Creating shareholder value in containerboard markets

Pulp & Paper, Mar 2005 by Stecko, Paul

I WOULD LIKE TO ADDRESS WHAT WE at PCA think are the important drivers to create shareholder value in a global economy and industry. The containerboard industry faces many challenges, but the right approach can produce superior returns.

Know your strengths

The first step in generating high returns is to know what you're good at and concentrate on that. PCA specializes in containerboard and corrugated products. Ninety-six percent of our revenues are in that segment compared with much lower percentages at our major competitors. We think this specialization gives us an edge.

When PCA was formed in 1999, we sold our woodlands. We wanted to pay down debt, but we also realized that managing woodlands was not a core competency. We're good at running paper mills and making and selling boxes. Recognizing that others could better manage woodlands helped our returns.

Make the right product

It's important to have the right product, and we think corrugated containers are the right product. They have demonstrated their value and place in society. They're functional, cost effective, recyclable, and a great advertising vehicle. As a percent of the cost of goods sold, they are a small part of what the eventual package carries in terms of gross value.

Create profitable box plants and mills

Corrugated containers will stay a very competitive business. To get the kind of returns shareholders expect, we must earn adequate returns in both our mills and in our box plants. This goal requires flexibility. At PCA, we realize there are many things that we don't really know or can't estimate, so we try to engineer around them by building flexibility into our processes. We can't predict natural gas and oil prices, but our processes are flexible enough to use whatever fuel is least expensive. We can also swing our OCC content to compensate for OCC price fluctuations.

Closely manage critical costs

A paper mill is fiber and energy cost intensive, and these two variables must be stringently managed. Labor costs in a wellrun containerboard mill can run $30-$40/ton cash cost, which is a relatively small part of the overall manufacturing cost. People speculate what will happen if China starts exporting containerboard, but the only real edge the Chinese have over us is in labor costs, which are more than offset by transportation costs alone. The Chinese have hurt labor-intensive industries, but the containerboard business is not labor intensive.

Fiber is the largest component of our cost. OCC has almost tripled in price over the last three years, but PCA uses among the least amount of OCC in the industry. We use about 22% in our furnish, but 6% of that comes from PCA's own box plant waste, meaning that when OCC goes up a dollar a ton, our costs go up only 16 cents a ton compared to much higher increases at most of our competitors.

Promote a flexible system

We run box plants differently than we run mills. For mills, it's all about costs. With our box plants, we focus on revenue and customer service. Our theory in running box plants is simple. We want to provide the best value, and we want to be easy to do business with. If we do that, we get the business. We're one of the few companies that have a wide mix of sheet plants and full line corrugated plants. Again, it's driven around flexibility. We don't worry about our order mix. Having a system that can go either way is one secret of our success.

Use capital wisely

This industry, and maybe rightfully so, has a bad reputation of over-investing and under-utilizing capital, and I think that's the final paradigm in generating adequate returns. We treat capital as a scarce commodity. If anyone could fix the problem for $20 million, we need to figure out how to fix it for $5 million. It's that simple because your return is four times higher.

I must add that one real benefit of having been acquired by a "financial buyer" is that it provides a new perspective. In the old days, I was content to get a 15% or 20% return on an investment involving a mill. Financial buyers think of returns in terms of 50% or more. While you don't always get there, it doesn't hurt to start from that perspective.

PAUL STECKO is president and CEO of Packaging Corporation of America. This column is excerpted from Stecko's comments at Paperloop's Global Outlook Conference, November 2004, New York, N. Y.