Mark Kowlzan – Chief Executive Officer Tom Hassfurther – Executive Vice President Bob Mundy – Chief Financial Officer.

Chip Dillon – Vertical Research Mark Wilde – BMO Capital Markets George Staphos – Bank of America Mark Connelly – Stephens Anthony Pettinari – Citi Debbie Jones – Deutsche Bank Adam Josephson – KeyBanc Mark Weintraub – Buckingham Research James Armstrong – Armstrong Investments Chris Manuel – Wells Fargo Securities Scott Gaffner – Barclays Steve Chercover – D.A.

Davidson Brian Maguire – Goldman Sachs Gail Glazerman – Roe Equity Research Blutenthal – Hartline Investment Corp.

Packaging Corp Of America (PKG) Q3 2017 Earnings Conference Call October 26, 2017 09:00 AM ET.

Thank you for joining Packaging Corporation of America’s Third Quarter 2017 Earnings Results Conference Call. Your host today will be Mark Kowlzan, Chief Executive Officer of PCA. [Operator Instructions] I will now turn the conference call over to Mr. Kowlzan, and please proceed when you’re ready..

Good morning, and thank you for participating in Packaging Corporation of America’s Third Quarter 2017 Earnings Release Conference Call. I’m Mark Kowlzan, Chairman and CEO of PCA, and with me on the call today is Tom Hassfurther, our Executive Vice President, who runs Packaging Business; and Bob Mundy, our Chief Financial Officer.

I’ll begin the call with an overview of our third quarter results, and then I’m going to turn the call over to Tom and Bob, who’ll provide more details. I’ll then wrap things up, and then we’d be glad to take questions. Yesterday, we reported third quarter net income of $139 million or $1.47 per share.

Reported earnings include the impact of special items expense primarily related to discontinuing paper operations associated with previously announced conversion of the No. 3 machine in our Wallula, Washington mill to linerboard.

Excluding these special items, the third quarter 2017 net income was $159 million or $1.58 per share compared to the third quarter 2016 net income of $123 million or $1.30 per share. Third quarter net sales were $1.6 billion in 2017 and $1.5 billion in 2016.

Total company EBITDA for the third quarter, excluding special items, was $364 million in 2017 and $299 million in 2016. Details of the special items for the quarter were included in the schedules that accompany the earnings press release.

Excluding the special items, the $0.38 per share increase in third quarter 2017 earnings compared to the third quarter of 2016 was driven primarily by higher prices and mix, $0.61, and sales volume, $0.07, in the Packaging segment, and a partial insurance recovery related to the DeRidder Mill incident of $0.02.

These items were partially offset by lower prices and mix of $0.05 and sales volume of $0.02 in the Paper segment. We have higher input costs of $0.12 with recycled fiber, energy and chemical costs, all higher, partially offset by lower wood fiber costs. Operating costs were up $0.03, primarily due to higher labor, repair and converting costs.

We also had higher expenses for freight of $0.02 and annual outages of $0.02 as well as higher corporate and other costs of $0.06 per share, which was primarily higher depreciation and interest expense.

Compared to the third quarter guidance, results were negatively impacted by $0.02 per share due to hurricane-related items at certain mills in corrugated products facilities. And these were offset by a partial insurance recovery related to the DeRidder Mill incident of $0.02 per share.

Looking at packaging – looking at our Packaging segment, the EBITDA, excluding special items in the third quarter of 2017 of $341 million with sales of $1.35 billion resulted in margins of 25.3% versus last year’s EBITDA of $256 million and sales of $1.17 billion or a 21.9% margin.

Higher year-over-year inflation came in close to where we expected, and the employees at our mills and corrugated products facilities did an outstanding job mitigating the negative impact from the recent hurricanes.

Our containerboard mills set all-time quarterly production record of 996,000 tons, reflecting the successful results of our scheduled outages earlier in the year as well as incremental improvements at the DeRidder Mill that we’ve spoken about previously.

Containerboard inventories were 7,000 tons above last year’s third quarter, as we plan for continued strong demand in our Packaging segment, while preparing for scheduled fourth quarter outages at our Counce and Tomahawk Mills. We also began the integration of the Sacramento Container acquisition across our packaging business platform.

And we’re also preparing for the first quarter 2018 scheduled outages at 3 of our mills that will significantly reduce our production early next year. I’ll now turn it over to Tom, who’ll provide more details on the containerboard sales and corrugated business..

Thanks, Mark. Overall, Packaging segment demand remained very strong with sales and production volumes contributing $0.11 per share above last year’s third quarter and $0.07 above the second quarter of 2017. Corrugated product shipments in total were up 4% with 2 less work days or 7.3% per work day compared to last year’s third quarter.

Continued strong demand in both our domestic and export markets improved our outside sales volume of containerboard by about 9,000 tons versus last year’s third quarter and almost 32,000 tons versus the second quarter of 2017. We executed the implementation of our Packaging segment price increases very well during the third quarter.

Domestic containerboard and corrugated products prices and mix together were $0.54 per share higher than the third quarter of 2016 and up $0.20 per share compared to the second quarter of 2017. Export containerboard prices were up over 21% or $0.07 per share above third quarter 2016 levels and up 6% compared to the second quarter of this year.

