U.S. Markets closed

Edited Transcript of PKG earnings conference call or presentation 30-Jan-20 2:00pm GMT

Q4 2019 Packaging Corp of America Earnings Call

LAKE FOREST Jan 31, 2020 (Thomson StreetEvents) -- Edited Transcript of Packaging Corp of America earnings conference call or presentation Thursday, January 30, 2020 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* 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

================================================================================

Conference Call Participants

================================================================================

* Adam Jesse Josephson

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

* Brian P. Maguire

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

* Jesse Brown

BMO Capital Markets

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Thank you for joining Packaging Corporation of America's Fourth Quarter and Full Year 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.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you. Good morning, and thank you all for participating in Packaging Corporation of America's Fourth Quarter and Full Year 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 our packaging business; and Bob Mundy, our Chief Financial Officer.

I'll begin the call with an overview of our fourth quarter and full year results, and then I'm going to turn it over to Tom and Bob, who'll provide further details. And then I'll wrap things up, and then we'd be glad to take questions.

Yesterday, we reported fourth quarter 2019 net income of $136 million or $1.43 per share. Fourth quarter net income included special items of $26 million, primarily for certain costs associated with the company's November 2019 debt refinancing, which included redemption premiums, financing fees and write-offs for unamortized debt issuance costs and treasury lock balances.

Excluding the special items, fourth quarter 2019 net income was $163 million or $1.71 per share compared to the fourth quarter 2018 net income of $205 million or $2.17 per share. Fourth quarter net sales were $1.7 billion in both 2019 and 2018.

Total company EBITDA for the fourth quarter, excluding special items, was $335 million in 2019 and $387 million in 2018. We also reported full year 2019 earnings, excluding special items, of $726 million or $7.65 per share compared to 2018 earnings, excluding special items, of $760 million or $8.03 per share. Net sales were $7 billion in both 2019 and 2018. Excluding the special items, total company EBITDA in 2019 was $1.45 billion compared to $1.50 billion in 2018. Details of the special items for both the fourth quarter and full year 2019 and 2018 were included in the schedules that accompany the earnings press release.

Excluding the special items, the $0.46 per share decrease in fourth quarter 2019 earnings compared to the fourth quarter of 2018 was driven primarily by lower prices and mix in our Packaging segment of $0.57; and Paper segment, $0.02; higher operating costs, $0.05, primarily due to inflation related increases with chemicals, labor and benefits expenses, repair, material costs and other outside service costs. We also had higher nonoperating pension expense of $0.02, higher depreciation expense of $0.01 and other costs, including start-up related costs at our new Richland, Washington plant of $0.03. These items were partially offset by higher volumes in our Packaging segment of $0.16 and Paper segment, $0.01, lower annual outage expenses, $0.04 and lower freight and logistics expenses of $0.03.

Looking at our Packaging Business. EBITDA, excluding special items in the fourth quarter 2019 of $303 million, with sales of $1.5 billion resulted in a margin of 21% versus last year's EBITDA of $352 million, and sales of $1.5 billion or a 23% margin.

We continued to run our containerboard system to demand in a very cost-effective manner. Our mill production supplied the necessary containerboard to achieve a new all-time quarterly record for box shipments per day and a new fourth quarter record for total box shipments allowing us to maintain our industry-leading integration rate.

Our new box plant in Richland, Washington had an excellent start-up during the quarter, and we're now beginning to take full advantage of the benefits from our machine conversion at the Wallula Mill with its flexibility to produce from the heavier weight, high-performance linerboard grades all the way down to the lighter weight, high-performance grades. This gives us the capability to further optimize the mix and the inventory levels of the entire containerboard system, and provide the type and the quality of board needed for our customers on the West Coast and in the Pacific Northwest and reduce our system-wide freight and logistics costs, which in the fourth quarter alone, provided over $2 million of benefit.

For the full year 2019, Packaging segment EBITDA, excluding special items, was $1.3 billion, with sales of [$5.9 billion] (corrected by company after the call), or a 22.1% margin compared to full year 2018 EBITDA of $1.4 billion, with sales of $5.9 billion or 23.6% margin.

