Packaging Corp of America (PKG) 2013 Q3 法說會逐字稿

Thank you for joining the Packaging Corporation of America's third-quarter 2013 earnings release conference call. Your host today will be Mr. Mark Kowzlan, Chief Executive Officer of PCA. Upon conclusion of his narrative, there will be a Q&A session. I would now like to turn the conference call over to Mr. Kowzlan, and please proceed when you are ready.

Good morning, and welcome to Packaging Corporation of America's third-quarter earnings release conference call. I'm Mark Kowzlan, CEO of PCA, and with me on the call today is Paul Stecko, Executive Chairman of PCA, Tom Hassfurther, who runs our corrugated business, and Rick West, PCA's Chief Financial Officer. Thanks for participating in this morning's call, and after the presentation, we'll be glad to take any questions.

Yesterday, we reported third-quarter net income of $84 million or $0.86 per share, which included an after-tax charge of $3 million or $0.03 per share for costs related to the announced Boise Incorporated acquisition agreement, and a non-cash after-tax charge of $2 million, or $0.02 per share, for pension plan changes related to the PCA hourly mill employees. We reported a similar charge in the second quarter, which covered our hourly corrugated products plant employees. Excluding these charges, earnings were a record $89 million, or $0.91 per share. This compares to third-quarter 2012 net income, excluding special items, of $53 million or $0.55 per share.

Net sales were a record $845 million, up 17% from third quarter of 2012 net sales of $723 million. The $0.36 per share increase in earnings, excluding special items, was driven by higher containerboard and corrugated products prices and mix of $0.44, and higher corrugated products sales volume of $0.05. These items were partially offset by higher costs for fiber of $0.03, labor of $0.03, incentive compensation of $0.03, energy $0.02, transportation $0.01, and chemicals $0.01. Excluding special items, net income for the first nine months of 2013 was a record $219 million or $2.25 per share, compared to the net income for the first nine months of 2012 of $142 million or $1.45 per share. Year-to-date net sales were $2.4 billion, up 14% from $2.1 billion in the first three quarters of 2012.

In summary, we had an outstanding quarter in all aspects of our operations, with record earnings driven by higher prices for containerboard and corrugated products, higher corrugated products volume, and record mill production. We beat our guidance by $0.03 per share, driven by better than expected volume and mix.

Moving to the details of operations. Corrugated product shipments were up 7.8%, both in total and per workday, compared to last year's third quarter. We're particularly pleased with this performance because it was achieved completely on organic growth. That is, the year-over-year increase not benefit from box plant acquisitions, since our last box plant was acquired in the first quarter of 2012. Corrugated product shipments were an all-time quarterly record on a shipments per workday basis.

Demand for both domestic and export containerboard remained strong through the quarter, but our ability to supply outside markets was limited. Because of higher containerboard consumption in our box plants, our outside containerboard shipments were down about 12,000 tons from last year's third quarter. The domestic sales were up 8,000 tons, while lower-priced export sales were down 20,000 tons. We ended the quarter with our containerboard inventories down about 4,000 tons below 2012 year-end levels. Our inventory level is rather tight, considering October has 23 corrugated product shipping days compared to just 20 shipping days in September. Therefore, it's imperative that our mills continue to run well in October, which they have through the first 14 days of the month.

Moving to mill production and performance, our mills ran extremely well, producing 671,000 tons of containerboard, setting an all-time quarterly record. Our final 2013 annual mill maintenance outage is currently underway in our Filer City, Michigan corrugated media mill, and I'm happy to report that it is progressing very well. The plan there is for a five-day outage that will reduce production by about 7,000 tons.

On the revenue side, prices and mix were higher for both containerboard and corrugated products, improving earnings by $0.44 per share, compared to last year's third quarter. This includes essentially a full quarter's impact of the pass through of our April $50 containerboard price increase for corrugated products. Wood costs were higher this quarter in the US Southeast, as the US Southeast had more rain than a typical Summer, making it tougher to get into some wood tracks that are normally accessible during Summer months. The frequency of the wet weather, especially in July and August, resulted in wood costs increasing $0.02 per share, compared to the third quarter of 2012.

