Tom Hassfurther - EVP, Packaging Mark Kowlzan - Chairman & CEO Bob Mundy - SVP & CFO.

Steve Chercover - D.A.

Davidson Scott Gaffner - Barclays Capital Mark Weintraub - Buckingham Research Group Anthony Pettinari - Citigroup Chip Dillon - Vertical Research Partners George Staphos - Bank of America Merrill Lynch Chris Manuel - Wells Fargo Securities Gail Glazerman - ROE Equity Research Debbie Jones - Deutsche Bank Scott Liebman - CLSA Limited Phil Ng - Jefferies Mark Wilde - BMO Capital Markets.

Thank you for joining Packaging Corporation of America's Third Quarter 2016 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 over to Mr. Mark Kowlzan and please proceed when you are ready..

Good morning and thank you for participating in Packaging Corporation of America's third quarter earnings release conference call. I am Mark Kowlzan, Chairman and CEO of PCA. With me on the call today is Tom Hassfurther, Executive Vice President, who runs our Packaging Business and Bob Mundy, our Chief Financial Officer.

I will begin the call with an overview of our third quarter results and then turn the call over to Tom and Bob who will provide more details. I will then wrap things up and be glad to take any questions. Yesterday we reported third quarter net income of $119 million or $1.26 per share.

Third quarter net income included special items of $3.3 million for acquisitions-related and facility closure costs. Excluding special items, third quarter 2016 net income was $123 million or $1.30 per share compared to third quarter 2015 net income of $123 million or $1.26 per share. Third quarter net sales were $1.5 billion in 2016 and in 2015.

Total Company EBITDA for the third quarter excluding special items was $299 million in both 2016 and 2015. Details of special items for the quarter were included in the schedule that accompanied our earnings press release.

Third quarter 2016 earnings per share excluding special items of $1.30 was equal to our guidance and was $0.04 per share above the third quarter of 2015 driven primarily by higher containerboard, corrugated products and white papers sales volumes of $0.04; higher white paper prices and mix $0.03; lower costs for energy $0.03; fiber $0.07; freight $0.03; lower annual outage costs $0.01; and the lower share count resulting from share repurchases for $0.04.

These items were partially offset by lower domestic containerboard and corrugated products prices and mix of $0.13; lower containerboard export prices $0.02; lower paper production volume $0.02; and higher costs for labor and fringes $0.04.

Looking at our Packaging business, EBITDA excluding special items in the third quarter 2016 of $256 million with sales of $1.17 billion resulted in margins of 22% versus last year's EBITDA of $268 million and sales of $1.14 billion or a 23% margin.

Operationally, the mills ran exceptionally well with production of 950,000 tons driven by the need to support record box shipments and a rapid integration of the new corrugated plants from the TimBar acquisition.

We ended the quarter with containerboard inventories 16,000 tons below last year's third quarter and 11,000 tons below the end of the second quarter of 2016 as a result of the strong sales volume and the integration of containerboard related to TimBar.

I am now going to turn it over to Tom who will provide more detail on containerboard sales and our corrugated business..

Thank you, Mark. Corrugated product shipments excluding TimBar set all-time records for both total shipments as well as shipments per day with our shipments up 1.7% in total and per workday compared to the record third quarter of 2015. Including TimBar, shipments were up 4.9%. As a comparison, the industry was up 1.5% in total and per workday.

Our outside sales of containerboard were about 15,000 tons above last year's third quarter and about 27,000 tons above the second quarter of this year. The higher volumes were driven by improved sales in both the domestic and export markets.

Export containerboard prices were about 6% or $0.02 per share below third quarter 2015 levels and flat compared to the second quarter of this year. Domestic containerboard and corrugated products prices and mix together were $0.13 per share below the third quarter of 2015 and down $0.05 per share compared to the second quarter of 2016.

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

As we have indicated in previous third quarter earnings calls, 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 and high-end graphics business for the Christmas holiday period normally falls off during the quarter.

However, we do expect overall corrugated products volumes to be slightly higher than last year's record fourth quarter. Additionally, we notified our containerboard customers of a $50 per ton price increase effective October 1 and we also notified our box customers of a box price increase. I will now turn it back to Mark..

Thank you, Tom. Looking at our Paper segment, EBITDA excluding special items in the third quarter was $59 million with sales of $293 million or an all-time record 20% margin compared to third quarter 2015 EBITDA of $46 million and sales of $292 million or a 16% margin.

