Packaging Corp of America (PKG) 2013 Q4 法說會逐字稿

Thank you for joining Packaging Corporation of America's fourth quarter and full-year 2013 earnings results conference call. Your host today will be Mark Kowlzan, 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.

Good morning. I'm Mark Kowlzan, CEO of PCA, and with me on the call today is Paul Stecko, our Chairman; Tom Hassfurther, who runs our packaging business; Judy Lassa, who runs our white papers business; and Rick West, our CFO. Thanks for participating in this morning's call, and after the presentation, we'll be glad to take any questions.

Yesterday we reported fourth quarter record net income of $227 million, or $2.33 per share. Earnings included special items of $1.70 per share of income from the reversal of tax reserves for both PCA and Boise related to alternative energy tax credits; and after-tax costs totaling $0.41 per share, related primarily to PCA's acquisition of Boise Inc. on October 25, 2013. Excluding special items, net income was $101 million or $1.04 per share, compared to the fourth quarter of 2012 net income; excluding special items of $59 million or $0.61 per share. Net sales were a record $1.3 billion compared to $737 million last year.

The $0.43 per share increase in earnings was driven by improvements in PCA's earnings, up $0.23 per share, compared to last year's fourth quarter, and a partial quarter's results from the acquisition of Boise of $0.20 per share. The PCA earnings increase of $0.23 per share resulted from improved price and mix of $0.36 and volume of $0.04, which was partially offset by cost increases in repairs $0.03 fiber $0.03, labor $0.03, energy $0.02, depreciation $0.02, chemicals $0.01, and other items $0.03.

I should also point out that $0.20 per share contributed to earnings from Boise includes a $0.06 per share deduction for all interest expense incurred during the quarter from the additional debt that resulted from acquiring Boise.

Full-year earnings, excluding special items, were $320 million or $3.28 per share, compared to 2012 earnings, excluding special items, of $201 million, or $2.06 per share. Net sales were a record $3.7 billion compared to $2.8 billion in 2012. Full-year earnings, including special items, were $436 million or $4.47 per share, compared to 2012 earnings of $164 million or $1.68 per share. Details of special items for both the fourth quarter and full year were included in the schedules that accompanied our earnings press release.

We finished 2013 with another outstanding quarter, setting all-time records for sales, earnings and shipments. Our demand was steady throughout the quarter for both packaging and white papers, and December volume was particularly strong. We are pleased with Boise results, which included only two months and five days of operations. Boise's earnings per share results benefited from early synergy realization, and also by the successful integration of PCA and Boise, which we will talk about in more detail later in the presentation.

For the year, our earnings were up 60% over 2012 record earnings, and strong cash flow has allowed us to pay down $150 million in debt since we acquired Boise on October 25.

Looking at more details in our packaging business, PCA corrugated product shipments were up 4.4% in total and per workday over last year's fourth quarter. Shipments were strong throughout the quarter, up each month on a per workday basis, and against a very tough comp with PCA's fourth quarter 2012 shipments, up almost 6% over 2011. Including Boise shipments from October 25 through year-end, total PCA shipments were up 24%.

For the year, PCA's total shipments were up 5.7%, and up 6.1% per workday compared to 2012, all of which came from organic growth. Including Boise's partial fourth quarter shipments, total 2013 shipments were up 10.7%, and per workday, up 11.1%.

Both domestic containerboard and export sales demand remained strong in the fourth quarter, except for South America, where the impact of cold weather on produce crops has lowered demand. Our containerboard mills produced 803,000 tons in the fourth quarter, including 141,000 tons of production by the former Boise mills.

We completed our annual outage at our Filer City, Michigan, medium mill in October, which resulted in production losses of about 6,700 tons. For the year, total containerboard production was 2,749,000 tons.

PCA total containerboard inventories at year-end, which for comparison purposes includes PCA and Boise tons at year-end 2013 and year-end 2012, were down 1,000 tons. The ending inventory is a little lower than we had targeted considering there are two less mill production days in the first quarter compared to the fourth quarter, and our Counce, Tennessee, linerboard mill will be down for a week in March for its annual outage.

Pricing for domestic containerboard and boxes remained very steady during the quarter, but we did see some limited price reductions in export containerboard, particularly in Latin America with the weather-related demand issues.

Looking at white papers, our volume was up about 1% compared to last year's fourth quarter driven by growth in office papers, which more than offset declines in printing and converting, and pressure-sensitive papers. The grades that declined in volume were significantly impacted by the permanent closures of two machines and the off machine coater at the International Falls mill in October. The closures reduced capacity by about 115,000 tons annually. These closures, however, brought the mill into pulp balance and eliminated the need for purchased pulp, which should improve profitability in 2014.

