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Edited Transcript of PKG earnings conference call or presentation 24-Oct-19 1:00pm GMT

Q3 2019 Packaging Corp of America Earnings Call

LAKE FOREST Oct 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Packaging Corp of America earnings conference call or presentation Thursday, October 24, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark W. Kowlzan

Packaging Corporation of America - Chairman of the Board & CEO

* Robert P. Mundy

Packaging Corporation of America - Executive VP & CFO

* Thomas A. Hassfurther

Packaging Corporation of America - EVP of Corrugated Products

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Conference Call Participants

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* Adam Jesse Josephson

KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst

* Brian P. MGuire

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Clyde Alvin Dillon

Vertical Research Partners, LLC - Partner

* Gabrial Shane Hajde

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* George Leon Staphos

BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research

* Mark Adam Weintraub

Seaport Global Securities LLC, Research Division - MD & Senior Research Analyst

* Mark William Connelly

Stephens Inc., Research Division - MD & Senior Equity Research Analyst

* Mark William Wilde

BMO Capital Markets Equity Research - Senior Analyst

* Randy Devin Toth

Citigroup Inc, Research Division - Associate

* Steven Pierre Chercover

D.A. Davidson & Co., Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Thank you for joining Packaging Corporation of America's Third Quarter 2019 Earnings Results Conference Call. Your host today will be Mark Kowlzan, Chairman and Chief Executive Officer of PCA. Upon conclusion of his narrative, there will be a Q&A session. I will now turn the conference call over to Mr. Kowlzan, and please proceed when you are ready.

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Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [2]

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Good morning and thank you for participating in Packaging Corporation of America's Third Quarter 2019 Earnings Release Conference Call. I'm Mark Kowlzan, Chairman and CEO of PCA, and with me on the call today is Tom Hassfurther, Executive Vice President, who runs the 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. After which, I'll wrap things up, and we'll be glad to take any questions.

Yesterday, we reported third quarter net income of $180 million, or $1.89 per share, which included $0.02 per share of special items expenses. Excluding the special items, third quarter 2019 net income was $182 million, or $1.92 per share, compared to the third quarter 2018 net income of $211 million, or $2.23 per share. Third quarter net sales were $1.8 billion in 2019 and 2018. Total company EBITDA for the third quarter, excluding the special items, was $364 million in 2019 and $406 million in 2018. Excluding special items, third quarter 2019 earnings per share of $1.92 was $0.31 per share below the third quarter of 2018 driven primarily by lower prices and mix of $0.36 and volume, $0.03, in the Packaging segment, and lower volume in our Paper segment of $0.03.

A richer mix in our box plants, as well as higher labor and repair expenses, contributed to higher converting expenses of $0.06, and we had higher operating and other costs of $0.03. These items were partially offset by higher prices and mix in our Paper segment of $0.09; lower annual outage expenses of $0.09 and lower freight and logistics expenses, $0.02.

Looking at the Packaging business, EBITDA, excluding special items in the third quarter of 2019 of $325 million with sales of $1.5 billion resulted in a margin of 22% versus last year's EBITDA of $378 million and sales of $1.5 billion, or a 25% margin.

Our containerboard mills operated in an efficient and cost-effective manner, as we continue to balance our supply with current domestic and export demand, while optimizing our containerboard footprint to minimize freight and logistics costs across the system.

We finished the quarter with inventory 51,000 tons below last year and 30,000 tons below the previous quarter. In addition, we maintained our industry-leading integration rate by supplying our box plants with the necessary containerboard to establish new shipment records.

I'll now turn it over to Tom, who will provide more details on the containerboard sales and our corrugated business.

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Thomas A. Hassfurther, Packaging Corporation of America - EVP of Corrugated Products [3]

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Thanks, Mark. As Mark indicated, our corrugated products plants established new records for quarterly box shipments per day as well as total third quarter shipments, both of which were up 1.9% compared to last year's third quarter, in spite of the significant business loss we incurred at Sacramento Container due to the purchase of 2 large sheet customers by another integrated.

Outside sales volume of containerboard was about 26,000 tons below last year's third quarter, as we ran our containerboard system to current domestic and export demand, and supplied the increased needs of our box plants.

Domestic containerboard and corrugated products prices and mix together were $0.23 per share below the third quarter of 2018, and down $0.20 per share compared to the second quarter of 2019. And as we have mentioned previously, the majority of the impact from the published index price decreases early in the year would be reflected in our third quarter results.

Export containerboard prices were down $0.13 per share compared to the third quarter 2018 and down $0.04 per share compared to the second quarter of 2019.

I'll now turn it back to Mark.

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Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [4]

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Thank you, Tom. Looking at the Paper segment, EBITDA excluding special items in the third quarter was $58 million with sales of $243 million, or a 24% margin. This was compared to third quarter 2018 EBITDA of $44 million and sales of $254 million, or 17% margin.