And I will turn it back to Mark..

Thank you, Tom. Looking at our Paper segment, EBITDA, excluding special items in the third quarter was $39 million with sales of $271 million or a 15% margin compared to the third quarter of 2016 EBITDA or $59 million and sales of $293 million or 20% margin.

Although white paper sales volume was about flat with last year’s third quarter, overall Paper segment volume was down due to our exit from the market pulp business. Paper volumes were up over 9% in the seasonally stronger third quarter versus the second quarter of 2017.

Similar to the industry published prices, Paper segment price and mix was about 2.5% below third quarter 2016 levels and 1.9% below the second quarter of 2017. Finally, third quarter results were also negatively impacted by a scheduled annual maintenance outage at our Wallula Mill versus having no outages in last year’s third quarter.

I’ll now turn it over to Bob..

Thanks, Mark. As mentioned when providing our third quarter 2017 guidance of $1.68 per share, this did not include any potential additional costs or anticipated recoveries related to the DeRidder Mill insurance claim. During the quarter, we were able to report another partial insurance recovery of $0.02 per share.

However, as Mark indicated earlier, hurricane-related items at certain mills and our box plants in Florida negatively impacted the third quarter by $0.02 per share, which gets us back to the $1.68 per share on a recurring basis.

There were other small differences in the key items that make up our guidance estimate, but they effectively offset each other. There’s no change in our estimate range of $20 million to $25 million for the total property damage and business interruption losses, including capital costs related to the DeRidder incident.

We ended the quarter with $371 million of cash on hand. Usage of cash included; $103 million for federal and state tax payments, capital expenditures of $87 million, common stock dividends totaling $59 million, pension contributions of $36 million and $2 million in term loan repayments.

Finally, our planned annual maintenance outages for the balance of the year are unchanged from our previous guidance, which reflects a negative impact of $0.12 per share moving from the third quarter to the fourth quarter, resulting in a full year 2017 total impact of $0.51 per share. I’ll now turn it back to Mark..

Thanks, Bob. As most of you know, during the third quarter, we announced that we’d entered into an agreement to acquire substantially all of the assets of Sacramento Container Corporation.

At 100% of the membership interest of Northern Sheets, LLC and Central California Sheets, LLC in a cash-free, debt-free transaction for a cash purchase price of $265 million.

We also announced that we will discontinue production of the uncoated freesheet and coated one-side grades at our Wallula, Washington mill in the second quarter of 2018 to begin the conversion of the 200,000 ton per year No. 3 machine to a 400,000 ton per year high-performance 100% virgin kraft linerboard machine.

Earlier this month, we announced that we had completed the Sacramento Container acquisition and activities are well underway to optimize and integrate these facilities into our Packaging business platform. Additionally, preparations are on schedule at our Wallula Mill to cease paper production on the No.

3 machine and begin production of virgin linerboard beginning in the second quarter of 2018.

Looking ahead, as we move from the third quarter and into the fourth quarter, we expect Packaging segment demand to remain strong, although at seasonally lower volumes, which includes one less shipping day as well as a seasonally less rich mix in corrugated products.

We will also have the addition of our newly acquired Sacramento Container operations in the fourth quarter. In our Paper segment, we’ve started implementing our recently announced price increases, but expect seasonally lower volumes and a less rich sales mix.

While recycled fiber prices should move lower, higher wood and energy costs, along with higher prices for certain key chemicals and higher freight costs are also expected.

Finally, as Bob mentioned earlier, we estimate our annual outage cost to be $0.12 per share higher than the third quarter due to scheduled annual maintenance work at two of our containerboard mills and two of the paper mills. Considering these items, we expect fourth quarter earnings of $1.50 per share.

This does not include any potential additional costs or anticipated recoveries related to the DeRidder Mill insurance claim. With that, we’d be happy to entertain any questions, but I must remind you that some of the statements we made on the call constituted forward-looking statements.

The 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 in our annual report on Form 10-K that’s on file with the SEC.

Actual results could differ materially from those expressed in the forward-looking statements. And with that, operator, I’d like to open the call for questions..

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

My first question has to do with – it’s a little broader one, but historically, you guys have done a great job focusing on the small and middle sized customers maybe relative to some of the other box producers.

And I am just curious and as the world becomes more tied to – or growth because and we are tied to e-commerce, is there any change in that strategy in the sense that you would feel the need to participate – in order to participate in e-commerce that you would have to get bigger in some of the larger companies that buy boxes?.

I’m going to answer that with no. But I’m going to let Tom provide more color there because it is important. Chip, I would say that – you know, listen, e-commerce is an important part of the business. And it’s a channel that many of our customers actually participate in.

And of course, I think a lot of people and I think about e-commerce, I just think about Amazon, which is somewhere between 40% and 50% of the e-commerce segment. And that’s one way to get products to directly to consumers, but a lot of our customers use other channels as well.

So along with Amazon, we participate in many instances, where e-commerce is taking place and I think we’re fortunate again, because we’ve got such a broad-based customer based at – many of those customers find a lot of different channels to sell-through, including e-commerce.

So we’ve been able to grow along with them and growing that e-commerce segment..

