Packaging Corporation of America

Good morning, everyone. Thank you for joining Packaging Corporation of America's fourth quarter and full year 2024 earnings results conference call. Your host for 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. Please also note today's event is being recorded, and at this time, I'd like to turn the conference call over to Mr. Colzan. Please proceed when you are ready.

Thanks for the introduction, Jamie, and good morning, everyone, and thank you for participating in Packaging Corporation of America's fourth quarter and full year 2024 earnings release conference call. Again, I'm Mark Colzan, 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. As usual, I'll begin the call with an overview of the fourth quarter and the full year results. And then I'll be turning the call over to Tom and Bob who'll provide further details. And then I'll wrap things up and we'd be glad to take questions. Yesterday, we reported fourth quarter 2024 net income of $221 million or $2.45 per share. Excluding special items, fourth quarter 2024 net income was $222 million or $2.47 per share compared to the fourth quarter of 2023 net income of $192 million or $2.13 per share. Net sales were fourth quarter record 2.1 billion in 2024 and 1.9 billion in 2023. Total company EBITDA for the fourth quarter excluding special items was $439 million in 2024 and $394 million in 2023. Excluding special items, we also reported full year 2024 earnings of $814 million or $9.04 per share compared to 2023's earnings of $784 million or $8.70 per share. Net sales were 8.4 billion in 2024 and $7.8 billion in 2023. Excluding special items, total company EBITDA in 2024 was $1.6 billion in both 2024 and 2023. Details of all the special items for the years 2024 and 2023 were included in the schedules that accompanied the earnings press release. Excluding special items, the $0.34 per share increase in fourth quarter earnings for 2024 compared to the fourth quarter of 2023 was was driven by higher prices in mix $0.52 and volume $0.40 in the packaging segment, higher prices in mix $0.02 and volumes $0.02 in the paper segment. Lower freight and logistics expenses benefited us $0.06. These items were partially offset by higher operating costs of $0.48 as inflation remains a significant issue across most of our cost structure. In addition, scheduled maintenance outage expenses were higher by $0.08, depreciation expense was also up $0.06, and other expenses were higher by $0.06. Results for the quarter were equal to our fourth quarter guidance. Looking at our packaging business, EBITDA excluding special items in the fourth quarter of 2024 of $426 million with fourth quarter record sales of almost $2 billion, resulted in a margin of 22% versus last year's EBITDA of $385 million and sales of $1.8 billion and also a 22% margin. For the full year 2024, packaging segment EBITDA excluding special items was $1.6 billion with sales of $7.7 billion or a 21% margin compared to the full year 2023 EBITDA of $1.6 billion with sales of $7.1 billion or a 22% margin. The operational benefits of our capital spending program and the continued great focus and execution by our sales, customer service, mill, and corrugated products plant employees continues to deliver impressive results while helping to minimize the inflationary impact across most of our cost structure. As we've seen throughout the year, demand in our packaging segment remained very strong during the quarter. Our corrugated products plants delivered record fourth quarter total shipments and an all-time record shipments per day. The plants also set new annual records for total shipments and shipments per day. Excellent operations throughout our mill container board system set new quarterly and annual production records as well. This allowed us to meet our customer service and quality demand needs in a timely manner, as well as build some very much needed inventory ahead of this year's annual mill outage schedule that will take place the first half of 2025. I'll now turn it over to Tom who will provide further details on the container board sales and corrugated business.

Thank you, Mark. As Mark mentioned, continuing strong demand during the fourth quarter resulted in record-breaking performance for our plants and mills. Total shipments... and shipments per day were up 9.1% over last year's fourth quarter. Versus the previous record-breaking third quarter of 2024, shipments per day were up 3.2%. Outside sales volume of container board was 9,000 tons above last year's fourth quarter and down 18,000 tons versus the third quarter of 2024, as we emphasized hitting our year-end inventory targets. For the full year, annual corrugated shipment records were set as well. both in total and per day, up 10.5% and 10.1%, respectively, with one more shipping day compared to 2023. Domestic container board and corrugated products prices and mixed together were up 46 cents per share versus the fourth quarter of 2023. Fourth quarter prices and mix, which were impacted by a less rich customer and product mix, compared to the third quarter, were up 5 cents per share versus the previous quarter. Export container board prices were up $0.06 per share compared to the fourth quarter of 2023 and flat versus the third quarter of 2024. As we've indicated, we have continued to see very strong demand and are continuing to experience inflation across most of our cost base. Beginning January 1st of 2025, we began invoicing a $70 per ton increase for liner board and a $90 per ton increase for medium, according to our recent price announcements. These prices have been accepted by our customers and for our market container board purchases, we are paying higher prices to container board suppliers that began invoicing us according to their recent announcement. We were very surprised when, as you are probably aware, a couple of weeks ago, the RISC-E pulp and paper week publication did not recognize any increase in the industry's benchmark prices for either liner board or medium. Industry sources, and the pulp and paper week publication itself have previously reported that at least 12 or around 90% of the top container board producers have issued January price increase announcements. The publication even noted that certain box makers have postponed purchases of liner board this month to avoid the price increase. Yet the publication left the reported prices unchanged. As the industry's open market has shrunk over the years, we believe that the RISI publication is gathering information from a very small sample of the container board market and using that to opine on market conditions for the entire industry. Additionally, the publication often references comments regarding box prices when the relevant product is container board. As you know, boxes are highly customized to customer needs and have different pricing attributes. This continues to be a source of frustration, not only for us, but for our customers who want predictability in their prices. As mentioned previously, we have been moving off of indexing our prices to the RISC-E publication as quickly as contracts allow. However, this will take some time to complete. 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 $39 million with sales of $152 million or a 26% margin compared to the fourth quarter. 2023's EBITDA of $35 million and sales of $144 million or a 24% margin. For the full year 2024, paper segment EBITDA excluding special items was $154 million and with sales of $625 million or 25% margin compared to the full year 2023 EBITDA of $151 million with sales of 595 million or a 25% margin. Prices and mix were up 2% from last year's fourth quarter and up 1% from the third quarter of 2024 while volume was 5% above last year and down 5% versus the seasonally stronger third quarter of 2024. Additionally, during the quarter, we notified customers of a $60 per ton price increase effective with shipments beginning January 13th for all office papers, printing papers, and converting papers. The management team and all employees of the paper business have done a tremendous job optimizing our inventory and product mix and remain highly focused on efficient and cost-effective operations in order to deliver outstanding results throughout the year last year. I'll now turn it over to Bob.

