Packaging Corp. of America has come a

Thinking On All Sides of the Box At Packaging Corp. of America, it s more than just producing containerboard and boxes, says chief executive Paul Stecko. It s about efficiently producing products that customers value. By John O Brien, Managing Editor Packaging Corp. of America has come a long way since 1999, when Paul Stecko was named chairman and CEO. Under his leadership, PCA has positioned itself as one of the industry s lowest cost producers of containerboard ard and corrugating medium. The company operates at a high vertical integration level, converting about 80% of its mill l production into corrugated packaging. Of late, PCA emerged from an extremely challenging 2009 in great financial shape, with strong cash flow, low debt, and a longstanding, predominately local customer base that has helped it outperform the industry on a volume basis, while delivering some of the best margins in the business. The company has slated $295 million over the next two years for energy-related projects at its Valdosta, Georgia containerboard mill (where work has started) and its Counce, Tennessee containerboard mill. When complete, the projects will increase electricity self-generation from 45% to 99% at Valdosta, and 57% to 84% at Counce. Considering PCA s steady growth over the past decade, solid 2009 results and its strong position both financially and operationally going forward, Paul Stecko has been selected as our 23rd Executive Papermaker of the Year. How did you get involved in the paper industry? I spent the first 10 years of my career in the nuclear power industry. In 1977, I had the opportunity to join International Paper as Manager, Equipment and Construction Procurement and then served in other capacities including mill manager and then ended up running several business units including Coated Papers, Pulp, and Converting Papers. In all, I spent 17 years at IP before coming to PCA. 18 MARCH/APRIL 2010 PaperAge

feature PCA s 68 converting operations produce a wide variety of corrugated packaging products. What brought you to Packaging Corp. of America? The opportunity to become a CEO and transform a corrugated products company into a diversified, multi-material packaging company. We accomplished that with the acquisitions of Mobil Plastics, Amoco Plastics, Hexacomb and KNP-BT s European protective packaging business. Our sales increased from about $2 billion to $5 billion in the process, and our name was changed from PCA to Tenneco Packaging. In 1999, the corrugated products business was sold and we reassumed the PCA name and the remainder of Tenneco Packaging became a company now known as Pactiv. How would you describe your management style? I m fairly hands on and have a strong interest in both the technical and business aspects of my job. I believe in being pretty direct and don t like to waste my time, or the time of people who work for me, on things that aren t really important. Many of our key people have worked with me for a long time, and they have been given a lot of responsibility and the freedom to do their jobs as they see fit. To use a football analogy, I want a 50-yard line seat to watch what s going on and how people are doing, not because I don t trust them, but because I m very interested in them and the business. But, by the way, I will send in a play every once in a while. According to industry analysts, your peers consider PCA the best managed in its market. What business strategy is in place that works so well for PCA? Our strategy has always revolved around the concept of operational excellence. We also believe that people make the difference. Unlike a lot of companies, PCA has never had a major restructuring or transformation program to improve performance and drive shareholder value. Instead, our efforts have remained focused every day and every year on improving every important element of our business both in sales and manufacturing. We believe that this intense focus on operational excellence is the key to our success. What role does innovation play at PCA? Innovation is critical to our business model and in a lot more ways than just products. We focus on customers who want hard to do things from us. If things are easy to do, many more competitors can get involved and then it comes down, usually, to only one thing price. Doing things that are PaperAge MARCH/APRIL 2010 19

