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    Packaging Corp of America (PKG)

    Business Description

    Packaging Corporation of America (PCA) is a leading producer of containerboard products and uncoated freesheet (UFS) paper in North America, primarily operating in the United States with eight mills and 86 corrugated products manufacturing plants . The company focuses on three main segments: Packaging, Paper, and Corporate and Other . PCA's largest segment, Packaging, produces a wide range of containerboard and corrugated packaging products, while the Paper segment offers communication-based papers, including both commodity and specialty papers . The Corporate and Other segment encompasses support services and transportation assets .

    1. Packaging - Produces a diverse array of containerboard and corrugated packaging products, including conventional shipping containers, multi-color boxes, and displays, as well as packaging for various consumer and industrial products .
    2. Paper - Manufactures and sells communication-based papers, including both commodity and specialty papers with features such as colors and coatings .
    3. Corporate and Other - Includes support services, transportation assets, and activities related to ancillary operations, with revenue primarily from related party transactions and transportation services .

    Q3 2024 Summary

    Initial Price$183.33July 1, 2024
    Final Price$215.29October 1, 2024
    Price Change$31.96
    % Change+17.43%

    What went well

    • $PKG has consistently outpaced industry volume growth, with bookings and billings per day up just over 8% versus 2023, reflecting strong demand and market share gains.
    • The company is confident in continuing profitable revenue growth by focusing on customer needs and capital expenditures based on customers' requests, positioning them to take advantage of every opportunity.
    • The Paper segment is performing exceptionally well, achieving EBITDA margins of 27%, as the mill is operating efficiently with strong market demand, contributing significantly to the company's profitability.

    What went wrong

    • Operating costs have increased significantly, with the company reporting that the reactivation of the Wallula mill added approximately $30 million in costs during the third quarter. This mill is noted as their highest cost mill, contributing to higher overall expenses.
    • Future volume growth may face challenges, as the company acknowledges that they are lapping tougher year-over-year comparisons. The strong growth seen this year, including an 8% increase in bookings and billings, may not be sustainable going forward.
    • Shifts in product mix could impact profitability, with stronger growth in e-commerce and non-durable goods, while areas like point-of-purchase displays and durable goods remain flat. This change in demand could affect margins and earnings growth.

    Q&A Summary

    1. Volume Growth Sustainability
      Q: How sustainable is your volume growth outpacing the industry?
      A: We continue to significantly outpace the industry with our 8% growth in bookings and billings versus '23' , primarily driven by growth within our existing customers and some new clients. While we expect tougher comparisons next year due to strong comps, we plan to take advantage of every opportunity to profitably grow revenue and maintain our track record of outgrowing the market.

    2. Capacity Expansion Plans
      Q: What are your plans for increasing capacity to meet demand?
      A: We are heavily investing in our box plant system, including building new operations in Glendale, Arizona, starting early next year, and have plans to build a couple of new big plants over the next 2.5 to 3 years. We continue to optimize existing mills and have identified projects at Counce and Valdosta to increase capability.

    3. Operating Costs and Margins Outlook
      Q: How are operating costs trending, and what is the margin outlook?
      A: Operating costs have stabilized at a high level due to inflation, with higher costs from running Wallula this year (approximately $30 million increase) and higher OCC costs. We expect costs to moderate over the next few quarters, potentially benefiting margins next year.

    4. Supply Constraints Management
      Q: How will you manage supply constraints given strong demand?
      A: We are optimizing existing assets to meet customer needs and have long-term plans to ensure supply. Although we aimed to build inventory ahead of maintenance outages, strong demand has kept inventory below target levels. We have plenty of capability to take care of our customers for the next few years.

    5. Box Price Increases Realization
      Q: Are box price increases fully implemented?
      A: We have a disciplined approach to box price increases, implementing them by customer and item. The lion's share was through in the third quarter, with some tracking into the fourth quarter, and a couple of annual contracts triggering in January '25.

    6. Paper Segment High Margins
      Q: What drove the strong margins in the Paper segment?
      A: The International Falls mill is performing exceptionally, producing close to 500,000 tons of uncoated freesheet annually, achieving margins around 27%. The mill is well-capitalized and hitting on all cylinders.

    7. Capital Allocation Strategy
      Q: How are you allocating capital, and any plans for share repurchases?
      A: We prioritize high-return investments in our operations, with capital spending increased to approximately $700 million this year for accretive opportunities. This is currently the best use of our excess cash to drive shareholder value.

    8. Maintenance Outages Impact
      Q: How will maintenance outages affect production next year?
      A: Next year will have a lighter maintenance outage schedule compared to this year, without significant outages like the 40-day shutdown at Jackson. This could result in about 100,000 tons of additional production.

