Packaging Corporation of America

Thank you for joining Packaging Corporation of America's fourth quarter and full year 2023 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 question and answer session. I'd now like to turn the floor over to Mr. Colzan. Please proceed when you are ready.

Thank you, Jamie. Good morning, everyone, and thank you all for participating in Packaging Corporation of America's fourth quarter and full year 2023 earnings release conference call. Again, I'm Mark Colzan, Chairman and CEO of PCA, and with me on the call today is Tom Hassfurther, Executive Vice President who runs the packaging business, and Bob Munday, our Chief Financial Officer. As usual, I'll begin the call with an overview of the fourth quarter and full year results, and then I'll be turning the call over to Tom and Bob who'll provide further details. After they're done, I'll wrap things up, and then we'll be glad to take questions. Yesterday we reported fourth quarter 2023 net income of $189 million, or $2.10 per share. Excluding special items, fourth quarter 2023 net income was $192 million, or $2.13 per share compared to the fourth quarter of 2022's net income of $215 million or $2.35 per share. Fourth quarter net sales were $1.94 billion in 2023 and $1.98 billion in 2022. Total company EBITDA for the fourth quarter excluding special items was $394 million in 2023 and $409 million in 2022. Excluding the special items, we also reported full-year 2023 earnings of $784 million or $8.70 per share compared to the 2022 earnings of $1.04 billion or $11.14 per share. Net sales were $7.8 billion in 2023 and $8.5 billion in 2022. Excluding special items, total company EBITDA in 2023 was $1.6 billion compared to the $1.9 billion in 2022. Fourth quarter and full year 2023 net income included special items primarily for certain costs at our Jackson, Alabama mill for the paper to container board conversion related activities and the closure and other costs related to corrugated products facilities and design center. Details of all special items for the year 2023 and 2022 were included in the schedules that accompanied our earnings press release. Excluding the special items, the 22 cents per share decrease in fourth quarter 2023 earnings compared to the fourth quarter of 2022 was driven primarily by lower prices in mix of $1.93 in the packaging segment, lower prices in mix, 4 cents, and volume, 3 cents in the paper segment, and higher depreciation expense, 10 cents. These items were partially offset by very good volume in the packaging segment of $1.07 per share. We also had lower operating and converting costs of 51 cents driven by very good process efficiencies and control over other usages of fiber, chemicals, energy, materials, and labor, as well as lower energy and wood fiber prices. In addition, we have lower scheduled maintenance outage expenses of 19 cents, lower freight and logistics expenses, 3 cents, lower other expenses, 4 cents, and a lower share count resulting from share repurchases, 4 cents. The results were 37 cents above the fourth quarter guidance of $1.76 per share, primarily due to higher volumes in our packaging segment, lower operating and converting costs, lower freight and logistics expenses. Looking at the packaging business, EBITDA excluding special items in the fourth quarter of 2023 of $385 million with sales of $1.8 billion resulted in a margin of 21.7% versus last year's EBITDA of $392 million and sales of $1.8 billion and also a 21.7% margin. For the full year 2023, packaging segment EBITDA excluding special items was $1.6 billion with sales of $7.1 billion or a 21.8% margin compared to the full year 2022 EBITDA of $1.8 billion with sales of $7.8 billion or a 23.8% margin. Throughout the quarter, demand in the packaging segment was stronger than our expectations. This higher volume, along with the operational benefits of our capital spending program and continued emphasis on cost management and process efficiencies across the entire manufacturing and converting facility system drove operating and converting costs lower as well. We had an excellent restart of the Wallula Washington mill and the number three machine during the latter part of October and ran exceptionally well during the November and December period. And that helped us meet the stronger demand and build some needed inventory during the quarter to ensure that our customers are supplied with their needs. We plan to restart the number two machine at the Wallula Mill in this first quarter to help manage our expectations in the first half of 2024 for continued strong demand together with scheduled mill maintenance outages and the final phase of the container board conversion of the number three machine at our Jackson, Alabama mill. I'll now turn it over to Tom who will provide more details on container board sales and the corrugated business.