White papers' income was disproportionately affected in the partial quarter of PCA ownership by the annual shutdown of the Jackson, Alabama, mill which occurred in November. The shutdown reduced production by about 10,000 tons and increased operating costs. We ended the year with our white paper inventories down about 14,000 tons compared to last year, and 11,000 tons below the third quarter.

In the fourth quarter, we notified customers and began implementing price increases of $60 per ton for office papers and printing and converting grades. In February, we notified customers of an additional price increase of $70 for printing and converting grades, $50 for branded business papers, and $70 for private label. The price increases are effective March 3, 2014. Finally, we continue to make improvements in day-to-day mill operations and are finding additional opportunities for synergies in the process.

I'm now going to turn it over to Rick West, our CFO, who will provide more financial details.

Thank you, Mark.

In the fourth quarter, cash generated from operations was $188 million, and for the year, $608 million. Capital expenditures for the quarter were $104 million, and for the year were $234 million. Common stock dividends of $39 million were paid, or $0.40 per share, and for the year, dividends of $109 million were paid. We did not repurchase any shares of PCA common stock during the fourth quarter. And for the year, share repurchases totaled $8 million. Cash tax payments were $45 million in the fourth quarter, and for the year were $91 million. We ended the year with $191 million in cash.

We paid off $109 million in debt in December, and an additional $41 million in January, making our total debt reduction since the acquisition $150 million. With the debt pay-down, our long-term debt is now at $2,509 million.

I am happy to report that the IRS audit of PCA's 2008 and 2009 tax returns was completed during the fourth quarter, and all claimed alternative energy tax credits were allowed. As a result, we were able to reverse the tax reserve recorded for the Filer City biofuel tax credits of $104 million, which we have fully used to offset past taxes owed. In addition, as a result of an IRS Chief Counsel memorandum published in the fourth quarter, we were also able to release a Boise tax reserve of $62 million related to the taxability of the alternative fuel mixture credits.

As we normally do at the beginning of each year, PCA provides estimates for certain 2014 items. We expect total capital expenditures to be between $380 million to $400 million, including normal capital, and required capital for synergies, Boiler MACT and the DeRidder conversion project. DD&A is expected to be about $340 million. Pension expense and funding is expected to be $25 million and $5 million, respectively. The combined federal and state effective tax rate is expected to be about 36.5%, with a cash tax rate at about 31%.

Based on our current long-term debt, with no additional debt to pay down and current LIBOR rates, our interest expense in 2014 is expected to be about $87 million, and cash interest payments are expected to be about $80 million. That is about $10 million below the combined interest expense for Boise and PCA prior to the acquisition.

I will now turn it over to Paul Stecko, who will comment on synergies and our Boise integration efforts.

Thank you, Rick.

This integration has obviously been our number one priority for the past four months. Our plan was to have our top three executives lead specific aspects of the integration, in what I would term a very hands-on, day-to-day fashion. Mark Kowlzan led the mill integration, Tom Hassfurther led the integration of all packaging operations, and Rick West led the integration of the financial, shared services and IT operations.

We also had very strong support from Boise personnel in this endeavor, particularly Judy Lassa, who is now Senior Vice President of White Papers; Virginia Aulin, who is now Vice President of Human Resources for PCA; and Bernadette Madarieta, who is now our VP and Controller. This team is off to a great start, and I want to emphasize that a tremendous amount of work has been accomplished.

When we announced the agreement to acquire Boise on September 16, we estimated synergies of $105 million, which would be achieved over three years, or about $35 million per year. Our synergy estimate is now $175 million, and we think we can get to a run rate of $75 million to $80 million by the end of the first year.

Actions taken immediately after the acquisition on October 25 and essentially completed by the end of the year were the elimination of about $25 million in overhead costs, primarily from reduced headcount and lower corporate governance costs. Although not counted in our synergy estimates, with the acquisition of Boise, we also inherited tax loss carry-forwards of $135 million, which we can utilize. These loss carry-forwards are front-end loaded, and already reduced our 2013 tax payments by $9 million, and will reduce 2014 tax payments by $38 million. The remaining tax loss carry-forwards will reduce payments by about $6 million per year from 2015 through 2028.

Finally, a few comments on the DeRidder paper machine conversion project. After closing the acquisition on October 25, we announced that we were putting the project on hold until we could perform a complete technical review. This was expected to delay the start-up of the project from mid-2014 to the fourth quarter of 2014. This is still the case. In addition to ensuring technical adequacy, we also wanted to fully utilize our expertise and make any changes to the project that could further improve its returns.

