Thank you for joining Packaging Corporation of America’s Fourth Quarter and Full Year 2020 Earnings Results Conference Call. Your host today will be Mark Kowlzan, Chairman and Chief Executive Officer of PCA. Upon conclusion of his narrative, there will be a question-and-answer session. I will now turn the conference over to Mr.

Kowlzan, and please proceed when you are ready..

Thank you, Holly and good morning, everyone and thank you for joining us today. I’m Mark Kowlzan, Chairman and CEO of Packaging Corporation of America and with me on the call today is Tom Hassfurther, Executive Vice President, who runs the Packaging business; and Bob Mundy, our Chief Financial Officer.

I’ll begin the call with an overview of our fourth quarter and full year results. And then turn the call over to Tom and Bob who’ll provide more details. I’ll then wrap things up and we’d be glad to take questions..

Thanks Mark. As Mark mentioned, our corrugated products plants established new all time quarterly records for total box shipments up 9.9% compared to last year’s fourth quarter, as well as shipments per day up 11.7% compared to last year.

Set another way, although there were three less shipping days this quarter compared to the third quarter, our total fourth quarter shipments exceeded the third quarter by 2.2%. For the full year annual corrugated shipment records were set as well, both in total and per day up 5.8% and 5.4% respectively, with one more shipping day compared to 2019.

Outside sales volume of containerboard was 16,000 tons below last year’s fourth quarter, as we ran our containerboard system to supply the record needs of our box plants.

Domestic containerboard and corrugated products prices and mix together were $0.31 per share lower than the fourth quarter of 2019 and down $0.11 per share versus the third quarter of 2020, primarily due to a less rich mix as the graphics and point of purchase display business, as well as the produce business in the Pacific Northwest tails off during this period.

Export containerboard prices were a $0.01 per share above both the fourth quarter of 2019, as well as the third quarter of 2020.

As expected late in the quarter, we began to see the initial benefit of our recently announced Packaging segment price increases, while we don’t comment on forward pricing specifics; we would expect to realize the vast majority of the increases during the first quarter of 2021..

Thanks, Tom. Looking at the Paper segment, EBITDA excluding special items in the fourth quarter was $10 million with sales of $156 million or 6% margin compared to fourth quarter 2019 EBITDA of $53 million in sales of $244 million or a 22% margin.

For the full year 2020, Paper segment EBITDA excluding special items was $73 million with sales of $675 million or an 11% margin compared to the full year 2019 EBITDA of $213 million with sales of $964 million or a 22% margin.

Market conditions in the Paper segment continued to be challenged due to the nationwide responses to help control the spread of the pandemic, as expected sales volume was below seasonally stronger third quarter levels, and over 30% below the fourth quarter of 2019.

As mentioned previously, with the scheduled outage at our International Falls mill, the Jackson mill was restarted on white paper in October and produced both paper and containerboard during the fourth quarter. We’ll continue to assess our outlook for paper demand in optimal inventory levels, and we’ll run our paper system accordingly.

Average paper prices and mix were 1% below the third quarter of 2020, and approximately 3% below the fourth quarter of 2019. I’ll now turn it over to Bob..

Thanks, Mark. For the fourth quarter, we generated cash from operations of $271 million and free cash flow of $103 million.

The primary uses of cash during the quarter included capital expenditures of $168 million; common stock dividends totaled $75 million, $51 million for federal and state income tax payments, and net interest payments of $40 million. We ended the year with $975 million of cash on hand, or just over $1.1 billion including marketable securities.

Our liquidity at December 31 was just under $1.5 billion. For the full year 2020, cash from operations was $1.03 billion. We had capital spending of $421 million. Free cash flow was $612 million. Our final recurring effective tax rate for 2020 was 25%. And our final report at cash tax rate was 18%.

Regarding full year estimates of certain key items for the upcoming year, we expect total capital expenditures to be between $500 million to $525 million, which excludes any potential capital spending related to the Jackson conversion, since that is still being evaluated, as Mark indicated earlier. DD&A is expected to be approximately $407 million.

Pension and post-retirement benefit expense of approximately $2 million, which is net of a non-operating pension benefit of almost $20 million primarily due to our pension asset performance in 2020. We also expect to make cash pension and post-retirement benefit plan contributions of $52 million.

