Packaging Corporation of America

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

Thank you, Myra. Good morning, and thank you all for participating in Packaging Corporation of America's fourth quarter and full year 2021 earnings release conference call. I'm Mark Kolzin, Chairman and CEO of PCA, and with me on the call today is Tom Hasfurther, Executive Vice President who runs the packaging business, and Bob Munday, our Chief Financial Officer. I'll begin the call with an overview of our fourth quarter and full year results, and then I'll be turning the call over to Tom and Bob who will provide further details. I'll then wrap things up and then after that we'll be glad to take questions. Yesterday we reported fourth quarter twenty twenty one net income of two hundred and seventeen million dollars or two dollars and twenty eight cents per share. Excluding the special items fourth quarter twenty twenty one net income was two hundred and sixty two million dollars or two dollars and seventy six cents per share compared to fourth quarter twenty twenty net income of $127 million or $1.33 per share. Fourth quarter net sales were $2 billion in 2021 and $1.7 billion in 2020. Total company EBITDA for the fourth quarter excluding special items was $463 million in 2021 and $293 million in 2020. Fourth quarter and full year 2021 net income included special items primarily for costs associated with the company's debt refinancing that was completed in October of 2021 and for certain costs at the Jackson, Alabama mill for paper to container board conversion related activities. We also reported full year 2021 earnings excluding special items of $894 million or $9.39 per share compared to 2020 earnings excluding special items of 550 million or $5.78 per share. Net sales were $7.7 billion in 2021 and $6.7 billion in 2020. Excluding special items, total company EBITDA in 2021 was $1.7 billion compared to $1.2 billion in 2020. Details of all special items for the years 2021 and 2020 were included in the schedules that accompanied the earnings press release. Excluding the special items, the $1.43 per share increase in fourth quarter 2021 earnings compared to the fourth quarter of 2020 was driven primarily by higher prices in mix of $2.17 and volume $0.35 in our packaging segment, higher prices in mix in our paper segment for $0.09, a lower tax rate for $0.04, lower non-operating pension expense $0.03, lower interest expense $0.02, and other items $0.02. These items were partially offset by higher operating costs of 68 cents per share, primarily due to inflation-related increases, particularly in the areas of labor and benefits expenses, wood and recycled fiber costs, energy, repairs, materials and supplies, as well as several other indirect and fixed cost areas. We had higher freight and logistics expenses of 24 cents per share as diesel prices and fuel surcharges continued to increase along with continuing truck and driver shortages and very low boxcar availability. Scheduled maintenance outage expenses were 14 cents per share above last year, and volumes in our paper segment were lower by 11 cents per share as both our machines at the Jackson Mill produced container board the entire quarter versus only a portion of last year's fourth quarter. Finally, inflation on pallets and other materials drove converting costs higher by $0.08 per share, and depreciation expense was higher by $0.04 per share. Looking at the packaging business, EBITDA excluding special items in the fourth quarter of 2021 of $461 million was with sales of $1.9 billion, resulted in a margin of 24.5% versus last year's EBITDA of $303 million and sales of $1.5 billion, or a 19.7% margin. For the full year 2021, packaging segment EBITDA, excluding special items, was $1.7 billion, with sales of $7.1 billion, or a 23.9% margin, compared to full year 2020 EBITDA of $1.2 billion with sales of $5.9 billion or a 20.8% margin. Demand in our packaging segment remained very strong with record setting shipments from our corrugated products plants. In order to meet the needs of our plants, the mills ran full out producing a record fourth quarter volume of container board. The high efficiency of our mill operations along with a very successful scheduled outage at our Derrida, Louisiana mill and favorable seasonal weather patterns relative to temperatures and precipitation helped to minimize higher inflation-driven operating costs during the quarter. Although we completed the scheduled outage at our Derrida mill earlier than we planned and we produced container board on both machines at the Jackson mill for the entire quarter, We ended the year with inventory, including the additional container board from our December acquisition of advanced packaging, below third quarter levels. And on a weeks of supply basis, we are once again below our targeted and historical levels. Considering the anticipated strong demand and to mitigate potential project risks to supply chain bottlenecks for material and critical equipment deliveries, we've decided to postpone the first phase of the Jackson, Alabama No. 3 machine conversion from the spring and into the fall of this year. In order to enhance the capabilities for reaching our target inventory levels, and with four other mills already scheduled for the first half of 2022 outages, we felt this was a very prudent decision to ensure our customers are supplied with their needs and the quality of our conversion work at the mill meets PCA standards. We plan to continue producing container board on both Jackson machines for the foreseeable future. And we'll continue to 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. I'll now turn it over to Tom, who'll provide more details on container board sales and the corrugated business specifically.