I'm now going to turn it over to Tom, who'll provide more details on containerboard sales in the corrugating business.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Mark. As Mark indicated, in corrugated products, we had an all-time record quarterly box shipments per day, which were up 0.7% compared to last year's fourth quarter as well as a record fourth quarter total shipments, which were up 2.3% over last year. Outside sales volume of containerboard was 6.2% below last year's fourth quarter while up 3.7% compared to the third quarter of 2019 due to higher export volume.

For the full year 2019, we established new annual records for total box shipments and box shipments per day both up 0.9% versus 2018. Domestic containerboard and corrugated products prices and mix, together, were $0.43 per share lower than the fourth quarter of 2018 and down $0.14 per share versus the third quarter of 2019 due to a less rich mix. Export containerboard prices were $0.14 per share below fourth quarter 2018 levels and down $0.02 per share compared to the third quarter of 2019.

I'll now turn it back to Mark.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Tom. Looking at the Paper segment, EBITDA, excluding special items in the fourth quarter, was $53 million with sales of $244 million or a 22% margin compared to the fourth quarter of 2018 EBITDA of $52 million and sales of $227 million or 23% margin. We did a good job managing our inventories during the quarter as we ran the system to demand and reduced our office paper inventories by almost 10% versus the third quarter of 2019.

Volume during the quarter was better than anticipated at levels above last year as well as the third quarter of 2019, and prices and mix were lower as expected, although slightly better than anticipated as well. Throughout the quarter, the mills [maintained excellent] (added by company after the call) control over input costs and freight and logistics expenses.

For the full year 2019, Paper segment EBITDA, excluding special items, was $213 million and sales were $964 million or 22% margin compared to full year [2018] (corrected by company after the call) EBITDA of $165 million with sales of $1.0 billion or 16% margin. These results are the best we've ever achieved and reflect the hard work and dedication by all employees in our paper business as well as the strategic decision to exit the white paper and pressure-sensitive business at the Wallula Mill back in 2017.

I'm now going to turn it over to Bob.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Mark. We have very good cash generation in the fourth quarter with cash provided by operations of $329 million and free cash flow of $194 million. The primary uses of cash during the quarter included capital expenditures of $136 million, common stock dividends totaled $75 million, $31 million for redemption premiums and fees associated with our debt refinancing, $34 million for federal and state income tax payments, pension payments of $4 million and net interest payments of $35 million. In addition, in order to generate higher interest income for a portion of our cash, $146 million moved from Cash to Marketable Securities on our balance sheet during the quarter. We ended the quarter with $679 million of cash on hand or $825 million if you include the marketable securities.

During the quarter, we refinanced $900 million of our existing 2.45% notes maturing in 2020 and 3.9% notes maturing in 2022, with new 10- and 30-year notes. This resulted in only a marginal increase in the Company's average cash interest rate of just over 0.1%, and extend the Company's overall debt maturity from 4.1 years to 10.3 years. Gross debt remained unchanged at $2.5 billion.

For the full year 2019, cash from operations was a record $1.2 billion. Capital spending was $399 million, and free cash flow was a record $808 million. Our final effective tax rate for 2019 was 24%, and our final cash tax rate was 19%.

Regarding full year estimates of certain key items for the upcoming year, we expect total capital expenditures to be between $400 million to $425 million. DD&A is expected to be approximately $400 million, pension and postretirement benefit expense of $22 million, and we expect to make cash pension and post-retirement benefit plan contributions of $85 million. Our full year interest expense in 2020 is expected to be approximately $81 million and net cash interest payments should be about $84 million. The estimate for our 2020 combined federal and state cash tax rate is approximately 19% and for our book effective tax rate, approximately 25%.

As we mentioned during the last quarter's earnings call, we have a heavy volume of scheduled mill outages in 2020. In total, we are planning for 9 outages this year versus 6 in 2019. Four of these scheduled outages at 3 of our containerboard mills and 1 of our paper mills are planned for the first quarter versus only 2 outages in last year's first quarter. This will have a negative impact on earnings per share of approximately $0.09, moving from the fourth quarter of 2019 to the first quarter of 2020 and $0.06 per share versus the first quarter of 2019.

The total earnings impact of these outages, including lost volume, direct costs and amortized repair costs is expected to be $0.81 per share compared to $0.60 per share for 2019. The current estimated impact by quarter in 2020 is $0.24 per share in the first quarter, $0.17 in the second, $0.13 in the third quarter, and $0.27 per share in the fourth quarter.

