Mark W. Kowlzan - Chief Executive Officer Thomas A. Hassfurther - Executive Vice President-Corrugated Products Judith M. Lassa - Senior Vice President-Paper Robert P. Mundy - Chief Financial Officer & Senior Vice President.

Mark A. Weintraub - The Buckingham Research Group, Inc. Chip A. Dillon - Vertical Research Partners LLC Philip Ng - Jefferies LLC Anthony Pettinari - Citigroup Global Markets, Inc. (Broker) George L. Staphos - Bank of America/Merrill Lynch Mark Wilde - BMO Capital Markets (United States) Chris D. Manuel - Wells Fargo Securities LLC Mark W.

Connelly - CLSA Americas LLC Alex Ovshey - Goldman Sachs & Co. Scott Louis Gaffner - Barclays Capital, Inc..

Thank you for joining Packaging Corporation of America's Third Quarter 2015 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. And please proceed when you are ready..

Good morning, and thank you for participating in Packaging Corporation of America's third quarter 2015 earnings release conference call. I'm Mark Kowlzan, CEO of PCA.

And with me on the call today are 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; Bob Mundy, our Chief Financial Officer. During our prepared comments, we will be referring to slides that are posted on our website.

I'll begin the call with a through review of our third quarter results and operations. And then I'll turn the call over to Tom, Judy, and Bob who'll provide more details. I'll wrap things up, and then we'll be glad to take questions.

Yesterday, we reported third quarter net income of $128 million or $1.31 per share, compared to last year's third quarter net income of $104 million, or $1.06 per share. Earnings included a $5 million, or $0.05 per share, net gain for special items related to the Boise integration, including the sale of the former St.

Helens mill site previously operated by Boise Incorporated. Excluding special items, third quarter 2015 net income was $123 million, or $1.26 per share, compared to third quarter 2014 net income of $124 million, or $1.26 per share. Third quarter net sales were $1.5 billion in both 2015 and 2014. Turning to slide three.

Third quarter 2015 earnings per share, excluding special items, were equal to the third quarter of 2014, driven by improved volume of $0.07; lower cost for chemicals, $0.03; energy, $0.03; and repairs, $0.02; and a lower tax rate, $0.03.

These items were offset by lower white paper prices and mix, $0.13; lower export containerboard prices $0.03; higher fiber costs, $0.01.

And we're pleased that we matched last year's record third quarter earnings considering that lower prices and mix in our Paper segment and lower export containerboard prices adversely affected earnings by $0.16 per share.

Looking at our – Packaging business, EBITDA and margins excluding special items were up over last year's levels with EBITDA of $268 million, and sales of $1.14 billion, or a 23.4% margin, compared to the third quarter of 2014 packaging EBITDA excluding special items of $262 million with sales of $1.18 billion or a 22.3% margin.

Keep in mind that third quarter 2014 revenues included over $36 million of sale that related to the discontinued newsprint business at DeRidder and other divested operations.

Containerboard production in the third quarter was 933,000 tons, up 75,000 tons compared to last year's third quarter, driven primarily by the tons produced on the D3 paper machine at DeRidder.

As mentioned during last quarter's call, we took D3 down in September to install six additional dryers, in order to provide the capability to achieve full design capacity of 1,000 tons per day. The outage was executed safely and efficiently, started off ahead of schedule and achieved all objectives.

The achievement of our designed capacity objectives puts us in position to fully optimize our entire containerboard platform and improve our manufacturing and freight costs. Also, just as importantly, this allows us to respond quickly and efficiently to future growth and service our customers' needs in a timely manner.

Our containerboard inventory at the end of the third quarter was up 6,000 tons versus the second quarter levels, and about 2,000 tons above year-end 2014.

As we've mentioned on previous calls, containerboard inventories at our box plants are higher than what we've carried historically due to the transportation issues that I think most of you are familiar with now.

Our containerboard mills operated very well during the quarter with energy and chemical costs lower than last year's third quarter, while fiber costs were slightly higher, primarily at our Tomahawk, Wisconsin mill. I'll now turn it over to Tom, who'll provide more details on containerboard sales and our corrugated business..

Thank you, Mark. Our corrugated product shipments set a new record, up 1.3% in total and per work day over a record third quarter of last year. This compares to industry shipments, which were up 0.9%. Pricing for corrugated products during the quarter remained stable compared to both the second quarter of 2015 and the third quarter of 2014.

Our outside sales in containerboard were flat with the second quarter, and up about 12,000 tons compared to last year's third quarter, reflecting an increase in export ships.

Domestic prices were comparable to the second quarter and last year's third quarter, while export prices were fairly flat with the second quarter, but about 8% lower than last year's levels.

We expect outside sales of containerboard and corrugated product shipments to be lower compared to the third quarter with three less shipping days, and some seasonal slowdown in demand that usually occurs during the Christmas holiday period.

