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Packaging of America [PKG] Conference call transcript for 2022 q2

2022-07-26 14:02:05

Fiscal: 2022 q2

Operator: Thank you for joining the Packaging Corporation of America's Second Quarter 2022 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 Q&A session. I will now turn the conference over to Mr. Kowlzan. Please proceed when you are ready.

Mark Kowlzan: Good morning, and thank you for participating in Packaging Corporation of America's second 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 second quarter results, and then I'll be turning 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 second quarter net income of $301 million or $3.20 per share. Second quarter net income included special items expenses of $0.02 per share, primarily for certain costs at the Jackson, Alabama mill for paper to containerboard conversion-related activities. The details of the special items for both the second quarter of 2022 and 2021 were included in the schedules that accompanied their earnings press release. Excluding special items, second quarter 2022 net income was $304 million, or $3.23 per share, compared to the second quarter 2021 net income of $207 million, or $2.17 per share. Second quarter net sales were $2.2 billion in 2022 and $1.9 billion in 2021. Total company EBITDA for the second quarter, excluding the special items, was $533 million in 2022 and $397 million in 2021. Excluding the special items, the $1.06 per share increase in second quarter of 2022 earnings compared to the second quarter of 2021 was driven primarily by higher prices and mix of $2.04 and volume, $0.12 in the Packaging segment, and higher prices and mix in the Paper segment of $0.18. Scheduled outage expenses were favorable by $0.08 per share. Interest expense was lower by $0.03. A lower share count resulting from 2021 repurchases was favorable by $0.03 and other items were favorable $0.03 per share. These items were partially offset by $0.95 of inflation-related operating costs, particularly with energy, fiber, chemicals, operating labor, repair labor and materials and several other indirect and fixed cost areas. Freight and logistics expenses have now moved higher for eight quarters in a row and were $0.25 per share above the second quarter of 2021. We also had inflation-related increases in our converting costs, which were higher by $0.10 per share and depreciation expense was up $0.08 per share over last year. Volume in our Paper segment was lower by $0.06 per share compared to last year when we were still running uncoated freesheet, our number one machine, at the Jackson, Alabama mill, and our tax rate was higher by $0.01 per share. Results were $0.40 above the second quarter guidance of $2.83 per share primarily due to higher prices and mix in the Packaging segment, lower scheduled outage expenses of $0.07 per share resulting from the postponement of the international falls outage from the second quarter to the third quarter and lower fiber and energy costs resulting from efficiency and usage initiatives. Looking at the Packaging business. EBITDA, excluding special items in the second quarter of 2022 of $525 million with sales of $2.1 billion, resulted in a margin of 25.4% versus last year's EBITDA of $409 million and sales of $1.7 billion or 23.8% margin. We had great execution of our previously announced price increases and demand in our Packaging segment was solid with corrugated demand about flat with last year's record second quarter, along with demand out of our containerboard mills generating new second quarter production and sales volume records. Even with record production from our mills, we still ended the quarter with weeks of containerboard inventory supply below our historical levels due to demand needs from both internal and external customers. We will be attempting to build some much needed inventory during the third quarter, ahead of the significant fourth quarter outage at the Jackson, Alabama mill for the first phase of the number three machine conversion to virgin linerboard. We're still experiencing significant inflationary headwinds in our operating costs as well as freight and logistics expenses. However, our mills and plans continue to do an outstanding job of meeting our customers' needs while delivering on numerous cost reduction initiatives, efficiency improvements, integration and optimization enhancements and capital project benefits to maximize our returns and margins. I'll now turn it over to Tom, who will provide further details on the containerboard sales and our corrugating business.

Tom Hassfurther: Thank you, Mark. As Mark mentioned, total corrugated product shipments and shipments per day were essentially flat compared to last year's record second quarter, which was up 9.6% versus the previous year. Outside sales volume of containerboard was about 41,000 tons above last year's second quarter, which was our lowest outside volume quarter for 2021, but 6,000 tons below the first quarter of this year due to the lower export shipments, strong internal demand and managing through the scheduled maintenance outages at our mills. Very good implementation of our previously announced price increases, together with profitable revenue growth and mix enhancements, delivered significant value for us during the quarter. Domestic containerboard and corrugated products prices and mix together were $1.89 per share above the second quarter of 2021 and up $0.76 per share compared to the first quarter of 2022. Export containerboard prices were up $0.15 per share versus last year's second quarter and up slightly compared to the first quarter of 2022. As it pertains to our converting facilities, I'd like to reemphasize some of what Mark was pointing out regarding the many things we do to meet our customers' needs, help offset inflation and improve our margins beyond just price increases. Our operations improvement and capital spending strategies in the corrugated plants have been extremely successful and put us in a position to serve our customers better than ever before, even against the backdrop of unprecedented supply chain and logistical challenges. Improving the processes, technology and equipment in our plants and optimizing our geographical footprint is driven by our customers' needs and improving our capabilities to grow with them. This strategy also improves our operating and converting efficiencies and delivers cost savings in several areas throughout our facilities. I'll now turn it back to Mark.

