Q4 2024 Earnings Call Transcript

Good morning, everyone. Thank you for joining Packaging Corporation of America's Fourth Quarter and Full Year 2024 Earnings Results Conference Call. Your host for today will be Mark Kowlzan, Chairman and Chief Executive Officer of PCA. Upon conclusion of his narrative, there will be a question-and-answer session.

Please also note today's event is being recorded. And at this time, I'd like to turn the conference call over to Mr. Colson. Please proceed when you are ready.

Thanks for the introduction, Jamie, and good morning, everyone, and thank you for participating in Packaging Corporation of America's Fourth Quarter and full year 2024 earnings release conference call. Again, I'm Mark 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 the fourth quarter and the full year results, and then I'll be turning the call over to Tom and Bob, who'll provide further details.

And then I'll wrap things up, and we'd be glad to take questions. Yesterday, we reported fourth quarter 2024 net income of $221 million or $2.45 per share. Excluding special items, fourth quarter 2024 net income was $222 million or $2.47 per share compared to the fourth quarter of 2023 net income of $192 million or $2.13 per share. Net sales were a fourth quarter record $1 billion in 2024 and $1.9 billion in 2023. Total company EBITDA for the fourth quarter excluding special items, was $439 million in 2024 and $394 million in 2023. Excluding special items, we also reported full year 2024 earnings of $814 million or $9.04 per share compared to 2023's earnings of $784 million or $8.70 per share.

Net sales were $8.4 billion in 2024 and $7.8 billion in 2023. Excluding special items, total company EBITDA in 2024 were $1.6 billion in both 2024 and 2023. Details of all special items for the year 2024 and 2023 were included in the schedules that accompanied the earnings press release. Excluding special items, the $0.34 per share increase in fourth quarter earnings for 2024 compared to the fourth quarter of 2023 driven by higher prices and mix $0.52 and volume $0.40 in the Packaging segment, higher prices and mix, $0.02 and volumes, $0.02 in the paper segment. Lower freight and logistics expenses benefited us $0.06. These items were partially offset by higher operating costs of $0.48 as inflation remains a significant issue across most of our cost structure.

In addition, scheduled maintenance outage expenses were higher by $0.08, depreciation expense was also up $0.06 and other expenses were higher by $0.06. Results for the quarter were equal to our fourth quarter guidance. Looking at our Packaging business. EBITDA, excluding special items in the fourth quarter of 2024 of $426 million, with fourth quarter record sales of almost $2 billion resulted in a margin of 22% versus last year's EBITDA of $385 million and sales of $1.8 billion and also a 22% margin. For the full year 2024 Packaging segment EBITDA, excluding special items was $6 billion with sales of $7.7 billion or a 21% margin compared to the full year 2023 EBITDA of $1.2 billion with sales of $7.1 billion or a 22% margin.

The operational benefits of our capital spending program and the continued great focus and execution by our sales, customer service, mill and corrugated products plant employees continues to deliver impressive results while helping to minimize the inflationary impact across most of our cost structure. As we've seen throughout the year, demand in our Packaging segment remained very strong during the quarter. Our corrugated products plants delivered record fourth quarter total shipments and an all-time record shipments per day. The plants also set new annual records for total shipments and shipments per day.

Excellent operations throughout our mill containerboard systems set new quarterly and annual production records as well. This allowed us to meet our customer service and quality demand needs in a timely manner as well as build some very much needed inventory ahead of this year's annual mill outage schedule that will take place in the first half of 2025. I'll now turn it over to Tom, who will provide further details on the containerboard sales and corrugated business.

Thank you, Mark. As Mark mentioned, continuing strong demand during the fourth quarter resulted in record-breaking performance for our plants and mills. Total shipments and shipments per day were up 9.1% over last year's fourth quarter. versus the previous record-breaking third quarter of 2024, shipments per day were up 3.2%. Outside sales volume of containerboard was 9,000 tons above last year's fourth quarter and down 18,000 tons versus the third quarter of 2024 as we emphasized hitting our year-end inventory targets.

For the full year, annual corrugated shipment records were set as well, both in total and per day, up 10.5% and 10.1%, respectively, with one more shipping day compared to 2023. Domestic containerboard and corrugated products prices and mix together were up $0.46 per share versus the fourth quarter of 2023. Fourth quarter prices and mix, which were impacted by a less rich customer and product mix compared to the third quarter were up $0.05 per share versus the previous quarter. Export containerboard prices were up $0.06 per share compared to the fourth quarter of 2023 and flat versus the third quarter of 2024. As we've indicated, we have continued to see very strong demand and are continuing to experience inflation across most of our cost base.