Paper segment price and mix was higher than the third quarter 2015 and the second quarter 2016. White paper sales volume was higher and pulp volumes were lower compared to the third quarter of 2015 while both papers sales volume and pulp volumes were up versus the second quarter of 2016.

White paper prices improved during either quarter from continued realization of the previously announced price increases.

And finally, I want to mention that earlier in the fourth quarter we announced to employees at our Wallula, Washington mill that we will cease soft wood market pulp operations at the mill and permanently shut down the number one machine with pulp capacity of approximately 100,000 tons effective December 1, 2016.

We expect margins at the mill and for the Paper segment to improve after completion of our shutdown plans. I will now turn it over to Bob..

Thanks, Mark. Our third quarter 2016 effective tax rate of 35% was about the same as the second quarter and last year's third quarter. We currently expect the fourth quarter 2016 tax rate to be similar to the third quarter at about 35%.

Cash provided by operations in the third quarter was $217 million after deducting $75 million in cash tax payments and $50 million in pension payments. Other uses of cash include capital expenditures of $66 million, common stock dividends totaling $52 million and $27 million in term loan repayments.

We ended the quarter with $280 million of cash on hand. I will turn it back to Mark..

Thanks, Bob. On October 11, we announce that we have entered into a definitive agreement to acquire substantially all of the assets of Columbus Container Incorporated, an independent corrugated products producer in a cash free, debt-free transaction for a cash purchase price of $100 million.

This acquisition is consistent with one of our key strategic focus areas we have discussed many times regarding increasing our vertical integration of containerboard through organic box volume growth and strategic box plant acquisitions.

We expect this acquisition to increase our integration by over 30,000 tons and will allow further optimization and enhancement of mill capacity as well as other benefits and synergies that we expect to begin realizing soon after closing.

We believe that the acquisition will allow us to further enhance our strong balance sheet, financial results and cash flow consistent with our strategy to return significant value to our shareholders.

We're on track to close the acquisition subject to certain customary conditions and regulatory approval later in the fourth quarter and we expect to finance the transaction with available cash on hand.

Looking ahead to the fourth quarter, we expect seasonally lower volumes for containerboard and corrugated products which includes four less shipping days as well as seasonally less rich mix in corrugated products compared to the third quarter.

However, we will have three months of TimBar activity in the fourth quarter versus only one month in the third quarter. In addition, as Tom mentioned, we did communicate price increases to our containerboard and box customers.

While we don't comment on forward pricing, I would note that if the Industry Trade Publication increases the index for containerboard tomorrow, we would realize some of the benefit of a price increase during the fourth quarter but the vast majority of the benefits would be realized in the first quarter of 2017.

We expect seasonally lower volumes and a less rich mix in white papers and with colder weather, wood, fuel costs are expected to be seasonally higher along with some price inflation on recycled fiber. Our annual outage costs will also be higher with the scheduled maintenance work at our Filer City, Michigan mill.

Considering these items, we expect fourth quarter earnings of $1.15 per share and in addition as previously announced, we're on track to close the acquisition of Columbus Container during the fourth quarter. With that, we would be happy to entertain any questions.

But I must remind you that some of the statements we have 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 the forward-looking statements. With that, operator, I would like to open the call for questions. Thank you..

[Operator Instructions]. Your first question comes from the line of Chip Dillon with Vertical Research Partners..

First question is actually related to TimBar. I was actually quite impressed with the volume increase that you reported basically implying it added 3.2% when you look at the overall and the organic growth with just one month.

And as I kind of back into it, I just want to know if I am in the right ZIP Code here? While I think it helps your forward integration by around 200,000 tons as you indicated, it looks like that actually TimBar's cut up is maybe double that and you were already supplying them and therefore that helps us get our arms around some of the synergy opportunities.

Is that roughly fair?.

No, I think we indicated before when we talked about TimBar that we were not currently a supplier of TimBar. So all of those tons, that 200,000 tons is what they are bringing to our system..

Okay, okay, I got you. And then I guess as you look at Columbus, you mentioned that helps you integrate by about 30,000 tons.

Is that also, are you not a supplier to them so that will all be incremental to them?.

Correct. We're not currently a supplier and when we announced the TimBar acquisition, we basically called out that was worth about 6% of integration on an annualized basis and then this 30,000 tons at Columbus would be worth about 1% more integration on an annualized basis..

So that should certainly bring you well into the 90s I would think in terms of the overall?.