Mark Kowlzan: Thanks, Tom. Looking at our Paper segment, EBITDA, excluding special items, in the second quarter was $32 million with sales of $150 million or 21% margin compared to second quarter 2021 EBITDA of $12 million and sales of $142 million or an 8.2% margin. Sales volume was about 12% below last year's second quarter when we were still producing paper on the number one machine of the Jackson, Alabama mill versus producing corrugating medium in this year's second quarter. Paper prices and mix were 19% higher than last year's second quarter and 5% above the first quarter of 2022, resulting from our previously announced paper price increases. Also, as mentioned earlier, we had to postpone the maintenance outage scheduled at the International Falls, Minnesota mill from the second quarter to the third quarter of this year due to excessive flooding in the area during the weeks prior to the outage. The outstanding efforts around implementing our latest price increase, together with optimizing the cost structure, inventory and product mix delivered excellent margins in our Paper business for this quarter. I'll now turn it over to Bob.

Bob Mundy: Thanks, Mark. For the second quarter, we generated cash from operations of $324 million and free cash flow of $135 million. Key cash payments during the quarter included capital expenditures of $189 million, common stock dividends of $94 million, cash taxes of $127 million and net interest payments of $35 million. We ended the quarter with $667 million of cash on hand or $811 million, including marketable securities. Our liquidity on June 30th was $1.1 billion. Primarily due to the postponement of the International Falls scheduled outage from the second quarter to the third quarter, our scheduled outage expense will increase from $0.20 per share in the second quarter to $0.27 in the third quarter, and we are estimating $0.44 per share in the fourth quarter. This results in the total company estimated cost impact for the year totaling to $1.06 per share. I'll now turn it back over to Mark.

Mark Kowlzan: Thanks, Bob. Looking ahead, as we move from the second into the third quarter in our Packaging segment, although the majority of our previously announced price increases were recognized in the second quarter, the remaining portion will be implemented during the third quarter. In our Paper segment, we will continue implementing our previously announced price increases. And yesterday, we notified our customers of an additional $60 per ton price increase on all office printing and converting grades effective with shipments beginning September 6th. As I mentioned previously, we began the quarter with containerboard inventories below our target. So we plan to build some inventory ahead of the fourth quarter outage at the Jackson, Alabama mill when we'll begin that first phase of the number three machine conversion to virgin linerboard. With economic conditions continuing to be negatively impacted by broad-based inflation and aggressive interest rate increases, we see corrugated products growth as softening in the quarter, but demand still firm as certain end markets work through their current supply of inventory. We expect continued inflation in most all of our operating and converting costs to be primarily driven – to be the primary driver of the third quarter results. Higher gas, purchased electricity and chemical prices, along with a very tight labor market and contractual wage increases driving labor costs higher are expected to be the key areas during the quarter. However, we also still have particularly high inflation-driven costs in repair labor and materials, pallet costs, property rents, outside services and many other indirect and fixed cost areas. Although we're beginning to see improvements in truck and driver availability as well as some moderating diesel costs, continued rail service challenges along with rail fuel surcharges that typically lag diesel fuel prices by 30 to 60 days should also result in higher freight and logistics expenses. And finally, as Bob indicated, scheduled outage costs will be $0.07 per share higher due to the International Falls mill outage that was postponed from the second to the third quarter. Considering these items, we expect the third quarter earnings of $2.80 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 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. Actual results could differ materially from those expressed in the forward-looking statements. And with that, Matt, I'd like to open the call for questions, please.

Operator: Thank you. We will now begin the question-and-answer session. And our first question will come from George Staphos with Bank of America Securities. Please go ahead.

George Staphos: Hi. Thank you. Good morning everybody. Thanks for all the details, Mark, Tom and Bob. The first question I had, if you could give us a bit more color to the volume and end market trends that you're seeing. You're saying you expect growth to soften, should we take that as actually we should see lower volumes 3Q versus 3Q? How would you sort of guide us or give guardrails around that? And you mentioned some end markets working through some inventory. If you could perhaps give us some color on which end markets and which inventories are being worked down? Is it finished goods inventories for your customers at retail? Or is it their inventories of paper and perhaps boxes? And then I had a couple of quick follow-ons.

Tom Hassfurther: Hi, George. This is Tom. Let me see if I can answer that question…

George Staphos: Hi, Tom. Good morning.