Our seasonally stronger cut-size and printing and converting volumes were higher than the second quarter levels as well as slightly above the third quarter of 2018. The average price and mix for our paper volumes during the quarter were about 6% above last year. However, our average price and mix was about 1.5% below the second quarter of 2019, which was less of a decline than indicated by the published industry index prices. Obviously, overall, Paper segment volume and revenue were below last year's third quarter due to the exit from the White Papers business at our Wallula mill. We continue to improve our profitability and margins in the Paper segment in part by having exited this business at Wallula rather than continuing to allocate people and capital resources to it. I'll now turn it over to Bob.

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Robert P. Mundy, Packaging Corporation of America - Executive VP & CFO [5]

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Thanks, Mark. We had very good cash generation in the third quarter with cash provided by operations of $340 million and free cash flow of $247 million. The primary uses of cash during the quarter included capital expenditures of $93 million, common stock dividends totaled $75 million, $46 million of federal and state income tax payments, pension payments of $49 million and net interest payments of $4 million.

We ended the quarter with $738 million of cash on hand. And finally, our planned annual maintenance expense for the fourth quarter is unchanged from our previous guidance, which reflects a negative impact of $0.06 per share moving from the third to the fourth quarter.

I'll now turn it back over to Mark.

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Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [6]

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Thanks, Bob. Looking ahead as we move from the third into the fourth quarter, in our Packaging segment, corrugated products shipments with 1 less shipping day should be slightly lower. Containerboard sales volume will be lower as we continue to run to demand and work towards building some inventory prior to the year-end in preparation for the first quarter 2020 scheduled maintenance outages at our 3 largest containerboard mills, which will significantly reduce our production early next year. We expect slightly lower prices as the remaining impact of the published domestic containerboard price decreases from earlier this year work through our system, and lower export prices. We also expect a seasonally less rich mix in corrugated products compared to the third quarter, as the produce business in the Pacific Northwest as well as the display and high-end graphics business for the holiday period normally falls off during the quarter.

In our Paper segment, volumes are expected to be seasonally lower, along with lower average prices. With anticipated colder weather, energy costs will be slightly higher, and we expect certain other operating and converting costs to be higher as well. These higher costs include approximately $0.03 per share associated with the start-up of our new Richland, Washington box plant during the quarter.

Finally, as Bob mentioned, scheduled maintenance outage costs should be higher than the third quarter. Considering these items, we expect fourth quarter earnings of $1.70 per share.

Happy to entertain any questions, but I must remind you that some of the statements we've made on the call constituted "forward-looking statements". These statements were based on current estimates, expectations and projections of the company and do involve inherent risks and uncertainties, including the direction of the economy and those identified, as "Risk Factors" in our annual report on Form 10-K on file with the SEC. Actual results could differ materially from those expressed in these forward-looking statements. And with that, Zatanya, can we please open the call for questions, please?

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Questions and Answers

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Operator [1]

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

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [2]

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Can you hear me?

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Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [3]

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Go ahead, Chip.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [4]

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Oh, yes. Thank you very much.

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Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [5]

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Chip, you're cutting out.

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Operator [6]

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It seems as if Mr. Dillon's line may have disconnected. And your next question comes from the line of Brian Maguire with Goldman Sachs.

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Brian P. MGuire, Goldman Sachs Group Inc., Research Division - Equity Analyst [7]

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Mark, you made some comments just around the seasonality and the less rich mix into the fourth quarter and the 1 fewer shipping day, obviously. Just wondering if you could comment on what you've seen so far in October on shipments and sort of related to those comments, any early thoughts on the holiday e-commerce season? There's been a lot of discussion about that and how SIOC and some of the changing -- changes in Amazon's frustration-free packaging might impact the fourth quarter volume? Just any early thoughts on that?

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Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [8]

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Yes. Tom, why don't you go ahead and give that color.

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Thomas A. Hassfurther, Packaging Corporation of America - EVP of Corrugated Products [9]

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Yes, Brian. Through 15 days, we're starting out October 2% ahead of a year ago. So we're off to a good start in October. Regarding e-commerce, I think e-commerce will have a strong fourth quarter. Again, as mentioned previously, you're now comparing e-commerce in total with e-commerce of the past, and it's not a mature market totally yet, but it certainly has matured over the years. So we expect an uptick, but not to the degree it was when it was in its infancy, and it was growing at double-digit rates. I think frustration-free and SIOC are having minimal impact at this point in time. I think it will be more so starting next year, as we continue to develop that for Amazon, specifically. And as I said previously, I think that plays to PCA's strengths very well, especially the SIOC piece. We're -- it's much required for performance, design-based, transportation-based, those play very well into our strengths.

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Brian P. MGuire, Goldman Sachs Group Inc., Research Division - Equity Analyst [10]

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Okay. Great. And just 1 last one for me. Just -- I think you were already asked a little bit about this on the last call, just about the new recycling index -- just now that it's rolled out, any thoughts on how customers might react to that, looking to maybe trade down to the lower quality recycled board or maybe for environmental sustainability reasons, maybe having a preference for recycled packaging, just to highlight that it's from a recycled paper. I know your mix of customers is a little bit different than the general market. So maybe you're a little bit more immune to it. But just thinking overall, like what impact, if anything, do you think that this new index could have?