Thanks, Mark. As Mark alluded to, in the fourth quarter, our corrugated products plants established a new fourth quarter total shipments record and set a new all-time quarterly record for shipments per day, both up 0.1% over the fourth quarter of 2020, which was an all-time record quarter for us and the industry. On a sequential basis, we exceeded third quarter 2021 total shipments, even though we had three less shipping days in the fourth quarter. For the full year, annual corrugated shipment records were set as well, both in total up 4.5% and shipments per day up 5% with one less shipping day compared to 2020. In addition to supplying the record internal needs of our box plants, our outside sales volume of container board was 36,000 tons higher than the third quarter of 2021 and 91,000 tons above last year's fourth quarter. In addition to the strong domestic market, as we typically do during the second half of the year, we needed to catch up on commitments to our key export customers. As you know, we are not large players in the export market, but we've developed long-term relationships with certain customers over many years, and you can't just turn these relationships on and off based on the relative dynamics in the domestic and global markets. Domestic container board and corrugated products prices and mixed together were $1.87 per share higher than the fourth quarter of 2020 and up 37 cents per share versus the third quarter of 2021 as we have substantially completed our rollout of last year's price increase announcements. Export container board prices were 30 cents per share above the fourth quarter of 2020 and 9 cents per share higher than the third quarter of 2021. Regarding our fourth quarter demand and our current outlook for 2022, as I've mentioned before, the same issues that continue to impact our ability to get more volume out of our box plants also persist with our customers and suppliers. Labor shortages, which had already been an issue for some time, have been even more challenging with the impact of the Omicron variant. Truck and driver availability, the lack of available box cars to move container board from our mills to our box plants, and many other supply chain bottlenecks will continue to be challenges for quite some time. Customers continue to tell us they have higher demand and could ship more if not for these or similar issues. There is no doubt we view demand as strong and we expect this to continue even with the numerous obstacles most companies are facing. Finally, I would like to add that our acquisition of advanced packaging that we spoke about during our last call was successfully completed last month. This acquisition gives us the ability to integrate over 80,000 tons per year and provides several other benefit and synergy opportunities that we will deliver on very quickly. Although there was no meaningful contribution to our fourth quarter results as the transaction closed late in the quarter, we have already made tremendous progress integrating ADVANCE into our operations and we are off to a great start toward achieving our goals and objectives. This could not have been accomplished without the outstanding effort and dedication of the employees of PCA, including our newest employees from Advanced Packaging. I'll now turn it back to Mark.

Thanks, Tom.

With sales of $143 million, or an 18.4% margin compared to fourth quarter 2020 EBITDA, of $10 million and sales of $156 million or a 6.1% margin. For the full year 2021, paper segment EBITDA excluding special items was $72 million with sales of $600 million or a 12% margin compared to full year 2020 EBITDA of $73 million with sales of $675 million or a 10.8% margin. as expected sales volume was below last year and third quarter 2021 levels as we did not produce any paper volume at the jackson mill during the quarter average paper prices and mix were nine percent above fourth quarter for 2020 and over three percent higher than the third quarter of 2021 as we continued the implementation of our previously announced price increases while we have currently maintained our capability to produce uncoated free sheet on both machines at Jackson, we will continue to monitor market conditions and run our paper system accordingly. As we begin the call, as we begin the year, we anticipate that volume from our paper segment will be fairly representative of the over 500,000 ton per year capacity at the International Falls mill. The commercial team and the employees at International Falls have done a tremendous job optimizing our inventory, product mix, and cost structure. And for 2022, we expect solid EBITDA margins of 15% to 20% from the paper segment. Finally, I'll mention that last week, we notified customers of an $80 per ton price increase, effective with shipments beginning February 14th for all office papers, printing papers, and converting papers. I'll now turn it over to Bob.

Thanks, Mark. The lower tax rate benefit in the fourth quarter was the result of favorable state income tax return versus provision adjustments made annually. We expect our tax rate for the first quarter of 2022 to represent a more typical rate of approximately 25%. Cash provided by operations during the quarter totaled $391 million, with free cash flow of $152 million. Capital expenditures were $239 million, which was a bit higher than the guidance we gave you on our last call last quarter, as we were able to get more work completed on projects at several corrugated plants, as well as items related to the Jackson number three machine conversion than we had anticipated. For the year, our total capital spending of $605 million was still below our original guidance range due to the same material, equipment, and labor availability issues we spoke about last quarter. Other cash payments during the fourth quarter included $189 million for the purchase price of the advanced packaging acquisition, dividend payments of $95 million, cash tax payments of $42 million, and net interest payments of $38 million. As we mentioned on our last call, 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 lowered our overall interest rate from 3.9% to 3.5%, lowered our annual interest expense by $11 million per year, and extended our average debt maturity from 8.5 years to 16.3 years. Our gross debt remained unchanged at $2.5 billion. Based on the timing of closing the new bonds in September, our cash balance at the end of the third quarter included the new bond proceeds. However, since the redemption of the old bonds occurred in October, there was a cash outflow in the fourth quarter totaling $756 million, which included a redemption premium for the retired bonds. The final significant cash payment in the fourth quarter was $193 million for repurchasing over 1.4 million shares of our common stock at an average price of $133.79 per share. This provided an earnings per share benefit of approximately one cent in the fourth quarter compared to last year, and we expect an additional sequential benefit of approximately two cents per share in the first quarter of 2022. These repurchases of our outstanding stock, together with $380 million of annual dividend payments, represent over 52% of cash from operations or 64% of net income that was returned to shareholders in 2021. We ended the year with $765 million of cash, including marketable securities, and our liquidity at December 31st was just under $1.1 billion. For the full year 2021, cash from operations was $1.1 billion and free cash flow was $489 million. Our recurring effective tax rate for 2021 was 24% and our final reported cash tax rate was 19%. Regarding full year estimates for 2022 of certain key items as we move forward, We expect total capital expenditures to be approximately $800 million and DDNA is expected to be approximately $455 million. With the recent fourth quarter 2021 share repurchases, we expect dividend payments of approximately $375 million and cash pension and post-retirement benefit plan contributions of $52 million. Our full year interest expense in 2022 is expected to be approximately $86 million, and net cash interest payments should be about $85 million. The estimate for our 2022 combined federal and state cash tax rate is approximately 20%, and our book effective tax rate approximately 25%. Currently, planned annual maintenance outages at our mills in 2022 will result in approximately 35,000 more tons of lost container board production compared to 2021, which includes the tons lost during the first phase of the Jackson number three machine conversion in the fourth quarter. The annual earnings impact of these outages, including lost volume, direct costs, and amortized repair costs, is expected to be $1.13 per share compared to 91 cents per share in 2021. The current estimated impact by quarter in 2022 is 15 cents per share in the first quarter, 33 cents in the second quarter, 24 cents in the third, and 41 cents per share in the fourth quarter. I'll now turn it back over to Mark.