That’s why, Chip, again, the inherently the strategy will change, it hasn’t changed for many years. We just go and take advantage of the market dynamics and the capability we have of approximately 19,000 customers nationwide..

Got you. Okay. And then the second follow-up I have is, as we think about conversions and let’s look at Wallula as an example.

Obviously, the payback is very quick, which is uniquely something that you can take advantage of that, I suppose, most can’t, but it’s also important to look at the lost revenue that – or income from what you used to make there.

And if you could just help us, as we model 2018 and beyond, how much will you forgo by not running whatever you’re running at Wallula as either pulp or white paper? And I know you shut down some pulp there last year. And then also, as we think about the quarters, and this might be more for Bob next year.

Whether it be kind of any disruption or unusual pressure on the Paper segment income as you’re actually doing the work in the second and fourth quarters?.

Regarding the first part, obviously, we’re exiting that business, the coated business primarily because we’ve seen the declining margins over the last couple of years. And we have the opportunity on the other side of the business being our growth side, corrugated products to take advantage of that mill asset.

And so obviously, there will be a decline in the reported revenues and the earnings, but it will be small.

Bob, do you want to add a little more color to that?.

Yes. Chip, as we were saying, with that business and where we were positioned in marketplace and so forth and as we looked out, the margins were certainly going in the wrong direction. So the impact of what we will lose when we convert is not extremely significant. Regarding 2018, yes, for the Wallula Mill, it will be a lumpy year.

When you think about the first quarter, maybe sort of business as usual, but in the second quarter, where we have the first outage to begin the conversion, that will be a – there will be some extra costs, certainly, coming in then and they’ll be coming out of that, we’re running the linerboard.

But we’re – we still have all the bells and whistles that we want to put on later in the year, so it will be improved, but maybe not at the cost that we ultimately would like to be at.

Then we go into fourth quarter outage to finish up the work and then coming out of, again, more costs coming in, but then as we come out of that, that’s when we feel like we will be on the run rate that we – that meets the expectations that we have built into the project..

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

Tom, I wondered, if you could give us some guidance in terms of your level of integration, once we’ve got kind of Sacramento and as well as those sheet plants.

What’s your – what will your integrations be in, say, the fourth quarter or the first quarter next year?.

Our integration level is currently about 95%, Mark. And even after the completion of Sacramento and then the work at Wallula and when we are up running full at Wallula, we’ll be right back to that 95% integration level..

Okay. And then kind of following on that, so it seems like Wallula is buying you, I don’t know, a couple of years of demand growth.

But can you just help us think about sort of what the next options might be for you guys in terms of either acquisitions, internal – other internal conversions just sort of what the – what the palette looks like?.

Yes, Mark, this is Mark. We’ve been asked that for the last year or so. Obviously, we will continue to evaluate all the options from acquisitions of one-off mills to conversions. And so trust that we are looking at this point frequently and understand what our options are and how we would do that.

And so – and I think I’ve used this term before, that’s our high-class problem as we go forward..

Okay. All right. And then the last one from me. Is there anyway, Mark, you can kind of quantify the pressure you expect in the fourth quarter on some of these inputs that you mentioned kind of wood, freight, chemicals.

And whether you think like particularly with wood, this is just a kind of transitory issue because of wet weather?.

Yes, on the wood issue, we had a wetter summer in the mid-south region, primarily the Jackson mill impacted. But obviously, with the hurricanes from the August through the September period, all the way from the Louisiana wood basket into the Georgia wood basked, across the board, we’d to deal with wetter weather.

So we still got some overhang from that. It’s been continuing to be wet. So unless it dries up, weather changes, we’ll see some overhang on the wood cost in those regions. And then it’s just the year-over-year on general chemical like caustic latexes and others year-over-year. And, Bob, why don’t you add a little more color to that..

Yes, yes. So, Mark, we have inflation that is not a lot across freight and wood and chemicals and energy, but there’s certainly some inflation. And there’s also some usage related as you get into the cooler months, some of those items are impacted by the weather that we anticipate.

And the other thing is, yes, we will have a benefit from lower OCC prices, but as everyone should know that when prices move, we’re not impacted as much when they go higher and so we’re not getting as much benefit when they go lower.

So the net of that is with those – all those types of inputs including freight is just not a – it doesn’t move the needle a lot one way or the other..

Okay that’s all from the row..

Next question please..

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

Thanks everyone, good morning. Thanks for the detail. The first question I had was on production. So in the quarter, you obviously had a record in the containerboard side, and you did a fair bit better than we were looking for.

How much more production can you squeeze out in this period here until Wallula shows up and the remaining project, DeRidder or debottlenecking shows up next year.

Can you continue running or have the ability anyway, if there is demand for it to be up 4% or so, 5%? Or are we looking at a narrower gain at this juncture in terms of what’s available?.

Well, this year’s year-over-year production is benefiting from the projects that we’ve called out i.e., the DeRidder improvements on both DeRidder No. 1 and DeRidder No. 3. We said we’d get probably around 50,000 tons benefit this year. And then we’re obviously seeing that.