Beginning January 1, 2025, we began invoicing a $70 per ton increase for linerboard and a $90 per ton increase for medium according to our recent price announcement. These prices have been accepted by our customers and for our market containerboard purchases, we are paying higher prices to containerboard suppliers that began invoicing us according to their recent announcement. We were very surprised when, as you are probably aware, a couple of weeks ago, the RISI Pulp and Paper Week publication did not recognize any increase in the industry's benchmark prices for either linerboard or medium. Industry sources and the Pulp and Paper Week publication itself have previously reported that at least 12 or around 90% of the top containerboard producers have issued January price increase announcements.

The publication even noted that certain box makers have postponed purchases of linerboard this month to avoid the price increase. Yet the publication left the reported prices unchanged. As the industry's open market has shrunk over the years, we believe that the risky publication is gathering information from a very small sample of the containerboard market and using that to opine on market conditions for the entire industry. Additionally, the publication often references comments regarding box prices when the relevant product is containerboard.

As you know, boxes are highly customized to customer needs and have different pricing attributes. This continues to be a source of frustration, not only for us but for our customers who want predictability in their prices. As mentioned previously, we have been moving off of indexing our prices to the RISI publication as quickly as contracts allow. However, this will take some time to complete.

I'm sure you will have some questions for us on this topic, and we'll be happy to discuss them with you shortly. I'll turn it back to Mark.

Thanks, Tom. Looking at the Paper segment, EBITDA excluding special items in the fourth quarter was $39 million with sales of $152 million or a 26% margin compared to the fourth quarter of 2023's EBITDA of $35 million and sales of $144 million or a 24% margin. For the full year 2024, paper segment EBITDA, excluding special items, was $154 million with sales of $625 million or a 25% margin compared to the full year 2023 EBITDA of $151 million with sales of $595 million or a 25% margin. Prices and mix were up 2% from last year's fourth quarter and up 1% from the third quarter of 2024, while volume was 5% above last year and down 5% versus the seasonally stronger third quarter of 2024. Additionally, during the quarter, we notified customers of a $60 per ton price increase effective with shipments beginning January 13 for all office papers, printing papers and converting papers.

The management team and all employees of the paper business have done tremendous job optimizing our inventory and product mix and remain highly focused on efficient and cost-effective operations in order to deliver outstanding results throughout the year last year. I'll now turn it over to Bob.

Thanks, Mark. Cash provided by operations during the quarter totaled $325 million and free cash flow was $124 million. The primary payments of cash during the quarter included capital expenditures of $201 million, dividend payments of $112 million, cash tax payment $50 million and net interest payments of $37 million. For the full year 2024, cash from operations was $1.2 billion with capital spending of $670 million and free cash flow of $521 million.

Our year-end cash balance, including marketable securities, was $852 million with liquidity of $1.2 billion. Our final recurring effective tax rate for 2024 was 24.4%. Regarding full year estimates of certain key items for the upcoming year, we estimate dividend payments of $450 million, total capital expenditures to be in the range of $840 million to $870 million and DD&A is expected to be approximately $565 million. Our full year interest expense in 2025 is expected to be around $56 million and net cash interest payments should be around $65 million.

The estimate for our 2025 book effective tax rate is 25%. Compared to 2024, the planned annual outages in 2025 include all of our larger mills with a higher number of outage days, including lost volume, direct costs and amortized repair costs, we currently expect the outages to total $1.18. The current estimated impact by quarter in 2025 is $0.23 per share in the first quarter, $0.32 in the second, $0.18 in the third quarter and $0.45 per share in the fourth quarter. I'll now turn it back over to Mark.

Thanks, Bob. The hard work of our employees, along with strong relationships between us and our customers and suppliers delivered outstanding results for PCA for 2024. In our Packaging segment, new annual company records for shipment and production were achieved in our corrugated products plants and mills. We successfully completed the number three machine conversion to containerboard at the Jackson mill and many other key initiatives throughout the system. We also completed numerous high return and deficiency improvement projects in our corrugated products plants that will allow us to better optimize our entire packaging business for the future and deliver profitable growth and mix enhancement opportunities for our customers and shareholders.

