Mark Kowlzan – Chief Executive Officer Paul Stecko – Chairman Richard West – Senior Vice President, Chief Financial Officer Tom Hassfurther – Executive Vice President, Packaging Judy Lassa – Senior Vice President, Paper.

Mark Weintraub – Buckingham Research Chip Dillon – Vertical Research George Staphos – Bank of America Anthony Pettanari – Citibank Alex Ovshey – Goldman Sachs Mark Connelly – CLSA Philip Ng – Jefferies Debbie Jones – Deutsche Bank Chris Manuel – Wells Fargo Scott Gaffner – Barclays Al Kabili – Macquarie Steve Chercover – DA Davidson.

Thank you for joining Packaging Corporation of America’s third quarter 2014 earnings results conference call. Your host today will be Mark Kowlzan, Chief Executive Officer of PCA. Upon conclusion of his narrative, there will be a Q&A session. I will now turn the conference call over to Mr. Kowlzan. Please proceed when you are ready..

Good morning and thanks for participating in Packaging Corporation of America’s third quarter earnings release conference call.

I’m Mark Kowlzan, CEO of PCA, and with me on the call today is Paul Stecko, our Chairman; Tom Hassfurther, Executive Vice President who runs our packaging business; Judy Lassa, Senior Vice President who runs our white papers business, and Rick West, our Chief Financial Officer.

I’ll begin the call with an overview of our third quarter results and then turn the call over to Tom, Judy and Rick who will provide more details. I’ll then wrap things up and we’ll be glad to take any questions. Yesterday we reported third quarter net income of $104 million or $1.06 per share.

Third quarter net income included after-tax charges for the Boise integration, debt refinancing, and DeRidder mill restructuring of $20 million or $0.20 per share, including cash charges of $6 million or $0.06 per share and non-cash charges of $14 million or $0.14 per share.

Excluding these special items, third quarter 2014 net income was $124 million or $1.26 per share compared to the third quarter of 2013 net income of $89 million or $0.92 per share and compared to the second quarter of 2014 net income of $114 million or $1.16 per share.

Details of special items are shown on the schedules that were included with the press release. Third quarter net sales were $1,519 million compared to third quarter 2013 net sales of $845 million and second quarter 2014 net sales of $1,468 million.

Excluding special items, the $0.10 per share increase in third quarter 2014 earnings compared to the second quarter of 2014 earnings was driven by increased sales volume and improved mix for $0.12, lower fuel costs $0.02, and lower chemical and recycled fiber costs $0.02.

These items were partially offset by higher annual outage costs of $0.03, higher electricity costs $0.02, and higher medical and workers’ compensation costs $0.02. This was our eighth consecutive quarter of record earnings, excluding special items, driven in part by strong sales volume, record mill productivity, and mill cost reductions.

The integration of Boise Packaging continues to generate significant synergies and operational improvements in the white papers that resulted in lower costs and higher margins.

At the end of the third quarter, realized annual synergies were at a run rate of about $110 million, up from about 85 to $90 million at the end of the second quarter, and we continue to expect synergies of at least $175 million by the end of 2016.

We have also achieved a significant strategic milestone on October 17 with the completion of the Number 3 newsprint machine conversion at the DeRidder, Louisiana mill to produce containerboard. This work was completed two weeks ahead of schedule and the start-up of the machine is on plan with no major production or quality issues so far.

In addition to providing needed capacity, we’re excited about the grade optimization potential and freight savings that the D3 machine will bring going forward. Looking at the details of our third quarter operations, packaging EBITDA excluding special items was $262 million on sales of $1,176 million, which equates to 22.3% margins.

Containerboard production was a record 858,000 tons, up 12,000 tons over second quarter of this year. Our Valdosta mill was down seven days during the quarter for its annual maintenance outage, reducing containerboard production about 11,000 tons.

In addition, we completed planned boiler and (indiscernible) repairs at our DeRidder mill and also in the fourth quarter our Wallula, Washington No. 2 medium machine will be down for five days for its annual maintenance outage, which will reduce production by about 2,000 tons.

Containerboard inventories at the end of September were down 7,000 tons compared to the end of second quarter but up 21,000 tons since the beginning of the year, including an increase of 4,000 tons with the April 2014 acquisition of Crockett Packaging.

The remaining 17,000 ton increase was the result of our decision to increase our containerboard inventories, some at our box plants to improve and optimize supply assurance and transportation costs. The rail and truck issues that we spoke about during our second quarter earnings call in July did not improve during the third quarter.

Fortunately with our inventory adjustment and our day-to-day management of the situation, we’ve been able to limit some of the impact on transportation costs. Our integration level in the third quarter was 92%, and to meet our total containerboard demand we purchased 47,000 tons of containerboard from the outside market.

Our year-to-date purchases of containerboard were 147,000 tons. With the start-up of the DeRidder No. 3 paper machine, most of these outside purchases will be eliminated and we will only purchase some specialty grades that we do not produce.

I’ll now turn it over to Tom, who will provide more details on PCA’s containerboard and corrugated packaging sales and demand..

Thank you, Mark. Our containerboard and corrugated products demand was strong and steady throughout the quarter. With the acquisition of Boise, overall corrugated product shipments were up 33% over the third quarter of last year.

Excluding Boise, PCA shipments were up 6.2% in total and were up 4.5% per workday with one additional workday in this year’s third quarter. The acquisition of Crockett Packaging in April of 2014 contributed about 1.5% of the shipments increase.