Recycled fiber costs were also higher than last year, decreasing earnings by about $0.01 per share, as industry published prices for recycled fiber, excluding delivery costs, were up about $25 per ton compared to the third quarter of last year. With regard to costs, energy costs were up $0.02 per share compared to last year's third quarter, driven by increased prices paid for purchased fuels. Natural gas prices increased about $1 per MMBtu, and coal prices were up about $0.60 per MMBtu, compared to prices paid last year during the third quarter.

In addition, labor costs increased $0.03 per share and incentive compensation, which are prorated to earnings per share, were $0.03 per share higher than last year, with our increased earnings. Transportation costs increased $0.01 per share, due in part to rail rate increases and the mix of outbound mill shipment destinations. I'm now going to turn it over to Rick West, our CFO, who will give you an update on our financial position.

Thank you, Mark. In the third quarter, PCA generated cash from operations of $137 million. Capital expenditures during the quarter were $50 million. We paid our quarterly common stock dividend of approximately $39 million. Cash tax payments of $36 million were made and the remaining fuel credits of $4 million were used to offset federal taxes during the quarter. We also elected to make a discretionary pension contribution of $30 million during the quarter, and at the end of September, our cash on hand was $397 million, up $27 million from the end of the second quarter. Our total long term debt outstanding at the end of the quarter, excluding capital leases, was $782 million, and including cash on hand, our net debt was $385 million. As of September 30, 2013, our diluted shares outstanding were 97.5 million shares.

As Mark mentioned earlier, during the third quarter, PCA recorded costs of $3 million after-tax related to the announced Boise Incorporated acquisition agreement. This charge included a $2 million charge for bridge financing fees, and $1 million for other acquisition-related costs. In addition, we recorded a $2 million after-tax charge, which was related to a change in our hourly pension plan. We recently negotiated an agreement involving our four containerboard mills who will transition from a defined benefit plan to a defined contribution 401(k) plan. The pension charge is based on accounting guidance, which requires us to accelerate the recognition of prior-service pension costs for employees affected by this change. With that, I will turn it back over to Mark.

Thanks, Rick. Before discussing the fourth quarter, I'd like to give you a brief update on the Boise acquisition. We initiated our tender offer for all Boise shares on September 26, 2013, and this offer expired at midnight on October 24, 2013. If more than 50% of the Boise shares are tendered, the minimum tender condition is met, and we would expect to close on October 25, 2013. We have bridge financing in place, and expect to complete the permanent bank and bond financing for the acquisition prior to close. For a variety of reasons, including that we must operate as separate businesses until the closing, we do not plan on taking any further questions about the acquisition until after the closing.

Now, moving ahead to the fourth quarter. We expect lower mill production, with planned annual outage at Filer City, and increased mill operating costs. Corrugated products volume is expected to be lower, since the fourth quarter contains two less shipping days than the third quarter. We also expect seasonally higher fuel costs with the onset of colder weather, and higher amortization of annual outage repair costs. Considering these items, we expect fourth quarter earnings to be about $0.84 per share, excluding any impact from the Boise acquisition. This would put us at earnings per share of $3.09 for 2013 excluding special items, compared to $2.06 last year.

With that, we would 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 and filed with the SEC. Actual results could differ materially from those expressed in the forward-looking statements.

With that, Operator, I'd like to open the call for questions. Thank you.

(Operator Instructions)

Our first question comes from Anthony Pettinari with Citi.

I was wondering if you could talk about how demand trended through the three months of the quarter, and how you're seeing it play out in October? And then also, you continue to grow faster than the industry. I'm wondering if you can give us any color in terms of what market segments or what customers maybe you're seeing the most strength with?

Yes, good morning, Anthony. As we said in July, we started out the first eight days or so up about 10%, but we trended down slightly, as we expected, but we did remain flat through the August/September period. So, with our roll-up being very strong, we saw good, strong, consistent numbers.

And in early October?

For the first eight days -- again, it's a small sample considering the 23-day shipping month -- we're up 4.4% on a shipments basis.

Great, and is there any segment or is there any customer base where you think you're growing faster than the industry? Or can you talk generally about the kind of volume outperformance that you've seen versus what we've seen industry-wide?

Yes, consistently throughout the year, especially through the third quarter, we saw good activity throughout North America through our 71-plant footprint. So, again, just good, consistent volume growth year over year throughout the system.

Okay, and maybe one last one. I don't know if Rick mentioned this, but could you give guidance for CapEx for the full year ex-Boise? I don't know if there's an updated view from last quarter?