Based on the recent 27% increase to our dividend, we expect dividend payments for the year of $380 million. Our full year interest expense in 2021 is expected to be approximately $95 million and net cash interest payments should be about $93 million..

Thank you, Bob. As they have done throughout this pandemic, our employees demonstrated tremendous resiliency to overcome adversity, in both their personal and work lives, to deliver significant accomplishments throughout the company.

Not the least of which was running our manufacturing and office locations safely during these times of constant change and distraction. Without question we experienced difficulties and unique challenges during the year; however, our employees never lost their resolve to succeed.

Our manufacturing and sales organizations continue to successfully adapt to the needs of our customers during this period of unprecedented demand in our packaging business and also effectively manage the market challenges in our paper business brought on by the pandemic, as well as working through the impact of multiple hurricanes.

Our engineering and technology organization has stayed on track with the key capital projects and process improvements for our box plants and mills.

And our corporate staff groups found innovative solutions for remote working conditions to ensure we continue to manage the company effectively, as well as perform all of the necessary administrative activities that are necessary for our employees or are required as a public company.

I am very proud of our accomplishments and the strong partnerships we have built with our customers and suppliers over many years. Looking ahead as we move from the fourth and into the first quarter, our Packaging segment demand should remain strong, with shipments exceeding those of last year’s record first quarter.

This will require us to continue producing containerboard at our Jackson Mill in addition to an appropriate amount of white paper to maintain optimal inventory levels for servicing the paper customers..

Thank you. And our first question is going to come from the line of George Staphos with Bank of America Securities..

Good morning. Hope you’re doing well. Thanks for taking my question.

I guess the first question I had regarding Jackson Mill and the containerboard that you produced in the fourth quarter, I was wondering if you could give us any kind of additional qualitative or quantitative commentary on the effect in the quarter in terms of additional costs? I know, it’s might be sensitive, but thought you be able to cover at least a little bit of additional detail there?.

We’re not going to give the exact costs. We called it out, as very high cost production. As you could imagine, without spending the capital on the mill that you would normally spend on a conversion that would help you with the pulpy yield as an example, and various features on the paper machine to improve drawing capability.

You’re limited in productivity and also again, fiber yield. So the costs obviously are the highest in our systems, but nevertheless, the machine exceeded our expectations in terms of its productivity. And we were extremely pleased during the quarter.

The machine accomplished what we needed and that was providing our box plant system they needed tons to continue supplying the box demand for the quarter and try to build a little inventory.

Again, we’re extremely pleased, the effort also enabled us to fully understand what we believed would be inappropriate phased approach to consider a conversion of the mill to containerboard. In much of the same way, we looked at DeRidder mill and the Wallula mill.

So we’ll be going forward with a discussion with the Board of Directors in February on our different options and alternatives on how we want to approach that. But we’re very pleased. Again, the machine has performed quite well.

And as I also called out in October, that machine is just an outstanding paper machine and the mill itself has a lot of great opportunity to go forward.

Bob, you want to add anything?.

No. I’d just say, George that from – bringing I guess some of the write-ups that have come out last night and so forth. But the impact from Jackson was probably what drove that difference that that people were noticing in the fourth quarter relative to the cost side on the packaging segment..

Right. That makes sense. Next question, I want to hit on, is on costs, to the extent you can give us a little bit of additional directional guidance.

And then my last question will be on kind of what volume you’re seeing early in the quarter? So on the items that you could perhaps have some line of sight on, and if we compare it to the year-on-year impact in the fourth quarter, what would you say, well, we have maintenance outages, but on freight and on energy and any other costs that you again could talk to, should be as direction versus the fourth quarter year-on-year change, when we look at first quarter.

So that’s question number one. And question number two, Tom, if you can talk about your early shipments and bookings. That would be great. Thank you, guys..

Yes, George, I’d say that, just as we look from the fourth to the first similar to the comments that Mark made, freight costs, we expect those to stay high and actually move up a bit more. And as well as OCC costs, recycled fiber prices are moving up.

Certainly, as we reset a new year, our fringes and benefits on our labor costs, as well as any increases in wage rates, that will be an impact as we move from the fourth to the first. And then also on a lot of outside services and materials supplies things of that nature, as a headwind as well.