Industry corrugated product shipments were reported last week and total shipments were up 1.7% and shipments per workday were essentially flat for the third quarter. PCA prices for corrugated products increased slightly compared to the second quarter, driven in part by a richer mix.

Our outside sales of containerboard were up 8,000 tons compared to the second quarter and down 19,000 tons compared to the third quarter of last year, including Boise tons in both years. We reduced both domestic and export sales and increased our integration level from 88% in the third quarter of last year to 92%.

Pricing for domestic sales of containerboard was essentially the same as the second quarter. Export prices were down about $10 per ton on average, but pricing stabilized and began to increase late in the quarter.

For the first 10 days of October, PCA bookings for corrugated products are up 5.6% over the same period last year and billings are up 4.5%, so we are off to a good start in the fourth quarter; however, we do expect corrugated product shipments in the fourth quarter to be lower than in the third quarter with three less shipping days and some seasonal slowdown in demand that usually occurs during the Christmas holiday period.

I will now turn it over to Judy Lassa, who will discuss white papers..

Thank you, Tom. Our paper segment EBITDA in the third quarter of 2014, excluding special items, was $56 million on sales of $313 million, which equated to about an 18% margin compared to just over a 15% margin in the second quarter.

This margin improvement was driven primarily by higher volume and improved operations, and lower costs in our white paper mills. Our white paper mills ran extremely well, producing 296,000 tons. We had no annual maintenance outages in the quarter.

We will have our Jackson, Alabama mill down for seven days in November for its annual maintenance outage, which will result in lower production by 9,000 tons and higher operating costs.

We did build some paper inventories at the end of the quarter, up about 6,000 tons compared to the end of second quarter, and that’s primarily related to the planned outage at Jackson. Office paper shipments during the third quarter were up 7.3% over the second quarter this year and were down 5.4% compared to the third quarter of last year.

During the past year, we elected to exit some business which did reduce our shipments. Printing and converting and pressure-sensitive shipments were up 3,000 tons compared to the second quarter and down about 22,000 tons compared to last year’s third quarter.

That is as a result of the fourth quarter 2013 paper machine closures at the International Falls, Minnesota mill.

Finally, white paper prices were essentially flat in the third quarter compared to the second quarter, and looking at the fourth quarter we expect to see seasonally lower white paper shipments and higher fuel costs at our International Falls, Minnesota paper mill with the onset of winter conditions. I will now turn it over to Rick West..

Thank you, Judy. Looking at other company-wide cost and earnings change items from second quarter results, amortization of annual outage repair costs and direct outage costs increased $0.03 per share, which was in line with our expectations.

We saw expected seasonally higher prices for electricity of $0.02 per share and our medical and workers’ compensation costs were up $0.02 per share. Moving to cash generation and use for the third quarter, PCA generated cash from operations of $223 million.

Capital expenditures were $107 million during the quarter, and year-to-date capital expenditures are $255 million. Common stock dividends of $39 million were paid or $0.40 per share. We made $53 million of cash tax payments, and we also paid off $75 million of long-term debt.

Total debt reduction since the acquisition of Boise on October 25, 2013 is $300 million, and our long-term debt is now at $2,357 million. We ended the quarter with $154 million in cash on hand.

To reduce the earnings risk of potential interest rate increases on variable interest rate debt, we issued $400 million of 10-year notes with a fixed interest rate of 3.65% in the third quarter and used the proceeds to pay down a portion of our bank term loan debt. I will now turn it back over to Mark..

Thank you, Rick. Looking ahead to the fourth quarter, with the DeRidder conversion we expect higher mill production which will allow us to reduce our outside purchases of containerboard.

Corrugated product shipments are expected to be lower with three less shipping days compared to the third quarter, and we also expect seasonally lower white paper shipments. Amortization of annual outage repair costs will be about $0.07 per share higher than in third quarter and we expect seasonal increases in fuel and transportation costs.

Considering these items, we expect fourth quarter earnings of $1.16 per share excluding special items. With that, we’d be happy to entertain any questions, but I must remind you some of the statements we’ve made on the call constitute forward-looking statements.

These statements are based on current estimates, expectations and projections of the company and involve inherent risks and uncertainties, including the direction of the economy and those identified as risk factors in our annual report on Form 10-K on file with the SEC.

Actual results could differ materially from those expressed in these forward-looking statements. With that, Operator, I’d like to open the call for questions. Thank you..

[Operator instructions] The first question comes from the line of Mark Weintraub with Buckingham Research. .

Thank you, good morning. Two quick ones. One, the September refinancing, so when you had originally completed the Boise transaction, you talked about paying down a billion dollars of debt subsequently.

I think with this refinancing where you took advantage of very low rates, does that change your thinking on the need to necessarily pay down a billion dollars in a specified time frame?.

Mark, regarding that, we took advantage of that opportunity with the interest rate to give us flexibility, but also I think the timing of our plan is still to pay down the billion dollars of debt over the next couple of years, so that target hasn’t changed but we did want to take care of some of the uncertainty.

Rick, did you want to add anything?.

No, except Mark, we still have over $700 million of variable rated debt, so we can continue to pay down our term loans until they are completely paid out with this refinancing..

And I’d add – this is Paul, Mark. This does give—as Mark pointed out, flexibility is the key word.