Correct. If you think about going forward into next year with Columbus and TimBar and with some organic growth at whatever you assume we finish the year with our organic, we're a little bit north of 95% integration in 2017..

Got you. Okay. And then just quick follow-up.

As you think about 2017 and recognizing that you are bumping up against your capacity at least on the board side, what should we think of CapEx? And would there be any opportunities to wring out more tons out of your mill system next year versus 2016?.

We have obviously been identifying various opportunities for some accelerated creep. We always have a portfolio of opportunities available and with the acquisitions that we have got now, we're involved in, we certainly have a good opportunity to take advantage of some of the opportunities within the containerboard mills.

So we will be accelerating some of that through 2017, 2018. And as you have seen historically for the past 16 years, these are not big amounts of capital. We're talking about $10 million, $20 million type opportunities in particular mills. And so we will call out the specifics on the January call for next year but again, nothing unusual out of that.

It would be just what you have seen over 16 years of opportunity spending for a little more creep that we will acquire as time goes on..

And then just last one, the white paper results were certainly better I think for the second quarter in a row than what we were looking for and it seems like you really have good operations there.

What are your thoughts in terms of next year? Is there any reason that you won't keep the operating efficiencies you have gotten and any thoughts on what your thoughts are long term? Any thoughts on the long term strategic importance of white paper to Packaging Corp?.

Again, it is proven, it is generating a tremendous cash flow for us. It does not require any significant amount of capital to fix anything. The action I called out today on the closure of the pulp machine at Wallula actually helps us focus on the efficiencies of that mill in a much better manner.

And so and as we called out almost a year ago back in the fall of 2015, every day we have our engineering and technology organization camped out in these mills along with the legacy containerboard mills working to improve efficiencies.

And so I fully expect as we have done through our history we will continue to wring benefits out of cost improvement and efficiency improvements and so very optimistic that we will continue on the path that we have been on. I am very pleased with what the white paper business is doing for us. Next question, please..

Your next question comes from the line of Mark Wilde with BMO Capital Markets..

I've got a couple of questions just around pricing. I know this is a sensitive issue so I will try and ask this carefully. But I noticed in the second quarter you guys had pointed to about a $0.04 share drag from lower containerboard and corrugated prices.

And in the third quarter it is up to $0.13 which seems like an awfully big quarter to quarter move for that drag.

Is there a mix element in there? Can you help us understand what changed just one quarter to the next?.

Mark, this is Tom. Yes, there is a mix element in there. Our mix was less rich. There is no question about it so that was some of the impact. The other impact quite frankly is if you really look on the containerboard side on average 3Q of 2015 over 2016, you are talking about on average about a 30% drop in published prices, so down.

So if you see that drop, I mean we try to hold off as much as we can but eventually that does impact the pricing containerboard in the domestic market..

Okay. The other when I was just curious about, Tom, if we go back to the first quarter there was that reduction in the Trade Paper price on liner of about $15 and there was a lot of commentary then about that drop was not big enough to kind of trigger some of the adjustment features in these box contracts.

I am just curious now with containerboard prices slated to go up $50, will you wind up netting the whole $50 or do we need to kind of net some of that 2015 drop earlier against the $50?.

Mark, I am not going to get into specifics about our contracts. But I can just tell you that there are a lot of different trigger mechanisms involved in these contracts. So in some cases yes, in some cases no and that is just the nature of those contracts..

Mark, you've got to appreciate we're dealing with probably 18,000 customers on the corrugated products, containerboard side of the business. Very complex..

Okay, understandably. The final question I had is, Mark, just in terms of your ability to kind of creep or debottleneck. Would you care to give us kind of an estimate of what you think is possible over the next two or three years? I think you have talked about 100,000 tons at DeRidder.

But in total across the PCA system, what might the potential be?.

I would rather wait until January to call that one. We're currently involved in an analysis right now. It involves capital spending and diminishing returns and where we're best getting our low-cost tons for our capital dollars spent.

So we will be prepared to call that one out in January for you but we're confident we have got the capability to supply what corrugated products we will need through 2017 into 2018..

Your next question comes from the line of Mark Connelly with CLSA..

This is Scott Liebman in for Mark. Just one quick question for you on Columbus. So we see the acquisition is worth about $100 million and you cited about 30,000 incremental tons that you will be able to integrate through the system.

So face value when you compare that to the TimBar transaction, it seems a bit expensive but then when you went through and you showed us the adjusted EBITDA multiples of both, it actually turns out to be cheaper.