And we still have many key strategic capital spending opportunities in progress or ahead of us in 2025. 2024 also saw our paper business matched the record margins from 2023, reflecting the capabilities of our employees to optimize our product mix, inventory, distribution channels and overhead structure, along with running very cost-effective and very efficient manufacturing operations. We ended the year with $1.2 billion of liquidity and a strong balance sheet, which maintains the financial flexibility to react quickly to most situations or opportunities in the future. We remain committed to a balanced approach towards capital allocation in order to profitably grow our company and maximize returns to our shareholders while still adhering to our conservative balance sheet views as we've done in the past.

I'm very proud of our employees, these accomplishments and the very strong partnerships we've built with our customers and suppliers over many years. Looking ahead, as we move from the fourth and into the first quarter in our Packaging segment, although seasonally slower, we expect volume in our corrugated products plants to set new first quarter records for total shipments and shipments per day. containerboard volume will be lower with two operating days and scheduled maintenance outages at the counts Tennessee and Valdosta, Georgia Mills. Domestic prices will be higher with an improved product mix together with our previously announced price increases.

Export prices export prices are assumed to be stable. In our Paper segment, we forecast slightly lower volume with two less mill operating days and prices and mix to be fairly flat. With the exception of recycled fiber prices, we expect price inflation across most of the direct, indirect and fixed operating and converting costs along with a higher cost mix of mill operations. In addition, wood, energy and chemical costs will also increase due to the unusually cold seasonal weather negatively impacting usages and yields for these items.

Labor and benefits costs will be higher due to the timing-related items that occur at the beginning of a new year for annual increases, the result of payroll taxes and share-based compensation expenses. First quarter rail rate increases at three of our mills will impact freight and logistics expenses, and we expect higher depreciation expense. Lastly, scheduled outage expenses should be slightly lower and we assume a low corporate tax rate. Considering these items, we expect the first quarter earnings for $2.21. With that, we'd be happy to entertain any questions, but I must remind you that statement not constituted forward-looking statements.

The statements were based on current estimates, expectations and projections of the company and involve inherent risks and uncertainties and direction of the economy and those identified as risk factors in the annual report on Form 10-K and subsequent quarterly reports on Form 10-Q filed with the SEC. Actual results could differ materially from those expressed in the forward-looking statements. And with that, Jamie, I'd like to go ahead and open up the call for questions, please.

And ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] Our first question today comes from George Staphos from Bank of America Securities. Please go ahead with your question.

Hi. Thanks very much. Good morning, everybody. Thanks for the details.

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

Hey, George, this is Tom. Bookings and billings are up 8% so far in January. So we're off to a very good start, and we indicated that in our opening statements as well. So that's very good.

The volume increase, I think if you take it, coupled with the capital initiatives that we have, yes, that has caused some cost inefficiencies quite frankly, because we've got a lot of those projects going on a lot of plants and you're shifting a lot of business around. But again, our people have done a tremendous job handling that and taking care of our customers.

George, interesting -- George, for last year for 2024, we on the converting side, we accomplished 12 major new equipment installations on the converting side. These are major reconfigurations of converting lines. And then within corrugators, we either had major rebuilds or new corrugator installations at 12 locations. And we finished building up the new Salt Lake City plant and then got ready to build up the new Glendale operation.

But we continue at this pace. I mean, prior year. And then last year, we're on that pace of around 60 major projects within the corrugated business, and we'll continue that this year. So along with all the benefit, there is some short-term disruption that occurs, but the capability that it gives us is just incredible.

We would not be doing what we're doing today if we hadn't been keeping up this pace of spending over the last half dozen years. So it's the gift that keeps on giving.

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

Exactly, yes. It's truly the growth engine, yes.

Now can you help us a little bit in terms of the sequential move from 4Q to 1Q in terms of some of the cost factors. And in particular, I'm thinking about whether usage input costs, what that might be causing you and for that matter, on the incentive comp. And then since you had teed it up on pricing, you're out with your price increases effective in January, others are as well. I know it gets a little bit sensitive because you can't talk about what others may or may not be doing or forward-looking, but how do you square the circle then if you're raising an effective in January?

And the arbiters are saying it hasn't happened yet. Are you giving your customers at all any price protection or time delay between when it's effective when you announce and when you make it effective? So two questions there.

Let's start with Bob.

George, yes, just on some of the cost movements from 4Q to 1Q, if you look at the buckets of what's higher, there's a higher mill -- higher cost of -- relative to the mill mix. There's just -- that's a component. Then there's the weather seasonal items that we typically have, but this is sort of exacerbated by the severe cold that the country went through during the month of January. And then there are those timing items that we typically talk about relative to wage increases and tax fringe benefits so forth.