Thanks, Mark. Cash provided by operations during the quarter totaled $325 million, and free cash flow was $124 million. The primary payments of cash during the quarter included capital expenditures of $201 million, dividend payments of $112 million, cash tax payments of $82 million, and net interest payments of $37 million. For the full year 2024, cash from operations was $1.2 billion, with capital spending of $670 million and free cash flow of $521 million. Our year-end cash balance, including marketable securities, was $852 million, with liquidity of $1.2 billion. Our final recurring effective tax rate for 2024 was 24.4%. Regarding full-year estimates of certain key items for the upcoming year, we estimate dividend payments of $450 million, total capital expenditures to be in the range of $840 to $870 million, and DDNA is expected to be approximately $565 million. Our full-year interest expense in 2025 is expected to be around $56 million, and net cash interest payments should be around $65 million. The estimate for a 2025 book effective tax rate is 25%. Compared to 2024, the planned annual outages in 2025 include all of our larger mills with a higher number of outage days. Including lost volume, direct costs, and amortized repair costs, we currently expect the outages to total $1.18 per share. The current estimated impact by quarter in 2025 is $0.23 per share in the first quarter, $0.32 in the second, $0.18 in the third quarter, and $0.45 per share in the fourth quarter. I'll now turn it back over to Mark.

Thanks, Bob. The hard work of our employees, along with strong relationships between us and our customers and suppliers, delivered outstanding results for PCA for 2024. In our packaging segment, new annual company records for shipments and production were achieved in our corrugated products plants and mills. We successfully completed the number three machine conversion to container board at the Jackson Mill, and many other key initiatives throughout the system. We also completed numerous high return and deficiency improvement projects in our corrugated products plants that will allow us to better optimize our entire packaging business for the future and deliver profitable growth and mix enhancement opportunities for our customers and shareholders. And we still have many key strategic capital spending opportunities in progress or ahead of us in 2025. 2024 also saw our paper business match the record margins from 2023, reflecting the capabilities of our employees to optimize our product mix, inventory, distribution channels, and overhead structure, along with running very cost-effective and very efficient manufacturing operations. We ended the year with $1.2 billion of liquidity and a strong balance sheet which maintains the financial flexibility to react quickly to most situations or opportunities in the future. We remain committed to a balanced approach towards capital allocation in order to profitably grow our company and maximize returns to our shareholders while still adhering to our conservative balance sheet views as we've done in the past. I'm very proud of our employees, these accomplishments, and the very strong partnerships 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, although seasonally slower, we expect volume in our corrugated products plants to set new first quarter records for total shipments and shipments per day. Container board volume will be lower with two less operating days and scheduled maintenance outages at the Counts Tennessee Mill and Valdosta Georgia Mills. Domestic prices will be higher with an improved product mix together with our previously announced price increases. Export prices are assumed to be stable. In our paper segment, we forecast slightly lower volume with two less mill operating days and prices in mix to be fairly flat. With the exception of recycled fiber prices, we expect price inflation across most of the direct indirect and fixed operating and converting costs, along with a higher cost mix of mill operations. In addition, wood, energy, and chemical costs will also increase due to the unusually cold seasonal weather negatively impacting usages and yields for these items. Labor and benefits costs will be higher due to the timing-related items that occur at the beginning of a new year for annual increases, the result of payroll taxes, and share-based compensation expenses. First quarter rail rate increases at three of our mills will impact freight and logistics expenses, and we expect higher depreciation expense. Lastly, scheduled outage expenses should be slightly lower, and we assume a lower corporate tax rate. Considering these items, we expect the first quarter earnings for $2.21 per share. With that, I would 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. The 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 the annual report on Form 10-K and in subsequent quarterly reports on Form 10-Q filed with the SEC. Actual results could differ materially from those expressed in the forward-looking statements. And with that, Jamie, I'd like to go ahead and open up the call for questions, please.