Our corrugated products mix will be seasonally less rich in the fourth quarter as the produce business in the Pacific Northwest as well as the display in high-end graphics business for the Christmas holiday period normally falls-off during the quarter.

However, we do expect overall corrugated product volumes to be slightly higher than last year's record fourth quarter. I'll now turn it back to Mark..

Thanks, Tom. Looking at our Paper segment, EBITDA excluding special items and sales were lower compared to the third quarter of last year with EBITDA of $46 million and sales of $292 million or 15.8% margin compared to the third quarter of 2014, with EBITDA of $56 million and sales of $313 million or a 17.9% margin.

Although sales prices negatively impacted our EBITDA by almost $20 million, we were able to cut that impact in half through our cost reduction and efficiency improvement efforts.

Additionally, at our International Falls mill, we also completed the successful installation and startup of a 53 megawatt turbine generator to replace four small inefficient units. With the new turbine generator, the mill is now capable of producing 70% of its electrical power requirements compared to 38% previously.

I'll now turn it over to Judy Lassa, who'll provide more operating details..

Thank you, Mark. The drop in revenues versus last year that Mark referred to were driven by lower prices and mix changes, while total shipments were essentially equal with last year's level. Compared to the second quarter, prices held up fairly well, dropping only slightly, and volume was up 5%.

Office paper shipments, which represent about 70% of our paper volume, were down about 1% versus last year, but up over 4% compared to the second quarter. Overall, the mills ran well during the quarter, compared to last year's third quarter; cost for wood, chemicals and energy were lower, offset slightly by higher prices for purchased pulp.

There are also improvements in maintenance costs and labor and benefit costs. We had no maintenance outages during the third quarter. But in the fourth quarter, we will have an extended recovery boiler outage at our Jackson, Alabama mill, which will reduce production by over 28,000 tons, primarily on our number three paper machine.

Also, our volumes are expected to be seasonally lower, and our mix will be less rich in the fourth quarter as compared to the third quarter. I'll now turn it over to Rob Mundy..

Thank you, Judy. As expected and mentioned during our last call, third quarter 2015 effective tax rate of 35% was the same as the second quarter, and about 1.5% below last year's third quarter. We currently expect the fourth quarter of 2015 tax rate to be similar to the third quarter at about 35%.

As shown on slide four, cash provided by operations in the third quarter was $237 million, that's after deducting $76 million in cash tax payments for federal and state income taxes, other uses of cash including the capital expenditures of $76 million, common stock dividends of $54 million, share repurchases of $55 million, and debt repayments of $27 million.

We ended the quarter with $187 million cash on hand. So year-to-date, in 2015, we paid dividends totaling $147 million, repurchased shares totaling $101 million, and we've made $31 million of debt repayments. I'll now turn it back over to Mark..

Thank you, Bob. Looking ahead, as discussed earlier, we expect seasonally lower volumes of corrugated products and containerboard, as well as a seasonally less rich mix in corrugated products compared to the third quarter. In addition, we expect seasonally lower volumes and a less rich mix in white papers.

With colder weather, wood and fuel costs are also expected to be seasonally higher.

Finally, as previously reported, maintenance outage costs are expected to be $0.10 per share higher in the fourth quarter due to the planned 24-day outage at our Jackson, Alabama mill for a major rebuild of the recovery boiler which will reduce production and increase costs.

Considering these items, we expect fourth quarter earnings of $1.03 per share. Now, before I move on to the Q&A portion of the call, I want to announce that effective October 31, Judy Lassa will retire. On behalf of all of us, I want to both congratulate and thank her for the 33 years of outstanding service and dedication.

She has agreed to continue to be available to us over the next 12 months on an as-needed basis under a consultation agreement. Paul LeBlanc, who currently reports to Judy as Vice President of Sales has been named Vice President of Boise Papers reporting directly to me.

With that, we'd happy to entertain any questions, but I must remind you that some of the statements we've made on the call constitute forward-looking statements.

These statements were 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 on 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..

Our first question comes from the line of Mark Weintraub of Buckingham Research Group..

Thank you. I was hoping to get a little bit more color on the bridge from third quarter to fourth quarter, if possible. I know that you had called out the Jackson rebuilds on your prior conference call, and that was $0.10. I guess historically, I thought that seasonal factors typically were in the $0.07 to $0.08 range.

And then maybe, mistakenly, I had thought that DeRidder might make a bit more money in the fourth quarter than the third quarter, but I recognize maybe seasonal factors might have affected that.

But I didn't hear anything else that was really going on, and I wasn't quite sure if I'm missing something or – because the magnitude of the decline from 3Q to 4Q is a bit bigger than what I had anticipated using those inputs.

Can you help me out there?.

Yeah, Mark. You're correct when you said that, historically if you went back over the years, the 3Q to 4Q impact was in that $0.08 range, going from three to four. However, with Boise, if you think about it, we're a 50% bigger company.