Thank you, Mark. As Mark mentioned, packaging segment volume for the quarter exceeded our guidance estimates. Corrugated product shipments per workday were up 5.1%, and total shipments with one additional shipping day were up 6.9% compared to last year's fourth quarter. Versus the third quarter of 2023, shipments per day were up 5.2%, and total shipments were up 3.4%, even though there was one less shipping day. Outside sales volume of Container Board was 88,000 tons above last year's fourth quarter and 17,000 tons above the third quarter of 2023. Our order backlog and Container Board cut-up remain incredibly strong throughout the quarter. Although demand continues to be challenged by persistent inflation, higher interest rates, and other factors, we expect our shipments to continue this positive momentum as we enter the first half of 2024. Relative to the published reductions in the industry benchmark grades that occurred in 2023, domestic container board and corrugated products prices and mixed together were $1.73 per share below the fourth quarter of 2022 and down 40 cents per share compared to the third quarter of 2023, which included a richer mix of graphics and point of purchase display business. Export container board prices and mix were down 20 cents per share compared to the fourth quarter of 2022, and down a penny per share compared to the third quarter of 2023. Beginning January 1, 2024, we began invoicing a $70 per ton price increase for liner board and a $100 per ton increase for medium, according to our recent price announcement. As you are probably aware, this past Friday, the RISI Pulp and Paper Week publication did not recognize any increase in the industry's benchmark prices for either liner board or medium. I'm sure you will have some questions for us on this topic and we'll be happy to discuss them with you shortly. I'll turn it back to Mark.

Thanks, Tom. Looking at the paper segment, EBITDA excluding special items in the fourth quarter was $35 million with sales of $144 million or a 24.5% margin compared to the fourth quarter of 2022's EBITDA of $39 million and sales of $154 million. or 25.7% margin. For the full year 2023, paper segment EBITDA excluding special items was $151 million with sales of $595 million or a record 25.3% margin compared to the full year 2022 EBITDA of $132 million with sales of $622 million or a 21.3% margin. Prices in mix were down 3% from last year's fourth quarter and from the third quarter of 2023, driven by the declines in the index prices that occurred during the year. Although slightly better than our fourth quarter guidance, sales volume was 3% below last year's fourth quarter and down approximately 6% versus the seasonally stronger third quarter of 2023. The management team and all the employees of our paper business have done a tremendous job over the last several quarters to optimize our inventory and product mix and remain focused on efficient and cost-effective operations in order to continue delivering outstanding results during 2023. I'll now turn it over to Bob.

Thanks, Mark. Cash provided by operations during the quarter totaled $335 million. and free cash flow was $194 million. The primary payments of cash during the quarter included capital expenditures of $141 million, dividend payments of $112 million, cash tax payments of $59 million, and net interest payments of $26 million. For the full year 2023, cash from operations was $1.3 billion with capital spending of $470 million and free cash flow a record $845 million. Our final recurring effective tax rate for 2023 was 24.5%. During the fourth quarter, we issued $400 million of new 10-year notes. The proceeds from these notes will be used to redeem our $400 million notes that mature in September of 2024. Our net debt is not affected by this transaction, and the proceeds from this issuance will be invested in marketable securities at an interest rate exceeding that of the new notes. The new bonds raised our overall fixed interest rate by approximately 30 basis points and extended the overall average maturity of our debt portfolio from 14.1 years to 15.6 years. Excluding the proceeds from this transaction, our year-end cash on hand balance, including marketable securities, was just over $800 million. with liquidity of $1.1 billion. Regarding full-year estimates of certain key items for the upcoming year, we expect total capital expenditures to be in the range of $470 to $490 million, and DD&A is expected to be approximately $530 million. We estimate dividend payments of $450 million and cash pension and post-retirement benefit plan contributions of $27 million. Our full year interest expense in 2024 is expected to be approximately $53 million, and net cash interest payments should be about $60 million. The estimate for our 2024 book effective tax rate is 25%. Currently, planned annual outages at our mills in 2024, including lost volume, direct costs, and amortized repair costs, is expected to total 96 cents per share. The current estimated impact by quarter in 2024 is 26 cents per share in the first quarter, 16 in the second, 19 cents in the third, and 35 cents per share in the fourth quarter. These expenses include the volume and cost impact that will be incurred during the completion of the final phase of converting the number three machine at the Jackson Mill to container board during the first and second quarters. This will negatively impact our first quarter results by approximately 16 cents per share, and our second quarter results by eight cents per share.