Thanks, Bob. For almost two years now, our employees have displayed tremendous adaptability and energy to overcome many obstacles. in both their personal and work lives to deliver significant accomplishments throughout the company. We achieved new records for both container board shipments and corrugated product shipments. We've successfully completed or substantially completed significant cost reduction and process improvement projects at our mills, including a new boiler at our filer mill for utilizing self-generated biogenic sources for energy. fiber flexibility projects at Wallula in Jackson, Alabama, wood yard, head box and shoe press improvements at Wallula Mill, head box and wet end upgrades at the Valdosta Mill, reel upgrades, pulp mill refining, and shoe press improvements at Derrida, Louisiana, and many others. Along with our recent acquisition of advanced packaging, We completed numerous higher return projects in our corrugated products plants that will allow us to continue to better optimize the entire packaging business for the future and deliver profitable growth and mix enhancement opportunities for our customers and shareholders. All the capital improvement projects that I referenced in the mills and corrugated plants have required the complete involvement of PCA personnel from project conception, preliminary and detailed engineering, all the way through to project implementation and startup. Although it required significant capital investments in order to achieve these important initiatives, we did so while improving our industry-leading return on invested capital to over 19%. We optimized the platform and financial results of our paper business while utilizing the versatility of the Jackson, Alabama mill to produce container boards. with minimal capital spending and delivering over $100 million of profit to our packaging business in 2021. Over 64% of our net income was returned to shareholders from dividend payments and stock repurchases. In addition, with our recent debt refinancing, we lowered the overall interest rate from 3.9% to 3.5%. lowered our annual interest expense by $11 million per year, and extended the average debt maturity from eight and a half years to 16.3 years. And finally, we ended the year with almost $1.1 billion of liquidity and a strong balance sheet, which maintains the financial flexibility to react quickly to most situations or opportunities in the future. These accomplishments, along with the recently approved $1 billion share repurchase authorization, clearly illustrate our continued commitment to a balanced approach towards capital allocation in order to profitably grow our company and maximize the returns to our shareholders while still adhering to our conservative balance sheet approach, as we've done for many years. I'm very proud of the accomplishments. and the strong partnerships that we've built with our customers and suppliers over many years. Looking ahead as we move from the fourth and into the first quarter in our packaging segment, we expect to benefit from higher corrugated product shipments with three additional shipping days. And we expect shipments per day to be higher than last year's first quarter as demand remains very strong along with slightly higher domestic and export prices in mix. Additionally, in our paper segment, we expect higher prices in mix from our previously announced price increase that was implemented beginning last November. There should also be a small benefit in the first quarter from our most recent uncoated free sheet price increase that was announced last week. Scheduled outage expenses will be lower, and we expect a small benefit from our recent share repurchases. However, continued higher inflation most all operating and converting costs, as well as freight and logistics expenses, more than offset these benefits. We estimate this to be the largest inflation-driven sequential cost increase in our history. In addition to the inflation-related impact, labor and benefits costs will also be higher due to timing-related increases as we start a new year, and seasonally colder weather should increase energy and wood costs. Considering these items, we expect first quarter earnings of $2.50 per share. This does not include any potential benefit from a $70 per ton price increase across all liner and medium grades that we communicated to our customers within the last few days. With that, we'd be happy to entertain any questions, but I must remind you that some of the statements we've made on the call constituted forward-looking statements. These statements were based on current estimates, expectations, and projections of the company and involve inherent risks and uncertainties, including the direction of the economy and those identified as risk factors in our annual report on Form 10-K and in subsequent quarterly reports on Form 10-Q that are filed with the SEC. Actual results could differ materially from those expressed in these forward-looking statements. And with that, Myra, I'd like to open the call to questions, please.

Thank you. We have our first question comes from the line of George Stappas from Bank of America. Your line is open. Please go ahead.

Thanks, everyone. Good morning. Thanks for the details and congratulations on the year. I guess my first question to start, can you talk a bit in a little bit more detail on where your shipments and bookings are early in the quarter and did the tightness in the market and all of the supply constraints that we've seen and heard about in the sector overall give you any opportunity to optimize your mix in corrugated? Could you provide some color there? And then a couple of follow-ons.

We'll let Tom get into that.