We wanted to get our debt down because it was variable and you never know what will happen, but we just took $400 million off the table that just put us at risk, and so paying down a billion in three years is still a goal but if it took 3.5 or 4 and we had a better use for the money vis-à-vis dividend or share buyback, we’re in a position that allows us to do what is the best thing and not be totally tied to this commitment to pay down a billion in three years.

So we’ve built some flexibility for ourselves that allows us to take advantage of whatever happens in the marketplace..

Thank you, makes a lot of sense.

There has been a lot of talk on MLP, and is that something that you guys have had a chance to take a look at, and do you have any thoughts at this stage?.

Yeah Mark, we’ve spent a lot of time on this and we have a good appreciation of its merits, both financially and strategically.

We’ve engaged legal and financial assistance to provide the information that would allow us to submit a request to the IRS for a private letter ruling, but obviously the big unknown is when the IRS will lift this moratorium on the MLPs and more importantly what are the rulings and the substance of any private letter request.

I think again this information will impact if and how we proceed with any MLP consideration.

Paul, do you have anything you want to add to that?.

The only thing that I’d add is that I’ve been looking at this, along with Mark and Rick and Kent Pflederer, our General Counsel, but I’ve kind of just tried to stay focused on the strategic aspects and the shareholder value creation, as opposed to the mechanics and the structure of setting one of these things up.

They’re kind of interesting – you know, MLPs can create shareholder value from my perspective in a couple ways.

The first is the traditional way, related to the value arbitrage, if you will, that results in selling a cash drain that’s tax advantaged for a higher multiple than your stock is trading, and the multiple that you end up getting is going to be a function of how the MLP investors view the security of that cash flow stream and what ability you have to increase distribution of that cash flow by puts down of additional cash flow from the parent company to the MLP over time, so that’s how it basically works.

But there’s a second and very important way that you could also create value, and that’s referred to as third party growth. This growth is in addition to simply pushing down a larger percentage of your existing cash flow to MLPs.

This new growth results from what value you get from redeploying the proceeds that you receive from the MLP investors, and as you know, this redeployment could be pay down debt, increase the dividend, buy back shares, or reinvest into the business.

In this regard with regard to reinvesting into the business, I think PCA has generated a track record over the last 10, 15 years of judiciously applying capital and obtaining superior returns for the shareholders. Our recent energy projects at Counce and Valdosta and our Boise acquisition are good examples of this.

We think that our ability to redeploy assets should resonate well with any potential MLP investors, and this can create a lot of value for both the MLP investors and the PCA shareholders.

So this thing is very attractive, especially if you can generate value in both ways, and it’s something that we consider to learn more and more about each day, but as Mark says, we can’t do anything until we hear what comes out of Washington..

That’s tremendously helpful. So recognizing you’ve got to wait to hear something from Washington, it sounds like you’re relatively comfortable with whatever complexities that the structure would entail.

Is that fair?.

Let me turn it over to our structure man, Rick..

Well Mark, we’re basically in the preliminary evaluation phase.

As Mark said, we’ve engaged auditors, legal and other advisors to look at what we would need to do for setting up the initial MLP IPO for carve-out audited financials, but we’re also beginning to look at the changes that would be needed with an MLP reporting structure, but we’re really in the early stages of that work and we’re continuing to look at each of the aspects of what we would need to do to operate on a daily basis with this type structure.

So that’s where we’re at – the preliminary evaluation phase, but we’re taking the time and effort to effectively look at it as how we can best operate in the future if that were to take place..

Thank you very much..

Next question, please..

The next question comes from the line of Chip Dillon of Vertical Research..

Yes, good morning. First question is just on the state of the market. A big dilemma we’ve all faced, and I’m sure you all have too, is the sort of decoupling of box demand with GDP that we’ve seen in the past few years with the outsourcing that seems to have come to an end.

We got, I guess, a hint in September that maybe we’re recoupling, and I know it’s hard to say with just a few months of data and finally seeing the economy get some life, but what are your thoughts about that? As you look at your current customer mix, do you think you’re going to see at least the industry tie its shipments more closely to the growth in GDP than we’ve seen in the last 15 years?.

Chip, this is Tom. Let me see if I can take a stab at this. I think where we are, at least in the short term here, is as business has grown, manufacturing has improved somewhat.

A lot of that has been in the durables area, and some of those industries don’t use a lot of corrugated; but the indicators are going forward that I think you’re going to see a little more in the non-durables area, and especially in light of the fact that the employment levels are improving, wages are going up, gasoline prices of course are coming down quite significantly, which puts a lot more money in consumers’ pockets, and therefore I think that will start to really begin to drive the non-durables area, which is much more tied to corrugated demand.

So I think that when you look at a total GDP number, it can be a little misleading from the standpoint of it depends on where the growth is coming from and how much use happens to be in the corrugated area. But when you look at non-durables, that’s very much tied to corrugated and I think we’ve got some definite upside there..

Yeah, let me just build on that. Tom said something very important here about non-durables.

If you go back, Chip, it has to be at least 10 years, though my memory is failing me there, but one of the first real tips we had in corrugated demand was the first time gasoline prices spiked up a lot, and that sucked a lot of disposable income out of the economy.

That disposable income was maybe $100 a month for everybody that drives a car, and so they weren’t going to buy a big non-durable—a big durable good with that money, they were going to spend that money on things packed in a corrugated container and not on gasoline, because as you know, we don’t ship a lot of gasoline in corrugated containers.