So if you could talk a little bit just about what makes Columbus a higher margin business and then what about the business is unique and how will that fit into your existing operations?.

We're not going to get into the details on that. We consider that proprietary but nevertheless, what attracted us to Columbus it is a very diverse, high-quality book of business that the enterprise has been able to build.

Tom, do want to add to that?.

We can't say much because we haven't closed yet. But the other thing is that I would just add they have a 30+ year reputation as being one of the very best in the marketplace. So they've got a great reputation for a long, long period of time..

Okay. And then you have talked about this a little bit earlier in the call but just quickly, you guys are known for continuous improvement from an operational efficiency standpoint in both containerboard and white paper.

But specifically in containerboard, do you have any bigger projects like some of the energy projects that we have seen you do in the past on the horizon maybe not in the next year but past that that will be able to offset some of the input costs and labor inflation that we saw hit you guys this quarter and in the past?.

The short answer is, yes. Again, we always maintain that portfolio of opportunities and then it is a matter of capital spending. And again, we dusted off the files and we're spending the next month or so to evaluate where these opportunities should be pursued.

But again, as we have done for the less 16 years, we've got a nice portfolio of opportunities that will address those very things, energy, fiber consumption. So again, we're confident as we go forward we've got very high return [indiscernible] of capital spending dollars. But we will give you an update in January on this specifically..

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

I just have two topics I would like to touch on. One is kind of early integration or thoughts of what you are seeing within TimBar? I think as has been discussed, you have talked about 200,000 tons of integration opportunity. If memory serves, you felt you could kind of get there through the end of this year.

I just wonder4d how the pace is with that? And then along the lines of Columbus Container as well, how long it takes to integrate those 30,000 tons? Is that something you can do pretty quickly after closing?.

Yes, I am going to start and then I am going to let Tom finish it up. Again with 200,000 tons, we started moving through very quickly in September and now through this fourth quarter. As we finish up the year, we will have a very small amount that will wind itself in a contract in January but it is literally a few thousand tons.

Tom, do you want to add some color to that?.

I would just add that we're only about 30 days into this business but it is certainly delivering exactly what we had hoped for and the integration is going very smoothly. You also asked about Columbus Container and how soon we can integrate.

Again, we haven't closed on that yet so that is going to be difficult to speculate but I would anticipate that one will go very smoothly post closing..

The second topic I wanted to ask about was the Papers business. When I look sequentially 3Q to 4Q, last year there was quite a drop. It was close to I think $20 million almost down sequentially. The year before it was closer to $10 million, $11 million.

I know there is always a lot of moving parts but if you could just give us a sense as to does it look more like last year, does it look more like 2014 with respect to how you would anticipate the Papers business performing in 4Q? Or maybe what some of the factors are that would help us think about that?.

Let me qualify that very simply. Last year we were faced with the very large expensive outage at Jackson Mill. Last year was our year to fix Jackson. We put in a new bottom or a recovery boiler, that was almost a month of downtime on that boiler. We went through the mill from top to bottom and put a lot of corrective action in the facility.

So it was an enormous undertaking last year in 2015 so that is what brought that earnings down for the Paper business in the fourth quarter.

Bob, do want to quantify that a little bit?.

Yes, a little bit too on the price side, the price and mix side of things, it was obviously going down whereas this time, Chris, that certainly should not be the case..

But it will be down quarter to quarter just due to mix seasonality testing--.

Yes, you will have your normal seasonality and whatnot. But just keep in mind too, as Mark mentioned, we're shutting down the number one machine at Wallula, the pulp volume which is in our volume numbers too. So that will be a bit of a drag from a volume perspective and if you are just doing a comparison quarter to quarter..

But the magnitude won't be nearly as significant as what we saw a year ago in 4Q..

Maybe just one thought on as you look into 2017 on capital allocation, you have a history of continuing to raise dividends.

But how do you feel about balancing between other opportunities you see in front of you with respect to more acquisitions or repurchase? Any thoughts there?.

Again, we're as we talked about earlier through the year and through the summer, we're in growth mode. We will continue to look at high-quality corrugated products acquisitions. We will continue to look at capital spending within the mills and in the box plants that have higher return, high justification.

And then again with the generation of cash and where we're with that, we will continue to look at what is meaningful and sustainable in terms of dividends. And so we have a nice balanced approach, nothing has changed and so we will go into next year and we will again be mindful of capital.

