Packaging Corporation of America

Thank you for joining Packaging Corporation of America's third quarter 2020 earnings results conference call. Your host today will be Mark Colzan, Chairman and Chief Executive Officer of PCA. Upon conclusion of his narrative, there will be a question and answer session. I will now turn the call over to Mr. Colzan, and please proceed when you are ready.

Good morning. Good morning. And thank you for participating in Packaging Corporation of America's third quarter 2020 earnings release conference call. I'm Mark Holzan, 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 Munday, our Chief Financial Officer. I'll begin the call with an overview of our third quarter results, and then I'll be turning the call over to Tom and Bob who will provide more details. And then I'll wrap things up and we'd be glad to take questions. Yesterday, we reported third quarter net income of $139 million or $1.46 per share. Excluding special items, third quarter 2020 net income was $149 million or $1.57 per share compared to the third quarter of 2019 net income. of $182 million or $1.92 per share. Third quarter net sales were $1.69 billion in 2020 and $1.75 billion in 2019. Total company EBITDA for the third quarter excluding special items was $323 million in 2020 and $364 million in 2019. Third quarter net income included special items expenses of 11 cents per share related primarily to the impact of Hurricane Laura on our de Ritter mill during the months of August and September. Bob will discuss that in more detail in a few minutes. Details of all the special items for the third quarter 2020 were included in the schedules that accompanied the earnings press release. Excluding the special items, the $0.35 per share decrease in third quarter 2020 earnings compared to the third quarter of 2019 was driven primarily by lower prices and mix in our packaging segment of $0.36 and paper segment $0.07, lower volumes in our paper segment of $0.33, higher scheduled maintenance outage costs $0.04, and higher freight expense $0.02. THESE ITEMS WERE PARTIALLY OFFSET BY HIGHER VOLUMES IN OUR PACKAGING SEGMENT OF 22 CENTS, LOWER OPERATING COSTS OF 20 CENTS, WHICH WERE PRIMARILY FROM LOWER INDIRECT COSTS AT THE IDLE JACKSON MILL AS WELL AS LOWER INDIRECT AND FIXED COSTS IN OUR BOX PLANTS. WE ALSO HAD LOWER CONVERTING COSTS OF 4 CENTS AND LOWER OTHER COSTS OF 1 CENT. LOOKING AT OUR PACKAGING BUSINESS. EBITDA, excluding special items in the third quarter of 2020, of $324 million with sales of $1.5 billion resulted in a margin of 22% versus last year's EBITDA of $324 million and sales of $1.5 billion, also a 22% margin. In the packaging segment, demand was very strong throughout the quarter, and we set new all-time quarterly records. for total box shipments and shipments per day. Our flexible container board mill system was able to overcome the Hurricane Laura related downtime at our Derrida mill and avoid any disruptions to customers. The mill was able to mitigate a portion of the downtime by postponing a previously scheduled outage during the quarter and other productivity gains. However, this unplanned downtime, combined with the extremely strong demand, resulted in an inventory drop of 55,000 tons during the quarter, or 58,000 tons below last year's level. As a result, our weeks of supply at the end of the quarter was at an all-time low. We decided to postpone the large, planned, discretionary fourth quarter outage at the DeRidder mill that we had discussed on the last earnings call in order to enable us to build inventory ahead of next year's annual outage schedule and the expected continued strong demand we're seeing. The mills did a great job of managing through the hurricane-induced production challenges to supply the record-breaking needs of our box plants and the efficiencies and cost improvement at the plants continued throughout the quarter. I'll now turn it over to Tom, who will provide more details on container board sales and our corrugated business.

Thank you, Mark. As Mark mentioned, our corrugated products plants established new all-time quarterly records for total box shipments, up 6.4% compared to last year's third quarter, as well as shipments per day up 4.7% compared to last year. Through the first three quarters of 2020, our box shipment volume is up 4.4% in total, and 3.3% on a per day basis. Outside sales volume of container board was 28,000 tons below last year's third quarter as we ran our container board system to overcome the hurricane related downtime at Derrida and supply the record needs of our box plants. Domestic container board and corrugated products prices and mixed together were 34 cents per share below the third quarter of 2019 and up 5 cents per share compared to the second quarter of 2020, primarily due to a favorable product and customer mix. Export container board prices were down 2 cents per share compared to the third quarter of 2019 and flat compared to the second quarter of 2020. Finally, we recently notified our container board customers of a $50 per ton price increase effective November 1st, and in addition, we have also notified our box customers of a price increase. While we don't comment on forward pricing specifics, we would expect to realize some of the benefits of the increase during the fourth quarter, but the vast majority of the benefit would be expected in the first quarter of 2020. I'll now turn it back to Mark.