But to your point, outages – maintenance outages will be favorable moving as we move into the first quarter. Of course, the benefits will be on the – as Tom mentioned, the price realization that we’ve got a small piece of that in the fourth, but we expect the vast majority to come in the first quarter..

And George, this is Tom, I’ll comment on the volumes. It remains incredibly strong through 16 days, our billings are up just slightly over 10% and our bookings are well north of that. So business remains very robust.

I’ll also just add on the cost side with this dramatic increase in volumes and shuffling business between plants and having plants cover for each other and things like that, that obviously drives our costs up as well, especially in area freight..

Understood. Thank you, guys. I’ll turn it over..

Thank you. Next question, please..

Thank you. Our next question is going to come from the line of Mark Wilde with Bank of Montreal..

Good Morning, Mark. Good morning, Tom. Good morning, Bob. I wondered, Mark, just on Jackson, two questions.

First, can you give us some sense of differences between what you might have to do at Jackson versus what you did at DeRidder and Wallula? And then maybe some sense of what other options might be out there for you beyond Jackson?.

Yes. As you could imagine, let’s go back to things we’ve said for years and years, you can convert any mill to make anything depending on how much capital you’re willing to spend on that conversion. That being said, if you look at a mill like DeRidder and mill like Wallula, they’re all unique.

They have their strengths and weaknesses that you have to address with capital, Jackson’s no different.

What you would be typically looking at is, in the pulp mill, hot stock refining, defiberizing, various pumping capabilities that would allow you to raise cap on the paper machine itself with stock approach, additional refining capabilities, and just mass throughput capabilities with the running containable versus a lightweight fiber.

So then you’re looking at head box dynamics drainage formation in terms of the former, and then pressing and drying, and then winder modifications and roll handling. So there’s a comprehensive checklist that you have to go through in doing your analysis, but those are the type of things you would look at.

And that those are the items that we’ve now have, a really good understanding of the capability and the limitations, so it’s helped us refine our expected scope. But nevertheless, you’re talking about a project at a minimum that’s in the hundreds of millions of dollars to convert Jackson mill and do it the way PCA would do a conversion.

But it would be a good project. And so we have other alternatives, obviously, we’re looking at. I don’t want to get into those. You can imagine, they include everything from further investments and existing assets to looking at other mills in mill opportunities. So that hasn’t changed for years now.

So again, that discussion will be a discussion we have with the board in February..

Okay, Mark. Just if I could uncheck them, that’s a newer machine than either DeRidder or Wallula has, if I’m not wrong. And then also, would there be an option to actually do something a little different at Jackson, like make white top, I don’t think you produce any white top. The market seems to be moving in that direction..

The machine has the potential to do that. The machine is an extremely modern machine, approximately 1990 vintage machine. It was one of the last big machines built during that period of time, 385-inch wide, high-speed. We taking care of it, as you can imagine, it’s a really great asset.

And that being said, we understand what we would do as it differs, it’s a much better quality machine than what we had at DeRidder and what we had at Wallula in terms of its capability. And so it does provide us a long-term opportunity.

Again, depending on the scope of work we choose to go forward with right now to become one of our premier machines in the future and also addressing the cost of the production. So we have that opportunity to spend capital and then as we’ve done at DeRidder and Wallula provide the necessary containerboard into our box plant system as needed..

Okay. All right.

And then just finally, Mark with OCC going up, can you just remind us, if we factor in that OCC stuff from out of Wallula, what’s your net purchase of OCC? If we kind of – as we exclude the stuff you transfer from your own box plants, how much OCC are you buying right now on the open market on an annual basis?.

I mean, I can’t give you that right now. We’ll have to get back to the after the call, but we’re probably net-net around 15% of our total fiber base into our mills..

Okay. All right. That’s helpful. I’ll turn it off..

I do want to throw a tonnage purchase number at you and we’ll get that exact number when we talk with you later. We’re somewhere around 15% of total furnish – fiber furnish..

Thank you. Our next question will come from the line of Mark Connelly with Stephens..

Thanks. Mark, we’re hearing from a range of companies outside of this industry about operating in logistics problems, really not transportation that are making running full and delivering on time more challenging, especially in the Midwest.

