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Text: I'm Mark Kowlzan, Chairman and CEO of PCA and with me on the call today is Tom Hassfurther, the Executive Vice President, who runs the Packaging business and Bob Mundy, our Chief Financial Officer.
After that, I'll then wrap things up and then would be glad to take questions.
Yesterday, we reported third quarter net income of $251 million or $2.63 per share, excluding the special items, third quarter 2021 net income was $257 million or $2.69 per share compared to third quarter 2020 net income of $149 million or $1.57 per share.
Third quarter net sales were $2 billion in 2021 and $1.7 billion in 2020.
Total company EBITDA for the third quarter excluding the special items was $464 million in 2021 and $323 million in 2020.
Third quarter net income included special items expenses of $0.06 per share primarily for certain costs at the Jackson Alabama mill for paper to containerboard conversion related activities while last year's third quarter net income included special items expenses of $0.11 per share that were related primarily to the impact of Hurricane Laura on the DeRidder, Louisiana mill.
Excluding the special items, the $1.12 per share increase in third quarter 2021 earnings compared to the third quarter of 2020 was driven primarily by higher prices in mix of $1.58 and volume $0.62 in our Packaging segment.
Higher production volume of $0.06 in prices in mix of $0.05 in our Paper segment and lower non-operating pension expense $0.03 and lower interest expense $0.01.
The items were partially offset by operating costs, which were $0.84 per share higher, primarily due to inflation-related increases, particularly in the areas of labor and benefits expenses, recycled fiber costs, energy, repairs, materials and supplies, as well as several other indirect and fixed cost areas.
We also had inflation-related increases in our converting costs, which were $0.10 per share higher.
For the last several quarters, freight and logistics costs have risen, and were $0.23 per share higher compared to last year, driven by significant increases in fuel costs, tight truck supply, driver shortages, and the higher mix of spot pricing to keep up with box demand.
And finally, scheduled outage expenses were $0.04 per share higher than last year.
And sales volume in our Paper segment was lower by $0.02 per share.
Looking at the packaging business.
EBITDA excluding special items in the third quarter of 2021 of $467 million with sales of $1.8 billion, resulted in a margin of 26% versus last year's EBITDA of $324 million with sales of $1.5 billion and a 22% margin.
Packaging segment demand remained strong and the teams did a tremendous job of implementing their previously announced containerboard and corrugated products price increases.
The containerboard mills set an all-time quarterly sales volume record and our box plants set new third quarter record for total corrugated product shipments, as well as shipments per day.
By utilizing the capability of both machines at our Jackson Alabama mill to produce containerboard, we were able to reach our desired inventory levels to better serve our customer demand, help minimize the transportation challenges we continue to experience, and build some inventory ahead of the DeRidder mills fourth quarter outage.
We manage very effectively, the execution of numerous initiatives and capital projects to reduce cost through efficiency, productivity, and optimization improvements across our manufacturing locations.
We continue to put tremendous effort into managing certain material, equipment, and labor availability issues to keep our customers supplied and their needs and their capital projects on track.
With no relief from the supply chain obstacles that we, our customers, and our suppliers continue to face along with unprecedented inflation-related challenges, the combination of all of these efforts are critical to our success going forward.
The improvements in execution our employees deliver constantly across many fronts is what allows us to continuously improve margins.
After successfully completing the planned maintenance outage at the Jackson mill during the third quarter, the mill restarted with the number 1 machine making corrugated medium rather uncoated freesheet grades, utilizing a mix of Virgin Kraft and DLK fiber based on the needs of our customers.
This was required to help meet continued strong demand from our box plant customers, meet our targeted inventory levels prior to year-end, and help supply the needs of our box plant acquisition that we anticipate acquiring later this quarter.
Similar to the number 3 machine at Jackson, the smaller number 1 machine is highly efficient.
It's a versatile machine and with minimal capital required to repurpose a deinking plant to handle DLK.
The machine was very quickly able to produce high-quality medium for the box plants.