So on a proportionate basis, if you go through the various elements, we're more in the line, probably $0.12 a share of seasonal Q3 to 4Q. And the elements you're looking at would be box volume and mix going from third quarter to fourth quarter, mill volume going from third quarter to fourth quarter.

You've got white papers volume and mix in the fourth quarter, and then wood and energy costs, typical increase. So you got those four items that now would be more likely in the range of that $0.12 area. So if you combine the $0.10 outage impact along with the $0.12, and then $0.01 of other, you get from the $1.26 to $1.03.

And we did have – again, last year, we had about the same amount of seasonal costs in last year's fourth quarter, but it was partially offset by containerboard volume from the pre-build of inventory that we called out in order to support the 2015 beginning of the year heavy maintenance schedule on our containerboard business.

That was about 45,000 tons of pre-build. And so we don't expect to see that type of pre-build this year. We now have the capacity with our D3 machine at DeRidder to support our Q1 maintenance downtime without that type of heavy pre-build. So in essence, this pushes some of the earnings out of the fourth quarter into the first quarter of 2016..

Oh, okay. That's....

Tom, you want to elaborate on that a little bit?.

No, I think you summed it well. I think just overall, I think what people should realize, we've undergone a big transition. We were a company out of capacity buying a couple hundred thousand of tons on the outside to support our demand.

But with D3 and other productivities (16:18) we got through synergy, we can now fulfill all of our internal demand with the additional capacity, and we still have room for growth over the next several years. And so there's no need to pre-build inventory, because we can make it as fast as we can sell it in the first quarter.

That wasn't the case when we were short of capacity. So I just kind of looked at that another way if that helps..

Got it. And that's real helpful. One quick follow-on if I could, just on the Jackson project. I think last quarter, actually pretty sure last quarter, you had called that out as being an unusual project and that next year your maintenance and outage expenses probably would be lower than this year. I think you'd said $0.05 or $0.06.

I just wanted to verify that, that's accurate? And also, can you fill us in on what the capital costs on the Jackson project are?.

Yeah. The Jackson outage this year involves – the big project is the rebuild of the recovery boiler. That was a 1973 vintage recovery boiler. And we're basically replacing the entire bottom of the boiler, putting a new steam generating section, and doing other various maintenance work on the project.

It's a $10 million capital spend, and again, this boiler will be good, it's lasted since 1973. We expect to get another 40-plus years out of the boiler. So – and this was a minimum effect of capital spend. We did study some various options looking at basically new boilers and complete rebuilds.

And so, compared to a $75 million CapEx spend, we've avoided that, and we're at $10 million level, that gets us very, very good, efficient operation for many years to come. Regarding your comment about where we were with next year, we did call out that this year, being $0.60 amortization for the outages, next year would probably be $0.55.

Where we are now looking the fact that we got the capability at DeRidder; 2014 was $0.48 of amortized shutdown expense. We told you the $0.55, there's going to be something in between that $0.55 and $0.48 that gets us into a more normalized range.

And so, we'll give you details in the January call when we give you specifics about our plans for next year..

Okay. Great. Thanks so much..

Next caller, please?.

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

Yes, and good morning. First of all, yeah, I just want to make sure it's clear, we did see that would call out that $0.10, and we had thought maybe the outage impact would've been an increment, but thanks for clarifying that the outage at Jackson is part of the $0.10.

The question I had is – and I think you answered it, but I just want to clarify, is you look back at 2014, you called out a $0.07 higher maintenance in the fourth quarter versus the third quarter, and the earnings dropped $0.10. So, that would suggest that the other impact was $0.03.

So maybe the way to think about that $0.03 is that, you still incur the $0.12 of seasonality, but that pre-build you mentioned might have offset $0.09 of that; is that in the ballpark?.

Correct. The pre-build had big impact of offsetting that. You're exactly right. And Chip, the other thing, last year was an unusually large pre-build because of the huge DeRidder outage, and the pre-build this year, because we don't have all that work to do at DeRidder, is less, and we'll give details in the January call. But you're exactly right..

Okay. That's very helpful. That makes that clear. And then looking at the – that maintenance, so I understand that, $0.48 in 2014, around $0.60 in 2015, I think you said $0.55 in 2016, and then in 2017, the more normal flow will be between $0.48 and $0.55.

Is that right or did you suggest that maybe next year could be between $0.48 and $0.55?.

What I'm suggesting is that, I think 2016 is going to be even lower than the $0.55 as we look at things and as we're concluding this year. When we gave you that $0.55, I believe that was on the July call and again, with what we know now. So, I believe the number will be somewhere between that $0.55 and $0.48.

And so, that's why we're saying it's going to be heading to a lower normalized number that we can provide more clarity on in the January call..

Got you. And you mentioned – last question that you're now in a position to better supply your need. Obviously, D3 helps there. But of course you all have shifted the output of that machine more towards virgin, and I guess two questions.

