a capital price for it. And so on an incremental cost, you know, if we're producing 100,000 tons today with appropriate capital, we could supply a significant amount of incremental medium off of that machine in future years if we chose to spend the capital. And so I look at Jackson. is a tremendous opportunity. We've said this before, when the work is done on J3, the Jackson machine, the J3 machine, appropriately will be in the category of about a 700,000 ton a year machine capable asset in the next few years. And then that would leave the number one machine to balance out our growth opportunity in the box plant system. And so if we're producing 100,000 tons on an annual basis today and you assume you ramp that up, the Jackson Mill becomes a significant container board producer if we so choose to and we grow with our demand. But it has very good opportunity to be one of our low-cost mills over the future years with the appropriate capital.

Great. That's very helpful. And then just shifting gears, Just trying to understand the bridging from the third quarter to the fourth quarter. Obviously, you had a very good third quarter relative to your initial expectations and everybody else's. In the fourth quarter, you basically are pointing to like a $0.65 reduction in earnings. You called out the $0.25 from maintenance. I think, Bob, you mentioned like $0.10 specific to energy. And then there were a number of other costs, the wood, freight, etc., At the same time, I guess I would have thought you still would have been getting some more pricing from the August container board flowing into boxes. Is there any kind of additional help you can give us to understand why there'd be as much of a decline, 4Q versus 3Q? I assume it's mostly costs. And then to the extent that it is, is there a way you can help us parse how much of that might be a seasonal impact, especially in these, this unusual environment. And so that there's the, the likelihood of recovery as we get into more seasonally favorable periods versus what may be more systemic changes that one's got to keep an eye on.

Yeah, Mark, this is, this is Bob, you know, as you know, third quarter to fourth quarter is always, you know, a negative movement sequentially. It's just going back probably as far as you want to look. It's, And a lot of that has to do with some of the seasonal things you see going on with wood, energy, and some other items. You know, what's happening this quarter, yes, we are certainly getting additional price improvement, or we expect to, from the previously announced price increases in the packaging segment. But we also have a, you know, the volume situation is is, you know, not as, you know, it's a little bit more unfavorable, primarily, you know, in the mill side of things with the outage at DeRidder and the fact that, you know, we actually expect our inventories to go down as opposed to build inventories. So you always have to consider that inventory change and how that impacts your costs and your cost absorption. Certainly freight is a bit higher than it normally would be this time of year. And then those operating costs, like, you know, I mentioned what's going on with energy. you know, with wood fiber and the things that Mark was speaking to with trying to get inventories where they need to be and competing with others, forest products producers that are trying to do the same thing in that part of the country, along with shortages, just trying to get drivers to get wood and bring it to the mill. You know, those costs are up a similar amount to what energy will be. We expect to be very busy in the box plants again in the fourth quarter, and with what we're already struggling with relative to labor availability, just like most other companies are, you know, paying additional overtime, doing what you have to do to get the volume out of the door, you know, that's higher than normal. And also just overall repairs and materials, you know, other fixed cost type things. I've never seen it quite like this. We talked about the maintenance outages being 25 cents a share negative. And we have some things relative to this capital spending in our box plants that we hope to bring several projects on board in the fourth quarter, and that results in some non-capital implementation expense. That's a little bit higher than normal, but it's for a good reason, obviously. So when you net all of those things, Mark, you're right, it comes to 65 cents, which for us, You know, it's certainly not out of line. If you look at the second half of our results, you know, versus, you know, the consensus numbers, you know, looks like we'll end up a year, you know, the second half, you know, 25 cents better than what anyone thought. It's just the timing between the quarters. You know, maybe we had, you know, a lot more price appreciation in the third than people were realizing, and there was more of that in the fourth. I'm not sure, but that's sort of how we see the sequential numbers moving.

Great, appreciate all the color.

Next question, please.

Thank you. Our next question comes from Adam Josephson with QBank. You may proceed with your question.