And ladies and gentlemen, at this time, we'll be in that question and answer session. To ask a question, you may press star and then one using a touch-tone telephone to withdraw your questions. You may press star and two. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the keys to ensure the best down quality. Once again, that is star and then one to join the question queue. Our first question today comes from George Staffos from Bank of America Securities. Please go ahead with your question.

George Staffos Hi, thanks very much, everybody. Thanks for the details. Mark, I guess the first thing I want to ask of you, Tom and Bob, can you talk a little bit about bookings and billings to start the quarter, what you're seeing And given how busy PC has been over the last couple of quarters, is that influx of volume creating any sort of inefficiencies beyond normal that you would call out and that we should be at least considering in terms of our modeling for you on a going-forward basis? And I had a couple of follow-ons.

Hey, George, it's Tom. Bookings and billings are up 8% so far. in January so you know we're off to a very good start and you know we indicated that in our in our opening statements as well so that's very good the the volume increase I think if you take it coupled with the capital initiatives that we have yeah that has caused some some cost inefficiencies quite frankly because we got a lot of those projects going on a lot of plants and you're shipping a lot of business around but you know again our people have just done a tremendous job handling that and taking care of our customers.

George, for last year, for 2024, on the converting side, we accomplished 12 major new equipment installations on the converting side. These are major reconfigurations of converting lines. And then within corrugators, We either had major rebuilds or new corrugator installations at 12 locations, and we finished building out the new Salt Lake City plant and then got ready to build out the new Glendale operation. But we continue at this pace. I mean, prior year and then last year, we're on that pace of around 60 major projects within the corrugated business, and we'll continue that this year. Along with all the benefit, there is some short-term disruption that occurs, but the capability that it gives us is just incredible. We would not be doing what we're doing today if we hadn't been keeping up this pace of spending over the last half-dozen years. So it's the gift that keeps on giving.

So in some ways, we shouldn't call it out because it's what enabling the growth is kind of your answer there, right?

Exactly. It turned out costly. It's truly the growth engine.

Now, can you help us a little bit in terms of the sequential move from 4Q to 1Q in terms of some of the cost factors? And in particular, I'm thinking about whether usage, input costs, what that might be causing you, and for that matter, on the incentive comp. And then, since you had teed it up on pricing... You're out with your price increases effective in January. Others are as well. I know it gets a little bit sensitive because you can't talk about what others may or may not be doing or forward-looking. But how do you square the circle then if you're raising and effective in January and the arbiters are saying it hasn't happened yet? Are you giving your customers at all any price protection or time delay between when it's effective when you announce and when you make it effective? So two questions there.

Let's start with Bob.

Hey, George. Just on some of the cost movements from 4Q to 1Q, if you look at the buckets of what's higher, there's a higher cost relative to the mill mix. That's a component. Then there's the weather seasonal items that we typically have, but this is sort of exacerbated by the severe cold that the country went through during the month of January. And then there are those timing items that we typically talk about relative to wage increases and taxes, fringe benefits, and so forth. So if you say that our costs, round numbers, somewhere between $0.50 and $0.60 higher on all operating and converting costs, 65% of those are these items that Typically we'll flip back the other way, not totally, but I would say 70% of that amount is we'll flip back in the second and third quarters. So that's sort of how we, you know, we bridge the fourth to the first and then what we expect, you know, how much of that we expect to turn around in subsequent quarters.

Okay. Okay, George, it's time. Let me. Let me see if I can fill you in a little bit on the pricing side. So, you know, for starters, let's make the distinction here. We're talking about liner board and medium. So we're talking about container board, all right? And in the container board segment, we raise the prices. We're billing at those prices. Our customers will be paying those invoices at those higher prices. And we will be doing likewise on the outside purchases that we have as well. So some of that comes from overseas because it's a specialty grade that may or may not be made here in the United States, or certainly the products that are made here in the United States that we are a net buyer of, and we're paying those invoices as we go. So that is in place, and that is set. All right? The frustration, as I mentioned in the verbiage that I gave you in the opening statements, is related to discussions around boxes and things like that. Now, we've always said our box price increases are between us and our customers. Those aren't publicly announced, but we do have some, and it's a relatively sizable amount that are still tied to you know, what happens in RISI and what's reported in RISI. And as I said, we're moving away from that as fast as we possibly can because I think in a lot of ways, and I've been at this a long time, and if you go back in time, there was a pretty large open market, and today it's a very, very small open market. So I think there's become some confusion in terms of how the reporting goes and what the interpretations are. And so we're finding this vehicle a little less useful. going forward, and therefore we're moving away from it as fast as we can. Hopefully that kind of wraps up your question a little bit.

It's helpful. I'll turn it over. Thank you, guys.

Thanks, George. Next question, please.

Our next question comes from Mike Rocklin from Truist. Please go ahead with your question.

Yeah, thank you, Mark, Tom, and Bob for taking my questions, and congrats on a strong year.

Thanks, Mike.

I just wanted to follow up. Can you give us a sense of the operating rate you're currently at? Would it be fair to say you're running full out given the strong demand you have? And if that's the case, can you help us understand the timeframe over which you expect to add capacity at Counts and Valdosta? You mentioned that. I think you teased that in the last earnings call. What do you think those projects will be operational and what incremental capacity do they add?

