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.