Thanks, everyone. Mark, Tom, Bob, good morning, and congratulations on another very good quarter. Bob, just one follow-up on Mark's previous question about the 3Q and the BEAT versus your guidance of 32 cents. Can you help us with how much of the third increase you realized and consequently how much more you're expecting in the fourth quarter per your guidance?

No, I don't think we'll get into that level of detail. I think you just have to think about what Tom said and certainly I think there was more than what people were assuming together with, as you know, we always do a really good job of of executing and bringing that price, you know, to the bottom line as quickly as possible. And I think it was just a great effort during the quarter.

Got it. I appreciate that, Bob. On OCC, whoever wants to take this, can you just talk about what you're, I know you're not a big buyer of it compared to some peers, but what you're expecting in the fourth quarter, I assume you're expecting some decline. I'm just wondering if you're thinking that's just seasonal or there's something more than that or what you're seeing in the OCC market at the moment.

Yeah, I think on average, Adam, if you look at the average of 3Q versus 4Q, 4Q will be higher. I think because we're exiting the third quarter, beginning the fourth at a higher cost, although as the quarter goes on, I think the cost looks like or the price looks like it will be fairly stable, maybe slightly lower. But like I said, on average, it's a headwind, 3Q to 4Q.

Got it, Bob. And Tom, just in terms of what happened in the third quarter of the box demand, I mean, you outgrew the market. Once again, the market was obviously flat. I think that came as a surprise to most people who follow the industry. And I know you talked about the labor constraints that many of your customers are facing. I mean, do you have a reason to think those constraints are going to go away anytime soon? Or is this just you think, a feature of this economy now, and we're going to be dealing with this for a considerable period ahead.

Well, Adam, as I mentioned to you, it's an American problem, an international problem, you name it. I mean, it's, and, you know, if I could predict exactly when this was going to end, you know, I'd be, I'd probably be doing something different than what I'm doing right now. The fact of the matter is, is that What makes this so hard to predict right now is the fact that every company is dealing with this, whether it's ours, whether it's our customers, whether it's other industries, whatever the case might be, we're all competing in a labor market that's incredibly tight. As I said before, we're also competing with the government here, which makes it even much more difficult. But there are shortages everywhere, and the demand remains very high. So, you know, is this going to be, is this going to end in the short term? Depends on what you determine short term is. I don't see it ending anytime soon. It's going to continue well into next year. And, you know, where it settles out, I don't know. The one thing that's been very evident is that the consumer has changed a lot of their habits. And, you know, that's been good for our business. And that's not going to change ever again, I don't think. And quite frankly, you know, we've also got customers that have been asking for alternative products to their plastics, which is still a great opportunity for the industry. But we've had a difficulty being able to address that right now just based on all the other demand. So, you know, I think when you look at all the trends, it's darn positive going forward.

Got it. And, Bob, can you give us any specifics on the acquisition that you announced, sales, purchase price, multiple, et cetera?

No, I think as Tom said, you know, we're not getting into the financial details right now, but so that's all, you know, we're going to talk about on the call today on that. Okay.

Thank you. All right. Next question, please.

Thank you. Our next question comes from Anthony Pettinari with Citi. You may proceed with your question.

Good morning. When you finish the work at J3 and then maybe factoring in the acquisition, is it possible to say where your integration rate and container board can shake out at and sort of how you would think about that versus maybe an optimal run rate integration rate for PCA?

You know, the easiest way to do it is just assume that we're always going to – our goal is always to be fully integrated. And how you define fully integrated, you know, for the last number of years, we've always moved some tons to the outside market internationally and domestically, and we will probably do that, you know, going forward. Tom, why don't you add some color?

