Mark Kowlzan:

Good morning, everyone and thank you for participating in Packaging Corporation of America's second quarter 2024 earnings release conference call. Again, I'm Mark Kowlzan, Chairman and CEO of Packaging Corporation of America. And with me on the call today is Tom Hassfurther, Executive Vice President, who runs the Packaging business; and Bob Mundy, our Chief Financial Officer. I'll begin the call with an overview of the second quarter 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'll be glad to take questions. Yesterday, we reported second quarter net income of $199 million or $2.21 per share. Excluding special items, second quarter 2024 net income was $199 million or $2.20 per share compared to the second quarter 2023 net income of $209 million or $2.31 per share. Second quarter net sales were $2.1 billion in 2024 and $2 billion in 2023. Total company EBITDA for the second quarter excluding special items, was $404 million in 2024 and $418 million in 2023. The details of special items for both the second quarter of '24 and 2023 were included in the schedules that accompanied the earnings press release. Excluding special items, the $0.11 per share decrease in second quarter 2024 earnings compared to the second quarter of 2023 was driven primarily by lower prices and mix in our Packaging segment for $0.87 and Paper segment $0.07. Even with our constant focus on minimizing inflationary cost increases, operating costs were higher by $0.31 per share. This was particularly in the areas of recycled fiber and inflation-driven increases on labor and benefits, outside service expenses, repair and operating material costs, rents, property taxes and insurance. We also had higher depreciation expense of $0.03 and a higher tax rate of $0.03. These items were partially offset by higher volume in the Packaging segment for $0.94 and Paper segment $0.07, lower other converting costs, $0.07, lower freight and logistics expenses, $0.06 and lower interest expense, $0.06. Looking at the Packaging business. EBITDA, excluding special items in the second quarter of 2024 of $400 million with sales of $1.9 billion resulted in a margin of 21% versus last year's EBITDA of $405 million and sales of $1.8 billion or a 23% margin. The strong market conditions in our Packaging segment continued in the second quarter. This drove a new all-time containerboard production record that was necessary in order to service the corrugated products and containerboard demand. Also, Packaging segment prices and mix moved higher from the first quarter levels as we continue to implement our announced price increases. Although still below target levels, we were able to build some inventory ahead of what we expect to be a very busy second half of the year. In our mills and corrugated products facilities, employees remain focused on efficient and cost-effective operations from thousands of initiatives as well as implementing the benefits and improvements from our capital spending strategy. I'll now turn it over to Tom, who will provide further details on the containerboard sales and corrugated business in general.

Mark Kowlzan:

Thanks, Tom. Looking at our Paper segment. EBITDA, excluding special items in the second quarter was $31 million with sales of $150 million or a 20.4% margin compared to the second quarter of 2023 EBITDA of $39 million and sales of $143 million or a 27.2% margin. Paper segment prices and mix as well as volume came in as expected. And as we mentioned last quarter, although we are implementing our recently announced paper price increases, the published decrease in index prices earlier this year and how that impacts contract triggers with certain customers would initially delay the timing of realizing the increases. Overall, average prices and mix were essentially flat with the first quarter 2024 levels and down 5.6% versus the second quarter of 2023. Market conditions versus last year were solid with volume up 12% versus the second quarter of 2023 driven somewhat by the timing of seasonal back-to-school business. Volume was 8% below the first quarter of 2024, impacted by the scheduled maintenance outage at the International Falls, Minnesota mill as well as exceptionally strong volume in the first quarter. Similar to the comments I made regarding the packaging business, employees in the Paper business remain focused on very efficient and cost-effective operations and executed the outage International Falls very well and slightly below our cost estimates. I'll now turn it over to Bob.

Mark Kowlzan:

Thank you, Bob. Looking ahead, as we move from the second quarter into the third quarter, prices and mix in both our Packaging and Paper segments will move higher as we continue to implement previously announced increases along with higher containerboard export prices. Although there is one less shipping day for the corrugated business, we expect shipments per day to continue to strengthen, potentially setting a new third quarter record. We also expect higher containerboard volume. With current containerboard inventory below our target levels, we will also attempt to build some inventory ahead of the scheduled maintenance outage at our DeRidder Mill in October. Paper volume will be slightly lower primarily due to timing of back-to-school business that was received in the second quarter. Operating and converting costs should be higher primarily due to seasonal electricity usage and prices and slightly higher recycled fiber costs with scheduled outage expense expected to be slightly lower. Considering these items, we expect third quarter earnings of $2.45 per share. With that, we'd be happy to entertain any questions but I must remind you that some of the statements we've made on the call today constitute forward-looking statements. These statements are based on current estimates, expectations and projections of the company and do involve inherent risks and uncertainties, including the direction of the economy and those identified as risk factors in our annual report on Form 10-K which is on file with the SEC. Actual results could differ materially from those expressed in the forward-looking statements. And with that, Alan, I'd like to open up the call for questions, please.

George Staphos:

I guess the first question I had gentlemen, is on costs. So you highlighted the $0.31 year-on-year negative variance in operating costs, converting costs were a little bit lower by $0.07. So the net of that was still a negative $0.24. If I look at the first quarter year-on-year, you were still seeing positives, I think kind of netting those 2 that you showed last quarter was $0.15. So almost like a $0.40 swing in 1 quarter in terms of comparisons, along with OCC -- gentlemen, what was the biggest factor in terms of costs that you've been trying to manage around? And what's the outlook? You said higher operating costs into the third quarter. There's a way to size what's happening in the third quarter on those factors. And then, I had a couple of follow-ons.

George Staphos:

Just holding at a very, very high level.

Bob Mundy:

Yes. Yes, exactly.

Tom Hassfurther:

George, this is Tom. Yes, bookings remain very robust. Bookings and billings both remain very robust. Through 12 days, we're up 12.5% so far in July. So an incredibly good start to the quarter. We had a very good start to last quarter. We exited at a higher rate and we're continuing that higher rate as you see going into the third quarter.

Tom Hassfurther:

Thanks, George. Now I'll address what I can, okay? And to give you as much color as I possibly can. What's happening with our mix is, is that the growth the growth we see within our existing accounts and some of the new business that we brought on is primarily in the brown area. And if you look at what's happening overall as we see it in the marketplace, some of that specialty business which would be graphics-oriented and some of those sorts of things have remained relatively stable, whereas the other growth has been primarily in brown. So from a mix standpoint, it's a slight change. It's not this big dramatic change or anything like that. But this is -- our growth is a result of a team working incredibly well, performing at a very high level, remaining incredibly focused on the customer and aligning ourselves with the markets and the customers that we choose to do business with.

Mike Roxland:

Congrats on another good quarter. Just wanted to get a sense of your 2Q guidance during 1Q, you mentioned your guidance to $2.07, you rounded up at $2.20. Wondering what occurred during the quarter relative to your expectations that drove the beat?

Mike Roxland:

Got it. Okay. So really a volume but also some of the cost efficiencies that you continue to pursue because now that you mentioned [indiscernible] markets for thousands of opportunities. A combination of those 2 really drove you at $0.13 fee relative to your initial expectations?

Mike Roxland:

Got it. And then just quickly, I would love to get your thoughts around your competition which seems to be changing. And a lot of them that seem to be echoing the strategy that you've pursued for some time in terms of targeting smaller local talents, trying to get more value over volume. Do you have any concerns in terms of this companies pursuing a similar strategy? Do you think of making competition. But what do you think is that -- what is sort of happening? And what are you doing to prepare if they become more aggressive and try to compete in your backyard.

Tom Hassfurther:

Well, Mike, I would just say, listen, I mean, we don't really comment on our competition or what our competition is doing. We have our strategy, we go execute our strategy in the marketplace. And that is, as I've mentioned before, aligning with the right customers in the right segments. That's what we try to do. And what our competition is working on or is doing at the moment is really their plan, their program. And so I've got very little to comment on that.

Mark Weintraub:

So you mentioned Wallula negative mill mix impact. You're also though ramping up Jackson and or have ramped it up. And can you kind of give us a sense as to how much of a positive impact that has perhaps already had? And is there more that's likely to show up? And when would you expect it to be really operating at its highest levels of productivity, efficiency, cost position?

Mark Weintraub:

And can you remind us, you had talked about EBITDA type contribution from Jackson. What's -- is there an updated thought or potential EBITDA contribution. Is there an updated thought now that you've seen that the scope of production could even be higher than what was originally expected.

Mark Weintraub:

Got you. And then on the increased CapEx, is there any -- a little bit more color in terms of the types of returns you might expect on this increased capital spend?

Mark Weintraub:

Okay. And then it sounds like a mix of cost and increased capacity. Is that fair?

Mark Weintraub:

Right. And is that the size of plant similar? Is that still like an $80,000 type throughput? Or what type of throughputs are you talking about with the -- this new plant.

Mark Weintraub:

Okay. Great. And then lastly. So, obviously, we got pricing in February and PPW, got it in June. Undoubtedly, that's helping the third quarter. Is there much that you would expect of the increases that have already been reflected in PPW to show up in 4Q and beyond? Maybe could you help us start to quantify how to frame it?

Operator:

Our next question comes from Anthony Pettinari of Citi.

Mark Kowlzan:

No, that's a piece of it. We've also -- as the year progressed, we continue to identify ongoing opportunities at existing plants and it's in the line of new corrugators, new converting lines. And so we, again, aggressively have pursued a lot of those opportunities. There is some spending in the mills that we also identified as immediate high return opportunity that we've deployed some of that extra capital into -- and so it's a mix across the board which, again, gives you a good opportunity and mitigates the risk of any 1 big project.

Mark Kowlzan:

Yes. As far as the level of spending as long as we have opportunities, we're going to spend to the opportunities and we'll call that out as we have to, we'll give you an update in October for what the year is starting to finish up at. And then in January, we'll clue you into 2025. But I think, again, we've got a history of delivering results and again, I think for the time being, we're in this level of spending. But again, it's immediate high return. It feeds into this tremendous growth that we're seeing. And so we get immediate return for it. As far as the project down in Arizona, I think, Tom, we're kind of looking at late next spring type early part of next year of getting that plant started up.

Anthony Pettinari:

Got it. And I guess, last question. When you look at your end markets and really the strong volumes you've seen between consumer, industrials, durables, logistics, are there specific markets or customer set that is really driving that strength? Or has -- where the strength of demand has surprised you maybe?

Operator:

The next question comes from Gabe Hajde of Wells Fargo.

Mark Kowlzan:

I think again, the number we're using internally is about a 95% integration. And as far as the value to us, I think you're in the ballpark. Bob, you got any comments?

Gabe Hajde:

Okay. And then we've got some new legislation regulation in the EU and I appreciate you're not in Europe. But just to the extent that it impacts kind of maybe global trade flows or implied values of virgin assets here in the U.S. do you see that putting maybe incremental upward tension on OCC over time as people look to use more in their furnish, or does that not even come into your thought process because you're focused on the U.S.

Gabe Hajde:

Okay. And last one, just on capital. Even with the increased spending, our model kind of has you guys still at 1x levered. You've always obviously taken a balanced approach with the dividend and share repurchase being a little bit more opportunistic. Anything changed either on the M&A front or a different perspective on capital as you look out over the next, I don't know, 12 months to return cash or value to shareholders?

Operator:

The next question comes from Phil Ng of Jefferies.

Tom Hassfurther:

Phil, this is Tom. I would -- I'm going to go back again just to reemphasize the fact that we have a particular strategy, our go-to-market strategy is a particular one. It's -- we try to align with the right customers. And by that, I mean, the customers that we see that are going to grow going forward. And we work very closely with them to help make us both very successful in the long run and those have proven to be very beneficial to us. We have shied away from some of the other ones that are very seasonal or perhaps a little more jargon [ph] in terms of their demand and fall over periods of time. So this has been a long, long-term strategy that we've had and we continue to execute very well on that. I think there's been a lot of discussion about the capital spend. And that's been a long-term strategy of PCA has been consistently capital spend where the opportunities present themselves. Our financial flexibility allows us to do that sort of thing. And those -- and then consequently, we can take advantage of the opportunities when they present themselves with the marketplace. So that's really -- that really describes this best what we're seeing in the marketplace. And I know that some of our growth may not be consistent with what you might see in a macro trend. But I think when you dig deep and you see certain industries or certain segments, you'll see significantly more growth in some of those than you might in others.

Tom Hassfurther:

Restocking. Our customers typically are keeping a what I would consider to be a very conservative inventory. We got through that whole destocking process quite some time ago now. And they're holding their -- they replenished some inventory but I would term it to be a on the historically lower side of inventory is what they're holding right now.

Mark Kowlzan:

Some of these projects we're doing currently in the box plants with some of the converting lines and corrugators. You'll see benefits this year and then we'll benefit going forward into next year. So without quantifying that, these are, again, very, very immediate quick return opportunities. And again, some of the longer-term projects like the project down in Arizona will be next year. But we currently have a portfolio of activity going on in the box plant. So we've been executing on an ongoing basis all year. And as the year rolled on, we observed more opportunities and we were able to take advantage of that. And so there's always somewhat of a lag but it's always in terms of months, not years.

Mark Kowlzan:

I don't want to comment about that. Again, that's -- there's always opportunities and we'll take advantage of opportunities when we need to take advantage of them. But I don't want to speculate on anything.

Charlie Muir-Sands:

Just two, please. Firstly, on the new Arizona box plant, you said the capacity of the new site would be 2 billion square feet per annum. Can you just tell us what kind of upgrade that is or what's the capacity of the existing site that you're closing? And then secondly, just on back on the competitive landscape. I appreciate you don't like to talk about individual competitors but it does seem to be a sort of a general trend towards pushing price a bit more -- is that something that you are tempted or able to follow? Or are you more inclined towards gaining market share and driving operating leverage?

Tom Hassfurther:

Yes, there's not a lot to talk about other than the fact that we are clearly out of capacity in that marketplace. We're not able to service the customers locally like we'd like to, we're having to pull from a lot of different plants and most of the plants are quite far away in the L.A. region or something like that in order to service that market. And that's not sustainable long term. So with the opportunities we have and with the customers that we have in that marketplace, they've indicated that we need to do significantly different things which we will do. And that will give us some -- obviously, some great opportunities in that region.

Operator:

Mr. Kowlzan, I see there are no more questions. Do you have any closing comments?