I’m curious if you’re seeing that from your customer base yet most of those comments started to happen in mid-November. And so I wonder if the impact is really more whole 1Q thing..

Well, as the positivity rate in the COVID pandemic during that holiday period of November and December was spiking throughout various regions. And the demand was at all time records from the containerboard mills to the box plants, to the box customers.

You can only imagine that when you’re a carrier, whether it’s a trucking carrier or a rail carrier, and you now have this unprecedented demand along with your workforce that is being challenged with this pandemic.

A direct example of that is, at any given time during those few months, we had upwards of a 100 people in our mill system that were out either quarantining or positive, and then same thing in the box plans.

So it was a challenge and we saw that through the logistics chain on how our customers were dealing with this and how our carriers we’re dealing with this, and their own workforce capability. And so it was the human factor and the rolling stock factor in terms of trucks and rail in order to move the goods, like say, to meet the unprecedented demand.

And as Tom said, in many cases, we were moving product from plant to plant and plants were cooperating with one another. So it was a very challenging time in that regard..

Okay. And Mark, you’ve said in the past that you might have as many as a dozen box plant debottlenecking or other projects going on at any one time.

I’m curious whether you’ve shifted that sort of pace and resources whether it’s shifted either in the amount of effort or whether you’re shifting your priorities to move closer to e-commerce or some other part of your customer base, has there been a meaningful change in the way you’re approaching box plant capacity?.

Tom, I’ll let you go ahead and talk about that..

No. We’ve continue to do our projects on schedule, on time for the most part, providing our suppliers can give us what we need. We’ve got a great technology and engineering group that we’re executing at a very high level.

And obviously, we’ve talked many, many times about the fact that we build our business around our customers and their demands, and we’ll continue to do so Mark..

Thank you..

Next question, please..

Our next question will come from the line of Mark Weintraub with Seaport Global. .

Thank you. I was hoping to get more color on the recent demand strengthened and by category or by the drivers, as you are seeing them.

And then we’d also love to get your thoughts on what happens to demand, how sustainable it is when the economy eventually reopened more fully?.

Mark, this is Tom. I’ll handle that. Our demand strength is basically across all segments with the exception of food service.

Obviously, it no surprise e-commerce is growing at a faster rate than those other segments, but they’re all in growth mode, which is great, which also, I think signals very clearly that this demand is strong across the board and sustainable going forward.

I would contend that a lot of purchasing habits have changed probably accelerated by five years or more. And those are expected to remain the same. We’re also seeing obviously the big trends in people moving away from cities, buying homes, when you buy homes, there’s a lot of things that go into those homes that are associated with corrugated boxes.

And then addition, you’ve got this trend moving away from plastics into paper-related products, which is also very positive going forward. So the demand strength, is it sustainable? I’d say absolutely, yes..

Great. And maybe can give us a sense as to how much growth you’re seeing for instance in e-commerce and how you define as….

Well, we don’t typically share our numbers per segment, but as I said, it’s been – it’s obviously significant and it’s higher than the other segments. But again, all those segments are growing, and of course, we expect food service to come back as well and is already beginning to as States began to open..

Great. And we did – it seems like in the last couple of months, we’ve seen even a new step-up from what was already stepped up. And again, just that was evenly broadly across everything.

Or was it more specified to certain areas?.

No, I’d say again, that is across the board and keep in mind also that we’re hearing from every one of our customers, their inventories are very low. They have not been able to replenish any inventory as a result of the strong demand on their side..

And one last one, do you think even with this latest step-up in demand, they’re still not replenishing those inventories, or do you think that part of this 10% plus type of demand growth that we’re seeing might represent some replenishing at this point?.

Some may represent replenishing, but we’re hearing from our customers, they’re still desperate to try to replenish any inventory. That’s all I can tell you at this stage..

Super. Thank you..

Next question, please..

Our next question will come from the line of Adam Josephson with KeyBanc..

Thanks. Good morning everyone.

One question on – just back to Jackson for a second, what would a conversion of the machine there do to your ability to service your large paper customers? And relatedly, what are your expectations for cut size demand this year? Obviously, the pandemic had a huge impact last year and will likely continue to for the next several months, I would imagine.