I don't care how much cash you generate, you can only spend so much capital efficiently and we understand that. So I think again, January earnings call will be the time to talk more specifically about capital..

Your next question comes from the line of Phil Ng with Jefferies..

Can you provide a little color on how demand trends is tracking in October? And just any thoughts on inventory going into the fourth quarter for you or the broader market? I think there has been some commentary that Hurricane Matthew led to some downtime for perhaps some of your other competitors in the South.

Any color on either one of those fronts would be great..

I'll just talk about Hurricane Matthew real quick. I will take the second half of that real fast. Yes, there was some downtime associated with that, not in our paper mills but as announced in some others. But as far as our impact goes, we did have some plants that were down for a few days.

We also had some customers that had facilities down for as much as a week. So there is some impact there. It is yet to be determined what that will be down the road.

Mark, do want to handle the--?.

Where we're with the first 10 days again, it is only 10 days through October but in the legacy system we're up 3% and if you put on some TimBar, we're rolling up to basically 6% to 7% for the first 10 days with TimBar included..

And then I guess just the nature of your box contracts how it works from a pricing standpoint, how much is that simply contractually tied to the movement of PPW versus you actually having to go out there and push [indiscernible] prices? I just want to understand how the mechanics of that and obviously we will be looking at what PPW publishes this Friday but just the mechanics please..

We're not going to get into the details of that. That is all speculative and again as I mentioned earlier, we've got about 18,000 customers, a very complex array of arrangements and agreements and so that is proprietary within our business..

Just one last one for me just from a downtime standpoint, I mean I guess you called out some potential impact from Matthew for fourth quarter.

Any impact for 3Q? And how should we think about year-over-year standpoint just because every year it changes a little bit in terms of just the timing and the magnitude of the downtime whether if you could call out from a tons perspective or maintenance expense standpoint, that would be great..

Bob, why don't you go ahead on that one?.

For 2017, we will give you some insight on that, Chris, during the January call..

And the fourth quarter?.

The fourth quarter of this year?.

Yes..

We had the fiber mill as an outage so that will be moved from 3 to 4, that will be a bit of a drag..

It was worth $0.03 to us in additional maintenance costs for the quarter..

Okay..

We called that out. Next question, please..

Your next question comes from the line of George Staphos with Bank of America Securities..

I want to come back to the question of vertical integration and paper production recognizing that you are in the process of now reviewing projects and you will have clearly more color for us on the January call.

But given your comments today, it would seem like you can run your business more or less as you would like through 2017 and then maybe into 2018. But then at that point a more substantive action would have had to have occurred within your mill system.

And I'm just kind of going back through my notes, I think you were answering Mark's question, would you agree with that point or am I putting too fine a point on the discussion?.

This is like revisiting the 2011, 2012 period, we found ourselves that that same high-class problem where integration was approaching the 92% level, 93% level and we were creeping and we looked at the runway and we knew that at the rate of growth that we were anticipating we needed to look at a substantially larger runway containerboard supply, hence Boise fell into the equation.

And so we find ourselves back at that type of a thought process. And again, we have got different levers to pull to get there and obviously opportunities including down the road over the next few year's acquisition opportunities for mill assets if they are available and at the right price. A whole host of opportunities could pan out in that regard..

Understood, Mark. On that same line of questioning, if I look at return on capital the last few years after the improvement you got after Boise, return on capital has been relatively flat. That being said, prices for your largest product have been down somewhat and so that masks the comparison.

So do you think with the projects that you are looking at organically that the returns on them qualitatively are as good as past projects that you have had? Is the portfolio as robust from a margin or return standpoint as what you have seen in past years? And again, recognizing that you are just beginning to dust off that binder as you put it earlier as we speak?.

Again, you know, you go back over the 20-year history, we have looked at our opportunities as a long term event and a return from a return point of view brings value going forward.

So yes, the portfolio that we have for energy projects, general efficiencies are of the same returns that we would expect and the benefits whether it is just pure efficiency improvement or volume capacity improvement. So we remain very judicious in how we evaluate those projects and the returns.

And again, that is why you get to a point -- it is no secret you will arrive at a point very quickly if you are not careful of a diminishing return on a project so you can't fall in love with a monster. And that is where you look at some of the underperforming mill assets that are available as we have a reputation for being extremely good operators.

And we've got a team of people that we can move in place and deal with this. So again, that is how we look at the world. But we've got great opportunities with our capital spending as we go forward but we're mindful of what the limits are..

Last question for me.