Operator:

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Mark Kowlzan:

Thank you, Jamie. Good morning, everyone, and thank you for participating in Packaging Corporation of America's first quarter 2024 earnings release conference call. Again, I'm Mark Kowlzan, Chairman and CEO of Packaging Corporation of America. And with me on the call today is Tom Hassfurther, Executive Vice President who runs the Packaging business, and Bob Mundy, our Chief Financial Officer. I'll begin the call with an overview of our first quarter results, and then I'll be turning it over to Tom and Bob, who will provide further details. And then I'll wrap things up and we'd be glad to take questions. Yesterday, we reported first quarter net income of $147 million or $1.63 per share. Excluding special items, first quarter 2024 net income was $155 million or $1.72 per share compared to the first quarter of 2023's net income of $198 million or $2.20 per share. Our first quarter net sales were $2 billion in 2024 and 2023. Total company EBITDA for the first quarter, excluding special items, was $333 million in 2024 and $405 million in 2023. First quarter net income included special items expenses of $0.09 per share, primarily for certain costs at our Jackson, Alabama mill for the paper to containerboard conversion-related activities. Details of special items for both the first quarter of 2024 and 2023 were included in the schedules that accompanied our earnings press release. Excluding the special items, the $0.48 per share decrease in first quarter 2024 earnings compared to the first quarter of 2023 was driven primarily by lower prices and mix in the Packaging segment for $1.33, and Paper segment $0.08, higher scheduled mill outage expense $0.10, higher depreciation $0.03, higher expenses related to corrugated plant capital projects of $0.02 and other expenses $0.04. These items were partially offset by higher volumes in the Packaging segment for $0.71, and Paper segment $0.06. We also had lower operating and converting costs of $0.15 driven by very good process efficiencies and control over other usages of fiber, chemicals, energy, materials and labor. Although energy prices were lower versus last year's first quarter, they were more than offset by higher recycled fiber prices. In addition, we had lower freight and logistics expenses for $0.04, lower interest expense $0.07 and lower tax rate $0.09. The results were $0.18 above the first quarter guidance of $1.54 per share, primarily due to the strong volume in both the Packaging and Paper segments, along with the continued emphasis on cost management and process efficiencies across our manufacturing and converting facilities. This drove operating and converting costs lower even with the persistent inflation we continue to experience across most of the cost structure. Executing the conversion outage at our Jackson, Alabama mill better than planned resulted in lower scheduled mill maintenance outages, expenses and freight and logistics expenses were less than guidance as well. Looking at the Packaging business, EBITDA, excluding special items in the first quarter of 2024 of $326 million with sales of $1.8 billion resulted in a margin of 18.1% versus last year's EBITDA of $392 million or sales of $1.8 billion or 21.7% margin. Throughout the quarter, containerboard and corrugated products demand exceeded our expectations. In addition to outstanding operational performance at our box plants and containerboard mills, we were able to service the high demand from excellent execution of the convert -- of the conversion outage at our Jackson mill. This enabled us to restart both machines earlier than anticipated and we completed our work prior to the quarter-end rather than in the month of April, which had been the original plan. Despite these efforts, with the higher demand, we ended the quarter at a record-low weeks of inventory supply for this time of year. With just our Filer, Michigan mill having a scheduled maintenance outage in the second quarter, we do expect to build our inventories back to targeted levels by the end of this quarter. I'll now turn it over to Tom, who will provide further details on containerboard sales and the corrugated business in general.

Mark Kowlzan:

Thanks, Tom. Looking at the Paper segment, EBITDA excluding special items in the first quarter was $41 million with sales of $164 million or 25% margin compared to the first quarter of 2023's EBITDA of $41 million and sales of $151 million or 27% margin. Sales volume, which exceeded our guidance estimates, was 14% above the fourth quarter of 2023 and 16% above the first quarter of 2023. Demand was very good both from our existing customers as well as incremental volume from some new customers as we acquire -- that we acquired towards the end of 2023. Orders remain strong as we enter the second quarter, although volume will be impacted by the scheduled maintenance outage at our International Falls, Minnesota mill in June. An improved sales mix moved paper prices slightly above the fourth quarter of 2023, although prices and mix were down about 6% from last year's first quarter. This past February, we announced $100 price increase across all of our paper grades and we began implementing these increases on April 1. I'll now turn it over to Bob.

Mark Kowlzan:

Thanks, Bob. Looking ahead, as we move from the first and into the second quarter in our Packaging segment, we expect continued strong demand and higher corrugated products and containerboard shipments. Prices and mix will move higher due to our announced price increases and increase in published domestic index prices as well as higher export prices. Orders in our Paper segment are expected to remain strong, however volumes will be lower due to the scheduled maintenance outage at the International Falls Minnesota mill during the quarter. Although we're implementing our recently announced paper price increases, the average prices and mix are expected to be slightly lower due to the published decrease in index prices earlier this year and how that impacts contract triggers with certain customers. Operating and converting costs should be slightly lower, primarily due to the sequential improvement in seasonal weather and wage and benefit timing expenses that we incurred in the first quarter and scheduled maintenance outage expenses will be lower. Rail rate increases at six of our mills during the first and second quarters will result in higher freight and logistics expenses and depreciation expense will be higher. Finally, our tax rate will be sequentially higher due to the tax-related benefit of share-based compensation vests in the first quarter. Considering these items, we expect the second quarter earnings of $2.07 per share. With that, we'd be happy to entertain any questions, but I must remind you that some of the statements we've made on the call constitute the forward-looking statements. The statements were based on current estimates, expectations, and projections of the company and do 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 on file with the SEC. Actual results could differ materially from those expressed in the forward-looking statements. And with that, Jamie, I'd like to open up the call for questions, please.

George Staphos:

Hi, everyone. Good morning. Hope you're doing well. Thanks for the details. I guess the first question, maybe the standard one for all of us, can you talk to what the early trends are in terms of bookings and billings so far in 2Q? And then I had a couple of follow-ons.

George Staphos:

Thanks for that, Tom. Can you talk a bit about what your vertical integration was in 1Q and also in 4Q? And if you don't want to provide -- and we understand an absolute level, can you talk about what the relative trend was? And similarly, can you talk about how the mix of your business was, third-party in export in 1Q and similarly relative to what you saw in 4Q?

Bob Mundy:

Yeah, yeah, I don't have the absolute -- yeah, the integration in the first quarter was around 90%, almost 93%, George. And slightly below that, I think it was in the fourth quarter.

George Staphos:

Okay. I guess the last one, and I'll -- please go ahead.

Tom Hassfurther:

Right. Are you asking about mix of export or you ask -- what exactly you're asking, George?

Tom Hassfurther:

Let me see if I can tie this together here real quick for you, George.

Tom Hassfurther:

Number one is the export. The export in first quarter versus fourth quarter, as I indicated was down slightly. Fourth quarter is a big export time for us. And -- but on an overall basis, it was pretty flat. Relative to the EBITDA margins, I think one of the things that probably you might be missing in the model was the fact that the $20 downturn that took place last year, some of that bled into the first of the year because of contract triggers. And of course, we were counting on the $70 being published and the only $40 was published and it was slightly delayed. So the roll through in the price increase did not occur quite as quickly as we had hoped and not in the same amount because of the index. In addition to that, I just want to remind you that inflation remains very sticky. And I think there is a lot of noise around inflation, the rate of inflation having slowed from that rapid rate during COVID, but it's still going up. And it's been going up, at the same time, the index has indicated prices going in the opposite direction until this $40 increase. So I think that's -- I think that's where the -- where the margin gap is.

Bob Mundy:

Yeah. Yeah, Mark. I mean the things and even as we go into the second quarter from the first, obviously, recycled fiber, wood may be a little bit higher from a price standpoint, electrical rate, even though gas is down, electrical rates are not. Chemicals, whether it be lime, adhesives in the box plants, resins, alums, starch across the board, all moving higher. And again, we typically talk about all the direct type of costs and which is only about 40% of our cost base, you have the other 60% which are, as Mark referenced, there are maintenance services, repairs, materials, operating material supplies, property taxes, rent, warehouse cost, insurance leases. So it's -- there is constant inflation and all the people that supply those things, they have the same inflation going on in their business and they don't eat it. They pass it on to us. So a lot of that just gets overlooked, I think, George.

Mark Kowlzan:

Thank you. Next question, please.

Nicco Piccini:

Thank you, Mark, Tom and Bob for taking my questions. This is Nicco Piccini on for Mike. I guess just realizing that demand has improved across the board, are there any particular sectors or end-markets where you saw more notable improvement, and then anything lagging?

Nicco Piccini:

Got it. Thank you. And then just following up, since roughly 2019, you spent like a deal of time and money recapitalizing your box plants. Can you comment on maybe if there's anything left to do there realizing there's always some level of work to be done?

Tom Hassfurther:

Well, I think I would add -- I think it's a good reminder always that our capital plants and the box plants are built around our customers. And our customers that we're aligned with are in growth mode and that's a big benefit to us. And we'll continue to invest around those customers.

Nicco Piccini:

Understood. Thank you very much for the commentary.

Operator:

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

Mark Kowlzan:

Yes, everything that we had sculped out four years ago is complete, and that project has turned out, as you can imagine, we're more pleased than we thought we were going to be at this time. The original phase of work that we just completed was originally a 58-day schedule. We completed that two weeks ahead of time, started up the day before Easter, and have been running extremely well ever since. And as I've talked over the last year, I expected that machine to be producing over 2,000 tons a day and we've been doing that for the last week or two. And so, getting that mill stretched out now, and getting everybody used to running at these high production rates, but the good news is we need every ton that we can produce. And this is all high-performance grade lightweight linerboard coming off that machine. And so it's doing everything that we expected it to do and more.

Mark Kowlzan:

If you include the seven mill system, would be a little bit over 5 million tons. If you round off 5 million tons system, a little over 5 million tons, 5.2 million or so.

Mark Kowlzan:

Depending on the grade mix that you're running as far as lightweights basis weight, 5 million, 5.2 million is a good number going forward on a run rate basis.

Mark Kowlzan:

Mark, it's still going up, it's going up at a lesser rate, but still we're going up and -- but second quarter is always an interesting one for us versus the third and fourth, which are more predictable because we have -- we take -- seasonality is kind of a little more iffy in the second quarter. But we still see that momentum going up and then we expect it to continue to go up again in the third and fourth quarters of the year.

Mark Kowlzan:

Yeah, Mark, that was a timing issue as far as just how the invoicing is done against the projects. We called out that somewhere in that higher 400 level, and we'll give you some updates in July. We always reserve the right as an example, if new opportunities come along, we move forward with these opportunities. And so right now, we're in that high $400 million area. But again, we'll give you some update. If there's any -- if there is any change, we'll update you in July.

Operator:

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

Mark Kowlzan:

Good morning.

Tom Hassfurther:

Gabe, this is Tom. That's a great question you have, especially relative to the decoupling from RISI. As I indicated in our last call, this would not be an easy task and it's going to take some time. But we're still pressing forward with that, driven again by our customers' frustration over what is going on and what gets reported these days. If you just work through at least from PCA's perspective, if you look through the -- walk through the math and you said, well, liner came down $110 after its peak and medium a little bit more, we would need to have a significant recovery to get back to those kind of levels. And as I also indicated, inflation continues to take place. So there's a -- even customers have said to us that if things had just remained the same from the peak, they would have -- they'd almost prefer that just because they just don't like these roller-coaster rides, and they're trying to get off of that down and then up and then down and then up, and these sorts of things. So -- and over a long period of time, we could have managed that in a much smoother fashion. So these are the kind of discussions we're having with our customers. Our customers are very open to alternatives and different methods. But you got to remember, a lot of these contracts are long-term contracts. They have different trigger points, they have different times when we're negotiating them. And so we are where we are at this point in time. And the other thing that we talked about was that when we announced this increase, the increase was on containerboard. And it wasn't -- the announcement wasn't on boxes. That's between us and our customers, but we announced it on the open-market of containerboard, and we implemented it. It didn't get reported quite that same way, but that's part of our frustration. I think that relative to future pricing, we don't -- we don't really discuss future pricing and we don't make any indication of what we're going to do in the future, but you could probably -- you probably read through where we are and some of the inflationary pressures that are taking place. And the last reminder is that it's -- there -- all increases aren't strictly on supply and demand. Sometimes they have to do just costs. And costs in general and some costs that we're trying to minimize as much as we possibly can, but in lots of cases, we can’t. So hopefully that gives you the -- hopefully that gives you a good indication of where we are.

Tom Hassfurther:

I think in total spendm Gabe, it's like 65% or so is rail, I believe.

Mark Kowlzan:

Yeah, I don't have any comment regarding that. That's at some place it's -- I won't go. But as you can imagine, we take advantage of opportunities as they come along.

Mark Kowlzan:

Next question, please.

Anthony Pettinari:

Hi, good morning.

Anthony Pettinari:

On the last call, you talked about expectations for I think $0.35 sequential headwind in 1Q on seasonal costs that I think were mostly labor and benefits related, and maybe being able to get 60% of that coming back in 2Q. If I got that right, I'm just wondering how given where you shook out in 1Q and the 2Q guidance, how that kind of played out versus expectations?

Anthony Pettinari:

Got it. Got it. And then just following up on Gabe's earlier question on pricing mechanisms, a lot of packagers have contracts where they get kind of an automatic pass-through on their primary raw material, whether that's aluminum or polyethylene. I'm just wondering kind of conceptually, big picture, would it be possible to structure contracts where fiber is just passed through automatically, whether that's OCC or virgin fiber or is there something about craft line or test line or boxes where maybe there's too many SKUs or there's too many customers or it's just it makes that kind of automatic pass-through more difficult.

Mark Kowlzan:

Yeah, Tom, go ahead...

Mark Kowlzan:

Yeah, I just wanted to emphasize that maybe once upon a time, when a decade ago, things were more stable in general with inflationary activity and fiber would move up and down and -- but now the last number of years, we're in a world where inflation is back on track at the way it was decades ago and you're seeing across-the-board all your input costs up dramatically. And as Tom said, it would be too complex to try to tie that into some type of mechanism. But don't forget again just like 25 years ago, transportation was a very minimal cost factor in moving containerboard and paper products around the country. Now transportation factor is in as a major -- very significant major element to the cost, just that one component.