Yes, Anthony, this is Rick. In terms of CapEx, we have a lot of CapEx spent normally in the fourth quarter, and we're still on plan for the $215-million estimate for 2013 -- maybe around $205 million to $215 million, but it's going to be in that range.

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

Next question, please?

Our next question comes from Mark Connelly with CLSA.

Mark, just two things. I wonder if you could tell us, given how fiber stacked up the wrong way this quarter, what you're expecting relative to Q3 and Q4? And second, as you look at your inventories, it looks like you guys are running pretty successfully with lower inventories than you used to. Have you actually changed the way you're managing inventories? Because as I look at my inventory days, I see that you're doing a lot better than you did a couple years ago.

Well, on the first question on fiber, again, with the wet weather we saw in the southeast region and specifically impacting Valdosta, the weather has subsided and gotten back to a normal pattern through September into October. So, we've seen things flatten out on the wood cost.

Also, don't forget, during the third quarter typically the southern mill system, in particular, does go through their winter wood builds. But we're seeing wood costs pretty flat right now throughout the southern system. So, again, we're not expecting any pressure.

And just to amplify on what Mark said, Mark, we saw bigger wood cost increase at Valdosta than, say, Counce, because Valdosta got hit more by the bad weather than Counce.

Yes, there was a 28-day period during the month of July that it rained 28 of the days during the month in the Valdosta region.

And with regard to inventory management, I'd just comment, I think we're managing it the same. We might be a little more efficient. And as they say, necessity is the mother of invention. When you're running constantly at 100% of capacity, where we've been for the last 2, 2.5 years, you've got to really stay on top of your inventory. And so, yes, maybe we're running it a little better than we had, but we haven't changed our philosophy or strategy in that regard.

Very helpful, thank you.

Thank you. Next question, please?

Our next question comes from Chip Dillon with Vertical Research.

Congratulations on a very fine quarter. The question I had is on the whole price timing of the increase, if you can comment? On my rough numbers, it looks like your average realizations are pushing $100 above where they were a year ago, which is about what the Board increase was and -- however, we know at the box level there can be some variation. So, the question is -- should we expect any more of the Spring increase to bleed into the fourth quarter, or was it fully reflected in the third quarter?

We reflected that fully in the third quarter. As we said on the second-quarter call, we expected to complete that passthrough early in the quarter, and we did. And so, we don't expect to see any more impacts from that.

There may be a couple of days, Chip, but it's a miniscule, small amount.

Got you, okay. And then on the second question is -- we just got the data for September, which seems to indicate that inventories seem to have come down a bit more than normal after the big jump in the Summer. In your system, can you comment, do you feel your inventories got -- it sounds like you don't feel they did, but did you sense at any point that they were above where you were comfortable? Or do you feel like they were always within what your plan was?

Again, running at 100%, we had to anticipate the third quarter. But we're about where we wanted to be, understanding where our Business was. And we are up about 6,000 tons compared to the second quarter, because of the Filer planned outage, and having to supply such a big October.

Okay, and then just final question. When we look overseas, it seems like, in a very general sense -- and I know as you guys have become more integrated, you're not as active in the export markets. But it looks like you've seen some firming in places like Brazil, but you saw some sluggishness in Europe. And I didn't know if you had any late, recent color on how you see, especially Europe, in terms of craft linerboard at this point?

Chip, this is Tom. I'll just comment on that real quick. I think that, for the most part, we saw the lift in pricing throughout this year, and that's held reasonably stable -- a little bit of sluggishness in Europe. But I don't see anything. Again, we're a fairly small player there, but with regard to our customers, we don't see any enormous slippage or anything like that.

Got you.

[That's why], Chip, we have more concerns about people wanting tons since we pulled them back in the export than price. So, most of the discussions -- and again, our export business isn't real large -- has been more about the availability of tons we might add, as opposed to the price.

Got you. Okay, thank you.

Thank you. Next question, please?

Our next question comes from Mark Wilde with Deutsche Bank.

One, can we get any thoughts, Mark, on any pressure you guys might be seeing or might be anticipating from some of these pellet plants going in the south? I know that southern and eastern Georgia seem to be getting more than their fair share.