Just as we look at the fourth quarter guidance and recognizing some of these points you may not want to talk to specifically to if at all, with that as a caveat, what should we infer from your guidance in terms of what you might have built in for incremental D&A given the TimBar acquisition? Specific to TimBar again recognizing you didn't call it out so our guess is you don't want to speak too specifically to the accretion that you are getting from that.

Would fourth quarter TimBar accretion be more substantive than what you saw in the third quarter just because you have more months or would there be any reasons why it wouldn't be as accretive to you 4Q versus 3Q? And on pricing, I just want to be clear would it be fair to say you have some impact of positive pricing in your fourth quarter guidance, Mark, without getting too specific? Whatever you can share there would be helpful.

Thank you, guys..

Again on the TimBar piece, the answer is yes, we do expect to see improved contribution. We're not going to quantify that for you but we did say that earlier. So the answer is yes, we should and would expect to see an improvement.

On the other question, Bob, do you want to get into that one on price?.

Yes, on your question was on price about, yes. We certainly as Tom has indicated, we have announced price increases to our containerboard and our box customers. And so yes, so we may have to have an assumption for what we think that will do for us for the fourth quarter..

Okay and the incremental D&A 3Q to 4Q, if you can put a finer point on that, guys? Thank you..

It will be up slightly, nothing large but it will be up just a bit..

Your next question comes from the line of Anthony Pettinari with Citigroup..

Just following up on George's question, understanding you can't talk about forward pricing.

When you look at previous box price increases, how many months after the board hike assuming we get it October 1, how many months before you achieve kind of the full run rate price improvement that you ultimately were able to achieve? Is it possible to say?.

Yes, I'm going to lead Tom talk around that again. Obviously for antitrust reasons, we're careful about what we say.

But, Tom, do want to go ahead?.

Yes, Anthony, let me see if I can just summarize this to kind of get the complete answer to this question at least from PCA's point of view. Whenever there is a price increase as we have talked about in the past, we take an incredibly disciplined approach to that.

And although we haven't had an increase in some 3.5 years, we certainly haven't forgotten how to be very disciplined in our efforts. We have notified our containerboard customers of the $50 per ton increase effective 10-1 and we began billing 10-1. We also notified our box customers of a box price increase effective 10-1.

The implementation of that increase is underway but as you know, we have a number of accounts that are large accounts that are tied to contracts primarily pulp and paper and those contracts have various trigger mechanisms. They will roll in primarily over the next 90 days.

So I can't break it out specifically about what is going to happen each single month but just rest assured that providing this thing goes as we plan, we will primarily get most of it over the 90-day period..

Maybe just following up on Columbus Container. There was some news over the summer they purchased some land in Indiana and were planning a major expansion project. I think they flagged up to $30 million.

Is that project attractive to you? Does it factor into one of the reasons that you are purchasing them? Can we add it to 2017 CapEx? Any kind of thoughts there?.

You know what, obviously that is proprietary. We're not going to get into that plus again as Tom mentioned earlier, we haven't completed the acquisition yet so we're not in a position to talk about that..

Your next question comes from the line of Scott Gaffner with Barclays..

First question was really just around your external shipments within the packaging business in the quarter. You said they were up 15,000 tons. I think before you were pulling back a little bit from the export market to supply your domestic business.

But just trying to figure out there was there some sort of pre-buy ahead of the $50 announced price increase or any shift in strategy around external shipments of containerboard there?.

Let me start that and Tom can finish it up. When you come out of first and second quarter of the year, we're heavy into the annual shutdown so intentionally pull back and trim back some of the outside sales to make sure that our own box plants are well supplied.

Coming out of that period of time in the July, August, September period, mills are running full so we virtually have a full capacity system up and running and we have more supply available to the market. And it just so happened that we had the orders and we had the supply so we were able to accommodate that.

Tom, do want to add some color to that?.

Yes, listen, we have in some cases running full, we're just trying to stay up with demand and there is really very little room for extra tons to be bought prior to this price increase. So I don't see any creep either..

Okay. I guess when I look at box shipments, this is industry data, food and beverage is about 50% of the overall industry shipments and most food producers have been dealing with 18 months of deflationary issues on their input costs.

And now we've got on the board a $50 price increase in containerboard and maybe that is a 7% to 8% price increase on the corrugated side of the business.

What gives you confidence that they would be willing to accept a price increase at this point in time given the other input cost deflation?.

We're not going to get into that. That is speculative and we can't talk about that..