I'll now turn it back to Mark.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Bob. Looking ahead, as we move into the first quarter of 2020, in our Packaging segment we expect lower prices as the remaining impact of the published domestic containerboard price decreases from last year work through the system as well as the negative impact from the recent January decreases in the published prices for linerboard and medium. We also expect lower export prices. Containerboard volumes will be lower due to scheduled outages at our three largest mills during the quarter. But we do expect higher corrugated product shipments.

In our Paper segment, volumes will be lower due to the better than expected levels in the fourth quarter as well as the scheduled outage we have at our Jackson mill. As Bob mentioned earlier, scheduled outage costs will be significantly higher with four scheduled in the first quarter versus just one in the fourth quarter of 2019. Freight costs will be higher due to rail rate increases in certain areas and scheduled outage-related increases. Labor and benefit costs will be higher with annual wage increases and other timing-related expenses. There will be inflation with purchased electricity, and most of our chemical and repair and material costs, while seasonally colder weather will increase energy and wood costs. We also expect our tax rate and depreciation expense to be slightly higher. Considering these items, we expect first quarter earnings of $1.20 per share.

With that, we'd be 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. 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 on file with the SEC. Actual results could differ materially from those expressed in the forward-looking statements.

And with that, Mariama, I'd like to open the call for questions. Thank you.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

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

(technical Difficulty]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

And so the integration continues -- will continue to aid our margins.

--------------------------------------------------------------------------------

Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [3]

--------------------------------------------------------------------------------

Yes. So maybe -- maybe I'll comment a little bit on the consumer integration elements that you touched on. And just the way we look at this is in SBS, we have about 40% of our volume that has serve some specialty markets such as tobacco, commercial print and liquid packaging. And in those situations, we're really specified down to the end user and sell the...

[Technical Difficulty]

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [5]

--------------------------------------------------------------------------------

I know pricing discussion, we need to avoid too much of a forward look guidance, I don't want to go beyond what you normally are comfortable with. But when we look at the bridge, fourth quarter versus fourth quarter relative to third quarter versus third quarter. There was a bit of an increased amount or a larger negative on price mix and packaging and I think the third quarter was around $0.36, and it was more like $0.50-plus this quarter. Was that purely the rollover or the continued effect of prior pricing rolling through the contracts? Was there any other effect that maybe we should be mindful of either mix or what have you? And while I wouldn't expect it was that big of a deal, is any of this related to the recycled liner impacts? And I had a couple of follow-ons.

--------------------------------------------------------------------------------

Thomas A. Hassfurther, Packaging Corporation of America - EVP of Corrugated Products [6]

--------------------------------------------------------------------------------

Hey, George, this is Tom. I'll just tell you that it was -- the price variance was primarily related to the rollover of the price decreases that had taken place through the year. But also, as we mentioned, it was mix related as well, both fourth quarter over fourth quarter and third quarter compared to the fourth quarter. So that's pretty much it on the pricing side. The recycled liner, what impact did that have? I mean, it's virtually not impactful to us in our businesses, as we mentioned before.

--------------------------------------------------------------------------------

George Leon Staphos, BofA Merrill Lynch, Research Division - MD and Co-Sector Head in Equity Research [7]

--------------------------------------------------------------------------------

Okay. I wouldn't have expected it. I know you might not want to go too much into detail, if at all here, but what was maybe a little bit less good for you in mix this quarter? Was it just export being up sequentially? Or is there anything else there? And could you give us a quick update on e-commerce? And then my last question, I'll turn it over. You mentioned paper volumes were better than expected. Why was that the case relative to what was going on in the market? What do you think was going well for you from a commercial standpoint?

--------------------------------------------------------------------------------

Thomas A. Hassfurther, Packaging Corporation of America - EVP of Corrugated Products [8]

--------------------------------------------------------------------------------

Okay, George, I'd say, your question regarding mix. I mean, we don't really talk about our mix much. It's obvious that export was up and that had a dramatic impact, and that was -- as far as mix is concerned, that was the biggest part of the impact. Ecommerce, remains strong. I think, as we've talked about before, it's maturing somewhat as a market. So I think as an industry, we've got a much better handle on it. And those sales were up earlier in the quarter than the emergency stuff that we typically would see right at the end of the quarter. Regarding paper volumes, I'll turn it back to Mark real quick.

