Mark Sutton: I think the number we’ve always thrown out there was an EBITDA margin that led us to a really strong ROIC, several hundred basis points above our cost of capital at yesterday’s revenue line, that used to be in the 20s. But I think for us, that’s an aspirational target to get back into that area. But even at today’s revenue an 18% margin generates very strong ROIC similar to what a 21% margin used to generate. So I think that’s the sort of milepost we are working toward now is getting up into those high teens, 18%-ish on our way to 20%. And if you kind of take that to an ROIC, you’ve got a really strong kind of mid teens ROIC in the packaging business. And then you put some growth on top of that, and I think the value creation can be pretty powerful.
Michael Roxland: And based on where you stand today, Mark, where do you — that 18% margin, when do you see that occurring? Is there something that occurs next year, next 2 years? And how do you see that unfolding in the near-term?
Mark Sutton: I think the answer to that question is going to depend a lot on what Tom Hamic talked about, and that is this steady improvement in demand, the consumer and when this turn occurs, obviously, those margins would be indicative of a healthy economy, which leads to a healthy Box market. So we would think several quarters before we’re sitting at that point. But we should see a step change in improvement in the margins as we go through quarter by quarter by quarter. I’d like to say a point in time in ’25, but it’s really going to depend on the demand, but it’s not that far in the future.
Michael Roxland: Got it. And just one quick follow-up. I think you had a recent conference, you mentioned a change in your customer mix, pre-COVID versus post-COVID and the different margin profiles you have pending with. So can you provide more color about changing your customer mix, pre-COVID versus post-COVID, any regional impacts that mix would have as well?
Mark Sutton: Yes. That’s a good question, Mike. At that conference, what I was discussing during COVID on some of our large contractual type customers that are in certain types of end-use segments, their growth rate were so astounding, and we had an obligation, if you will, to support their demand either as a percentage of their buy or some other metrics inside our contracts. And they grew at an outsized rate with some of the other segments and some of the smaller customers. And as it absorbed basically all of our capacity, we had to leave certain customers in certain segments where we didn’t have those contractual obligations because we just had no more room in our converting system. So what I was trying to describe, these are not [indiscernible] customers, they’re all great customers.
It’s not ever the customer’s fault. They grew very fast and we met their demand. But it cost us in margin because some of the customers that we didn’t have [indiscernible] were actually more profitable. They were regional and local type customers. So the mix ended up shifting more toward very large, what we would call, national accounts as a percentage of our total business. And what we are doing now is in those large national accounts, improving the economics now that the contracts are open post-COVID. Some of them were 2 years, some of them were 3-year contracts. And where we can, we are improving the economics, and that’s what Tom has been describing. That was a portion of the — a large portion of the $110 million in the first quarter. Where we are not able to work with our customer to improve the economics and they may have a better alternative we will lose that amount of volume, free up that capacity and retarget the original segments and customers that we disappointed a few years ago.
And the good news is we’ve been suppliers to most of these people for very long periods of time. And while it was painful, we are getting opportunities to go back into these customers that we serve for so many years. So a real external shock created demand profiles that were very abnormal. We did our best to meet all our obligations, ended up at a spot especially with post-COVID inflation and demand declines and contractual limits of spot economically we didn’t like. And so what we are doing is getting back to the most profitable mix that we can have. If you think about converting, Mike, it’s basically hours of time you have on your converting machinery to add value to containerboard in the form of making a package. So maximizing profitability per hour or converting time you have to offer to the market is always the challenge and the equation, the value creation algorithm that the Box business uses.
And that just got skewed for us, not necessarily because we wanted it to, but because we did what we thought was the right thing to do for our customers during that period of time based on the commercial contracts we signed pre-COVID.
Michael Roxland: Got it. Thank you very much. Great color and good luck in retirement, Mark.
Mark Sutton: Thanks.
Operator: And your final question for today comes from the line of Gabe Hajde from Wells Fargo. Please go ahead.
Gabrial Hajde: Mark, I like to echo everyone’s comments. I think we told you also that congratulations. Hope you get to enjoy the time.
Mark Sutton: Thanks, Gabe.
Gabrial Hajde: I’m going to try to come back to the maintenance and investment question. I looked at average maintenance outage expense pre-pandemic in an average of about $250 million. During the pandemic over the past 4 years, including 2024, I think it’s averaging about $380 million, $130 million more maintenance expense we are investing. And now we are talking about some cost — additional costs running through the P&L. I don’t know if you quantified it for us, but it seems like it’s maybe at least $100 million in the second quarter, correct me if I’m wrong. So maybe just help us with dimensionalizing some of these costs where maintenance would go next year sort of an ordinary environment? And what sort of return are you expecting on the capital or the extra costs that are flowing through the P&L?
Mark Sutton: Gabe, let me start just at a high-level. So the $250 million you talked about, you could probably put a 40% inflation number across that spend. Typically, maintenance is half materials and half labor. Some labor is in annual outages and it’s labor that we don’t provide at specialty work. So we hired that labor during those 2-week outages. And so that $250 million automatically jumps up in the neighborhood of 40% more. Now the numbers you’ve quoted at $380 million, $400 million, that’s more like 50% more. Some of that is additional targeted spending and a lot of that’s in the Box business. It shows up as maintenance spending, not capital expense because Box plant projects tend to be small enough in many cases, where we don’t need a new machine, we just upgrade an existing machine, that flows through the P&L as an expense.