Tom Hassfurther: Good morning. Let me see if I can answer that question, which is going to take a little while to work through. But right now just to give you a little color on where we are, we're now billing about 2% below a year ago and – but the bookings trends are starting to go up a little bit. So I think we'll be – third quarter is going to be flattish, probably, as we said, which is maybe to down just a little bit. But we're feeling good about the amount of volume that we have and that we're basically retaining all of those gains that we – that took place during the COVID years. Right now, I think, we're going through – we've been going through a cycle, probably the last 30 days and leading into another short-term period going forward, where our customers have excessive amounts of inventory. And this is not inventory of boxes. This is inventory of their finished products. Almost to a company, they've said that they built inventory based on the demand curve that took place during the COVID years, and that demand curve is now flattened. They're not saying that their business is going to be down, but that it's just flattening. And I think those are good – I think those are – that's a good trend, quite frankly, and a good trend for our business because it was kind of fits where we were hoping to be, and that was to retain all those significant gains we had over the last couple of years. And they feel like – and they feel very confident that once they work through these inventory issues, which I think is really our short-term problem at the end of the second quarter leading into the third quarter, once they come out of that, they're going to go back to demand trends that are more equivalent to where they were last year.

George Staphos: Tom thanks for that. My two quick follow-ons and I appreciate all the color. Is there a way, Bob or Mark, to bridge 2Q to 3Q? We obviously have the outage swapping, call it, $0.07. Would it be fair to say the $0.40 in total sequential change from 2Q to 3Q that maybe volumes and the decremental margins are maybe $0.15 to $0.20, and then the higher cost that you cited are the residual in terms of getting to that $0.40? And then recognizing you don't want to give up too much color here, can you talk about what went particularly well in terms of your execution on pricing and mix such that you were better than your expectations going into the quarter? Thanks and good luck in the quarter.

Mark Kowlzan: Yes. Hey, Bob, why don't you go ahead and start that and then we can let Tom finish that.

Bob Mundy: Yes. Yes. Yes. Hi, George. Yes, you're pretty close, George. If you look at Tom's comments regarding third quarter volume and as we've indicated, we still have a little bit of a tailwind from the latest price increase that we'll work through into the third quarter. The net of that is certainly – that's a positive number between those two, but it's the inflationary components. And the ones that we pointed out in the release with freight costs and logistics costs because primarily on the rail side and chemicals, starch lime, soda ash, resins, all up again this quarter. But the largest hit is that with natural gas and purchased electricity. We went up almost 30% 1Q to 2Q and 2Q to 3Q it's another like 26% higher. And then you throw in the labor, we have some contractual wage increases that are – that come through this quarter in the mills and the box plants. And then you look at supplies and materials and operating items and so forth, the suppliers we get those from they had the same issues that we're dealing with around their costs and their labor and whatnot. So, that gets priced into what we buy from them. So it becomes a rather large number that offsets that positive that we see between the price tailwind and the volume that Tom spoke to.

George Staphos: Understood. And on just pricing execution, what went better?

Bob Mundy: Yes, I think, everything across the board went very well into price execution and continues to be so. I would add in addition, when it comes to volume, when you go through a price increase, I mean, you have to be prepared to perhaps lose some volume as a result of raising prices or improving your mix or whatever the case might be, which, as we've said in the past, we've always been prepared to do, and we'll continue to be prepared to do. George, you also asked about end markets and I'll give you just a little color on where we see some of those end markets. And simply put e-commerce is still going up, not at the growth rate it was, but it's still growing. Food and beverage has held its own and has been very steady. The biggest decline has come in the durables area, which you would have expected if volumes jumped let's say 15% to 30% over the last couple of years in some of these durable markets all of those customers expected their volumes to go back down to 2019 levels and to moderate. So that's no big surprise to us. But certainly an end market that is not going to retain all of the gains and the rate going forward. But it's one of the smaller segments for us.

George Staphos: Thank you very much, guys. Good luck in the quarter.

Mark Kowlzan: Thank you. Next question, please.

Operator: Our next question will come from Mike Roxland with Truist. Please go ahead.

Mike Roxland: Thanks very much. Congrats guys on a very good quarter.

Mark Kowlzan: Thanks Mike.

Mike Roxland: Just wanted to follow-up Tom, on the comment you just made in response to George's question in terms of durables and one of the smaller one of the smallest segments for PKG. Is there any way to quantify like what percentage durables represents of PKG’s overall mix?

Tom Hassfurther: Well, we don't really get into that kind of detail, Mike. But just trust me it's one of the smaller segments.

Mike Roxland: Got it. And then just following up on the mix, can you talk about some of the mix improvement that helped drive the beat during the quarter? And Tom you've also mentioned maybe being prepared to walk away from some business. So how much of the mix improvement was PKG being proactive and walking away from business versus customers just being upset with power prices?