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Thomas A. Hassfurther, Packaging Corporation of America - EVP of Corrugated Products [11]

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Well, Brian, this is Tom again. This -- the index has had virtually no effect on us. As mentioned previously, it's a very different product. It's not performance-based. It's not a lot of the other things that we sell to the open market. Plus, there's not a lot of availability. So I think that there are a lot of reasons why it's had virtually no impact.

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Operator [12]

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Your next question comes from the line of Chip Dillon with Vertical.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [13]

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Yes. First question is on the maintenance again. How does it look next year quarter-by-quarter versus what it looked like this year?

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Robert P. Mundy, Packaging Corporation of America - Executive VP & CFO [14]

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Yes, Chip, that's something we will talk about on the next call regarding next year's guidance.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [15]

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Okay. Okay. And then I don't know if you gave us a year end debt level-- sorry, the quarter end debt level. Did that change at all from the second quarter?

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Robert P. Mundy, Packaging Corporation of America - Executive VP & CFO [16]

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Yes, we were down -- our net debt was a bit above $1.7 billion, and leverage is sort of in between that 1.1x, 1.2x.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [17]

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Which means the gross debt did not change. Got you.

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Robert P. Mundy, Packaging Corporation of America - Executive VP & CFO [18]

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Gross debt did not change. Right.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [19]

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Okay. That's very helpful. And then on the third question I had was just quickly is, if you could talk a little bit about what you're seeing in the export markets, at least in terms of -- it looks like we've seen another leg down in October, at least in Europe, and do you think that some people out there are getting close to a point where they might take some downtime and maybe even over those markets just because it seems like there's not a whole lot to gain by continuing to supply those markets.

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Thomas A. Hassfurther, Packaging Corporation of America - EVP of Corrugated Products [20]

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Chip, this is Tom. I'll take that question regarding export markets. Yes, we did see another trickle down in price here just recently. But I think that we're getting at or very near the bottom, given the reaction, I think, to the marketplace on this last one. So I think your thesis is pretty close.

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Operator [21]

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

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [22]

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I just wanted to perhaps get at the paper performance, which was a lot better than what we were looking for. Mark, could you parse, perhaps, what Wallula not being in there meant in terms of the earnings bridge and any other factors, if not to the dollar just key buckets in terms of the year-on-year performance in the Paper segment.

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Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [23]

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Well, again, a lot of it has to do with just the overall performance operationally and then just where we are in the marketplace with that business. I've said before, we've worked very hard over the last 6 years to take cost out of that business and then exiting Wallula, in particular. And finally, exiting completely year-over-year, lapping that has helped again with the entire cost structure of the business. And again, we're just very pleased with where the sales held up. And don't forget, we've talked about this over the years that one of the strong suits in that business is the legacy Boise logistics capability and the value proposition that, that logistics capability brings to the equation. So again, nothing different. We're just very pleased with the business and volumes been in a good place for us.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [24]

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Okay. Congratulations on the performance there. In Packaging, I just wanted to get at vertical integration. By our calculations, vertical integration probably moved up a couple of hundred, 300 basis points in the quarter. Could you comment to that effect? Could you comment where vertical integration is for you right now? And if you would prefer not to give a percentage, how far off are you in basis points from where you would like to be optimally?

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Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [25]

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Let me answer it this way. We're currently in the low 90s, as we've been talking this year. We're getting ready to start-up the new Richland box plant, as that ramps up on the curve into next year. We fully expect to see if the marketplace holds up as we are looking at the world. We would be starting to approach the mid-90s where we were a couple of years ago as the year unfolds next year. And that's -- I don't want to give any specific numbers, but that's how we're looking at things.

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [26]

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Okay. I appreciate that, Mark. Last one for me, and I'll turn it over. As you look at 2019, obviously, it hasn't been as full of a year, perhaps, as had been 2018, at least through the first half. But in years that maybe aren't as strong from a demand standpoint, there are other things that a company like PKG would do to improve the earnings profile in years ahead. Obviously, Richland is one of the things that you're doing. What other key initiatives do you have right now to improve the performance of the business, which remains good in a more -- in a stronger environment? And what are you doing in particular on the converting side to the extent that you can comment relative to the continued growth of e-commerce in terms of a channel? What are you doing in terms of printing or converting to the extent that you can comment there?

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Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [27]

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Yes. I'm going to start that off, and then I'm going to let Tom finish it. But across the board, we're continuing to look at opportunities to take cost out. We mentioned earlier this year that with the big projects completed at DeRidder and Wallula, on the conversions, we've taken the engineering and technical resources, and we're deploying them company-wide now into the corrugating converting operations. And that's also allowing us to observe and see some new opportunities that we're able to go forward with. In addition, the annual hiring of new engineers will begin to place engineers into these box plant operations. But overall, we'll continue to drive cost and volume opportunities in that side of the business with the effort we have.

Tom, do you want to add to that?

