Packaging Corp of America 2026 Q3 Earnings Call

Thank you, Jamie. Appreciate it very much. Good morning, everyone, and thank you all for participating in Packaging Corporation of America's third quarter 2026 earnings release conference call. Again, I'm Mark Kowlzan, Chairman and CEO of PCA, and with me on the call today is Tom Hassfurther, our President, and Kent Pflederer, our Chief Financial Officer. I'll begin the call as usual with an overview of the third quarter results, then I'll be turning the call over to Tom and Kent, who will provide further details. After that, I'll be wrapping things up, then we'd be glad to take questions. Yesterday, we reported third quarter net income of $262 million, or $2.93 per share. Excluding special items, third quarter 2026 net income was $272 million, or $3.04 per share, compared to the third quarter 2025 net income of $247 million, or $2.73 per share.

Third quarter net sales were $2.6 billion in 2026 and $2.3 billion in 2025. Total company EBITDA for the third quarter, excluding special items, was $577 million in 2026 and $503 million in 2025. Third quarter net income included special items expense of $0.11 per share, primarily for costs and write-offs related to facilities closures, acquisition and integration-related costs, the impact of a fire at our Palmyra, Pennsylvania sheet feeder, and the Wallula restructuring charges. Details of the special items for the third quarter of 2026 and 2025 were included in the schedules that accompanied the earnings press release. Excluding the special items, our earnings increased by $0.31 per share compared to the third quarter of 2025. The contribution from the acquired Greif business was $0.24 favorable year-over-year, generating $0.13 of earnings this year versus an $0.11 loss last year in the first month of ownership.

Legacy earnings improved by $0.07 per share, driven by favorable price and mix in the packaging segment for $0.79, favorable production and sales volume in the packaging segment, which includes the impact of additional containerboard supplied to the Greif operations of $0.12, favorable price and mix in the paper segment for $0.05, and a lower share count, $0.02. These items were partially offset by higher labor and operating costs, $0.28, higher freight costs, $0.26, higher corporate and other expenses, $0.13, higher fiber costs, $0.12, higher depreciation and amortization expenses, $0.06, higher maintenance outage expenses in the paper segment for $0.04, lower sales volume in the paper segment for $0.01, and higher interest expense, excluding the Greif acquisition and debt issuance for $0.01.

As comparable quarters going forward will include the ownership of the acquired Greif business for the entire periods, we will no longer separate and state the earnings contribution from the acquisition in the future. We exceeded our guidance of $2.91 on the strength of price realization and a higher-than-expected contribution from the acquired Greif business. These items were partially offset by higher labor and operating costs, partially driven by lower-than-forecast corrugated products volume. Looking at our packaging business, EBITDA, excluding special items in the third quarter for 2026 of $578 million, with sales of $2.4 billion, resulted in a margin of 23.9%, versus last year's EBITDA of $492 million and sales of $2.1 billion or a 23.1% margin. The mills produced 1,489,000 tons during the quarter.

The legacy mills produced 1,286,000 tons of containerboard, about 77,000 tons more than the second quarter of 2026 and 31,000 tons more than the third quarter of 2025. The acquired mills produced 203,000 tons. Quite frankly, an exceptional number for a quarter in which Riverville was down for an extensive annual maintenance outage. System-wide, our inventories were up 34,000 tons from the end of the second quarter. In fact, most certainly, we need that inventory as we move into the fourth quarter. We've been able to catch up with keeping our plants adequately supplied, resume shipping via most efficient methods possible, and we're in a good position to supply our customers in the fourth quarter, even with three of our containerboard mills down for their annual maintenance outages.

Operational performance was excellent across the board, much improved from the second quarter, and we completed the first annual maintenance outage at the Riverville mill under our own ownership safely and successfully. From the cost side, in addition to increasing freight, we saw significant increases in recycled fiber, purchased power, and chemical costs during the quarter, and we expect these input costs to continue to go up. Our mill production reflects improved output at Jackson, even ahead of the completion of the winder project coming online in the fourth quarter as we continue to maximize the performance of the paper machines. We also benefited from continued improvement and reliability out of the acquired Greif mills. I'll now be turning it over to Tom, who'll provide more details on containerboard sales and the corrugated business in general.