Tom Hassfurther: Well, I think we've got an ability because of the setup of our box plants and sheet plants to make sure that we ran the business where it needed to be run. We took advantage of our entire system as opposed to just trying to focus on few plants. And listen, it was very difficult in that high demand curve business that we've been dealing with over the last few years with an incredibly tight labor market to satisfy all of our customers' needs. So, we had to be very focused on making sure that we were doing all the right things and that at the same time we were getting paid appropriately for all those things that we were doing. And so all in all, Mike, I mean, it's a very complex set of logistical challenges, scheduling challenges, et cetera, that we had to implement and the team did an incredibly good job, making sure that we were as efficient as we possibly could, satisfied all the customers’ needs and captured those opportunities that presented themselves.

Mike Roxland: Got it. And just one final question, in the press release, you called out lower fiber and energy costs resulting from efficiency and usage initiatives. Just wondering if you could provide a little bit more color on what those initiatives are and whether they have been fully deployed through the mill and the box plant system, or if there is more runway for you to deploy them to drive costs lower? And I asked this question, realizing that you've really focused on optimizing your box plant system the last few years, following the optimization of your mills. And so I'm just wondering if there is any further runway ahead in your box plants.

Tom Hassfurther: Yes. Mike, this is something we do every day. And again, over the last five years, half a dozen years we've accelerated that process across the box plants, along with the mills. And so it's something that goes on every day, seven days a week, and we'll continue to go on and we will always find opportunities to make improvements with. That's one of the advantages of the organization. We have about 150 engineers and technology specialists that are dedicated to assisting with the mills and the box plants seven days a week. And so that will be an opportunity that continues to go on forever.

Mike Roxland: Got it. Thanks very much and good luck in the quarter.

Tom Hassfurther: All right. Thanks Mike. Next question, please.

Operator: Our next question will come from Mark Wilde with Bank of Montreal. Please go ahead.

Mark Wilde: Thanks. Good morning, Mark.

Mark Kowlzan: Good morning.

Mark Wilde: Mark, could we just start by maybe getting an update on sort of cost and cadence of the GenX and conversion efforts, because you're I think going to be doing some work in the fourth quarter you mentioned, and I think there is more work scheduled for next year. So if you could just help us with how the expenses on that are going to run and then sort of how the capacity at the mill will actually ramp up over time?

Mark Kowlzan: Just to call out the whole project, we were talking approximately $450 million of capital for not just the machine, but all of the associated work at the mill. And we're still on track with that. And I think this year we're probably somewhere in that $160 million type spend, next year we'll wrap that up with about a $100 million of final spend on the spring outage that we've got scheduled or the final phase that will take care of that machine. But we're on track for the original call out of about $450 million of total capital at the mill.

Mark Wilde: And Mark, when that's done, what will the capacity of the mill be? And what's, just in general terms, what will the fiber mix look like between kind of virgin fiber and recycle?

Mark Kowlzan: Well, again, we've talked that machine theoretically would have a capacity of just rounded off 700,000 ton a year type of capability under the optimal grade mix. As far as the fiber mix as we've done with all of our mills, we've built in a lot of flexibility, we're getting ready to start up the new OCC plant this summer. And so that will give us a tremendous opportunity to flex the virgin fiber to the OCC and some DLK. So I don't want to get into the specifics, it will be very similar to what we do at DeRidder and Counce mills as far as being able to move that fiber mix around and take advantage of the marketplace.

Mark Wilde: Okay. And then Tom Hassfurther, I just wanted to talk a little bit about the converting business. I'm just curious from a broad perspective the impact on kind of productivity and cost that you see from kind of new corrugators and new converting equipment going in across the industry very similar to, I think, what you've just done up at Washington, because it seems like just an unprecedented period to me when I look across the industry broadly at the amount of new investment that's going on in converting, I don't know whether you would agree with that statement.

Tom Hassfurther: I would say that it's – I wouldn't call it unprecedented necessarily Mark, I think, it seems like that probably because there are so few suppliers to this industry anymore and the lead times are so far out that you are seeing announcements that are coming about, but if you really take into account, when they are actually going to go into place, you are looking at 18 to 24 months from now.

Mark Wilde: And in terms of like, just when you think about things like the project out in Washington recently, what kind of productivity or cost benefits do you get from kind of these new or bigger corrugators and also the new downstream converting equipment?

Tom Hassfurther: Well, there is no question. I mean, this equipment provides better cost structures and provides more productivity. But again, I think you have to use it based on, and you have to think of it based on what your mix is, the type of customers you're dealing with and what your expectations are to be able to service those customers. So, they are incredibly expensive investments and it's something that, I think, from PCA, I can only speak from PCA standpoint. From PCA's point of view we've consistently reinvested in our box plants and our mills obviously. We've hardly missed a beat in any given year, no matter what's happening in the economy. And I think that's served us very well. But again, our investments are all based on what our customers are telling us they need, and what they want us to do and how they need us to provide the products to them in a timely manner.