So if getting gasoline prices—if they can fall in the short term, that’s a big plus for corrugated because that disposable income will go somewhere, and wherever it goes, most of it is going to be packed in a box. So we also root for lower gasoline prices at PCA – it helps transportation expenses, too..

Got you, that’s very helpful. I guess shifting gears a little bit, I know you guys certainly—of late certainly have shown a great alacrity in adding to shareholder value.

I’m just sort of looking here at—you know, the net debt is down to $2.2 billion, you’re roughly a third of the way through your debt repayment plan that you had discussed after the Boise deal.

But it’s interesting – when you look at your EBITDA is arguably going to be less than two times—I’m sorry, a little more than half of that net debt level, so you’re less than two times leveraged already as we look at next year.

I just wanted to sort of take a temperature and see, would that at least allow you to consider the dividend as a potential increase candidate, and also given your success in making acquisitions, are you considering that you’re still open for business or do you still want to get that debt down even further before you’d consider that?.

You know, I think it goes back to the word, flexibility, that I used earlier. I think where we are right now, we’ve got these options to consider and that’s something that as time goes on, we’ll be discussing with the board.

The fact that we have paid down $300 million and where we are with the business, it gives us a lot of firepower to move in different directions, whether it’s dividend increases.

I think on the acquisition side right now, obviously we’re still focused pretty heavily on the completion of this integration, so that’s less of an interest to us immediately but that doesn’t say that going forward, if an opportunity came along, we certainly would have to consider that.

But again, I think right now we’re very comfortable and we’ve got tremendous flexibility to move that cash and best deploy it.

Paul?.

Chip, we mentioned on the previous caller – you probably didn’t hear it, but you were holding on the line – we also refinanced $400 million in variable debt and got very attractive rates on 10 years. That gave us a lot of flexibility to put us in a position to consider the things you’re talking about..

Got you. Real quickly – could you talk a little bit about the increased integration we’ve seen? I mean, you guys are buying box plants. We saw another big deal down in the southwest.

How much of the non-integrated business is left, and do you think that could discourage new capacity aimed at the independents, since it seems like there’s not that many left?.

Chip, this is Tom. I think you were getting at getting a real handle on what’s going on in the marketplace, and certainly see it very much like we see it.

So I think that our strategy to get to 90%-plus integration, which is where we are and we intend to even do more, is a sound strategy and certainly given what’s going on in the rest of the marketplace.

And of course, you know have even—if you observe if you’ve got some direct mill owners who had no cut-up at all who are now—have now actively pursued some acquisitions, so it’s a bit of a change in the marketplace..

Very helpful, thank you..

The next question comes from the line of George Staphos of Bank of America Merrill Lynch. .

Thanks everyone, good morning. I wanted to go back to MLPs, just a couple of questions.

Remembering that flexibility is one of your bigger watch words at Packaging Corp, would it be safe to say that until you ultimately come to a decision on MLPs and for that matter get the appropriate signals one way or another from Washington, that bigger capital allocation decisions might be on hold, or will you look at these are parallel and independent decisions that you need to look at?.

I think the latter part – you know, we will continue in parallel and look at opportunities as they come along. Obviously we wouldn’t want to pass up on something that was a good opportunity for the shareholders anticipating something out of Washington.

I think the key right now is for us to be prepared and understand what the implications are of a private letter ruling, which we are; but in the meantime, we’re going to continue running the business and provide value to the shareholders in the ways that we’ve done historically..

Back on that flexibility, we’re going to sound like a broken record and we’ve said this for 10 years. We’re not smart enough to predict the future, but we’re know we’re not smart enough to predict the future so we take another way out – build in flexibility, and that allows you to capitalize on the future, whatever it may be.

Again, paying down or converting this debt we had, $400 million, to fixed rate gives us some flexibility to pursue, in your term, a parallel and independent course. So we’ve got the firepower, we think, now to do a lot more different things than we had six months ago..

Paul, another question, and maybe this is somewhat preliminary.

Again, as you’ve studied MLPs and what the investor base and investment MLPs values perhaps somewhat differently than traditional, if you will, paper and forest investors might look at or value, do you envision any changes in the actual business model? I’m not getting into mechanics now in terms of what assets might or might not be in an MLP or (indiscernible) and what would remain with the parent, but more in terms of the integrated containerboard business, do you perhaps run it differently if it were part of an enterprise that had MLPs than what you’re doing currently? If so, what would those changes maybe look like?.

Yeah, that’s a very easy question to answer. The answer is no, we wouldn’t run it any differently. We have a business model that works and no matter what vehicle you have for transferring value to shareholders or creating value for shareholders, in the end it comes down to your primary business model.

If you’ve got a lousy business model, there’s nothing you can do to improve shareholder value. As they say, cash is cash, and our business model, as you know, has been performing at a very high level for a long time. That’s the last thing we’d change..

Understood. I appreciate that, Paul. Two last ones and then I’ll turn it over, both on operations.

Can you comment at all in terms of how D3’s start-up might be built into your guidance for fourth quarter? You obviously mentioned it will be more in the way of production, obviously, but what should we factor in perhaps for start-up costs or incremental EBITDA, if that’s possible to comment on? And the down time in the third quarter in packaging was 11,000 tons, I think you said in total; initial guidance was 13,000 tons.