Although still capable of producing uncoated freesheet products, we plan to continue producing medium on the machine over the next several months as our internal and external packaging demands warrants.
This gives us the opportunity to further evaluate the machine's capabilities and to process -- and process changes that might be required to potentially produce medium permanently in a cost-effective manner.
We'll also use the period to further refine our estimates and assumptions to fully understand the potential of the entire mill to produce containerboard on both machines at their optimal cost and quality.
This will also allow us to evaluate our strategic containerboard supply capabilities for providing the necessary runway to grow our Integrated Downstream box demand.
We are committed to being fully integrated and we have a track record of ramping up our internal capacity according to our customers' demand requirements.
The previously announced conversion of the J3 machine to linerboard remains on track with no changes to the schedule we discussed on last quarter's call.
We will continue to serve our paper customers with both machines at our International Falls mill, which is capable of producing all of Jackson's paper grades as well as available inventory produced on the number 1 machine at Jackson.
We continue to get excellent realization from the implementation of our previously announced price increases across all product lines.
Domestic containerboard and corrugated products prices and mix together were $1.40 per share above the third quarter of 2020 and up $0.55 per share compared to the second quarter of 2021.
Export containerboard prices were up $0.18 per share compared to the third quarter of 2020 and up $0.06 per share compared to the second quarter of 2021.
As Mark mentioned, we achieved a new all-time record for containerboard shipments with continued strong demand in our box plants as well as our domestic and export containerboard markets.
We had record third quarter corrugated products shipments, which were up 2.3% in total and per workday over last year's very strong third quarter.
Through the first three quarters of 2021, our box shipment volume is up 6.7% on a per day basis versus the industry being up 4.5%.
In addition to supplying the record internal needs of our box plants, our outside sales volume of containerboard was 73,000 tons above last year's third quarter and 37,000 tons higher than the second quarter of 2021.
Regarding our third quarter demand and our outlook, I'd like to reemphasize some points I made on previous earning calls and what Mark alluded to earlier, the same issues that impact our ability to get more volume out of our box plants like labor shortages, truck availability, driver shortages, raw material availability issues, and supply chain bottlenecks also persist with our customers.
They are telling us they have higher demand and could ship more if not for these issues.
There is no doubt we view demand is strong and we expect this to continue even with the economic obstacles most companies are facing.
And keep in mind the fourth quarter will have three less shipping days in the third and fourth quarter comparisons will be against last year's all-time quarterly record for the industry.
Regarding the box plant acquisition, Mark mentioned, last week we entered into a definitive agreement to acquire substantially all of the assets of Advanced Packaging Corporation, an independent corrugated products producer in a cash-free transaction.
Under the terms of the agreement, PCA will acquire a modern full line 500,000 square foot corrugated products facility located in Grand Rapids, Michigan.
The transaction is structured as a purchase of assets, resulting in a full step-up of the assets to fair market value.
This acquisition is consistent with one of the key strategic focus areas we have discussed many times regarding increasing our vertical integration of containerboard through organic box volume growth and strategic box plant acquisitions.
After completion of the acquisition, our containerboard integration is expected to increase by almost 80,000 tons.
This also will allow for further optimization and enhancement of our mill capacity and box plant operations, as well as other benefits and synergies that we expect to begin realizing soon after closing.
Although we won't get into financial details at this point, we expect the acquisition to be accretive to earnings immediately with a bottom line purchase price multiple similar to the average of our last four acquisitions.
Closing subject to certain customary conditions and regulatory approval is expected later this quarter and we will finance the transaction with available cash on hand.
Advanced Packaging is a well-capitalized full service provider of corrugated packaging products, including high-end graphics, retail displays, sustainable shipping containers, and protective packaging.
They utilized started state-of-the-art technology, structural and graphic design, and engineering capabilities, and an ISTA certified test laboratory to provide customers a solution for nearly any packaging need.
With the commitment to continuous improvement, innovation and safety in their operations, Advanced Packaging is a great strategic fit for PCA and our culture with an excellent management team, highly skilled and dedicated employees, and an outstanding reputation in the marketplace.