Probably easier to say than actually do. That s why at PCA we constantly remind ourselves we have to be big and small at the same time. Our size, technical capabilities, and approach to innovation put us in a good position to compete on value. The trick is not to let size get in the way of being easy to do business with. At PCA, we require behavior that is usually normal and expected in a very small company things get done quickly, efficiently and without a lot of bureaucracy, politics or overhead. This is why we run our 68 box plants as decentralized, standalone profit centers. All of this helps make us very easy to do business with. PCA s four containerboard mills produce over 2.4 million tpy of linerboard and medium. Linerboard is produced at Counce, TN and Valdosta, GA mills, while corrugating medium is produced at Filer City, MI and Tomahawk, WI mills. hard to do is often avoided and not embraced by many companies for a variety of reasons. Innovation is essential if you are going to do the hard things well, and more importantly, profitably. Often the only profitable way to do the hard things is by developing entirely new ways of doing business. Here, one size doesn t fit all, and having a combination of 68 corrugating plants and sheet plants with a wide variety of capabilities and approaches to innovation, is a big plus for us. Your margins are among the best in the industry and have been for some time. Could you shed some light on how you ve accomplished this? Well, first, we have low cost containerboard mills driven by some competitive advantages in fiber and energy as well as outstanding paper machine efficiencies. Second, we run our box plants as standalone profit centers, and they consistently make money driven by a value-added product mix and an outstanding customer base that we have developed over a long period of time. And, as I said earlier, we focus on the hard-to-do. Finally, we have very low corporate overhead and very little interest expense due to our low level of debt. You deal with customers around the world. Are there any common themes in what they re looking for in regards to products and/or service? We think customers worldwide want two basic things. They want the best value, and they want to deal with companies who are easy to do business with. If you can do both of these things well, you usually get and keep the business. You broke ground on Feb. 2 at the Valdosta (Ga.) mill, marking the start of a project to construct a new recovery boiler, and you also have plans to rebuild the recovery boilers at the Counce (Tenn.) mill. What s behind all this boiler work at the two mills? The three recovery boilers at Valdosta and two of the three at Counce are very old and inefficient. We knew we would have to replace them at some point. With the recession, we had a unique opportunity to do the project at a much reduced capital cost as prices for equipment and construction dropped significantly. At Valdosta, we re putting in a new state-of-the-art recovery boiler, an additional turbine generator and making some drying improvements on the paper machine. At Counce, we re rebuilding two recovery boilers and installing an additional turbine generator. What are the expected benefits? This project will reduce our purchased fuel consumption at these mills by 50% and essentially eliminate all fossil fuel usage in the boilers. Only wood waste and black liquor will be used as boiler fuel, which are renewable and sustainable resources and considered carbon neutral with respect to greenhouse gas emissions. PCA s services include designing and manufacturing retail packaging. 20 MARCH/APRIL 2010 PaperAge