Yes, Mark, over the last three years, we've seen the south plants come online, and it's put direct pressure on the basket, and much as we expected. So, much of the cost escalation that we've seen in the last few years in the southeast was the pellet plant activity, along with some of the OSB plants coming on. But, yes, there's been an impact from the pellet plants.

I think the other consideration here, Mark is, and Mark Kowlzan is right on, yes, we've seen some pressure, but it's not resulted in large price increases for wood, obviously. Prices remain pretty stable. But long term, I'm a little more optimistic, because a lot of these pellets, as you know, are being exported to Europe, and the only thing that makes the economics work in that deal, because you're shipping a lot of water with that fiber, is the government subsidies over there. And we've seen countries like Spain that have heavy subsidies for solar energy, et cetera, determining that the economics do not do good benefits to their balance of payments, their debt, et cetera.

So, I think longer term, as the world becomes a more competitive place, people are going to start questioning whether the subsidies that government are paying to support these wood chips are really worthwhile. So, long term, I think the jury is still out on how successful pellet plants will be.

Yes, it's a long distance to ship sort of low-BTU-content fuel.

The other question I had was for Tom Hassfurther -- just back on the export markets briefly. Tom, just to confirm something that I think is the case -- in the export markets, you guys skew more to Latin America and more to the heavy whiteboard; is that correct?

That's correct.

Can you give us any kind of just general guideline about what percent of your exports might be Latin America over time?

Well, I'm not going to get into those kind of specifics, Mark, but I'd just say that when you get to that market, echoing what Paul said earlier, our big concern is finding the tons to be able to supply the customers that we have down there and the demand we have down there. So, that market remains quite good for us.

Okay, very good. Good luck in the fourth quarter and with Boise.

Thank you. Next question, please?

Our next question comes from Phil Gresh with JPMorgan.

First question -- with the demand trends you've seen so far this month, any impact that you've noticed from the government shutdown?

No, I mean it's hard to qualify that and quantify that. Again, with the 23-day month, and with the Business up 4.4% for the first 8 days, we're pretty pleased with that. But we don't have any direct evidence of any impact to us, per se.

And just to amplify on that point, when you have a 23-day month, your best number -- and you want to compare it year over year -- we got an extra day this October. One extra day, and so that's going to add 5% to the number. And so, you would expect a little lower per-day shipment balanced by having one more day. No, I'm incorrect. It's the same number? No, I'm incorrect. It was last month, so it will be the same number of days, I stand corrected.

And like Mark said, we're up 4.4%. We average 6%, up 7% or so last quarter, so we're a little bit behind that. What it's related to is -- October is a long month -- 23 days, so we got a very small sample size.

Got it, okay. I know you guys didn't want to take any questions on Boise. Rick, you had mentioned on the last call that you might have some initial thoughts on the D&A and the step-ups in those types of things. So, if you had a comment there, I was just curious if you had any info?

No comments on Boise.

Okay. And then, with the integration ahead for you guys, and with where your financial leverage is right now, to the extent other mill assets were to come for sale, would you think of yourselves as being more focused on integrating the Boise acquisition and doing just kind of the box plant deals that you typically would do, and more likely nothing on the mill side? Or how would you think about your capacity to do more right now?

That's a great question for next quarter's earnings call, and we'll be more than happy to answer it. But that's tied part and parcel to Boise, and as Mark said, we're not going to comment on that until we're completed with it.

Fair enough. Last question just on pension contributions, Rick, with these changes in the plans, are there any expectations that we should have about what that might mean for required contributions in the future?

Long term, less, but not any lower amounts than the short term.

Got it. Okay, thanks a lot.

Thank you. Next question, please?

Our next question comes from George Staphos with Bank of America Merrill Lynch.

A couple of questions -- maybe bigger picture. First of all, you've done a tremendous job over the last few years of raising margin in the Business. Do you have a view on what the horizon could be in terms of how much more margin improvement you can have, excluding the effect of pricing, and obviously excluding the effect of Boise within your Business? And how important are the box plant investments in driving that margin improvement over time? And then I had a follow-up.

Yes, I'll take that, George. Margins -- depends on a couple of things -- price and cost. And obviously, if your volume increases, you get to amortize overhead over more tons -- that reduces your costs. And so, that, and where price goes are the two biggest determinants of profitability. And we have got a pretty good handle where we think volume is going, and we don't speculate ever on forward pricing, publicly. So, that's about as good as I can do there.

