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.