Packaging Corporation of America

Thank you for joining Packaging Corporation of America's third quarter 2022 earnings results conference call. Your host today will be Mark Kulzan, Chairman and Chief Executive Officer of PCA. Upon conclusion of this narrative, there will be a Q&A session. I will now turn the conference over to Mr. Kulzan. Please proceed when you are ready.

Thank you, Matt. Good morning and thank you all for participating in Packaging Corporation of America's third quarter 2022 earnings release conference call. I'm Mark Holzan, Chairman and CEO of PCA and with me on the call today is Tom Hasfurther, Executive Vice President who runs our packaging business and Bob Munday, our Chief Financial Officer. I'll begin the call with an overview of our third quarter results and then turn the call over to Tom and Bob who will provide further details. I'll then wrap things up and then we'd be glad to take any questions. Yesterday, we reported third quarter net income of $262 million, or $2.80 per share. Excluding special items, third quarter 2022 net income was $266 million, or $2.83 per share, compared to the third quarter of 2021 net income of $257 million, or $2.69 per share. The third quarter net sales were $2.1 billion in 2022 and $2.0 billion in 2021. Total company EBITDA for the third quarter, excluding the special items, was $477 million in 2022 and $464 million in 2021. Third quarter net income included the special items expenses of three cents per share, primarily for certain costs at the Jackson, Alabama mill for the paper to contain board conversion related activities. Details of all special items for the third quarter of 2022 and 2021 were included in the schedules that accompanied the earnings press release. Excluding the special items, The $0.14 per share increase in third quarter 2022 earnings compared to the third quarter of 2021 was driven primarily by higher prices and mix in our packaging segment of $1.60 and paper segment $0.23. Lower interest expense, $0.04. A lower share count resulting from share repurchases, $0.04. And a lower tax rate, $0.02. These items were partially offset by operating costs, which were 70 cents per share higher, primarily due to inflation-related increases in the areas of energy, repairs, materials and supplies, chemicals, labor and benefits expenses, as well as several other indirect and fixed cost areas. We also had inflation-related increases in our converting costs, which were 4 cents per share higher. The negative impact of lower volume was 52 cents per share in our packaging segment and 5 cents in our paper segment. Freight and logistics expenses were 20 cents above last year, and scheduled outage expenses were 10 cents higher. We also had higher depreciation expense of 7 cents and other expenses of 4 cents. The results were three cents above the third quarter guidance of $2.80 per share, primarily due to the very sound implementation processes around our previously announced price increases in the packaging and paper segments, as well as the continued benefits generated from our mills and plants through process efficiency optimization efforts and material usage initiatives. Looking at our packaging business, EBITDA excluding special items in the third quarter 2022 of $467 million with sales of $1.9 billion resulted in a margin of 24.1% versus last year's EBITDA of $467 million with sales of $1.8 billion and a 25.5% margin. Our teams did a tremendous job of implementing our previously announced price increases However, demand in our packaging segment was well below our expectations for the quarter. Tom will discuss this further in a moment. The container board mills operated in an efficient and cost-effective manner as we balanced our supply with current domestic and export demand. As part of the effort, we began the scheduled maintenance outage in the first phase of the No. 3 machine conversion to container board at our Jackson, Alabama mill a few weeks earlier than originally planned. Total economic-related downtime for the third quarter was approximately 128,000 tons. The outage and conversion work at Jackson will be completed in the fourth quarter and we will remain committed to ramping up our internal capacity according to our customers' demand requirements. Finally, although we are still experiencing historically high inflation within our operating and converting costs, our mills and plants continued to remain focused on delivering numerous cost reduction initiatives, efficiency improvements and integration and optimization enhancements, and capital project benefits that helped minimize the impact. I'll now turn it over to Tom, who will provide more details on the container board sales and corrugated business.

Thank you, Mark. As Mark mentioned, 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 $1.54 per share above the third quarter of 2021 and up 35 cents per share compared to the second quarter of 2022. Export container board prices and mix were up 6 cents per share compared to the third quarter of 2021 and up a penny per share compared to the second quarter of 2022. The lower demand in our packaging segment that Mark spoke of was driven by several items, the combined impact of which resulted in our volumes being much lower than we anticipated. Corrugated product shipments were down 6% in total and per workday compared to last year's third quarter. Outside sales volume of container board was 57,000 tons below last year's third quarter, and 61,000 tons below the second quarter of 2022. The ongoing inventory correction in the retail channels is larger than originally thought, and significant inflation continues to negatively impact consumers' purchases of both durable and non-durable goods. In addition, various events and issues in 2021 and this year, including the recent hurricane in Florida, continue to have a negative effect on the agriculture and protein markets. Demand is beginning to experience headwinds from the cooler housing markets as well. These things combined with rising global interest rates, deterioration in U.S. economic conditions, economic weakness in China and Europe, along with China's zero-tolerance COVID policy, all negatively impacted domestic container board and box demand. As we look from the third quarter and into the fourth quarter, we expect the majority of these conditions to continue. And in addition, there are four less shipping days in the fourth quarter compared to the third quarter. Now I'll turn it back to Mark.