So if you say that our cost, round numbers, somewhere between $0.50 and $0.60 higher on all operating and converting costs, 65% of those are the items that typically will flip back the other way, not totally, but I would say 70% of that amount is -- will flip back in the second and third quarters. So that's sort of how we bridge the fourth to the first and then what we expect -- how much of that we expect to turn around in subsequent quarters.

Okay. George, this is Tom. Let me see if I can fill you in a little bit on the pricing side. So for starters, let's make the distinction here. we're talking about linerboard and medium.

So we're talking about containerboard, all right? And in the Containerboard segment, we raised the prices we're billing at those prices. Our customers are paying -- they will be paying those invoices at those higher prices, and we will be doing likewise on the outside purchases that we have as well. So some of that is -- comes from overseas because it's a specialty grade that may or may not be made here in the United States or certainly the products that are made here in the United States that we are a net buyer of and we're paying those invoices as we go.

So that is in place, and that is set, all right? The frustration, as I mentioned, in the verbiage that I gave you in the opening statements, is related to discussions around boxes and things like that. Now we've always said our box price increases are between us and our customers. Those aren't publicly announced but we do have some, and it's a relatively sizable amount that are still tied to what happens in RISI and what's reported in RISI.

And as I said, we're moving away from that as fast as we possibly can because I think in a lot of ways, and I've been at this a long time. And if you go back in time, there was a pretty large open market and today, it's a very, very small open market. So I think there's become some confusion in terms of how the reporting goes and what the interpretations are. And so we're finding this -- in this vehicle a little less useful going forward.

And therefore, we're moving away from it as fast as we can. Hopefully, that kind of wraps up your question a little bit.

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

Thanks, George. Next question please.

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

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

Thanks, Mike.

I just wanted to follow up. Can you give us a sense of the operating rate you're currently at? Would it be fair to say you're running full out given the strong demand you have. And if that's the case, can you help us understand the time frame over which you expect to add capacity at Counce and Valdosta.

You mentioned that, I think you teased that in the last earnings call. What do you think those projects will be operational? What incremental capacity do they add?

We've got the opportunity to add capacity as time goes on. As we've always said, we have tremendous flexibility on how we provide containerboard tons into the system. Obviously, we completed the big Jackson reconfiguration. But nevertheless, we also have a lot of opportunity on how we optimize the seven mill system right now.

Regarding what you mentioned between Counce and Valdosta, those projects, if we go forward with those would be the next couple of years timing. And so again, that's something that we haven't decided to execute. We're studying all opportunities as we always do, and we have tremendous flexibility on how we bring new tons into the system when they're needed. And so that's the beauty of where we are.

The high integration and the continuation of our demand growth presents the high opportunity, high return for these projects in our mills as we go forward. So we'll let you know when the decisions get made.

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

Yes. We are running -- I'm not going to say we're running full out, we're just -- we're running hard, which is a good place to be. We run best when the pressure is on. But again, we've got room to optimize the system and the grade mix, and also, as we've always done, we did this back over the years, the ability to buy some open markets within a region where it's -- it makes sense.

So we have those opportunities. So again, the ability to really utilize our capacity right now and whether you call it running full out, we always find ways to squeeze more tons out of the system, and we'll continue doing these projects. These are the high-class opportunities we engage with.

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

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

Thanks very much, Tom. Good luck in 2025.

Thank you.

Thanks, Mike. Next question.

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

Mark, Tom, Bob, good morning.

Good morning, Gabe.

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

And if you're still realizing any price in Q1 2025 from movements that transpired in 2024 on a sequential basis from Q4 to Q1?

Gabe, it's Bob. There is some of that, that does -- some things that just move on an annual basis. So there is some movement relative to that as you said regarding these price increases of 2024. But the other thing you have to look at is, if you sort of do the math and make sure you account for the inventory change and what's export volume and what's domestic volume, I think it's somewhere around the mid $50-something a ton change. And then you have to compare rather than comparing to $80, which were the two increases at the beginning of 2024, you have to remember, there was a $20 per ton drop late in the year in 2023. So you sort of look at it that way, and I say that's a net $60 a ton.

And like I said, I think we're in the mid-50s, something like that, and similar to your math. And then you do have mix changes. You have customer mix, product mix and seasonal mix, things like that, that weigh into it. So we feel good about capturing the price based on those index changes that you referenced.