Thanks, Mark. Domestic containerboard and corrugated products prices and mix were $0.75 per share above the third quarter of 2025, and up $1.11 per share compared to the second quarter of 2026. We have realized substantially all of the first net $50 increase and about half of the second $50 increase. Price realization came in ahead of forecast for the third quarter. We expect to realize almost all of the remainder of the second increase in the fourth quarter. Realization of the $70 increase will be split between Q4 and Q1 and skewed more towards Q1 in terms of timing. Export containerboard prices were $0.04 above last year's third quarter and $0.03 above the second quarter of 2026. Export sales volume of containerboard was 5,000 tons higher than the second quarter of 2026 and 10,000 tons lower than the third quarter of 2025, and remains at a relatively low level.

While various factors that we've previously discussed led to lower agriculture end market volume, demand was solid throughout the quarter across the remainder of our customer base. Shipments were up around 11% in total and per day versus last year, with the legacy business down a half a percent, which is about in line with our expectations, taking into account the lower ag shipments. A silver lining is that we got ourselves back on solid footing from an inventory standpoint in time for what looks like a pretty strong fourth quarter from a volume standpoint based upon our September and October bookings. We were also able to save a lot on freight during the quarter by being able to plan and optimize our routes.

We remain in a very tight containerboard market, which based upon what we are seeing in our own system, appears to be further tightening with fourth quarter seasonal pickup. As Mark said earlier, we have three containerboard mills down for annual maintenance in the fourth quarter, including DeRidder, and we will need the mills continuing to perform at the top of their game to keep us properly supplied. The acquired corrugated business meaningfully contributed to our profitability during the quarter, though volumes took a hit from the fire at Palmyra that kept the plant down for most of September. Integration levels continue to improve, and legacy PCA mills supplied approximately 45,000 more tons of containerboard into the Greif system during the quarter than it did a year ago.

The improved integration, together with better operational performance in the mills that Mark mentioned earlier, has us well ahead of our synergy targets. All systems work will be completed during the fourth quarter, which will further improve our visibility and day-to-day management of the business. This acquisition is working out very well for us, in large part due to the quality and performance of our people, who have put in a tremendous effort integrating and running the business. I'll now turn it back to Mark.

Thanks, Tom. Looking at the paper segment, EBITDA, excluding special items in the third quarter, was $34 million, with sales of $163 million, or a 20.6% margin, compared to the third quarter of 2025 EBITDA of $40 million and sales of $161 million, or a 24.9% margin. The differences in EBITDA and margin results from the maintenance outage being in the second quarter last year and the third quarter this year. Sales volume was approximately 0.9% above the second quarter of 2026, and approximately 2.5% below the third quarter of 2025. Prices and mix were up 2.8% from the second quarter of 2026 and up 3.8% from the third quarter of 2025. Sales volume, price realization, and cost performance contributed to performance above our expectations. I'll now turn it over to Kent.

Thank you, Mark. Cash provided by operations was $472 million, and after $247 million of CapEx, free cash flow was $225 million. In addition to CapEx, the primary payments of cash during the quarter included dividend payments of $134 million, cash tax payments of $66 million, and net cash interest payments of $29 million. We did not repurchase shares during the quarter. Excluding special items, our effective tax rate during the third quarter was 25.8%. We expect our fourth quarter rate to be nearly identical to the third quarter. We now forecast $865 million-$890 million of CapEx for the year, and excluding special items, just above $705 million of depreciation and amortization. These primarily relate to timing of expenditures and assets placed in service and do not reflect changes in our overall plans.

Our special items expense for the year to date, just to remind you, through Q3, included just under $60 million of depreciation expense and write-offs, primarily associated with the Wallula restructuring. I'd now like to give you an update on the annual outage schedule and earnings impact for the rest of the year. Our outage expense was $0.28 during the third quarter. Our fourth quarter estimate is $0.72 now, totaling $1.48 for the year. The increase of $0.08 from when we last updated you is primarily due to some timing, with a couple of cents in 3Q moving into 4Q, as well as our decision to substantially increase the scope of maintenance activities at the completed third quarter Riverville outage with more costs now being amortized into the fourth quarter, and to a lesser degree, an increase in the scope of the DeRidder outage will take place next month.