So I’m just wondering what your outlook for paper demand and specifically cut size demand is just as we go into this year? And how that’s affecting your thought process about Jackson as well?.

As you could imagine, the demand is still down at the levels we saw throughout last year. This first quarter is not much better than what we saw in the fourth quarter.

I would expect as the economy finally recovers and you have workplaces starting to come to some new semblance of normalcy and schools fully opening up across the country all the way up to a higher education, that at some point over the next year. Demand will pick up to a new norm. I don’t really know what that new normal will be.

I do have to believe that there has been now a permanent demand destruction of some number that people have learned working from home, how they do their business. And so Jackson currently affords us the opportunity to short-term, take advantage of the asset and make again, a high cost, very good quality containerboard.

But at the same time, you would have to assume that our box demand grows and our paper demand destruction remains at a certain level, that it will be difficult to justify having a very large machine that only is able to fill its orders for a portion of the time in the future years.

So we’re looking at that as an opportunity that we have a very strong need for the containerboard. And as we’ve always done, we have long-term filled those needs internally rather than go out to the outside market. And even if we want it to go to the outside market, now there are no tons to be purchased.

And so we believe that Jackson ultimately will be a far better asset in the containerboard side of the business ultimately. What the timing is, I’m not sure. I’m just thinking over the next couple of years that timing will play out..

Yes. Sure.

And as you’re thinking about the paper business again, longer term, I know it’s really difficult to make forecasts of anything these days, but there’s been some permanent destruction you think, do you think there’s a reason to expect a rebound in cut size demand for the full year or next year? Or do you think that we’re just – we’ve established a new lower base.

And hopefully, we hold this space and not go much lower than that..

Again, I don’t know. I just – from my own personal observations and what we see around us, I would have to believe that even post pandemic, there will be some new lower demand efficiency that businesses and schools and individuals are learning to function with. And that will just continue to play out.

So we’re in a position that we have the optionality on how we utilize assets. And we’re just going to play that optionality out. Again, it’s hard for me to, start giving you a numbers. There’s nothing I could base them on..

Sure, sure. And I fully understand.

And just on OCC, your near-term outlook, how much inflation sequentially are you expecting? And I’m just asking in the context of ocean container availability being exceptional and limited, and presumably that having an impact on OCC export volumes, I’m just wondering, what’s driving your expectation of continued OCC inflation? How sustainable you think that’ll be and the magnitude of the inflation you’re expecting sequentially?.

I’m sorry, sequential it’s probably $0.03 or $0.04 as we move into the first quarter, based on where we see prices going..

And just in terms of the drivers of that, just given the lack of availability of containers?.

It’s just absolute demand.

Tom?.

Yes, I’ll add. Let me add a couple of things there, Adam. We’ve talked for a long time about the need for fiber around the world. And it took a while to digest China’s exclusion of OCC and moving to other fiber. And as you see, pulp is up dramatically and being shipped over there as well as linerboard being shipped directly over to China as an example.

So, they’re just gaining their fiber in some other form, other than OCC. OCC has then found markets elsewhere around the world. The global outlook is very strong and we know it will continue to be so.

So as we said, it found its bottom, it’s moved up dramatically from that point and we expect it’ll move up for – as well going forward as strictly just based on supply and demand..

Got it. Thanks a lot Tom..

Next question please..

And our next question will come from the line of Gabe Hajde with Wells Fargo Securities..

Good morning, Mark, Bob, Tom..

Good morning, Gabe..

I think the CapEx figure at least relative to what I was expecting is a little bit higher. And I was just curious if there were any kind of discrete projects in there that you would like to call out for us.

I recognize that there’s probably some either preparation work or ongoing maybe projects at Jackson to continue producing containerboard or swinging between the two grades. But I’m more thinking down on the converting operations. And then there was that DeRidder project that you guys had kind of pushed out.

So if there’s anything you can call it for us, that’d be helpful..

There’s nothing significance in terms of anything unique right now, besides we’ve gotten dozens and dozens of great projects that we’re working on in the box plants. We’ve got projects that we’re addressing in the mills that will address cost and efficiencies.

