Packaging Corporation of America (NYSE:PKG) Q4 2023 Earnings Call Transcript
Packaging Corporation of America (NYSE:PKG) Q4 2023 Earnings Call Transcript January 25, 2024
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Operator: Thank you for joining Packaging Corporation of America's Fourth Quarter and Full Year 2023 Earnings Results Conference Call. Your host today will be Mark Kowlzan, Chairman and Chief Executive Officer of PCA. Upon conclusion of his narrative, there will be a question-and-answer session. I'd now like to turn the floor over to Mr. Kowlzan. Please proceed when you are ready.
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.
Tom Hassfurther: Thank you, Mark. As Mark mentioned, Packaging segment volume for the quarter exceeded our guidance estimates. Corrugated product shipments per workday were up 5.1% and total shipments with one additional shipping day were up 6.9% compared to last year's fourth quarter. Versus the third quarter of 2023, shipments per day were up 5.2% and total shipments were up 3.4%, even though there was one less shipping day. Outside sales volume of containerboard was 88,000 tons above last year's fourth quarter and 17,000 tons above the third quarter of 2023. Our order backlog and containerboard cut-up remained incredibly strong throughout the quarter. Although demand continues to be challenged by persistent inflation, higher interest rates and other factors, we expect our shipments to continue this positive momentum as we enter the first half of 2024.
Relative to the published reductions in the industry benchmark grades that occurred in 2023, Domestic containerboard and corrugated products prices and mix together were $1.73 per share below the fourth quarter of 2022 and down $0.40 per share, compared to the third quarter of 2023, which included a richer mix of graphics and point-of-purchase display business. Export containerboard prices and mix were down $0.20 per share, compared to the fourth quarter of 2022 and down $0.01 per share compared to the third quarter of 2023. Beginning January 1, 2024, we began invoicing a $70 per ton price increase for linerboard and $100 per ton increase for medium according to our recent price announcement. As you are probably aware, this past Friday, the RISI Pulp and Paper Week publication did not recognize any increase in the industry's benchmark prices for either linerboard or medium.
I'm sure you will have some questions for us on this topic, and we'll be happy to discuss them with you shortly. I'll turn it back to Mark.
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.
Bob Mundy: Thanks Mark. Cash provided by operations during the quarter totaled $335 million and free cash flow was $194 million. The primary payments of cash during the quarter included capital expenditures of $141 million, dividend payments of $112 million, cash tax payments of $59 million and net interest payments of $26 million. For the full year 2023, cash from operations was $1.3 billion with capital spending of $470 million and free cash flow, a record $845 million. Our final recurring effective tax rate for 2023 was 24.5%. During the fourth quarter, we issued $400 million of new 10-year notes. The proceeds from these notes will be used to redeem our $400 million notes that mature in September of 2024. Our net debt is not affected by this transaction and the proceeds from this issuance will be invested in marketable securities at an interest rate exceeding that of the new notes.
The new bonds raised our overall fixed interest rate by approximately 30 basis points and extended the overall average maturity of our debt portfolio from 14.1 years to 15.6 years. Excluding the proceeds from this transaction, our year-end cash on-hand balance, including marketable securities, was just over $800 million, with liquidity of $1.1 billion. Regarding full year estimates of certain key items for the upcoming year, we expect total capital expenditures to be in the range of $470 million to $490 million. And DD&A is expected to be approximately $530 million. We estimate dividend payments of $450 million and cash pension and post-retirement benefit plan contributions of $27 million. Our full year interest expense in 2024 is expected to be approximately $53 million and net cash interest payments should be about $60 million.
The estimate for our 2024 book effective tax rate is 25%. Currently, planned annual outages at our mills in 2024 including lost volume, direct costs and amortized repair costs is expected to total $0.96 per share. The current estimated impact by quarter in 2024 is $0.26 per share in the first quarter, $0.16 in the second, $0.19 in the third and $0.35 per share in the fourth quarter. These expenses include the volume and cost impact that will be incurred during the completion of the final phase of converting the No. 3 machine at the Jackson mill to containerboard during the first and second quarters. This will negatively impact our first quarter results by approximately $0.16 per share and our second quarter results by $0.08 per share. I'll now turn it back over to Mark.
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.
Operator: [Operator Instructions] Our first question today comes from Mark Weintraub from Seaport Research Partners. Please go ahead with your question.
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