--------------------------------------------------------------------------------

Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [9]

--------------------------------------------------------------------------------

Yes, the third quarter sales were lower than we had expected, but also if you compare year-over-year, we were on allocation most of 2018. And then we came into 2019 and were getting back in balance. But again, third quarter was lower. And we had a number of key customers pick up their volume significantly during the fourth quarter. So we can't provide a lot of details on that, except to say that obviously, we were pleased with the volume that developed.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

Our apologies for the quirks. Your next question comes from the line of Chip Dillon from Vertical Research.

--------------------------------------------------------------------------------

Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [11]

--------------------------------------------------------------------------------

Hopefully, you guys can hear me okay?

--------------------------------------------------------------------------------

Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [12]

--------------------------------------------------------------------------------

Yes, Chip, go ahead.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. My first question has to do with -- when we think about the downtime you guys are taking quite a bit for maintenance this year. And my guess is there's a lot that I think a lot of -- we don't maybe fully understand how much preparation goes into that. And so my question is, as you look at the world from, say, 18 months ago, when the industry was so tight and now, it's a bit looser. Is that affecting the timing of some of this maintenance? In other words, did you have an incentive to kind of push it out a little bit, say, 2 years ago, 1.5 years ago? And now this is a better time to be pursuing some of this work?

--------------------------------------------------------------------------------

Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [14]

--------------------------------------------------------------------------------

No, Chip. The way our shutdowns fall, some of the mills now are on an 18-month rotation. And so there are some years that we actually end up with a skip year on some of the mills and then just the way the boiler work and turbine generator work falls in, you end up with a first quarter such as what we're describing. So it has nothing to do with meeting demand or managing inventories. It's just basically adhering to our maintenance policies and our requirements to take care of the mill assets.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay, that's helpful. And then just a quick follow-up. If you could update us a little bit on the project to add recycling capability to Wallula. And are you buying recycled board for certain box customers right now? And will that mean you won't be buying recycled board, at least in the Western United States as that project ramps up?

--------------------------------------------------------------------------------

Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [16]

--------------------------------------------------------------------------------

For the first part of the question, we expect to have the OCC plant up and running by the end of the year at Wallula, so that's well on schedule. And then, Tom, do you want to address the second question?

--------------------------------------------------------------------------------

Thomas A. Hassfurther, Packaging Corporation of America - EVP of Corrugated Products [17]

--------------------------------------------------------------------------------

Yes. Chip, we don't buy recycled on the outside market. As we've said many, many times, our customers require a performance-based containerboard, which is primarily all virgin. Now even the recycled project at Wallula is designed to just be able to add some recycling to the furnish, it does not change the fact that it will be a virgin board.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Jesse Brown, BMO Capital Markets [19]

--------------------------------------------------------------------------------

This is Jesse Brown on for Mark. Just our first question. You guys are sitting on quite a bit of cash. Can you kind of talk about what your capital allocation is looking like for 2020? And kind of your plans for all that cash?

--------------------------------------------------------------------------------

Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [20]

--------------------------------------------------------------------------------

The plans haven't changed, and we called out the capital down in that lower $400 million level, $400 million to $425 million. We still remain in terms of our cash uses, we will be opportunistic, and that could be share buyback, acquisitions, and then just capital opportunities in general, but we're quite content with where we are and what the cash is doing. And again, as I said on a few prior calls, for every dollar of cash we're not spending, we're certainly not wasting it. So it's -- it will provide good value at the right time.

--------------------------------------------------------------------------------

Jesse Brown, BMO Capital Markets [21]

--------------------------------------------------------------------------------

And then just one follow-up for me. Are you guys sensing any impact on the export markets from Finnish pulp and paper strike?

--------------------------------------------------------------------------------

Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [22]

--------------------------------------------------------------------------------

I haven't seen anything, Tom, do you see anything?

--------------------------------------------------------------------------------

Thomas A. Hassfurther, Packaging Corporation of America - EVP of Corrugated Products [23]

--------------------------------------------------------------------------------

No, no, we haven't seen anything to date, no.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

Your next question comes from Mark Connelly with Stephens Inc.