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

No, there's definitely some open market. As we've always said, those things happens immediately when there's price change, up or down. But there are some things relative on the box side that regarding those price increases from last year that now will take effect in the first quarter. So that's embedded in there too, along with what we feel like we'll realize from this year's January price increases.

Considering the impact of RISI, as Tom was talking earlier, RISI not picking it up in January. So you have to adjust for that a little bit, but there is some of that in our numbers as well.

Understood. Okay. And last one on CapEx. You did signal on the Q3 call that it would be up into 2025, it's probably up a little bit more than what we were modeling.

I don't know how others are thinking about it, but the Glendale, I think box facility, should we sort of pencil in numbers that we see are $240 million to $260 million for a new box plant depending if it's out with a corrugator. But even if I adjust for that, when I look at maintenance I think that was also supposed to be down in 2025 and it's actually up. So Mark, are you telling us there is no incremental capacity on the containerboard side in 2025, no debottlenecking or anything like that in that CapEx number?

No, there certainly is. There's work going on in the mills. Again, there's no one big project. There's just a whole host of small projects that we always do every year to enhance what we have.

One of the challenges that we've laid out to the team over the last year that over the last six or seven years of all these conversions that we've done at a very blistering pace. Now is the time to step back in and really optimize what we have. And so we were doing these conversions and moving on to the next mill at such a pace we've never really taken the time to really drill down and make sure we're getting all the benefits from all the spending that was taking place. So now we've got the technology organization stepping back in and engaging with the mills and making sure that what we are doing is extracting all the value we can.

So that gives us good return. But as far as the capital spending, this year, if you think about the Glendale project down in Arizona. We're finishing out that box plant. And there is some number, the -- 10 years ago, you could build a box plant for $50 million.

And now a big full-line box plant, if you're talking $200-plus million. We've also -- just this week, we broke ground in Newark, Ohio for another big new box plant. That's been in the works for the last few years. We actually bought the land three years ago and so that box plant will be under construction and hopefully have everything ready to run by the end of next year.

We also -- with this 800 -- high $800 million capital call out that we're talking about right now. There's a major rebuild taking place at another plant in the Northeast. It's not a new box plant, but essentially it will be like new and we're done with it inside. And then there's another reconfiguration on the East Coast, that's a major enhancement, major rebuild of that plant.

So there's four big activities going on within the corrugated products side of the business, along with I'll call out right now, and I'm probably right. There's probably another 50 projects going on for the year that will be the smaller projects, the EVOL, the single converting line replacements that will just continue forever. And so that's all baked into that capital call out. But there's a good portion of new business growth in that capital along with optimization and just enhancing the business, not just maintenance.

Maintenance is a small portion of that capital.

And Gabe, relative to your question on the maintenance expense, thinking it was down. If you're recalling something from the last quarter's call, there was a question about what's normal relative to what we had as outages in 2024. But it was not an indication of what our plan was for 2025 regarding outages. And the reality is there's a couple of things. One is we have more larger mills with more days down in this year's plan versus last year, larger mills are more expensive, more days down so on and so forth.

The other thing is in the second half of 2022, all of 2023 and then for the first part of 2024, certainly in the first quarter of 2024, we were still taking -- running to demand. So we had market downtime and the way we sort of bucket our variances if you're in market downtime and you have a maintenance outage you would not include the profit per ton of those in your -- you wouldn't penalize your outage for that because you're in market downtime, you couldn't sell the ton anyway. So those -- the negative impact of that shows up in your volume variances that we talk about whereas this year, we have none of that.

So that profit per ton is in our outage calculations for every ton that's down. That's another reason it's going to be higher relative to 2024, if that -- if you follow me.

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

[indiscernible] Next question.

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

Good morning, Mark.

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

Yes, Mark, this is Tom. What happens is it's a timing issue, especially relative to the contracts that we have left that relate to RISI. So we got to take a relatively conservative approach in the first quarter to what -- to how those contracts would roll through. However, we are implementing right now the noncontractual business, we're going ahead and putting in place.

But again, those amounts and those sorts of things is between us and our customers when it comes to boxes. So we take -- we don't publicly come out and announce some of those things that -- those agreements that we've got with our customers. But I think what you're really referring to is the index and what's left tied to the index. And like I said, that rolls through at a different rate.

And until that index indicates the price is a liner medium going up, it won't trigger some of those contracts.