Thank you, Tom. Looking at our paper segment, EBITDA excluding special items in the third quarter was $17 million, with sales of $178 million, or a 9% margin. compared to the third quarter of 2019 EBITDA of $58 million and sales of $243 million, or a 24% margin. Average prices in MIX were about 5% below the third quarter of 2019 and about 1% below the second quarter of 2020. Although our seasonally stronger third quarter cut size and printing and converting volumes were about 45% higher than the second quarter levels, They were well below last year's levels by almost 24%. We had our Jackson Mill down for the entire third quarter to help manage our supply to these lower demand levels. We restarted paper production at the mill in early October, partly as a result of our demand outlook relative to our inventory levels, as well as the scheduled outage at our International Falls Mill earlier this month. We'll continue to assess our outlook for paper demand and we'll run our system accordingly. I'll now turn it over to Bob.

Thanks, Mark. We had very good cash generation in the third quarter with cash provided by operations of $298 million and free cash flow of $196 million. The primary uses of cash during the quarter included capital expenditures of $102 million, common stock dividends totaled $75 million, pension payments of $71 million, $21 million for federal and state income tax payments, and net interest payments of $7 million. We ended the quarter with $949 million of cash on hand, or just under $1.1 billion, including marketable securities. Our liquidity at September 30th was just over $1.4 billion. Regarding Hurricane Laura-related costs and expenses at our DeRidder mill, Based on the way our insurance coverages work for a named storm such as this, there are separate deductibles for property damage in the time element or business interruption aspects of our coverage. The costs incurred over the months of August and September did not meet the deductibles for either of these, so there will not be an insurance claim filed for these damages in downtime, which together total just under $10 million. Finally, as Mark indicated, because of our extremely low container board inventory and and expected continued strong demand, we postponed a scheduled third quarter machine outage at DeRidder, and we will postpone the mill's large plan discretionary fourth quarter outage that we mentioned on last quarter's call. As a result, our planned outage expense for the third quarter came in four cents per share lower than what we last discussed, and the revised estimate for the fourth quarter is now expected to be 23 cents per share or 11 cents per share higher than the third quarter. This would put us at 66 cents per share in total for the full year 2020. We are currently assessing when to reschedule these outages, as well as the entire planned outage schedule for 2021, and we'll communicate that to you in January as we normally do. I'll now turn it back over to Mark.

Thanks, Bob. For three quarters now, our employees across the company ran their operations safely and at a cost-effective manner during the pandemic. They're doing an outstanding job adhering to the processes and strict protocols we have instituted to help protect them and their families. What makes this even more remarkable is that our employees' focus on these new work requirements is occurring while we are experiencing unprecedented demand within our packaging business and they continue to successfully meet the expectations of our container board and box customers. Everyone has worked very hard to overcome the challenges and obstacles we've faced this year, and I couldn't be more proud of the entire organization as well as the strong partnerships we have with our customers and suppliers. Looking ahead as we move from the third and into the fourth quarter in our packaging segment, we expect corrugated products demand to remain strong. Although box shipments will be lower than the third quarter with three less shipping days, volume should be higher than last year's record fourth quarter shipments. In early October, a second hurricane, Hurricane Delta, again impacted operations at our DeRidder mill by approximately four days and almost 8,000 tons, which further challenged our historically low inventory position. However, we expect higher container board production volume compared to the third quarter, AS WE WORK TOWARDS BUILDING SOME INVENTORY PRIOR TO YEAR END IN PREPARATION FOR THE FIRST QUARTER OF 2021 SCHEDULED MAINTENANCE OUTAGES AND EXPECTED CONTINUED STRONG DEMAND. AS WE MENTIONED ON LAST QUARTER'S CALL, THE CONVERTED NUMBER THREE MACHINE AT THE WILOOLA MILL AS WELL AS THE MILL ITSELF IS CURRENTLY RUNNING TO ITS CAPACITY. HOWEVER, WE DO PLAN TO GET SOME ADDITIONAL VOLUME DURING 2021 after we optimize the OCC plant capital project we're currently finishing up and complete some reliability improvements therefore to help bring our inventory back to an appropriate level by year-end beginning in November we will also be producing high-performance virgin liner board on the number three machine at our Jackson Alabama mill in addition to any white paper needs most of you know for some time that the Jackson Mill has always been an option for us to address our strategic, integrated container board supply needs that's capable of providing the necessary runway to grow our downstream converting demand. We've done numerous studies and estimates over the last few years, and with the depressed demand in the uncoated free sheet market for Jackson products, our integration rate consistently in the upper 90s percent range our historically low inventory levels, and the limited outside availability of the types of container board we need to run the mix our box plants require, now is the perfect time to do some trial work and learn some things relative to the studies we have performed. We're confident, however, of our ability to produce high quality virgin craft container board for use in our box plants during this period. The number three machine at Jackson, is a great, very versatile machine and the mill infrastructure itself allows us the necessary flexibility and optionality to react appropriately to our container board and white paper needs during these fluid and dynamic times. Obviously, to fully utilize the potential of the mill to produce container board at an optimal cost and quality, future capital investments and process changes in a phased approach will be required And we'll use this period to further refine our estimates and assumptions as well as our volume and capital spending plans for 2021. Continuing on as Tom mentioned, we expect to begin realizing some of the recently announced container board price increases during the fourth quarter. However, 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 addition, we expect average export prices to move higher in the fourth quarter versus the third quarter. In our paper segment, although demand is during this period is well below historical levels. As schools and businesses have reopened to some extent, volume has improved since the low point reached during the second quarter. However, we believe our sales volume in the fourth quarter will be lower than the seasonally stronger third quarter, although with the scheduled outage we had at our International Falls Mill earlier this month, our Jackson Mill was restarted on October the 6th, Beginning sometime in early November, the mill will be in a position to begin producing an appropriate amount of white paper to maintain the optimal inventory levels and service our customers require, as well as begin the trials and production of container board that I just referred to. We also expect freight costs to be higher, and with anticipated colder weather, energy costs should be higher as well. And finally, as Bob mentioned, scheduled maintenance outage costs should be about 11 cents per share higher than the third quarter. As certain areas of the economy continue to reopen, shelter in place and lockdown conditions are expected to continue changing across the country, especially considering the upcoming colder weather and holiday gatherings. There continues to be numerous events and actions that could impact our expectations for the upcoming quarter, and the operation of not only our facilities, but also adversely impacting the needs of our customers and the availability of services and products we rely on from our suppliers. As a result, we are still not able to appropriately quantify our guidance for the fourth quarter. And 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 involved inherent risks and uncertainties, including the direction of the economy. And those identified as risk factors in our annual report on Form 10-K and in subsequent quarterly reports on Form 10-Q filed with the SEC. Actual reports could differ materially from those expressed in the forward-looking statements. And with that, I'd like to open the call for questions. Go ahead.