You know, we've got... the opportunity to add capacity as time goes on. As we've always said, we have tremendous flexibility on how we provide container board tons into the system. Obviously, we completed the Big Jackson reconfiguration, but nevertheless, we also have a lot of opportunity on how we optimize the seven mil system right now. Regarding what you mentioned between counts and Valdosta, Those projects, if we go forward with those, would be the next couple of years' timing. And so again, that's something that we haven't decided to execute. We're studying all opportunities, as we always do, and we have tremendous flexibility on how we bring new tons into the system when they're needed. And so that's the beauty of where we are. The high integration and the continuation of our demand growth presents the high opportunity, high return, for these projects in our mills as we go forward. So we'll let you know when the decisions get made.

Got it. I appreciate that, Mark. So how much – can you just comment then about where the system is right now in terms of operating rate and how much ability or how much flex you have in the system right now to meet what seems to be really growing demand?

We are running – I'm not going to say we're running full out. We're running hard. which is a good place to be. We run best when the pressure's on. But again, we've got room to optimize the system and the grade mix. And also, as we've always done, we did this back over the years, the ability to buy some open market tons within a region where it makes sense. So we have those opportunities. So again, the ability to really utilize our capacity right now And whether you call it running full out, we always find ways to squeeze more tons out of the system. And we'll continue doing these projects. These are the high-class opportunities we engage with.

Got it. And one last question just before we are turning it over. It gives a sense of the volume cadence you're expecting through 2025. Should we expect some more pronounced volume growth in the first half and then maybe lessening as you get towards mid-year in the back half? probably due to tougher comps?

Well, I'll tell you, Mike, the comps are going to get much tougher as the year goes on if you look at last year's. But we see continued volume growth throughout the year, steady growth, but obviously the numbers come down a little bit on percentages when you do a year-over-year comparison as we move throughout the year. But we have plenty of growth opportunities and lots of things that we're already putting in place and will continue to put in place as some of our capital projects come on board and we're able to produce more.

Thanks very much, Tom. Good luck in 2025. Thank you.

Thanks, Mike. Next question.

And our next question comes from Gabe Hyde from Wells Fargo. Please go ahead with your question.

Mark, Tom, Bob, good morning.

Good morning, Gabe.

I'm going to start with the sequential numbers that you kind of give us on a quarterly basis in terms of the split corrugated price realization and export. And if I'm doing my math right, I'm seeing about $50 a ton of price realization in the fourth quarter, or excuse me, in 2024, which would imply sort of $30 million of unfavorable mix. And that's in my mind seems a bit punitive and probably uncharacteristic of, of how PCA would operate. So I'm just curious if you guys have thought about it that way. And, um, if you're still realizing any price in Q1, 25 from movements that transpired in 2024 on a sequential basis from Q4 to Q1.

Yeah. Yeah. It gave us Bob. Yeah. There is some of that, that, that does, uh, some things that just move on an annual basis. So there is some movement relative to that, as you said, regarding these price increases of 2024. But the other thing you have to look at is if you sort of do the math and make sure you account for the inventory change and what's export volume and what's domestic volume, I think it's somewhere around the mid-$50-something a ton change. And then you have to compare, you know, rather than comparing to 80, you know, which were the two increases at the beginning of 2024, you have to remember there was a $20 per ton drop late in the year in 23. So you sort of look at it that way, and let's say that's a net $60 a ton. And like I said, I think we're in mid-50s, something like that. and similar to your math. And then you do have mixed changes. You have customer mix, product mix, and seasonal mix, things like that that weigh into it. So we feel good about capturing the price based on those index changes that you referenced.

Okay. Thank you. And I guess for the avoidance of doubt, in the first quarter, are you telling us that included in the guidance that you gave us, 221, includes price increases on open market tons and not on the converted box side, or are you embedding in what has been announced on both the corrugated and open market?

No, there's definitely some open market, as we've always said. It happens immediately when there's a price change, up or down. But there are some things relative on the box side that regarding those price increases from last year that now will take effect in the first quarter. So that's embedded in there, too, along with what we feel like we'll realize from this year's January price increases. Considering the impact of RISD, as Tom was talking earlier, RISD not picking it up in January, so you have to adjust for that a little bit. But there is some of that in our number as well. Understood. Okay.

And last one on CapEx. You did signal... on the Q3 call that it would be up into 25. It's probably up a little bit more than what we were modeling. I don't know how others are thinking about it. But the Glendale, I think, box facility, should we sort of pencil in numbers that we see are $240 to $260 million for a new box plant, depending on if it's outfitted with a corrugator. But even if I adjust for that, when I look at maintenance, I think that was also supposed to be down in 25, and it's actually up. So, Mark, are you telling us there is no incremental capacity on the container board side in 2025, no de-bottlenecking or anything like that in that CapEx number?