One is, how has that dryer project gone and sort of what kind of incremental benefits do you expect? And secondly, would that mean that you might on the margin be buying a little bit more medium on the open market as we go forward and which would seem to be a good thing, given that market seems to be a lot looser or at least there's more availability than certainly you would see on the linerboard side?.

Regarding the first part of your question on the project, we took the machine down for its intended work in September. We accomplished all of the dryer work and fine-tuned up some of the wet end and again started the machine up. The outage instead of 13 days, was just approximately 10 day outage, but executed very well.

Machines started up flawlessly, quality is great. And again with the work that's been done in the back-end of the mill to support the virgin kraft fiber production, we truly have the capability to meet that 1,000 ton a day of productivity off the machine as a virgin quality linerboard.

And so, we can supply whether it's a medium mix, linerboard mix, that the machine has tremendous capability. And so, going forward, for the foreseeable future, we have the ability in our legacy system and DeRidder to supply our needs.

As Tom grows the box plant business, and takes that cut up into the system, we will reach a point where we are out of capacity. Right now, the DeRidder facility is at its design, and we're very pleased; but regarding the outside purchase of medium; that'd be a high-class problem to have in the future years..

Okay. And I guess, the last question is, are we sort of at the end of the Boise synergies? Or as we look at 2016, do you see them helping to offset some of the cost change – well, assuming there are cost changes on the upside, although I would imagine chemicals and energy are helping you.

But could you sort of update us on those synergies, if you could? Thank you..

We've said on the July call, we're not going to give you specifics right now. We'll give you a summary on the January call. We told you in July that we were on target for the year, heading towards the $200 million run rate, and we called out a few items, one of which has been the I Falls turbine generator project, that's an example.

Your comments about the efficiencies, as we said, we were able to overcome the year-over-year price decline impact on the white papers side with improvements in that business, and that was an example, again that we've said we'd be continuing to make improvements in operational efficiencies. And that's a great example.

And that would be a direct synergy. So those are the type of things that we're looking at, and we're very pleased with how that's all rolled in. But again, and we've mentioned this in July, we're one company now, and we're not going to be getting into the specific synergy items. But we will give you a summary in January of where we are..

Yeah, Chip, I'd add. Again, it gets harder, we're going to make the $200 million by the end of what we've predicted that we were $175 million, and we'd get to the $200 million over the next year, which would be in the next year.

But it starts to get muddied after a while, after you get the standalone-type projects of what is really just normal efficiency improvement or what is synergy related. In other words, comes from putting two companies together. And we don't want to spend a lot of time trying to do nothing, but accounting.

We'd rather spend our time on nothing, but improving the operations. And so that's why we'll give a summary at the end of the year, but it's – and we're going to make our numbers, and there's more operational improvements that will happen in 2016. We're just calling them normal operational improvements. We're not calling them synergies anymore..

Understood. Thank you very much..

Okay.

Next caller, please?.

Our next question comes from the line of Philip Ng of Jefferies..

Hey. Good morning, guys. Is it mostly....

Good morning..

Yeah. Is it mostly due to comps or have you lost any market share? I don't think that's the case. But just seems like volumes for corrugated was a little weaker during the quarter. I mean, you guys have historically outpaced the broader market, and guidance for 4Q seems pretty soft growth as well.

I just want get some color on what you're seeing on corrugated volumes?.

Phil, when we look at the third quarter, and we built our guidance of $1.28, we had estimated obviously a little bit higher volume. We did come in at the 1.3% year-over-year. So we are off about 1.2%.

Tom, do you want to add little color to what you saw?.

Yeah, Phil. Keep in mind, the economy is certainly not performing as we would hope it would. And I think it weakened a little bit in the quarter. But still, we beat the industry by almost 50%. And that's against, of course, record comps from the previous quarter – previous year's quarter.

But we – also in the past, if you recall, when we had higher growth rates, it was a mix of both organic growth and acquisition growth. And we haven't made an acquisition now for about 18 months. So you're now talking about fewer organic growth here..

Got you. I mean, and that's a great segue.

And my next question was going to be, are you seeing a little more competition on box assets in the M&A side, and could you look to grow more organically from just building some new box plants? How are you going to tackle that, I guess ultimately?.

Well, I think that – sure, it's a little more competitive. There's no question about it. You see the amount of activity that's going on, and also, those multiples have gone up dramatically. So we're very delighted with the fact that we were at the leading edge of this in terms of the acquisitions. But – and there's a lot fewer available.

If you look just what's happened in the last quarter, I mean there's been some pretty significant acquisitions both in box plants and the mills; independent mills got acquired. So there continues to be quite a bit of activity there. That said, we're still looking at opportunities, and we will continue to do so. I feel good about a couple of them.

So, we'll see where things go, but also, we'll continue with our strategic capital investments as we have in the past to find opportunities where they're best suited..