Yeah. Anthony, I think the way to look at it is this. We're going to run to demand. We've always told you that. You know, so whatever our integration level is is going to remain essentially the same. There's really, you know, we have additional demand in the export market, but as I've mentioned many times, the domestic market has shrunk so dramatically that, you know, it's not just a matter of just going out and saying I can go sell a bunch of people in the domestic market. There is no domestic market to speak of. And those that supply it are going to stick with what they've got, just like we are sticking with what we have. uh... we're not a big player in the export market uh... we've been dealing with the same customers for decades now and that's what we intend to do so uh... you know we will we will grow into our capabilities and that's why as mark mentioned we will still have the capability to produce white at the mill and uh... you know as our as our paper demand might dictate we could we could uh... swing back to that if we needed to so uh... you know uh... Our objective, as Mark said, remains exactly the same. We will be a fully integrated company.

Okay, that's very helpful. And then, Tom, you made an interesting comment on plastic substitution. And, you know, obviously probably not the biggest part of your business, and you may not be able to even sort of meet that demand given some of the constraints you and customers are facing. But can you just talk a little bit about, you know, what – what plastic products customers are looking at substituting out of or what, you know, customers or end markets these opportunities are cropping up in. Just any kind of general commentary would be helpful.

Yeah, I'll just give you an example real quickly. You know, if you receive apparel in a plastic bag through the e-commerce network, typically those things arrive and they're pretty nasty. And, you know, people, consumers have become alerted to what plastics does to the environment, and the lack of recyclability in plastics. They're working on it, but obviously it's a very, very low number compared to corrugated, which probably is the best sustainability story in the world, perhaps. And so they're looking for conversions, conversion opportunities to get out of that stuff to satisfy really what are consumer demands, even more so than their own demands. That's just one small example of what's going on. But all of the companies that sell to consumers have been very alerted to the fact that consumers want a recyclable package, a good sustainability story, and they want to be good stewards of the environment. And consequently, there's going to be more opportunities going forward for those kind of conversions.

Okay, that's very helpful. I'll turn it over. Okay, thank you.

Next question.

Thank you. Our next question goes from Cleve Rookert with UPS. You may proceed with your question.

Great. Good morning, everybody. Thanks for the question. Most of mine have been asked and answered. I just wanted to touch quickly sort of on a higher level on costs. We calculated about a 2% sequential decline in packaging costs at DNA. on a per ton basis. Did you get some relief in the quarter? I know you talked about sort of running more efficiently and I'm just wondering sort of more broadly over here.

Yeah, Clay, this is Bob. I'm not sure how you calculate your costs. I mean, our costs actually went up. You know, so I really don't know how to answer that question. You've got to be careful when you look at costs if you're taking them at a high level and just, you know, if you'd like subtracting EBITDA from sales or whatever you may be doing, you also have to take into consideration, you know, inventory change times that were going on, you know, between the two periods that you're comparing so you get your denominator right. So, again, I don't know how to answer because our costs went up.

Okay, so cost up sequentially on a per capita basis. And then just a quick follow-up on container board inventories. Sorry if I missed it earlier. Did you say that at the end of the quarter or in the quarter you got to target and then you expect to consume some in the fourth quarter?

Yeah, we got to what our average, where we like to be from a weeks of supply basis, sort of our average, what it was for the last five years, if you exclude that. you know, the record low of September of last year, that's just not a normal situation. So we, you know, with the help of the Jackson Mill, obviously, we got to where we want it to be from a week's supply basis, which, but we have this big deritter outage coming up in the fourth quarter. Demand is going to be very strong. So right now on paper, you know, our inventories would actually decline by the time we hit the end of the year.

Right. Okay. Thanks for that, Colin. Appreciate it.

Thank you. Next question.

Thank you. And as a reminder, to ask a question, you will need to press star one on your telephone. And Mr. Pozan, I see there are no more questions. Do you have any closing comments?

I'd like to thank everybody for joining us today on the call. And I look forward to talking with everybody at the end of January for our full year and fourth quarter call. Stay well. Stay safe and have a nice holiday season.

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