And then the other mills just continued to benefit from our constant attention to detail on improving the efficiencies on an ongoing basis. But if you think about – if you did an estimate for 2017 versus 2016, we’re going to be up probably a 150,000 tons over last year, and then we’ve got the shutdowns that we’re going to be facing.

So the big opportunity is going to be coming, obviously, from the work at DeRidder during the first quarter annual outage that will take care of some final work on No. 1 and then the remaining work on the wet end of No. 3 machine.

And then DeRidder will be behind us after the first quarter and then we just need to get lined out there and so we will achieve the full run rate benefits that we’ve been talking about.

And then to the point, we just faced that opportunity of how do we continue to provide the tons and looking at the different opportunities, but – and I’ve said this many times, we are very mindful of that every dollar of capital spent does have a diminishing return at some point in time.

So we are very prudent in how we’d look at where that opportunity comes from..

Okay Mark thank you for that. Can you comment at all in terms of what trends you’re seeing early in the fourth quarter in terms of both box shipments? And for that matter, what you’re seeing in the paper market? And then I had one last follow-on question..

Yes, let me handle the Paper side and Tom is going to give you the details on the corrugated products. Paper is holding up, as we would expect. We’re right into the fourth quarter typical. The mix has fallen off, as you’d expect. It’s not as rich as you’ve seen in third quarter.

You’ve seen some seasonally slower volume and activity with the cut size, in particular and some of the offset during the converting grade. But all in all, we’re where we expect to be. And so from our Paper business, we continue to just move along with fairly flat sales quarter-to-quarter, year- over-year.

Tom, why don’t you give some details on that?.

George, in terms of the packaging side of the business and boxes specifically, demand remains very good, very strong. Through 15 days returning 5% higher on a per-day basis and that excludes Sacramento Container, of course. So we’re very pleased with the current level of demand..

Thomas, are you saying that includes or excludes Sacramento in that 5%?.

that excludes Sacramento Container..

Okay. Thank you for that. My last question is – it’s more around the margin opportunity in corrugated for your longer term.

I mean, given our research travels recently, it seems like the e-commerce customers tends to be a bit more service-oriented, which maybe means more costs, but potentially also means more sorts of things are required that you’re quite good at and therefore, provides an opportunity.

And then similarly, if we think about Sacramento, can you tie in any parallels between its margin opportunity and return relative to what we saw out of – implicitly, any way out of TimBar and Columbus? Thank you guys and good luck in the quarter..

Let me make a quick comment, and then Tom could add to that. We, obviously, have a very large sales force that caters to the requirements of the customer base and provides a of that focus and value to the customer base. We will continue to extract value as time goes on and grow that opportunity.

And then, Tom, what’s the Sacramento Container, again of Corrugated Products Yes. I’ll just add a little bit to that, Mark, as well.

Every time, any customer that has a high level of demand for service, quality, cost takeout, whatever might happen to be, that really fits into our wheelhouse, of course, that’s a – we consider that to be somewhat of an advantage for us, given the way we go to market.

So it all goes down to value, and we can provide a lot of value that’s a great opportunity for us. Regarding Sacramento, yes, we’ve got – we have many opportunities in Sacramento. We are off to a terrific start.

Culturally, the companies are very well aligned and that, I think, that our returns at Sacramento and there are a lot of different – there are a lot of moving parts there. So especially when you talk about the sheet feeders that are in the plant that we acquired as well. So there is a lot to be done that there is a lot of opportunities..

Thank you very much..

Next question please..

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

Thank you, good morning. So in white paper, you’ve already made some progress on costs, Mark, you’re going up and down. But as you think about the Wallula project and the change to the mix and the shifting production from one place to another. Is there a big opportunity to reoptimize at I Falls and Jackson.

I just don’t have a good sense of how much that coated one-side is going to affect those other mills?.

It really has no effect. That was truly a separate business. We did make a very small amount of uncoated freesheet on the Wallula No. 3 machine just to fill up some of the time over the last number of years, since we made the acquisition. But a very small amount of – primarily some printing and converting grade that came off that machine.

And so the move away from that business is very – has very little to none impact on I Falls and Jackson. Again, it just helps us again, focus now with that two mills and the group sales force marketing and operations can just concentrate on that better business that we think will remain. .

Okay, that’s helpful. And just one clarification.

How much of the new Wallula linerboard is replacing outside tons? And how much is replacing stuff that you’re shipping or trading for?.

I think the best way to look at that is, when we come on with Wallula, we have a home for it immediately within our system. And so it’s spoken for already..

Okay, that’s enough thank you..

Alright. Next question, please..

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

Hi, good morning..

Good morning..

I was wondering, if it’s possible to say how much of the Wallula CapEx spend is in 2017 versus 2018? And then just from a big picture perspective, you’ve done this conversions before.

How do you judge the kind of degree of difficulty or complexity in terms of what you’re doing at Wallula versus the earlier conversion at DeRidder?.

Yes, as far as capital, we’ve got somewhere in that neighborhood of $13 million committed to this year in our capital plan. And a lot of that, obviously, have to go to ordering a lot of the long-lease item equipment and getting started with things, so we’re well on our way. As far as the complexity, the Wallula machine is very, very similar.