Certainly. At this time, if you'd like to ask a question, please press star 1 on your telephone keypad. George Staffos with Bank of America, your line is open.

Hi, everyone. Good morning. Thanks for the details. Mark, I was wondering if you could give us a bit more color on Jackson, recognizing it's a bit fluid. You know, one, should we take away from this that you're still determining whether you will, you know, ultimately convert the third paper machine or PM3 at Jackson, or you're going to keep this, there's a chance that you could keep this as a flex machine that can run uncoated? and container board. And what might the trialing costs be in the fourth quarter and first quarter that we should try to build into our models?

As we look at the paper machine at Jackson and the mill in general, you have to keep in mind that for eight years now, we've not only thought about this, but we've worked towards enhancing the capability of the mill and its flexibility. We would run the mill to supply both our white paper needs and our container board needs as such. We believe where we are currently, we're in a good place to do that. The cost that you talk about, it's truly the fact that we will have higher input costs in terms of production of container board on that machine. The mill, obviously, is not fully configured as you would think about an integrated container board mill to run high kappa at the speeds to get the big tonnage out. But nevertheless, we can produce a good quality sheet and at the same time maintain the flexibility of the mill to provide our paper customers what is required. And it gives us a chance to see what... and how long this pandemic plays out. And then at the end of this pandemic, what the paper demand will ultimately look like. So it's an elegant way for us to understand the capability of Jackson long term, while at the same time, understanding how we need to supply our paper business, short term and long term. With that, Bob, do you have anything on the cost side? I think it's George, does that satisfy that?

Yeah, I guess. I mean, there's no way to quantify what the trialing and further understanding might cost you, or given all the work you've done over the last eight years, it wouldn't be worth calling out.

Well, again, for anybody that knows us, you would have to believe we have done an awful lot of work with our annual maintenance work, with the annual upgrades that we do to bolster and beef up the capability of of the infrastructure that being said uh... we have a lot of knowledge in this arena and as far as the costs there should not be a great deal of cost in terms of the trialing uh... but again i i would expect us to be able to get on grade rather quickly and produce a very high quality sheet albeit at lower normal production rates than you would see at our conventional container board virgin bills.

Okay. No, thanks for that, Mark. The next question is around the movement of the maintenance, the discretionary outage that you're planning for the fourth quarter, how that would likely come into results in 2021, I assume it would be in 2Q. And I know you didn't really want to guide too much for the fourth quarter. You didn't want to quantify, but can you give us some of the larger buckets we should consider? I mean, you're starting at $1.57 entering the quarter from 3Q. The deferred outage, you know, based on your numbers in the past, should add $0.30. Then you have seasonal factors and some of the other factors. You know, is there any way to quantify what some of those larger buckets would be or – And as we sit here, kind of a range between 2Q and 3Q seems reasonable, but any thoughts on that would be helpful. And then my last one would be any quick thoughts on how bonds are starting in the quarter. Thank you very much.