Tom Hassfurther:

Anthony, this is Tom again. We're exploring all the potentials and we're doing it in detail with our customers. And so I think we'll just see where this unfolds over time. But -- and we're learning a little bit too on our side because we're getting it from all our suppliers and we're getting all of the above from all of our suppliers. And that's part of the inflation problem and the cost problem that we're incurring. So we're taking everything into account and -- but this will be solved directly with our customers.

Anthony Pettinari:

Understand. I appreciate it, and appreciate it's a difficult question to answer in this kind of format. But appreciate the color. Thank you.

Operator:

Our next question comes from Philip Ng from Jefferies LLC. Please go ahead with your question.

Tom Hassfurther:

Well, I think, Phil, the -- yes, there's -- it's been a big plus for us. There's no question about it, otherwise we wouldn't have embarked on it. I've said many times, we don't build it and hope they will come. We do what our customers need us to do and invest where they need us to invest. And that's what we've been doing. And it's coupled with making our system more efficient, getting ourselves aligned properly in the right marketplaces, getting ourselves aligned with the right customers. And that's -- I think that's a huge plus. Now in addition to that, I think what helps us a lot is the fact that we're building a better-quality product every day, we're able to turn much faster and meet demands and work as a -- and work as a complete system. Makes a huge difference for us and our customers definitely appreciate it, and I think that's showing up in the business that we're capitalizing on.

Philip Ng:

Super. That's helpful. And I guess a question on the pricing side of things. Since only $40 to the $70 linerboard increase got reflected in the index, just from a logistics standpoint, are you issuing rebates to your customers? And then I guess separately, the trade publication kind of reported maybe perhaps some of the independent box makers were a little reluctant to push price just given a more mixed demand backdrop for them. How did the box price increase progress? And do you kind of expect it to kind of proceed like normal?

Philip Ng:

Okay. If I can sneak one more in, your two larger competitors in US are obviously merging with European counterparts. Historically, industry has had mixed track-record being international. But Mark, Tom, team, I'm just curious, how do you kind of see that perhaps changing the competitive landscape and how you may compete and how you proceed with some of your customers going forward?

Tom Hassfurther:

I don't have any comment at all, that relative to our competitors or what they're attempting to do or trying to do. We know what we need to do in our marketplace and that's what we go and focus on executing.

Philip Ng:

Okay. Appreciate the color. Thank you.

Operator:

Our next question is a follow-up from George Staphos from Bank of America Securities. Please go ahead with your follow-up.

Mark Kowlzan:

That will never end. If a company does not have the capability that we do, you will not be able to function efficiently going forward. The technology capability that we bring to bear 24 hours a day, seven days a week, we take care of our operational matters in real-time, whether it's a box plant issue or a mill issue, we don't depend on vendors to take care of our needs. And so this technology, the engineering group is not only working on capital investments, but they're working on process efficiency, process improvement on a real-time 24/7 basis, and that will never end. And that's been one of the benefits that has differentiated PCA for many years now, and we just continue to make it better and better. And the opportunities that the organization, whether you take an individual box plant or a mill and you take the operating group and the technology engineering group together, they see new opportunities continuously. And then you're able to identify new technology that can be applied and then we implement that new technology and again, how that rolls into the relationship with growing what our customer needs are.

Mark Kowlzan:

Absolutely. It's -- that's one of the differentiating factors that will continue to provide the type of benefits that you see at PCA.

Mark Kowlzan:

Thanks, George. Any further questions?

Ryan Fox:

Good morning, gentlemen. In the fourth quarter of '23, we saw that you outperformed the broader industry by a very wide margin. Just curious if you felt like in the first quarter, we're going to see a similar performance.

Bob Mundy:

No, I mean, Tom, he's referring to the industry numbers. I think that will come out at the end of the week versus our performance.

Ryan Fox:

And why do you think you've outperformed the industry by such a great margin in the last two quarters?

Ryan Fox:

Brilliant. Thank you so much.

Operator:

[Operator Instructions] And sir, at this time in showing no additional questions, I'd like to turn the floor back over to you, Mr. Kowlzan, for any closing comments.

Operator:

Ladies and gentlemen, that does complete today's conference call and presentation. We thank you for joining. You may now disconnect your lines.

Mark Kowlzan:

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 Kowlzan, 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 Mundy, our Chief Financial Officer. As usual, I will 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-containerboard 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 $0.22 per share decrease in fourth quarter 2023 earnings compared to the fourth quarter of 2022 was driven primarily by lower prices and mix of $1.93 in the Packaging segment, lower prices and mix $0.04, and volume $0.03 in the Paper segment and higher depreciation expense $0.10. 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 $0.51 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 had lower scheduled maintenance outage expenses of $0.19, lower freight and logistics expenses $0.03, lower other expenses $0.04 and a lower share count resulting from share repurchases $0.04. The results were $0.37 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 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 No. 3 machine during the latter part of October and ran exceptionally well during the November, December period. And that helped us meet the stronger demand and build some needed inventory during the quarter to ensure the customers – that our customers were supplied with their needs. We plan to restart the No. 2 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 containerboard conversion of the No. 3 machine at our Jackson, Alabama mill. I'll now turn it over to Tom, who'll provide more details on containerboard sales and the corrugated business.

Mark Kowlzan:

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 and 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.

Mark Kowlzan:

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 containerboard mills and corrugated products plants. Our dedicated sales and customer service organizations continue to be extremely motivated and understanding the business of our customers. They were very responsive to our customers' needs and works 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 towards 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 No. 2 machine at the Wallula mill, containerboard volume will be lower due to the downtime associated with the conversion of the No. 3 machine at the Jackson mill and a scheduled maintenance outage at the Counce, 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.

Mark Weintraub:

Thank you. First, congrats on another really strong year in a challenging environment. So you say in the press release that that you are expecting a little 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?

Mark Weintraub:

Okay. And sorry, just to clarify, so when you said net $20, was that the increase minus the impact of the $20, or was that that you’re 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.

Mark Weintraub:

Got it. Understood. And lastly and I’ll turn over. Could you sense of how demand is shaping up in January so far for the business?

Mark Weintraub:

Okay. Thank you.

Operator:

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?

Operator:

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

Tom Hassfurther:

Thank you.

Mike Roxland:

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 in 3Q, you called out weaker building products, lower graphics from softer retail, UAW strike. I’m wondering if that had an impact in 4Q as well, and whether you expect that to fade in 2024.

Mike Roxland:

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

Mike Roxland:

Okay. Got it. Thank you for that. And then just of the $1.93 in lower prices and mix, is there anyway to parse how much was price versus mix? And then in terms of your – the $1.54 guide, what’s embedded for price and mix separately?

Mike Roxland:

Got it. So Tom, would it be fair to 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.

Mike Roxland:

Got it. And last question just before turning it over. Can you help us just think about what’s next for PKG from a growth perspective? Obviously, you’re finishing up Jackson here. And you still have I Falls. Now realizing that I Falls is a great asset, it’s modern, generates a lot of cash, [indiscernible] paper. Do you expect to run I Falls as is? What’s really the next leg of the growth trajectory for PKG after this?

Mike Roxland:

That’s great, Mark and very good call. I really appreciate it. And best of luck in 2024.

Operator:

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

Tom Hassfurther:

Well, with regard to linerboard and medium, I’m talking about linerboard of medium here. It’s 100% of our customers, outside customers on linerboard of medium and trade partners as well. So that’s where that stands. And I just like to add, we’re having no customer dispute us on these price increases or anything. And obviously we’re disappointed that it didn’t show up in the trade publication, as I mentioned earlier. And 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 we don’t want the tail wagging the dog here, but 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.

Bob Mundy:

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 quarter from a cost perspective relative to what we had guided to. As far as the first – 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 is on a sequential basis, is $0.16 per share. But outside of that, if you look at all of our other costs, there’s probably 60% or so of those are what we call seasonal or timing type cost increases. 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 we don’t see much of a change relative to usages and things that get impacted by cold weather down there. And then the wages and benefits. The base – that base gets larger every year. You never have deflation with your wages and benefits. So the annual increases that we experienced going from 4Q and to start a new year in 1Q, it just gets higher and higher, the dollar impact of that. Plus this year, our medical costs alone, they were up probably over 12% to 15%. However, on a sequential basis, the weather-related items should flip back the other way as we move from 1Q to 2Q and 2Q to 3Q, as should about half of the – those wage-related timing items. Those start to flip back the other way on a sequential basis. You have to sort of keep that in mind going forward. And I’d say the balance of well, I guess one other item is we talked about bringing Wallula on in the first quarter and taking Jackson down, so we’re replacing low-cost tons with very high cost tons. That’s a – that’s probably a $0.10 hit in and of itself right there, exclusive of the outage impact that $0.16. And then the balance of that is just inflation related things that don’t get talked about a lot. For all these cost increases we incur, believe me, anyone who provides a part, a good product service to us, they’re experiencing those same increases. So there’s a lot of outside services, equipment rentals, rents, property taxes even. You can go on and on and on. All that is – it’s a lot of money that we have to absorb especially on – 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 the – for our guidance.

Mark Kowlzan:

Next question please.

Gabrial Hajde:

Mark, Tom, good morning. Thanks for taking the question.

Gabrial Hajde:

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 the GDP type growth. But this quarter was seemingly pretty pronounced relative to what we’re reading maybe in the green markets report or REFI [ph]. 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.

Gabrial Hajde:

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 $0.26 and the $0.16. But is that happening? Is it straddling in March, April from a timing standpoint? And then I’ll ask a 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, that’s, 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.

Tom Hassfurther:

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, et cetera. So, as I mentioned, we got the increase in place for the linerboard medium. And we’ll see where things roll through, but we expect it to be a traditional roll through.

Mark Kowlzan:

Thank you. Next question please.

Anthony Pettinari:

Hi Good morning.

Anthony Pettinari:

Hey, following up on your earlier comments, I’m wondering, is there some percentage of your box contracts that are not on Pulp and Paper Week? And I guess, looking at other paper grades, there were some boxboard producers we 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 a Pulp and Paper Week. Is that something that you potentially could do? Or you think some customers might welcome? Just wondering if you – to the extent you can discuss how you think about that?

Anthony Pettinari:

Okay. That’s very helpful. And then just switching gears on the CapEx guidance for 2024. I think you said $470 million to $490 million CapEx. Is it possible to break that down between maintenance, 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?

Mark Kowlzan:

Yes, I mean we’re probably spending close to $250 million just in the box plants alone this year. 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 maintenance-type capital that goes on. But the bulk of its – quite frankly, the bulk of its in the box plants. And then finish up the Jackson conversion.

Mark Kowlzan:

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 is production of that machine was somewhere around 537,000 tons of production for 2023. So if you add 200,000 more tons 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, and provide all the grades we need at an incredibly attractive cost position.

Mark Kowlzan:

Okay. Next question please.

Phil Ng:

Hey guys, congrats on a really strong quarter. Your business is relatively a shorter cycle business, but it certainly seem pretty confident on the demand outlook for the first half with capacity bringing back online. What are your customers selling? Are there any pockets of end 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 a year’s worth of destocking effectively?

Phil Ng:

Okay. That’s helpful. And then 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 Wallula come back on. 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 all these different projects you guys are working on the box side of things. So kind of help us think through that driver potentially good or bad this year.

Phil Ng:

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

Mark Kowlzan:

One good example of that, and we don’t talk about 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 running the country, taking care of not only containerboard, but a lot of our packaging to the customer. And so that capability of having our own trucking in-house has provided enormous flexibility in cost management on the transportation side of the equation. So that’s just one example of how we go about looking at our business and then executing.

Mark Kowlzan:

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 2023s capital, and we – 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.

Mark Kowlzan:

Thank you. Next question?

Mark Weintraub:

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 color as to kind of where the bias might be from your perspective?

Mark Weintraub:

Totally understood. Is there anything that 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…

Mark Weintraub:

Yes. I did try. And then Bob, you had mentioned about 60% of the costs increased from 4Q to 1Q seasonal or timing. Could you sort of put a number on that? Would that be like $0.20 per share? And if it we were just – had that 6% come back in the second quarter?

Mark Weintraub:

Right. Okay. Thank you so much.

Operator:

[Operator Instructions] Our next question is also a follow-up from Gabrial Hajde from Wells Fargo. Please go ahead with your follow-up.

Tom Hassfurther:

Well, Gabe, you described it very well. I got to be honest with you. There is a linerboard 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. So you – 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 customers’ 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 we’ve got – 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.

Tom Hassfurther:

Thank you.

Operator:

Our next question comes from Charlie Muir-Sands from BNP Paribas. Please go ahead with your question.

Mark Kowlzan:

Yes. We talked about this for the last couple of years and that when we were done with all of this work because the work that’s going on that will 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. Once again, in and of itself is a lot of work with dryer cans real 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 will be – 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 linerboard and be at or amongst our lowest cost in the system. So if you think about Valdosta, DeRidder and Counce, Jackson should be as good or better, quite frankly, than Counce and DeRidder. And probably get Valdosta run for its money. And so the huge opportunity is in the, in the cost savings as we go forward, that will flow through in the future. Bob, do you want to add to that?

Charlie Muir-Sands:

Many Thanks.

Operator:

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

Tom Hassfurther:

No, we did not see that, Richard.

Mark Kowlzan:

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

Mark Kowlzan:

All right. Why don’t we go ahead and conclude this. If 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.