Mark Wilde: Yes, okay. And last one, does it lead you to kind of pivot away at all from the use of sheet plants that you've had over time? I mean, I think that you've probably had a higher proportion of specialty sheet plants than the rest of the industry.

Mark Kowlzan: Well, I don't see any – for us, we're not pivoting away from that by any means. In fact, again, we're adjusting to the customer needs even in those facilities so that we can satisfy a complete array of customers’ demands as opposed to just a segment of their demands. So, it's still a very critical piece to how we go-to-market.

Mark Wilde: Okay.

Mark Kowlzan: Mark thinking about the investments we've made in these sheet plants we've not only increased their productivity, but their efficiencies and their capability in terms of what Tom was talking about to satisfy whatever the customer needs and do it in a very efficient, effective fashion.

Mark Wilde: Okay. Very good. Thanks a lot, guys. I'll turn it over.

Mark Kowlzan: Thank you. Next question, please.

Operator: Our next question will come from Mark Weintraub with Seaport Research Partners. Please go ahead.

Mark Weintraub: Thank you. First, trying to understand the increase in sequential cost, et cetera, third quarter versus second quarter, would that be similar in magnitude to what your expectations, similar in magnitude to what you experienced first quarter to second quarter? Is there any slowing you are seeing or any specificity there you could provide?

Bob Mundy: Yes. Yes, Mark, this is Bob. It's extremely similar to what we saw first quarter to second quarter. But actually on the energy side is where it's significantly higher, because like I said, cost went up in the first to second about almost 30% and now there is another 26 plus percent on top of that. So, that's probably the main difference from a cost perspective, but freight and so on and so forth are very similar. So you are not too far off.

Mark Weintraub: And historic because if I look back last 10 years, I think, all about one year you were up third quarter versus second quarter, obviously you typically don't have this experience of as big, an increase in cost second to third quarter. Are you and would you typically be getting some seasonal tailwinds, which you are sort of not factoring in this time around?

Bob Mundy: Well, one thing that's different is and that Tom mentioned it's on the volume side, because I think, typically if you go back that many years since you referred to, you wouldn't see volume flat to down a little bit. So that's a big difference 2Q to 3Q versus what we've done historically, I would say that stands out and the inflation of course, that you mentioned.

Mark Weintraub: Okay. That makes sense. All right, thanks very much.

Mark Kowlzan: Okay. Next question, please.

Operator: Our next question will come from Adam Josephson with KeyBanc Capital Markets. Please go ahead.

Adam Josephson: Mark, Bob, Tom, good morning. Thanks always.

Mark Kowlzan: Good morning.

Adam Josephson: Good morning, Mark. Tom would you mind just walking me through, so on the last call, I think, you said your bookings in April up about 3.5, for the quarter your shipments were about flat. Can you just help me with your shipment trends or your booking trends, however, whatever you want to talk about? How they trended throughout the quarter and then into July? And then I think, George asked about July and you mentioned that, I think, billings are down couple percent, but that bookings are starting to turn up. So can you just help us understand the distinction between all these terms that you are throwing out to measure demand?

Tom Hassfurther: Sure. Sure Adam, no problem. In April I believe I told you on the call that we were up about 3.5% at the time, and we ended up just shy of that at 3.2% in April. As you went through the quarter, we started to see that decline and we started to hear from those customers, as I mentioned earlier, that they were in a pretty severe inventory situation and they needed to work off some of that inventory. So, we've been seeing that and have been experiencing that over the last 90 days or so. And I think it looks as if maybe perhaps we're coming to the end of that. It's almost in timing and in concert with what some of the customers had to say. However, as you can probably well imagine are we in a recession, are we not in a recession, all these other things that are being talked about from an economic point of view, it leads us to take a fairly conservative approach to forecasting at this point in time. And in addition, we just, we came out of a price increase during that period of time as well. And we were implementing that price increase. And in some cases, as I mentioned earlier, you've got to be prepared to put some business on the line to do so. So, the price is obviously a bigger lever for us and that was an important part of our strategy to go execute. So, that's the best I can tell you is to the forecast going forward and where we are and where we've come through.

Adam Josephson: No, I appreciate that. And just to clarify the July, so if billings are down 2% month-to-date, can you help clarify that bookings comment that you made that more recently they have started to go up, just help us understand the distinction between the two and why they might seemingly be moving in different directions in July?

Bob Mundy: Well, I think, billings are from what happened already, bookings are looking out a few weeks to even a month in some cases. And so, you start to determine what's the correlation there. And I'm talking about on a volume point of view not on a – obviously not revenue point of view.

Adam Josephson: Right.

Bob Mundy: So, that's the big difference is I'm just looking at what happened already to date from the billings point of view. Yet from a booking standpoint, I can see a trend that's looking out another two and four weeks and that's getting better than the trend we saw in the billing.