No, there certainly is. There's work going on in the mills. Again, there's no one big project. There's just a whole host of small projects that we always do every year to, you know, enhance what we have. One of the challenges that we've – we've laid out to the team over the last year is that over the last six or seven years of all these conversions that we've done at a very blistering pace now's the time to step back in and really optimize what we have and so we were doing these conversions and moving on to the next mill at such a pace uh we've never really taken the time to really drill down and uh make sure we're getting all the benefits from all the spending that was taking place. So now we've got the technology organization stepping back in and engaging with the mills and making sure that what we are doing is extracting all the value we can. So that gives us good return. But as far as the capital spending, this year, if you think about the Glendale project down in Arizona, we're finishing out that box plant and And there is some number, you know, 10 years ago you could build a box plant for $50 million, and now, you know, a big full-line box plant, you're talking $200-plus million. We've also, just this week, we broke ground in Newark, Ohio, for another big new box plant. That's been in the works for the last few years. We actually bought the land three years ago. And so that box plant will be under construction and hopefully have everything ready to run by the end of next year. We also, with this high 800 capital call-out that we're talking about right now, there's a major rebuild taking place at another plant in the northeast. It's not a new box plant, but essentially it will be like new and we're done with it inside. And then there's another reconfiguration on the east coast that's a major enhancement, major rebuild of that plant. So there's There's four big activities going on within the corrugated product side of the business, along with I'll call out right now, and I'm probably right, there's probably another 50 projects going on for the year. That'll be the smaller projects, the EVOLs, the single converting line replacements that will just continue forever. And so that's all baked into that capital callout. But there's There's a good portion of new business growth in that capital along with optimization and, you know, just enhancing the business, not just maintenance. Maintenance is a small portion of that capital.

And, Gabe, relative to your question on the maintenance expense, thinking it was down, you know, if you're recalling, you know, something from the last quarter's call, you know, there was a question about what's normal maintenance relative to what we had as outages in 2024. But it was not an indication of what our plan was for 2025 regarding outages. And the reality is, you know, there's a couple of things. One is we have more larger mills with more days down in this year's plan versus last year. Larger mills are more expensive, more days down, so on and so forth. The other thing is, you know, In the second half of 22, all of 23, and then for the first part of 2024, certainly in the first quarter of 24, we were still running to demand. So we had market downtime. And the way we sort of bucket our variances, if you're in market downtime and you have a maintenance outage, you would not include the profit per ton of those. You wouldn't penalize your outage for that because you're in market downtime. You couldn't sell the ton anyway. So the negative impact of that shows up in our volume variances that we talk about, whereas this year we have none of that. So that profit per ton is in our outage calculations for every ton that's down. That's another reason it's going to be higher relative to 2024, if you follow me.

I do. Thank you guys for all the detail and appreciate the investment in Ohio.

Good deal. Next question.

Our next question comes from Mike Weintraub from Seaport Research Partners. Please go ahead with your question. Hi.

Good morning. So to the extent you can help us, just trying to understand how much of the higher box prices that would come as a part of the container board price increase initiative that's been announced for January is incorporated in your 1Q guidance. Just really trying to understand how much additional upside there could be through the balance of the year if the price increase gets fully implemented.

Yeah, Mark, this is Tom. You know, what happens is that it's a timing issue, especially relative to the contracts that we have left that relate to RISC. So we've got to take a relatively conservative approach in the first quarter to how those contracts would roll through. However, we are implementing right now the non-contractual business we're going ahead and putting in place. But Again, those amounts and those sorts of things is between us and our customers when it comes to boxes. So we don't publicly come out and announce some of those things, those agreements that we've got with our customers. But I think what you're really referring to is the index and what's left tied to the index. Like I said, that that rolls through at a different rate. And until that index indicates the price is a line or medium going up, it won't trigger some of those contracts.

So is it fair to say, and again, I'm really trying to get potential upside beyond the 1Q, but another way to maybe ask the same question is, so if for whatever reason RISI didn't publish the container board price increase in February or March, how significant an impact would that have on what you provided in the guidance versus what you then would expect, if that's a question you can ask?

Well, again, as I said, we're taking a pretty conservative approach here. So is there upside going forward? Yes. I mean, there's no question about it once this is indicated in RISI.

Okay. And then can you give us any more color in terms of like the process of moving customers off the indexes and or what type of variables are being put in place or is it just like a negotiation each time or is it being tied to various costs or things like that just to help us begin to understand as we want to kind of be able to forecast in the future what might happen to your pricing, et cetera?

Well, it's probably going to be a little more of a mixed bag. As I mentioned, our customers have been very, very frustrated with this process, and so have we. And I think at the end of the day, it's more of a discussion with our customers about what's going to happen going forward with pricing and an agreement that we come to. And we've not found any other indicator out there that we feel comfortable with. So I think it's going to be – it's going to take a little time to unwind, but we feel very comfortable in our discussions with our customers about where we're going to end up going forward. And it's going to be a little different per customer, but I think that the discussions have gone very well.

You know, Mark, our customers – They are undergoing the same inflation that we undergo and the same cost pressures. They appreciate, you know, what we're talking about every day. They also appreciate and they understand the capital spending that we do and we expect a return for our capital spending. That capital spending provides incredible benefits for the customers in terms of quality and on-time delivery. So, you know, that discussion is truly a customer... driven discussion one-on-one. Thank you for the color. Next question, please.

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

Good morning. Just following up on Mark's question, is it possible to say, just kind of order of magnitude, what percentage of customers you've moved off of RISI? Is it 5% or 25%? And then, you know, given the turnover of customer contracts, like how long it might take for you to get maybe a large majority of customers off the index?