Yeah. And just to be clear, we outgrew the industry in the third quarter, and when you outgrow the industry, you increase your market share. So your earlier comment about losing market share, it's the opposite. We outgrew the industry, and by definition, we've increased our market share.

And then as Tom pointed out, it's not as much as this previous quarters, but we still outperformed the industry..

Okay. That's helpful. And I guess just one last one from me. A major competitor of yours is idling significant capacity for containerboard. Just curious to get your view on supply/demand over the next year or so in light of some of the new capacities that's coming on. Thanks..

Yeah. You know, for anti-trust reasons, I don't want to comment on that. For PCA, we run to demand, and that's how I'd answer that..

Okay. Thanks. Good luck in the quarter..

Next question, please?.

Our next question comes from the line of Anthony Pettinari of Citi..

Good morning. Tom, just a follow-up on Phil's question. You said that you were interested in opportunities and actively looking at opportunities. Is that on the box plant side or the mill side or both? And then just following up on that, I mean, one of your large competitors made a large acquisition of recycled mills.

Would you be interested in recycled mills, given you've been more levered to virgin historically, but OCC has been lower for longer than many of us expected?.

We're primarily looking at box plant acquisitions. We would like to add to that side of the business. As far as recycled mill capacity, we're not actively looking at that.

And quite frankly, I think, as Mark made very clear, our projects that we've just completed at DeRidder position us very well to accommodate the growth going forward for quite some time. So I think our mill system is in excellent shape..

Okay. That's helpful. And then just switching to white paper, I was wondering if it's possible to parse how much of the $0.13 hit in the quarter was from price versus mix.

And then just following up on that, post the boiler rebuild in Jackson, is there any incremental volume that you'll be adding in Jackson, or is there any impact to the mix at Jackson?.

Are you referring to – again, year-over-year there's a $0.13 paper price mix going from third quarter 2014 to third quarter 2015. And then – so again, for the fourth quarter, you're probably in that $0.11; but – in terms of the year-to-year impact, but not quarter-to-quarter..

Yeah. And then I'll just – I like to put – the only comment I'd like to make on that are; the index is down $35 a ton quarter-over-quarter from last year. There is a lot of mix impact and it really is in all of our segments. We have more commodity in our office segment, less recycle in premium.

We have a more offset and less envelope in the mix center are creating, converting. We're still experiencing price erosion on the pressure sensitive, which adds to that as well. And then pulp has been down quite a bit, (32:02) down $70 per U.S. shipment, and about $80 to $100 on shipments to China. So all those components add to that mix.

And the question on Jackson, I mean, the Jackson piece doesn't impact – I mean, it's the overall business mix for Q4. We built inventory for the Jackson outage. So just some more commodity in office in Q4, and some more offset versus envelope in premium (32:26)..

But the recovery boiler outage does not affect the paper machine. You won't get any more tons off of paper machine by the rebuild on a recovery boiler. Hopefully, we'll get a little more with the burning capacity, which means that we can buy – less purchase pulp down there, and that helps the cost side of the equation..

Okay. That's helpful. I'll turn it over..

Next question, please..

Our next question comes from George Staphos of Bank of America..

Hi, guys. Thanks for all the details. I just wanted to piggyback on the maintenance question, and then the sequentials, really into first quarter.

So would it be fair, piggybacking on Chip's question then, that we should be expecting a more favorable seasonal pickup 1Q versus 4Q, to the tune of $0.09, you get all that in 1Q or would that be somehow spread over the other quarters?.

Again, we only give guidance one quarter at a time, George. And so....

Understood..

Again, and I did say this. We looked at this year's maintenance amortization of $0.60. We did call out $0.55, but we know now looking at where we are. We do believe that the maintenance amortization for the year will be lower than the $0.55.

How much? We'll qualify and quantify that in January, but I can tell you, just inherently looking at the shutdown activity next year, the bulk of the heavy lifting done, we did all the big major work at DeRidder. The white paper mills have two years of time to fix a lot of opportunity.

And so we're going to be truly into a more normalized annual shutdown activity in 2016, but I can't give you the detail right now. And we'll clarify that on the call in January..

Okay. Understand. Figured I would give it a shot. Now, I think you had mentioned, third quarter was maybe off a little bit from your expectations on volume. Fourth quarter, I thinking you're guiding for a slightly higher corrugated shipments, if I heard you correctly.

Tom, could you talk at all to bookings and orders early in the quarter, relative to what's in your guidance?.

Yeah, George. I've got 10 days of data, and after 10 days of data, our bookings and billings are running about 1% over previous. And keep in mind that those were record quarters and record comps. So, it's a – we've got some tough comps, but we're still running slightly ahead..

Okay. My last two ones, I'll ask them in sequence, and turn it over just for time sake. This question, I think has come up in the past.