And so it’s just an entire category and host of projects – numerous projects in our box plant system that the group is working on. But it’s no one big, it’s not like building a new Richland box plant that’s taking up the bulk of the capitals, dozens and dozens of – in many cases, new converting equipment installations, modifications.

Again, mill equipment installations that will address some opportunities we have. So it’s – which is the good news. These are low risk, high return, quick return type opportunities that we’re addressing. Again, we’re – things that we’re good at doing..

Thank you, Mark.

So to be clear, there’s nothing in there for a potential Jackson conversion?.

Not at this time..

Okay. And then maybe Tom, I know it’s difficult sometimes to speak to the competitive landscape. But given what we read on the outside world in terms of new capacity coming in.

Are there particular grades or end markets where customers are saying, hey, we’d like you to add capabilities here because you don’t necessarily have it and maybe that’s a competitive threat and maybe that plays into what some of Mark’s talking about in terms of new converting capabilities.

I’m just trying to understand where you guys are best positioned, I guess..

Well, let me kind of start at the beginning a little bit here, Gabe. You might ask, you might start with the question of, again, why Jackson and what we’re doing at Jackson? And as we alluded to earlier, the fact is I can’t buy any tons in the open market. We have a great volume demand.

We have great need, if anything, our customers are concerned that we have enough supply, even as an industry. So consequently, we were fortunate to be able to have this great asset as Mark alluded to that’s not going to produce at its normal rate because of the destruction of demand in the white business.

And we were able to convert it, and yes, it’s at a high cost, but great quality. It kept us going, it gave us the ability to grow, gave us the ability to satisfy our customers and was incredibly integral to our ability to continue this growth trend.

Now when it comes to white and some other things, we have trade agreements, we’ve got some other arrangements where we’re in good shape there. So we’re not really that concerned about that.

But – again, what you see, and I think it’s important to point out that what’s going on – what we observe at least in the marketplace and our inability to buy any additional tons, we would have only bought those for a short period of time anyway, because we intend to be fully integrated and supply our own tons.

And I would assume others might think the same way. But it’s important to note that some of these projects that are continually mentioned out there that are the one-offs, somebody’s going to put a mill in with no downstream cut-up very difficult to do. I don’t know where they get the customer base. Again, I can only speak for ourselves.

We’re going to supply ourselves. We’re not buyers in the open market. So I’m not – we have to take care of ourselves, I guess that’s the point. And you see very few of these one-offs ever come off. I can name one that did, and it’s now shutdown. So I’m not really concerned about that.

We have to take care of ourselves and we have to figure out our own supply..

Very much appreciated..

Hopefully that gives you an answer that you can digest..

It does. Thanks..

All right. Thank you. Next question, please..

Our next question will come from the line of Neel Kumar, Morgan Stanley..

Hi. Good morning. In terms of freight, you mentioned that you made $0.07 headwind for you year-over-year. And your expectation of it stain pretty elevated.

Just, can you give us a sense of the magnitude inflation you’re seeing in freight rates year-over-year? Is it in the low double digit percent level? And then if you just remind us how your freight expenses is split between trucking versus rail..

Yes, Neel, I’d say it’s – the year-over-year increase in our costs, as we look out 2021 versus 2020 is I wouldn’t – right now, I don’t think it’s that high. It’s certainly the higher single digits as a percent, but not into the double digit, so at least not what we see right now.

And our split as far as rail versus truck, roughly 70% the cost, 70% rail, 30% truck, but obviously, box plants typically use trucks to deliver their products and mills are using rail. But that’s sort of the breakdown of the cost..

Hey, Neel, it’s Tom.

I’d also add that we are a little bit concerned about rail costs going up, going forward as a result of this new administration’s taken out the pipeline and being less interested in, in piping oil which could lead back to the shortage of boxcars that we had at one time when the rail cars – when the rail industry all went to shipping oil..

Land congestion, yes..

Great. That’s very helpful. And then I just had a couple of questions on the scope of M&A opportunities you would consider just given that your balance sheet offers you a lot of optionality.

Are you largely interested in small bolt-ons of box plants, or would you be open to something larger? And is there a specific size cut-off? And just given your track record in pursuing paper conversions, the containerboard, would you consider opportunities to acquire paper mills for conversion opportunity? Or do you see too many unknown variables in doing that?.