Adam Josephson: Right. And so, based on that, I think, you said in response to one of George’s other question that for the quarter, you are thinking flattish to down a bit year-on-year in terms of shipments, is that right?

Bob Mundy: Right, correct.

Adam Josephson: Got it. Okay. And also, Tom, just on the inflation, you mentioned freight, I think, having gone up for eight consecutive quarters and all other manner of costs have been highly inflationary for the last two years, for reasons we're all well aware of, if in fact we do go into a recession, what is your view as to what will happen to that inflation? How embedded do you think certain aspects of that inflation are versus energy and other costs that may be less so?

Tom Hassfurther: Well, I think, a lot of that inflation is embedded and I will tell you why, because we took this big jump in volume and the economy took a big jump over these last few years, unexpected, especially in our business. And I don't see us going down to 2019 levels or even 2020 levels anytime soon. I think we'll maintain a lot of that. And given what we've had and what we're dealing with right now, especially like you take labor shortages, as an example, labor shortages are impacting us. They are impacting the freight business, they are impacting every business. And I don't see that subsiding anytime soon, either. So, I think a lot of those – I think a lot of those costs are embedded now. Energy on the other hand, and some of these others, they can change on a dime, given demand and things like that. But some of these other things certainly in the box business are quite embedded.

Adam Josephson: I appreciate that. And Tom or Bob, just 3Q to 4Q, just to make sure we're on the same page as you, can you help me with historically cost are up sequentially 3Q to 4Q as weather gets cold, or et cetera, use more energy, et cetera. And then you have the Jackson project going on. Is there anything we should keep in mind in terms of how much higher one could reasonably expect cost to be 3Q to 4Q seasonally or otherwise related to the Jackson project?

Bob Mundy: Well, yes, certainly for the Jackson project that you'll see a lot of that is in the – that scheduled outage sequential movement, Adam that goes, I think I said $0.44 in the fourth quarter. So that's a lot of where you'll see the Jackson impact. But as far as the other costs, I mean, yes, we don't expect them to be the, move sequentially. Like we were seeing, we expect to see between the second and third and frankly energy actually usually gets a little better because the temperatures are a little bit milder in the fourth quarter versus the hot summer months. So you expect some of your usages and some of your chemicals and energy and some of the wood yields and things like that. It typically gets a little better actually. So we would hope that you don't see near as large a sequential movement in cost going from 3Q to 4Q, but we'll see.

Adam Josephson: Got it. Thanks very much, Bob.

Mark Kowlzan: Thank you. Next question.

Operator: Our next question will come from Phillip Ng with Jefferies. Please go ahead.

Phillip Ng: Hey guys.

Mark Kowlzan: Good morning.

Phillip Ng: I guess, good morning. With the macro backdrop a little less clear at this point, any change in how you're thinking about phasing in Jackson ramp and how much confidence do you have those tons being sold out effectively when it comes online next year?

Mark Kowlzan: Again, I think it's important that we get this, this phase in the fall done because it's not just a matter of incremental tons, but it's significant cost reduction opportunity. And so along with next the sec – the final phase that will occur next year, that's another step in not only the productivity on the machine, but another big piece of the cost improvement that comes out of the mill. So it's imperative that we get these projects done and then going through the future as we always do, we will run to demand and we'll optimize our system.

Phillip Ng: Okay. And appreciating once it's fully ramped up from a cost profile, it's much enhanced, but remind us how that all plays out just because you're taking the mill down or it's probably not operating as ideally throughout next year. But from an EBITDA contribution, should we expect it to be up year-over-year? Flat down, just want to make sure what direction we're thinking about at least the right way?

Mark Kowlzan: 2023 over 2022?

Phillip Ng: Yes.

Mark Kowlzan: You'd expect it to be up.

Phillip Ng: Okay. All right. That's what I thought I just wanted.

Mark Kowlzan: Just for the very reason I said that not only the productivity incremental tons, but the significant cost reduction.

Phillip Ng: Okay, super. And if I may, energy standpoint, appreciating gas prices are really kind of perked up and that's hard to predict. Can you remind us how much gas – nat gas and electricity you consume from a cost standpoint, any hedges that you have in place?

Mark Kowlzan: Yes. We do hedge. We don't hedge all of our volume. We – it's a certain percentage of our volume and we constantly are monitoring that. Sometimes we're on the right side of that and sometimes you're not, and, but we've always done that and we'll continue to do that going forward. But we supply about 70 plus percent of our internal needs for energy. When the balance of that that other 30%, I'd say 80% 85% of that is tied to gas; so that's the – that's how it works.

Phillip Ng: Got it. And just one last quick one for me perhaps question for Tom. Appreciating that getting that mix gains in 2Q was very complicated, a lot of moving pieces. Should we expect those gains to be pretty sticky throughout the rest of the year?