Hey, George, you know, just looking at 3Q to 4Q and starting, you know, I'm not sure what you have in your model, but, you know, as we've said, the outages will be, you know, higher by 11 cents from the third quarter. And, you know, we referred to freight costs. I think if you compare it to our, you know, the last two or three years relative to, you know, 3Q to 4Q, I would expect our freight costs to be higher than what it has been historically. Energy maybe a little bit higher. You know, where demand is in the packaging segment, as we head into, you know, a holiday season, you know, the overtime requirements because of the strong demand, you know, labor benefits costs would be a little bit higher than normal. And as Mark referred to, it's, you know, running Jackson, running White and Brown, and then as we, you know, do some of the work that we plan to do to improve the, you know, the liner board that we'll be running there, you know, there'll be some cost hiccups. So, We certainly have something in there for that as we sort of do this work and make this line of board in the fourth quarter. So you have some cost in some of the variable areas that you normally wouldn't see going from 3Q to 4Q.

All right, I'll turn it over. Thanks very much.

Thank you. Next question, please.

Mark Wildey with Bank of Montreal. Your line is open.

Thank you. Good morning, Mark. Morning, Tom and Bob. Morning. I wondered, Mark, if either you or Tom could just talk a little bit about what has changed so dramatically in the last three months on the demand side of the industry. I mean, if we go back to July, you talked in your second quarter release about running to demand. One of your bigger competitors took nearly a million-ton mill in Oregon out in mid-July. you know, ostensibly for kind of market downtime. And all of a sudden, we're in a situation where lots of people are saying this is the tightest market in 25 years. So what's driving this from your perspective? Where's the incremental demand really coming from?

You know, I'm going to have Tom start that answer off by answering George's last question and getting into yours. Tom, why don't you talk about the volume and then get into it?

Okay, well, first of all, Mark, let me just tell you, our volume through 16 days this month is trending up 15%. Wow. Did you hear that number? Yeah, I heard that number. Okay, all right. Yeah, because I have to remind myself of that number occasionally.

Yeah, you're not the only guy throwing that kind of number around, Tom.

Yeah, yeah. You know, and let me tell you something. You know, when you dig in and you review the segments that are up, I mean, it's virtually every segment across the board is up significantly. Now, you had, as we talked about in the previous call, the food service side of the business was down dramatically. It was down almost 80% in some cases. And that's recovered quite a bit, but still not nearly where it was, you know, in the past. So, you know, we still have an opportunity there in that segment. Now, you know, If you look anecdotally and say, you know, why is this demand like it is, I think one of the key elements to this is that you've got consumers that are not spending their discretionary monies on travel, entertainment, things like this, you know, movies and all these other sorts of things, you know, that they traditionally would have. And I think they're spending on a lot of products that actually come in boxes. And whether it's home improvement or whatever the case might be, Then, of course, you've got that e-commerce segment, which is obviously up significantly as well. So that's the best description I can give you at this point in time. I really have no other explanation for it other than, and I think you've also got a situation, I'll just add, that our customers tell us their inventory levels are desperately low as well. We're telling you the same thing about our container boards. And, you know, they're looking to try to replenish that and at the same time trying to satisfy very, very strong demand. Hope that helps, Mark.

What would your backlogs for, you know, a box customer look like right now?

I'm sorry, you didn't come through clearly.

Yeah, what would your backlogs look like for a box customer right now? In other words, somebody comes into you with, you know, new volume, how long is that going to take to fill? Because I've been hearing numbers, you know, out to kind of three, four, five weeks.

Well, yeah, I mean, we're not, you know, we'll satisfy our customers, you know, based on what they need. I mean, we've got a very, very flexible system that we've set up. And, you know, we don't really talk about, you know, ultra long lead times or anything like that. But I can tell you that when you look out and you say, how far out is the demand and that sort of stuff, I mean, our trend going into November is much like what I'm talking about, you know, in terms of demand that we have in October. And this, of course, ties in directly to the discussion we just had regarding the Jackson Mill. You know, we can't buy any container board out in the open market. That's impossible to do. And this high demand level, this is the perfect time to, you know, to trial Jackson and put some, and put some brown into our system. And I would also say, you know, again, as Mark alluded to, you know, we've planned this for a long time. We knew this day would come. And, you know, our track record demonstrates that PCA takes care of itself. And, you know, we're committed to being fully integrated. And this is just yet another example. And we're not going to do it, you know, until the market demands it.

Yeah. Okay. Mark, for people who aren't familiar with that Jackson milk, and you just I think there are two machines there. Is the number three the machine that they put in in the late 90s, or is it the smaller machine down there?

The number machine is the big machine from the 1990s. It's about 365 inches wide. It's a big, high-speed, modern machine, lots of capability. Quite frankly, you know, we've always spoken in terms of relative capability. you know, quality of machine. The machines at DeRitter were good machines. The machine out of Wallula that we converted, the number three was a better machine than what we converted at DeRitter. But quite frankly, this Jackson machine is a better machine than all of those put together.

Okay. Just finally on Jackson, would it be possible to think about kind of making that a white top mill over time? The market seems to be moving toward white top. I don't think you produce any right now.