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Thomas A. Hassfurther, Packaging Corporation of America - EVP of Corrugated Products [28]

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Yes, George, I would just add that, as you well know, we take a pretty long-term approach to our business. And we make investments at times when there can be slow periods. This is one of them, where the demand hasn't been incredibly robust. It's been okay but not robust. And we're making some significant capital investments. We're doing some things that are -- will position us for the long haul. And it's a good time to be doing that because as business does ramp-up as demand does ramp-up, and we go through a little bit higher growth period, we're able to absorb that. So the W3 machine is a good example of that, where we built some runway in terms of tons. And we're doing some of the same thing in the box plants.

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Operator [29]

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Your next question comes from the line of Mark Wilde with Bank of Montreal.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [30]

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Mark, just to start off, you've been talking more in recent quarters about really just running to demand. And I wondered if you could just share a few thoughts on what the most effective strategies have been for throttling back production and running to demand? What are kind of the key elements there?

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Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [31]

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Well, again, with the capability at Wallula now, we've been able to rebalance that whole system, and without shutting machines down, we've been able to throttle back and that gives us the ability, again, to adjust in real-time as the market dictates, as customer requirements flow through a quarter. We're much more nimble in how we service that market. But at the same time, it's given us a lot more confidence in how we manage our inventories. And if you think about the year-over-year inventory being down 50,000 tons and the second quarter to third quarter inventory being down 30,000 tons, that ability now to truly work the mill system as dictated by the demand has truly paid off for us, and we now have that nationwide coverage of containerboard supply. And we're taking advantage of it.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [32]

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Okay. And then I just wanted to turn to this growth in recycled containerboard. It seems like some of the new mills and a number of the new machines are running a really high portion of mixed waste, and with mixed waste being somewhere near 0 right now, that's definitely a cost advantage for them. I wondered if you or Tom could talk a little bit about the puts and takes that using a containerboard product with a lot of mixed waste in it would involve. What is it good for and what can't you use it for?

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Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [33]

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Well, again, mixed waste, generally speaking, the fiber quality from a strength point of view, is not anywhere near what you would expect with kraft or OCC or DLK. Also the contaminant level is significantly worse traditionally unless you're getting sorted office paper. But again, the overall performance characteristics are much lower than traditional containerboard fiber furnishes. And so it's not that you cannot use some of that, but it's in very limited applications. And again, we don't use mixed waste.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [34]

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Okay. And just going back to kind of Brian's question. Is including more recycled containerboard in the mix -- is that something that would be interesting to you over the next, say, 3 to 5 years?

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Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [35]

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Well, as a matter of fact, one of the projects we just had approved at the board level in August was for a new OCC plant to be built at the Wallula Mill starting next year, and we hope to have it online by the end of the year. It's a 1,000 ton a day OCC project that will provide the plant all the necessary recycled fiber, and we'll have -- as we've used this word before many times, the ultimate fiber flexibility at Wallula, where fiber is our most expensive in terms of the mill system. So we're going to take advantage of the availability of the OCC and take advantage of it on the machines. And so Tom, do you want to add to that?

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Thomas A. Hassfurther, Packaging Corporation of America - EVP of Corrugated Products [36]

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Well, I'll just answer the last part of your question there, Mark, and that is are customers asking for 100% recycled? Occasionally, they do. But once they get the education and understand that in order to run this closed loop system that we have, it has to start with virgin. Everybody understands that. Everybody knows that. So I think that they're much more sensitive to performance-based and what it does for them and how the box performs for them and delivers at a cost-effective way. More so than saying I have to have 100% OCC. They understand if all customers said that, we wouldn't have a system anymore of closed-loop with the -- that material degradates very fast and over a period of time. So that's essentially where we are, and that's why I think that this whole recycled linerboard discussion is somewhat muted, at least regarding PCA.

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Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [37]

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A little more on that project. We're looking at that, again, as an opportunity for cost reduction. And the supply in that whole region. If you go out to the coast and down to the intermountain region, we've identified our sources. And so again, we expect to have that project online by the latter part of next year.

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Operator [38]

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

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Mark William Connelly, Stephens Inc., Research Division - MD & Senior Equity Research Analyst [39]

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Mark, you've said that Wallula has an unusually wide range of mix without having the efficiency hit that we usually see. Has that mix of business so far stayed within your expectations, even as the market has gotten softer? And is Richland going to change the grade mix that you're producing there?

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Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [40]

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No, it's worked out quite well. As we had planned on 2 years ago, the Wallula mill, in order to be successful, had to produce the heavier weight, high-performance grades all the way down to the lighter weight, high-performance grades. And we've been doing that all year. And so we obviously have not been running the mill up to its full capacity. But as Richland comes on, we'll be able to take full advantage of that remaining capacity. And we're very pleased with the quality -- we're very pleased with the flexibility of the machine in terms of the heavyweight, high-performance down to the lightweight, high performance. So it gives us ultimate flexibility to provide the Pacific Northwest and the West Coast with all the board we need.

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Mark William Connelly, Stephens Inc., Research Division - MD & Senior Equity Research Analyst [41]

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That's great. And just one more question. You've talked about the strategic importance of your export partners. But has that strategic importance of export markets changed as your system has grown and diversified?