That process is continuing, and we have found ways to improve the returns. We expect to be in a position to provide an update on the cost of the project and the expected returns sometime in March.

With that, I will turn it back to Mark for the first-quarter outlook.

Thanks, Paul. Earnings improvement is expected from a full quarter's operation of Boise, including synergies and lower amortization of annual mill outage costs. White papers' prices are expected to improve in the first quarter as a result of our announced price increases. Our largest containerboard mill, in Counce, Tennessee, will be down in March for its annual maintenance outage, which will reduce production and increase operating costs.

We normally have increased costs from colder weather of about $0.06 per share compared to the fourth quarter for such things as wood, energy, and transportation. So far this year, however, the extreme cold temperatures and significant snowfalls across the country have impacted all of our mills with higher than normal cost increases for these items. Costs at our converting plants are also being impacted, and we have had some plant closures. It is very tough to predict how these extreme weather patterns will impact PCA for the entire quarter. But it has probably cost us $0.03 per share already, with about a month and a half left to go in the quarter.

Labor costs are expected to be higher with beginning of the year wage increases for both salaried and hourly employees, and certain benefit costs will be higher, primarily FICA, during the first quarter. We also expect a higher tax rate. Considering all of these items, we currently expect first-quarter earnings to be from about $1.00 to $1.05 per share, excluding special items.

With that, we would be happy to entertain any questions.

But I must remind you that some of the statements we have made on the call constituted forward-looking statements. These statements were based on current estimates, expectations, and projections of the Company, and do involve inherent risks and uncertainties, including the direction of the economy and those identified as risk factors in our annual report on Form 10-K on file with the SEC. The actual results could differ materially from those expressed in these forward-looking statements.

And with that, Operator, I would like to open the call for questions. First question, please.

(Operator Instructions)

Chip Dillon, Vertical Research.

The question is -- the first one is on the synergy target, which you just raised. It is impressive to see, certainly.

Could you just give us an idea of where you found the increments from what you thought in the beginning? And were some of those increments in ways the white papers business is run as part of PKG?

As a matter fact, the biggest area was in white papers. We didn't have much in initially, and as we started to operate the business, we discovered a lot of opportunities.

And on the brown side, we had the big things, such as great optimization and transportation opportunities, along with sales mix. But as we got into the actual operations of the mills and the box plants, again, a lot of smaller items made results available to us.

Okay. And then just one quick follow-up. You all mentioned that the Jackson outage impacted white papers in the fourth quarter. And of course, the $15 million in the paper segment was certainly more than we were looking for to begin with, not being aware of that or building that in consciously.

How much of an impact was that? And should we add back that number, and then make our own judgment on pricing as we look at 2014 per quarter?

Yes, I'm going to let Judy comment on that.

Yes, Chip, the [second pot] of $4 million, $4.5 million impact to us is from EBITDA for fourth quarter.

Okay. But I would imagine you have other outages you take in your system, so is that a normal per-quarter amount? Or was that an outsized amount?

It was pretty close to a normal month, with a little bit longer than normal our outage.

Chip, this is Paul. I think the point we were trying to make is, we only had the business for two months. And so we had an annual shutdown in the two-month period, and usually Boise would have a shutdown once every three months. This is once every two months.

So it was disproportionate because of the stub period only that we owned it. They did not have a full quarter or two to absorb that hit over. It was over a much shorter period.

Got you, very clear. And last quick one. Can you talk a little bit about your box demand experience so far this year? In the first -- in January?

Yes, if you look at January -- this is both combined PCA and Boise -- we were up 2.5%. And again, considering where we were from the tough comps a year ago, combined, we are looking at a Boise-PCA 11% last year January over the prior year.

So our 2.5% performance in January was -- we felt good. And again, it was up against a tremendous prior-year number.

And the weather hurt us a little bit on demand. That's hard to quantify. And hopefully, you will make that up over the rest of the quarter if this weather ever improves.

Thank you.

Next question, please.

Anthony Pettinari, Citigroup.

On the corrugated side, when I back out the volume growth from legacy PCA, it seems like Boise's box shipments may have declined year over year. Am I reading that right? And can you just talk a little bit about the volume performance of the Boise business?

Yes, Anthony this is Tom. All I can tell you is we really only have the information for the stub period, which was very flattish over the previous year. So that is really all I can comment in terms of the comparison.

Okay. And --

But Anthony, we would comment in January, where we did have a full month of each box, that Boise was up about the same amount that we were in January of this year. So that is our best current comparison.

Okay, that is helpful. And then regarding the weather, you referenced the impacts to box plants. I am wondering with Valdosta, has there been any impact to mill production from the very severe weather in the South?