I'll now turn it back over to Mark. Thank you, Bob. I'm very proud of the outstanding results PCA delivered in 2023 under very challenging demand conditions. We successfully completed numerous cost reduction and process improvement projects along with other key strategic initiatives at the container board mills and corrugated products plants. Our dedicated sales and customer service organizations continued to be extremely motivated at understanding the business of our customers. They were very responsive to our customers' needs and worked proactively to help them with their solutions to their opportunities and their challenges. These combined efforts allowed us to enhance our entire packaging business and deliver profitable growth opportunities for our customers and shareholders now and into the future. 2023 also saw our paper business deliver record margins reflecting the capabilities of our employees to optimize our product mix, inventory, distribution channels, and overhead structure, along with running very efficient manufacturing operations. These accomplishments helped us to achieve a new all-time annual record-free cash flow, We ended the year with over $1.1 billion of liquidity and extended the overall average debt maturity to almost 16 years. We continued our commitment to a strong balance sheet and a balanced approach toward capital allocation. This allows us to profitably grow the company and to maximize returns for our shareholders while maintaining the financial flexibility to react quickly to situations and opportunities. None of these things would be possible without the hard work of the talented employees and strong partnerships we've built with our customers and suppliers over many, many years. Looking ahead as we move from the fourth and into the first quarter, as Tom indicated, in our packaging segment, we expect continued positive momentum in demand along with two additional shipping days in the first quarter to drive higher total corrugated product shipments. Despite restarting the number two machine at the Wallula Mill, container board volume will be lower due to the downtime associated with the conversion of the number three machine at the Jackson Mill and a scheduled maintenance outage at the Counts Tennessee Mill. Prices and mix should be slightly higher with the implementation of our announced January price increases partially offset by a decrease in the published benchmark prices that occurred late in 2023 with export prices fairly flat. In our paper segment, we expect an improved mix to move prices slightly higher with flat sales volume. Recycled fiber and energy prices will be higher, and unusually cold seasonal weather will negatively impact usages and yields for energy, wood, and chemicals, along with higher operating costs associated with the restart of the full operations at the Wallula Mill compared to the fourth quarter operations. Labor and benefits costs will have seasonal timing-related increases that occur at the beginning of a new year related to annual wage and benefit increases, the restart of payroll taxes, and share-based compensation expenses. And finally, as Bob mentioned, scheduled outage expenses will include the significant first quarter impact of the conversion outage at the Jackson Mill, which is estimated to be $0.16 per share. Considering these items, we expect the first quarter earnings of $1.54 per share. And with that, Jamie, I'd like to open the call for questions, and we can proceed as you call it out. Thanks, Jamie.

Ladies and gentlemen, at this time, we'll begin the question and answer session. To join the question queue, you may press star and then 1. To withdraw your questions, you may press star and 2. If you are using a speaker phone, we do ask that you please pick up the handset prior to pressing the keys to ensure the best sound quality. Once again, in order to join the question queue, please press star and one. Our first question today comes from Mark Weintraub from Seaport Research Partners. Please go ahead with your question.

Thank you. First, congrats on another really strong year in a challenging environment. So you say in the press release that you are expecting a slightly higher pricing despite the $20 decrease in November, and obviously you're including some from the January increase, which, as you mentioned, we're going to have questions undoubtedly. Is that fair to say that you're including a little bit more than $20 on average in the 1Q? How should we think about that?

Yeah, Mark, this is Tom. Yeah, well, it's slightly above the $20. You know, we've got the follow-through on that published $20 down. And as I said, we put the liner board of medium price increase into effect January 1st. And we're invoicing accordingly and getting paid accordingly. And I might also add that as a net buyer – We also have accepted the $70 increase on the buy side and have been paying invoices accordingly.

Okay. And so just to clarify, so when you said net 20, was that the increase minus the impact of the 20 or was that that you were effectively, because of the way the lags work, et cetera, as you push it through into box prices, that the impact of the $70 that's been announced is slightly more than $20 in the first quarter. I apologize for the question, but just clarify.

Yeah, you're pretty much right. And you've got to also think about it as the $20 is factoring into the box business right now given contract triggers. Got it.

Understood. And lastly, and I'll turn it over, Could you give us a sense of how demand is shaping up in January so far for the business?

Yeah, demand remains very strong. We're currently booking and billing about 8% above a year ago, and we see that trend continuing through the quarter.

Okay, thank you.

Thank you, Mark.

Next question. Our next question. Our next question comes from Sandra Liang from Bank of America Securities.

Please go ahead with your question. Sandra, your line is live. Is it possible your phone may be on mute? Jamie, let's move to the next question.

And our next question comes from Mike Roxland from Truist. Please go ahead with your question.