--------------------------------------------------------------------------------

Mark William Connelly, Stephens Inc., Research Division - MD & Senior Equity Research Analyst [25]

--------------------------------------------------------------------------------

Mark, we're accustomed to seeing you build inventories ahead of big maintenance outages. And now you've got a really big maintenance outage and you've actually let inventories go down. So can you talk about your inventory levels and whether you've sort of -- are inventories higher than I think? Or are you just running better and you're content with less inventory?

--------------------------------------------------------------------------------

Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [26]

--------------------------------------------------------------------------------

Well, there are 2 factors there. When we came through the month of September, and we were looking at our plans for 4Q. Obviously, we had to anticipate the startup of the new Richland box plant. And that obviously impacts the Wallula Mill production. So the fact that the Richland box plant was on schedule and started up -- and started running extremely well. We had to supply that. Also, our demand across the board for corrugated products, for containerboard outside some extra export sales required that we had to start running the system to full capacity during the last couple of weeks of September, and that full capacity running mode continued right through the entire fourth quarter. Now part of the equation also is that during the last year, we have also worked diligently across the linerboard system to develop our own, what we'll call special grade mix of high-performance virgin kraft linerboard for our own usage. And so it's moving the system into a lighter weight, high-performance capability. And so we sold some extra tons. And then tons that would have shown up because you were running an older grade mix would have been a heavier basis weight grade mix, that also was part of the equation. But net-net, business was, obviously, good, and we continue to supply. We also, with the ability of the Wallula Mill, we can supply the entire system now in the West Coast. And I mentioned that on the commentary that in terms of the total system inventory requirements and how we look at that need. We also have to consider the fact that you saw boxes on a square foot basis. And so when we look at our inventories now, we start to think in terms of square feet of containerboard in our inventory system, not just pure tons because of a mix we're dealing with. So it's complicated. But bottom line, we ran full out and we're having to run full now into this part of the year. Obviously, with the outages that we're facing, we come out of these outages, as we've always done, we're going to have to run very well to continue to supply the demand on the packaging side of the business. That's a long answer to a short question.

--------------------------------------------------------------------------------

Mark William Connelly, Stephens Inc., Research Division - MD & Senior Equity Research Analyst [27]

--------------------------------------------------------------------------------

No, well, it's a good problem to have, too. You mentioned reoptimizing the whole system with the impact of Richland, how long will it take for Richland to fill up with the right kind of business? And then how long will that reoptimization around the system take?

--------------------------------------------------------------------------------

Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [28]

--------------------------------------------------------------------------------

We actually started the plant up in November. And as of the first part of January, we're running right on plan. Now the plan, obviously, has a ramp-up with our customer base, but we're extremely pleased. The plant, as you could imagine, is a high-volume, highly automated plant, high capacity, a lot of flexibility in the plant, but Tom is going to be filling that order book out. Tom, do you want to comment, again, with just a good start-up, and we're really happy with what we're seeing there.

--------------------------------------------------------------------------------

Thomas A. Hassfurther, Packaging Corporation of America - EVP of Corrugated Products [29]

--------------------------------------------------------------------------------

Mark, I would just say that we're slightly ahead of plan right now, and I think we'll be well ahead of plan as the year rolls out, and that's about the extent of what I'm going to comment on.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

Your next question comes from Brian Maguire with Goldman Sachs.

--------------------------------------------------------------------------------

Brian P. Maguire, Goldman Sachs Group Inc., Research Division - Equity Analyst [31]

--------------------------------------------------------------------------------

Just wanted to come back to earlier questions around the mix. Just wondering why there was an increase in exports in the quarter, given, obviously, those are lower prices and sort of negative, what drove the sort of shift towards the export market? And maybe if you could just remind us, the board you sell externally, how many tons are roughly going into the domestic market and the export market now?

--------------------------------------------------------------------------------

Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [32]

--------------------------------------------------------------------------------

Well, again, as the fourth quarter rolled through, we ended up with a lot of the legacy customers. Again, we moved tons probably in the 35 different countries around the world, small volumes of these are legacy customers that you've heard us refer to through many years. And we ended up with what we believe was adequate volume in our own domestic system, and we were able to satisfy some of these requirements from our legacy customers offshore. And Tom, do you want to add to that?