But the fact that we have added box plant capacity in markets where we were either sold out or getting close to that, again, has enabled us to put those tons through a box plant that's -- most of the overhead was already absorbed. That's helped our margins. So, these $200 million of money we've spent on the box plants over the last three or four years has definitely contributed to our margin improvement.

Right. I was holding price [constant] as well in the question, so it sounds like it's not so much incremental mix you're getting from the box plant investments, it's more the operating leverage it's allowing you because you have more ability to grow the Business.

It's actually both.

Okay. And would you say it's split evenly, or more the volume growth, or more the mix effect, Paul?

We're not giving out the secret recipe.

Okay. The other question I had, and I'll turn it over -- where do you have the most concern about cost pressure over the next two to three years? Which line item or which factors should we be observing most closely in terms of potential erosion of the margin progress we've had over the last number of years? Thanks. Good luck in the quarter with the closing with Boise as well.

George, regarding that question, just general inflation. Obviously, the energy, wood cost type of impacts, but again, just general. Except for, of course, the big wild card that everybody knows about is OCC. And if the world economy expands at a more significant rate than it has in the last year or two, we believe that OCC is going to come under cost pressure. And again, we're advantaged in that regard because we are among the lowest users of OCC in the industry.

Okay. Thank you.

Next question?

Our next question comes from Alex Ovshey with Goldman Sachs.

As you think about your existing mill assets in the containerboard side, and your ability to increase production through productivity initiatives, as you look over the next 12 months, what do you think you can grow your production on the containerboard side through productivity?

We've been stating the 1% creep is a normal creep for us based on, again, a normal CapEx spend. As we've said for many years now, it depends on how much capital you want to spend, but 1% is a good number to expect for a creep.

That's helpful, Mark. And then, clearly you're busy with the Boise acquisition, but as you think about the potential to add incremental converting capacity and box plants, can you talk about what the pipeline looks like for you on the box plant side?

Yes, we will continue to look for opportunities wherever they happen to be. And if they fit our model correctly, we'll pursue those acquisitions going forward. We're not going to deviate much from the plan that we've had going the past few years.

Yes, we want to get to over 90% vertically integrated. And if we can get there with strictly internal growth, that would be fine, but it will probably take some more box plant acquisitions to do it.

Got it. Thank you.

Thank you. Next question, please?

Our next question comes from Scott Gaffner with Barclays.

So, as the economy shifts more towards eCommerce, especially in the fourth quarter, is there anything that you're changing as far as your production or inventory plans in the fourth quarter to accommodate that shift to more of an eCommerce market, versus traditional brick and mortar?

No -- again, no plans on changing anything. Just over the last five or six years, we have just definitely seen the benefit of the eCommerce during the holiday season.

Yes, December used to be a tough month or a half-decent month. Decembers have been pretty constant over the last five years. The only thing we do, and it's nothing new, we try to build a little inventory in the fourth quarter to support our mill outages, which are stacked into the first quarter. But that's not a change; we've done that for the last 15 years.

Okay. There was a couple articles in the Wall Street Journal about Wal-Mart trying to buy more American goods. And I think part of your thesis on the North American containerboard markets has always been onshoring of US manufacturing. Anything you can share on those two fronts? Anything you're seeing that maybe we aren't seeing as far as return of manufacturing to North America?

Yes, this is Paul again. I'll comment on that. I read the same things you read, and so I don't think we're seeing a lot more than you might be seeing in terms of a macro look at this onshoring phenomena as it unfolds.

I will tell you though, from my perspective, if I went back -- I've got to go back 10 years now -- that Tom Hassfurther would be running in about every three days telling me that this customer moved to China, and this customer moved his business to Mexico. I can't remember the last time he came in and told me somebody moved to China, and it's very infrequently that he tells me somebody moved to Mexico. So, there's still a little movement to Mexico, but not much.

And Tom, do you want to comment on that a little further, because I think it's an important point, that the trend is definitely stopped. The question is -- how strong will it reverse itself? So, I'll let you, since you're talking to 70 box plants, amplify on that.

Okay, Paul, I'd just like to add that what Paul says is absolutely correct. The exodus from the country has essentially stopped. We don't see that much at all anymore.