We have been fortunate that we have not had any direct impact on the productivity per se. But we've obviously had the impact on raw material goods transportation issues, along with finished goods transportation issues, because of the icy roads and the rail problems.

And nationwide, if you go all the way from the I Falls, the Canadian border down to the Gulf Coast, we have seen the massive railroad problems with the extreme cold, snow and ice. So in that regard, the mills had been productive. But again, the cost impacts are there.

What I would add to that with just what Mark said, we have been a little bit lucky, too. One of the problems is the rails, with this [for long] cold weather, they are having maintenance problems. And the rail system is slow noticeably.

And in January, we had at several of our mills less than a day's worth the chemicals. And if we did not get a rail ship in time, we might have had to shut those -- we would have had to shut those mills down. And we were fortunate. We did get some just-in-time switching of railcars, and we able to keep our mills running.

Knock on wood, we've got another 1.5 months to go to get through this. But transportation is as big an issue -- in and out of mills -- as your other costs.

Okay, that is helpful. I will turn it over.

Next question, please.

George Staphos, Bank of America Merrill Lynch.

Congratulations on the year. Two quick questions, actually on papers.

I was wondering if you could talk a little bit more about the size of the synergy increment. The question being, previous to Boise, you did not have the white papers business. Now you do. And so it is interesting that you had so much incremental synergy gain in a business where there was no direct overlap with your existing business. I was hoping you could provide a bit more color on that.

And then more broadly, having owned the business now for a few months, and it seems to be performing well -- certainly relative to your expectations, could you advise the community here how you see the papers business fitting in ultimately to your strategy, guys? Thank you.

Yes, let me take that one, George. With regard to the synergies, we do have a lot of synergy. And the synergy is an operating expertise. We were not in the white paper business, but we operate mills.

There are a lot of practices -- preventive maintenance being one of them -- that we think we are pretty good at, and we have applied those principles in the white paper business. Now that said, we actually did a poor job up front estimating the white paper synergies. Because we focused -- we're primarily a packaging Company, and we focused on those synergies.

But again, as we got in to the white paper business, a lot of synergies came out. And I would say that about half the increment -- and it is just an estimate at this point -- came from additions to white papers. The other half came from things we found in the brown.

With regard to your second question, you know -- what we think about the white paper business. I will say again, we are primarily a packaging Company. But when it comes to white papers, we see some excellent opportunities to create shareholder value.

And that's what we are here to do, create shareholder value. And the first way we can do it is obviously by improving operations in white papers, and we have already started to do that.

And then we got a little bit of help in that. Market conditions, as you know, have improved significantly since we made this acquisition -- for white papers. And third, we feel we have the ability to build on a very strong competency that this business has, and that is excellence in logistics and customer service.

So overall, I would tell you that compared to the time of acquisition, we are very encouraged. And we feel we have a real opportunity to create significant shareholder value. And as part of the business -- although it is not nearly as big as packaging -- it can add a lot of value to the enterprise.

Thank you, Paul. I will turn it over.

Next question, please.

Alex Ovshey, Goldman Sachs.

On the white papers business, the second-largest player seems to be walking away from some business. As you think about your volumes for white papers in 2014, do you expect to benefit from any incremental business going your way that the competitor is walking away from?

Judy?

I do not have any comment on that.

Okay. And on the packaging side, can you let us know what the mix between domestic and export is, including Boise? And where the integration level is, as well, to the box plants, including the Boise assets right now?

Let me handle part of that, and I'm going to let Tom take some of that. Regarding the integration level, we are currently looking at about 90% integrated. And if you think about what we said over the last four years, we expect it to be at 90%-plus by the end of 2014.

We are there. So everything we have been talking about regarding the importance of DeRidder and the ability to supply tons is still very true. Regarding the export and the balance of domestic and export, I will let Tom get into that.

Alex, I would just say that on the balance between domestic and export with the combined Company, is still virtually the same. We've reduced our export footprint, as we talked about in previous quarterly calls during the year.

And Boise has pretty much maintained theirs. But going forward, we will still be very much what I call a small specialty strategic player in the export market.

Got it. And just one last quick one for me. The increased synergy target -- I think looking at the D & A number today, it's a little bit lower than what I think you previously had talked about.

Is any of the increased synergy due to lower D&A? Or is it all higher cash synergies that you are seeing?

No, the synergies did not have any impact on DD&A. And in fact, DD&A came in about where we expected.

And one thing I would point out is the -- when you look at the step-up in value to fixed assets and the overall assets, they are probably not as great as you would expect. Because the Boise assets were revalued in 2008.

