Packaging Corporation of America Reports Third Quarter 2018 Results

Packaging Corporation of America (NYSE: PKG) today reported third quarter 2018 net income of $207 million, or $2.18 per share, and net income of $211 million, or $2.23 per share, excluding special items. Third quarter net sales were $1.8 billion in 2018 and $1.6 billion in 2017.

Reported earnings include $.05 per share of special items expense in the third quarter of 2018 and $.21 per share in the third quarter of 2017, primarily for certain costs related to discontinuing paper operations associated with the previously announced conversion of the No. 3 paper machine at our Wallula, Washington mill to linerboard. Excluding special items, the $.55 per share increase in third quarter 2018 earnings compared to the third quarter of 2017 was driven primarily by higher prices and mix $.38 and volumes $.37 in our Packaging segment, higher prices and mix in our Paper segment $.13, lower wood and recycled fiber costs $.04, and a favorable tax rate $.26 primarily resulting from Tax Reform changes. These items were partially offset by lower volumes in our Paper segment ($.14), higher operating costs ($.28), higher freight and logistics expenses ($.08), higher scheduled maintenance outage costs ($.05), higher converting costs ($.02), higher depreciation expense ($.03), and other costs ($.03).

Results were $.09 above third quarter guidance of $2.14 per share primarily due to higher prices and mix in our Packaging and Paper segments and higher volumes in our Paper segment.

Financial information by segment is summarized below and in the schedules with this release.

In the Packaging segment, total corrugated products shipments with one additional workday were up 8.2% and shipments per day were up 6.5% over last year’s third quarter. Containerboard production was 1,087,000 tons, and containerboard inventory was up 50,000 tons from the second quarter of 2018 and up 84,000 tons compared to the third quarter of 2017, partially due to the addition of recently acquired Sacramento Container. In the Paper segment, compared to the third quarter of 2017, sales volumes were 14% lower and inventories were 39% lower, primarily due to discontinuing the paper business at the Wallula Mill.

Commenting on reported results, Mark W. Kowlzan, Chairman and CEO, said, “Our containerboard and corrugated products price increases continued to be implemented as planned, and demand in our Packaging segment remained strong. Our containerboard mills ran very well, and we set an all-time quarterly containerboard sales volume record. Our containerboard inventory levels were higher due to the addition of our Sacramento Container acquisition, along with the need to maintain appropriate inventory in certain areas of the country to help minimize the transportation and freight challenges we continue to experience. In addition, higher inventory levels were required to prepare for the fourth quarter extended outage at our Wallula Mill to complete the containerboard conversion work that we have spoken about previously. Market conditions in our Paper segment remained very tight as we continue to have good volume along with low inventories, and our prices and mix were slightly better than anticipated. The benefits of the strong market conditions in both of our segments helped us offset higher inflation in many of our operating and converting costs as well as higher freight and logistics expenses.”

“Looking ahead to the fourth quarter,” Mr. Kowlzan added, “we expect Packaging segment demand to remain strong although there will be two less shipping days, and we expect a seasonally less rich mix in corrugated products, compared to the third quarter. In our Paper segment, we will continue implementing our recently announced price increases, but expect a seasonally less rich mix. Although paper volumes will be seasonally lower, we expect demand to remain strong as we manage our already tight inventory levels. With seasonally colder weather, fuel costs are expected to be higher across the company, and we expect continued inflation in most of our operating and converting costs, including incremental wage pressure with a tighter labor market. We will also have an extended outage at our Wallula Mill to complete the remaining work related to the conversion of the No. 3 machine from paper to linerboard. Considering these items, we expect fourth quarter earnings of $2.15 per share.

We present various non-GAAP financial measures in this press release, including net income and diluted EPS excluding special items, segment income excluding special items and EBITDA excluding special items. We provide information regarding our use of non-GAAP financial measures and reconciliations of historical non-GAAP financial measures presented in this press release to the most comparable measure reported in accordance with GAAP in the schedules to this press release. We present our earnings expectation for the upcoming quarter excluding special items as special items are difficult to predict and quantify and may reflect the effect of future events. We currently expect special items in the fourth quarter to include accounting charges, fees, and expenses related to the Wallula Mill paper machine conversion from paper to linerboard. Additional special items may arise due to fourth quarter events.

PCA is the third largest producer of containerboard products and the third largest producer of uncoated freesheet paper in North America. PCA operates eight mills and 95 corrugated products plants and related facilities.

Some of the statements in this press release are forward-looking statements. Forward-looking statements include statements about our future earnings and financial condition, expected benefits from acquisitions and restructuring activities, our industry and our business strategy. Statements that contain words such as “ will”, “should”, “anticipate”, “believe”, “expect”, “intend”, “estimate”, “hope” or similar expressions, are forward-looking statements. These forward-looking statements are based on the current expectations of PCA. Because forward-looking statements involve inherent risks and uncertainties, the plans, actions and actual results of PCA could differ materially. Among the factors that could cause plans, actions and results to differ materially from PCA’s current expectations include the following: the impact of general economic conditions; conditions in the paper and packaging industries, including competition, product demand and product pricing; fluctuations in wood fiber and recycled fiber costs; fluctuations in purchased energy costs; the possibility of unplanned outages or interruptions at our principal facilities; and legislative or regulatory requirements, particularly concerning environmental matters, as well as those identified under Item 1A. Risk Factors in PCA’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission and available at the SEC’s website at “www.sec.gov”.

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