Mark Kowlzan:

Thank you, Jamie. Good morning, and thank you all for participating in Packaging Corporation of America's third quarter 2023 earnings release conference call. I'm Mark Kowlzan, Chairman and CEO, PCA, and with me on the call today is Tom Hassfurther, Executive Vice President, who runs our packaging business, and Bob Mundy, our Chief Financial Officer. As usual, I'll begin the call with an overview of the third quarter results, and then I'll turn the call over to Tom and Bob, who will provide further details and then I'll wrap things up and then we'd be glad to take questions. Yesterday we reported third quarter net income of $183 million or $2.03 per share. Excluding special items, third quarter 2023 net income was $185 million or $2.05 per share, compared to the third quarter of 2022's net income of $266 million or $2.83 per share. Third quarter net sales were $1.9 billion in 2023 and $2.1 billion in 2022. Total company EBITDA for the third quarter excluding special items was $388 million in 2023 and $477 million in 2022. Third quarter net income included special items expenses of $0.02 per share, primarily for certain costs at the Jackson, Alabama mill for paper to container board conversion related activities. Details of all special items for the third quarter of 2023, as well as 2022 were included in the schedules that accompanied our earnings press release. Excluding the special items, the $0.78 per share decrease in third quarter 2023 earnings, compared to the third quarter of 2022 was driven primarily by lower price and mix of $1.33 and volume $0.09 in the packaging segments. Higher depreciation expense $0.11; lower volume in the paper segment $0.04; higher tax $0.02; and other expenses $0.02 cents. These items were partially offset by lower operating costs of $0.58, primarily resulting from lower recycled fiber and energy prices along with outstanding mill and plant operational execution. Other favorable items included a lower share count resulting from share repurchases in the second half of 2022 were $0.11, higher prices and mix in the paper segment $0.04, lower converting costs $0.04, lower scheduled maintenance outage expenses of $0.04, and lower freight and logistics expenses $0.02. The results were $0.17 above our third quarter guidance of $1.88 per share primarily due to higher volume in the packaging and paper segments and lower operating and converting costs. Looking at our packaging segment EBITDA excluding special items in the third quarter of 2023 of $374 million, with sales of $1.8 billion, resulted in a margin of 21.3% versus last year's EBITDA of $467 million, with sales of $1.9 billion, and a 24.1% margin. The operational benefits of our capital spending program and the continued great focus and execution of our mills and corrugated products facilities on numerous process improvement initiatives once again delivered impressive results. This included areas such as machine and equipment efficiencies, fiber, chemical and material usages, internal energy generation and usage, and labor costs. Our approach to cost-effective management of container board supply with demand also delivered the benefits we were anticipating. This was primarily achieved by idling the Wallula mill for the entire quarter, which resulted in a market-related downtime of approximately 174,000 tons. However, with the stronger demand in our packaging segment, we ended the quarter with inventory levels lower than anticipated. Based on our current outlook for improved demand, together with current plans for the first quarter of 2024 for the scheduled mill maintenance outages and completing the final phase of the container board conversion on the number three machine at our Jackson, Alabama mill. We are planning to restart the number three machine at the Wallula, Washington mill during the fourth quarter in order to bring our inventories to desired levels. I'll now turn it over to Tom, who will provide further details on container board sales in the corrugated business.

Mark Kowlzan:

Thank you, Tom. Looking at our paper segment, EBITDA excluding special items in the third quarter was $35 million with sales of $158 million or a 22.4% margin, compared to the third quarter of 2022’s EBITDA of $33 million and sales of $165 million or a 19.7% margin. Seasonally stronger cut size and printing and converting volumes were 13% higher than the second quarter levels and down almost 8% versus the third quarter ‘22 with about 40% of the decline being driven by no paper sales from our Jackson mill in this year's third quarter. Prices and mix were up about 3.5% from last year's third quarter and down 2% from the second quarter of 2023, due to the declines in the index prices that occurred earlier in the year. Our International Falls mill managed their nine-day planned maintenance outage very well, and similar to the packaging facilities, the mill remained focused on efficient and cost-effective operations, delivering great results for the quarter. I'll now turn it over to Bob.

Mark Kowlzan:

Thanks, Bob. Looking ahead as we move forward into the -- from the third into the fourth quarter, in our packaging segment we expect less market-related downtime as we build our inventories back to appropriate levels, along with higher shipments per day in our corrugated products facilities, although our plans will have one less shipping day, compared to the third quarter. We also expect lower average prices primarily due to the majority of the May decrease in the published benchmark index grades being realized throughout the third quarter, as well as a seasonally less rich mix. In our paper segment, volume will be lower compared to the seasonally stronger third quarter and prices and mix are assumed to trend lower with declines in the index prices. Operating and converting costs will increase -- driven by higher recycled fiber prices, seasonal energy costs, and the restart of the wool of the mill. Depreciation expense is estimated to be slightly higher and scheduled maintenance outage expenses will be lower. Considering all of these items, we expect the fourth quarter earnings of $1.76 per share. With that, I would be happy to entertain any questions, but I must remind you that some of the statements we made on the call constituted forward-looking statements. These statements were based on current estimates, expectations, and projections of the company and do 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 the 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.

George Staphos:

Hi, it's George Staphos. How are you everybody? Congratulations on the quarter.

George Staphos:

I just -- how are you doing? Doing dueling conference calls today at this time. So again, congratulations on the performance. Can you talk to the -- you enumerated a number of factors in terms of the lower operating and converting costs. I know, Mark, it's always a number of projects, but were there any in particular that were sources of the improved performance? Yes, there's going to be some pickup in the fourth quarter seasonally and you have OCC higher, but how much do you carry forward and what's the room for further improvement on both operating and converting costs as we look out to ‘24 from where we're at right now. If you can talk a little bit to that.

Tom Hassfurther:

Yes, I think George, this is really, you know, an effort to really realize the deployment of the capital that we've done in the -- in all the box plants and to streamline those box plants and to really get those box plants, you know, right-sized for the growth we've got coming and what the existing volume is right now. So we're very pleased. We're very, very pleased with the results.

George Staphos:

Sounds like it wouldn't be surprised by that Mark. So to Wallula, and again I know it's hard to talk about some of this live mic. But the restart for the fourth quarter, what does it mean about what your customers are saying for ‘24? I realize you need to rebuild inventories and we know PM3 at Jackson's going to be down for the last part of the conversion. But what does it mean in terms of your demand outlook, what your customers are saying? And hopefully this isn't the case, but if things wind up being from a macro standpoint a little bit softer, how quickly could you maybe pull back on Wallula if need be? And then my last question I'll turn over. Can you talk to us a bit about how your early fourth quarter bookings and billings are? And how we should again think about how those map to actual volumes. Thanks and good luck in the quarter, guys.

Tom Hassfurther:

Yes, let me first just kind of tag along with what Mark just said relative to running to demand. You know, that is what we do. And if we didn't have the demand, we wouldn't be talking about restarting Wallula, pure and simple. Now to calibrate that a little bit, George, I think you need to really look at our low point was the first quarter of 2023 in terms of demand. Our demand currently is, you know, just in a couple of quarters is now 8% higher than that number and going higher going forward. So, you know, that's the real reason why we need the, you know, the cut up in -- at Wallula. It's really being driven on the box side of the business more so than anything else. And relative to the bookings and the billings, again, our bookings are up 14% for this at the beginning. And again that’s, you know, you've got to take that number, because we've had high numbers and then we come in a little low, you know, we come in significantly lower for the actual quarter, because a lot of these bookings are for quite a ways out. But I think the key here is that the backlog remains incredibly strong, and our cut-up demand is also very strong. So we feel very good about where we are on the fourth quarter and certainly entering into next year.

Mark Kowlzan:

Next question please.

Mark Weintraub:

Thank you. Tom, just following up, you mentioned an 8% reference to your demand now versus, I think, first quarter. So is that sort of what you're expecting in the fourth quarter on an average day basis? Because I was sort of trying to do a little bit math and again, is that how to think what that number you just mentioned?

Mark Weintraub:

Got it. Okay, thank you. And just on the Jackson project, could you just remind us what the end result is going to be? Is it happening in the fourth quarter and the first quarter? And, okay just color on that would be great?

Mark Weintraub:

Great. And if you just remind, I think it was like a 265,000 ton per year, this part, or correct me what that number was and if there's a way for it to calibrate the amount of cost per ton or whatever the best way to look at it, what you're expecting to achieve with this last phase would be helpful too?

Bob Mundy:

Yes, Mark, and the improvement from where we are today versus where we will be when we hit that run rate after the completion of the second phase, it's close to $40 a ton. That benefit coming from most of your direct variable type costs and you're getting all this additional volume with no increases in your, obviously indirect costs or any fixed costs. So you get a nice, huge benefit once this project is completed.

Mark Kowlzan:

Just for simple math, you can, whether you use 2,000 or 2,200, but the ultimate goal between myself and some of the people around me is that machine will be a 2,400 ton a day machine someday when we're done fine tuning it. But it would be -- to my knowledge, it would be the most productive, low-cost, linerboard machine in the Western Hemisphere.

Tom Hassfurther:

No. Mix is a big factor in there, both in end uses and in basis weights. So it's there's a heck of a lot that goes into what the final pricing is. And as I mentioned last time, and I'll just mention it again, building products, that's still -- that segment, which is a good segment for us, still remains underwater as housing starts have been affected by higher interest rates. The graphics mix and the effect of what's going on and the changes that are taking place in brick-and-mortar stores, that's been impacted. And of course, our automotive segment with the UAW strike is now really starting to get impacted. Now all of those segments tend to be on the higher price side. However, we've got a lot of other segments that are doing quite well. And we're -- and we've been -- and we haven't been impacted much at all other than what you've seen in the publications in terms of price.

Mark Kowlzan:

Thank you. Next question?

Mike Roxland:

Thank you, Mark, and Bob for taking my questions. Congrats on another solid quarter despite tough environment.

Mike Roxland:

Just kind of a little bit more -- I wonder if you could provide a little more color just about the cadence of shipments during the quarter. Just a little more color on laboring upon, I should say. Some of the different end markets, some good color before on the prior question on building products in the automotive segment, but anything you could provide as to you maybe some the cadence during the quarter? And what end markets really showed some significant growth as the quarter progressed?

Mike Roxland:

It does. Very helpful. Thank you. And as you think about bringing back Wallula, can you talk about any headwinds that any of your other mills might face? I recall that last quarter, you mentioned -- now because of Wallula being down, you were able to optimize production at your remaining mills achieving $150 per ton benefit. So any headwinds that you could expect or anticipate or your other mills once fully up and running?

Mike Roxland:

One final question, I guess, squeezing in here. Mark, can you help us think about how you're thinking of growing the business once you're past the phase, the conversion of number three in Jackson next year, where does growth come from mix? Is the conversion of I Falls, the resumption of M&A? How should we think about you growing the business, let's say, post 2024.

Tom Hassfurther:

Well, I think in addition, I think that as I mentioned, these segments that are down, those segments are going to come back. So they're going to show back up. And we'll continue to -- what we think is operate, you know, demonstrate the best value in the marketplace to an entire customer base and be able to grow our business accordingly as well. So we'll -- we're constantly looking outward to see what's possible and what those demands look like and working very closely with our customers, and we want to make sure we're well aligned. That's what's driving the whole Wallula project at the moment.

Mark Kowlzan:

Thank you. Next question, please.

Unidentified Analyst:

Hey. This is [Alex] (ph) on for Gabe. Thanks for taking my question. So just thinking about the inventory level, can you maybe just kind of comment on what your targeted inventory looks like for year-end or when thinking about the Jackson outage.

Unidentified Analyst:

Okay, thanks. And just thinking about Wallula. Is there anything -- does anything change with the cost structure that we see, [Indiscernible] of as the mill restarts in variable or fixed?

Tom Hassfurther:

Yes. I would just add that with Wallula mill operating in a very large market for us, it certainly gives us a lot more flexibility in a box plant to react and respond quicker to the marketplace as that continues to rebound. And of course, that's heavy ag up there as well. So this will be -- this will give us some advantage in terms of flexibility in that marketplace.

Unidentified Analyst:

Great. Okay. That's good. And I guess, my last question is just thinking about 2024, maybe can you just kind of maybe frame how you're thinking about ’24, I understand we still have another quarter to-date, but just for the high levels of percentages, how you are thinking about '24? Thanks.

Unidentified Analyst:

Perfect. Okay, I’ll turn it over. Thank you.

Operator:

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

Tom Hassfurther:

Good morning.

Mark Kowlzan:

We've always been primarily a virgin linerboard medium producer, we have the capability of flexing a number of our mills. I think most people understand that we've invested heavily over the last decade. And in these conversion opportunities, DeRidder, Wallula, now the Jackson mill, Counce, the Northern Mills all have recycled capacity. But again, we're not going to put all our eggs in one basket and go all into recycle. We take advantage of it. And it does give us some opportunity to flex the fiber cost and time of year and availability. But again, I think -- if you look at us 10-years from now, we'll still look the same that we do today in terms of our fiber balance. Tom?

Mark Kowlzan:

One of the factors, if you think about recycled versus virgin fiber, virgin fiber prices and input costs, conversion costs have been very stable over the decades, relatively speaking, if you're solely dependent on OCC, DLK, the price and cost input swings have been wild high, low, high, low. And so trying to anticipate what your conversion cost is not a good place to be if you're 100% recycled. So we like where we are. We will continue with this model.

Mark Kowlzan:

Next question.

John Dunigan:

Good morning. Mark, Bob, Tom. This is John diving on for Phil. I wanted to start off with the implied 4Q guide box shipments. I mean, I know you said so far, bookings are up 14%, but bookings aren't actually billed. So if I'm just reading your press release being up on a per day basis in 4Q quarter-over-quarter on the shipping day. It seems to imply that 4Q, at least for the guide is up about 14.5% or so, 15%. Is that the right way to think about it? Any kind of extra color you could give on that?

Bob Mundy:

Well, I'm not sure I can, Tom. No, Phil. That’s -- I’m not sure maybe we'd talk afterwards, but it's not sure how you're arriving at that certainly from anything that we said we put out. But that obviously would be a tremendous thing if that were to happen, but I just don't see how you're getting there. Maybe if you could just talk off-line.

Tom Hassfurther:

Yes. I would say the holiday demand is going to be strong, yes.

Mark Kowlzan:

That was the Wallula downtime.

Mark Kowlzan:

Okay. Thank you, next question. Jamie, anybody left on the queue? I guess we will conclude. I think we've lost our moderator on the call, but for those of you that joined us today, I want to thank you for taking the time, and I look forward to having you join us at the end of January for our full-year and fourth quarter call. With that, have a good day. Take care.