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

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

Okay. And then can you give us any more color in terms of like the process of moving customers off the indexes and or what type of variables are being put in place? Or is it just like a negotiation each time? Or is it being tied to various costs or things like that?

Just to help us begin to understand as we want to kind of be able to forecast in the future, what might happen to your pricing, et cetera?

Well, it's going to be -- it's probably going to be a little more of a mixed bag. The -- as I mentioned our customers have been very, very frustrated with this process, and so have we. So -- and I think at the end of the day, it's more of a discussion with our customers about what's going to happen going forward with pricing and an agreement that we come to. There's -- we've not found any other indicator out there that we feel comfortable with.

So I think it's going to be -- it's going to take a little time to unwind, but we feel very comfortable in our discussions with our customers about where we're going to end up going forward. And it's going to be a little different per customer, but I think that the discussions have gone very well.

Mark, our customers, they are undergoing the same inflation that we undergo and the same cost pressures. They appreciate what we're talking about every day. They also appreciate and they understand the capital spending that we do, and we expect a return for our capital spending. The capital spending provides incredible benefits for the customers in terms of quality and on-time delivery.

So there's -- that discussion is truly a customer-driven discussion one on one.

Thank you for the color.

Next question please.

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

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

Well, Anthony, this endeavor didn't start five years ago, it started about a year ago. So this is -- as I said, this is going to take some time to unwind those contracts, some of those are long-term contracts. And obviously, we've stated many, many times, I mean, we've dealt with these customers for decades, and we've got long, long-term relationships. So we're very sensitive to those relationships, and we're making sure that we're doing what is in the best interest of ourselves and our customers as we move forward.

So this is going to take a little time to unwind. I'm not going to give you percentages of how this is going to sequentially fall into place here, but it's going to take some time, but we're moving in that direction.

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

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

Got it. Got it. Is the Ohio greenfield the largest roughly or...

Yes.

Okay. Great. That’s very helpful. I’ll turn it over.

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

Got it. Got it. Thank you.

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

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

Understood. Thank you.

Next question.

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

Hi, guys. Exciting times with all these growth projects. Mark, I guess, perhaps help us think through how the contribution kicks in. I know the Phoenix, Arizona box plant at least was scheduled to come on, I think, late 1Q, 2Q.

So that's probably going to be contributing this year, but the other projects you've called out, the reconfiguration in Ohio. Help us size up what that could actually drop to the bottom line? Do we see any of this year? Or is this more of a 2025 event where you could accelerate growth?

Yes, the Arizona project should start up this spring as scheduled. And that new project will take the place of three -- we've been running a business down in the Phoenix for years. But to run that business, we've been operating out of three different locations within the kind of the neighborhood, so to speak. It's not the most effective way to run a business.

And so this new plant will allow us to consolidate all the operations to one state-of-the-art, high-efficiency operation. In terms of unit labor and efficiencies, it will add tremendous efficiencies. Probably triple or quadruple the production capability of the region down there now coming out of this one plant. And again, the quality, cost structure, we'll see immediately this year.

I don't -- I'm not going to attempt to give you a number, but it's -- it will be immediately accretive to the system when we bring the plant on and we exit the old operation. And the employees are moving over from the existing operation right into the new operation.

And then the ramp-up of some of these other projects you've called out, New Jersey, the reconfigurations...

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

But any color on the timing of that ramp, Mark? Is that a 2025...

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

Yes. Philip, I'll add just a couple of things to this. don't forget that any one of these projects, we're building in, as Mark mentioned, a lot of efficiency in these projects, including closures of inefficient box plants and things like that, where we can consolidate some operations into one. But in addition, it gives us a lot more capacity to satisfy those customers that I talked about earlier who want to do business with us want us to supply them, have agreements for us to supply them including different markets that we haven't been in, especially when you consider Phoenix because we had a smaller three building operation that couldn't -- didn't have a lot of reach.

This will give us -- provide us a lot more opportunities. And the one in Ohio is the same, I mean, which -- where we've got a very large footprint and this will be able to consolidate that footprint a little bit in terms of numbers of plants, but also, more importantly, create a lot more efficiency and a lot more reach for us in terms of our customer base.

Super. And then from a demand standpoint, Tom, you guys have box shipments in 2024, and that momentum sounds like it's continued into January so far. Can you just help us think through some of this? I mean some of it is obviously the market is recovering, but clearly outpacing the market, you're taking share, called out some share gains on the brown side of things.