    9. Operating at Full Capacity
      Q: Are you operating mills at full capacity?
      A: All mills are running full out, including Wallula, which has been operating at full capacity this year. We continuously optimize our operations to meet customer demand.

    10. Recycled vs. Virgin Mix
      Q: Has your approach to recycled versus virgin fiber changed?
      A: We focus on meeting customer performance needs and have enhanced our mills to efficiently run lighter weights, but we haven't changed our strategic approach to fiber mix.

    11. Inventory Levels and Demand
      Q: Why are inventories below target levels?
      A: Stronger-than-expected demand has prevented us from building inventories as planned. Despite efforts, we have not succeeded in achieving target inventory levels, but it's a good position to be in.

    12. Crop Damage Impact
      Q: How might crop damage affect volumes?
      A: The severity of crop damage, particularly in Florida, is uncertain. A full crop expected in Q4 may shift to late Q4 and bleed into Q1 '25 due to replanting efforts.

    Revenue by Segment - in Millions of USDFY 2013Q1 2014Q2 2014Q3 2014Q4 2014FY 2014Q1 2015Q2 2015Q3 2015Q4 2015FY 2015Q1 2016Q2 2016Q3 2016Q4 2016FY 2016Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    Packaging1,808.61,790.31,759.81,776.97,135.61,798.31,908.32,008.7
    Paper150.9142.8157.9143.8595.4163.8150.1159.3
    Corporate and Other16.819.018.317.371.417.416.914.4
    - Intersegment Eliminations(43.7)-------
    Total Revenue1,976.31,952.11,936.01,9387,802.41,979.52,075.32,182.4
    Revenue by Geography - in Millions of USDFY 2013Q1 2014Q2 2014Q3 2014Q4 2014FY 2014Q1 2015Q2 2015Q3 2015Q4 2015FY 2015Q1 2016Q2 2016Q3 2016Q4 2016FY 2016Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    Sales to Foreign Customers----402.6---
    Total Revenue1,976.31,952.11,9361,9387,802.41,979.5-2,182.4
    KPIs - Metric (Unit)FY 2013Q1 2014Q2 2014Q3 2014Q4 2014FY 2014Q1 2015Q2 2015Q3 2015Q4 2015FY 2015Q1 2016Q2 2016Q3 2016Q4 2016FY 2016Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    Export Containerboard Shipments (% Change)-23.5%-18.8%18.1%--38.7%19.9%2.2%
    Domestic Containerboard Shipments (% Change)--9.8%---22.1%-25.8%
    Corrugated Products Shipments Per Workday (% Change)-12.7%-9.8%1.9%5.1%-11.0%9.2%11.1%
    Corrugated Products Shipments Per Day (% Change)-12.7%-9.8%1.9%5.1%-11.0%9.2%11.1%

    Executive Team

    NamePositionStart DateShort Bio
    Mark W. KowlzanChairman of the Board and Chief Executive OfficerJuly 2010Mark W. Kowlzan has served as PCA's CEO since July 2010 and Chairman since January 2016. He previously led PCA's containerboard mill system and worked at International Paper for 15 years .
    Robert P. MundyExecutive Vice President and Chief Financial Officer; Principal Accounting Officer2015; April 1, 2024Robert P. Mundy has been PCA's CFO since 2015 and will become the Principal Accounting Officer effective April 1, 2024. He was previously CFO at Verso Corporation and held finance roles at International Paper .
    Pamela A. BarnesSenior Vice President, Finance and Controller; Principal Accounting Officer (retiring)May 2019Pamela A. Barnes has been in her current role since May 2019. She joined PCA in 1992 and has held various finance positions, including Treasurer since 1999. She will retire on April 1, 2024 .
    Charles J. CarterExecutive Vice President - Mill OperationsJanuary 2011Charles J. Carter has led PCA's mill operations since January 2011. He joined PCA in 2010 after working in managerial roles at various pulp and paper companies .
    Thomas A. HassfurtherExecutive Vice President - Corrugated ProductsSeptember 2009Thomas A. Hassfurther has served in his current role since September 2009. He joined PCA in 1977 and has held senior management and sales positions at PCA and Tenneco Packaging .
    Jeff S. KaserSenior Vice President - Corrugated ProductsMay 2020Jeff S. Kaser has been in his current position since May 2020. He joined PCA in 1987 and has held various roles in sales and management within the corrugated products business .
    Darla J. OlivierSenior Vice President - Tax, ESG and Government AffairsJanuary 2022Darla J. Olivier has led the tax department since 1994 and was promoted to her current role in January 2022. She also leads sustainability reporting and government affairs .
    Kent A. PfledererSenior Vice President, General Counsel and SecretaryJanuary 2013Kent A. Pflederer has served as General Counsel and Secretary since January 2013. He joined PCA in 2007 and previously worked at Hospira, Inc. and Mayer Brown, LLP .
    Bruce A. RidleySenior Vice President - Environmental Health and Safety and Operational ServicesMay 2019Bruce A. Ridley has been in his current role since May 2019. He joined PCA in 1999 and has held various operational roles, including Operations Manager and Mill Manager .
    Robert A. SchneiderSenior Vice President and Chief Information Officer2019Robert A. Schneider has served as CIO since 2019. He joined PCA in 1989 and has held various management positions in information systems .
    D. Ray ShirleySenior Vice President - Corporate Engineering and Process TechnologyMay 2019D. Ray Shirley has been in his current role since May 2019. He joined PCA in 1996 and has held various engineering and management positions, including Mill Manager .