And I think that Wal-Mart's initiative that they just announced to purchase more from American companies, I think coincides with the fact that a lot of American companies have become much more competitive worldwide. And with labor rates going up in places like China dramatically, it's become more difficult to do business there, and the costs have gone up, et cetera. That's driving Wal-Mart's initiative. I think it's altruistic to say I'm going to buy from America, and that's a good thing to do, but also, they are only going to do it if it's really competitive. So, I think that's a very good indicator that Wal-Mart sees American manufacturing becoming much more competitive.

Thanks for the comments, and good luck in the quarter.

Thank you. Next question, please?

Our next question comes from Phil Ng with Jefferies.

Great quarter. Just want to get a read on demand trends. I know you said the first few days of October was up 4% or so. Seems like a modest deceleration from Q2 trends. I just don't want to read too much into it; just want to get a pulse of what you're seeing from the demand side, and what your customers are saying?

I would say, Phil, that our demand has remained fairly steady. It's hard to read in much to this number that we have so far in October, just because October's a 23-day month and we don't have a very good sampling for just 8 days. It's hard to indicate what's going to go on. And we came out of a very strong Q2 and a very strong September, as well.

Okay, so it sounds like business as usual.

And in terms of your fiber costs, you talked about how wood costs ticked up, from a weather standpoint things have subsided a little bit, and I think you mentioned that you expect wood prices to flatten out. Is there any room for it to fall down, decline, ex the seasonality component? Just because it does seem like the headwind that you saw in 3Q is subsiding a bit here.

It's really sensitive to weather patterns, and again, if we ended up with a warm, dry winter period, you'd see a lot less pressure and basically a falling off on the pricing. If we end up with cold, wet weather, then it's a different story. So again, it's pretty much just weather dependent.

Got you. (multiple speakers) And just one last bigger-picture question. You guys are pretty much running flat out for the last few years, and your box shipments have obviously outpaced the broader market. Has that limited your ability to grow on the box side? It certainly doesn't seem like it, but with potentially the incremental capacity you get from Boise, will that allow you to sustain that growth profile or potentially accelerate it going forward?

Well, as we've said over the last year or two, in order to support the domestic growth, we were going to rationalize any of the lower-value export tons, and we've done just that. And so, as time has gone on, we've supplied the North American footprint growth with the tons that came out of the exports.

Got you, all right, thanks, guys.

Thank you. Next question, please?

Our next question comes from Al Kabili with Macquarie.

Just a question on the growth, and can you just help us parse out the type of growth you're seeing in larger, national accounts versus more of your traditional strength in the smaller, regional producers?

Okay, Al, this is Tom. We don't get into lots of detail about individual segments or anything like that. I'll just say that our growth has been consistent, spread out over thousands of customers, and of course, we do business with large customers as well as very small ones. And it's all about the value we deliver to those customers, and that's what helps drive our demand.

And basically, we consider that as marketing data, which is Company-confidential, and we don't share it with you because then we would have to share it with competitors, and we don't do that.

Okay, all right, I appreciate that.

I guess a second question is just on mix. Is there -- certainly the dynamic of less exports helps. Is there anything else on mix that's improving, or is it just really that dynamic?

I think it's more just that dynamic, Al.

Okay, and then just a housekeeping question for Rick. Amortization expense going up sequentially on maintenance outages -- can you just help us with that sequential headwind, if you will, is?

About $0.02 a share from 3Q --. (multiple speakers)

Okay. $0.02 a share. Okay, got it. Great, thanks, and good luck with the quarter and upcoming Boise transaction.

Thank you.

When he says $0.02 a share, that's the increase, not the total. So it's gone from roughly $0.04 to $0.06.

Okay, understood, got it. Thanks.

Thank you. Next question, please?

Our next question comes from Chris Manuel with Wells Fargo Securities.

Gabe Hajde sitting in for Chris. A question about utilization across your downstream box plant assets. Can you talk about maybe regionally, or maybe end markets, where you guys are particularly tight, and could see investment dollars over the next 12 to 24 months?

No, we can't comment on that.

All right, thank you, gentlemen.

Thank you. Next question?

Our next question comes from Carly Mattson with Goldman Sachs.

Could you talk to any update on the anticipated timing for the public debt financing portion of the acquisition, given the shelf that was filed this morning?