As far as M&A activity, as we’ve always done, we look at all opportunities, bolt-on small acquisition, as well as larger opportunities are always considered and looked at as far as any other opportunities.

Again, it just depends on the specifics that you would always have to consider if you were talking about spending x dollars to convert current asset, as opposed to being able to buy a mill asset from somebody. And what’s the differential in the ultimate total investment. So that’s always a consideration.

So I would say that all of the above are always on the table to evaluate and consider..

All right. Thank you..

Thank you. Next question..

And our next question will come from the line of Anthony Pettinari with Citi..

Good morning. In white paper with the 30% sequential decline in shipments, you obviously had the conversion at Jackson and the outage at I Falls. I think you referenced weaker market demand as well.

I’m just wondering of those lower white paper volumes, how much was sort of planned and expected versus maybe unexpected market weakness? Or sort of how did volumes hold up versus maybe what you expected going into the quarter?.

Rounding off, when the pandemic started in the March-April period, when we saw the massive decline, we’re down say, on average 30% of the year. And that’s what we saw going through the December period.

And even as we look at the first quarter now, we’re probably in that 25% to 30% demand destruction in terms of our business from where it was a year ago. It’s not declining further, but it’s not getting better in any significant manner..

Yes. Anthony, I’ll just add relative to the quarter. One thing to keep in mind as far as the results in the Paper segment, the volumes were about where we thought they would be.

But one of the things that impacted paper was our outage costs that we had for the quarter, there’s like $0.10 negative impact year-over-year in paper, packaging not – it was actually a slight positive, I believe. But that was a big hit on our paper results in the fourth quarter..

Okay. That’s very helpful.

And then Bob, is it possible to quantify or put a finer point on the level of wage inflation and timing increases for fringes of benefits that you see step up in the New Year either on a percentage basis or maybe sort of relative to what you saw last year?.

Well, right now it’s in that 3% to 4% range is what we’re seeing. And that’s coming off of actually as Tom, I think alluded to, especially in the fourth quarter, our labor costs just to run – to get the volume out of our box plants, converting costs and so forth. We had to pay a lot of overtime and we were running really, really hard.

And so, our wages and what have you in the fourth quarter were high, and they’d been in the high – they’ve been like that pretty much the most of the year to meet the demand. So those percentages I’m giving you are off a year that has had very high labor cost to begin with..

Okay. That’s very helpful. And then just one final one, if I could. I think your participation in the export market is very small. Now with Jackson, assuming you pursue a larger conversion and understanding this is potentially far off.

Is that mill close enough to the Gulf Coast that you could potentially export if you needed to as a safety valve? Or is that something that’s not possible? Just kind of wondering down the road on exports out of Jackson?.

Let me answer it this way. If I were to invest to convert Jackson, I would not be considering an export opportunity in the savings calculus. A conversion at Jackson would be fully to supply our own needs. And that is how we would look at a conversion.

We have no desire to build capacity and then we’ll have to move it off shore, our own capacity, we’ll move through our own box plant system..

Understood. That makes sense. I’ll turn it over..

Okay. Next question, please..

Our next question will come from the line of Kyle White with Deutsche Bank..

Hey, good morning. Hope everyone’s doing well. Thanks for taking the questions. Most of the outages are weighted to the fourth quarter of this year. And just curious if we should kind of read into this at all in terms of how you anticipate demand playing out for the year.

Do you anticipate Q4 kind of getting back to those normalized levels, which allows you to have a higher outage this quarter?.

Yes. I’ll let Bob finish this up, but if you – one of the big factors this year we have the outage that we had planned at the DeRidder mill that was originally going to be executed in the fall of 2020. We postponed that because originally to be considered in the spring and then we pushed it off.

But because of demand, we’ve now moved that work plus the annual work into the fourth quarter of this year. So the work that will be done at DeRidder will be the normal annual work that has to be done along with the discretionary opportunity work that we have on the recovery boiler the number one machine.

And so that’s why – that’s just one factor in why the fourth quarter number is higher.

Bob, you want to add some color to that?.

No, just perfect..

Okay..

Got it. That was going to be my follow-up on DeRidder, I wasn’t curious. But I’m curious kind of just following up on this in terms of your visibility on demand and what kind of confidence that you have that this demand that we’re seeing right now is sustainable. Obviously backlogs are up and customers need to restore their inventories at some point.