Well, Anthony, this endeavor, you know, didn't start five years ago. It started, you know, about a year ago. So, you know, as I said, this is going to take some time to unwind. Those contracts, you know, some of those are long-term contracts. And obviously, you know, we've stated many, many times, I mean, we've dealt with these customers for, you know, decades. And, you know, we've got long, long-term relationships. So we're very sensitive to those relationships, and we're making sure that we're doing what is in the best interest of ourselves and our customers as we move forward. So this is going to take a little time to unwind. I'm not going to give you percentages of how this is going to, you know, sequentially fall into place here, but you know, it's going to take some time, but we're moving in that direction.

And then just switching to the CapEx guide, I think you talked about four big box plant projects, Ohio, Glendale, and then two maybe reconfigurations in the East Coast. Is it possible to say what of the 840 to 870 projects How much of that is those four big box plant projects? And are there any that you would call out, whether it's Ohio or Glendale or others, as being an especially large component of the 840?

Yeah, hold on one second. Let me get some numbers here. Probably $250 million is... is going to that this year.

Got it. Got it. Is, is the Ohio Greenfield the, the largest roughly or? Yes. Okay. Great. Um, that's very helpful. I'll turn it over.

I mean, there's, you know, we, again, there's another, um, one of the projects is it's about a $70 million project to reconfigure one of our plants. And that's, uh, a discrete project that we'll see this year also that's in that number.

Got it, got it. Thank you.

You know, and again, just to remind you of the 445 million that was allocated to the corrugated side for 2024, 370 million of the 445 was for growth opportunities. So again, most of the capital spending that's going on is to enhance our capability to go to market and work with the customer.

And let me remind you, Anthony, also that, you know, as we've said many, many times, these are already growth opportunities that are in place. These aren't, you know, we're not expanding or doing any of those sorts of things in hopes that we get more business. This is growing with the existing customer base we have.

All right, next question.

Our next question comes from Phillip Bain from Jefferies. Please go ahead with your question.

Hey, guys. Morning, Phil. Exciting times with all these growth projects. Mark, I guess perhaps help us think through how the contribution kicks in. I know the Phoenix, Arizona box plan, you know, at least was scheduled to come on, I think, late 1Q, 2Q. That's probably going to be contributing this year. But the other projects you've called out, the reconfiguration, Ohio, Help us size up what that could actually drop to the bottom line. Do we see any of this this year, or is this more of a 2025 event where you could accelerate?

Yeah, the Arizona project should start up this spring as scheduled, and that new project will take the place of three. We've been running a business down in Phoenix for years, but to run that business, we've been operating out of three different locations within kind of the neighborhood, so to speak. It's not the most effective way to run a business. And so this new plant will allow us to consolidate all the operations to one state-of-the-art high-efficiency operation. In terms of unit labor efficiencies, it will add tremendous efficiencies, probably triple or quadruple the production capability of the region down there now coming out of this one plant. And again, the quality, cost structure, we'll see immediately this year. I'm not going to even attempt to give you a number, but it'll be immediately accretive to the system when we bring the plant on and we exit the old operation. And the employees are moving over from the existing operation right into the new operation.

The ramp-up of some of these other projects you've called out, New Jersey...

reconfiguration there's a New York and a Pennsylvania project going on and they'll again those will be more disruptive type of projects that Tom spoke of and that I spoke of those are the type of projects that you suffer a little bit of pain while you're doing them but then once they're done they provide incredible opportunities for the next 10 years for us

But any color on the timing of that, Mark? Is that at 25?

Well, just again, we'll finish those projects this year and then get them running and get the bugs worked out. And then, again, we'll see immediate benefits out of those also.

Yeah, Phillip, I'll add just a couple things to this. Don't forget that any one of these projects we're building in, As Mark mentioned, a lot of efficiency in these projects, including closures of inefficient box plants and things like that where we can consolidate some operations into one. But in addition, it gives us a lot more capacity to satisfy those customers that I talked about earlier who want to do business with us, want us to supply them, have agreements for us to supply them, including different markets that we haven't been in, especially when you consider Phoenix, because we had a smaller three-building operation that couldn't, didn't have a lot of reach. This will provide us a lot more opportunities. And the one in Ohio is the same, where we've got a very large footprint, and this will be able to consolidate that footprint a little bit in terms of numbers of plants, but also, more importantly... create a lot more efficiency and a lot more reach for us in terms of our customer base.

Super. And then from a demand standpoint, Tom, you guys were talking about box events in 24, and that momentum sounds like it's continued into January so far. Can you kind of help us think through some of this? I mean, some of it's obviously the market's recovering, but clearly outpacing the market. You're taking share, called out some share games on the brown side of things. Certainly still a lot of disruption in the marketplace with consolidation in the makings. Do you see that as a big driver, a catalyst in terms of momentum you've seen thus far this year? How should we think about share gain opportunities this year for you guys?