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Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [42]

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Well, again, keep in mind that probably 30-plus years, 40-plus years, we've had this legacy customer business around the world, probably 36, 38 different countries. Tom, do you want to add to that?

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Thomas A. Hassfurther, Packaging Corporation of America - EVP of Corrugated Products [43]

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Yes, I would just say, Mark, that it remains strategic from the standpoint of these are long, long-term customers -- have been with us a long time. The grades are a very good fit. The seasonality is a very good fit. There are a lot of things that go into the equation, but they still remain strategic.

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Operator [44]

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Your next question comes from the line of Gabe Hajde with Wells Fargo.

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Gabrial Shane Hajde, Wells Fargo Securities, LLC, Research Division - Associate Analyst [45]

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Mark, you made a comment about some outage plans for next year. So I'm going to take that at the end. Can you quantify any sort of lost production tons that occurred here in 2019? And maybe, I guess, compare/contrast that to what you're expecting for 2020. And really, the nature of the question is, in 2018, it seemed like the industry was running full tilt -- coming into '19, things were throttled back a little bit. And my impression was that you guys have taken a little extra time to do some other maintenance projects around the mill, such that 2020, you could run a little bit harder, but it sounds like from your comment that you guys have a pretty heavy maintenance schedule again in 2020. So just trying to understand that.

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Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [46]

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No, we didn't take any inordinate downtime this year to do any extra work. We executed our normal planned annual outages. And then, again, taking advantage of the Wallula capability now, we're able to truly supply all of our demands in the containerboard side of the business with our 6-mill system and truly run to demand. And then that capability has allowed us to really move the inventory levels down to a much more comfortable level with that capability. That being said, we will continue to run to demand.

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Gabrial Shane Hajde, Wells Fargo Securities, LLC, Research Division - Associate Analyst [47]

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And then, I guess, trying to understand customer dialogue a little bit here, not obviously trying to get anything specific, but just how are conversations going? And I guess, are folks looking for a little bit more efficiency from their suppliers? I mean, when things start to slow down, or I should say when things are going well, maybe folks don't dial in as much on the cost side. But now, things are -- that they're a little bit slower -- is it more of a conversation around costs or efficiencies on the converting side?

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Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [48]

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We don't generally talk about customer-specific activity. And you can only imagine, again, part of our proposition -- our value proposition, it's just that we provide tremendous value for our customers in many ways.

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Operator [49]

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

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Randy Devin Toth, Citigroup Inc, Research Division - Associate [50]

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This is actually Randy Toth sitting in for Anthony. Over the past couple of years, you've done some impressive things on the mill side with DeRidder and Wallula and then this year, I think you focused more on the box line side with Richland and Wisconsin, amongst others. Would it be fair to say that CapEx could step down in 2020, given all this work has been put in over the past couple of years?

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Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [51]

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Well, again, without answering that, we'll give you a better assessment in January when we have the January call. Just keep in mind that we will be able to take advantage of opportunities as we see fit. And so just I'd rather answer it that way, that whatever opportunities we deem as true opportunities, we have the ability. We have the cash on hand. We have the resources to execute. And so we're in a good place in that regard.

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Randy Devin Toth, Citigroup Inc, Research Division - Associate [52]

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Okay, that's fair. I guess, coming at it from a different angle, you've been using your internal technology organization to improve your box plant system for a couple of quarters now. Or at least they've been looking at it. What inning would you say that process is in -- are we still in first or second inning? Or is Richland and the other projects in Wisconsin, is that a decent chunk of what you expect?

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Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [53]

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It's in the first minute of the first inning.

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Randy Devin Toth, Citigroup Inc, Research Division - Associate [54]

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Okay. Okay. That's fair.

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Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [55]

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Which means we have tremendous, tremendous runway opportunity over the future years to continue to build out that side of our opportunity in much the same way we did in our mills 25 years ago.

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Randy Devin Toth, Citigroup Inc, Research Division - Associate [56]

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Understood. Understood. That's very helpful. And then just switching gears quickly. I know you just announced the new OCC plant at Wallula. Historically, I think you're your recycled fiber mix has been somewhere around 15% to 20%. In your opinion, is there a natural limit to where that could go while still maintaining the performance that your customers expect from you? Or just how you think about that?

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Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [57]

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We don't have any current plans to move that significantly within our legacy mill system, but we do have the flexibility to ramp-up and down at any given containerboard mill but again, there are limits, as we've called out over the years. So again, with the exception of the Wallula project, the remaining legacy mills will remain in the same range they've been in, in terms of OCC utilization, DLK utilization.

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Operator [58]

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Your next question comes from the line of Mark Weintraub with Seaport Global.

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Mark Adam Weintraub, Seaport Global Securities LLC, Research Division - MD & Senior Research Analyst [59]

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First, on the box demand side, you were up close to 2% in the just ended quarter, you suggested that's how October is running. I think that previously, you've also indicated that the Sacramento related business loss was about a 1.5% drag. So is it fair to say that you're kind of in an environment where you might expect to -- once you lap the Sacramento business, be growing at about a 3.5% type rate. Is that a fair way to look at it?