--------------------------------------------------------------------------------

Thomas A. Hassfurther, Packaging Corporation of America - EVP of Corrugated Products [33]

--------------------------------------------------------------------------------

Yes. In addition, I'd just say that we typically have higher exports in the fourth quarter. I think in this particular case, we had customers who were holding off, they were operating on very, very low inventories, and became necessary to pick up the pace in the fourth quarter.

--------------------------------------------------------------------------------

Brian P. Maguire, Goldman Sachs Group Inc., Research Division - Equity Analyst [34]

--------------------------------------------------------------------------------

And the overall integration level still in the sort of low 90s? And I guess, within that remaining, if it's 8%, 9% or 10% kind of it's margin, is it roughly split between domestic and export or mostly export?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

If you look at the full year, as we're starting to look at things, we ended 2019 with, obviously, the Richland box plant coming on as planned. And so when you balance all of that supply and demand, we're quickly approaching that 94%, 95% level, which as we said a few years ago, at 94%, 95% level, that's what we consider full integration. And so last year, through the first 3 quarters, we were down in the low 90% range integration, but we've moved up. And so we're going to have to run full this year in order to supply our anticipated order book. So we're in a good place.

--------------------------------------------------------------------------------

Operator [36]

--------------------------------------------------------------------------------

Your next question comes from Anthony Pettinari with Citi.

--------------------------------------------------------------------------------

Randy Devin Toth, Citigroup Inc, Research Division - Associate [37]

--------------------------------------------------------------------------------

This is actually Randy Toth sitting in for Anthony. In the release, you mentioned running to demand again. And I think in the past, that was a direct reference to Wallula not running to design capacity. My first question is, is that still what that is referencing? And the second question is with Richland coming up the start-up curve, do you think you can start running Wallula full out in 1Q, 2Q? Just how do you think about that?

--------------------------------------------------------------------------------

Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [38]

--------------------------------------------------------------------------------

Yes. We're using that term running to demand in terms of where we are right now, that means running full out because we have the demand across our system. With Wallula specifically and where the Richland plant and the West Coast footprint is, we're running Wallula to capacity as we speak. We've been running Wallula hard throughout the fourth quarter. And we'll have some opportunity to fine-tune the operations over the next year or 2. I've spoken about that in the past year or 2 as we've always seen, on a conversion project, like what we've completed out there. Over the following subsequent year or 2, you find ways to stretch the machine out. Some of it will be some capital spending. But for the short-term period, right now, Wallula is running hard and running full to capacity to meet the demand internally.

--------------------------------------------------------------------------------

Randy Devin Toth, Citigroup Inc, Research Division - Associate [39]

--------------------------------------------------------------------------------

Okay, understood. And then with CapEx flat to slightly up year-over-year. Is there any large-scale box plant project that we should know about similar to Richland in 2020? Or just how should we think about that?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

We have numerous projects going on across the system, optimization projects. We've got 1 big corrugator project going on out in the West Coast in the Pacific Northwest region. But we have a lot of projects throughout the 95 box plant system that are the small $0.5 million, $1 million projects, just debottlecking and taking advantage of the fact that, again, we've got a good opportunity to supply the customer base, and we're taking advantage of that. So there's no 1 big new plant project like we just finished at Richland for this year. It's just a host of smaller opportunities, which is actually good. It means we don't have a lot of risk on the table.

--------------------------------------------------------------------------------

Operator [41]

--------------------------------------------------------------------------------

Your next question comes from Mark Weintraub with Seaport.

--------------------------------------------------------------------------------

Mark Adam Weintraub, Seaport Global Securities LLC, Research Division - MD & Senior Research Analyst [42]

--------------------------------------------------------------------------------

A couple of follow-ups. First, just wanted to clarify, I think you indicated that the maintenance outages was going to be $0.81 this year. Was -- did you say that was against $0.60 last year?

--------------------------------------------------------------------------------

Robert P. Mundy, Packaging Corporation of America - Executive VP & CFO [43]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Mark Adam Weintraub, Seaport Global Securities LLC, Research Division - MD & Senior Research Analyst [44]

--------------------------------------------------------------------------------

Okay. And now does that or doesn't include the impact of the reduced containerboard production?