Yeah, thank you, Mark, Bob, Bob, and Tom for taking my questions. Congrats on a really good quarter.

Thank you. Thank you.

Thanks. Just wanted to get a sense from you regarding the mix in 4Q. Box prices looked like they were notably down sequentially year over year. Now, aside from lower price, were there any one-time mix issues as well? And I recall that, you know, in 3Q you called out you know, weaker building products, lower graphics from software retail, you know, UAW strike. I'm wondering if that had an impact in 4Q as well and whether you expect that to fade in 2024.

Uh, Mike, the, uh, you know, our 4Q mix was about what we expected it to be. Uh, at the end of the third quarter, we had a little more graphics business that came in, which was, which was positive. But, uh, you know, our, our mix, uh, in the fourth quarter followed pretty much true to true to form. And, uh, You know, going into this year, I think that, you know, with some of those headwinds that you talked about behind us, especially the destocking, which was very unpredictable, that we incurred during 2023, it's kind of steady as she goes in 2024.

Got it. Thank you, Tom. So would it be fair to say, you know, that in 4Q, some of those issues you mentioned in 3Q last time continued a little bit in 4Q?

Yeah, they did a little bit. They did, but then they began to settle out towards the end of the year.

Okay, got it. Thank you for that. And then just, you know, of the $193 and lower prices and mixed, is there anybody to parse how much was priced versus mixed? And then in terms of your $1.54 guide, what's embedded for price and mixed separately?

Well, I think it's mostly price, obviously, but then it does get impacted by mix, and that kind of varies back and forth. So we try to do the best we can to forecast that.

Got it. So, Tom, to be fair, say you're expecting, given destocking coming to an end, given some of these issues mentioned previously in my question, probably you expect a better quality, a high-quality mix in 2024 versus 2023?

I think our mix will be traditional to what we typically have.

Got it. And last question is before turning it over. Can you help us just think about what's next for PAG from a growth perspective? Obviously, you're finishing up Jackson here, and you still have iFalls. Now, realizing that iFalls is a great asset, it's modern, generates a lot of cash, has a niche in paper, would you expect to run iFalls as is? What's really the next leg of the growth trajectory for PAG? for PKG after?

Yeah, Mike, you know, obviously you don't know what the future is going to hold, but we've got a lot of optionality in what we're doing. All of the capital spending that we continue to do in the box plants, as an example, continues to create incredible opportunity to grow with our customers. You know, just this year alone for 2024, we planned over 30 strategic projects at 26 of our box plants. And this is, you know, major converting equipment installations, corrugators, corrugator rebuilds and upgrades of significant magnitude. You know, this past year, it was the same situation. You know, number of evals, rotary die cutters, you know, corrugators, new plant in Pennsylvania, the start of a new plant out in Salt Lake City. And so we will continue to build in the internal organic capability to grow with the marketplace. Mills have the runway to continue providing that over the next few years. And then you have to assume, as we have always done, we can grow the container board supply as we need to, whether it's adding capacity in an existing mill or if we had to go out and buy a mill or build a mill. There's a lot of optionality in the future that we have the ability to proceed with. But that's never been an issue for us and I don't expect it to be an issue in the future. But right now the key is that we have tremendous capability within the converting side of the packaging unit and the mill system to provide the container board to grow for the next number of years. So I'm very, very encouraged by where we are.

That's great, Mark. Very good call. I really appreciate it, and best of luck in 24.

Thanks, Mike. Next question.

Our next question comes from George Stathos from Bank of America Securities. Please go ahead with your question.

Yeah, hi. Good morning. This is actually Cashin Keillor sending in for George. He had an internal conflict this morning. So I guess just back to the pricing discussion, are you able to comment at all in terms of what percent of your customer base are invoicing at those higher prices in both container board and boxes?

Well, with regard to liner board and medium, I'm talking about liner board and medium here. It's 100% of our customers, you know, outside customers on liner board and medium and trade partners as well. So, you know, that's where that stands. And, you know, You know, I'd just like to add, you know, I mean, we're having no customer dispute us on these price increases or anything. And, you know, obviously we're disappointed that it didn't show up in the trade publication, as I mentioned earlier. And, you know, right now we have customers that are incredibly frustrated with the mechanism right now and feel that there's a disconnect between what they see going on in the market and what's being reported. Now, maybe some of that is because the outside market has shrunk so severely that it's quite small now. And, you know, we don't want the tail wagging the dog here, but it's, you know, we've got customers now both on the liner and the box side that are asking us to look for alternatives. And we'll be exploring any and all alternatives going forward, including maybe not even using an index, but... We'll kind of give you some color on that going forward as that progresses. But I just wanted to make you aware of where our customer base is and how they feel about certain things at the moment.