Obviously it was a good operating quarter – you already said that, but were there any specific things that really went well in bringing back up Valdosta? Thanks, and good luck in the quarter..

On the first part regarding DeRidder, we’ve only been running for four days; this will be our fifth day of running, so it’s early. We’re obviously pleased with what we’re seeing so far, but we’ve got just—like I say, we’re in the start-up phase. But we’ve been conservative in building contributions to fourth quarter earnings.

I think a better way of looking at that is to understand going forward, if you assume we get through the start-up curve with no problems and we’re producing according to the original plan, on a quarter-over-quarter basis, Rick, you can build that for them, and I understand it was $115 million capital and about 30% returns, so that would give after-tax contribution of--?.

Yes, Mark. You know, with that what we’ve said previously with the 30% return at the capital, you’re looking at a project that’s going to generate on an annual basis when fully operating rough numbers about $60 million of EBITDA or about $0.36 per share on an annual basis.

So of course, that would be about $0.09 per share per quarter, and if you look at the fourth quarter, the machine is not operating essentially the first month, October, and you’ve got start-up costs as you mentioned, so that’s what Mark was alluding to. What we’ve put into the guidance is something—you know, you’re almost guessing at this point..

Yeah George, let me just amplify on that. When you start up the paper machine, and you know of examples where others have done this, it doesn’t go well.

You actually lose money the first quarter you start it up because you don’t run very well, and all that overhead that the newsprint machine was covering, and although you were only breaking even with newsprint, it covered a lot of overhead. So this machine doesn’t run well, it could actually hurt fourth quarter earnings.

Now, we don’t think that’s going to be the case. We’ve been running for five days and there’s been no showstoppers, but we’ve got a long way to go. Depending how well this machine ramps up, depending on a lot of things, we’ll make money in the fourth quarter.

It’s a tougher guess than normal because it’s easy to make a forecast on a machine that you’ve run for 10 years – you know how it behaves, you know what cold weather does to it, you know a lot of other things. But with a start-up like this, it’s plus or minus 50%, just to grab a number. So we’ve put a number in.

At the end of the quarter, we’ll see if we were close. We’re hoping it’s better and we’re hoping it’s not worse, but we really don’t want to give guidance. We don’t want to throw that number out, because there is so much uncertainty around it.

Throwing out a number tends to validate it, and it tends to maybe mislead investors that we’re overconfident in something. Right now, we’re in a learning phase – so far so good, but so far is the operative phrase..

Understood..

Then regarding the last part of your question on tons, the difference in the containerboard, we had originally planned to have the Wallula No. 2 machine outage in the third quarter, and that was moved into the third quarter so that’s a couple of thousand tons of difference..

Okay, thanks. I’ll turn it over. Thank you very much..

The next question comes from the line of Anthony Pettanari of Citi..

Good morning. I was wondering how volumes trended over three quarters—sorry, the three months of the quarter, and then the industry data for September shipments seemed incrementally positive. You talked about bookings and billings being up 4 to 5% in October.

Are you seeing sort of an acceleration of box demand, or has it been mostly stable, or was it stable throughout the quarter or is there any kind of color you can give us there?.

Anthony, this is Tom. The volume trend through the quarter was relatively steady. We kind of built up into this September time frame somewhat because of the holiday season and our specialty graphics business does come up a little bit at that point in time.

Box demand though overall, I would say is pretty steady and we’ll see the same thing in the fourth quarter, with the exception of the end of the year when we have a little bit of a holiday slowdown..

Okay, that’s helpful. Then maybe just turning over to MLPs, Rick, you indicated that you’re at a preliminary stage of investigation.

I’m just wondering, assuming that the IRS pause or the government was not an issue, how long do you think it will take you internally to really make a decision or to feel that you’ve completed your analysis on the MLP front? How long do you think that would take?.

I really can’t comment on that right now, Anthony. You need to go in and look at—you know, there’s a number of things you have to do in terms of auditing and carve-out financials.

We’re in the preliminary evaluation of that phase, and you always want to have a look at what do you want to do in advance and what do you want to wait to do until you have more clarification on what a potential MLP could look like.

So we don’t want to waste a lot of time doing things until we kind of know a structure of what one could look like, but there are some things you can do in advance to prepare yourself.

But at this point, I couldn’t give you a time frame that we could be ready or how long it would take, but I can tell you that we’ll be in a much better position to do so in the next few months..

The only real broad calibration we could give you – you know, it won’t be in terms of days or years. It will be in terms of months..

Okay, that’s helpful. I’ll turn it over..

The next question comes from the line of Alex Ovshey with Goldman Sachs..

Thank you, good morning guys. A couple of questions.

So in terms of the IRS moratorium, do you have any visibility on the timing around when we may hear back? Do you think we’d hear something before the end of the year, or do you have any visibility around that at all that you can share with us?.

The latest is that they’re saying by the end of the fall. The problem is, the fall ends in December, so that would be government’s latest..

Fall of ’14, Mark?.

Well, that’s what—but again, you know, two months ago they were saying August and September, so the number, the date keeps shifting with the government. Our ability to handicap when that happens is approaching zero..

Understood. Appreciate the honesty there. Then just on D3, so it’s being ramped into the seasonally slow part of the year.