Okay. Just one last one then just around the price increase, you noted obviously the effective date October 1 for the containerboard. On the corrugated, you don't give an exact date.

Is that because you are out negotiating with these 18,000 customers on various timeframes? Is that why you don't have a point estimate of the increase date?.

I did give you, Scott, an increase date. We notified our box customers of a box price increase effective 10-1..

Your next question comes from the line of Debbie Jones with Deutsche Bank..

I wanted to talk -- just I will ignore price for a second -- I want to talk a little bit just about mix. I do think you did actually guide to lower price and mix quarter-over quarter year-over-year and some of that was expected. But the mix I get the impression was maybe a little bit worse.

And I wanted to understand if that was your experience or also if that is something that should be sustainable going forward if there is a mix shift in your business overall?.

Debbie, mix can move all over the map quite frankly. There is not any big dramatic change other than the fact you might have graphic sales that move up earlier in the year, later in the year depending on any given year.

Also with the Boise acquisition, we picked up a large segment of ag business that we didn't have in the past up in the Pacific Northwest and that business moves quite dramatically too especially in the quarter as the crops come in. And depending on weather conditions, etcetera.

they suffered a severe drought in the previous year, that impacted some crops this year as well. So those are the sorts of things that can occur but there is nothing you can read into that that says there is some dramatic mix shift permanently going forward..

So if I were to look to Q4 or the first half of next year, I shouldn't look to be modeling in a lower mix in your corrugated business?.

Whatever the demand comes in is what the demand comes in. I can't predict weather changes, I can't predict what retailers decide to do regarding displays, etc. So it is very difficult to predict but it is a moving target. But overall over the long period of time, it usually evens out..

So your guidance in fourth quarter though is for kind of a stable mix?.

What we called out was a normal seasonal downturn in mix. We always see a fairly big drop off in the November, December months..

Just last question, you talked about potentially looking forward that you may need to look to acquire some mill assets.

Are there assets available for you that make sense in your system just given where your capacity is on the box plant side? If you could just comment on what you see there?.

Again, I don't want to get into any speculations there. Again we know there are always opportunities that exist and we have a lot of flexibility in how we approach that..

Your next question comes from the line of Steve Chercover with Davidson..

I doubt this would be an effective counter strategy but I am wondering if any of your customers have said they would shop their tons or their business to avoid the price hike?.

We're not going to talk about that..

[Operator Instructions]. Your next question comes from the line of Gail Glazerman with ROE Equity Research..

I apologize for beating a dead horse but you did talk about being in growth mode and that you would consider looking at other corrugated acquisitions.

How hard and fast I guess is your low 90s integration target in that perspective? I mean if another TimBar came up would you be comfortable doing it even if it meant that you had to buy board on the market without kind of an obvious near term outlet for internalizing that?.

I am going to answer that theoretically. If another TimBar high-quality opportunity came along, we would certainly go after that aggressively like we did with TimBar. We have means to acquire the tons and we're comfortable with where we're so that is how I want to answer it..

Okay.

Can you talk a little bit about the export markets? I think you mentioned pricing was relatively sequentially stable, is that something that you are seeing continuing into the fourth quarter?.

Yes, I will give you a little update on the export market. South America, Latin America, Mexico, we have announced a price increase in those markets. Overall demand is improving there. Europe is stable both regarding demand and price. Asia demand is slightly lower but everyday pricing wise is fairly stable.

So globally I think you can say that it is fairly stable with the exception of some markets that are tending to move up..

Okay. Just last couple of questions on costs.

The freight improvement that you have been posting the last couple of quarters, how much of that is from internal initiatives versus I guess external factors? What trends do you see moving forward over the next quarter or two?.

A significant portion of that is just from our own internal optimization efforts and how we have set up our lanes and will work with the various facilities and various carriers. The majority of that is our own initiative..

Okay.

Would you expect to see continued freight savings moving forward just based on what the market dynamics are doing?.

Again, there is a lot of moving pieces to that so it would be just speculation..

Okay.

Can you break down your fiber trends a little bit between recycled and wood and I guess particularly, what you are seeing in would costs?.

Wood has been fairly flat. Again you will get into the seasonal variations with winter weather activity depending on if there extreme moisture within regions. Other than that, we're just into the normal seasonal uptick. Recycle obviously has moved up. If you go year-over-year with what recycled fiber has done, we're up obviously.

And so recycled fiber obviously becomes a much more significant cost item on our radar than been virgin fiber..