So in total, I would say that the total step-up in DD&A only impacted depreciation expense year over year from 2013, as if we had acquired Boise on January 1 through the entire year, to 2014. DD&A only went up about 15, with DD&A going down in the paper business a little some, and up in the packaging business.

That's very helpful, everyone. Thank you.

Next question, please.

Mark Weintraub, Buckingham Research.

Two questions. One, on the segmentation, are you including basically the same things in the paper segment that Boise had? Or have you made some adjustments?

The only adjustment we've made in the reporting of the paper segment -- we now report the W2 machine at Wallula, which makes corrugating medium within the packaging segment. Whereas Boise kept the medium machine in the paper segment. And we felt that was a better representation of both businesses to move it into the packaging.

Okay, thank you. And then second, so I believe Boise was roughly $0.20 accretive in the just over two months that you had it.

Is it fair to think of the acquisition as, if you had it for the whole time, it would be close to $0.30? And if you times that by four, it would have been close to $1.20?

And then hopefully, you've even got good things going on with price and some other things, and encoded, for instance. So that again, we will see how things play out. But potentially you can get even more accretion for those synergies on top of that as well.

Which -- assuming that there is some validity to that process of thinking, how do you think about the dividend? Which really was established before you had Boise, and now we've got all this additional earnings and cash flow. Is it appropriate to think about -- sooner rather than later -- repositioning some of that cash flow into raising the dividend again?

Mark, this is Paul. I would say, as a general answer, it is yes to about everything you said. But let me clarify that now, with regard to the dividend.

What we said initially -- our number one objective with regard to proceeding was to pay down debt. And our goal was -- and we said at the time of the acquisition -- was to pay down $1 billion worth of debt over, say, the next three years. And that was based on what we thought we could do.

Now, admittedly, we underestimated synergies. And we have also got this tax benefit on the tax loss carry-forward.

So I think there is a possibility that we can be in a position to do both. Because the one negative of your stock price going up -- and there is only one -- is that the yield on your dividend goes down. And so we may be in a position to be able to meet both goals.

And both goals would be to pay down that $1 billion in debt. And with the excess cash, do something to continue to improve the yields on our dividend as we go forward. And so I think there is more of a possibility of doing what you said than less of a possibility.

Thanks very much.

Next question, please.

Mark Connelly, Credit Agricole Securities.

Mark, as we think about the synergy optimization, it sounds like you are already talking about re-optimizing the mills in the existing expanded synergy targets. Should we think of this as a two-step process then? Where you are going to re-optimize the mills and then you're going to figure out what D2 is going to make, and then probably re-optimize again after that?

And second question. Do you expect your overall fiber mix to change very much? Some of the past repositioning of mills that Boise has done has made some major changes in fiber over time. Just curious if that is a piece of your strategy here.

Regarding the first part of the question on optimization, the way we have been approaching Boise is just what we've done at PCA over the years. We've got the very strong technical organization that is dispatched to the mills on a weekly basis. And so we've basically just incorporated the Boise mills into that routine.

So we have multiple activities taking place at all of the mills. And there is a parallel path forward on how we are optimizing.

And that is also including the DeRidder piece of the equation. Everything is happening in parallel fashion, so we are not doing anything in a linear fashion by any means. And then regarding the fiber, I do not expect to see anything change in that regard.

And I would add on again, back to the first question, we do not view this as a two-step process. We have a big picture that says: these are the capabilities we have, these will be the capabilities after the DeRidder conversion is online. This is our supply, this is the demand.

You know, as Mark says earlier, our integration level got to our goal of 90%. And that is why -- that is the main driver for doing the DeRidder conversion.

We need a bigger runway for the next five years. We are growing. We need tons from somewhere. And the DeRidder conversion is where we will get them, or our integration level will get too high. And we do not want that to happen because it impedes your ability to serve customers.

But no, we know what we're going to do. We know what we're going to make.

We are just figuring out again on our projects what the optimum way to do that -- to construct it to make sure we get the highest return. But it's a one-step plan, albeit that the last up in our process is the conversion process.

Okay, that is helpful. Thank you.

Thank you. Next question, please.

Philip Ng, Jefferies & Company.

From what I understand, you guys are probably the only national containerboard producer on the West Coast. Has that opened the door for you guys to leverage your existing relationships to -- when some new business from the independents?

When you say we are the only national producer on the West Coast? That's not --

Well, you just have a footprint out there on the West Coast.

We don't have a mill footprint on the West Coast.

Okay.

We've the medium machine -- (multiple speakers)

Obviously the medium machine at Wallula and the DeRidder machine puts us much closer to the West Coast, from a transportation point of view. So we --

Got you.