Certainly still a lot of disruption in the marketplace with consolidation in the making. Do you see that as a big driver that's a catalyst in terms of the momentum you've seen thus far this year? Like how should we think about share gain opportunities this year for you guys?

Well, I think, as I mentioned many times, I said we've got our core customer base. If you're -- if you position yourself as the best supplier and the most reliable supplier to that customer base, there it presents many internal opportunities for you to continue to grow your volume. And I think traditionally, a lot of corrugated customers have split their business and done other things because they just couldn't get comfortable with sole suppliership and things like that. But that's changing dramatically over time.

And we're proving in a lot of cases that we're just -- we're a great supplier, incredibly reliable, we got -- we consider the best quality and the best service of anybody in the business. And we're great partners for our customers. And we position our business around those customers and about their game plans. So that's -- I think that gives us a competitive advantage.

And fortunately, we've got the financial flexibility to be able to expand at a rapid rate, to be able to do some things quicker than maybe some others can do it. And I see nothing but solid runway for those opportunities going forward.

Got it. Then, Tom, one quick one. Mix was a modest drag last year on the brown side. Do you anticipate mix be much of a good guy or bad guy when you think about 2025?

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

And then as the year rolls on, we'll see more e-commerce into the fourth quarter, again, I expect.

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

Q – Philip Ng: Okay. Appreciate the color.

Next question please.

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

Yes. Good morning all. Thank you very much for taking my question. Just returning to the capital expenditure. I wondered if you could give us an estimate as to how much you would considered to be a generic maintenance CapEx within the overall budget for this year?

Yes, Charlie, this is Bob. Typically, that's about -- it runs 60%, 65% of our total spend. I think that's probably just a good way to think about it. Year-to-year, it's different, but I'd say that's...

This year, we've got a few bigger discrete projects...

Yes, I think a little less.

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

Yes. Very clear. And on the weather impact that you called out, I recall January 2024, there was some pretty severe cold weather as well. But I'm not sure if it was you, but I think some of the other box makers called that out as an impact in Q1 last year.

But I just wondered, is the weather you're talking about here something that you see as adverse just on a quarter-on-quarter basis or also more challenging incurring more costs than last year?

Yes. Let me comment and then Bob can fill. Obviously, we've just gone through the month of January, we're wrapping up here, but we've had a couple of weeks of severe weather and not just severe normal weather, but we've had more colder snowy weather and the very deep south region. As you all know, last week, along the Gulf Coastal area, Interstate 10 was shut down from Houston all the way over to Florida for a couple of days.

And so that's very disruptive. So it wasn't just the cold weather impacting energy usage and raw material consumption and yield, but it was actually impacting business in general commercial activity. So there will be a volume impact there with the cold weather. But again, we just had -- and generally we had a colder winter right now.

We're running well. Operationally, we're running very well, but it's more expenses to run well under these conditions. And again, last week, in particular, we saw some volume impact from that weather.

Thanks very much.

Next question please.

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

Hi, good morning. I think, Gabe, I think, asked this question, but maybe he asked it in a different way. I was hoping you could clarify it. So if we look at the revenue per produced ton in 2023 versus 2024, it looks like 2024 is down about $50 per ton even while the index is up about $35 a ton creating a margin of about $85. How do you -- how can you help us understand that?

Run that -- say that again, Ryan.

Yes. So revenue -- If we look at revenue compared to the produced tonnage, over -- year-over-year, that number is down about $50 per ton, even while the index has gone up for containerboard.

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

2023 to 2024. So full year 2023 to full year 2024.

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

Okay. I guess just in light of the fact that there were two price increases last year for about $80. And I realized that there was a $20 slide at the end of 2023. But if you look -- just look at the averages for containerboard over those two years, even that's up. So there's about a -- I call it maybe $85 it could be a little bit less than that, but there's the differential where prices are going in the opposite direction of where the index is going. I'm just trying to figure out how do we square that?

Yes. It's -- there's also -- in the way you're looking at that is there's export a good chunk of export volume in that. And during that period, I think export was definitely going down. So that's sort of getting into your math a little bit.

I think if you sort of accommodate for that as well as some inventory change thing and some mixed things I think we're right there where we would expect to be based on how that index moves.

And let me just add another element to this, too, because if -- we don't actually sell tons, we sell MSF. And if the basis weight is working its way down on MSF, that's going to trigger a different situation in tons. And so there's a lot of variables that go into this. And again, that's a whole another subject that we could get into.