The market participants that sort of have a really good feel on what’s happening are characterizing it as a very sloppy market now, so how do you balance bringing on new supply, at the same time continuing to manage price costs in an efficient and effective manner?.

Well again, as we talked about through the second quarter call, we had a home for the tons and basically the tons are already sold to our system, so we’re in the process of reducing outside purchases.

We plan to build some inventory during the quarter and get ready for the annual outages in the first quarter of next year – we’re going to have our Counce and DeRidder No. 1 machines down in the first quarter of next year. So essentially again, we have a home for all the tons we plan on making, and as usual we plan on running to demand..

Got you..

To build on that, we have two—we’re up and beginning the first quarter downtime at this point, but we’ve got our two biggest mills, DeRidder and Counce, will be down in the first quarter, so our challenge with D3 is not to sell the tons.

Our challenge is to make enough so that we can supply our current demand and build a little bit of inventory to support our first quarter shutdowns. So the pressure is on the mill to produce. Tom Hassfurther does not have nearly as much pressure in selling the tons because we need them, we’ve got a home for them..

Got you, Paul – okay.

If I could just ask one more real quick one, do you guys have a net debt to EBITDA leverage target in mind below which it wouldn’t make much sense to pay down debt from an official capital allocation perspective?.

You know, everybody asks that question, and we really don’t because you can control the debt side of it but you can’t control the EBITDA side of it. You know, you could look at—we’re at about 2.1 right now debt to EBITDA.

Some would say that’s a very good number, but it’s not good enough for us because the flexibility we want, if by some unusual chance, as it did in 2008 and 2009, that EBITDA dropped. So we like the flexibility. Could you put a number out there? Maybe 1.5, but that’s not something we hang our hat on. We keep the flexibility, as we’ve said previously..

Good stuff. Thank you very much, everybody..

The next question comes from Mark Connelly with CLSA..

Thanks. I wonder if we could go back to Tom’s comments about integration.

Containerboard is pretty profitable right now and building new capacity seems pretty profitable, too; so might it make sense to get short and stay short for the next couple of years, and then think about your integrated strategy longer term than that?.

You know, Mark, I’m really not going to comment on that. I would just stay with the previous comments that I made and then you could draw whatever conclusions you want to on that. We’re in an industry that’s running 97.7% operating rates, so it seems at this point in time obviously whatever is produced primarily has a home.

You’d be hard-pressed to find any other industry running at this kind of rate. We’ll just leave it at that..

Okay. So can we switch to white paper for a second? Your revenue per ton was off a little bit.

Was that price or was that mix, and can you tell us what’s happening in the mix?.

This is Judy. Our mix is shifting around a bit just because of our change in customer mix, but we are basically on track with where we were planning to be..

So prices are flat?.

Flat pricing for third quarter..

Third quarter essentially was flat, Mark..

Thank you..

The next question comes from the line of Philip Ng with Jefferies..

Hey, good morning guys. DeRidder is coming on pretty nicely, but as you pointed out, there’s a ramp-up start-up cost and all that good stuff.

How should we think about the impact, the incremental tons going to ’15, on your mix and margin, especially in the first year?.

Well again, as Rick pointed out, on a going forward basis in an ideal world, what was that, Rick – about $0.36 on an annual basis of contribution on earnings per share?.

That’s right..

And then again, understanding that we think we know what the machine is designed to do, but we’re learning about that every day right now. So our plan is just what it’s always been with the rest of our legacy system – we’ll run to demand..

We don’t give projections for the full year. We give guidance a quarter ahead, so every quarter you’re going to learn more and more about that machine..

Okay, that’s helpful. Then in terms of capital investments on the horizon, you guys have obviously done a great job on the energy projects and the D3. But part of the attraction, as you pointed out earlier on the MLP front, is potential investments of that cash flow that you would get from an MLP event.

Would that be more geared towards acquisitions, or you still do see a good amount of capital reinvestment opportunities down the road in your business?.

Well, both. We’ll continue to take advantage of opportunities and acquisitions of the box plant businesses, and also keep reinvesting in the existing assets in terms of energy and productivity improvements.

Again, I think if you step back and look at the margin gains in the white paper business, a great deal of that margin gain over the last 11 months came from operational improvements and efficiencies in the white paper mills through hundreds of investments in fixing assets and new bolt-on technologies.

So the answer is both, and a myriad of opportunities..

Okay. I know exports are not a big part of your business, but you did give some color on prices ticking back up. Where are you seeing export prices move higher, and how should we be thinking about just demand overall? It’s actually been quite strong on the export front, but we’ve seen the U.S.

dollar tick up and there’s some concerns about global growth slowing down a bit..

Yeah Phil, this is Tom. Regarding exports, again I’ll just say we’re a small player, getting limited markets, and we’re very specialized in exports. So for me to give you a broad perspective of what’s going on in exports is a little bit difficult.

As I mentioned, our prices have started to tick up again a little bit and primarily in the Europe market, but we have currency issues. There’s a whole myriad of things that go on in that export market, and the strength of those markets tends to move around the world. Europe was strong; they're a little bit weaker now.

South America has picked up, so it’s just—you know, on any given day it can look a little bit different..

Okay, good luck in the quarter, guys..

The next question is from Debbie Jones of Deutsche Bank..

Hi, good morning. Just wondering, looking at the bigger picture in paper, what your thoughts are on how the industry or PKG will manage the continued decline in white paper going forward, and then if you have any thoughts on the impact of imports over the next six to 12 months and the ability to sustain prices in this business. .