Mark Kowlzan:

Thank you, Jamie. Good morning, everyone, and thank you for participating in Packaging Corporation of America's second quarter 2023 earnings release conference call. Again, I'm Mark Kowlzan, 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 Mundy, our Chief Financial Officer. I'll begin the call with an overview of our second quarter results, and then I'll be turning the call over to Tom and Bob, who will provide further details. I'll then wrap things up, and then we'll be glad to take any questions. Yesterday, we reported second quarter net income of $203 million, or $2.24 per share. Excluding special items, second quarter 2023 net income was $209 million, or $2.31 per share, compared to the second quarter of 2022 net income of $304 million, or $3.23 per share. Second quarter net sales were $2 billion in 2023 and $2.2 billion in 2022. Total company EBITDA for the second quarter, excluding special items, was $418 million in 2023 and $533 million in 2022. Second quarter net income included special items expenses of $0.07 per share for certain costs at the Jackson, Alabama mill for paper-to-containerboard conversion related activities and closure costs related to corrugated products facilities and design centers. Details of special items for both the second quarter of 2023 and 2022 were included in the schedules that accompanied our earnings press release. Excluding special items, the $0.92 per share decrease in second quarter 2023 earnings compared to the second quarter of 2022 was driven primarily by lower volumes in the Packaging segment for $0.90 and Paper segment $0.07. Lower price and mix in the Packaging segment of $0.47 and higher depreciation expense, $0.09, and higher other converting costs, $0.03. These items were partially offset by lower operating costs of $0.34, primarily driven by lower fiber, energy and chemical costs. We also had higher prices and mix in the Paper segment for $0.12, a lower share count resulting from the share repurchase in the second half of 2022 for $0.13; lower scheduled maintenance outage expenses for $0.03 and a lower tax rate for $0.02. The results were $0.35 above the second quarter guidance of $1.96 per share, primarily due to lower operating costs resulting from efficiency and usage initiatives and lower freight and logistics expenses. Looking at our Packaging business. EBITDA excluding special items in the second quarter of 2023 of $405 million with sales of $1.8 billion resulted in a margin of 23% versus last year's EBITDA of $525 million and sales of $2.1 billion or a 25% EBITDA margin. Demand in the Packaging segment was about where we expected for the quarter, and Tom will discuss this further in a moment. As they did in the first quarter, our employees remain focused on very efficient and cost-effective operations as we balanced our supply according to the demand, or said another way we are extremely effective at managing what is in our control. In our mills, this included things like improving our wood yields, producing board closer to nominal basis weights, reducing fiber and chemical usage and running our pulp mills more efficiently, increasing our internal energy generation while also reducing our energy consumption and executing our planned maintenance outages for less cost than we had estimated. Also at our mills and including our corrugated facilities, we closely monitored headcount and overtime as well as usage of materials and supplies in addition to other discretionary spending items. In addition, our mills and plants, together with our logistics and distribution personnel worked effectively to minimize the negative impacts from rail rate increases at certain locations and changes in the mix of shipping locations as we ran our system to demand. Finally, as you know, we temporarily curtailed operations at our Wallula, Washington mill once we exited the planned maintenance outage early in the quarter. This was not a reaction to any change in our views on demand, but rather our thoughtful approach to manage containerboard supply as economically as possible. The mill remains temporarily curtailed and we will continue to monitor any potential changes to this strategy along with our outlook for demand during the second half of the year. I'll now turn it over to Tom, who'll provide more details on containerboard sales and the corrugated business.

Mark Kowlzan:

Thank you, Tom. Looking at the Paper segment, EBITDA, excluding special items in the second quarter was $39 million with sales of $143 million for a 27% margin compared to the second quarter of 2022 EBITDA of $32 million and sales of $150 million, or 21% margin. Paper prices and mix were 12% higher than last year's second quarter and less than 1% below the first quarter of 2023. Paper demand remains soft with our sales volume just over 14% below last year's second quarter, which also included some sales from our Jackson, Alabama mill, where there was no volume in this year's second quarter. We ran our International Falls mill to match supply with demand as well as to build some additional inventory during the quarter to prepare for the nine-day planned outage – maintenance outage that's coming up this third quarter. Similar to the comments I made regarding the Packaging business and for many of the same categories, employees in our Paper business remained focused on efficient and cost-effective operations as they also balance supply according to demand and delivered outstanding margins for the quarter. I'll now turn it over to Bob.

Mark Kowlzan:

Thanks, Bob. Looking ahead, as we move from the second and into the third quarter, in our Packaging segment, although there is one less shipping day for the corrugated business, we expect shipments per day to improve versus the second quarter. However, prices will be lower as a result of previously published domestic containerboard price decreases along with slightly lower export prices. We expect seasonally stronger volumes in our Paper segment from back-to-school shipments, although prices are expected to trend lower based on the recent declines in index prices. Operating converting costs should trend slightly higher, primarily due to higher recycled fiber prices and seasonal energy cost. Scheduled outage expenses will be higher by approximately $0.06 per share, driven by the scheduled maintenance outage at International Falls, Minnesota. Finally, we estimate that our depreciation expense and tax rate to be slightly higher as well. Considering these items, we expect the third quarter earnings of $1.88 per share. With that, we'd be happy to entertain any questions, but I must remind you that some of the statements we've made on the call constituted forward-looking statements. 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 on file with the SEC. The actual results could differ materially from those expressed in the forward-looking statements. And with that, Jamie, I'd like to open the call up for questions, please.

George Staphos:

Hi, everyone. Good morning. Thanks for the details and congratulations on the operating performance in the quarter. Mark, Bob, Tom, my first question, the excellent from our vantage point operating performance in 2Q, I guess, the $0.34 or so and lower operating costs. How much of that is embedded in your third quarter guidance? Is there any chance within reasonable probabilities that you could – given all the efforts that your employees have underway, find further efficiencies and benefits such that there might be some upside tilt to your guidance. So have us think about how operations might be able to benefit? And what's baked into your third quarter guidance?

Bob Mundy:

Yes, Mark, it's – this is Bob. George, I'll say that from the operating cost perspective, we'll hold on to really the performance we had in the second quarter. If you just assume that that production volume in the mills is similar to the second, maybe up a little bit, we'll see. Yet, we think our cost per ton stays relatively flat. So to be able to hold on to that even though we know OCC prices will be higher, if you just take the average, they moved up from the end of the second quarter and just supply that across the third quarter, they're up like 12% or 14%. So we'll overcome that plus we have the seasonal electricity rates that hits you as well as some seasonal usage items. So in effect, we'll pretty much be offsetting that by continuing the excellent operating cost performance in the mills and the box plants.

Tom Hassfurther:

George this is Tom, I would just add one last thing. It's very obvious that a lot of this – a lot of this extensive groundwork has taken place and as our volume increase is going forward we're going to be able to take advantage of this cost position we're in. And it will be quite dramatic, I think, going forward as the business conditions change and get more positive.

Mark Kowlzan:

George let me just…

Mark Kowlzan:

George let me add one thing. If you looked at our quarter and you looked at month by month, we were running in not just one mill, but most of the mill system, we were pushing 99% uptime efficiency, operational efficiency in our mills. I mean, that's unheard of in the industry. Month of June, we had most of the mills in that category, and we had we had one mill in particular that was like basically 99.99% uptime efficient. It had no paper breaks. And so, we're in a level now, it's obviously not many of our competitors are there, but that's what we strive to do every day and make it better and better. And so I'm confident we'll continue to see good results.

Tom Hassfurther:

George, I will take the closure piece and then I'll turn it over to Bob and he can comment on the pricing changes going forward. But on the closure side, listen we have continuously tried to make sure that we're right sized for the business and that we have very efficient operating methods. And part of our whole capital investment has been around making sure that we're as efficient as we possibly can in the plants that make the most sense. So, that's been an ongoing process. This is nothing really new, we're just announcing it because it took place in the quarter. But this is small facilities and its consolidation and some things like that. So, it's kind of more the normal course of business for us. Bob?

George Staphos:

Yes, I guess so. I mean, I guess what I would ask is just how much again, not trying to be too precise, I know you can't be, how much of a residual would be left of that in for the fourth quarter, 5%, 30%?

George Staphos:

Okay.

George Staphos:

Yes.

George Staphos:

That's perfect. Thank you, Bob. I'll turn it over.

Operator:

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

Bob Mundy:

Yes, Mark over a year ago actually we started getting people thinking about the fact that the heavy projects were winding up, the big projects that we had been involved in over the last ten years were really coming to fruition. And that 2023 would be a year that we wound that capital down in the $400 million range, last year we were $824 million of capital spending. And we would – again we alerted everybody that this year would be in that $400 million level, and that's where we are. I fully expect us to finish the year somewhere in that $400 million area. And then we're already talking about the 2024 capital spending plan. And looking at our needs and the opportunities, we feel comfortable right now that the number will continue to be in that $400 million area unless some opportunity came along that was so outstanding that we felt compelled that we wanted to direct our capital into that opportunity. So, we have that luxury right now. But I think for the benefit of running the business on certain times we're in $400 million range is a good range to be in, and it supports business improvement opportunities along with maintenance capital spending within the mills and box plants.

Mark Kowlzan :

No, that's the beauty of it. We're continuing to execute every week on a number of opportunities within the box plants, new equipment installations, new equipment – significant rebuilds modifications on a lot of the production lines. So, this is not stopping. The mills, as we talked about, we wound up most of the big work at Wallula mill last year and the woodyard work in the OCC plant, Jackson, Alabama, most of that work has wound up, we're just waiting for the opportunity to move into the final phase of the number three machine at Jackson. But again, we can do all of that and still keep the capital spending in this $400 million range. That provides us an opportunity to really just move forward as we look at what these – whether it's a customer-driven opportunity, or a cost take out efficiency, energy efficiency, labor efficiency, we continue to see those opportunities. And where we are right now like I say, barring some big one-off opportunity, some $400 million number keeps us moving forward with taking advantage of this. Bob?

Mark Weintraub:

Appreciate that. And I say it's certainly showing. So, just one, if I could go back to the bridge from the second to third quarter, make sure that I understood. I mean, it sounded like there wasn't going to be any negative pickup in operating costs. And I guess you alluded to like a $0.06 increase in maintenance outages. And so if we look at the $2.31 and we go to a $1.88 that would seem to be like a $0.37 other if we take off the $0.06 for the maintenance. Is that primarily impact from price or are there other variables to be conscious of when doing that bridge? Because it seems kind of high on – for a price number.

Mark Weintraub:

Okay. I appreciate the color. Thank you.

Operator:

Our next question comes from Gabe Hajde from Wells Fargo. Please go ahead with your question.

Tom Hassfurther:

Okay, Alex [ph] this is Tom. Our bookings for July we’re about halfway through the month is very robust up 15%, which is great good start to the quarter. The other thing that we're seeing is, I think, that's pretty important and I want to point out is that a lot of our customers are telling us that some of this destocking is now over with their products. And that's very important. So, hopefully that will translate throughout the quarter and certainly going into the fourth quarter for some volume that is, what I would call, more predictable. We still do – I'll just go ahead and point this out right now we do have some challenging segments still that we're dealing with which indicates some of our decline in volume. The ag business, Florida had the worst citrus season they have had since the 30s or 40s. We had hurricanes down there, which completely wiped out some of the tomatoes and all the strawberries for a cycle. We've had flooding in Northern California, which has caused a lot of problems. They it's a – feast or famine there and I guess in terms of moisture, but – and then in Eastern Washington also they had some pretty serious droughts. So that, that segment has been – has been a drag on us. The building product segment was booming during COVID with a lot of remodeling going on and all those sorts of things. And that slowed down dramatically, and now because of high interest rates it's really slowed down housing starts. So that's been a – that's been a drag on us as well as single use plastic products manufacturers. So those are the – those are the segments that have – that have impacted us on a negative point. The ag will recover for sure. The e-com and the food and beverage, those – those segments have held up significantly better. But I think the – I think the key takeaway here going into the second half of the year is the fact that a lot of this destocking has now finally taken place and I think we'll have more predictability going forward relative to volume.

Tom Hassfurther:

Well, again you're always concerned about fiber costs and energy transportation especially on the rail, rail rates continue to move up. So it's – it's, and then as we go through the third into the fourth we'll be getting into the seasonal cooler months and, and energy usage along with – with cost pressure from that usage. So as wood cost is always a factor depending on weather conditions, so it's a continuing whole host of all your input and what's happening at any given time.

Mark Kowlzan:

Okay. Next question, please.

John Dunigan:

Good morning, Mark, Bob, Tom. This is John Dunigan on for Phil. I just, I wanted to start off around the box shipment, I mean, you guys have lagged the last few quarters from the overall market, which is generally surprising given your solid track record. Would you consider that more of a factor of the local customers and them feeling more of the pinch that you've kind of called out prior? Or is it you're maybe seeing a little bit more pressure from customers on pricing and, and you're walking away from some of that business?

John Dunigan:

Okay. That's helpful. And just with the pricing that we've seen already come out, so they already realized $90 per ton on the containerboard side. Are you seeing prices erode maybe a little bit quicker on the box side? Or are these seem generally in line with historical trend?

John Dunigan:

Okay. That's very helpful. And if I could just squeeze one more in, did the box demand progression in the second quarter seem to get worse from what you had called out month-to-date on the last earnings call through the rest of the quarter? Could you kind of just give us a breakdown of maybe what you were seeing during the quarter and then if things had weakened was there any material economic downtime that you guys took to kind of help offset that?

Mark Kowlzan:

Yes. I would just – I would just add that. I would just add that. We were up about 3% Q2-over-Q1 and the trend line continues to look quite favorable. So we'll – and the beauty of – the beauty of what we've done and what we talked about on the operating side is that we can flex now however we need to and to whatever the demands are and do it very cost effectively.

John Dunigan:

Does that mean essentially flat in terms of a ton percentage quarter-over-quarter?

John Dunigan:

Yes.

John Dunigan:

Apologies. To clarify what I meant was the, the economic downtime on a tons basis. You were saying there wasn't any change from...

John Dunigan:

Okay. Thank you very much. I'll turn it over.

Operator:

[Operator Instructions] And our next question comes from Anthony Pettinari from Citi. Please go ahead with your question.

Mark Kowlzan:

Good morning, Anthony.

Tom Hassfurther:

Okay, Anthony, relative to the July trends, let's, the one thing we've typically started out most quarters up quite a bit year-over-year. And that no different – no different this quarter but there's – there's a little more predictability in these numbers than what we've had in the past. And I'm seeing – I'm seeing our customer's trends of order patterns starting to come more in line with where they had been prior to all this destocking and this big change from after COVID. So that's – that's the best I can tell you about the July trends. I'm feeling better about these trends than, than in the past. And these numbers up and don't forget, I mean, when its bookings, you're talking about not just in the month of July, you're talking about August, September kind of out through the quarter. And so but – but again these – these patterns seem to be – seem to be much more predictable. Relative to the – relative to the inventories we didn't talk about export. Export's still a moving target and it's – it's certainly something that we're trying to get our arms around and it – and it seems to change almost on a daily basis in this – in this global demand. So I think we feel comfortable with where inventories are and, but again we've got the ability to flex some depending on – depending on what the demand curves are.

Mark Kowlzan:

Yes. Yes.