Okay. I appreciate that color. And then in terms of production, you know, was the cost of production in 4Q where you had anticipated it in packaging? I know you commented that you had lower operating and converting costs year-over-year, but just interested if there were any items that were higher than you expected kind of in there. And as you look out for the rest of 1Q, any kind of cost items or lines that might give you pause? I know you commented to fiber and energy and chems, but just interested on those items.

Yes, this is Bob. I would just say relative to 4Q, maybe OCC prices, that was probably a little higher than what we had baked in. But maybe there were some what we call other fixed-type costs around some services and equipment rentals, some outside things like that, maybe just a touch higher. But all in, it was certainly a very good order from a cost perspective relative to what we had guided to. As far as going to the first quarter from the fourth, there are some moving parts there. Some of them are just not what we normally see. Obviously, we pointed out the big significant change that we're being impacted by relative to the Jackson conversion, which on a sequential basis is $0.16 per share. But outside of that, if you look at all of our other costs, you know, there's probably 60% or so of those are what we call seasonal or timing type cost increases. You know, those would be weather related, which are actually a little more severe going 4Q to 1Q this year because of so much cold weather down in the southern mills and the box plants, which typically, you know, we don't see much of a change relative to usages and things that get impacted by cold weather down there. And then, you know, the wages and benefits, you know, you know, that base gets larger every year. You never have deflation with your wages and benefits. So the annual increases that we experience going from 4Q and to start a new year in 1Q, you know, it just gets higher and higher, the dollar impact of that. Plus this year, you know, our medical costs alone, they were up probably, you know, over 12 to 15%. You know, however, you know, on a sequential basis, you know, the weather-related items should flip back the other way as we move from 1Q to 2Q and 2 to 3, as should about half of those wage-related timing items. You know, those start to flip back the other way on a sequential basis, so you have to sort of keep that in mind going forward. You know, and I'd say the balance of, you know, well, I guess one other item is we talked about, you know, bringing Walloo on in the first quarter and taking Jackson down, so we're replacing low-cost tons with very high-cost tons. You know, that's a, you know, that's probably a 10-cent hit in and of itself right there, exclusive of the outage impact, that 16 cents. And then the balance of that is just, you know, inflation-related things that, you know, don't get talked about a lot. You know, for all these cost increases we incur, believe me, anyone who provides a part, a good product, a service to us, they're experiencing those same increases. So there's a lot of, you know, outside services, equipment rentals, rents, property taxes even. You can go on and on and on. All that is a lot of money that we have to absorb, especially on a, you see it mostly in a sequential nature going from 4Q to 1Q. So I hope that gives you a little color about what's in those numbers for our guidance.

Great. Thanks for the details.

Next question, please.

Our next question comes from Gabrielle Haiti from Wells Fargo. Please go ahead with your question.

Mark, Tom, Bob, good morning. Thanks for taking the question. Morning, Gabe. I wanted to ask a little bit on the demand side. Historically speaking, you guys have done a good job of kind of outperforming the industry or even exceeding that kind of GDP-type growth. But this quarter was seemingly pretty pronounced relative to what we're reading maybe in the green markets report or receipt. So I'm just curious if there's anything that you can talk about. I mean, I know historically you guys haven't talked about like a vitality index or something like that, but just maybe new business wins that you all are excited about or change incentive structure for your sales folks to go out and win new business.

Gabe, the majority of our increase in volume came from our existing customers. You know, as we've said many, many times, I mean, you know, that's our main growth engine, and we've tried to align with the right kind of customers who over the long haul will grow, and I think that's been a big plus for us. Are we winning any new business? Yes, we win some new business. Some other business goes the other way. It's, you know, over the... Over time, you know, we do come out ahead. But, you know, as you mentioned, I mean, historically, we have outperformed the industry. And, you know, we plan to do so going forward. But we did lag, you know, as you probably know, you know, for a number of quarters over the last couple of years. There were times when we did lag. And, you know, it's because of some of the segments that we were in. And I mentioned before, you know, as an example, I mean, building products went crazy during COVID. and then suddenly that came to a screeching halt. And so some of those segments that we're in did hold us back, but they're coming back now nicely, and that's a big part of our growth.

