Packaging Corporation of America Pricing Spineometer: 2 of 5 Vertebrae

Packaging Corporation of America, a containerboard and corrugated packaging company, had a negative FY 2023 following a bumper 2022 yet showed three-year growth. Revenue fell 8% to $7.8 billion and earnings before interest and taxes fell 24% to $1.1 billion over last year.

A review of Packaging Corporation of America’s Q4 2023 earnings call held on 24 January and accompanying financial reports provided insight regarding the importance of pricing on performance.

From the comments made by Mark Kowlzan, Chairman and CEO of Packaging Corporation of America, and Tom Hassfurther, EVP of Packaging at Packaging Corporation of America, it is clear that executive management is aware of the impact of pricing on performance and the need to manage pricing carefully to balance the interests of customers with corporate performance.

Two examples demonstrate the high importance to the Packaging Corporation of America and its executives of price and mix. Both examples rely upon some sort of revenue or profit bridge that identifies the impact of price, volume, and mix volume changes on financial performance.  (See “Normative decomposition of the profit bridge into the impact of changes in marketing variables” for an updated set of equations that removes biases when accounting for changes in performance across periods.  https://rdcu.be/dBEOK)

1. Mark Kowlzan referred to financial performance bridges multiple times. For example, in his prepared remarks, he stated “the … per share decrease in fourth quarter 2023 earnings compared to the fourth quarter of 2022 was driven primarily by lower prices and mix of $1.93 in the Packaging segment, lower prices and mix $0.04, and volume $0.03 in the Paper segment and higher depreciation expense $0.10.”
2. Similarly, Tom Hassfuther also referred to financial performance bridges multiple times. For example, he stated “Domestic containerboard and corrugated products prices and mix together were $1.73 per share below the fourth quarter of 2022 and down $0.40 per share, compared to the third quarter of 2023, which included a richer mix of graphics and point-of-purchase display business. Export containerboard prices and mix were down $0.20 per share, compared to the fourth quarter of 2022 and down $0.01 per share compared to the third quarter of 2023.”

Other comments by Tom Hasfurther indicate a growing strategic challenge in pricing itself.  It appears that Packaging Corporation of America is using an index from the RISI Pulp and Paper Week publication to vary prices with market conditions in a systematic manner.  Unfortunately, three comments indicate that this index is becoming an unreliable benchmark for understanding costs and dynamically adjusting prices:

1. The benchmark uses too few datapoints: “With Pulp and Paper and feel that there’s a disconnect there to what they see in the market and what’s being reported. As I’ve said for a number of years now, as this independent market continues to shrink and what we really consider to be a real open market gets into the mid-single digits.”
2. The benchmark did not reflect a recent price increase by Packaging Corporation of America itself: “Beginning January 1, 2024, we began invoicing a $70 per ton price increase for linerboard and $100 per ton increase for medium according to our recent price announcement. As you are probably aware, this past Friday, the RISI Pulp and Paper Week publication did not recognize any increase in the industry’s benchmark prices for either linerboard or medium.”
3. The benchmark does not reflect the costs or value delivered on many products and customer demands: “There is a linerboard and medium market, and then there’s a box market. And the box market is all custom-made. Lots of different things go into it, and there’s a value created accordingly. So you – as I’ve said before, I’m not going to get into all the optionality and all those other sorts of things, those things we’ll discuss with our customers. But you do describe it accurately, I think, especially from our customers’ point of view, that what gets reported is quite different than what they see in the marketplace.

These comments and other issues provide guidance on the pricing capability needed to navigate Packaging Corporation of America through its challenges:

1. Industry benchmarks would suggest 16 to 80 professionals dedicated to pricing at Packaging Corporation of America. Complexity issues would suggest Packaging Corporation of America should operate at the upper end of this range.
2. With seven mills, 89 manufacturing plants, and 120 facilities, Packaging Corporation of America has many factors that would enable it to price differently based on customers’ proximity and cost to deliver.
3. Packaging Corporation of America produces many different types of containerboard and corrugated packaging, much of which is custom-made for specific clients. Custom-made offerings imply custom pricing and a higher level of pricing complexity.
4. Each customer engagement requires negotiation. Pricing should be able to provide salespeople with reasonable pricing guidelines identifying stellar, expected, and poor price outcomes.
5. Given the importance of mix and price on financial performance, a deal quality scoring method for guiding sales negotiations and setting sales incentives has been shown to dramatically improve performance and therefore should be investigated. (See Adopting Profit-Based Sales KPI https://wiglafpricing.com/media/white-papers/adopting-profit-based-sales-kpi/)
6. On a macroeconomic basis, Packaging Corporation of America reports that demand is dynamic and somewhat growing on the ecommerce side but facing headwinds on the more predictable brick-and-mortar side. Some level of applied economic forecasting would be useful in planning production capacity and anticipating utilization rates.
7. Yet the biggest pricing challenge facing Packaging Corporation of America today would be that of using indices to dynamically adjust prices in the first place. If, as management is reporting, the current index is failing, then a new price structure should be developed, tested, and improved.  This might include other factors, indices, and issues.  Given the multiple price structure concepts explored in the text “Pricing Strategy”, there is much heavy strategic thinking to be done.

Research into the investment by Packaging Corporation of America in pricing yielded problematic results.  Pricing appears to be managed by everyone and yet no one at the same time.  People in sales, customer negotiation, marketing, customer service, market research, accounting, and finance all report having skills in pricing, but our research only identified one individual who reported managing price itself.  With disbelief that this could be true, I searched for pricing jobs at Packaging Corporation of America and found zero openings.  Surely, if Packaging Corporation of America staffed a full pricing department, it would have some level of turnover and a few jobs open in the field.  Surely, out of 15,500 employees, more than one would be dedicated to pricing?

While I do not dispute that the executives and managers are well-skilled in pricing, direct experience and research indicate they would find their jobs easier and have fewer missed opportunities to capture price if they had a strong pricing team.

Given the importance and capability of pricing at Packaging Corporation of America as indicated in financial reports, management statements, and our pricing team research, and given their performance, we have come to the following conclusion as of March 2024.

Packaging Corporation of America Pricing Spineometer: 2 out of 5 Vertebrae. Executives are aware of the importance of pricing yet haven’t fully developed a modern pricing capability.

PKG (Packaging Corporation of America) was relatively flat at 165 the day prior to their earnings call and 162 one week later. FY 2023 revenue of $7.8 billion with a 14% operating margin and P/E ratio near 21.

For FY 2023, a 1% improvement in price would yield a 7% improvement in operating profits holding all else constant at Packaging Corporation of America.

(Compare and contrast this rating with their industry peer, WestRock. https://wiglafjournal.com/westrock-pricing-spineometer-4-of-5-vertebrae/)