Mark Kowlzan:

As we were running through the first quarter and into the second quarter, we were running the mills in many cases slowed back and just kind of throttling our way through demand. As we got into the springtime and we had our outages taking place, we were into the Wallula outage and we didn't see the improvement at that time back in April with demand. And so we quickly reassessed our position and realized that it was far better to take the six mills that we currently have running and run them very, very efficiently. And then in order to do that, you had to take Wallula and keep it down. So we were – we had Wallula down for the annual outage. So we finished that work and, and decided to just temporarily idle that mill for the time being as, as we watched the demand situation. But by doing that, it allowed us to take the six other containerboard mills and really optimize them and speed them up to the optimum point on their production curve and take advantage of that, and that's another part of the benefit we saw in the second quarter earnings.

Anthony Pettinari:

Okay. That's...

Anthony Pettinari:

Okay. That's very helpful. I'll turn it over.

Operator:

And ladies and gentlemen, with that it's showing no additional questions. I'd like to turn the floor back over to Mr. Kowlzan for any closing remarks.

Operator:

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

Mark Kowlzan:

Thank you, Jamie. Good morning, and thank you for participating in Packaging Corporation of America's First Quarter 2023 Earnings Release Conference Call. Again, I'm Mark Kowlzan, 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 Mundy, our Chief Financial Officer. As usual, I'll begin the call with an overview of our first quarter results. And then I'll turn the call over to Tom and Bob will provide further details. And then I'll wrap things up, and we'd be glad to take questions. Yesterday, we reported first quarter net income of $190 million or $2.11 per share. Excluding special items, first quarter 2023, net income was $198 million or $2.20 per share compared to the first quarter of 2022 net income of $256 million or $2.72 per share. First quarter net sales were $2 billion in 2023 and $2.1 billion in 2022. The Total company EBITDA for the first quarter, excluding special items, was $405 million in 2023 and $467 million in 2022. The First quarter net income included special items expenses of $0.09 per share, primarily; for the closure costs related to corrugated products facilities and design centers. Details of special items for both the first quarter of 2023 and 2022 were included in the schedules that accompanied our earnings press release. Excluding the special items, the $0.52 per share decrease in first quarter 2023 earnings compared to the first quarter of 2022 was driven primarily by lower volumes in our Packaging segment for $0.95, and Paper segment $0.04. Although recycled fiber costs were lower than last year. Overall operating costs were 27% -- $0.27 higher, primarily due to inflation on chemicals, labor and benefits, supplies, repair materials and services. Energy costs, although trending down, were also higher versus the first quarter of 2022. In addition, we had higher depreciation expense of $0.11, freight and logistics expenses, $0.04; nonoperating pension expenses, $0.04; and higher converting costs, $0.02. These items were partially offset by higher prices and mix in the Packaging segment for $0.58 and Paper segment $0.18. A lower share count resulting from share repurchases we made in the second quarter of 2022 for $0.11, lower interest expense, $0.03; lower other expenses for $0.03, lower scheduled maintenance outage expenses for $0.01, and lower tax rate, $0.01. The results were $0.03 below the first quarter guidance of $2.23 and per share, primarily due to the lower volume and lower prices and mix in the Packaging segment. Looking at our Packaging segment. EBITDA, excluding special items in the first quarter 2023, of $392 million with sales of $1.81 billion resulted in a margin of 21.7% versus last year's EBITDA of $464 million and sales of $1.96 billion or 23.6% margin. Demand in the Packaging segment was well below our expectations for the quarter. Tom will discuss this further in a moment. The mills and corrugated products plants responded to the lower demand by remaining highly focused on efficient and cost-effective operations as we balanced our supply accordingly. Our employees continue to deliver on numerous cost reduction initiatives, efficiency improvements, integration and optimization enhancements and capital project benefits to not only minimize the negative demand impacts on the short term but also to remain in position to capitalize on our longer-term strategic goals. The accomplishments were achieved while building less inventory than we had planned and staying committed to ending the quarter at our targeted weeks of supply inventory. I'll now turn it over to Tom, who will provide further details on containerboard sales and the corrugated business.

Mark Kowlzan:

Thanks, Tom. Looking at our Paper segment. EBITDA, excluding special items in the first quarter was $41 million with sales of $151 million or a 27.2% margin, compared to the first quarter of 2022 EBITDA of $29 million and sales of $153 million or an 18.9% margin. Paper prices and mix were 18% higher than last year's first quarter and about 3% above for the fourth quarter of 2022. Sales volume was about 17% below last year's first quarter which included some of the inventory that had been sold from our Jackson Alabama mill and just over 4.5% below the fourth quarter of 2022. The efforts of our employees to optimize the cost structure inventory and product mix in our paper business helped minimize the inflationary cost increases compared to last year and delivered solid returns for the quarter. I'll now turn it over to Bob.

Mark Kowlzan:

Thanks, Bob. Looking ahead, as we move from the first and into the second quarter, although there is one less shipping day for the corrugated business, we expect improved volume in our Packaging segment. However, prices will be lower as a result of the previously published domestic containerboard price decreases along with lower export prices. Sales volume as well as prices and mix in the Paper segment are assumed to be slightly lower based on lower demand. Although we do look for most operating costs to trend lower, our converting costs, scheduled maintenance outage expense and depreciation expense will be higher, primarily due to recent increases in contract rail rates at most of our mills, we expect higher freight and logistics expenses compared to the first quarter. Considering these items, we expect second quarter earnings of $1.96 per share. With that, we'd be happy to entertain any questions, but I must remind you that some of the statements we've made on the call constituted forward-looking statements. 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 on file with the SEC. The actual results could differ materially from those expressed in these forward-looking statements. And with that, Jamie, I'd like to open the call up for questions, please.

George Staphos:

Thanks for the details. Mark, a question for you. Normally 2Q is up sequentially from 1Q. And when we look back historically over time, the only time that we saw a down 2Q, if we're correct, was the COVID second quarter, even if we went back to the, the great recession in '08 and '09, you had up 2Q versus 1Q. As you sit here today and if you're in our seat, what is the biggest driver of the drop off 2Q versus 1Q. Is it the timing effect on the pricing and just how that's flowing through? Or is it the demand affect the continued demand effect being worse than expected. If you could give us some qualitative comments on that, that would be helpful. And then a couple of follow-ons.

Robert Mundy:

You're right, Mark. And in the magnitude, that $70, George, the timing of that, as you look at going from 1Q to 2Q, it's just -- that's unprecedented in the company's history. And we mentioned on last quarter's call that the vast majority of those price declines would show up in the second quarter. And that's exactly what's happening. So it's sort of an unprecedented drop in price just based on the timing of the published decreases is really what's driving that. And that's pretty much the answer.

Mark Kowlzan:

Yes. Tom, why don't you go ahead and take a...

George Staphos:

Last quick one, I'll turn it over. Just from an operations standpoint. Can you talk a little bit about the facility closures, kind of what they're allowing or optimizing for PCA. And given the shift in recycled cost versus virgin cost, this question comes up periodically on your calls. How are you flexing your system relative to lower-cost recycled and lower-cost recycled board, recognizing your customers ultimately dictate what kind of box they want that ultimately dictates the Board. I'll let it go there.

Operator:

Our next question comes from Mark Weintraub from Seaport Research Partners.

Mark Kowlzan:

Yes. Mark, just remember back in 2008 into the 2009 period, we saw a more rapid downturn in volume than our competitors. And then when we started seeing the improvement in the spring, we came back stronger and faster than our competitors. And I believe most of that has to do with the predominantly local book specialized local accounts, smaller local account business that we have. These accounts are much more tuned into what's happening with their own business. They can move very quickly. They're very nimble. But I'm going to let Tom elaborate on that because, again, it's not as simple as it seems.

Mark Weintraub:

It does. Just 2 quick follow-ups. One is you mentioned not lost volume -- were you basically think you haven't lost customers, obviously, your volumes are down?

Mark Weintraub:

Got it. And then just maybe a little bit of clarification. Why would you -- given that demand has been weak and you certainly have the capability to have fulfilled needs, which maybe were being fulfilled from the outside and now apparently, you're fulfilling from the outside. I guess I'm a little puzzled why you would, given you've got plenty of capability, I would think, to meet it internally or maybe I don't understand exactly.

Operator:

Our next question comes from Phil Ng from Jefferies.

Robert Mundy:

Yes. It was about 110,000 tons in the first quarter.

Mark Kowlzan:

No. We just -- as we've always done, we're just going to run to demand and do what we've got to do to satisfy our customer base. If you go back and look at the first quarter, when we were in the January period of time, anticipated volume was starting to settle down and improve. We anticipated going through our winter spring annual shutdowns that would have greater need. So our plan was to build a little more inventory. As a matter of fact, I think the number was about 30,000 tons more inventory through the first quarter that we ended the year last year. But in fact, as we saw the deteriorating volume in -- especially in February and March, we certainly didn't need that extra volume. So we trimmed back and scaled back operations and only ended up 6,000 tons at the end of 1Q as opposed to where we thought it would be. So again, we'll just continue running to demand.

Robert Mundy:

Yes, John, it's Bob. As far as on the rail rate increases, most of that is -- some of it occurred during the first quarter, and then we had some that just started at the beginning of the second. So it's a large impact as you move from 1Q to 2Q because you'll have all of those pretty much higher as we start the second quarter. So that's what's driving the freight cost higher. I'm sorry, your first question was.

Robert Mundy:

Yes, typically. Typically, that's probably a good way to think about it.

Robert Mundy:

Yes, really labor benefits, obviously, with just -- that's just -- that's part of it. The other is really at starch. Starch prices are just skyrocketed and that is something that we had another big increase this year. And as we expect to -- our volume to start improving in the box plants and so forth, and you're using more of those types of things. And so that's what's driving labor and some of your some of your material costs that are also included in that converting number.

Robert Mundy:

No. No, it's not.

Mark Kowlzan:

Thank you. Next question.

Anthony Pettinari:

Kraft liner prices have been stable for a couple of months now. And understanding you don't sell much board in the open market, and I'm not asking about forward pricing. But I'm just wondering if you had any thoughts about kind of where containerboard markets kind of feel like they are right now. I mean, you've seen a number of cycles maybe some of these capacity projects have started up and maybe are being sort of absorbed. I just wanted to get your sense of containerboard markets versus maybe where we were a few months ago?

Anthony Pettinari:

Got it. Got it. That's helpful. And then just -- I wonder if you could talk a little bit, given the balance sheet flexibility that you have about capital allocation, and from a capital return perspective, I mean, you're paying an attractive dividend. I don't know if you can talk about maybe opportunities for repurchases. And then in terms of investing in the business, you're coming off maybe a big CapEx cycle where you're doing a lot of internal projects. Just wondering if you could kind of talk about where you're seeing the opportunities in capital allocation and capital return this year.

Operator:

Our next question is a follow-up from George Staphos from Bank of America Securities.

Operator:

[Operator Instructions]. Our next question is also a follow-up from Mark Weintraub from Seaport Research Partners.

Robert Mundy:

Yes. Mark, this is Bob. So there's a lot going on there. If you're saying if our volumes were higher, it were closer to what we had anticipated, you're looking at that $0.95 being something a lot larger?

Robert Mundy:

That volume is -- it's not just box shipments, right? It's -- there's export volume, there's trade, there's domestic outside volume. So that would not be a good way to look at it. However, directionally, yes, it would be a higher number. But you would also have a lot better probably cost within your system because your mills would be running more full. Your box plants would be running more full. So you're converting costs, your direct variable costs, all those types of things, your unabsorbed costs would not be as high would more than offset any additional decline that you would see in that price variance, if that makes sense, because of higher volumes.

Robert Mundy:

Yes. And if you want to look at it sort of simply the published price dropped $20 a ton after we gave our guidance. And if you sort of do the math, on that. And as we said before, when that price -- the published price drops, it pretty much hits our outside containerboard immediately. There's no delay. So if you sort of do the math, there's about $0.03 just from that price decline that occurred after we gave our guidance.

Mark Kowlzan:

Absolutely, Mark. Absolutely. That's what we would anticipate.

Operator:

Our next question is also a follow-up from Phil Ng from Jefferies.

Mark Kowlzan:

Again, as we spoke last year that we -- our paper business now has become just the International Falls mill up in Minnesota, and that mill is capable of a little over 500,000 tons a year. And that's pretty much what we're selling too. We're down slightly off of that peak capability. But what that allows us to do really is just run and optimize the market and where we choose to sell and where we want to sell to maximize profit. So we really have the luxury of being the fourth largest player and we don't have to do anything. I say we're in a real sweet spot right now, down just a few thousand tons off of where we were last year. Any other questions, please?

George Staphos:

Sorry, you've got a technical issue here. So I just want to reaffirm the guidance on the paper segment is for pricing and volume to be down slightly sequentially. Was that the comment, Mark? And Tom -- and Bob? Thanks very much and good luck in the quarter.

George Staphos:

Excellent, thanks guys, good luck in the quarter.

Operator:

Mr. Kowlzan, I see no more questions at this time. Do you have any closing comments?