If you could remind us, what's your view on the uncoated free sheet capacity you have, and its suitability over time if you need more containerboard capacity for conversion? Obviously, they wouldn't necessarily be well situated given the fiber mix, but I want to see what your view on the optionality of that would be or whether you think a further expansion at DeRidder would be more likely if you could talk to that? And then, the other question I had with demand, this is certainly not your fault, but demand being a little bit softer than perhaps we would have seen earlier in the year.

With the mills now running more normally, does it suggest that you'll need or you'll have the ability to run with less inventory in 2016 than you were running in 2015? Thanks and good luck in the quarter..

George, regarding the first part of your question, we are not contemplating any conversions currently. I'll finish that comment up with comments we've made for many years now. Anything can be converted at a certain capital investment, providing you have the fiber availability and the market demand.

Regarding the last part of your question, inventory, with where we are, we do have the capability to supply. But we have a lot less pressure. I'm not going to quantify what we intend on doing next year. Our current inventory is up a couple of thousand tons over the beginning of the year. We're comfortable at that range.

But yeah, we've got a lot more flexibility now. That's why we don't have to do the bigger pre-build. And so – so we now have built in some capability to overcome some of the transportation challenges. But again, we don't expect those challenges to ease off.

We expect them to become more of a challenge in the upcoming years, but we have a lot of flexibility for those..

Yeah. Thank you..

Next question, please?.

Our next question comes from Mark Wilde of Bank of Montreal..

Good morning..

Good morning, Mark..

Question first for Judy.

Judy, I just wondered if you could talk about any impacts you're seeing so far from the anti-dumping duties in the white paper business?.

Certainly. So, the July market stats with the preliminary CBB (37:57) in place at the end of June, and the ADD (38:00) announced for the end of August really started to show some signs of movement on imports being done by 36,000 tons and like a real reduction in China and Indonesia.

But customer inventories are still high with some of the pre-buying that took place. And we think the impacts could begin to show up maybe mid to quarter end..

Okay. And then I just – looking at the trade data the other day, it seems like you can see this drop in cut size imports, but it looks like kind of converting grades might be going up.

Can you speak to that?.

I can only speak to what we're seeing in the stats, because like I said, we don't participate there..

Okay, all right. The other two questions, I had were on the containerboard side. One, I wondered, one of the indexes moved down in the trade papers this last weekend, and if you could just comment on whether that is – there's any impact from that in your fourth quarter numbers.

And the other thing I wondered, Tom Hassfurther, are you seeing any impact in your specialty business from all of these evols that have gone in? Because, when people first started putting in evols, they talked about how quick they were to change from product-to-product, and that they could go after more of that specialty business, and I wonder if that's really happening in reality?.

Okay. Mark, let me answer the first one regarding the index change. I see that will have very little impact for us. The changes that have taken place, if you really read the detail, they're basically related to 100% recycled media.

There's a whole variety of quality levels, of course, with 100% recycled medium and the core quality, obviously, and I was trying to find a home. So it's an area we don't really participate in. It does sometimes get reflected in grades that we do, we are in.

But I think most of our customers understand that it's really about the quality of semi-chem and their need for semi-chem. So, we're not – I don't think we'll see much impact at all regarding that. The specialty business and evols. You asked what evols do.

It's pretty hard for me to tell exactly what our competitors are doing with evols, but I think if I was to generalize, I would say that not much has changed in terms of how people are using evols, more output purposes. And if you really see what's going on when people install evols, many of them take out two or three flexors to put in one evol.

So, if you're going to do that, it's going to be pretty hard to run a lot of graphics on it given the output that you have in two flexors and going to one evol. So, I don't think that's going to have some – having a dramatic impact either..

Okay. All right. Sounds good. Good luck in the fourth quarter..

Thank you..

Next question, please?.

Our next question comes from Chris Manuel of Wells Fargo Securities..

Good morning, gentlemen. Two questions for you. First, cash usage here, it looks like you had stepped up repurchase a little bit in the quarter. It's been kind of level almost what you've done all year-to-date.

Can you comment a little bit on uses of cash going forward? Do you anticipate picking up repurchase a little bit? Are there – is that reasonable or unreasonable?.

Again, where we're looking at right now as we build cash, we're going to remain opportunistic in our stock buyback. As we summarized, we bought back $55 million worth of stock in the quarter. We've paid down some debt and continue to pay the dividend, and build cash. So got a lot of firepower here, and we'll continue to do – take advantage of that.

But again, we don't have any stock buyback targets. And again, it all ties into where you're looking at capital for the year. So, we've got a lot of opportunity as we wrap up the year and go into the new year with our use of the cash..

Okay. Second question I had was, now that you've got the DeRidder machine fully running or fully capable, I think your integration level has kind of moved to the 83%, 84% range.

So a) if you could kind of verify that, and then b) appreciating that you run the demand, so you'll fill all your needs internally for box – box plants first, that remaining, I don't know, 16%, 17% that you have, how would you characterize the export market today for price demand? Are you having any difficulty finding a home? Are you seeing any further price reversion beyond just currency? Or how would you have us think about that, and your ability to continue to run kind of flat out in export or would you think about bowing that back a bit?.