Tom Hassfurther: Give me the second half of that. I didn't quite hear you, Phillip.

Phillip Ng: Should we expect the mix gains that you saw in 2Q to be pretty sticky in the back half this year?

Tom Hassfurther: Yes. I think the mix change will be. I mean, our mix always changes a little bit in the third and fourth quarter, again. And I think you'll see some of that – some of the same issues, as I said going into the third quarter especially around inventory that's what's – that's what's creating some of – some of our issues at the moment, but I think that'll smooth out. So I think that'll be – that'll be a plus force in the third and fourth quarters.

Phillip Ng: Okay. Thank you.

Mark Kowlzan: Okay, next question, please.

Operator: Our next question will come from Gabe Hajde with Wells Fargo. Please go ahead.

Gabe Hajde: Mark, Tom, Bob good morning.

Mark Kowlzan: Good morning.

Bob Mundy: Good morning.

Gabe Hajde: I had a question about kind of tightness in the freight markets. I guess both trucking and rail that that you guys have referenced. So are you still inclined kind of to carry more inventory or safety stock to maintain acceptable customer service levels? And are you running behind this level or what you've historically have considered kind of comfortable safety stock, if you will? And then maybe, I don't know, I came up with you guys kind of process call it 14,000 tons per day across your whole system, kind of quantify the inventory levels that you would expect to build in the third quarter going into this, this big out outage at Jackson?

Mark Kowlzan: Let me answer it this way, if you think about the last two years, we've been struggling to achieve an adequate level of containable inventory through the system. We hope to get through this third quarter and actually pre-build some inventory to get ready for this big outage at Jackson in the fourth quarter. But again for the last two years it's been a struggle. Now that being said even though there is some incremental improvement in truck and driver availability, the rail side of the equation it remains very inefficient. And so it behooves us to try to build more inventory. We don't have the luxury of the short transportation times that we saw prior to 2020 and so you have to think that in terms of a lead time of getting a ton of container board from a mill to a box plant remains a challenge. And so essentially that has not improved significantly from where we were. And so we continue to be very mindful of what we do with our inventories and making sure that we have adequate container board stock to satisfy what the box plants need to take care of their customers. Tom, Bob, you want to add anything?

Tom Hassfurther: Well, I would just add Mark that that's – that those are the efficiency. Those are part of the efficiencies that you alluded to when you talked about the Jackson conversion. In addition to the Jackson mill operating, it also creates opportunities for us to be more cost efficient in terms of the way we're operating from a transportation point of view, and also making sure that we have the correct stock in each of our facilities to service our customers.

Gabe Hajde: Okay. And I'll try to take a stab one more time, not interested in quantifying the level of inventory you're trying to build.

Mark Kowlzan: As far as inventory level, we don't generally talk about absolute numbers but if you think about the outage in November it's approximately a 30-day outage that's probably 35,000 or 40,000 tons of impact that we'll – that we'll have to deal with. So it would behoove us to try to accomplish a significant build this quarter to get through the fourth quarter. So if you think about where we've been and again not achieving the adequate levels, I think if you think about 30,000, 40,000 tons of incremental containable inventory, 3Q going into 4Q would be a desired goal. Bob, you want to add anything?

Bob Mundy: No.

Gabe Hajde: Okay. Thanks for that Mark. And then my second question and I suspect you'll probably defer, but when I look across your converting system, you do have a pretty good representation in the Northeast. But your mill system is kind of Southeast and obviously Michigan, Tennessee, et cetera. Any thought process or I don't want to say guidance, but view for potentially having a mill in the Northeast in the three to five-year planning horizon?

Mark Kowlzan: No comment.

Tom Hassfurther: Thanks. Have a good one.

Gabe Hajde: Thank you.

Mark Kowlzan: Take care. Next question, please.

Operator: Our next question will come from John Tumazos from John Tumazos Very Independent Research. Please give ahead.

John Tumazos: Thank you. There's a lot of literature about the consumer backing out of big brands because they're strapped and buying generic brands. Does it matter to PKG which brands the consumer buys because you sell the containerboard anyway?

Mark Kowlzan: Generally speaking it doesn't matter. Certainly to some individual customers, it might matter but as far as we're concerned we've got 16,000 plus customers we're dealing with from very large to, to quite small. Somewhere along the way those – that customer base is supplying those brands you mentioned. So for us and the broad base of customers we have it doesn't – it doesn't really impact us that much.

John Tumazos: Thank you for the good results.

Mark Kowlzan: You're welcome.

Tom Hassfurther: You're welcome.

Mark Kowlzan: Next question please.

Operator: Our next question will come from Cleve Rueckert with UBS. Please go ahead.