It has that capability if we determine that that made sense to us. Okay. Obviously, the machine, I mean, think about it. White top, you would have to put a top sheet on with a mini four-drainier. But in capital spending and upgrades to a machine that was going to be permanently converted in the future years, you would more than likely put a mini four-drainier on that machine that can handle brown or a bleached fiber. And then the machine currently has a size press, so you wouldn't have to add a size press. So it just determines in terms of where we believe, where we need to take that mill and what's the demand look like.

Okay, fair enough. I'll turn it over, Mark.

Thank you. Okay.

Next question, please. Mark Connolly with Stevens. Your line is open.

Thanks, Tom. Two questions. You obviously have a reputation for being service-intensive and flexible, but I'm curious, as this volume expands, is your mix moving away from value-add orders more towards regular orders, and do you see that as a permanent shift if it is happening?

Mark, I don't see that shift happening. As I mentioned before, virtually in every segment of our business, I mean, we're up significantly, so... I think our customer base has remained very much the same. Obviously, we continue to grow our business and, first of all, grow with our existing customers. But, no, I think part of our service flexibility, you know, is a driver of our growth as well. So I don't see it changing significantly.

Okay, super. And just one more question. You've talked about the – dramatically increased flexibility of your newer machines at Wallula, at DeRidder. Is there a productivity lag that comes with that increased flexibility, or do you get the flexibility without those lags?

You pretty much get the flexibility without the lags.

Okay. Looks good to me. Thank you very much.

Next question, please. Brian McGuire with Goldman Sachs. Your line is open.

Hey, good morning. Thanks for taking the questions. Just a couple more just on the paper segment and Jackson in general. Just in the last couple of months when you weren't running Jackson and you were just running International Falls, obviously not probably the best environment for demand in paper, but just wondering if you were able to provide the variety of paper to your customers and service them and You know, have you had any feedback from customers on the quality of the paper you were producing there versus what they were getting at Jackson? Any kind of issues with, you know, kind of eventually transitioning to just a one mil system and paper?

No, you know, keep in mind, I-Falls and Jackson have supplied the marketplace with cut size as an example. It's the same product. We also have the ability, and we've had that for years at iFalls on the smaller machine, to produce color grades. And so we were producing a few of the color grades during this period of time, but also just running out of inventory. A little more pointedly to answer your question, iFalls ultimately has the ability to supply our current customer portfolio if, in fact, that's all that was required in terms of production. future demand destruction. But that remains to be determined where we end up with that. But I-Falls is a very versatile, capable mill.

Okay. And I think this question's kind of been asked a little bit already, but just maybe more directly, is there a capacity number or a tonnage you could estimate for how much liner board you would be able to produce on the number three machine if you decided to run it full out? I mean, I guess the trialing is part and parcel to that, but is there an expectation of what you might be able to get to if all goes well?

No, you know, we'll update you in January. You know, we have some numbers in the back of our mind that we think we're capable of, but I don't want to put that out until we prove it ourselves. And then as time goes on, you would have to imagine a mill the size of Jackson with the appropriate level of capital to has tremendous opportunity to supply just about anything that the packaging side of the business needs for the foreseeable future, if growth demands that. So we've got lots of optionality in that regard, and we'll play it out that way.

Okay, and this last one from me, just with the really strong demand we're seeing and the need to kind of add a little bit more paper supply to it, How is the utilization at the box plant level going? Do you foresee having to add any more capacity to the box plants, or is there enough to just be able to add shifts to existing operations to meet the demand?

Brian, this is Tom. You know, fortunately, we have consistently invested in our box plants over the years, given how our customers drive our businesses. And, you know, so we're, I mean, we're stretched. There's no question. I mean, we're incredibly busy. I mean, you don't just all of a sudden take these kind of surge demands and be able to roll it out. You know, again, I'll go back and I do want to mention that our employees have done an unbelievable job during this COVID pandemic, as Mark mentioned earlier. And, you know, to be able to satisfy these kind of demand levels with this going on at the same time is just absolutely remarkable. You know, we'll continue to invest. We're positioned to do so. We've got, you know, we've got projects rolling on all the time. And, of course, you know, it's how we run our business. We run our business based on what our customers want, and that factors all the way back to the mill level. So you see that's why, again, as we mentioned, that it's so important that we get some output out of Jackson just to replenish some inventory and to keep our customers supplied with boxes.

Okay, I appreciate the call. Thanks so much.

Next question, please. Gabe Haji with Wells Fargo. Your line is open.

Good morning. Thanks for taking the question. The first one, I guess, with the delaying the optional, I guess, deritter work that you're looking to do, I'm assuming that goes into next year. Has anything changed on the CapEx side of the equation for this year since you were targeting $400 million?

We're still right in that ballpark.

Okay. And then as it relates to container board inventories, I mean, I think, I don't know, by my math, maybe you have to restore 55,000 to 65,000 tons this quarter, and that would maybe aid in fixed overhead absorption by about 15 million. Is there, I don't know, Bob, can you help us with that?