    Questions to Ask Management

    1. Given the anticipated increase in operating and converting costs due to higher seasonal energy and chemical expenses in the fourth quarter, how do you plan to manage these costs to maintain your profit margins?
    2. With the recent hurricane damage to strawberry crops in Florida impacting your corrugated shipments, can you quantify the expected volume and revenue loss for the fourth quarter, and what strategies are you implementing to mitigate this disruption?
    3. You mentioned plans to build new plants over the next 2.5 to 3 years; can you provide more details on the expected capital expenditures and how you plan to fund these projects without adversely affecting your cash flow and dividend commitments?
    4. Considering your volumes are up over 8% versus 2023 and continue to outpace the industry, when do you expect this growth rate to normalize, especially given the tougher comparisons next year and the restructuring efforts by your larger competitors?
    5. As e-commerce demand continues to grow and you've invested in running lightweight products, are you considering a strategic shift in your virgin versus recycled fiber mix to better capture the lightweight recycled market segment?

    Share Repurchase Program

    Program DetailsProgram 1
    Approval DateJanuary 26, 2022
    End Date/DurationN/A
    Total additional amount$1 billion
    Remaining authorization amount$436 million as of September 30, 2024
    DetailsThe program allows PCA to repurchase shares in open market or privately negotiated transactions, considering factors like stock price and market conditions. It aims to balance share repurchases with other uses of cash such as acquisitions and dividends.

    Past Guidance

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: Q4 2024
    • Guidance:
      • Earnings Per Share (EPS): Expected to be $2.47 per share .
      • Demand and Shipments:
        • Packaging Segment: Strong demand with slightly higher containerboard volume, but impacted by two fewer shipping days and hurricane damage .
        • Paper Segment: Lower shipments compared to Q3, with flat prices and mix .
      • Costs:
        • Operating and Converting Costs: Increase due to higher seasonal energy and chemical costs .
        • Scheduled Outage Costs: $0.12 per share higher than Q3 .
        • Depreciation Expense: Slightly higher .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: Q3 2024
    • Guidance:
      • Capital Spending: Revised to $670 million to $690 million .
      • Earnings Per Share (EPS): Expected to be $2.45 per share .
      • Prices and Mix: Expected to increase in both Packaging and Paper segments .
      • Shipments: Strengthening shipments per day, potentially setting a new Q3 record .
      • Operating and Converting Costs: Higher due to seasonal electricity and recycled fiber costs .
      • Scheduled Outage Expense: Slightly lower .

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: Q2 2024
    • Guidance:
      • Earnings Per Share (EPS): Expected to be $2.07 per share .
      • Scheduled Mill Outage Costs: Revised total impact of $0.89 per share for the year .
      • Packaging Segment: Strong demand and higher shipments expected .
      • Paper Segment: Strong orders but lower volumes due to maintenance outage .
      • Operating Costs: Slightly lower converting costs, higher freight, and logistics expenses .
      • Tax Rate: Sequentially higher .

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: Q1 2024
    • Guidance:
      • Capital Expenditures: $470 million to $490 million .
      • Depreciation, Depletion, and Amortization (DD&A): $530 million .
      • Dividend Payments: $450 million .
      • Cash, Pension, and Post-Retirement Contributions: $27 million .
      • Interest Expense: $53 million for the year, with net cash interest payments around $60 million .
      • Book Effective Tax Rate: 25% .
      • Planned Annual Outages: Impact of $0.96 per share for the year .
      • First Quarter Earnings: $1.54 per share .
      • Jackson Mill Conversion Impact: Negative impact of $0.16 per share in Q1 and $0.08 per share in Q2 .
      • Containerboard Price Increase: Effective January 1, 2024 .

    Competitors

    Competitors mentioned in the company's latest 10K filing.

    • Domtar Corporation: A division of Paper Excellence, mentioned as one of the largest competitors in the paper segment .
    • Sylvamo Corporation: Listed as a large competitor in the paper segment .