So we get help there obviously, and that's part of our transportation synergy. But all of the big players have box plant capacity on the West Coast.

Okay, that is helpful.

We did not have capacity in the specific Northwest. So we joined -- we can now say we are on the West Coast. Others could have said that before us.

Okay, that's helpful. And then based on some of the news you guys are making in terms of pushing out D2 a little bit, and some of these synergies you're looking to unlock. Can you provide some clarity on how we should be thinking about CapEx for 2015 and 2016?

Not at this point. We stated earlier our target for the year is around $400 million. And so that is what our plan is calling for, for this year. And we haven't really taken a look out into 2016 -- 2015, 2016.

Okay. And just one last housekeeping question. Can you give us some color on the tons that guys are planning to take in terms of a maintenance standpoint for the full year?

I know there is some comparison differences. Last year, you guys took a lot more in Q2 than Q1. So I just wanted some color on that front.

We generally do not comment on full quarters regarding tons. But obviously we have Counce down for its annual this quarter. And then, I -- at least help me understand the second quarter, without getting into tons, we will have between I Falls and the mill down primarily in Tomahawk for the Q2.

I don't want to get into going-forward tons impacts. We will do that quarter by quarter when we talk about the quarter.

But Q1 should be a heavier quarter, is that correct?

No. Again, Counce is down for its annual at the end of the March period. So it is just the one-week out --

Historically, Q1 was our heaviest downtime quarter. That will not be the case this year. Because one, we have more mills.

And two, because equipment deliveries, for example -- even Counce is pushed out to the end of the first quarter. So it will not be our normal pattern. It will be more uniform this year than skewed towards the first quarter.

Okay. All right, thanks, guys.

Next question, please.

Mark Wilde, Deutsche Bank.

I wonder if it is possible within that CapEx number of about $400 million for this year -- is it possible to get a sense of how much of that is the D2 project?

No. We do not want to get into that right now. Again, as Paul mentioned, we will be discussing probably during the month of March more of the details.

Okay. Well then, away from that, Mark, is it possible to get a sense of what the CapEx looks like at the other Boise mills? And what that looks like relative to depreciation at the Boise mills?

No. We are not prepared to do that on this call, Mark. This is primarily an earnings review, and we do not really want to get into that today.

Okay. The one other question I had then, going back to Mark Weintraub's question about both debt reduction and potentially a higher dividend. Is it fair to say that the targets that you set initially with that three-year debt reduction goal of $1 billion, that those would not have assumed all of the news that we have had about pricing on uncoated freesheet over the last four months?

That would be fair to assume.

Okay,, great. Good enough. Thanks.

Thanks, Next question, please.

Al Kabili, Macquarie.

I just wanted to follow up on some of the CapEx questions I believe you mentioned when you provided the initial synergy outlook of $75 million to $100 million to achieve the $105 million or so synergies. With the increase in the synergies that you now expect, can you just update us on what you think the synergy-related CapEx will be in total?

Yes. Well, the synergy -- it was not a -- I think we may have misstated. I'm not sure exactly what we said. We said that the cost of getting the synergies would be from $80 million to $100 million. So you got the $100 million to $80 million part right.

But those costs were not all capital. They also included such things as severance costs for the headcount reduction. So that number isn't all-in. Some of it's capital, some of it's not. It is a one-time expense.

As we sit now, that number is below $80 million as we've had a chance to refine it. So probably in the $70 million to $80 million range is our best guess today. Down from $80 million to $100 million.

Okay, very good. And that is with the increased synergies as well, I take it.

Yes, it's with the increased synergies as well.

Okay, terrific. And then on a related topic on the synergies. Can you help us with how -- maybe I missed this. But how much synergies you realized in the fourth quarter, and what the run rate today is on the synergies?

Well, I would say, as we said in the -- I'm not going to get into the specific EPS amount now. But if you look at it, what we said in the call was, immediately after October 25 and through the end of the year, we had got about $25 million in corporate overhead costs.

So I will let you do the math on that, because it is kind of difficult in terms of coming in through the quarter. And that is an annual number, taking out $25 million in annual costs of corporate overhead.

And then Paul mentioned that we would be at an annual rate of about $75 million to $80 million by the end of the year. So that is about as much granularity as we are able to give at this point.

Okay, all right, that is helpful. And then, to the degree you can comment on just the order book -- I believe you mentioned volumes were up 2.5% combined, Boise and PCA. As you look at the order book to the degree it gives you visibility there, how is that looking versus last year?

Are you seeing a notable uptick there? Because we have heard from some others that they have seen that.