Looking at the Paper segment.
EBITDA excluding special items in the third quarter was $18 million with sales of $150 million or 12% margin compared to third quarter 2020 EBITDA of $17 million and sales of $178 million or 9% margin.
Prices and mix were up 4% from last year's third quarter and also moved 4% higher from the second and into the third quarter of 2021 as we continue to implement our previously announced price increases.
As we mentioned last quarter, we finished goods inventory now at optimal levels for the paper business, sales volume, which was 19% below last year's level, is fairly reflective of our production capability.
As I said earlier, while the Jackson number 1 machine is running medium, we will continue to service our paper customers' needs from both of the International Falls machines, which are capable of producing all of the Jackson paper grades.
While we've maintained our capability to produce uncoated freesheet on both machines at Jackson, we'll will continue to monitor market conditions and run our paper system accordingly.
Cash provided by operations during the quarter totaled $284 million with free cash flow of $134 million.
The primary payments of cash during the quarter included capital expenditures of $150 million, common stock dividends totaled $95 million, $68 million for federal and state income tax payments.
Pension and other post-employment benefit contributions of $51 million, and net interest payments of $7 million.
During the third quarter, we issued $700 million of 30-year, 3.05% notes and used the proceeds from these notes to redeem our 4.5%, $700 million, 2023 notes in early October.
This transaction will lower our average annual cash interest rate from 3.8% to 3.4%, lower our annual interest expense by $11 million per year, and extend our average debt maturity from 8.5 years to 16.3 years.
Based on the timing of closing the new bonds in September and the redemption of the old bonds occurring in October, our quarter-end cash on hand balance included the new bond proceeds.
Excluding this transaction, our quarter-end cash on hand balance was just over $1 billion or $1.2 billion, including marketable securities with liquidity at September 30th of $1.5 billion.
Our planned annual maintenance expense for the quarter is still expected to be about $0.41 per share or about $0.06 per share primarily due to the DeRidder mill outage.
This will result of negative impact of $0.25 per share moving from the third quarter to the fourth quarter and $0.18 per share higher than last year's fourth quarter.
Finally, as Mark mentioned previously, we continue to put tremendous effort into managing certain material equipment and labor availability issues to keep our capital projects on track.
While we are managing to keep the key milestones of our more significant projects on schedule, our capital spending across the entire company is now expected to come in below the range we provided previously.
We currently expect to end the year with total capital spending around $550 million.
Looking ahead, as we move from the third into the fourth quarter, we will continue to implement our previously announced price increases for domestic containerboard, corrugated packaging, and paper and will also expect average export containerboard prices to move higher.
Packaging segment volume will be lower due to three less shipping days, as well as the scheduled outage at our DeRidder mill and Paper segment volume will be lower as the Jackson mill is not expected to produce any paper grades.
With higher energy prices and anticipated colder weather, energy costs will increase.
Wood costs, especially in our Southern mill system, will be higher due to the previous wet weather.
Low-inventory and high-demand will also impact wood.
We also expect inflation to continue with most of the other operating and converting costs along with higher freight and logistics expenses.
And lastly, as Bob mentioned, we expect scheduled outage cost to be approximately $0.25 per share higher than the third quarter.
Considering these items, we expect fourth quarter earnings of $2.04 per share.
With that, we'd be happy to entertain any questions.
The statements were based on current estimates, expectations and projections of the company, and involve inherent risks and uncertainties, including the direction of the economy and those identified as risk factors in our Annual Report on Form 10-K and in subsequent quarterly reports on Form 10-Q filed with the SEC.
And with that, Josh.

user
packaging corp of america sees q4 earnings per share of $2.04.
sees q4 earnings per share $2.04.
q3 earnings per share $2.69 excluding items.
expect inflation to continue with most of other operating & converting costs,alongwith higher freight and logistics expenses.
expect average export containerboard prices to move higher.
with higher gas prices and anticipated colder weather, energy costs will increase.
wood costs, especially in co's southern mills, will be higher due to previous wet weather, low inventory and high demand.

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