Well, I think, as I mentioned many times, I said we've got our core customer base. If you position yourself as the best supplier and the most reliable supplier to that customer base, you know, it presents many internal opportunities for you to continue to grow your volume. And, you know, I think traditionally a lot of corrugated customers have split their business and done other things because they just couldn't get comfortable with sole suppliership and things like that. But that's changing dramatically over time. And we're proving in a lot of cases that, you know, we're just, you know, we're, We're a great supplier, incredibly reliable. We consider the best quality and the best service of anybody in the business. And we're great partners for our customers. And we position our business around those customers and about their game plans. So I think that gives us a competitive advantage. And fortunately, we've got the financial flexibility to be able to expand at a rapid rate, to be able to do some things quicker than maybe some others can do it. And I see nothing but solid runway for those opportunities going forward.

Got it. Then, John, one quick one. Mix was the modest drag last year on the brown side. Do you anticipate Mix being much of a good guy or bad guy when you think about 25?

Got it. Well, the fourth quarter, we had that mix impact. You know, there was a lot more e-commerce activity, quite frankly, in the fourth quarter. You know, that's done now. And so I think the comment was made during the call earlier that we expect an improved, richer mix, 1Q versus 4Q. And so we'll probably see that better mix through the first half of this year. And then as the year rolls on, we'll see more e-commerce into the fourth quarter again, I expect.

Yeah, I think our mix is pretty steady compared to what it's always been.

Okay. Appreciate it, Colin.

Next question, please.

Next question comes from Charlie Mirastance from BNP Paribas. Please go ahead with your question.

Yes. Morning, guys. Thank you very much for taking my questions. Just returning to the capital expenditure, I wondered if you could give us an estimate at all as to how much you would considered to be genuine maintenance capital within the overall budget for this year.

Yeah, Charlie, this is Bob. You know, typically that's about, you know, it runs 60, 65% of our total spend. I think that's probably just a good way to, you know, to think about it. You know, year to year it's different, but I'd say that's

This year we've got a few bigger discrete projects going on. It's going to be on a percentage basis it'll be less this year because we've got four big discrete projects going on on the packaging side of the business. As I said earlier, the bulk of the spending is going towards growth opportunities and not just maintaining what we have. We've been fortunate that over the decades we've we've done a good job of maintaining our assets and continuing to, you know, make sure we stay on top of the asset preservation so we're not playing catch-up.

Yeah, very clear. And on the weather impacts that you called out, I recall that January 2024, there was some pretty severe cold weather as well that I'm not sure if it was you, but I think some of the other box makers called that out as an impact in Q1 last year. I just wondered, is the weather you're talking about here something that you see as adverse just on a quarter-on-quarter basis or also more challenging and carrying more costs than last year?

Yeah, let me comment and then Bob can say. Obviously, we've just gone through the month of January. We're wrapping up here, but we've had a couple of weeks of severe weather And not just severe normal weather, but we've had more colder, snowy weather in the very deep south region. As you all know, last week along the Gulf Coastal area, Interstate 10 was shut down from Houston all the way over to Florida for a couple of days. And so that was very disruptive. So it wasn't just the cold weather impacting energy usage and raw material consumption and yield. but it was actually impacting business in general, commercial activity. So there will be a volume impact there with the cold weather. But, again, we just had it in general without a colder winter right now. We're running well. Operationally, we're running very well, but it's more expensive to run well under these conditions. And, again, last week in particular, we saw some volume impact from that weather. Thank you very much. Next question, please.

Our next question comes from Ryan Fox from Bloomberg. Please go ahead with your question.

Hey, good morning. Good morning. I know Gabe, I think, asked this question, but maybe he asked it a different way, and I was hoping he could clarify it. So if we look at the revenue per produced ton in 23 versus 24, it looks like 24 is down about $50 per ton, even while the index is up about $35 a ton, creating a margin of about How can you help us understand that?

Say that again, Ryan.

Yeah, so if we look at revenue compared to the produced tonnage year over year, that number is down about $50 per ton, even while the index has gone up for container boards.

Which period are you talking about? Hey, Ryan, which period are you talking about that it's gone down $50 a ton?

23 to 24, so full year 23 to full year 24.

Yeah, well, if you adjust, I think what you're doing, you're using produced tons, so you have to account for inventory change. But directionally, I'd say it's probably closer to 40, not 50, but go ahead.

Okay. Okay. Well, I guess just in light of the fact that there were two price increases last year for about $80, and I realized that there was a $20 slide at the end of 23. But if you just look at the averages for container board over those two years, even that's up. So there's about an, you know, I call it an $85. It could be a little bit less than that. But there's a differential where prices are going the opposite direction of where the index is going. I'm just trying to figure out how do we square that.

Yeah, it's, you know, there's also in the way you're looking at that is, you know, there's export, a good chunk of export volume in that. And, you know, during that period, I think export was, you know, was definitely going down. So that's sort of getting into your math a little bit. I think if you sort of, you know, accommodate for that as well as some inventory change thing and some mixed things, you know, I think we're right there where we would expect to be based on how that index moves.

And let me just add another element to this, too, because if we don't actually sell tons, we sell MSF. And if the basis weight is working its way down on MSF, that's going to trigger a different situation in tons. And so there's a lot of variables that go into this. And Again, that's a whole other subject that we could get into. But here again, we have an industry that is measuring something they don't even sell, which is tons. And here we sell MSF. So when you're factoring everything around a ton, there are a lot of variables that go into that and that have to be taken into consideration.