Hey, George, it's Tom. Yeah, let me just give you a little bit of flavor for where we're starting out the year. And there's a little confusion in the numbers, perhaps. So, The FBA considered January 3 to be a full workday, whereas for the most part, PCA, that was a holiday. So if you left the FBA number in, we're up about 2% for the month. If you took that number out and you just went with the PCA days, we're up 9%. So maybe blended somewhere in there, we're probably up about 5%, 5.5%. But as the quarter rolls on, that will kind of smooth out and even out. Regarding the supply constraints and optimizing mix, you know, we're constantly looking at those sorts of things. And, you know, yes, there's no question that at times, you know, we'll have to rationalize some business. We'll have to do some other things. But for the most part, I just remind you, I mean, we've got 16,000 plus customers. You know, we've partnered with these customers over a long, long period of time. We're very selective to the type of people we do business with, and we want to align ourselves with people who have long-term growth potential where we can enjoy both growth together. So hopefully that answers your question this morning.

Yeah, thanks for that, Bob. I mean, to some degree, even you said, though, in your release that price mix was a positive contributor to results relative to your guidance in the quarter. So I don't know if there's anything else you'd want to call out there. My other two ones, and I'll turn it over, you know, was there or could you quantify to some degree the benefit that the packaging segment got from Jackson, you know, producing, you know, purely container board and coming up the curve, recognizing not all the work's done there? And similarly, in paper, what benefits you got from not having some of those costs trapped since they're now allocated to packaging? Was there any kind of benefit from no open market pulp purchasing for Jackson for the paper business? And then last, Mark, just on the share repurchase authorization, obviously you completed the last one. Obviously the company generates a lot of cash flow. What, if anything, should we draw from the billion-dollar authorization relative to your need for capital since you've done so many projects and they seem to be generating a high return based on your results? relative capital allocation for the future. Thank you guys. Good luck in the quarter.

Thanks. Tom and I'll handle both the first part of the question, but if you, if you think about Jackson, uh, you know, for the full year, we produced, uh, probably 400 and just almost 450,000 tons of board at the mill. Uh, we had a home for all of that through our system. Uh, if you look at it another way, if we hadn't had Jackson, we wouldn't have been able to grow with the customers in the manner that we had. And, uh, generate the results. I called out on my portion of the script, you know, Jackson contributed $100 million, you know, to the segment of the year. And again, Tom, you know, if you think about Jackson and what it allowed us to do.

Yeah, certainly, certainly, Mark. And, you know, George, if you think about it, you know, with the volume that we had and that we were able to grow with our existing customer base, Had we not had Jackson, none of that would have materialized for the most part. And so the big jump in improvement really is a result of being able to get that board out of Jackson. And if you recall, I believe we forecast to take about 25% downtime in Jackson in the fourth quarter, which we didn't do at all, just due to the fact that we had significant demand, and that demand is carrying right into the first quarter.

Bob, do you want to add to that?

Yeah, and George, you know, regarding the, I think your question around the, you know, the shift of cost from paper segment to packaging relative to Jackson in the quarter, well, you know, year over year it was probably around $13 million that moved from paper to package of cost. And then sequentially it was probably six, maybe about $7 million that moved from paper to packaging. Okay.

And then regarding the share buyback, as far as the remaining authorization that was utilized, the decision was made it was the right time to use that authorization. It was the right time to buy and send that signal. And then as far as the new authorization for a billion, again, we just feel that's the appropriate number to have available as we go forward. And it continues to send the right message to the investors, shareholders, that we're going to continue delivering a return in many different ways, dividends, share repurchases, capital investments, and growing the company, i.e. growing the earnings that support all of that. So move on to the next question, please.

Thank you.

Our next question comes from the line of Phil Nung from Jefferies. Your line is open. Please go ahead.

Hey, guys. Congrats on another strong quarter. You know, it's great to see box shipments track really strong out at Gates, and you do have a little tougher comps. It would be helpful, Tom, maybe give us some perspective how you're thinking about the cadence and the growth profile for this year, given some of the challenges you're seeing in the supply chain. Should we expect more of a normal PCA growth year again?

Yeah, I'm very bullish. We're starting out very strong. We've got very good backlogs going into the year. It would certainly be nice to get a little more onto the downside of this Omicron strain because if there's any one thing that's impacting right now, it's the fact that not only do we have labor shortages as a result of it, but so do our customers. So it's a little bit choppy in our ability to be able to supply our customers on a consistent basis because things are changing almost daily in every single box plant across the United States. But all of our customers virtually across the board tell us that they could have shipped significantly more if not for the labor shortages, truck issues, and other supply chain issues that we mentioned.

Got it. That's helpful. And then from a CapEx standpoint, the $800 million CapEx, it's a big number. I'm appreciating there's a lot of capital for Jackson, but any other bigger projects you want to call out that's going to be a nice needle mover, whether it's a box plant or any cost-out take-out projects you have in place for this year?

Let me just describe it in this manner. For 2021, we were working on 1,060 projects between the mills and box plants. And just in the box plants alone, on what we'd call significant size projects, we had over 100 projects that were taken care of and involving 53 of the plants. And we're continuing that effort. And it involves everything from equipment replacement, equipment upgrades, corrugator rebuilds, new corrugators, just a continuing effort that we've been executing for the last four or five years now. We're doing it in a bigger way. The mills continue to enhance that opportunity to work on cost and efficiency. As we speak, two days ago, we just finished the rebuild of the Wallula No. 2 paper machine. We rebuilt the wet end, new head box. new stock approach, all new electric drives, new DCS, a lot of supporting equipment on the machine. A lot of that work was done primarily by our own PCA personnel. And it was, again, just another example of what we do. Also, as we speak, we're completing the first larger phase of the $50-some-odd million woodyard project at Wallula. That's been started up over the last week. So these are the type of projects that will continue to enhance our ability. And so these projects will just continue. We have a whole portfolio that we work on every year, but these are the type of projects that we'll continue to see. Just, again, numerous enhancements throughout the system.