Okay, thank you. And then maybe two questions on the Jackson conversion. It sounds like I know sometimes that they're not always directly linked in terms of when the costs flow through and the guidance that you gave us, Bob, in terms of the the 26 cents and the 16 cents. But is that happening, you know, is it straddling in March, April from a timing standpoint? And then I'll ask the question, I don't know if you guys will answer, but on a sequential basis, if the $70 and $100 a ton is going through, and by our math, you know, to your point, Mark, maybe $25 a ton is being reflected in Q1, then is it fair that the extra $50 a ton incremental should be on a sequential basis embedded into the second quarter? Thank you.

As far as the $20... Right.

Well, we're in the midst of discussing all that with our customers, especially on the box side and what the roll-through will be, etc. So... As I mentioned, we've got the increase in place for the liner board and medium, and we'll see where things roll through, but we expect it to be a traditional roll through.

Thank you. Thank you. Next question, please.

Our next question comes from Anthony Petinari from Citi. Please go ahead with your question.

Good morning. Good morning, Anthony. Hey, you know, following up on your earlier comments, I'm wondering if, Is there some percentage of your box contracts that are not on pulp and paper week? And I guess looking at other paper grades, you know, there were some box board producers who didn't feel like the index was really reflecting what was really happening in the market, and they were able to move some customers off of pulp and paper week. Is that something that you potentially could do or you think, you know, some customers might welcome? Just wondering if you, you know, to the extent you can discuss how you think about that.

Well, Anthony, as I mentioned, we do have a high level of frustration with customers, both on the liner and on the box side, with pulp and paper and feel that there's a disconnect there to what they see in the market and what's being reported. As I've said for a number of years now, as this independent market continues to shrink and what we really consider to be a real open market gets into the mid-single digits, uh, you know, it, and if that's all that's being reported on, that becomes, that becomes quite a, uh, you know, can, can cause that, that disconnect in my opinion. So our customers have asked us to look at a lot of different alternatives, which we are going, which we are doing along with them. And, uh, you know, we'll, we'll see, we'll see where we end up. Uh, have we moved some people off of that? We don't really like to get into those kinds of details just because that's between us and our customers. So, uh, I'll leave that one, you know, aside because we're not going to really get into those discussions. Other than I just will tell you we are looking at any and all alternatives.

Okay. That's very helpful. And then just switching gears on the CapEx guidance for 24, I think you said 470 to 490 million CapEx. Is it possible to break that down between maintenance and discretionary and then Jackson. And is there any kind of finer point in terms of the run rate capacity add from Jackson when that conversion is completed?

Yeah, as far as I would say, you know, Jackson will be 30 to 40 million of that amount. The balance, I would say 65% or so would be sort of that non-discretionary you know, must-do type maintenance type capital spending.

Mark, you talk about... Yeah, I mean, we're probably spending close to $250 million just in the box plants alone this year. Yeah. And that's all of the 30 strategic projects we're working on, the box plants and building the new plant out in Salt Lake City and finishing that up. And then the rest will be just in the smaller one-off projects in the mills. And then, obviously, we've got the... the maintenance type capital that goes on, but frankly, the bulk of it's in the box plants, and then finish up the Jackson conversion.

Okay. And is there a final number on the Jackson capacity add in terms of how many tons you would expect that to add when it's completed?

You know, the machine certainly ought to be able to add Approximately 175,000 to 200,000 more incremental tons a year when we're done with this phase of work. I believe the number for 2023's production off that machine was somewhere around 537,000 tons of production for 2023. So if you add 200,000 more tons to that, you're up in that 700,000 tons capability. But again, it all depends on our demand. And so we're going to run to demand, as we always have, but that's the necessity of being able to build this runway that our customers can depend on, and they know they can grow with us, and we can supply them the product and the value they need. And so the Jackson machine is going to have that capability to ramp up and ramp down, provide all the grades we need, at an incredibly attractive cost position.

Got it, got it. I'll turn it over.

Okay, next question, please.

Our next question comes from Phil Knight from Jefferies. Please go ahead with your question.

Hey, guys. Congrats on a really strong quarter. Your business is relatively a shorter cycle of business, but it certainly seemed pretty confident on the demand outlook for the first half. What's the capacity you're bringing back online? What are your customers selling? Are there any pockets at markets that kind of really stand out where you're seeing demand kind of bounce back in a bigger way? And are you seeing any restocking after, you know, a year's worth of destocking effectively?