We have no comments at this time.

Okay, thank you.

Thank you. Next question, please?

Our next question comes from [Rodney Singh] with JPMorgan.

It appears their line has left the queue. Do you want to move on to the next question?

Yes. Next question, please?

Our next question comes from Mark Wilde with Deutsche Bank.

Kind of a follow-on question, I think mainly for Tom Hassfurther. If we look at the industry box shipments year to date, they're essentially flat. The economy is up a bit. So, just raises the question, Tom, of what you're seeing in terms of puts and takes in terms of where the industry might actually be losing volume. Is there some demand destruction which might have taken place?

If we walk through a big-box store like a Costco, you see a lot more use of shrink wrap it seems like these days. At the same time, we know that eCommerce is using more boxes. So, can you just help us kind of reconcile those puts and takes in terms of box demand, and why you think the industry as a whole is flat this year when there's some growth in the economy?

Well, Mark, you've got a lot of different topics you're talking about there. I think you pretty much rationalized the puts and takes, quite frankly. You've got industries moving in lots of different directions. If they can do stretch wrap and slip sheets, that's what they will do, as opposed to a corrugated box. At the same time, you've got the whole eCommerce side of the business, which is significantly different. And I think you've got small companies that are really upstarts, and their demand is in boxes -- starts out in stock boxes and then moves on to regular containers.

I think that you've got ag business that, in some cases, is doing more bulk than they did before, which can reduce some demand. But on the other hand, you've got organic growers that use more. So, it kind of just goes back and forth, and you can go in all these various markets and come up with scenarios of plusses and minuses.

But at the end of the day, it is what it is, and we got the market we got. And I think that at times the FDA numbers have tracked GDP, but have gotten away from that for quite some time. And I think at any given point in time, you can probably find the plusses and minuses to rationalize those numbers, but it's very complex.

I think the more important point is that I think the biggest plus that the industry would need for the next decade is what we just talked about with the previous caller -- more onshoring of business that use the box in this country as opposed to coming from another country again. And long term, we're fully -- we're pretty optimistic that that's going to occur over the next decade for a lot of reasons, one of which is the national debt. It's best fixed by economic growth, and I think that's an imperative for this country.

Okay, very good, thanks.

Thank you. Next question, please?

Our next question comes from George Staphos of Bank of America Merrill Lynch.

Two quick ones. I know it's late in the call. First of all, Paul, Mark, when you look at the energy products now, I guess two years from when they came online, what are your observations? What have been the learnings from this -- how have they -- versus your initial expectations, set you up better for the next number of years?

And then shorter term, as we're penciling out -- production for the fourth quarter -- would it be somewhere around 650,000 tons, in that ballpark, when we think about the shipping days and the outages at Filer City? Thanks very much; again, good luck in the quarter.

George, as far as the energy projects go, again, they're delivering extremely well, both at Counce and Valdosta, and performing as designed. So, we're extremely pleased with the results.

As far as what we expect for tons, we would expect that Filer is going to impact the 7,000 tons. And if you look at the third quarter, we're somewhere down in that 660,000-ton area.

And that number can move 20,000 tons either way, easily, depending on how we run. So, we don't normally give a production forecast for the next quarter, and we're not going to start.

Okay, thanks, guys.

Thank you. Next question, please?

The next question comes from Chip Dillon with Vertical Research.

Have you any comment, or have you seen any impact in your doings with the converted capacity we've been reading about? My understanding is that some of these mills don't even call their output containerboard; they call it packaging grades. But I just thought if you had any broad comment about either the conversions, or maybe even the company that recently announced the Midwest mill, and how they fit in the marketplace, and as a competitor to you?

Yes, let me take that one, Chip. We're not going to call out any particular companies, but I don't think it's any secret that some of the conversion tons are not the best quality, but some are good. And other than that, we would just say that the variety in terms of quality is greater with some of this new stuff than you would get with the existing capacity at a good, integrated mill.

And then, as the OCC supply gets pressured -- as you know, that can have a deleterious effect on quality, because most of the conversions that have been talked about are 100% recycle. But other -- further than that, we're not going to comment any further than that.

Okay, thank you.

Thank you.

(Operator Instructions)

Seeing that there are no more questions, I want to thank everybody for joining us today, and look forward to seeing you on the annual call in January. Thank you very much.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.