Packaging Corp of America (PKG) 2018 Q2 法說會逐字稿

Thank you for joining Packaging Corporation of America's Second Quarter 2018 Earnings Results Conference Call. Your host today will be Mark Kowlzan, Chief Executive Officer of PCA. (Operator Instructions) I will now turn the conference call over to Mr. Kowlzan. And please proceed when you're ready.

Good morning, and thank you for participating in Packaging Corporation of America's Second Quarter 2018 Earnings Release Conference Call. I'm Mark Kowlzan, Chairman and CEO of PCA, and with me on the call today is Tom Hassfurther, Executive Vice President, who runs our packaging business; and Bob Mundy, our Chief Financial Officer.

I'll begin the call with an overview for second quarter results and then turn the call over to Tom and Bob who'll provide more details. I'll then wrap things up and then we'll be glad to take questions.

Yesterday, we reported second quarter net income of $187 million, or $1.97 per share. Second quarter net income included special items expenses of $0.11 per share, primarily for certain costs related to discontinuing paper operations associated with the previously announced conversion of the No. 3 paper machine at our Wallula, Washington mill over to linerboard. Excluding these special items, second quarter 2018 net income was $197 million, or $2.08 per share, compared to the second quarter 2017 net income of $144 million or $1.52 per share. Second quarter net sales were $1.8 billion in 2018 and $1.6 billion in 2017. Total company EBITDA for the second quarter, excluding special items, was $382 million in 2018 and $328 million in 2017.

Excluding special items, second quarter 2018 earnings per share of $2.08 was $0.56 per share above the second quarter of 2017, driven primarily by higher prices and mix of $0.47, and volumes, $0.26 in our Packaging segment, higher prices and mix in our Paper segment of $0.05, low fiber costs, $0.07, which was a combination of improved fiber usage and lower OCC prices, and a favorable tax rate of $0.16, primarily resulting from Tax Reform changes. These items were partially offset by higher operating costs, totaling $0.24 per share and converting costs, $0.02, primarily due to the inflation-related increases with labor and benefits costs, repair and material costs, environmental and other professional services, equipment and building rental costs et cetera, as well as the addition of converting costs related to our Sacramento Container acquisition.

We also had higher freight expense of $0.09, costs related to the Wallula No. 3 paper machine, conversion of $0.04, higher annual outage expenses of $0.01 as well as higher depreciation, $0.02, and other costs, $0.03.

Our results were $0.12 per share above the second quarter guidance, primarily due to higher prices and mix, and higher volumes in our Packaging and Paper segments, and lower mill operating costs. Looking at our Packaging business, EBITDA, excluding special items in the second quarter 2018 of $363 million, with sales of $1.5 billion resulted in a margin of 24.2% versus last year's EBITDA of $305 million and sales of $1.3 billion, or a 23.3% margin. We continue to run our containerboard mills full out in order to keep up with the demand and they performed extremely well during the quarter. We successfully executed scheduled maintenance outages at two of our mills and the first phase of the conversion work on the No. 3 machine at our Wallula Mill to a high performance, 100% virgin kraft linerboard machine, was executed extremely well both from a ramp-up perspective as well as an operating cost perspective. These outstanding efforts allow us to achieve all-time record containerboard shipments and supply all-time record box shipments.

We ended the quarter with containerboard inventory of about 8,000 tons above the first quarter of 2018 levels, and almost 54,000 tons above the second quarter of 2017, primarily due to the addition of the inventory needs of our Sacramento Container acquisition and our need to build inventory in certain regions of the country in order to help mitigate the higher freight and logistics issues that we continue to face.

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

Thanks, Mark. Overall, corrugated products and containerboard demand remained very strong during the quarter. As Mark indicated, in corrugated products, we achieved a new all-time record for quarterly box shipments, which were higher in total by 8.3%, with one additional work day or 6.6% per workday compared to the second quarter of 2017. Continued strong demand in both our domestic and export markets improved our outside sales volume of containerboard by over 21,000 tons versus last year's second quarter. Outside volume was over 11,000 tons below the first quarter of 2018 in order to help supply record shipments from our internal plants.

Domestic containerboard and corrugated products prices and mix together were $0.38 per share above the second quarter of 2017, and up $0.19 per share compared to the first quarter of 2018. The realization from our announced price increases was greater in this year's second quarter compared to last year as the key containerboard price index, which many contracts are tied to, occurred one month earlier than last year and our implementation was executed faster than last year as well. Export containerboard prices were up $0.09 per share compared to the second quarter of 2017 and up $0.02 per share, compared to the first quarter of 2018.