Well, I'll handle the export pricing first, and then talk about what's going on. Right now, the pricing in export is – pricing has gone down. It's primarily driven by currency, which is the largest factor. Trade flows is another one and economic conditions around the world.

So the massive slowdown that you saw that's taken place in China as an example obviously has some impact. And of course, the currency situation around the world is the primary impact. Export demand remains pretty stable, quite frankly. It's not – there's a bit of a global slowdown, but the export demand is still pretty good.

We're just going to have to deal with some of our pricing issues going forward as a result of those items I just mentioned. And regarding integration level, we're currently at 85% level..

Okay. That's helpful. Thank you, guys..

Next question, please?.

Our next question comes from the line of Mark Connelly of CLSA..

Thank you. Just two simple questions on the cost side. You've highlighted some meaningful cost pressures this quarter, and you did last quarter, too.

So I'm wondering as you think about the boiler and other productivity projects whether you think you have enough to offset that over the next year if these current kinds of cost trends stay in place? And second, you obviously had some fiber issues last summer that were weather-related.

Do you expect weather aside to be in much better shape this year?.

Regarding the first part of your question on costs, historically, we're always working every day addressing cost efficiencies and opportunities within the mills, and box plants and that will continue. And that's not changing. So on the second part of your question regarding fiber, we did see a better summer weather wise.

And so, harvesting conditions and wood availability improved significantly compared to the fall and winter months, and early spring. The Tomahawk commentary regarding wood prices was primarily related to the fact that it was a catch-up issue that so many mills and paper mills and saw mills run their inventory so low during the winter.

The pricing pressure remained even though harvesting conditions improved. But all-in-all, the wood harvest and wood volume has improved considerably year-over-year..

So, you won't carry more wood going in this winter?.

Well, we'll carry the normal amount of winter wood build. We do that every year. The industry – as an example, the Gulf Coastal region, the Mid-South region, you always end up traditionally with the winter rain periods. And so, it's a typical winter wood build.

But again, what we're seeing to date; we haven't seen the fall or rains that we saw last year in some of these areas. So, it's a much more normal season right now..

Very helpful. Thank you..

Next question, please?.

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

Thank you. Good morning..

Good morning..

The negative mix impact on corrugated in the fourth quarter, so is that all seasonal or is there anything else happening? I know you talked about the economy being slower than where we were earlier in the year.

Is that having any impact on the mix or is that all just a seasonal impact?.

That's all seasonal impact, Alex..

Very good. And then on the cost side, so certainly, the seasonal uptick makes a lot of sense, and then we see every year. But what about the decline in oil prices that we saw in the middle of the year? And I think diesel will probably be about $0.50 a gallon lower in the fourth quarter, chemicals are continuing to come in.

Is that going to have much impact on the business?.

Oil price has been down for a year. Natural gas prices have been down. And so, we haven't seen any relief in terms of transportation costs. Rail and trucking have continued to raise rates regarding overall costs, regardless of what the – what their diesel fuel was. So, in terms of fuel, that hasn't changed basically year-over-year..

And we don't burn any oil in our boilers..

And natural gas has been pretty stable..

Yeah. Okay. And just last one, intra-quarter it was reported that Turkey put in some tariffs on kraft linerboard from the U.S., I know you're not a big exporter, but you do put in some product into Europe.

But were you putting any products into Turkey, and what sort of – if you were, what sort of the plan for that product?.

Alex, I really can't talk about what markets we ship into, and stuff, so we'll just leave it at that. Obviously, we're small in the export market to begin with..

Okay. Okay. I'll turn it over. Thank you, guys..

Thank you.

Next question, please?.

Our next question comes from Scott Gaffner of Barclays..

Thanks. Good morning..

Good morning, Scott..

So, if I look at 3Q, it sounds to me, after we've gone through everything, that really the only item that came in below expectations was the corrugated product shipments, or was there anything else that came in below your expectations heading into the quarter?.

Yeah. You got it right. I mean, it was a great quarter, except we're just a little bit lighter on volume compared to our original forecasting model that we had built our guidance on for $1.28. So the $0.02 miss was directly related to that little lighter volume..

And to put that into perspective, the first half of the year, we were up 2.5%. We had forecasted about 2.5% for the third quarter, and we came in at about 1.3%. So when you adjust that for yield, that basically – had we made that 2.5%, would have been right on our number..

Okay. And so as we look at the fourth quarter guide, I hear a lot of seasonality, a lot of – around demand and input costs, and again maybe the only thing that's changed in your mind is corrugated product shipments, I just – and it sounds like we may be misestimated a lot of the seasonality here.

Is there anything other than corrugated product shipments as we go into 4Q that is below where you would've expected it to be, maybe midway through the year?.