But here again, we've got -- we have an industry that is measuring something they don't even sell which is tons. And here, we sell MSF. So when you're factoring everything around a ton, there are a lot of variables that go into that and that have to be taken into consideration.

Yes. Just lastly, Ryan, as you know, the prices started moving down at the end of 2022 throughout a good part of 2023 and all the way into late 2023 and just the way those -- that affects our box -- that's -- you've got to overcome all that. Prices come up $80 since then, but it was down $110 with all those decreases. So it's just the way the timing and the way the things -- when they start to appear, it's sort of impacting what you're doing, which is just taking a high-level revenues by tons.

My other question for you is you've talked a little bit about how your customers are frustrated. Are you referring to box customers or the containerboard customers?

Both.

Both. Interesting. Okay. I guess last question. Help me understand, I mean, in the U.S., the mill operating rates are about 90%. I mean we're going to be on pace to export nearly 5 million tons in 2024. Why would an open market -- somebody who maybe doesn't have a mill, why would they be wanting to pay higher prices for containerboard with such overcapacity.

You'll have to ask them. I can tell you that our customers don't see it the same way you're calling it out. Again, I'm going to refer to something that you're measuring in terms of tons, but we don't sell any tons. We sell MSF.

So there's a large disconnect in my opinion, to what's really going on in the marketplace and what exists out there in terms of numbers. I'll give you another example. There's a relatively large mill that produces -- that is producing everything they can produce and their output is about 50% of what is projected for that particular mill. . So the projections and the realities are very different as well.

And although we can buy some tons in the open market, the type of tons that we need to produce the boxes that our customers require is very limited and we've had long-term relationships to be able to do that. If those relationships did not exist, I would have some difficulty buying the proper tons.

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

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

I say, I mean, it becomes an opportunity. We're making more product with less fiber. And that's part of the capital investment over the last decade is to run these mills on a lighter weight grade mix much more efficiently. And so it hasn't impacted the mill profitability and the mill capability.

Great. Thank you so much.

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

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

Thanks, guys. I'll try to make it painless, Mark. Just to wrap up all the pricing discussion, when we look at fourth quarter last year, fourth quarter this year, prices are up a ton. They're not down.

They're up about $43, recognizing it's tons produced. And what you're saying is when we consider the price drop that entered last year, and the fact you're building back from that and you look at mix, you're pretty much where you expect to be. Is that a fair statement?

Yes, George, with my math, I would say we're closer to $55 a ton, something in the mid $50s rather than $40, but go ahead.

Understood. Okay. And then the other question I had, aside from fiber, where are you seeing the most cost inflation? Because when we look at cost per ton, it's been trending steadily higher over time, despite the fact that you are spending a good amount of capital to become more productive and more efficient.

So looking at your return on capital history over time, you don't spend bad dollars, so you're being coming up more efficient. Where are you seeing the most pressure on your cost and what are you going to do about that on a going-forward basis? What kind of products do you have that will take -- bend the curve back the right way on cost per ton?

For the first quarter, energy is obviously a glaring factor. But don't forget, over time, fiber has become less of a component. You've got all of your labor medical benefits, all of that element. Transportation is another example.

All of your service costs, services in general, all the lease expenses, everything is up dramatically. We called this out on the call earlier. We've got rail increases taking place significant rail increases, again, taking place in this first quarter. And so the fact that we are fortunate in the ability to effectively spend capital, it helps us maintain our position, but it certainly is not able to overcome all of your inflation.

And so that's why you have to have price along with a very, very effective capital spending program to stay ahead of the curve here. But energy right now is probably the big.

Yes. In energy, as far as your direct items, George, I mean, even chemicals, but chemicals are going to be up. And you look at just pretty much across the board, for the types of chemicals we use. We're seeing price increases in the first quarter, and those will stay with us throughout the year.

But as Mark alluded to 65 -- the majority of the inflation we're seeing is in those items below all your direct costs, the things that Mark was referring to. That's where the biggest hit will be.

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

And that's -- and George, that's what we've been doing. I mean think about the rate of spending over the last seven or eight years now, especially the last six years, the benefits that we've gained from this activity are immense. It's allowed us to do what we do and be where we are. Now good news is we're going to continue at this pace, and we'll continue to take advantage of this.

But nevertheless, with this comprehensive inflation across the board. It doesn't matter how much capital you spend. You will never -- unless you see appropriate pricing, you can't keep up with all of the inflation.

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

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

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

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

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