That's great color, Mark. And just one last one. I'm appreciating you're seeing a lot of inflation across the board, but did you mention that it's the biggest sequential improvement, I mean, hit, I guess, in terms of operating costs. Are there any big buckets you want to call out? Because, I mean, at least on OCC nat gas prices, it seems to at least be stabilizing a little bit. So, be helpful kind of buckets in the biggest buckets where you're seeing a step up sequentially.

Yeah, Phil, this is Bob. You know, you sort of look, as we said, there's inflation like we've never seen in addition to what we, you know, the normal timing and seasonal type things. You know, moving sequentially all in, you know, it's 55 to 60 cents per share. And I would say maybe 10, a little over 10 cents of that is just the seasonal timing type thing. So the balance of that is this inflation we're referring to. And Yeah, you're right. I think OCC seems to have stabilized a bit, although extremely high compared to last year still. But the other buckets, whether it be the majority of the change in wood fiber, pretty much every chemical that we use is going up. Energy will be higher. And then the big one is labor and benefits, over and above the timing-type items that I mentioned. So it's really across the board in repairs and materials and other things. And, of course, freight. Freight is another big item. So they're all fairly significant relative to what we've seen historically.

Got it. Thanks a lot, guys. Really appreciate it.

Thank you. Next question, please.

Our next question comes from Mark Willie from Bank of Montreal. Your line is open. Please go ahead.

Thanks. Good morning, Mark, Tom, Bob. Good morning. Mark, I wondered if you could just help us with a little more in the way of kind of cadence and details around sort of the steps as we go forward at Jackson in terms of generally what you're doing at each phase and what the step-up in capacity will be. at each phase, and then what you expect kind of the ultimate capacity at Jackson might look like.

The phase that we talked about moving from the springtime, that would be the first really big phase of machine work that will now be done in the fall. That will enhance the capability of the machine itself to significantly produce at a higher speed. We'll be doing some work in the pulp industry in the back end of the mill to support some of that. We won't fully be able to take advantage of that work until the spring of 2023. So as we come out of this fall shutdown, we will have more capability to produce on a tons per day basis incremental capacity. We'll have the OCC plant completed this summer that will allow the utilization of some of that fiber over the machine after the work is done in the fall. But the bigger benefit will come in the spring of 2023 when the final additional dryers are added to the machine, and there's some press work that will be done at that time that will allow the full benefit of the work to be completed, and then you'll see the machine capability at the 700,000-tonne production rate per year in terms of the final phase. So does that help?

Any sense, Mark? Yeah, that does help. But any sense of that second machine and what you might ultimately be able to produce on that machine?

You know, we've studied that. Obviously, we're not going to talk a lot about that in public. That is a very good quality machine. It's obviously not as big. The number one Jackson machine is is not as big a machine as the number three, but it is a very good quality machine. It has a very good trim. So as we are doing the analysis that we currently have underway, we look at market, we look at growth, we look at what our internal needs are, that machine offers a tremendous amount of opportunity. And then it depends on how much capital we would choose to apply to that opportunity. And I'll give you an example. The machine with minimal capital could produce 500 tons a day, or at an appropriate capital spending, you could produce 1,000 tons a day. So it all depends on what we determine is the right situation in terms of demand and where we want to get tons from. But a lot of opportunity and a great asset base.

Yeah. Okay, the other question I had is really more for Tom Haas further. And Tom, I wondered if you could just give us some sense of sort of inflationary pressures at the box plant level. And also related to that, just sort of what it means for the industry as we move to these bigger and wider corrugators and how that sort of ripples back into the mill system? Because it seems like most of the new corrugators that are going in are, you know, anywhere from 98 to 130 inches.

Yeah, Mark, you know, well, I'll take the last one first regarding the corrugators. You know, for a long time as an industry, you know, we've been moving to wider corrugators. And the mills have just, you know, in my opinion, you know, some of that is good for mills and some of that is not so good for mills. And as Mark just talked about, you know, when you've got a wider machine, obviously, you know, we've got more flexibility in terms of the trim pool for those wider machines for the wider corrugators. So, you know, and quite frankly... what you need to do to efficiently get volume out of a box plant today, you're going to need a wider corrugator just to be able to run a profitable business, getting the proper amount of footage out the door. And a lot of these narrow corrugators are finding their way uh, into combining into, you know, two narrows into one larger corrugator and those sorts of things. So there's a lot of moving parts going on and that's been going on for quite some time. And, uh, you know, it's, it's, if you take our mill system as an example, uh, you know, they just, they know who their customers are and they just adapt to what the customer needs are. And we figure out a way to do it and we figure out a way to do it very efficiently. Um, you know, the inflationary pressures at the box plants, uh, You know, you've got labor, obviously, is a big, big issue for us. And, you know, the inefficiencies built in with all the absenteeism and everything else around the COVID that we've been dealing with for a number of years. Transportation is an enormous issue. And all indicators are that that's still rising dramatically. And energy costs as well. So, you know, those are our key drivers.

I want to comment. If you went back to 2019 period, 2018, 2019, and you compare the hundreds and hundreds of projects that we've executed over the last couple of years, all of these from new equipment, equipment upgrades, new box plants, we've improved productivity per unit hour approximately 20% across the packaging system. Our growth and the results would not be what they are if we had not been able to achieve the capital upgrade and improve all of the asset base in the corrugated packaging side of the business.