--------------------------------------------------------------------------------

Robert P. Mundy, Packaging Corporation of America - Executive VP & CFO [45]

--------------------------------------------------------------------------------

Yes. Yes, that's part of it. I think I said in the prepared remarks, Mark, that it included the tons that are involved with those outages.

--------------------------------------------------------------------------------

Mark Adam Weintraub, Seaport Global Securities LLC, Research Division - MD & Senior Research Analyst [46]

--------------------------------------------------------------------------------

Okay. I guess, people are trying to figure out the drivers is to the extent of the decline in the 1Q guide versus at least where the consensus numbers had been. And so kind of 1 of the questions is, what besides -- there's something related, there's some number here related to the outages, which is timing related. Is there anything else that you might call out as being more timing related than normal that would be depressing the 1Q number relative to where profitability would typically -- the trajectory typically would be over the course of the year?

--------------------------------------------------------------------------------

Robert P. Mundy, Packaging Corporation of America - Executive VP & CFO [47]

--------------------------------------------------------------------------------

Yes, Mark. There are, as usual, going from the fourth to the first quarter. If you sort of look at the buckets that are of that nature you're describing. Certainly, wages and benefits, certainly a lot of timing things there as everything resets for a new year. The seasonal usage with the weather-related impacts on wood and energy and chemicals, to an extent. And we also, this year, we have a -- going from 4Q to 1Q, we have a stock-based comp item of about $0.03 that just because the granting of these options, I mean, these restricted stock units and what have you, historically had occurred in the second quarter, now it's in the first quarter. So you'll see a negative there, but you'll -- obviously, that turns back the other way as you move into the second quarter. And obviously, outages, based on the guidance I gave, that will improve going into the second quarter. Paper volumes, it's -- we expect that to normalize as we move out of the -- from the Q1 to Q2. And freight, some of that freight was outage related, less able to optimize our system. So when you add all those things together, you could be, pick up $0.15, $0.20 kind of thing as you move from Q1 to Q2.

--------------------------------------------------------------------------------

Mark Adam Weintraub, Seaport Global Securities LLC, Research Division - MD & Senior Research Analyst [48]

--------------------------------------------------------------------------------

Okay. That's very helpful. And then lastly, I noticed that the cash balance went down in the fourth quarter. And given the type of cash from operations I would have expected you to be generating. I guess, I would have thought it would have gone up. And it looked like gross debt, even with all the refinancing stayed the same. So can you maybe fill in the blank there?

--------------------------------------------------------------------------------

Robert P. Mundy, Packaging Corporation of America - Executive VP & CFO [49]

--------------------------------------------------------------------------------

Well, the cash, like I said, the -- we moved $146 million out of what's considered cash on the balance sheet to marketable securities. So you really need -- you count that. And then I think your numbers will work out.

--------------------------------------------------------------------------------

Operator [50]

--------------------------------------------------------------------------------

Your next question comes from Gabe Hajde with Wells Fargo Securities.

--------------------------------------------------------------------------------

Gabrial Shane Hajde, Wells Fargo Securities, LLC, Research Division - Associate Analyst [51]

--------------------------------------------------------------------------------

And I apologize if you touched on this earlier, I jumped on a little bit late. But CapEx, I think you're guiding to $400 million to $425 million, and I'm assuming embedded within there are some return-oriented projects, the hydro pulper in Wallula. Did you speak at all in terms of any capacity creep or additions that you might be making? Or are these all centered on cost reduction, I'm assuming?

--------------------------------------------------------------------------------

Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [52]

--------------------------------------------------------------------------------

It's primarily the -- if you think about big projects that we're involved in right now. We've got the new boiler up at Filer City Mill that's being completed this spring and summer. That's 1 bigger piece of CapEx. It's -- again, that's a total project cost in that $50 million neighborhood. But for this year, the new projects that we're looking at, as I called out without mentioning specifics, is a new corrugator at 1 of our Pacific Northwest operations. And then just a host of a lot of the smaller opportunities throughout the converting side of the equation to satisfy what we see as good box demand growth. And then the project that Wallula Mill with the new OCC plant. But again, there's a lot of business opportunity for capital spending and then cost reductions in capital spending.

--------------------------------------------------------------------------------

Operator [53]

--------------------------------------------------------------------------------

Your next question comes from Adam Josephson with KeyBanc Capital Markets.