It’s almost a twin machine of the DeRidder, only it’s a much newer version of the DeRidder No. 3 machine. So technically speaking, it’s a much more capable machine. And also keep in mind that, we now have owned that business for four years.

So right from the beginning, as we were working on the mills, the efficiencies and capital spending opportunities that we identified over the last number of years, we’ve always looked at that mill as an opportunity that could be converted.

And so very little of the capital that was spent would be throwaway capital and the capital that was spent was always looked upon as how we could enhance the future of the mill. And so it already addressed a lot of the unit operations issues and opportunities.

And so the complexity of the conversion right now is just ensuring that we’ve done a good job with our engineering and then the installation of the equipment and done in a precision manner. So we have extremely high level of confidence in how we will execute.

And so it’s just a matter of waiting for the equipment deliveries and take the machine down in the spring and install and start back up..

Okay, that’s very helpful. And then kraft linerboard export prices have been very strong throughout the quarter and the year.

Is it possible to say how much of your production you exported in the quarter? And would you expect that share to be kind of stable? Could it rise? Or could it shrink just given the very strong domestic demand you’ve seen?.

Yes, I’m going to let Tom walk you through that because what they – obviously, we have seen a quarter-to-quarter change in the – how much we exported and what was available from the mill system that ran exceptionally well.

Tom?.

Yes, Anthony, as I mentioned, I mean, we did export significantly more in the third quarter over the second quarter and over the previous year. A lot of that has to do with some catch up that we had in terms of demand from the export market. It’s been, as you said, it’s been very strong. The pricing has been booming up rapidly.

So we did have some catch up we needed to do.

And given the fact that the Counce outage was moved into the fourth quarter and the mills produced so well, it really allowed us to – and then, of course, the one less selling day on boxes, it certainly allowed us the opportunity to really move some of those types in the export market and satisfy those customers that we’ve after a long time and that we continue to service.

Again, as I said many times, we’re not huge players in the export market by any means, but we’ve got some key customers that we’ve had for a long, long period of time. And we feel an obligation to continue to take care of those customers..

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

Next question, please..

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

Hi, good morning..

Good morning, Debbie..

I think you made some comments in the prepared remarks about maintenance early next year at three locations.

Could you just walk through when you think that might be recurring? Is any of this related to Wallula? I mean is this a pull-forward or should we expect higher maintenance next year?.

We’re not going to get into the details of our shutdown plans for next year. We’ll give you all the details on the January call when we go for full year and first quarter guidance. And so, just to understand that we have a heavy first quarter outage plan regarding three of our big operations.

And then obviously, the big work and the most complex work will be going on at DeRidder during that period of time with the final phases of the work on the No. 1 machine and the No. 3 machine. So we’ll give you the details on that.

But again, it’s not that we don’t have heavy quarters, it’s just we’re calling out the fact that we’ve got increasing demand for every ton we produce. So it just year-after-year becomes that much more critical that we are well prepared on how we look at our inventories going into the new year.

So part of that cost is inventory and then obviously the direct maintenance impact. But we’ll call it out, when we have our next call..

Okay, thanks. I appreciate that is helpful when looking at Q1 at this point, so I – second question, just I want to move back to Sacramento Container. There’s just been a lot of activity in the region in Northern California.

I think Golden Western packaging also talked about building a box plant, I believe, in Saxton, and I just wanted to get a better sense of what is your end-market exposure there? What is attractive about that region? And I think Amazon is expanding. You have [indiscernible] if I talk about exports as well.

Could you just talk us through what your exposure is and what you are looking forward to?.

Yes.

Tom, why don’t you take that question?.

Yes. Debbie, listen, if you think about the number of customers we have at all of the businesses that we sell into, we don’t get – we don’t break things out specifically and say we want to go into a certain segment or certain anything.

But, the fact, Northern California specifically, of course, is, I mean, is enormous ag region and then you’ve also got Sacramento itself located just outside of the Bay Area as well. So you have a large industrial base as well. So there is a broad segment of customers to be supplied in that area of the country and it’s growing.

And of course, you can talk about the Amazon, back then you talked about Silicon Valley and a lot of other things to go on there. But it just is a – it is one of the faster growing regions of the state and of the country, quite frankly. So it provides us a lot of great opportunities..

Okay thanks I will turn over..

Thank you next question please..

Your next question comes from the line of Adam Josephson with KeyBanc..

Thanks good morning everyone..

Good morning.

Tom, just one clarification on the 5% October.

Is that inclusive of Columbus from last year? Or is that an organic number?.

Well, it’s not really inclusive of Columbus either, because we didn’t have it last year at this time. But I’m factoring in, I do know now, because I’ve got numbers because they’re growing at about that rate. So I roll that into our 5% number because they are not going to impact that dramatically anyway, it being just one plant..

Okay.

In terms of your guidance for 4Q, what does that incorporate in terms of any uncoated freesheet price increase that you announced for October? And then what’s the Sacramento contribution to the 4Q guidance?.

Yes. On the paper pricing increase, we have a very small amount of benefit. Obviously, the price increase was announced. We’re working through that, but with the big piece of the volume that we moved into customer base until we see paper trader picks up that index, you don’t start billing some of the customers.