This is Judy. So I’m going to decouple demand with shipments. In looking at demand, they fall in between that 3 to 5% range that we thought we were, so we think we’re right in line with where we think demand is.

I can’t comment on impact on the industry on the import piece of things, but we think—we believe that it’s having maybe some impact on the market, but we are not impacted as much because of our customer mix..

Okay, thanks. That’s helpful.

If I could just get in my MLP question, is it possible with your preliminary analysis, could this type of structure could be potentially applied to your papers business? I’ve heard a few opinions that this could also be applied to recycled containerboard, which seems like a stretch, but I was wondering if you think either of those options could be on the table if the moratorium is lifted..

I think it’s too preliminary. I think everyone needs to wait until we have better indication from the IRS about what would qualify or if anything would qualify. So I really would not want to speculate on the products that could potentially be within an MLP structure..

Okay, thanks very much..

Yeah, we just want to stay away from sheer speculation. If we knew something, we’d tell you; but you’re in the area of sheer speculation and we really just don’t like to do that..

No, and I appreciate that. I think that part of the problem is there is a lot of speculation out there, so just getting an idea of maybe what’s off the table could be helpful. But anyways, thank you very much and I’ll pass it on..

The next question comes from the line of Chris Manuel with Wells Fargo..

Good morning, gentlemen. I promise I don’t have an MLP question for you. Anyway, I did want to go back to DeRidder for a second and the D3 start-up and some of the elements there.

Could you maybe walk us through what a typical experience might be bringing one of these machines on stream? I think you mentioned the first month or so, it really doesn’t produce a lot of paper.

Is this typically a six-month process until you get to the roughly 90,000 tons a quarter run rate? Is there a typical phasing that these go through?.

Well, let me just again put a little color on this. Three weeks ago, the paper machine down at DeRidder was nothing more than just framework. I’m talking about just press section framework, forming section framework, the driers – there wasn’t much left in the drier section and the winder was completely gone.

So in three weeks’ time, that was all reassembled and started up last Thursday, so we’re pleased with what we’ve seen. We’re obviously on a curve. We’re making good quality—well, we’re making medium at the time. We also have to qualify our linerboard product on the machine as time goes on.

So we really are not going to speculate in terms of its capabilities and the timing of that. There is a lot of uncertainty in terms of what could go wrong; on the other hand, we have tried to and we believe we have engineered in best practices and have the right people managing the business.

So again, our plans for the quarter would produce roughly 50,000 tons for the market to demand, to supply our system, but other than that we’re just going to take it day by day..

That’s helpful. One more follow-up question, if I could there.

How do you—how difficult is it to flip back and forth between linerboard medium that you make there? Is it a complicated process? How do you think about that balance within your system?.

It’s complicated. It involves the chemistry on the wet end of the machine, so it’s not just a simple matter of turning a switch.

You have to consider the various chemical additives that are used to produce medium characteristics as opposed to linerboard, so there is a period of hours, say, that are involved and then getting the machine started back up and lined back up on the various grades.

So there is a degree of difficulty there, and again we have to learn how to do that and go through that experience..

Thank you. Just two other quick ones. Rick, one of your favorite questions about 2015 that I know you love to answer – could you give us maybe a sense as to early thoughts about capital spending? I mean, obviously this year was a big year as you went through this conversion at D3. I’m anticipating ’15 probably comes down.

Is something in that 3 to 350 range something that’s probably reasonable, or how should we kind of think about ’15 at this point for capital?.

Well, we’ve already stated that we were going to drop our capital from 2014 to 2015, and we said we were going to be in around 400, 410 for this year. So I think first thing you should do is back off the D3, which was about 100, 110 for this year – that gets you down to 300, and then you don’t have (indiscernible).

So just without a lot of strategic projects, you’re below 300, and we’ve said we plan to be below 300 – you know, in the high 200’s range somewhere – and we’ll give more clarification on that in January.

But unless there’s major strategic projects that come up that Mark talked about with very high returns, we would plan to bring our capital below 300 next year..

Yeah, and just the qualifier on that – you know, with the acquisition of Boise, there’s obviously more opportunities to deploy capex into high return projects, and if you’re willing to reduce your hurdle rate, you still could have a lot of pretty good projects that you could spend capital on.

We haven’t done that – we’re keeping our hurdle rates where they were, and that means that there’s some projects that even though they have attractive returns, we’re not going to compensate on hurdle rate. So that will limit more than anything else how much capital we spend.

Now, if we find some big project that meets the kind of hurdle rates we’ve historically wanted, then we would increase that number; but we’re not going to break our discipline just because we have opportunities for some pretty good projects if they’re below the hurdle rate..

Okay, that’s helpful. Just a last quick question is as we see some of the efforts in China now to step up collection of OCC, that’s put a little bit of pressure here on OCC domestically.

How do you view the balance between some of the more virgin grades that you’re making and some of the recovered grades? Is that something that—how do you process that, how do you think about that? Is that something that you’re worried about?.

Just the opposite. We think long-term, the world is going to run out of recycled fiber because virtually all the capacity added in the world for the last 10 years has been recycled. Had the recession not happened in the fourth quarter of 2008, there’s the chance that we’d have run out of recycled fiber then, the line we’re about to cross.