Yeah, that's helpful, Mark. Tom, just to be clear on the freight, would you in the box business, would you carry the cost of freight between the box plan and the customer, or does the customer pick that up?

Well, that's built – listen, I mean, there's a lot of different things and a lot of different pricing mechanisms that we use. But ultimately, obviously, we're just not – we're not prepared to eat these enormous freight increases and stuff, and that's what's driving some of the price improvements that we've just realized.

Yeah, okay. I'll turn it over. Thanks, guys. Thank you. Next question, please.

Our next question comes from the line of Mark Weintraub from Seaport Research. Your line is open. Please go ahead.

Thank you. Hats off. Phenomenal quarter. Great year. One thing I was trying to get a better sense of, you guys are very thoughtful whenever you go to the market raising prices to customers. You just announced on Container Board that you're performing superbly internally. people have been looking at industry data and they've been questioning whether or not this is a good time to be raising prices. Again, you guys are very thoughtful. I'm sure you have a perspective and would love to, if you're willing to hear you share that.

Now, Mark, this is Tom. We don't, you know, as you know, we never talk about forward-looking pricing or what our thoughts are around it or anything else. So it's, That's all I'm going to say about that.

Okay. Well, let me just follow up on it a little bit. One of the questions I guess people are asking about is inventories seem to be going higher. You guys probably have a better view of what's really going on in the drivers and dynamics of place, which I'm sure you're factoring in. to the way you're thinking about how your business plays out and how the market is. Is there anything on that specific that you could share? For instance, I did notice you talked about boxcars being an issue. Would that potentially have led to, for you guys or the industry, for an increase in mill inventories where it's not necessarily occurring so much at the box plants? Or any color like that that may be you could share that would help us understand in these very unusual times some of the dynamics going on in the business that might not be so apparent to outsiders.

Mark, when the AFMPA data came out recently, there was a lot of confusion. You're looking at mill data, and if you think about the way the holidays fell and you think about how the mills were running, trying to get a truck or a box car at the mill, even if you could get a boxcar at the mill switched, the likelihood of getting it taken away from the mill was unlikely. Hoping that trucks would show up, again, it was a hope, so it was the most difficult period in the history of PCA trying to move container board during the holidays, and we saw the largest increase of our mill inventory since I've been here for almost 26 years, in terms of a holiday build at the mill. On the other hand, we saw the opposite at the box plants. We saw the inventory drop to that low level as the mills built to the high level. And so not being able to speak for the industry, though, I believe we are probably all in a similar situation. We share a lot of the same railroads. We share a lot of the same trucking industry. And so it'll be interesting when FBA comes out with their data. Tom, do you want to add a little color to that?

I totally agree with you, Mark. And I think a lot of people jump to conclusions quickly just based on mill inventory. And as Mark just alluded to, if you look at our box plants, our box plants are very skinny on inventory right now. and we need every ton that we can get out of those mills. Nothing's changed in the demand curve, as I talked about. And, you know, of course, we trade paper as well, and we see the same problems coming out of other mills that we do out of our own. So I think taking a small snapshot of inventory at the mill level, which is low, you know, which is a low number to begin with, and seeing those numbers go up has led to a little bit of a misnomer, in my opinion, as to where emanatories really sit right now in the industry.

Mark, if you go back before the pandemic and you think about a normal holiday, you could count on a rail switch, one switch a day, even through the holidays. You'd have trucks still showing up as scheduled. Now we've just experienced a holiday where We didn't see trains for days to come and bring empty cars in and take your loaded cars away. And because of Omicron in particular and what it was doing to the availability of drivers and rail crews, we had to deal with that. We were close to, in a few cases, running out of room to put container board on the floor at mills. and so it was an extremely challenging holiday period. So again, that's our take on it.

I really appreciate all that additional color. Are you seeing any easing on those issues yet, or are they still as difficult as they were a few weeks back?

It's improved significantly, but it's improved to where we were before the holidays, which was not very good to begin with. I mean, it It's really the pandemic-related impacts of labor availability for everybody out there, whether it's the trucking industry, railroads. And so we have our inventories now headed back at the mill level into a more normal balance and getting container board out to the box plants and our outside customers. But again, every day is still a challenge when you look at the winter weather. and how that now impacts storm to storm. Again, it's improved, but we still have all eyes on what's happening 24 hours a day, trying to make sure we don't fall behind. Thank you. Good luck on the quarter. Thank you. Next question.

Our next question comes from the line of Gabe Haji from Wells Fargo. Your line is open. You may now ask your question.

Good morning, Mark, Bob. Good morning. I was hoping maybe to get a little bit of insight in terms of kind of your mill system. We can obviously look at it and understand it's predominantly virgin-based. But as some of your customers, I guess, become increasingly focused on environmental initiatives and want to incorporate more recycled content, could this cause you to rethink or at least consider having a little bit more recycled container board exposure in your mill system over time?

Tom, why don't you go ahead and answer.