So it’s going to be a very minimal positive for fourth quarter..

Yes.

Yes. There certainly is some benefit there and $2.00, $3.00 something like that probably expect. Adam Jesse..

Okay. And then, Mark, just one last one. Just in terms of export prices moving up. Obviously, the synergies from your recent acquisitions of converters have presumably been partly related to pulling tons out of lower-priced export markets.

Appreciating that you’re also integrating the additional DeRidder tons and that you have a small export presence to begin with. But with the spread between domestic and export prices shrinking, and I don’t know how sustainable that is, but it’s clearly been shrinking pretty dramatically.

Does that reduce the expected synergies from those acquisitions?.

No. The way we look at the entire footprint nationwide, we move our tons through our system in the most opportunistic manner we can. And as has Tom mentioned and I mentioned many times, we have some very good legacy customers worldwide. And so we will continue to take advantage of that.

And then, regarding our footprint nationwide, how we move and what tons we move into those systems, you have to consider that the differential between the transportation cost to move only tons out of our own mills across the nation as opposed to being able to take advantage of either doing trades or purchasing local tons and then selling some of these tons that we make offshore, it’s part of a complex analysis.

But we are very opportunistic on how we move our tons through the system..

Thanks a lot Mark..

Okay, next question please..

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

One follow-up just on the mills down in the first quarter. And as much as last year or this year, I should say, 2017 first quarter, there was only $0.07 maintenance in outage. Fourth quarter, I think, you’re guiding to about $0.23. And it sounds like 1Q ‘18 that I realize you’re not giving specifics at this point.

But that we should be assuming, it’s going to – will it be much closer to the $0.23 than the $0.07 from 20 – first quarter of ‘17?.

I think, as Mark said earlier, Mark, we haven’t given out any EPS numbers relative to the outages. We’ll do that on the next call. But it will be one heavy – one of the heaviest maybe in a long time as far as tons impacted in the first quarter next year. So it will be sizable.

But it is the beginning of the year, so you certainly don’t have some of those advertising expenses hitting you early of the year, as you do in the fourth quarter of this year..

Can you remind us this year, how many mills you had down in the first quarter?.

Yes, We had, I believe, it was 2. But again, the scope of the work being done, so you could have 1 mill down, but it’s a lot of work being done, it could have a bigger impact and have not too many notes. But there were 2 down last year’s first quarter..

Okay, great. The second, I just want to clarify, I think you had said that price mix in the corrugated business provided $0.20 improvement 3Q versus 2Q.

Did I hear that right?.

Yes.

And I guess, I’m just trying to kind of understand, I believe, year-over-year, you note that it was $0.61 better..

That includes containerboard and export and box..

Okay. And what did the $0.20 include..

That’s primarily on the corrugated side..

Okay.

So not export or containerboard?.

No, no. Export was a positive, but it wasn’t a part of that $0.20 that Tom mentioned..

Okay, okay. Then one last one. So the 5% per day improvement so far this month, I just want to make sure that I’m understanding this right, because this month, there is going to be one more shipping day for all of October than last year. And so that, if for the full month, you had a 5% per day improvement then on an absolute basis, you’d be up 10%.

Is that how we should interpret it? Because I realize it could – maybe that is not necessarily how to interpret it. So I just wanted to clarify..

Mark, I mean, that’s what the math says. But as you typically know, to smooth things out, I mean often what we do is we take the app speed of the total amount out in the per day and try to kind of find an average in those.

So that gives you a little bit better flavor, I think, for smoothing it out over the year as opposed to having these just monthly spike with the 1 extra day.

You understand, what I’m saying?.

I do thank you.

Next question please.

Your next question comes from James Armstrong with Armstrong Investments..

Good morning congrats and a good quarter..

Good morning James thank you..

The first question is, your mix was a nice help in the Packaging segment even beyond pricing.

Could you give us a little more color on how your mix changed and what’s going to change as we go into the fourth quarter?.

I’ll start off with that, and then Tom can finish it up.But again, the third quarter is always a very, very good rich mix for us in terms of what we’re producing and what’s going to the market, displays and a lot of holiday business activity. And then that falls off obviously in the fourth quarter.

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

It’s primarily, when we talk about the richer mix, it’s primarily the graphics-related side of the business. And then perhaps on the ag side, there might be some krafts that tend to – tend to give us a little better return than others..

That helps a lot. Switching gears, are you seeing any seasonal change from e-commerce.

Specifically, are you seeing any evidence that demand is extending through November and December that it hadn’t in previous years?.

I think, again, year-after-year, we continue to see that smoothing benefit of going into the latter part of the year and then into the new year, we have seen less downturn in volume activity. So obviously, the e-commerce channel is becoming very important to the industry year-around..

Yes. And there is a large percentage of e- comm that ships in the fourth quarter. I mean, it ramps up quite rapidly over a 60 and 90-day period..

Okay that helps thank you..

Next question please..

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

Just a couple of questions from me. First, you kind of opened the door earlier, when you talked about how you think about mills in long- term purposes for them within your system. So I’m going to kind of try to exploit that.

But when you think about capital allocation, you spent this year’s capital – or this year’s free cash flow effectively buying Sacramento and doing the conversion at Wallula.