Cleve Rueckert: Great, good morning. Thanks for taking my question, everybody, and nice job in the quarter.

Mark Kowlzan: Good morning.

Cleve Rueckert: Very strong performance, it's impressive. I just wanted to dig in a little bit on the comments about maybe being willing to give up some business while you're trying to push a price hike through. I'm just curious if you're seeing competition increasing in the domestic U.S. market for your containerboard products?

Mark Kowlzan: We generally don't. We generally don't talk much about competition or some of the things that are going on in the market. Let's just put it this way that the market, as you can tell the volume and the market place in total remains very strong. In spite of the fact that I mentioned a little bit of pullback, because if you look at the gains we had over the last few years that put tremendous strains on the entire industry. So the entire industry is remains in my opinion very healthy and that's pretty much all I'm going to comment on.

Cleve Rueckert: Okay. Yes, that's fair enough. I just wanted to follow-up. And then we were talking about sort of the order book and bookings and Adam, asked several questions about it. I'm just curious about what the lead time is on your order book and those bookings? Not necessarily for containerboard to box plants, but for use of inbox customers. How much visibility do you have there and maybe how is that different versus what you saw in Q1 and in Q2?

Mark Kowlzan: Well, our lead times have come down, which is actually good because they got – they got way too far out as a result of the demand that – that we suddenly incurred along with the labor shortages we had the freight issues, other supply chain issues, as you can well imagine. So lead times – lead times had gotten out there quite a ways. We typically – we typically operate on very short lead times based on whatever our customer's needs and we're not – we're not back to that yet. We're working to get back there, but again we are still dealing with a lot of those same issues labor related, freight related, whatever it might happen to be we're still dealing with a lot of those issues and those are still impacting those lead times, but they have come down.

Cleve Rueckert: Yes. Yes. Okay. All right. That makes sense. And maybe, finally, sorry if I missed it earlier, but could you just – could you tell us again what the incremental capacity that you expect to get out of Jackson is, and when that comes on. Is that going to be sort of in the middle of next year after the spring outage? I'm just wondering what the ramp-up schedule is there?

Mark Kowlzan: Well, if you think about the production currently on the machine, the work that's being done in November will provide an opportunity, but it's probably about 125,000 tons of a year of extra opportunity on a machine from its current situation.

Cleve Rueckert: That's total once you're finished, its 125...

Mark Kowlzan: No. No, that's, that's this November's project. Again, so from where we are today and going through the project in November, we'd get about 125,000 tons of annualized opportunity on the machine. And then the final project next year you get about 140,000 tons more of productivity opportunity on the final phase, because you're talking about dryer – additional dryer cans and drying capacity in particular.

Cleve Rueckert: Got it. Got it. And you get...

Mark Kowlzan: But keep in mind again that's significant cost reduction that goes along with that.

Cleve Rueckert: Right, right.

Mark Kowlzan: Which falls right to the bottom line.

Cleve Rueckert: Exactly. Okay. That does it for me. Thank you very much. I appreciate it.

Mark Kowlzan: Okay. You're welcome. Next question, please.

Operator: Our next question will come from Kyle White with Deutsche Bank. Please go ahead.

Kyle White: Hey, good morning.

Mark Kowlzan: Good morning.

Kyle White: Thanks for taking the questions. Yes, good morning. I want to go back to Phil's question on energy. Just curious, has the dynamics in the energy markets this year caused you to make any changes to your energy policy and how you manage this cost. I recognize you're not as exposed to nat gas, some other producers, but curious what levers you have to manage this risk?

Mark Kowlzan: No. Again we've the box plants essentially use natural gas across the board. The mills have the advantage of burning black liquor wood waste, and minimal amount of natural gas. It would be primarily used in a lime kiln as an example. But we don't have a lot of flexibility in that regard. You're tied to natural gas in the box plants and then a certain minimal amount in the mill. So it is what it is. So you have to buy that whether you hedge a portion or all or how you manage that. But no, the balance hasn't changed and again how we manage it quite frankly is the same today as we've looked at it probably over the last 10 years.

Kyle White: Got it. And then, and I think I missed this in the prepared remarks, but did you repurchase any shares during the quarter? And just think – how are you thinking about buybacks with the recent authorization you announced at the beginning of this year, and then also given the full back and equity value since the end of last quarter?

Mark Kowlzan: Yes. No, we didn't – did not buy back any shares this recent quarter. And as far as how we look at it, the keyword is opportunistic and so amongst ourselves, we know where we would be choosing to buy at any given time and we'll just leave it at that.

Kyle White: All right. It sounds good. I'll hand it over.

Mark Kowlzan: Okay. Next question, please.

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

Mark Kowlzan: Yes. I'd like to thank everybody for joining us today on the call and I look forward to speaking with you in the latter part of October with the third quarter results. Have a nice day.

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