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Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [60]

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Well, let me start that, and Tom can give you some color. Obviously, I'm not going to speculate on what volume is going to do next year. I'm just saying we're in a much better place. And again, you mentioned the keyword, we've lapped as of the December period, we're coming up on the year that, that business has exited. And so into next year, it's a different metric. But again, it all depends on what the demand looks like. And so I can't speculate on that. Tom, do you want to add anything?

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Thomas A. Hassfurther, Packaging Corporation of America - EVP of Corrugated Products [61]

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I've got nothing else to add.

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Mark Adam Weintraub, Seaport Global Securities LLC, Research Division - MD & Senior Research Analyst [62]

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And then, Bob, when you're -- you mentioned, you just said something about developing for Amazon when related to the SIOC conversation. And I just -- was that a Packaging Corp specific comment? Was that an industry comment? And if that's a Packaging Corp specific comment, can you provide any more color on what we were supposed to kind of take away from that mention?

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Thomas A. Hassfurther, Packaging Corporation of America - EVP of Corrugated Products [63]

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No, Mark, what I would say is, I would say that we are on the Amazon team to help develop SIOC and help work on that. And help define what that is and help meet the objectives that Amazon has. So we're actively involved both with Amazon and with our direct customers as well as some prospects in developing that SIOC program. So I'm making a comment regarding PCA. And obviously, this is an industry initiative as well.

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Mark Adam Weintraub, Seaport Global Securities LLC, Research Division - MD & Senior Research Analyst [64]

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Okay. Great. And then just for this year, capital spending through the first 9 months, it's running about 264. I guess, it seems to me unless you're going to spend a whole lot of money in the fourth quarter, you're probably going to come in lighter than what I had previously anticipated. Any update on what your CapEx for 2019 is likely to come out at?

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Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [65]

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Yes, Mark, that's a good observation. We called out through the July call that we thought we'd be a little over $400 million. In the summer period, we were able to reassess some opportunities, and we shifted gears. That's basically how the Wallula projects came about and so that gave us the opportunity to pull back on some of the capital. So we're going to be lighter than the original estimate, probably not over $400 million but somewhere below that. But again, we're shifting gears on some of these opportunities. But I think it's worth calling out that in PCA's tradition, we have that ability to step back and reassess what's the right thing to do with our dollars. And again, it was a summer time period of reevaluating what the opportunities look like, what the best opportunities were for us. And so we shifted some things around. So it's just a timing issue.

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Mark Adam Weintraub, Seaport Global Securities LLC, Research Division - MD & Senior Research Analyst [66]

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So is it that we'd expect that the spend to flow into next year? Or is it -- or maybe a bit more color. Are there other options that are under consideration potentially that, obviously, you can't speak to necessarily but that can play into it. Or I guess the third alternative would be if you were -- and I think this is unlikely -- but if you were less confident on where your cash flows -- your cash flow generation on a go-forward basis? Any help you can give us with...

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Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [67]

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Without giving you the exact capital number, the board approved in August 2 big projects at Wallula Mill, one being the OCC project and the other being a new Woodyard project. And so that spend, although not all of it next year, some of it will roll over into 2021. But a good portion of the spend will start next year on these 2 big projects at Wallula, but those are 2 high-return projects. So again, we reserve the right to be able to move the capital up and down, but within a range of somewhere that we've been and that we're comfortable with. Part of what we're doing is we are making sure that all these projects that we do, that we are doing the engineering, we are managing the projects ourselves, and we are maintaining tight control of these project executions. And so that gives us the optimum return.

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Operator [68]

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

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [69]

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Until the end of 2017, you guys were pretty voracious acquirers of converting capacity. But since Sacramento, you've kind of taken your foot off the gas. And I'm just wondering has anything changed philosophically? Or is it perhaps a valuation perspective?

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Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [70]

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Let me comment on that, and then Tom can add to that. Part of it's -- the opportunities that exist and what you're paying for that opportunity. So again, we're pretty judicious in how we evaluate those opportunities and pretty particular about the opportunities we would be attracted to. Tom?

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Thomas A. Hassfurther, Packaging Corporation of America - EVP of Corrugated Products [71]

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I would just add that we've been incredibly disciplined in our acquisition strategy. It's been a very specific approach -- the opportunities are less today as the -- especially as the independent market has shrunk so dramatically. So are there a few opportunities out there? Yes, we explore every opportunity that we think makes sense. We just haven't found any that absolutely fit our criteria that we're looking for. So it's still a very important part of our strategy, and we'll continue to look and explore every opportunity and those that make sense, we'll move forward on. That's the best I can say.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [72]

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Okay. And just a quick follow-on, I guess, on e-commerce, which is still growing, maybe not as fast. And SIOC is an interesting development. But as people try and diminish the overall packaging, we've seen plastic pouches kind of reemerge. And I don't think that's very environmentally friendly at all. Do you guys have any capabilities? Or do you foresee any benefits of a migration towards kraft paper or kraft sacks?