But from an underlying demand standpoint, what kind of confidence and visibility do you have there for the backdrop of this year?.

I can’t, it’s hard to predict what the back half of this year is going to be Kyle, but I would just say that our demand levels will be higher for sure than they were in 2020 throughout the entire year.

And we’re starting out incredibly strong and we’re not waiting any mill outage based on suppose the demand being less than the fourth quarter than it is in the first quarter. It’s very hard to predict. But everything I’m hearing and all the indicators we get from our customers and the various segments, it’s going to be very strong all year..

All right. Perfect. Thank you. Good luck..

Thank you..

Thanks, Kyle.

Holly, any other questions?.

We do. And our next question is going to come from the line of Philip Ng with Jefferies..

Hey, good morning, everyone. Sorry. I got cut off a little bit. So if I’m repeating this question, I apologize in advance. Demand obviously very, very strong, just curious how extended are your backlogs at this point? And do you expect inventory to improve sequentially and being able to better service all of your customers in the first quarter..

We’re not going to – we don’t get into backlogs. Most of our orders on a very short lead time and we’re able to meet those demands at the moment. We’re very fortunate because we made some significant investments throughout the years. We’ve been very consistent doing that and it allowed us to respond accordingly to this demand.

And as I said before, it’s going to remain strong and I feel very confident. We’re going to be able to meet all the requirements of our customers..

That’s helpful color.

And as the vaccination process ramps up, is that an opportunity for you guys and do you have any exposure on that front?.

In what terms? Is it box supply or….

I would assume that if there is lot of vaccines being transported through the country, there might be….

Yes. So we’re participating in this and proud to do so. It’s very important that we get – that these vaccines get out and proud to be a part of the packaging side of distributing those vaccines..

And do you envision that being a pretty meaningful contributor? Or just part of the ongoing growth story?.

Not just the part of the ongoing, it’s part of the ongoing, and it’s going to have a start and then an end eventually. But it’s one of those areas where we take great pride in being able to contribute to hopefully putting an end to this pandemic..

Got it. That’s helpful. Just one last question. Your largest customer in paper could be merging with the competitor. Is there a change of control provision in your supply agreement? Any color would be really helpful..

I know the contract runs through next year, and so I don’t know the details in that regard. I would doubt there is a change of control clause. We can check on that and get back with you. But we’re good through the end of next year..

Okay. That’s helpful. And just one last one, and if you’re able to share any color. You mentioned Mark that, if you do ramp up Jackson’s probably more of a phased approach. And with that process, would you be able to continue to produce board and could that help your cost profile throughout the year? Thanks a lot and good luck on the quarter..

Again, right now, with what we’re producing, we have a home for all of these tons in our own system. Now, the bigger opportunity with the capital investment at Jackson over the next say 24 months would be to address not only additional incremental productivity off the asset, but also a major cost reduction from the asset.

So in that regard, we will continue to run to demand, if demand dictated that containerboard was not needed and paper was needed for the time being, we could make paper. So we haven’t eliminated the capability of making paper on the machine at this time.

It’s just that the overwhelming demand for containerboard far outweighs the opportunities for paper..

Got it. Super helpful, guys. Thank you..

Thank you.

Any other questions please?.

And we do have a follow-up question and that’ll come from the line of Mark Wilde, Bank of Montreal..

Go ahead, Mark..

A quick follow-up for Tom. Tom, there were a couple of foreign players that put a lot of capacity into Central Indiana. I know that’s not too far from where TimBar was headquartered.

Can you just talk about sort of any impact you might be feeling from all of that new converting capacity?.

I would just say Mark, we’ve had zero impact from that capacity..

Okay. That’s helpful..

I can only speak for us. Okay..

Good deal. All right. Operator, I think we’re about out of time..

Yep. Mr. Kowlzan, I see that there are no more questions.

Do you have any closing comments?.

Yes. I just want to thank everybody for joining us today and stay well, be safe and look forward to talking with you in the April call. Thank you very much..

Once again, we’d like to thank you for joining today’s Packaging Corporation of America’s fourth quarter and full year 2020 earnings results conference call. You may now disconnect..