No. As far as where we would've expected, just the box volume is softer, but then again, it's – it all is related to the normal seasonal softness, and it's spelled out in the earnings..

And our box volumes forecast is predicated on what we see today. If the economy starts to pick up, that's going to be a positive. If the economy slows down more, that will be a negative. And so there's uncertainty about this number, but as Tom mentioned, we expect our volume 4Q-over-4Q to be up in corrugated. So when you say soft, we'll still be up.

We may not be up as much as we had hoped, and if the economy picks up a little bit, that'll obviously help us..

Sure. And just last question on the guidance. I realized historically you've only given one quarter forward on the guide. But it sounds to me as if the fourth quarter guidance really isn't that far off from what you expected before. It's more – our models had differing seasonality, and they are maybe based on history versus where the company is today.

Any thoughts around possibly giving further out guidance so that you don't have this volatility in the stock on a day like today?.

No. We're comfortable with giving guidance one quarter at a time, and we'll leave it at that. Yeah. I think we're the only company in the industry that even gives you a firm number one quarter at a time. So, we don't give you full-year guidance, but I don't know of anybody else that publishes one quarter in advance.

So, we think we're ahead of everybody in that regard, and we're not going any further ahead..

Fair enough. Thank you..

Thank you. Next question, please..

Our next question is a follow-up from George Staphos of Bank of America..

Hi, guys. Quick one.

Just on capital allocation, maybe for Tom and Bob, if we are to understand that multiples for corrugated assets have maybe trended higher over time, and certainly you were ahead of the curve a few years ago with what you were doing, you're still going to need if you continue at your historical trend, more converting capacity at some point.

Have the returns gotten such where it makes more sense to do greenfield, or basically what I'm asking, are box plant greenfield investments at this juncture higher returning from what you can see relative to the suite of acquisition opportunities you've got out there right now in box plant? Thanks guys, and good luck in the quarter..

Let me start with that again. Looking at the opportunities that have been presented in the last year or so, obviously, we've been looking at them. As Tom mentioned, there was some rich prices. We had capacity within our own system to continue growing the volumes.

And so, we've been pretty judicious about how we look at the assets, and the inherent value, and it's all related to the book of business.

And so, going forward, if you were to look at capital allocation into the box plant side of the business as opposed to building a greenfield box plant, theoretically you're always better to go buy an existing book of business than an existing plant.

And so with that Tom, you want to add any color there?.

I would just say, George, that our strategy is not going to change. I mean, if we find an acquisition that meets our financial objectives, but primarily meets a great customer base, great management team, and obviously accretive to earnings and it makes sense for us to do a buy under those circumstances, I mean we'll do that.

In addition, we'll continue to look at strategic capital investment where that makes sense, and – which we've done in the past.

So if we're in markets where we're out of capacity in terms of converting capacity, and we've got customer base who desire to do significantly more business with us or they're expanding or whatever the case might be, I mean, in those particular cases we'll certainly invest in the strategic capital.

So I think our – just because we haven't made an acquisition in the last 18 months doesn't mean we're changing our strategy by any means. That said also, keep in mind that, what is able to be acquired out there is getting less and less every day, because of the activity that's going on. So, those – that capital may flow into other buckets.

But we'll see what comes up as the future goes..

That's all fair. Thanks for the time, guys. Again, good luck in the quarter..

Thanks. Next question, please..

Our next question is a follow-up from Mark Wilde of Bank of Montreal..

Yeah, just on the – going back to the box business, Tom Hassfurther, I just wondered, we've seen these ISM numbers slipping over the past few months. And historically, they've correlated pretty well with the box business.

Can you tell me based on what we've seen in the ISM, do you actually expect box volumes to soften further over the next couple of months?.

Mark, I really can't predict what the future is going to hold. All I can tell you is that, as I indicated that the numbers didn't set what we had hoped they would be. So we didn't have a lot of tailwind, quite frankly, from the economy in the third quarter. But I can't predict at all what's going to happen in the fourth quarter..

Okay. And then, one other question I had is just going back to this integration level. You've always operated since you became public in a pretty tight band on integration.

I'm curious, if you saw a good mill asset come up over the next year or two, would you actually be willing to take that integration level down further for a good mill asset?.

I don't want to speculate on that, because that's absolutely purely speculative. And I just don't want to get into that. And Mark, that's a question it's so open-ended. If somebody wanted to give a mill away for next to nothing, that was good asset, we're really interested in things that are almost free. But to pay the normal price, no..

Yeah. I don't see any giveaways right now..

Me neither..

Okay. All right. Thanks..

Thanks.

Next question, please?.

Mr. Kowlzan, I see that there are no more questions.

Do you have any closing comments?.

I'd like to thank everybody for joining us today and look forward to talking to you on the January call for the full year 2015 numbers. Have a good day. Thank you..

Ladies and gentlemen, thank you for joining today's call. You may now disconnect your lines and have a wonderful day..