Well, again, as I mentioned, we talked about the January number up 2.5%, combined PCA and Boise. That was up in terms of a very tough comparable of 11% in the prior year. So again, our 2.5% we feel is a good number, considering the big comp from the prior period 12 months before.

Yes, let me say it another way. We have had some quarters last year where we were up 6%. But last January was an anomaly, when you are up 11%. And so beating an 11% up by a lot is hard to do.

So yes, the 2.5% we were pretty pleased with, compared to what we were comparing it against. If you wanted to find that an uptick, I guess you can. I don't know if I want to go that far.

And then as I said early, things were exacerbated by weather. We've had a lot -- we've had box plants down from several storms, and that has hurt our volumes a little bit. If you're going to recover some of that, then we will probably recover it, if the weather changes, in February. So it is a hard question to answer.

Okay. I appreciate that. And final question, Rick, just housekeeping. The corporate line item on the segment reporting. Is there any flavor you can give us how we should be thinking about what that amount is for the year?

I don't want to predict for the year because we're continuing to go through the corporate line, and as you get synergies, it may change. But I would say that in the past, we had kept all corporate overhead as one item, when we were one segment.

Whereas with our reporting in the fourth quarter, we are allocating a portion of the corporate of the overhead to both the paper and the packaging segments. And only retaining the part that is not allocated, which would be more true corporate functions in corporate.

So I think it is a little too soon to do that. We could probably give you a better idea after the end of the first quarter.

Okay, thanks, and good luck the rest of the year.

Thank you.

Thank you. Next call, please.

Chris Manuel, Wells Fargo.

Just a couple follow-up questions for you. First, when you -- could you help us a little bit with the timing or the phasing as you anticipate the two price increases coming through?

At what point -- or, how much have you realized thus far? How does that phase through over the balance of the year? Does it typically take a quarter or two for the UFS pricing to phase in?

This is Judy. I will take that one. So the price increase that we announced back in last quarter -- depending on product or grade mix, our price realization today is about $40 to $50 a ton, excluding the volume that's tied to indices. And as we commented in the opening remarks, we do have another price increase announced out here. But we won't talk about products that have come in.

Okay.

And I think Mark and I and Rick, we are new again to the white papers business, having not been in that segment for about 20 years. But if you look at some of the indexes, they have tended to put in a little bit of the increase each month.

It is almost like a box price increase, as opposed to a containerboard increase that usually goes in on one date. And so that will probably be the case this year. But we will see.

Okay. So it sounds like you've got about two-thirds of it in there as of the end of the quarter. So the first price increase. But the rest will be in during this quarter maybe?

No. That's not what -- what Judy said is, on the businesses that we have unilateral ability to raise the price, we are up the numbers that she gave you. But we have stuff also that's tied to indexes. And that moves only when the index moves.

So the answer to your question is, you have to know how much is tied to indexes and how much is not. And that's Company proprietary information that we do not discuss with anybody. Because that information would be useful to our competitors also. So we do not talk about it.

Got it. Second question is, with respect to -- you talked about -- and I know you discussed this a few months back as well -- moving out the D2 conversion from mid-year towards end of the year. You alluded to a couple of elements in there where you said that you would improve returns, and what you wanted out of that business.

Can you give us a little color as to how you intend to improve returns? Is a coming from costing less to put in? Is a coming from having more capacity than that 300,000 I think that was originally slated to come on?

Or is there even an element that's -- you figured out how to lower the cost curve of the new mill when it does come online by the same capacity? Can you help us a little bit there with what you are able to do?

Without getting into the details, I can tell you that since the announced acquisition in September, we have been heavily involved in analyzing and reviewing the entire detailed scope of the project. And again, with my cast of heading up the mill integration, I've personally been involved with all of the engineering staff on a week-to-week basis for reviewing all of this. So that is where that's focused.

And I would add that we will not share that information with the public until we share it with our Board of Directors. And we've got a Board meeting at the end of this month.

And we owe them a status report on what we've found, what we are going to do, how we are going to improve the return, et cetera. Once we do that, then we will be free to discuss that.

Well, then can you share with us, is it the plan still that it's going to be 300,000 tons when it comes on stream? Or is it --

As I said earlier, we are not talking about any specific detail until we talk to the Board about the detail first. And unfortunately for you, you're behind our Board in the pecking order. So we are going to have to stiff you on this one.

Okay. The last question I had is, I used to have an old number I used for maintenance CapEx in the $125 million range for PCA. Including -- appreciating now that you are a little bigger with the Boise element in there, what would you now estimate that a maintenance CapEx number would be?