Yeah, and just lastly, Ryan, as you know, price started moving down at the end of 22, throughout a good part of 23, and all the way into late 23. And just the way, you know, the way those, you know, that affects our box, you know, that's, you've got to overcome all that, you know, prices come up $80 since then, but it was down 110. with all those decreases. So it's just the way the timing and the way the things, you know, when they start to appear, it's sort of impacting, you know, what you're doing, which is just taking up, you know, high-level revenues by tons.

Yeah. My other question for you is you've talked a little bit about how your customers are frustrated. Are you referring to box customers or the container board customers? Both. Both. Interesting. Okay. I guess last question, help me understand, I mean, in the U.S., the mill operating rates are about 90%. I mean, we're going to be on pace to export nearly 5 million tons in 24. Why would an open market, you know, somebody who maybe doesn't have a mill, why would they be wanting to pay higher prices for container board with such overcapacity?

You'll have to ask them. I can tell you that our customers don't see it the same way you're calling it out. Again, I'm going to refer to something that you're measuring in terms of tons, but we don't sell any tons. We sell MSF. There's a large disconnect, in my opinion, to what's really going on in the marketplace and and what exists out there in terms of numbers. I'll give you another example. There's a relatively large mill that is producing everything they can produce, and their output is about 50% of what is projected for that particular mill. So the projections and the realities are very different as well. And although we can buy some tons in the open market, the type of tons that we need to produce the boxes that our customers require is very limited, and we've had long-term relationships to be able to do that. If those relationships did not exist, I would have some difficulty buying the proper tons.

Yeah. Obviously, with the lighter basis weights, that definitely creates some disparity in the contribution per machine hour on your mills. Is that lighter weight, is that a Is that a thing that you're going to continue to see in the future where it's going to be a drag there?

Well, I wouldn't call it a drag. I just think it's a fact of life.

It becomes an opportunity. We're making more product with less fiber. And that's part of the capital investment over the last decade is to run these mills on a lighter weight grade mix much more efficiently. And so it has an impact on the mill profitability and the mill capability.

Great. Thank you so much.

Thank you. I know we're out of time, but I know there was one more question. I think George Staffos may have had a question if you're still on, George.

Yes, sir. Our next question is a follow-up from George Staffos. Please go ahead with your follow-up.

Thanks, guys. I'll try to make it painless, Mark. Thanks for taking it. Just to wrap up all the pricing discussion, When we look at fourth quarter last year, fourth quarter this year, prices are up for a ton. They're not down. They're up about 43, recognizing it's tons produced. And what you're saying is when we consider the price drop that entered last year and the fact you're building back from that and you look at mix, you're pretty much where you expect to be. Is that a fair statement?

Yeah, George. My math, I would say we're closer to $55 a ton, something in the mid-50s rather than 40. But go ahead.

Understood. Okay. And then the other question I had, aside from fiber, where are you seeing the most cost inflation? Because when we look at cost per ton, it's been trending steadily higher over time, despite the fact that you are spending a good amount of capital to become more productive and more efficient. So looking at your return on capital history over time, you don't spend bad dollars. So you're becoming more efficient. Where are you seeing the most pressure on your cost inflation? And what are you going to do about that on a going forward basis? What kind of products do you have that will bend the curve back the right way on cost per ton? Thanks, guys.

For the first quarter, energy is obviously a glaring factor. But don't forget, over time, fiber has become less of a component. You've got all of your labor, medical benefits, all of that element. Transportation is another example. All of your service costs. Services in general, all the lease expenses, everything's up dramatically. We called this out on the call earlier. We've got rail increases taking place, significant rail increases again taking place this first quarter. And so the fact that we are fortunate in the ability to effectively spend capital, it helps us maintain a position but it certainly is not able to overcome all of your inflation. And so that's why you have to have price along with a very, very effective capital spending program to stay ahead of the curve here.

But energy right now is probably the big... Yeah, and energy as far as your direct items, George, I mean, even chemicals, you know, but chemicals are going to be up. And you look at, you know, just pretty much across the board, for the types of chemicals we use. We're seeing price increases in the first quarter, and those will stay with us throughout the year. But as Mark alluded to, the majority of the inflation we're seeing is in those items below all your direct costs, the things that Mark was referring to. That's where the biggest hit will be.

It also means you need to be given the expense, the inflation on labor, medical services, rail, which you can't control necessarily, you've got to be very, very precise, very strategic about where you put that next box plant so that you optimize around those various factors.

And, George, that's what we've been doing. I mean, think about the rate of spending over the last seven or eight years now, especially the last six years. You know, the benefits that we've gained from this activity are immense. It's allowed us to do what we do and be where we are. Now, good news is we're going to continue at this pace and we'll continue to take advantage of this. But nevertheless, with this comprehensive inflation across the board, it doesn't matter how much capital you spend. You will never, you know, unless you see appropriate pricing, you can't keep up with all the inflation.

Thank you, Mark. Good luck in the quarter. Talk to you soon.

Thank you. Thank you. Appreciate it. Jamie, I think that may be wrapping things up. Do you want to conclude this?

Absolutely. Mr. Colzano, I do see that there are no additional questions. If you have any closing comments, feel free to proceed at this time.

Thank you, everybody, for joining us, and I look forward to talking with everybody at the end of April. Take care. Have a good day. Bye-bye.

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