No, I think you're right, Gabe. I think you're in the right ballpark, and that certainly will help with our cost absorption in the quarter as we increase production to get our inventories up. Okay. Thank you.

Good luck. Thank you. Next question, please.

Mark Weintraub with Seaport Global. Your line is open.

Thank you. On Jackson, understanding premature to give us where the mill gets to potentially, but obviously you need paper now to the extent you can. Is there any color you can provide in terms of short-term capability? And I know if it's at the same time, in the past you've talked about the ability to expand at Wallula with some incremental capital. Is that something that's also on the table and being considered?

A little bit to help quantify that question, if you recall when we started this process at Wallula almost four years ago and then we took the machine brown without all of the benefits of the major capital, we called out, we expected to be able to produce probably about 700 tons a day of good craft line aboard on that machine at Wallula And don't forget, the Wallula machine's a narrower machine. It's almost 100 inches narrower. The machine at Jackson's wider. But quite frankly, we're hoping in the same relative terms to be able to produce that type of volume, 700, 800 tons a day of production. But again, that remains to be seen. The challenge is on the folks at the mill and our technology organization over the upcoming weeks. But theoretically, that machine has that kind of capability currently. And then as far as its future capability, it's just capital dependent.

Great. And the potential to do something incremental at Wallula, is that still something to be considered?

Well, not in a big way. We know that we've got some opportunity with the OCC plant. We'll be starting that up after the first of the year. We'll be finalizing the actual project work as we wrap up this fourth quarter and then getting ready to start it up. That will lend itself to a benefit in terms of fiber furnished makeup and drainage, pressing, drying capabilities, quality characteristics. And then also we've had some ongoing project work on number two machine at Wallula. That's a smaller machine. But as of next year, we'll be adding a new head box and new wet end capability. We'll see, you know, tremendous more reliability and quality benefits from this work. So, you know, incrementally we'll see improvements. But as we've always said, you know, on a run rate basis was probably going to be around 600,000 tons a year. And we're there. As of this past summer, we've been running the mill, depending on grade mix, right at that run rate tonnage on an annual basis of about 600,000 tons a year. And we're very pleased with that.

Great. And one last quick one, if I could. The costs, or I think you talked about the indirect costs at Jackson being lower. in the third quarter than the second quarter. Was there still much in the way of costs related to Jackson, or were we getting a relatively clean look at what the white paper system does ex-Jackson? I imagine there were still some costs related to Jackson.

No. Yes, Mark. Obviously, your fixed costs are fixed. Whether you're producing or not, you have a substantial amount of cost there and, of course, a portion of your indirects as well. So I would say that's not a good clean look, as you were referring to, of a one-mil paper system.

Okay. Any chance of getting additional color on that or –

I think that's, you know, I'm not going to quantify that for you, but, you know, that is, you know, it will improve somewhat in the fourth quarter because we did run Jackson, or we are running Jackson, rather, as we speak. But you still will, we're not going to quantify right now, I guess, what the, you know, what a one mil system would look like from a cost perspective. But maybe next year sometime as things unfold relative to packaging demand and our paper demand as well. Understood. Thank you.

Next question, please.

Adam Josephson with KeyBank. Your line is open.

Mark, Bob, Tom, good morning.

Morning.

Mark, back to Jackson. If you assume that white paper demand stays at roughly these levels, maybe at bounces a little bit next year, just given how much it's fallen this year. But if it stays at roughly these levels, do you envision needing to produce much paper at that mill next year? And if not, then what do you think the container board slash white paper mix could look like at that point, or if not next year, then once you fully configure the machine to produce container board?

Yeah, if you assume that the pandemic-related impacts continue on through next year, we would anticipate about 50% production of white paper coming out of the mill, which would then allow us the flexibility to take care of some extra brown liner board for the system. But we would expect about 50% white paper coming out of that mill to support our anticipated customer demands.

Which would result in roughly how much container board production, Mark?

I'm not going to – we'll talk more in January after we've had the three months under our belt and can really give you some hard numbers and a little bit better conviction on what we see.

Sure. No, understood. Tom, following up on Mark's question – What is your visibility like, not just right now, but in general? How much visibility into future box demand do you generally have at a point in time? And so three months ago, did you have any idea this was coming? Presumably not. And so if you didn't, what gives you confidence that three months from now demand will be at, if not these levels, then still very robust? I'm just trying to understand. Just walk us through what your visibility is.