Phil, I think the demand outlook obviously remains good. It's pretty much across the board. There's no one industry that stands out more than the other, other than maybe e-commerce, because you still see the – You know, the brick-and-mortar stores continue to struggle a little bit, but that's more than offset by the e-commerce side of the business. So that remains quite good, and I think, you know, relative to restocking, I would say that the restocking has been quite conservative to date. You know, nobody jumped up and said, I'm going back to where I was during COVID or anything like that. They're trying to... be reasonably conservative going forward. So I think we saw a little bit, we probably saw a little bit of a jump as a result of that, but nothing like we saw on the destocking side.

Okay, that's helpful. And I guess a question for Bob. If I look at your last two quarters, operational and converting costs were down pretty sharply, which is impressive, especially with Falula come back on. You know, preaching the first half of the year, you're going to have some outage expense of Jackson. But some of the gains you saw in the back half, is that pretty sticky and that's still to come? And I know you guys talked about, you know, all these different projects you guys are working on, the box out of things. So kind of help us think through that driver potentially, good or bad, this year.

I'm sorry, what did you say was sticky, Phil? I didn't catch that part.

The operational and converting costs, that came down pretty nicely in the back half of 2023. Right. You know, I'm just trying to gauge, should we expect follow-through in 2024, especially with some of the investments you're making on the box plant? Is that a good guy as well?

No, absolutely. As we've said many times, that never stops. It's not just capital projects. It's things that don't... It's just changing a behavior, a technique, a process. It doesn't cost money comparing to others. New things, new technologies, new ideas, and thousands of those things are going on every year, and that is really what drives those reductions that we've talked about historically, and that certainly will continue in the future.

One good example of that, and we don't talk about it a lot, our transportation capability. Over the last decade, we've built an incredibly strong transportation logistics group within the company, and it's nationwide now. We've got a very large fleet of tractors and trailers operating running the country, taking care of not only container board, but a lot of our packaging to the customer. And so that capability of having our own trucking in-house has provided enormous flexibility and cost management on the transportation side of the equation. That's just one example of how we go about looking at our business and then executing.

Super. I just want to ask one for May. I think on the prepared marks, you called it 1.1 billion liquidity. Mark, you highlighted being balanced in terms of capital employment. Any opportunities perhaps to play a little offense in a market that's a little more distressed, especially some of the capacity that's come on? Is that an opportunity? You guys are obviously growing pretty nicely and generating a ton of free cash flow here.

I'll let you know when it happens. That's the beauty of having that firepower. We can not only continue to look at share buyback and dividends, but if an opportunity comes up on a one-off, on the packaging side to buy an existing business, we can easily move into that. If something on the mill side came up that we found attractive, we can move into that and not worry about how we finance it or how it affects the balance sheet. And so the other thing I want to remind everybody, Back when we called out the 2023's capital and we, you know, the 2022 capital up over 800 million and we reminded everybody that the 2022 capital would be going down into a much more manageable level, much more reasonable level in that 400 million range. Just keep in mind, we did that and we accomplished an incredible amount of high return projects and impact projects that benefit our customers. and our shareholders alike. But also this year, we continued that trend. The $400 million range of high-return, high-impact projects affords us, again, an incredible opportunity with the balance sheet because all that operating cash that we're generating goes into free cash and can be deployed appropriately. And so we're in a very good place. Over the last 10 years, we've done all the heavy lifting to get the mills and the box plants in very, very efficient condition. And so now it's much more manageable about how we go about with these projects. And so with the fact that we have the internal capability with the engineering and technology organization to manage the bulk of all this work, we're in a much better position than we've ever been and we'll continue that, but again, all optionality is open for us on how we look at the world. Okay, appreciate that. Thank you. Next question?

Our next question is a follow-up from Mark Weintraub from Seaport Research Partners. Please go ahead with your follow-up.

Thank you. So can you share with us the types of alternatives on pricing structures that might be contemplated? Would they be more cost-tied? Would they be more macro or data-tied? Would it be more just going and negotiating with counterparties, some combination or any colors to kind of where the bias might be from your perspective?

Mark, it's nice that you're thinking about it, and I appreciate all your options that you just presented, but I'm not going to get into that at all because, as I told you before, that's between us and our customers. and we'll work those out as we go forward. I'm sorry I can't give you anything, but that's the way we do business.