Operator:

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

Mark Kowlzan:

Thank you, Jamie. Good morning, and thank you all for participating in Packaging Corporation of America's Fourth Quarter and Full Year 2022 Earnings Release Conference Call. Again, I'm Mark Kowlzan, Chairman and CEO of PCA. And with me on the call today is Tom Hassfurther, Executive Vice President, who runs our packaging business; and Bob Mundy, our Chief Financial Officer. I'll begin the call with an overview of our fourth quarter and full year results, and then I'm going to 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 2022 net income of $212 million or $2.31 per share. Excluding special items, fourth quarter 2022 net income was $215 million or $2.35 per share compared to the fourth quarter of 2021 net income of $262 million or $2.76 per share. Fourth quarter net income -- fourth quarter net sales were $1.98 billion in 2022 and $2.04 billion in 2021. Total company EBITDA for the fourth quarter, excluding special items, was $409 million in 2022 and $463 million in 2021. Excluding special items, we also reported full year 2022 earnings of $1.04 billion or $11.14 per share compared to 2021 earnings of $894 million or $9.39 per share. Net sales were $8.5 billion in 2022 and $7.7 billion in 2021. Excluding special items, total company EBITDA in 2022 was $1.9 billion compared to $1.7 billion in 2021. Fourth quarter and full year 2022 net income included special items primarily for certain costs at the Jackson, Alabama mill for paper to containerboard conversion-related activities. Details of all the special items for the year 2022 and 2021 were included in the schedules that accompanied the earnings press release. Excluding special items, the $0.41 per share decrease in fourth quarter 2022 earnings compared to the fourth quarter of 2021 was driven primarily by lower volumes in our Packaging segment $1.14 and Paper segment $0.02. We also had higher operating costs of $0.48, primarily from inflation on energy, chemicals, labor and benefits, supplies, repair materials and services and other indirect and fixed costs. Freight and logistics expenses were unfavorable $0.13 along with higher depreciation expense, $0.09, higher converting costs, $0.06 and higher scheduled maintenance outage expenses of $0.01. These items were partially offset by higher prices and mix in the Packaging segment of $1.18 and Packaging segment -- and Paper segment rather of $0.21. A lower share count resulting from share repurchases $0.08; lower interest expense, $0.04 and a lower tax rate, $0.01. Results were $0.13 above the fourth quarter guidance of $2.22 per share, primarily due to higher prices and mix in the Packaging segment, lower freight and logistics expenses, a lower share count resulting from share repurchases and a lower tax rate. Looking at our Packaging business. EBITDA, excluding special items in the fourth quarter of 2022 of $392 million with sales of $1.8 billion resulted in a margin of 21.7% versus last year's EBITDA of $461 million and sales of $1.9 billion or a 24.5% margin. For the full year 2022, Packaging segment EBITDA, excluding the special items, was $1.8 billion with sales of $7.8 billion or a 23.8% margin compared to full year 2021 EBITDA of $1.7 billion with sales of $7.1 billion or a 23.9% margin. Demand in the Packaging segment was below expectations for the quarter, causing us to run our containerboard system to these lower demand levels. Our employees did a very good job with their cost management and process optimization efforts at these lower production rates to offset the negative volume impact. Total economic-related downtime for the fourth quarter was approximately 231,000 tons. The scheduled maintenance outage and conversion work at our Jackson, Alabama mill was completed successfully during the fourth quarter, and we restarted the mill earlier this month after being down as a result of the lower demand. The number three machine achieved its first phase design capacity and is producing a very high-quality virgin linerboard. However, based on current containerboard demand levels, we decided to move the second phase of the conversion work from this spring to next year in 2024. I'll now turn it over to Tom, who will provide further details on containerboard sales and the corrugated business.

Mark Kowlzan:

Thanks, Tom. Looking at our Paper segment. EBITDA, excluding special items in the fourth quarter was $39 million with sales of $154 million or a 25.7% margin compared to the fourth quarter of 2021 EBITDA of $26 million on sales of $143 million or an 18.4% margin. For the full year 2022, Paper segment EBITDA, excluding special items, was $132 million with sales of $622 million or 21.3% margin compared to the full year 2021 EBITDA of $72 million with sales of $600 million or a 12% margin. Prices and mix were up 21% from last year's fourth quarter and moved 3% higher from the third quarter of 2022 as we continue to implement our previously announced price increases. Sales volume was about 11% below last year's fourth quarter, primarily due to paper sales from the Jackson Mill's number one machine, which we included in last year's results as well as having -- we optimized our product and customer mix since that time as we transitioned away from paper volume at Jackson mill. As expected, volume was down approximately 11% versus the seasonally stronger third quarter of 2022 and that also included the remaining inventory from the Jackson mill. The management team and all of the employees of the Paper business have done a tremendous job over the last several quarters to optimize our inventory, product mix and cost structure in order to deliver outstanding results for 2022, and I'm confident that we can maintain this momentum through 2023. I'll now turn it over to Bob.

Mark Kowlzan:

Thank you, Bob. The hard work of our employees, along with strong relationships between us and our customers and suppliers delivered outstanding results for PCA in 2022. New annual company records were achieved for revenue, cash from operations, net income and earnings per share. And as Bob just mentioned, 91% of our net income was returned to our shareholders from dividend payments and stock repurchases. We successfully completed or substantially completed significant cost reduction and process improvement projects at our mills including a 30-megawatt steam turbine and first phase of the number three machine conversion to containerboard at the Jackson mill. This effort included fiber flexibility projects at the Wallula and Jackson Mills and many other key initiatives. We also completed numerous high return and high efficiency 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. The significant capital investments we've made during the year had complete involvement of PCA personnel from project conception, preliminary and detailed engineering, all the way through to project implementation and start-up. These projects and initiatives achieved numerous tactical and strategic benefits while improving our industry-leading return on invested capital to just under 20%. As we've discussed on these calls many times before, by the end of 2022, we would be winding down several years of significant strategic capital investments that position us very well to meet the future needs of our many customers in a very cost-effective manner. We also finalized the optimization of our paper business while delivering excellent financial results that we expect to sustain us well into the future. As economies around the world continue to deal with numerous issues and uncertainties, virtually every individual industry is being negatively impacted in some manner. At PCA, we will continue to maintain a strong balance sheet which provides the financial flexibility to react quickly to most situations or opportunities in the future. We will also continue our commitment of a balanced approach towards capital allocation in order to maximize our profitability and returns to our shareholders. Looking ahead, as we move from the fourth and into the first quarter in our Packaging segment, as Tom mentioned, we expect box demand on a per day basis to be similar to the fourth quarter levels, although we expect higher total volume with corrugated products plants having four additional shipping days. Prices will move lower as a result of recent decreases in the published domestic containerboard prices and we're assuming lower export prices as well. Paper prices should move slightly higher with sales volume fairly flat. Labor costs and certain indirect costs will increase as some containerboard mill operations were temporarily idled during the fourth quarter. In addition, we anticipate higher labor and benefits costs and other timing-related expenses that occurred at the beginning of a new year as well as higher prices for many chemicals, particularly starch and caustic soda. However, we expect lower wood and recycled fiber prices, lower energy prices and lower scheduled maintenance outage expenses. Lastly, we expect higher interest and nonoperating pension expenses and a higher tax rate, but we will see some benefit from our recent share repurchases. Considering these items, we expect first quarter earnings of $2.23 per share. With that, we'd be happy to entertain any questions, but I must remind you that some of the statements we've made on the call constituted forward-looking statements. 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 our 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 open the call for questions, please.

George Staphos:

Hi. Good morning, everybody. Thanks for the details. Congratulations on very good performance in a very, very challenging quarter, at least from our estimation. Mark, my first question, to the extent that you can comment, you took a significant amount of downtime. Production was down sharply, from our own rough calculations it would seem like your inventories now are fairly well balanced relative to your needs, but if you had to qualitatively talk to them, would you say your inventories are normal, below normal, above average? How would you have us think about that?

George Staphos:

A couple more, I'll make them quick. The mix given our calculations was quite strong. Is there one thing you would point out or a couple of things you'd point out in terms of what allowed you to put up some fairly strong realizations per ton realizing quarter-to-quarter things can move around. And the same thing on operations and cost if there was one or two things, you had to point out that allows you to put up the quarter that you did. What were the two highlights be? Then I'll turn it over there. Thank you.

Thomas Hassfurther:

Yes. Well, our mix was solid again, George. Of course, we don't -- with 18,000-plus customers spread across a lot of different industries, it was a relatively strong mix, and we were pleased with that. And I would just -- Yes, go ahead.

Thomas Hassfurther:

Yes, yes, I think so. And Mark will talk a little bit more about the cost side. But I think we're also seeing some big benefits from all the investments that we've made, especially in our box plants over the past number of years. And so from a cost basis, we were incredibly good and performed very well.

George Staphos:

Thanks very much. I'll turn it over.

Operator:

And our next question comes from Mike Roxland from Truist Securities. Mr. Roxland please go ahead with your question.

Mark Kowlzan:

No, the Jackson mill now is a containerboard operation. That mill, for all intents and purposes, will not make any white paper ever again. It's truly the work we just completed in terms of the scope of work that we set out has achieved everything that the first phase was supposed to. We are now running very efficiently, very effectively. We started up just the week before last, and we ran last week, and we've been producing Grade A paper converting it in our box plants, but we'll be able to take advantage now of the project's cost benefit opportunities. There's the work that was done, and we talked about this last year would help us on the input cost side of the equation with energy usage, labor-type impacts, fiber yield, and so we will see those benefits. Now it depends also on how much production we see on the big machine. We're also ramping up the machine as we speak. The machine for the last 1.5 years from when we converted it in 2021 and ran through 2022, we were producing probably 1,275 tons a day average in that range. And right now, currently, we're somewhere in that 1,300-ton a day range and just getting comfortable with all of the new equipment. Essentially, we have a new paper machine on our hands here and then the pulp mill has been significantly rebuilt and new OCC plant. So there's a lot of new infrastructure in the mill that we're getting used to running, but we're also going to look at what the opportunity is. The second phase of work that we can choose to do when the timing is right, involves 23 new additional high-pressure dryer cans, a new forset reel at the dry end of the paper machine and then a new shoe press in the press section to enhance pricing and improve the drawing. That will take place when we need the tons. So that's to be determined, but we have the luxury of deciding that when we need to decide that. But the first phase of the work has been done extremely well. We're very pleased with what we see. So now we'll take advantage of what we have in place. And as we've done for many years, we'll wring out these benefits and these efficiencies from day to day here. So I'm pretty optimistic on what we have at Jackson. The number one machine, the smaller machine is down. It's idle temporarily. It will be available if demand determines that we should run that. And so again, I think current times, we will continue to run to demand. The entire system, we also have the annual outages coming up starting next month with our DeRidder and Counce mill. So we have to think about where we need to be with inventory levels and what we have to do to supply our box plant needs. So in that regard, I think Jackson is in a good place, but a lot of opportunity there.

Mark Kowlzan:

I'm not going to talk about our competitors. We just -- we're running to demand. We'll continue to run to demand. The Jackson machine is an opportunity for us to provide low-cost, high-quality containerboard into that Southeastern region. But it also means, as you could well assume, the rest of the system will run as we need to run it. But keeping in mind what I just said that we have our big annual outages coming at our two biggest mills being DeRidder and Counce, Tennessee, so our plans were to run a little bit extra inventory build over the next couple of months to ensure that as we go through these big outages, we will supply our needs appropriately.

Mark Kowlzan:

Thanks, Mike. Next question please.

Mark Weintraub:

Thank you. Following up on George's question to some extent. You had talked about how the capital projects really helped on the and capital, particularly the converting operations. You've also talked about how your price mix was really strong in the fourth quarter. And frankly, it's been really good for the last like two years. You've just been doing extraordinarily well, price/mix. How the capital projects help to improve your -- the mix in terms of like more higher value-added packaging that you're providing your customers? Or has your extraordinary performance been kind of just execution also your focus on smaller, more local accounts.

Mark Weintraub:

And so sort of getting to the next -- so would you say that the product that you're producing and selling to the customer has changed much? Or it's really -- so the mix has sweetened that way over the last couple of years? Or it's just you've been very, very successful in getting higher pricing?

Mark Weintraub:

Okay. Great. And then lastly, obviously, demand kind of -- to me at least, it's been astoundingly weak in the last couple of quarters. And you've pointed out the various drivers. Do you have any sense as to how impactful in particular, say, the inventory correction has been in terms of the magnitude of decreases? And are you getting any clarity from customers where we might be in that process? Because it sounds like we're going to continue to see weakness in the first quarter at a minimum. And then a tough question, but are you getting any indications from your customers as to what to expect for the full year? Or is it just not enough visibility?

Mark Weintraub:

Okay. Thank you.

Operator:

And our next question comes from Adam Josephson from KeyBanc Capital Markets. Please go ahead with your question.

Mark Kowlzan:

Adam, if demand picked up next month and all of a sudden, we needed the tons, we could pull the plug on that project, and we could do it in the spring time if we wanted to. That's the luxury that we have. We have all the equipment in our hands sitting in the warehouse at the mill. We have all the engineering done. So when we need the tons, we will do that project, and that's the benefit that we have there. So there's no secret formula. There's no magic in terms of what's driving this decision except the marketplace and our customers. And as Tom mentioned a few minutes ago, we grow with our customers' demands, and we're in a good place to do that, but also being mindful of our uses of cash and our capital spending, there's no need to spend the remaining portion of that capital on a project that's not earning any return currently as opposed to perhaps another use of that cash this year.

Mark Kowlzan:

Adam, what Tom just said and this plays into what we've always done, our competitors typically would have done one big project, got the entire project done at one time and had all of this capacity and had all of this complexity to deal with. We determined two years ago; we would do this project in phases. And if you go back decades, go back 20 years, we've always done our projects in multi phases. Now there's reasons for that. Besides capital effectiveness and uses of cash and prudent management of our cash, there's also risk mitigation and then growing with our customers' needs. And so it all plays into our historical behavior on how we go about projects and how we grow our business.

Thomas Hassfurther:

That's the million-dollar question right there. Let me tell you. I'd like to be able to predict that perfectly. Obviously, I can't. As I said, I said that's we're taking a pretty conservative approach in the first quarter to our projections because we really don't know when this destocking is going to end. I think we're clearly past the midpoint in that. I know that for a fact, and I can feel that. But to what extent it goes further, I really can't tell you, but I think even with this conservative approach, my point about comparing to 2019 was, it's still pretty solid compared to 2019, just to get us all calibrated as to where we are.

Thomas Hassfurther:

Well, I think some of -- when we talk to specific customers, I mean, we get kind of a mixed bag is what we get. Some have completely -- some are completely destocked and others still have significant inventories and significant issues. And even on their side, they've got a lot of product of their own sitting there in warehouses that was prepared for a COVID environment, and now we're post COVID, and it's a different environment. So they're making their adjustments as well. And I did mention the supply chain issues that a lot of them are still dealing with.

Robert Mundy:

Adam, this is Bob. What we said in our release and in our prepared remarks is we were talking about wood prices, not necessarily wood cost. Wood cost sequentially is fairly flat because typically, as you go into the much colder months, your wood yields and so forth aren't as good. So you see some usage going the other way. But the pricing improvement that we're seeing is, it is -- it was a bit drier than normal. The weather cooperated at least as far as wood supply goes over the last few months. So we're in a good place with our inventories and the price of that wood. And demand, quite frankly, there's a lot -- there has been downtime when the industry, as everyone knows, so demands and that helps you with price. So wood typically does not jump around a lot, and it's -- but I do think overall for the year, we think it will be -- should be down slightly on a price basis and maybe costs fairly flat for the full year.