feature The new, low odor, high efficiency recovery boilers will produce almost twice as much energy using the same amount of black liquor. This energy will be used to power the new turbine generators increasing our self-generation of electricity from 57% to 84% of total needs at Counce and from 45% to 99% at Valdosta. How much will be spent on the projects? The total capital for the project is $295 million, and $215 million in net capital after deducting $80 million in maintenance capital that will no longer be necessary on the old boilers. The after tax return on the project is over 20% on a total capital basis and over 25% on net capital. And, where is the funding coming from? About two thirds of the funding will come from the alternative fuel mixture credits we earned in 2009 from black liquor. The remaining third will come from current cash-on-hand. PCA built a biogas plant at the Filer City mill and it started up in summer 2008. How has that worked out, and are there possibilities/plans for similar projects at other mills? The plant is doing well, and we continue to learn about the intricacies of this technology. We ve been unable to ramp up to full capacity because of the recession and the fact that the mill is running at less than full capacity due to market conditions. We have not yet received our patents for this process, but I m told by the lawyers that we re getting close. Tomahawk could be the next logical mill for the technology, but right now we re focusing our boiler efforts on the Counce and Valdosta projects. PCA s exports jumped up substantially in Q409 and they had been trending up in the prior quarter. What do you attribute this too? And what percentage of PCA s production goes to export? The big pick-up in exports occurred as world economies began to recover throughout 2009. Except for the early months of the recession, PCA exports have held pretty steady for the past decade at 8-9% of our sales tons. Do you have a product focus for exports? We have many longtime customers and relationships and try to focus more on specialty products like super heavyweights. For example, we sell a 96#, full wet strength, linerboard grade in Asia that s 100% virgin pine with very demanding specifications on cleanliness and formation, and not many people can offer a 100% virgin pine sheet. Also we re not very big players in the spot export market where, at times, all you have to offer is price. PCA has a low reliance on OCC. How much does your company use per year? We use about 24% recycled fiber in our fiber mix of which about 7% comes from our own box plants. So, we re net Approximately 76 percent of PCA s fiber needs are met with virgin fiber. buyers of 400,000 tons of OCC annually, which is 17% of our total fiber furnish. You consider this a competitive advantage. How so? Recycled fiber mills now represent 75% of the world s containerboard capacity, and this percentage is expected to increase as China continues to expand its containerboard industry where mills use essentially 100% recycled fiber. Additionally, and longer term, India could become a factor in terms of adding recycled capacity. So to answer your question, a lot of people, including myself, believe that the world will eventually run out of recycled fiber, and virgin fiber capacity will be needed to make up the shortfall. This, we think, will translate into higher and higher recycled fiber prices long term. You mentioned in an earnings call the prospect of increasing PCA s box capacity. Could you elaborate on this? We would like to get our vertical integration level up from 80% to 90% over the next 3-4 years. This is important not only to protect our mill volume, but also to increase our profitability because we make money at both our mills and box plants. PaperAge MARCH/APRIL 2010 21

We will spend about $35 million this year and next year to expand several of our key box plants and add specialized converting equipment at several other plants. This is being done at plants where our corrugated products demand currently exceeds, or will shortly exceed, our capacity. We also plan to continue to look for attractive box plant acquisitions, hopefully adding about one plant per year, as we have done in the past. Finally, we think we can continue to outgrow the industry in box volume as we ve done the past decade. All of these things taken together should get us to about 90% integration. PCA produces an extensive array of point-of-purchase displays. If you increase your box making capacity, will PCA have enough containerboard capacity to feed the expanded system? Yes, because even if we achieve the projected growth, we will still have 10% of our containerboard capacity available for sale in the open market. In addition, we usually get some productivity improvement each year in our mills which also increases our capacity a little. Corrugated products demand in the U.S. has not grown over the last ten years and is even negative with the recession. Where do you see it going from here? I m optimistic. RISI s latest 15-year forecast for corrugated products shows a growth rate of 1.5% per year in the U.S., and I agree with them that growth will be better over the next decade. Europe has experienced better growth in the corrugated market. Why? In Europe, corrugated products volume was up over 30% during the past decade. This was due, in part, to rapid economic growth in Eastern Europe and the fact that European countries make it much harder for companies to shut down and move to China or Mexico. Many European companies have set up operations in Eastern Europe instead and kept the corrugated volume in Europe. What has contributed to the past flat volumes for U.S. corrugated producers in U.S. markets? A lot of the U.S. volume has been lost to China or Mexico as some end-users of boxes have moved there. But I think much of this process is behind us, and companies have learned more about some of the perils of operating in China and Mexico product contamination, crime, logistics, etc., and are beginning to consider keeping operations in the U.S. So, I m optimistic that the next decade will be a lot better volume-wise in the U.S. Moving forward, what excites you most about your company and your industry? Our product! The corrugated container is a great product, one that has established its place in society and is not likely to be replaced by anything else. A box is very functional. It holds, protects and can even advertise the products it contains. It s very affordable and represents a great value to our customers. It s also very eco-friendly. It s made from wood fiber, a renewable, sustainable resource, and corrugated containers are one of the most recycled materials in the world. Finally, most of the energy used to make containerboard is very green black liquor and wood waste which are also renewable and sustainable fuels. The plain brown box is actually pretty green! 22 MARCH/APRIL 2010 PaperAge