Okay, Adam, let's go back. Let's go back three months ago, you know, first. And, you know, we had little visibility because nobody knew where the pandemic was really headed, other than the fact that the economy was going to continue to open up. And depending on what happened in these various states and how fast they opened and those sorts of things, that, you know, that helped drive some of this demand level. I think, in addition, because it hit so quickly and so fast and because of the way our customers were running their business, Inventory levels, as I said, both for us and our business and our customers got dramatically low. And so as this demand is going up, there's actually two forms of demand that are taking place. One is to satisfy the end consumer, but also to build inventory of some sort. And so it's almost a little like pushing water uphill to some extent. So I think that what we'll see is we'll go through this, and as those inventory levels do, become a little more manageable, this surge is going to slow down to some extent. At least that's what we think. But it's still going to be positive. Right now it's very positive for the box business, and I expect it to remain so. In talking to customers and kind of getting their forecast and what they think is coming forward, which is what really drives our business, I would say that it's a very positive attitude right now, positive outlook, and they want suppliers who can really adapt to their demands as well. So I think it's very positive going forward.

I appreciate it. And just one last one for Mark or Bob on guidance. So obviously you're quite confident on a box-to-mat heading into next year, but there are a number of uncertainties. Can you just kind of walk us through your hesitation in giving current quarter guidance, given that you're pretty much a month into the quarter? And then just more broadly, does this experience change your thought process about giving guidance any sort of guidance? In other words, if it's this unclear, if it's been this unclear for three straight quarters, is there any compelling reason to give quarterly guidance thereafter?

Well, Adam, I guess, you know, if you look at what our internal numbers were for the last three quarters, counting the third versus where we ended up, you know, we were, you know, we were off. I'm not going to say whether we were better or worse, but And if we had put those numbers out there, it would have been a lot of discussion around why we didn't come closer to our guidance. And it's for the same reasons we've said every call and what Mark said in today's call. And Tom's comments around the demand and where that went to. It's just too – things are too fluid. And when you look at the fourth quarter of this year, especially with how we're going to be running Jackson – You know, there's a lot of assumptions in there about our container board production as well as our paper needs. And depending on how that swings, it can move your costs wildly. And it's just another reason that, you know, another added degree of uncertainty relative to providing fourth quarter guidance.

And just beyond, I mean, is there a compelling reason to give guidance, period?

That's something we'll say for another day, Adam. What we've done historically has worked well for us. These are unusual times, which is why we've taken a pause relative to what we've done historically. And when things get normalized, whatever that means, we'll evaluate that as far as how we do it going forward. Sure.

Thanks, Bob.

Next question, please. Neil Kumar with Morgan Stanley. Your line is open.

Hi. Good morning. Thanks for taking my question. Can you just talk about what you're seeing in terms of box demand for the holiday e-commerce season? It seems that retailers are trying to have an earlier and more evenly spread out holiday season. So are you seeing any evidence of that so far given your strong October volumes?

I'll just respond real quick, Neil. You know, e-commerce and the holiday and et cetera is up dramatically. And, you know, the forecast is it's going to be incredibly busy all the way through. The limitation, I think, on the holiday season for e-commerce is going to be getting the product to the consumer. You know, you've heard FedEx, you've heard UPS both say that they're basically maxed out for the season. That's why they're encouraging people to get their holiday deliveries earlier than normal.

Great. That's helpful. And then you referenced expecting a less rich mix in corrugated products in the fourth quarter relative to the third quarter. Can you provide some more color on what's driving that and the potential magnitude?

Yeah, that's primarily around our graphics business, our point-of-purchase displays. and other graphics business, you know, that tails off quite dramatically in the fourth quarter. That's all done primarily throughout the year for the various holidays. And, of course, Christmas, you know, is a big holiday, and that's already been delivered. So that just tends to drop off, and then that begins to come back, and it's strongest in the second and third quarters.

Great.

Thank you. Next question. Anthony Petanari with ESPN. City, your line is open.

Good morning. Good morning. Tom, just circling back to Mark's earlier question, is it accurate to say that, you know, is it your expectation that Jackson will keep you from buying board externally in 4Q and maybe 21 as well? Or is there some risk that, you know, if demand is stronger than expected or based on the results of the trial that you would have to buy externally, you know, how much of a risk is that potentially? And are you Are you exploring other capacity options outside of what you've outlined at Jackson and Wallula to mitigate that risk?

Anthony, you know, fortunately, because of the work we've done at Jackson leading up to this, I've got a high degree of confidence that this is going to turn out to be very good for us and will continue to be able to supply us in our box system. And the reason, you know, and as I mentioned earlier, I said one of the reasons we have to do this, this is really our only option. There's not board to be bought on the outside market right now. I mean, everybody is incredibly busy and it is unbelievably tight. So, you know, we're going to have to do what we're, you know, what we plan to do in Jackson in order to keep our box plants supplied. That's just, you know, and that's simply driven by the demand we have right now.

Okay, that's helpful. And then just trying to understand that, you know, 15% growth you're seeing. Obviously, it's been a big increase in COVID cases heading into colder weather. I'm just wondering when you talk to your customers, especially on the CPG or grocery side, is there any early indication that they're seeing consumer stockpiling like what we saw in March and April or Or has that been a part of customer conversations?

No, we're not seeing anything like the stockpiling that we saw at the beginning of COVID, no.

Okay.