Robert Mundy:

Next question please.

Gabrial Hajde:

Tom, Bob, good morning. I just had one on capital allocation. And I know that you reserve the right to spend is warranted in terms of returns and things like that. But you made the comment that you've come out of a couple of years of elevated spend. This year's CapEx is $475 million. Is it appropriate for us to sort of think about, I don't know, $450 million to $500 million in CapEx as normalized. And then on the capital allocation side, Mark, you also said, "Hey, we want to take a balanced approach. But I can't help but look at history when you guys have been aggressive buyers of your shares. It seemed to be opportune and give you a nice return. So can you just talk a little bit about how you internally talk -- think about returns on capital as it relates to projects versus share repurchases?

Gabrial Hajde:

It does. It absolutely does. And then maybe the low-hanging fruit just to make sure we kind of have math calibrated right. If I extrapolate out the comment that you guys made it seems to imply maybe 16 million square feet for the first quarter or down 4% to 5% or so on a year-over-year basis. I'm assuming that whatever your experience has been thus far in January, went into that calculation, and it's the best estimate in terms of backlogs and what you have line of fight to.

Gabrial Hajde:

Thank you. Good luck.

Operator:

Our next question comes from Cleve Rueckert from UBS. Please go ahead with your question.

Mark Kowlzan:

Yes, I'll let Tom take care of that.

Cleveland Rueckert:

Okay. That makes sense. And then just a couple of quick follow-ups, inventories, you talked about them a couple of times. I just explicitly like where are inventories relative to where you would like them versus your plan in containerboard.

Cleveland Rueckert:

Right. I think that makes a lot of sense. And that's very clear. And then I know you said that the number one machine is down at Jackson is idled temporarily. I mean, are you expecting to take any other economic downtime in Q1? Or is it really more about maintenance in the first quarter?

Cleveland Rueckert:

Okay. Good luck guys. Thanks very much.

Operator:

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

Mark Kowlzan:

Well, I'll go by historically what we said in the last two years. The ultimate project at Jackson would on paper, get us a 2,000 ton a day containerboard machine. It would be one of the largest machines in the Western Hemisphere in terms of productivity and if you could understand and appreciate our efficiencies, it will not only be one of the largest, most productive virgin kraft linerboard machines in the Western Hemisphere, but it will be one of the lowest cost machines. And so I said we started up last week. We're in that 1,300 ton a day rate right now. We're obviously -- we'll probably push the machine and see what we -- like having a new toy. We're going to see what it will do for us over the next month or two. What are the limitations and making sure we haven't missed anything from a process point of view. And if we missed anything, then we have ample time to correct it over the course of the months ahead of us. But ultimately, the final phase will give us the extra drying and the speed on the paper machine to take us from let's just say we could run 1,500 tons a day right now with the machine we have. the last phase of work gets us that extra 500 tons a day, just to help you with some math.

Mark Kowlzan:

I'll answer part of that, and I'll let Tom answer part of that. We talked about some of these fiber flexibility projects. The biggest ones at the Wallula Mill, we over a 2.5-year period, we added a big OCC plant out there and then did completely rebuild the woodyard and improved our chip handling, chip screening and fiber yield capability in the woodyard but now Wallula has the ultimate flexibility to push OCC at very high rates if the pricing and availability is there. And then we just finished up the big OCC project at Jackson in conjunction with the rest of the work at the mill. And so Jackson, Counce, DeRidder, Wallula in terms of our linerboard mills primarily linerboard, even though DeRidder and Jackson and Wallula can make medium, but they have incredible opportunity to flex the amount of OCC, DLK that goes into the furnish depending on pricing and opportunities to take advantage of various fiber sources. And so I think if you did the math, and I'm not -- I don't have this right now, Bob might have this, but we're probably still around 20% in total -- of our total makeup of what would be OCC, DLK and virgin fiber. But we have now improved significantly by mill, what we can use in any given day. Tom, do you want to add?

Anthony Pettinari:

Okay. That's very helpful. I'll turn it over.

Operator:

Our next question comes from John Dunigan from Jefferies. Please go ahead with your question.

Thomas Hassfurther:

The answer to that is no, that does not accelerate when prices fall. In fact, it probably is the other way around. And our feedback from our customers is that they're not -- they haven't been anticipating it and they're not -- they're interested in being aligned long term. This is not a short-term play or anything like that. So we haven't seen any uptick in bids or anything like that either.

Thomas Hassfurther:

Well, number one is the capacity adds that are coming on really have very little impact for us. And I think you have to look back historically and see what happened in the past when there's been adds of capacity that have come on. I think about the Verso mill up in Jay, Maine when they converted a machine to virgin kraft. That did not succeed. That mill is not even open anymore. Midwest Paper was another one that had -- it's -- as we've said a long, long time, the open market is very small in the U.S. And so those that add, they're going to have to look outside the United States for the most part. This is a very, very integrated market, the open market that does exist is under long-term contracts, typically or certain relationships like we have with our outside market buyers. So it's -- that has very little impact in my opinion. So when you hear us say we're running to demand and demand is what it is. And just to produce additional board for the sake of producing it, is basically like a death wish and it doesn't do you any good. So I hope that gives you a little flavor for where we're coming from.

Thomas Hassfurther:

Okay. Next question please.

Kyle White:

Hey, good morning. Thanks for taking the question. I just wanted to go back to boxes at demand. And just wondering if you can give us a little bit more details on what you're seeing by end market in that business. Any end markets that are really still working to the destocking and a bit weaker that we should really monitor here versus other end markets that have gone through this impact already?

Kyle White:

Got it. And then you're fairly active in share repurchases this past quarter. Can you just talk about your thought process there? And should we expect you to continue to be active throughout 2023, given your healthy balance sheet and maybe just how you weigh those decisions versus any potential acquisitions?

Kyle White:

Sounds good. I'll turn it over.

Operator:

Our final question today will come from Mark Weintraub from Seaport Research Partners. Please go ahead with your question.

Thomas Hassfurther:

Well, Mark, as you can well imagine, I mean, the $50 has just come, has come in increments, I mean, may or may not hit a rate at which the price would change based on the contracts. All these contracts are very different and very different timing mechanisms. So that's why I said it's -- there's no -- you can't say that it's going to go down faster than it went up or vice versa. I mean it's just; it is what it is. And as these things cycle in, they'll cycle in uniquely, we've got some customers who have even asked us just to hold off at the moment because they're not confident of what may be taking place in reality. So we'll just have to -- I mean, as I said, it just -- it factors in and meters in a little differently than I'd say on the way up just because of the small incremental moves that take place.

Thomas Hassfurther:

I'll let Bob handle that.

Mark Weintraub:

Okay. Thanks very much.

Operator:

Sir, that does conclude today's Q&A session. Do you have any closing comments?

Operator:

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.

Mark Kowlzan:

Thank you, Matt. Good morning and thank you all for participating in Packaging Corporation of America’s third quarter 2022 earnings release conference call. I’m Mark Kowlzan, Chairman and CEO of PCA and with me on the call today is Tom Hassfurther, the Executive Vice President, who runs our Packaging Business and Bob Mundy, our Chief Financial Officer. I’ll begin the call with an overview of our third quarter results and then turn the call over to Tom and Bob, who will provide more details. I’ll then wrap things up and then we’d be glad to take questions. Yesterday, we reported third quarter net income of $262 million, or $2.80 per share, excluding special items third quarter 2022 net income was $266 million, or $2.83 per share, compared to the third quarter of 2021 net income of $257 million or $2.69 per share. The third quarter net sales were $2.1 billion in 2022 and $2.0 billion in 2021. Total company EBITDA for the third quarter excluding the special items was $477 million in 2022 and $464 million in 2021. Third quarter net income included the special items expenses of $0.03 per share primarily for certain costs at the Jackson, Alabama mill for the paper to containerboard conversion related activities, details of all special items that for the third quarter of 2022 and 2021 were included in the schedules that accompanied the earnings press release. Excluding the special items, the $0.14 per share increase in third quarter 2022 earnings compared to the third quarter of 2021 was driven primarily by higher prices in mix in our packaging segment of $1.60 and pay per segment $0.23 cents. Lower interest expense, $0.04, a lower share count resulting from share repurchases, $0.04, and the lower tax rate, $0.02. These items were partially offset by operating costs which were $0.70 per share higher primarily due to inflation related increases in the areas of energy, repairs, materials and supplies, chemicals, labor and benefits expenses, as well as several other indirect and fixed cost areas. We also had inflation related increases in our converting costs which were $0.04 per share higher. The negative impact of lower volume was $0.52 per share in our packaging segment, and $0.05 cents in our paper segment. Freight and logistics expenses were $0.20 above last year, and scheduled outage expenses were $0.10 higher. We also had higher depreciation expense of $0.07, and other expenses of $0.04. The results were $0.03 above the third quarter guidance of $2.80 per share primarily due to the very sound implementation processes around our previously announced price increases in the packaging and paper segments, as well as the continued benefits generated from our mills and plants through process efficiency optimization efforts and material usage initiatives. Looking at our packaging business, EBITDA excluding special items in the third quarter 2020 of $467 million, with sales of $1.9 billion resulted in a margin of 24.1% versus last year as EBITDA of $467 million with sales of $1.8 billion and 25.5% margin. Our teams did a tremendous job of implementing our previously announced price increases. However, demand in our packaging segment was well below our expectations for the quarter. Tom will discuss this further in a moment. The containerboard mills operated in an efficient and cost-effective manner as we balanced our supply with current domestic and export demand. As part of the effort, we began the scheduled maintenance outage in the first phase of the No. 3 machine conversion to containerboard at our Jackson Alabama mill a few weeks earlier than originally planned. Total economic related downtime for the third quarter was approximately 128,000 tons. The outage and conversion work at Jackson will be completed in the fourth quarter. And we will remain committed to ramping up our internal capacity according to our customers demand requirements. Finally, although we are still experiencing historically high inflation within our operating and converting costs, our mills and plants continued to remain focused on delivering numerous cost reduction initiatives, efficiency improvements, and integration and optimization enhancements and capital benefit -- capital project benefits that helped minimize the impact. I'll now turn it over to Tom who will provide more details on the containerboard sales and corrugated business.

Mark Kowlzan:

Thank you, Tom. Looking at the paper segment, EBITDA excluding special items in the third quarter was $33 million, with sales of $165 million or a 20% margin compared to the third quarter of 2021 EBITDA of $18 million, and sales of $150 million or a 12% margin. Prices and mix were up 21% from last year's third quarter and moved 6% higher from the second and into the third quarter of 2022 as we continue to implement our previously announced price increases. Sales volume was about 9% below last year's third quarter primarily due to this year's scheduled outage at our International Falls mill as well as last year's third quarter that included paper sales from the Jackson mill's No. 1 machine. The outstanding efforts around implementing our latest price increase, together with optimizing the cost structure, inventory and product mix delivered excellent margins in the paper business. Now I'll turn it over to Bob.

Mark Kowlzan:

Thank you, Bob. Looking ahead as we move from the third and into the fourth quarter as Tom mentioned, we see most of the issues and economic conditions and higher global interest rates that impacted third quarter packaging segment demand continuing. Our box plants will have four less shipping days compared to the third quarter. And we also expect a seasonally less rich mix in corrugated products as well as lower average export containerboard prices. We will run our containerboard system based on this demand outlook along with completing the Jackson, mill scheduled annual maintenance outage in the first phase of the containerboard conversion work on the No. 3 machine. In our paper segment, we will continue to implement our previously announced $60 per ton price increase on all office printing and converting grades that took effect on September 6. However, volume will be lower compared to the seasonally stronger third quarter. As Bob mentioned, scheduled annual outage expenses will be $0.11 per share higher than the third quarter. Lastly, we expect slightly higher operating costs, primarily labor and benefits expenses, along with anticipated colder weather resulting in higher energy costs. Considering all of these items, we expect fourth quarter earnings of $2.22 per share. With that we'll 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 our Annual Report on Form 10-K and subsequent quarterly reports on Form 10-Q filed with the SEC. The actual results could differ materially from those expressed in the forward-looking statements. And with that Matt, I'd like to open up the call for questions please.

Unidentified Analyst :

Hi, this is Sandy Liang on behalf of George Staphos, he had a small conflict. First, can you please discuss your early 4Q booking and billing trends? And to the extent that you can share are customers continuing to destocking the supply chain? Thank you very much.

Operator:

Our next question will come from Mark Weintraub with Seaport Research Partners.

Tom Hassfurther:

Mark, this time again, it's significant. There's no question about it. And it's the primary number. It's quite interesting that just -- as of yesterday, as a matter of fact, I mean, we had a fairly large customer at one of our plants, who sent an email in and said, I have finally run down my excessive inventory. I'm now ready to order again. So we probably lost in a lot of cases, one or two of the typical order cycles that some of these customers would go through as they went through this destocking of inventory.

Tom Hassfurther:

Well, obviously, I can't predict the future. But I can tell you that. I believe that when you look at our fourth quarter, as I mentioned, there are a lot of other factors going into the fourth quarter and including this destocking. So if you look at those numbers, and you think about those, you would see that the trend is probably we'll begin to work our way out of this inventory issue. But we've got some other headwinds as well, as I mentioned, especially like the ag business in the south that was impacted by the hurricane, and that those crops are either going to be delayed or in some cases lost completely. So we, I, the only -- I've never experienced this, to be honest with you in my entire career. So this severity of this building the inventories, the lead times, the box plants got to and kind of in some cases almost a panic buy boxes because they couldn't ship their products without it obviously. So it's just going to take a little while to work through this, I look back at the great recession. And it was kind of interesting there because in the Great Recession, it took a couple of quarters for the cycle to finally turn and the business to really turn up beginning it still wasn't equal to the previous year that took a few more quarters. But the first two quarters were the big jumps. So that's the only thing I've really got it to compare to. And so I think when you think about how many boxes somebody can store, or how much product they can have and get rid of, I would think that through this Christmas season, you'll see a lot of destocking take place.

Adam Josephson:

Thanks so much, everyone. Hope you're well. Tom, just one more question about that the, are you seeing it at the retail level at your customer? To your point, I just -- I wouldn't think that your customers could store would have room to store that many boxes. So I'm just a little perplexed as to where exactly that destocking is taking place and how much longer it could last for?

Adam Josephson:

Got it, okay. But even though they've come back to normal lead times, they're still sitting on, it seems like much too much inventory for --