Hey, Gabe, listen, our customer base and primarily, I mean, I think the industry has done a very good job of educating, you know, our customer base, consumers, et cetera, with the fact that we have a sustainable product and, you know, it, You can't have a recycled product without starting with a virgin product. So I think that most people now, and certainly our customers, and we've done a good job educating our customers to the fact that virgin fiber, it performs very well. It gives us a lot of flexibility in terms of the amount of fiber we have in the sheet. We constantly are working on those sorts of things. And, you know, that creates the recycled stream down the road. So they get the closed loop system. They get the sole sustainability story around container board grades. And, you know, we'll continue to do what we see is the best things to do for our company and for our mills and for our cost structures going forward. And, you know, we really believe in fiber flexibility. And, you know, I think that's proven to be very good for us in the long term.

Okay, thank you. And then if you can give us a little bit of sense quantitatively, kind of an integration rate exiting 2021, and then is there, I don't want to say a formal target, but a bandwidth that you think is comfortable for PCA to operate within, and once you get to the low end or the high end, or if you're making outside purchases, when you might want to think about more mill capacity?

You know, I'll answer that, and I'm sure Bob Bob or Tom are going to weigh in on this. As far as integration, we look at ourselves as fully integrated. We continue to move a minimal amount of product to some outside customers. That balance is going to stay normalized. Tom mentioned earlier on his part of the script that export sales in particular, we've had that customer base for many decades. But rather than calling out an exact number of whether it's 92% or 94% or 95% or 98%, we are in a situation where we say that we're fully integrated with the business as, as we run through, uh, and looked at last year, the year before and, and into 2022. Tom or Bob, you want to add to that?

I've got, I've got very little to add to that. I mean, that is, that is the way we look at our business. And, uh, Even the small outside customer base, and I've mentioned before many times that outside independent customers have become smaller and smaller and smaller as we've acquired them or other people in the industry have gone through the acquisition. And of course, the one we just did in advance, that was another very large one that will now be fully integrated. But even those outside customers that we have, we have such long-term relationships with them and long-term contracts with them that even to some extent, that few percentage of those customers we consider to be and treat them like they're fully integrated.

And I think also part of your question regarding going to the outside market for container board, we don't see that need. We're looking out into the future years on on as the packaging side grows and we need to supply that demand. We have levers to pull internally on how we would do that and we're very comfortable looking out over the next three to five years on how we would achieve the type of growth we would expect.

Thank you guys. Congrats and good luck.

Thank you. Next question.

Our next question comes from the line of Adam Josephson from KeyBank. Your line is open. Please go ahead.

Thanks. Good morning, Mark, Bob, and Tom. Congratulations on a really fine quarter. Mark, I think George asked you about this earlier, but just back to the buyback, you mentioned that you felt like now was a good time, and I'm just wondering... why now as opposed to you know any time over the previous year or so i mean the stock has been pretty range bound over the past several months uh obviously didn't buy back any stock in 2020 so i guess why did you think now was the appropriate time as opposed to over the past you know preceding year or two and and what what signal were you trying to send uh to investors

You know, the only good way to answer that is that we just believed it was the right time, that we wanted to go ahead and just reaffirm our ability to continue to take care of the investors and return value to the investors in numerous ways. We've been doing that with the dividends. continue to generate extremely high returns with our capital spending that ultimately generates higher profitability, which continues to feed into the value for the shareholders. But we felt, again, with the cash that we had available and the fact that the stock was trading in the range it had been, we felt it was a fair price to buy at and it was the right time to buy at.

It's as simple as that. Sure. No, I appreciate that. And just one on guidance. I mean, you you you refrain from giving guidance at the outset of the pandemic for several quarters and then you reinstated it a few quarters ago. And obviously you beat your guidance by 72 cents or 35 percent in the fourth quarter, which is outstanding. But it just makes me wonder how much visibility you still have in your business given these circumstances. significant deviations versus your guidance. So how would you characterize your visibility into what's coming over the next several weeks or this quarter for that matter, compared to what it's been over the past several quarters and pre-pandemic for that matter?

Hey, Adam, this is Bob. You know, I'll say that I know you were one of the ones that were, you know, wanting us to quantify again once we did stop just, but You know, there are more uncertainties now probably than when we stopped, you know, giving the guidance right there, you know, after the pandemic began back in 2020. Because, you know, so many things, whether it be, you know, people leaving the workforce, the COVID variants that have just made that situation worse, the supply chain has become even more complex and difficult and many more obstacles. So things that have been embedded that started after the pandemic began have just sort of continued to get worse. So there's more uncertainty now for us than there was when we stopped the guidance, frankly. And our results have shown we've been conservative, obviously, in our guidance, which is one of the reasons I think we end up beating it. But as Tom alluded to, these same things that we struggle with, our customers struggle with, and, you know, they – They see the orders, they put in orders for containers and boxes, but yet then at the other end, you know, they don't have the labor to get their orders out the door. So they have to change what, you know, what they're doing. And that changes, you know, it all backs up to, you know, our forecasting and so forth. And it's not like we all of a sudden, you know, got dumb relative to how do we do this. We've always been fairly accurate, but there's just way... You know, a lot more unknowns now, frankly, than there was, you know, when we started this back in the early part of 2020.

Yeah, no, understood. Thanks a lot, Bob. Best of luck.

Okay, thank you. Next question, please.

Our next question comes from the line of Mike Roxland from Trust Securities. Your line is open. Please go ahead.

Thanks very much. I'm Mark, Bob, Tom. Thanks for taking my questions and congrats on a solid quarter end year. Most of my questions have been asked. Just one quick question I wanted to ask you about is inventory. Can you help us frame how you're thinking about inventory management on a go-forward basis? Given the supply chain logistics, which you constantly stressed on the call, How do you think about inventory level coming out of the other side? Do you think that it will be 5% higher, 10% higher? The last couple of decades has been a big focus on just-in-time. Does that continue, or do you try to modify that to account for any type of issues similar to the ones that you're experiencing now?