And then just a quick last one, if I could. On Derrida, I'm wondering if you could talk about Laura and Delta's impact on the fiber basket around that mill, and in terms of elevated fiber costs and availability there, Is that something that is sort of largely dissipated in 4Q, or how long-lived could that be, given what looked like pretty extensive damage to the timberlands around there?

Well, quite honestly, whenever you see a hurricane like this, because of all the damaged trees, there's a glut of wood available. You just have to get the producers into the woods to get the wood out to the mill. So the landowners, the producers... have to get the wood out in a timely manner before it starts rotting and decaying in the woods. So besides for a short period of time, the impact of localized flooding, longer term, I don't expect to see any big impact on fiber supply, fiber cost of the mill. Okay, that's helpful. I'll turn it over.

Next question. Again, if you'd like to ask a question, please press star 1 on your telephone keypad. George Staffos with Bank of America. Your line is open.

Hi, guys. Thanks for taking the follow-on. I didn't take the analysis back more than a few years, but it certainly looks like your inventories are kind of the lowest they've been since 2017. Could you confirm or correct that view? And, you know, is this an all-time record low inventory for you? Just some thoughts or guardrails that you could provide us on that would be appreciated. and then question for tom you know it's come up in different ways on the call so far you know a lot of the questions that investors seem to have on container board and corrugated hey look you know when this is all over whatever that might mean uh... and we stop ordering for direct-to-consumer uh... ultimately the box finds will normalize as we all go back out uh... you know and to movie theaters and restaurants and the like what level of harman and that's one view and What permanent level of consumption do you think has now been built into the corrugated market? Because we've learned new behaviors, right? We're ordering more at home. That's convenient. That behavior might stay going forward. What have you seen so far from what your customers are saying on that or any work that you've done on the consumer side in terms of what the new embedded amount of volume in corrugated is because of what we've gone through? Thanks, and good luck in the quarter, guys.

Okay, I'll take the, George, this time I'll first talk to you about this, you know, what this normalized demand is. You know, one of the reasons we're not giving any forecasts because we don't know what that normalized demand is, quite frankly, okay? I think if you, you know, if you look back and you say, well, what has the average been so far this year prior to October? I would have said at a given point in time, I'd have said, well, maybe that's, That's probably more indicative of what the average is going to be. But, you know, now we've had this huge spike again, so it's very unpredictable at the moment. And I think our customers are very much in the same boat. They're in a very reactionary mode right now. I think there are a lot of, you know, there are a lot of different moving parts here, not only you know, consumer demand and COVID, but we, you know, we've also got a presidential election and we may have administration changes, whatever the case might be. There's just a lot of big ifs out there and we're just gonna have to wait and see what that is. You know, the only thing I can tell you is, is that we're on a positive, we're on a very positive trajectory and I think that will continue.

And George, regarding your, I'm sorry, regarding your inventory question, I went back as far as, you know, 2013, and these are, you know, from a supply – available supply standpoint, we're lower than we were back then. And, you know, I didn't go back any further because obviously that's sort of when the transformation of the company occurred with the Boise acquisition. So, yeah, these are historically low levels of inventory.

Tom, without putting a number on it, are your customers of the view that corrugated demand has been permanently benefited – But what we've gone through or even that's too hard to discern at this time. And if that's the case, totally understand. Just want to try it one more time. Thanks again.

Yeah, I think that's just too hard to discern at this point in time.

Okay. Thanks, Tom.

I think we've got time for – go ahead. Sorry. Mark Wilde with Bank of Montreal. Your line is open.

Two quick follow-ons. One, I wondered if we could just get some comment – on the cash position of the company. I mean, $1.1 billion with the marketable securities is a pretty impressive war chest, and I just wonder about the need to maintain such a big position if we're at the front end of a cyclical upturn. And then the other question I had is for Tom Hasford, and that's just whether there's any portion of the corrugated market that you think may be moving away from a reliance on kind of pulp and paper as the escalator de-escalator? I think particularly there about some of these big e-commerce firms and whether they're striking different deals.

Let me answer the cash question. I think we went back to the first quarter and someone asked a similar question, and I think I answered and I said I wasn't concerned about the level of cash and – You know, we were basically in very uncertain times, but I think I said at the time that I would let you know when I thought we had too much cash, and I still have that same position that we are still living in very uncertain times, and I'll let you know when we have too much cash.

Okay. And, Mark, I would say that, you know, I'm still not interested in stepping on landmines, so I'm really not going to even discuss anything regarding pulp and paper. And, of course, any agreements we have with our customers are between us and our customers, and we don't publicly disclose those. So although I'd like to give you a little more clear answer to your question, I really can't at this time.

That's fine, Tom. Better with two legs.

Okay. All right. Operator, I do believe we're out of time.

Do you have any closing comments, Mr. Colter?

Yes, everyone, thank you for joining us today, and we look forward to talking to you at the end of January. Stay safe, stay well, have a nice holiday. Thank you.

This concludes today's conference call. We thank you for your participation. You may now disconnect.