So in the short term, unless China gets going, recycled fiber we think will probably stay where it is; but if economic activity begins to improve in China, there’s going to be pressure on OCC again in our opinion, and we’re glad we’re primarily a virgin operation..

Thank you, good luck..

The next question comes from Scott Gaffner with Barclays..

Good morning. My question’s really around the demand that you’re seeing so far in 4Q.

Are you seeing anything that looks more like September, or is it looking more like the rest of the quarter where things were maybe a little bit slower for the industry?.

I would say that our demand—as I mentioned, we’ve only got a few days to really look at, about 11 days, and it’s been pretty solid starting in October. We will of course trend down some by the end of the year, which is pretty much the norm for us, but right now the quarter is pretty solid from a demand standpoint..

Okay.

Any thoughts around sort of the increase in ecommerce as we move into the fourth quarter? I think you guys mentioned it the last couple of years, but is it something that you’re looking at as something that could improve demand in the fourth quarter again this year?.

I don’t think there’s any doubt about that. You just look at the numbers – that arena is growing very, very fast, and of course you know that’s heavy corrugated use. So again, we experienced an increase last year and I think some of that is going to occur in the fourth quarter this year as well..

Okay. When you look at your inventory levels, you seem to think that everything was—you know, you were comfortable with your inventory levels.

Is there any reason you would need to take those higher, meaning if that freight cost built on rail and truck hadn’t abated, is there any concern that maybe that gets a little bit tighter again in the fourth quarter and you might need to take your inventory levels up to account for that?.

You know, as we talked about on the second quarter and we reiterated today, we’d intentionally moved that inventory up because of the transportation issues and with the fact that going into 2015 1Q we have the Counce mill down and the big D1 DeRidder machine down.

So our intention is to build some inventory and take advantage of that, and again not seeing a significant improvement in transportation issues..

Okay. Just lastly, I think I might have heard you say that you had positive mix in your corrugated business in the third quarter.

If I heard that right, what was driving the positive mix shift?.

The positive mix is primarily the graphics-related business that relates to the Christmas season and even going into next year’s season, depending on when those customers begin to develop those products..

So more just a positive seasonal mix shift, nothing out of the ordinary?.

That’s correct..

Perfect, thank you..

The next question comes from Al Kabili with Macquarie..

Thanks, good morning. I wanted to circle up on DeRidder and clarify if in your adjusted EBITDA in the third quarter, if that included any headwind from some of the start-up costs, as you indicated..

No..

Okay, that’s helpful. And then secondly, Rick, on the capex on the high 200’s, would that include box plant, necessary sort of box plant investment, because I know sometimes that can change depending on whether you acquire or invest organically in box plants.

Just a clarification on that capex, factoring in the box plant, necessary box plant expansion. .

Yes, other than some of the things that we have periodically done strategically in the box plants to put in major pieces of equipment all at one time, that number does include environmental, maintenance, some cost reduction in the mills as well as growth in the box plant.

So it’s the normalized base that we’ve always had, just including now the white papers business and the packaging business of Boise now that we have some of the major strategics ahead of us—behind us, excuse me..

Okay, thank you very much.

Then on the inflation front, last question is just what are you seeing on wood costs, and any view over the next year as perhaps pellet demand continues to increase? And conversely, any thoughts on if oil prices stay here, what that might mean to you from a savings perspective across transportation, other kind of oil type derivative costs that you might have..

I think on the wood cost question, the only issue we’ve seen this year was the summer rains that occurred in the upper midwest that affected the Wisconsin area for us and also the Minnesota region. But that’s stabilized, so the rest of the North American wood cost system has been pretty flat.

As far as pellets, we continue to hear of some additional pellet plant activity in the southern region. That has—currently, it hasn’t been a significant impact this year. As far as oil, obviously lower oil would portend to indicate a lower diesel price, but we haven’t seen that yet. That’s a potential opportunity you’d have to anticipate.

Other than that, I really don’t have anything..

All right, I appreciate that, and good luck. Thank you..

All right. Operator, I think we’ve got time for one more question and then we’ll wrap it up. I think it’s after 10:00 our time..

The final question comes from the line of Steve Chercover with DA Davidson..

Good morning, thanks for fitting me in. A lot of things have been covered, but it seems like packaged food has really hit a rough patch recently.

Do you believe there’s been a permanent shift in consumer behavior?.

Can you repeat the question again, Steve, real quick?.

Sure. It just seems like packaged food has hit a rough patch, according to some of the retailers.

I’m wondering if there’s a permanent shift in consumer behavior, and if so, would a shift to local food offset that?.

I don’t really have an answer for you on that. I’m not aware of this most recent study. I can tell you that obviously food is a big part of the demand in corrugated, and it’s just moved up modestly this year. The beverage sector has been kind of flat as well.

But to my point earlier regarding consumers having more money in their pockets, we would expect those areas to move up going forward as consumers have a little more money to spend..

Agreed.

Is it safe to say that your $1.16 guidance for the fourth quarter is incorporating flat pricing?.

We don’t give price guidance in advance. We don’t do that. We only talk about historic prices, not forward-looking on pricing for legal reasons..

Got it. Okay, thank you very much..

Okay, with that, Operator, I’d like to thank everybody for participating on the call today and look forward to seeing everybody and talking to everybody in January for the fourth quarter and full-year call. Thank you very much..

Thank you. This will conclude today’s conference call. You may now disconnect your lines..