Let me answer it in this way. When we came out of 2020 into 2021, we desperately needed to build inventory, and we did that. And we got ourselves in a good place through the summer into the third quarter. But as we've also mentioned, the inventories now have dropped to a much lower point than we really need to be at. We're actually into our annual shutdown schedules right now. So we will go through the winter and spring and end up at a very low point. And so I'm not going to give you a number for a target. I'm just going to tell you that this year, as it has been for the last few years, will continue to be a challenge to make sure that the mills are producing and adequately supplying the box plants. And so in that regard, it's a high-class problem to have. But, you know, again, for PCA, the situation is that, you know, where we had been was a good level to be at. But again, we slipped and lost ground with the logistics transportation issue. So Tom, you want to add to that?

Well, I just say that one thing to keep in mind is as we've continued to grow our business, the inventory has to be somewhat commensurate with that growth. And we just have not been able to totally catch up with that We got in, as Mark said, we got into a decent position last spring and summer. But, you know, here we are starting out this year. We've got a pretty gigantic backlog. Demand has moved up again. And we've got, you know, mill outages coming. So, you know, it is all hands on deck to not only get everything produced what we can produce at the mill level, but to get it shipped fast. to the box plants and to some of our other customers. Now, the other good news is at least that our export business is heavy in the second half of the year and primarily into the fourth quarter. So that will get a little relief there, but we've got a lot of work to do to get the inventory levels back up.

I appreciate it, Collin. As things normalize, we get past COVID, how do you think about inventories? Relative to what's been the historical trend Will you look to have a larger amount of inventory just in case conditions, you know, like these supply chain issues reoccur? Are you going to be a little more cautious with inventory management, I guess, on a go-forward basis?

Yeah, that really depends, Mike. You know, what we'd really like to do is if we could get back to, you know, if we could get back to some normality here, you know, we like to operate with lean inventories if we can, providing we've got the whole transportation system and supply chain in place. to be able to do that. Unfortunately, right now, we're still a long way away from that. But if and when that time returns, we'll operate incredibly efficiently because that's a cost area that we'd like to avoid if we could.

Thanks very much. Good luck in the quarter. Thank you. Next question, please.

Our next question comes from the line of Anthony Pettinari from Citigroup. Your line is open. Please go ahead.

Good morning. Good morning. Mark or Tom, you talked about postponing Jackson's conversion phase from spring to the fall to meet the very strong demand that you're seeing. Is it possible to quantify how many tons that sort of buys you this year, if I'm thinking about that the right way?

Anthony, this is Bob. I'll just say that, you know, relative to when it was originally scheduled in the spring and now, you know, frankly, the volume we were expecting out of Jackson this year is really about, will be about the same because, you know, from when we originally started that machine up, we're actually getting more production out of it, more efficiency out of it than we had originally thought. So although we won't be on that higher ramp as early in the year this year because we push it from the spring to the fall, those additional efficiency we've been getting out of the machine, sort of on a net-net basis, we'll get about exactly what we thought we would get before we push that outage.

Okay, okay, that's helpful. And then on the container board price increase, not asking for any forward-looking view, but historically, can you kind of remind us with previous price hikes how many quarters or months those have sort of typically taken to be to be reflected or flow through to the bottom line?

Yeah, we typically, you know, from the time of formal announcement to, you know, to completion, we typically will roll that out over about a 90-day period.

Okay, that's helpful. I'll turn it over. Thank you. Next question, please.

Our next question comes from the line of Kyle White. Your line is open. Please go ahead.

Hey, good morning. Thanks for taking the question. I just wanted to go back to the labor challenges that you're experiencing and the industry is experiencing. Is there any way to give us a sort of order of magnitude in terms of how many workers at the box plants were typically out per week back in December and what that level kind of looks like here today?

I wish it was as predictable as that question might make it appear. You know, we could have, you know, a high percentage of a workforce not out in one place and then have, you know, a pretty good percentage out at another place. So it's just moving across the country. And if you track what's happened with this Omicron variant as an example, you know, we track very closely with what's going on nationally. However, you know, it's incredibly disruptive. at one point in time where, you know, you just have a, you know, you might have a whole crew, you know, on a particular machine center, a couple of machine centers not available on a particular shift, when in essence, you know, we've got, we certainly have the demand for that. So, but I think in addition, I think what really complicates this labor issue is what I mentioned earlier, and then Bob just mentioned again, our customers are dealing with the same exact thing. And so, you know, there's a lot of disruption as a result of that, trying to deal with this.

That makes sense. It's definitely unprecedented times. It's difficult to quantify. On the buyback, given your healthy balance sheet, is there a timeline that you expect to fully use that authorization that you just announced?

No. As we've done in the past years, we have it available, and we'll just leave it at that.

Sounds good. I'll turn it over, and good luck in the year.

Thank you. With that, Myra, I believe we're out of time and out of questions.

Yes, Mr. Coulson, we have no more questions. Do you have any closing comments?

I'd like to thank everybody for taking the time to join us today, and we look forward to talking to you in April to review the first quarter earnings results. Take care. Have a good day.

This concludes today's conference call. Thank you all for participating. You may now disconnect. Have a great day.