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Thomas A. Hassfurther, Packaging Corporation of America - EVP of Corrugated Products [73]

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We're not, obviously, in the kraft sack business. But I think there are corrugated opportunities that are coming about as a result of consumers really moving away from plastics, understanding what that does to the environment. And in many cases, we've got a lot of e-commerce. We talk about Amazon all the time with regard to e-commerce, but virtually everybody who manufactures anything and sells through a retail environment is in some form of e-commerce today. And they're all saying the same thing, and that is that many of the consumers don't want to receive their products either in plastic pouches or some other form of plastic container. And even in the SIOC program, there's a lot of discussion about taking plastic out of the primary package. So I think your premise is correct, and I think there are opportunities for the corrugated industry going forward regarding this potential opportunity in e-commerce.

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Operator [74]

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

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [75]

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I appreciate it. Tom, you commented in response to a question on the last call about the trend of quarter starting out quite strong and then slowing towards the end of the quarter. And it seemed like 3Q is much the same. I think you said in July you were up 5.8% in the first couple of weeks. And for the full quarter, you were up a little under 2%. Can you just reiterate why you think you're seeing these patterns? And do you expect 4Q to be similar to what you've seen over the past, however, many quarters along those lines?

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Thomas A. Hassfurther, Packaging Corporation of America - EVP of Corrugated Products [76]

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Adam, it's impossible to predict exactly what's going to happen with our 18,000-plus customers. But I think the trend is because our customers are keeping their inventories so low and in check that in the quarter, the beginning of the quarter, they replenish the inventories to some extent. And by the end of the quarter, they perhaps are running them down because as you know, the economy is such that it's quite unpredictable. It's not robust, if you will. And I think our customers are managing their cash, their inventories, everything very close to the vest. And so do I expect the same thing to happen in the fourth quarter? Well, the fourth quarter is pretty -- is a little more predictable in terms of holidays and all the other things that occur starting Thanksgiving and rolling into Christmas. So I would be surprised if the levels stayed at this level, but I still think the fourth quarter will be pretty solid.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [77]

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And just to be clear on the third quarter, did you see the same sort of thing that the trend slowed toward the very end?

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Thomas A. Hassfurther, Packaging Corporation of America - EVP of Corrugated Products [78]

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Yes, it slowed down somewhat towards the end. Yes.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [79]

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Okay. And then just Bob, one on the bridge for 4Q. I know you mentioned maintenance would be a $0.06 drag. And obviously, you're guiding to $0.22 lower overall, so that leaves out $0.16. Can you roughly talk about the other factors, lower prices, lower volume, weaker mix, higher cost. Can you just give us a rough sense of what each of those -- you expect each of those to be?

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Robert P. Mundy, Packaging Corporation of America - Executive VP & CFO [80]

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Well, obviously, those are the categories that we pointed out. But we never have given specific numbers for those different buckets. So you just have to go with our comments for now.

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Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [81]

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Okay. And then I think you said on the next call, you'll talk about what maintenance will be by quarter. It sounds like 1Q will be a particularly heavy maintenance quarter. Is that the right way to think about it?

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Robert P. Mundy, Packaging Corporation of America - Executive VP & CFO [82]

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Well, I'll just say that we do have -- as we said in our -- I think in the earnings release, we have our 3 largest containerboard mills with annual outages in the first quarter. So that does point to a lot of work going on then.

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Operator [83]

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(Operator Instructions) Your next question comes from the line of Chip Dillon with Vertical.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [84]

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I just want to make sure I have this straight. You all are putting in some OCC capability in Wallula, and I know there's another organization trying to raise money to build a recycled mill in Utah, and you all, I think, have the most box converting presence in that state. Would the Wallula mill pretty much take care of all the recycle needs you would have for your box plants, if they need it. We recycle board in Utah?

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Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [85]

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Yes, Chip. As we were analyzing this project opportunity, again, we have looked at from the intermountain region all the way up to the Pacific Coast, all of our supply opportunities. And so we feel confident we've got discussions ongoing, and in some cases locked in with where the supply will come from. So we're very confident. And again, the project is ongoing, and we're pushing ahead full speed with getting this executed for next year.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [86]

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Okay. And then just quickly also, no one, I believe, has asked about the White Paper business. And $48 million in 1 quarter was, I think, your best performance and one of the best you've had since the Boise deal 6 years ago. And was there anything unusual in the third quarter, whether it was just super good performance? Or is this sort of a decent baseline to think about as we go ahead and obviously, we factor in maintenance, we factor in price and volumes from here?

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Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [87]

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Well, keep in mind, we did not have an outage in the third quarter this year. And again, there was -- the seasonal volume was there. But again, part of it is just -- it's a -- I'm going to use the word, it's a tidy little business for us. It's the 2 mills, the Jackson Mill and the I Falls mill, and we've got this great nationwide distribution capability. So we've got a very good customer base, and the logistics capability is very valuable to that proposition. And so if you can understand that we will have outages scheduled for next year at some point in time during these quarters, you'll have these puts and takes of outage cost impacts. But net-net, it will -- it remains a good business for us. Bob, do you want to say anything?