As you kind of think going forward and your needs to continue to expand capacity, how do you think about perhaps some of the other paper mills, whether it’s maybe not as much International Falls, but perhaps – but maybe done in Jackson, where you’re in kind of the softwood basket.

Opportunities as you go forward, say the next 3 to 5 years, how would you handicap the likelihood that you have another containerboard mill out of one of those?.

I don’t want to speculate that and that’s what it is, it’s pure speculation. We, again, have various means of supplying our system and necessary tons.

And as long as the paper business, and this is more a consideration, as long as the paper business continues to generate the kind of cash it’s generating and the positions it is, it remains a good piece of the portfolio.

And then you have to assume also your cost to convert each asset is very unique and different versus going out looking at purchasing a mill on the market and doing either a conversion or buying an outright containerboard mill. So there’s various complex considerations. But, again, I don’t want to speculate on the future. Obviously, that’s wide open..

All right. That’s fair. If I could come back to Sacramento for a second. I think, as I try to read through your press release at that time, you talked about the ability to do up to 200,000 tons to integrate. Kind of 2 parts to this question.

One, roughly what’s the tons or the use that Sacramento has today, just because you could integrate that doesn’t mean it couldn’t be more bigger or smaller, I guess through ton, but – so part A is roughly what size? Is that what it is 200,000 or is it something more than that? And two, were you supplying any to them today? Or is that an organic number?.

Yes, the 200,000 is a good number to use right now. And no, we weren’t supplying. Tom, you want to give him a little more detail on that [indiscernible] business? Yes, it’s 200,000 tons. That’s a good number you used, Chris.

And as Mark just indicated, I mean that’s all – that will all be opportunity for us because we were not supplying any of those customers..

Okay. And just 1 last quick question for Bob.

I know you’re not trying to predict timing, but do you have any more insurance that you’re anticipating getting over the next 2, 3, 4 quarters? Is it similar size? Or are you done there?.

No. We do, Chris. If you take what I’ve indicated was a range of what we were expecting and compared to what we’ve been able to record over the last couple of quarters. There’s still – there’s still $0.04, maybe a little bit more than I would expect to see. .

Okay, thank you guys good luck..

Thanks..

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

Just a follow-up on the mix in particular in the Packaging segment.

So as you move into 4Q, this year, versus 3Q, is there anything that would suggest that the mix issues are more pronounced than they have been, say, last year? Or should we think that’s pretty similar?.

It’s very, very similar. We see this every fourth quarter. It’s just the nature of the marketplace. .

Okay. And just some of the freight issues you experienced in the quarter. Obviously, others did as well.

Have you seen those start to abate both on [indiscernible] in availability and a cost perspective?.

Some regions have, but overall nationwide. We’re still faced with the – on the trucking side, it’s the driver availability issue.

And then on rail, you have the 5 Class I rails that we’re dealing with in particular, that changes that everyone’s is dealing with on the East Coast and Southeast through the mid-part of the country with1 Class I railroad, in particular, that we’re all having to manage around. So in general, transportation continues to be a headwind.

And then what happened during the hurricane period and what that did to trucking demand. So again, for the foreseeable future, transportation continues to be one of the items that is very high on my radar screen, day-to-day..

Okay. And then just, I know, I realize, you don’t want to get into the cadence of the maintenance outages as we move into2018. But as more and more companies are moving to sort of 18-month outage schedules.

I mean, how should we think about just the absolute year-over-year outages 2018 versus 2017, higher, lower, similar?.

I don’t want to get into the details on that. We’ve already, for the last few years, been into 18- month cycles on a number of our mills. And again, it depends on the asset base and the flexibility within a mill.

But we started that a few years ago on taking advantage of our maintenance programs and technology available to run the mills out, extended periods of time. So – but again, for all the reasons we have already mentioned, I don’t want to get into the details of next year plans..

Okay. Last one from me, just a follow- up on Adam’s question on box integration or assets, buying, converting assets. When you look at the multiples, I mean a large part of the multiples has been – the post synergy multiples has been driven by taking export tons in your system and integrating those into domestic converting.

So therefore, by definition almost that post synergy multiples would go higher, if export prices go higher.

Does that at all impact your decision-making around whether to go after some of these assets?.

We will continue to evaluate. It’s basically the book of business. If we have an opportunity to acquire a great book of business that fits our portfolio, you will have to assume we’d be very interested in that. Tom.

Yes, I would just add each one of these acquisitions stand on their own 2 feet. They’ve got to make perfect sense for us. And they’re also – and have to be able to be standalones outside of what the integration level is or those integration opportunities. So we analyze each one individually. And like I said, they’re going to have to pay for themselves. .

Okay thanks..

Next question please..

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

It’s late in the session. So I’m going to ask a weird one. Everyone talks about when China is going to resume purchasing OCC.

But if we were to assume that they never buy another ton again, would they need to buy virgin linerboard from us like they did before 2000?.

That’s again, you can speculate all you want on how they would fiber up their system. So that’s not even worth wasting the time..

Okay. Well, I wasn’t trying to waste your time.

But if you assume that they did, could you export from Wallula, it’s on the Columbia River?.