--------------------------------------------------------------------------------

Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [54]

--------------------------------------------------------------------------------

Bob, just one clarification on Mark Weintraub's question about the bridge, the $0.15 to $0.20 that you mentioned, is that inclusive of outage cost being $0.07 lower sequentially, 1Q to 2Q?

--------------------------------------------------------------------------------

Robert P. Mundy, Packaging Corporation of America - Executive VP & CFO [55]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [56]

--------------------------------------------------------------------------------

Okay, perfect. And, Tom, forgive me if I missed it. Can you talk at all about January demand trends you're seeing just relative to perhaps what you saw in the fourth quarter?

--------------------------------------------------------------------------------

Thomas A. Hassfurther, Packaging Corporation of America - EVP of Corrugated Products [57]

--------------------------------------------------------------------------------

Yes, Adam. Right now, our January trend is, and we're pretty much through the month, we're up 1.5%.

--------------------------------------------------------------------------------

Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [58]

--------------------------------------------------------------------------------

That blended? I forget if there's a shipping day difference?

--------------------------------------------------------------------------------

Thomas A. Hassfurther, Packaging Corporation of America - EVP of Corrugated Products [59]

--------------------------------------------------------------------------------

No, that's on a per-day basis, 1.5% on a per-day basis.

--------------------------------------------------------------------------------

Operator [60]

--------------------------------------------------------------------------------

Your Next question comes from Mark Wilde with Bank of Montreal.

--------------------------------------------------------------------------------

Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [61]

--------------------------------------------------------------------------------

Good morning. Tom, just following on that last question, that up 1.5% in January, how much would that have been helped by the Richland startup?

--------------------------------------------------------------------------------

Thomas A. Hassfurther, Packaging Corporation of America - EVP of Corrugated Products [62]

--------------------------------------------------------------------------------

It's slightly helped by the Richland startup, Mark. I don't have the exact breakdown, but I mean, it's going to be relatively small in this January number. And -- but as the quarter rolls on, it will become more important to us.

--------------------------------------------------------------------------------

Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [63]

--------------------------------------------------------------------------------

Okay. All right. And then, Mark, I wondered if we can just come back to Wallula and that OCC system you're putting in. It seems like when that's up and running, you're going to be long, a lot of fiber at that mill. I know one of the plans might be to just kind of creep the volume on the paper machines over time, but can you just help us understand how you plan to optimize between the existing virgin pulp mill and all this additional recycled fiber?

--------------------------------------------------------------------------------

Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [64]

--------------------------------------------------------------------------------

Yes. Keep in mind that the Wallula facility is our highest cost fiber basket in the Lower 48 states. And so the OCC and some of the DLK we currently use really will give us the ultimate fiber flexibility to take advantage of the marketplace on the entire fiber basket in that Pacific Northwest region. And so it truly will give us an opportunity to really satisfy the mill requirements. And also, keep in mind, we do anticipate, over the future years, of ramping up the Wallula #3 capability. We have some opportunity that does require some capital, but we're quite satisfied with where we are right now on a machine productivity, and so it's a matter of just finishing up this project. The OCC plant is, again, it's a 1,000-ton a day design system, but it will give us truly some great opportunities to optimize the fiber cost at that location.

--------------------------------------------------------------------------------

Adam Jesse Josephson, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [65]

--------------------------------------------------------------------------------

Okay. Just 1 other little one on that. So if you pivot more toward recycled fiber there, do you also have to spend some more capital, just putting in more boiler capacity to kind of complement that OCC system?

--------------------------------------------------------------------------------

Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [66]

--------------------------------------------------------------------------------

No. No, we've got plenty of boiler capacity at the mill.

--------------------------------------------------------------------------------

Operator [67]

--------------------------------------------------------------------------------

(Operator Instructions) There are no further questions at this time. I will now turn the call back over to the presenters for any closing remarks.

--------------------------------------------------------------------------------

Mark W. Kowlzan, Packaging Corporation of America - Chairman of the Board & CEO [68]

--------------------------------------------------------------------------------

Mariana, thank you very much, and we appreciate everybody attending the call today. We look forward to talking to you in April regarding the first quarter results. Thank you. Have a good day.

--------------------------------------------------------------------------------

Operator [69]

--------------------------------------------------------------------------------

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.