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Robert P. Mundy, Packaging Corporation of America - Executive VP & CFO [88]

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Yes. No, I agree. It's just the cost structure, and I think there's -- it's just -- it continues to do an outstanding job of just managing the cost, Chip, and turning as many costs as possible into variable-type costs as opposed to fixed and things like that, and it just continues -- they continue to do just an outstanding job.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [89]

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And lastly, on volumes. I mean, there's been a lot of moving pieces with the imports up, but a lot of capacity removed and one competitor actually leaving the market. As you look into 2020 and 2021, do you see anything -- any step functions in the demand side or should it continue to be hopefully flattish or maybe just decline slightly? Or do you see something different than that?

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Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [90]

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Well, if you read the index information, what the trade is saying, obviously, they predict a continuing market demand destruction over time. But yes, we've been dealing with that for better part of a few decades now. So we just have that ability to manage that. Our volume will run to the market demand. And that's about all I can really say. We have the ability to flex that capability a little bit. And -- but we also -- again, it allows us to move within the customer base we choose to be within.

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Operator [91]

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Your next question comes from the line of Mark Wilde with Bank of Montreal.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [92]

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I wanted to just come around to the cash balance, which is about $0.75 billion right now. Would you be comfortable kind of continuing to build cash for at least the next 2 or 3 quarters?

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Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [93]

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I'm not going to talk about too far out. We're comfortable where we are right now. We'll use some of the words we've used this year in terms of -- we still are living in uncertain times. We feel it's very prudent for us right now to remain very conservative on how we treat that cash. It gives us utmost optionality in how we take advantage of that cash. And I said this on the July call with every dollar of cash sitting on hand is not being wasted. And so we reserve the right to allow that to continue on for the time being. But it gives us tremendous opportunities in the future to create shareholder value as we have done many years over.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [94]

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Yes. Look, Mark, you've been great capital allocators over time. I think everybody can see that. And I'm just kind of curious, it's a big position. I mean, this is obviously more cash than you need to buy a couple of box plants. So can you give us some sense of sort of what types of situations might be interesting and whether there's been any change in the types of things you're willing to consider? Historically, you've said you didn't want to go offshore, you didn't want to go to Mexico, you didn't want to go to Europe. Any change in those positions?

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Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [95]

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No changes in that position of being offshore. We are American-based, and we will continue to be American-based. Again, I just have to believe we're going into an election year next year, we have a lot of uncertainty in the world around us. And so this cash gives us tremendous opportunity no matter what happens in the future.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [96]

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Okay, that's fair. Again, I think if you look at your track record over the last 20 years, it speaks pretty clearly.

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Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [97]

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Okay. I think we've got time for at least 1 more question.

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Operator [98]

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Your next question comes from the line of Gabe Hajde with Wells Fargo.

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Gabrial Shane Hajde, Wells Fargo Securities, LLC, Research Division - Associate Analyst [99]

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I'll try to make it brief. In the press release, and I think in the prepared comments, you talked about running to demand but also trying to build some inventory in anticipation of maintenance next year. Is there anything specific you want us to take away from that?

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Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [100]

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No. Again, just as we look at the outages next year, and we -- if we assume a certain demand, which you have to build a model, whether or not that's what happens in the world. But if we assume we're going to take these outages next year and what the implication is on the tons that we're taking down for the first quarter, you have to -- and also, you're dealing with winter weather phenomena, which is a big uncertainty throughout the country and what that can do to transportation. So you certainly have to have somewhat of an increased inventory to supply the demand in the box plants, while you're taking these mills down. So we're just saying that there's some number that we're going to move up from the end of the third quarter. And get a little bit more comfortable as we end December and go into January. We're not going to call that number out, but it will be somewhat higher than we ended 3Q.

Again, we've got time for one more question.

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Operator [101]

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

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George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [102]

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Just a quick question on e-commerce, one more time, Mark and Tom. I mean, to the extent that you're working on more SIOC projects, perhaps rightsizing products for customers given dimensional weight protocol, are there any important elements that you're working on the converting side, anything that you're doing perhaps on printing, maybe digital as you're trying to further your penetration or share of what you do for the customer there? And then if you could update us on your views again, relatedly, on white top line and whether you need to build any capability, to a large degree, in-house or not?

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Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [103]

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Let me take the white top question first, and then Tom can finish the rest of the question. Currently, we do have the capability, if we had to, we could produce white top, but it's not economical for us to do that. And so we will not be pursuing that as you would expect. Tom?

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Thomas A. Hassfurther, Packaging Corporation of America - EVP of Corrugated Products [104]

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George, just real quick on e-com. Obviously, I'm not going to go into any details about what we're planning to do other than to just say we explore all of the alternatives. We explore what's best for our customers, what we think are best solutions in the marketplace, and we'll continue to do so.

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Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [105]

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Zatanya, that wraps up our call today. And I'd like to thank everybody for joining us and look forward to talking with you in January as we give you the full year and fourth quarter wrap up. Have a nice day.

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Operator [106]

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This does conclude today's conference call. Thank you for your participation. You may now disconnect.