Okay. Just one last quick one.

The uncertainty you referenced around the hurricane, I presume in terms of Packaging Corp that is baked into the guidance that you have given the 115 for the fourth quarter?.

Yes..

You have a follow-up question from the line of Chip Dillon..

A couple of questions related to the industry. One is there has been a very definite dichotomy in the last three years between the box shipments and square feet and the consumption of the board reported by the FDA to make those square feet.

Since we measure capacity and production in tons and supply, I imagine we should at least consider the demand in tons and so far this year, it is about a 1% difference.

So the boxes are getting heavier out there and I didn't know if you could offer your thoughts as to why that is happening? Secondly, it looks like when you back into the unaccounted for tons, the amount has, it looks like the in-transit inventories have really come in really hard in the last couple of months and I didn't know if you were seeing that in your system with delivery schedules, etc.?.

Tom, why don't you go ahead and handle that first part on the bases weights and box weights?.

Industry data which showed that the boxes have stayed the same or gotten slightly lighter over a period of time. If there has been any short term trend or anything like that, that just revolves around some short term demand trends, Chip.

But I don't, I think that we continue, we get a lot of comparisons with Europe and this sort of stuff then why is the U.S. doing certain things? We have talked about this in the past.

We make board basically to perform to whatever standards that the customer needs it to perform to and we have a completely different distribution system, different warehousing system, etc. than virtually any place in the world. So it puts a lot of requirement on that box to perform.

But I think that from a basis weight standpoint, it has gotten slightly lighter over a longer period of time period of time..

I know that is true for the weight of the board, that is true but the boxes are clearly getting heavier, you can see in the FBA data and I just wonder if with lighter weight board you have weaker board and you got to use more plies and therefore the irony is with the lighter weight board are the boxes out there getting heavier because people have to double and triple wall since they are using on the margin lower quality board or is that not something you are seeing?.

It doesn't apply to us number one because we're not producing that kind of board or using that kind of board in the marketplace. I am sure in the case of 100% recycled sheets and 100% recycled liner board, there is a definite possibility you might have to use a lot more fiber in order to get the performance.

So if that is your case, that is probably true. It is just not impacting PCA because we're not in that market..

And then on the transit inventory?.

Regarding that question, we really don't have a good answer for you on that. We look at that also in the same way you do and we don't fully understand what that number implies..

Your next question comes from the line of Mike Weintraub with Buckingham Research..

Just a couple of clarifications. First off, I believe you indicated that 4Q maintenance outage expense would be $0.03 higher than 3Q.

Is that correct?.

Yes..

Second, in answer to one of the questions on the timing of how containerboard flows through into boxes, maybe I misheard but I thought you referenced a box price increase for 10-1. I believe that would be a board price increase for 10-1 not a box price increase. I don't think that was to be referenced 10-1.

Am I correct there?.

Mark, this is Tom. We announced both container board and boxes for 10-1..

Okay, interesting. And then when you were talking about -- there was a question on pre-buy and you basically suggested that from your perspective were basically no tons available out there.

So is it fair to say you would characterize current conditions in the industry as quite tight?.

Again, I didn't say that there wasn't a pre-buy. We just didn't really perceive it as pre-buy. And yes, if you want to go back to operating rates, if you think about what the latest FDA numbers are and the industry numbers for operating rates and where we're operating, we're operating both..

And then also I just was trying to make sure I understood there was a reference earlier about that $0.04 move in the impact from corrugated pricing and mix in the second quarter and then $0.13 in the third quarter.

And the answer to the question, I apologize for asking for you to repeat it again, but I heard a reference to $30 per ton or something but I believe the liner price is now $15 per ton and pulp and paper.

So I wasn't quite sure if I again misheard on that one?.

Yes, Mark, liner is down 15 over that period and medium is down 60. So if you average those you have got a downturn of $30 a ton Q3 over Q3..

Okay, great..

That is how much the published price is..

Understood. So hence the reference to the domestic board sales that you would have because you are obviously selling both liner and medium.

And I realize this may be competitive and you don't want to answer it fine but box prices, are they typically tied to a combination of the two or more to liner, can it be all over the place?.

Again we have said many times whatever we do price-wise is between us and our customers. So we really don't comment on that..

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

Do you have any closing comments?.

I want to thank everybody for joining us on the call today and look forward to talking with you in January for the full-year and the fourth quarter earnings update. Have a good day. Thank you..

Again, thank you for your participation. This concludes today's call..