We are still looking at that, Chris. And I'm not going to break out and parse out at this point the estimated capital. It is something that takes a while, as Mark looks at the integration of the mills and what we need to do.

It's just too soon. We've got the full number, and I cannot parse that out at this point.

But you are incorrect about the number. Our CapEx number varied through the last decade, say, from $110 million to $125 million. About half of it was maintenance. The other half was projects that improved profitability, reduced costs.

So you had the right number, but only half of that is pure maintenance capital. The other involves the capacity addition and things of that nature.

Okay, thank you. And good luck, guys.

Thank you.

Next question, please.

Steve Chercover, D.A. Davidson.

Just a couple of quickies. They are follow-on to Mr. Weintraub's questions. It is appropriate that Wallula is now in packaging. Am I correct that newsprint is still in the packaging segment as well?

That is correct.

Okay. And along that line, it appeared that Boise's packaging margins were well-below your historical margins. And that made us a little nervous.

But your margins in Q4 were in line with your generally terrific margins. Have you already fixed the system? Or is that due in part to the re-segmentation?

We'll let Tom Hassfurther.

Steve, this is Tom here. I will comment on that. We have already done a lot on the packaging side of the business, obviously starting with headcount, which we discussed earlier.

We have brought a lot of operation expertise to Boise, which has already begun to yield some results. The geographic footprint is important to us, and has allowed us to expand some customer base into the Pacific Northwest, where we did not have a footprint before.

But you know, I would say that as we talk about many acquisitions, one of the most important aspect of any acquisition -- and that includes all of PCA -- is the people. The people that make the difference at Boise, we're very pleased with them, the progress they are making.

There is a great opportunity, in my opinion, to continue to bring Boise into the PCA culture. Which gets them focused on much more hard to do value-added business, and get paid appropriately for it.

So I think there is a lot of upside in those plants. And we are very encouraged with the improvement they have made already.

So if pricing and input costs were to remain constant, we should see these low-20% EBITDA margins approach the mid-20%s, I suppose.

Given that range, I would say yes. And you have to remember, we were about -- when you look at Boise, even in terms of volume, we were about three times the size of Boise anyway.

Acquiring the Boise packaging business was about a quarter bigger than us. So you have to factor that into how you look at the margins and the average. But as Tom said, we are very happy.

Terrific. And one other quick clarification, please. I think you said embedded in the $0.20 accretion from Boise there was $0.06 associated with interest.

Can you just clarify -- was that to your benefit? Or it might have been actually $0.26 without that interest hit?

You are correct in your last statement. What we did is, we had to take on debt to acquire Boise. So we felt it was appropriate to take the entire interest expense on that new debt and, for reporting purposes this one quarter, apply that interest expense of $0.06 against the Boise's earnings on a standalone basis.

So therefore, before interest, it was $0.26 per share. After the full interest to acquire Boise, it was $0.20 per share.

And the other reason we did that is, we had given guidance to the street before the Boise acquisition, of $0.84 for PCA. So we wanted to have a valid comparison of how did we do against the $0.84 target. And so that is why we isolated that interest to Boise.

And PCA actually came in at $0.84 on that side, and Boise took the entire brunt of that interest expense. Which, we thought that was a fair way to do it. So without that interest expense, it would have been $0.06 higher at Boise.

And by extension --

(multiple speakers) going forward as we do a proper allocation -- a more normal allocation.

So by extension, do we annualize it? It could be more like $1.40 than $1.20, I suppose.

As we said earlier, we do not want to really get into that number. And in the future quarters, we will probably report only PCA earnings, and will not isolate Boise as a separate.

Okay. Well, you are one Company. Congratulations. Thank you.

Thank you. Next question, please.

John Tumazos, John Tumazos Very Independent Research.

Congratulations on all your great achievements. In terms of the DeRidder project, my question is, do you believe that the capital costs can be accurately estimated? My impression is, there is a plethora of natural gas in oil-related projects in Louisiana.

There was just a project of shale that the capital overran 60% in the first four months of studies, and they canceled it. My impression is, it is very hard to get contractors these days, because of the oil and gas boom.

You know, as we've looked at the project, we've also been meeting with the general contractors. And I am not concerned with that right now.

We currently have a contract on site working on part of the capital program, as it does DeRidder regarding the OCC plant that was, again, a critical component to the announced plans at DeRidder. Again, we are not having that problem that you discussed. So that is all I want to say about that.

Thank you.

And with that, we basically have run out of time. And so thank you for joining us today. And I look forward to talking with you at the end of the first quarter on the April call. Have a good day. Thank you.

Thank you. This concludes today's conference call. You may now disconnect.