PKG Q3 Deep Dive: Greif Integration, Cost Pressures, and Industry Demand Headwinds

Packaging Corporation of America (NYSE:PKG) met Wall Street’s revenue expectations in Q3 CY2025, with sales up 6% year on year to $2.31 billion. Its GAAP profit of $2.51 per share was 11.4% below analysts’ consensus estimates.

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StockStory’s Take

Packaging Corporation of America’s third quarter was met with a negative response from the market, as earnings per share came in meaningfully below Wall Street expectations amid ongoing industry headwinds. Management cited stronger pricing and improved operational efficiency as key supports, but also pointed to soft demand in important corrugated packaging end markets such as beef and building materials. CEO Mark Kowlzan highlighted that these segments have been particularly challenged, noting, “Cattle herds are down to a 70-year low,” which weighed on sales volumes. While the integration of the recently acquired Greif Containerboard business was a major focus, higher operating costs and persistent inflation, especially in energy, continued to pressure margins.

Looking ahead, management’s guidance reflects ongoing caution due to anticipated seasonality, continued cost inflation, and the integration process following the Greif acquisition. CEO Mark Kowlzan emphasized that while operational improvements at the new mills are underway, energy costs remain a significant concern, stating, “I don’t see electricity cost flattening out with the demand from all of the data centers.” Management expects inventory optimization and further cost control to support profitability, but acknowledged that ongoing challenges in key end markets and the ramp-up of maintenance projects will be closely watched in future quarters.

Key Insights from Management’s Remarks

Management attributed Q3 performance to operational improvements and pricing gains, but highlighted acquisition costs, difficult end markets, and inflation as headwinds.

• Greif acquisition integration: The company completed its acquisition of the Greif Containerboard business, adding two mills and related operations. Management has already deployed significant resources to upgrade these facilities, with CEO Mark Kowlzan noting that over 100 Packaging Corporation of America personnel were on-site to drive operational improvements and technology upgrades during the first month of ownership.

• Key end-market weakness: Demand continued to decline in two important customer segments—beef and building materials—due to external macroeconomic factors. President Thomas Hassfurther explained that “cattle herds are down to a 70-year low,” and construction activity remained soft, both of which significantly impacted corrugated shipments.

• Inflationary pressures: The company faced persistent operating cost inflation, particularly in electricity and labor. Management cited a 50% to 75% increase in electricity rates at some facilities over the past two years. Kowlzan acknowledged that energy inflation has become a structural cost headwind, prompting investments in on-site generation projects.

• Operational efficiency initiatives: The company undertook extensive maintenance and upgrades at the newly acquired mills, including a five-week outage at the Massillon facility that led to immediate improvements in product quality and operational reliability. These efforts are expected to create long-term cost and productivity benefits.

• Inventory and capacity management: Management is focused on reducing elevated inventory levels at the acquired Greif operations and optimizing production to align with demand. The integration is expected to enable more agile supply to box plants and help manage overall capacity utilization in response to industry conditions.

Drivers of Future Performance

Looking forward, management’s outlook centers on Greif integration, cost control, and navigating persistent demand and input cost challenges.

• Greif synergy realization: Management expects material cost and productivity improvements as the company integrates Greif’s operations, with targeted synergy benefits of around $60 million on a run-rate basis within two years. CEO Mark Kowlzan said the focus remains on operational upgrades and leveraging PCA’s technical expertise to bring acquired assets to company standards.

• Energy and input cost management: With energy inflation cited as a major headwind, the company is investing in on-site energy generation projects to reduce exposure to volatile electricity prices. Kowlzan noted that three mills are expected to achieve electricity independence within two and a half years, which could help mitigate cost pressures.

• End-market recovery and volume trends: Persistent weakness in beef and building materials is expected to continue, with management noting that a meaningful rebound in these markets may take several years. However, the company is working to grow volume within existing accounts and maintain pricing discipline, while customer inventories remain at historically low levels.

Catalysts in Upcoming Quarters

In upcoming quarters, our analysts will be tracking (1) the pace and effectiveness of operational improvements and synergies at the recently acquired Greif facilities, (2) execution of cost control initiatives, especially related to energy and labor inflation, and (3) signs of stabilization or recovery in key end markets such as beef and building materials. Additionally, progress on energy independence projects and the impact of inventory optimization strategies will be important indicators of underlying business momentum.

Packaging Corporation of America currently trades at $212.49, up from $208.74 just before the earnings. Is there an opportunity in the stock?The answer lies in our full research report (it’s free for active Edge members).

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