Again, that’s pure speculation, not an opportunity – that’s not even on our radar screen..

Your next question comes from the line of Brian Maguire with Goldman Sachs..

Most of my questions have already been asked and answered. But I do want to just follow up, Mark, on your response to Anthony’s question about some of the capital spending that you already did at Wallula to kind of position it for this conversion.

Would it be fair to say that sort of the all-in capital costs for the conversion are little bit higher than the – that are recorded in the press release? And what I’m really trying to get at is, you quoted last quarter a number that was a lot higher for somebody to do a conversion.

Just trying to get a sense as to whether that’s a come down in your minds? Or maybe this is just an opportunity where you’ve already laid a lot of that capital out in earlier years to your maintenance program and other projects.

And just you kind of update on whatever cost you think would be involved in a different company trying to do a conversion like this?.

Every mill is unique, every asset is unique. And we have the advantage of, 4 years ago, taking all of these assets and understanding what their opportunities were and also where there strength and weaknesses were.

And so as we put in a massive amount of effort into optimizing the mills, each dollar of capital that was spent over this period of time as a standalone on its own metrics of return.

And so we are mindful of how we spent that money and understanding that, that dollars spent on capital improvement and efficiency improvements could follow through to a containerboard platform in that asset i.e., Wallula as an example.

So the capital that we called up $150 million for conversion is the capital that we will require and take that machine from its current position today to the 400,000 ton per year of virgin kraft. And then again, any other capital that has been spent or will be spent is standalone, high return opportunities and/or maintenance capital.

And again, every mill is unique in its needs and its opportunities..

Okay, thanks for that good luck in the quarter..

Alright, thank you.

Any other questions?.

Your next question comes from the line of Gail Glazerman with Roe Equity Research..

Hi, good morning. Mark, going back to your comments on transport.

Are the concerns anywhere near where they would have been a year-or-so ago, when things were very, very tight and the industry was carrying a lot more inventory? Or is it more manageable compared to that?.

Well, it’s manageable. I’m not going to say more manageable, it’s just manageable. But we have the matter in regard to the one class railroad, as I mentioned in the eastern part of the country to southeast, that’s everybody is working with right now. And then you have the trucking industry.

They are going through their own issues of very strong demand and driver shortages, also faced with the latter. As the year wraps up, the trucking industry will have no regulations in place regarding electronic logbooks per se that are required, is mandatory throughout the industry. So there’s a lot of moving parts.

But it’s just one of the items that is manageable, but it requires much more attention than it did in past years..

Okay.

And on export pricing and markets, any concern that if OCC stay down for a prolonged period of time that might impact export pricing? Or do you think it’s been driven by just underlying demand for actual kraftliner globally?.

I don’t want to speculate on that. That’s something that’s not even worth talking about..

Okay.

And I’m going to appreciate – can you just walk through what you’re seeing in the market that supported the price increase announcement?.

Again, regarding pricing matters, that’s something we don’t talk about. Pricing is something we discuss between ourselves and our customers. And so I’m going to leave it at that..

Okay. Thank you.

Alright, next question please..

Your next question comes from the line of Herb Blutenthal with Hartline Investment Corp..

Good morning. I want to ask one subject that hasn’t been brought up and that is, debt. I have two questions basically. The first is debt reduction. You at the times talked about you wanted to – after acquisitions and spending internally on the conversion of machines, et cetera, talked about the relatively high debt percentage up in the 50% range.

And what is your thoughts on that? That’s my first question, sir..

I’m not sure, I understand when you say 50% range. If you look our debt-to-EBITDA ratios, we’re down below 2 right now. We’re probably down around 1.9. So in a very comfortable range on our debt position on our balance sheet..

I was trying to relate it to long-term debt to total long-term stockholder net worth. I was – that’s what I was looking at. The 2 combined, debt is about 50% according to Value Line..

Well, it is what it is. It’s something we, quite frankly, we don’t pay that much attention to it routinely..

You don’t think it’s a problem in other words.

So your debt – there is no major debt paydown that you see a [indiscernible] for, is that correct?.

Correct..

Okay. And then the second question, which – with all the information about the email and Amazon, et cetera.

Do you give any indication of proportionally approximately the size of Amazon that other online merchants, how much is that to the revenue and profit? I know you can’t give anything specific, but is it – can you give us any general comments about it?.

That’s one particular item we’ve mentioned in the past. We don’t call that out. We don’t measure that per se to the degree that you’re asking for. As Tom mentioned earlier, it is a very broad portion of the opportunity that we deal with every day. And so just – everyone has to understand and appreciate that it’s ongoing.

It’s an important opportunity for the industry to continue working through that channel with our customer base. But again, we don’t measure it and try to quantify the exact impact. We know it’s [indiscernible]..

I would say that – the bottom line, you guys are doing a great job at the long-term historical look. I have that – followed your company previously, but I am quite impressed. That’s it..

Okay. All right. With that, operator, we are out of time. Thank you for joining us on the call today. We look forward to seeing you, talking with you in January, when we wrap up our full year and giving the first quarter outlook. Thank you..

This concludes today’s conference call. We thank you for your participation and ask that you please disconnect your lines..