Totally understood. Is there anything that I may have been missing that would have been in the list, recognizing there's going to be a whole bunch of things that you're going to be talking about with your customers?

Nice try, but I'm going ditto again, okay?

Yeah, I did try. And then... Bob, you'd mentioned about 60% of the costs increase from 4Q to 1Q seasonal or timing. Could you sort of put a number on that? Would that be like 20 cents per share if we were just to have that 6% come back in the second quarter?

No, Mark, it'd be closer to 35, maybe a little more per share.

Great. Okay. Thanks so much. Okay. Thank you, Mark. Any other questions, please?

Once again, if you would like to ask a question, please press star and then one. To withdraw your questions, you may press star and two. Once again, that is star and then one to join the question queue. Our next question is also a follow-up from Gabrielle Haiti from Wells Fargo. Please go ahead with your follow-up.

Tom, Mark, I'm going to try one more time. I apologize in advance, but it's more trying to understand the thought process. And I think the price discovery process that we've seen over the past 25 years, what we're hearing is maybe is not as bulletproof or as useful as it maybe once was. And so maybe really what we're hearing is, you know, and something I think is misunderstood in the industry is, is that you guys sell boxes that are made to a stack that service a customer's needs as opposed to selling a customer a parent roll of paper. And so is it fair that maybe what's going on behind the scenes is the value that you're bringing to your customers is really what you're trying to understand and work with them to help them understand ultimately and move the pricing structure to something like that?

Gabe, you described it very well. I've got to be honest with you. There is a liner board and medium market and then there's a box market and the box market is all custom made. Lots of different things go into it and there's a value created accordingly. As I've said before, I'm not going to get into all the optionality and all those other sorts of things. Those things we'll discuss with our customers. But You do describe it accurately, I think, especially from our customer's point of view, that what gets reported is quite different than what they see in the marketplace. And just as an example, I mean, even when the prices went down over the past 18 months or so, there isn't a customer who said, I see that, there's a need for that, or that they saw that in the marketplace. So what we're hearing from our customers is very different than what's getting published. And that disconnect, we've got to figure out how to solve that disconnect, I guess, is probably the best way to put it.

Very much appreciated. Thank you and good luck.

Thank you. Thank you. Any other questions, Jamie?

Our next question comes from Charlie Maurer-Stans from BMP Paribas. Please go ahead with your questions.

Good morning, gentlemen. Thank you very much for all the good answers so far. It's given us a lot to think about. I just had one question on the Jackson mill. You've obviously very helpfully quantified the temporary cost drag that we should expect in Q1 and Q2, but can you just talk about the cost benefit that we should see from the mill once it fully ramps up and perhaps contextualize how much more efficient this mill is compared with the rest of your network?

Yeah, you know, we talked about this for the last couple of years and that when we're done with all of this work, because the work that's going on, it'll start next month and then finish up. It's about a 58-day outage at the mill, but it involves more than just the paper machine, which, again, in and of itself is a lot of work with dryer cans, reel, press section rebuild, but it's also power plant work. We're going to be reconfiguring a lot of the power plant steam flows, steam pressures that Ultimately, we'll be producing more megawatts off the power plant in the back end of the mill and providing more high-pressure, higher-efficient steam into the paper machine. And so, net-net, the mill, when it's done, will have the capability to produce liner board and be at or amongst our lowest cost in the system. So if you think about Valdosta, DeRidder and Counts, Jackson should be as good or better, quite frankly, than Counts and DeRidder and probably give Valdosta a run for its money. So the huge opportunity is in the cost savings as we go forward that will flow through in the future. Bob, you want to add to that?

Yeah, Charlie, and what Mark is describing, if you sort of quantify that, we're looking at somewhere between $35, $40 a tonne. you know, once all that work is completed and that machine is fully, you know, fully operational.

Many thanks. Thank you. Any other questions, please?

And we have an additional question from Richard Fork from Bloomberg Intelligence. Please go ahead with your question.

Thank you for taking the time to answer my question, gentlemen. I was just wondering with your announced price increase, um, to be effective January 1st if you maybe saw some demand get pulled forward into the fourth quarter by customers attempting to get ahead of that price increase?

No, we did not see that, Richard.

Okay, thank you.

Thank you. Any other follow-up questions, Jamie?

Answer at this time. I'm showing no additional questions.

All right. Why don't we go ahead and conclude this? There are no questions. I'd like to thank everybody for joining us on the call, and we look forward to talking with you in April. Thank you. Everybody have a good day.

Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.