I'll now turn it back to Mark.

Thanks, Tom. Looking at the Paper segment, EBITDA, excluding special items in the second quarter, was $38 million with sales of $251 million or a 15% margin compared to second quarter 2017 EBITDA of $41 million and sales of $254 million or a 16% margin.

Our announced price increases were realized quicker than anticipated during the quarter, and volume for our cut-size and printing and converting products remained strong. The decline in EBITDA and margin versus last year was due to the lower results in our pressure-sensitive business at the Wallula Mill. Additionally, inflation on input costs and operating costs as well as higher freight logistics expenses negatively impacted EBITDA during the quarter. Excluding the results of Wallula's pressure-sensitive business that we are phasing out of, our ongoing paper business EBITDA margin was 17% for the quarter. I'm now going to turn it over to Bob.

Thanks, Mark. The primary uses of cash during the quarter included capital expenditures of $166 million. common stock dividends totaling $59 million, interest payments of $39 million and $12 million for state income tax payments. We ended the quarter with $200 million cash-on-hand. There are no changes to our 2018 estimate range for our combined federal and state cash tax rate of 15% to 16% and our book effective tax rate of 24% to 26%.

However, versus the guidance we provided back in January, our planned annual maintenance outage costs will be higher by $0.02 per share in the third quarter and lower by $0.01 per share in the fourth quarter. The full year total will now be $0.01 higher, totaling $0.61 per share for 2018. In addition, we have updated our full year 2018 estimate for capital spending to a range between $530 million to $550 million, compared to the $440 million to $460 million we provided you earlier this year. The increase is attributable to addressing profitable growth and mix enhancement opportunities at several of our box plants, the large plant expansion is going on in the Wisconsin, Pennsylvania and Virginia regions that we've mentioned previously, as well as a few high-return quick payback projects in a couple of our containerboard mills related to fiber and energy. These projects, along with our recent 25% dividend increase, fit in very well with our expected cash flow and our balanced approach towards cash allocation in order to profitably grow our company, maximize returns to our shareholders, while still maintaining the financial flexibility to act upon accretive M&A opportunities and adhere to our conservative balance sheet approach as we have in the past. I'll now turn it back to Mark.

Thank you, Bob. Looking ahead, as we move from the second into the third quarter, we anticipate continued strong demand in our Packaging segment, however, corrugated products shipments will have one less shipping day during this quarter. As Tom mentioned, although the majority of our previously announced price increases were recognized in the second quarter, we expect to implement most of the remaining portion during the third quarter. In the Paper segment, we expect to complete the implementation of our previously announced paper price increase, however volumes, which are currently on allocation, should be lower than normal during the seasonally stronger period as we manage our already tight inventory levels around the scheduled outage at our Jackson mill. Finally, we should have improved operating costs related to the No. 3 paper machine at our Wallula Mill as the ramp-up curve from the first phase of the conversion is now behind us.

We expect continued inflation in most of our operating costs, including slightly higher recycled fiber prices and incremental wage pressure with a tighter labor market. As Bob mentioned, our scheduled maintenance outage costs will be $0.02 per share higher than our original third quarter guidance, and we anticipate higher freight and logistics expenses as well as slightly higher tax rates. Considering these items, we expect third quarter earnings of $2.14 per share.

With that, we'd be happy to entertain any questions, but I must remind you that some of the statements we've made on the call constitute forward-looking statements. These statements are based on current estimates, expectations and projections of the company and involve inherent risks and uncertainties, including the direction of the economy and those identified as risk factors in our Annual Report on Form 10-K on file with the SEC. Actual results could differ materially from those expressed in these forward-looking statements. With that, Heidi, could you open up the call for questions please?

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

First question has to do with -- you mentioned some very strong, relative to what, I think, you sell, pricing benefits in the export markets, and if you could give us an idea of how many tons you generally sell there? And do you think some of the issues in China with their shortage of OCC, shortage of board is pretty now a very strong bid for export prices for pretty much anything that can be sold?

Yes, Tom why don't you go ahead and talk about that?

Chip, we don't go into great detail about what our exact sales are in the export market, but I will say that the market has remained strong, as you can see, indicated by our sales. The pricing has still remained very solid and I see that continuing. Relative to China, I mean, you know, you get back to the same thing. It's -- they've got to get fiber into their market. We've got the whole OCC thing that's going on and nobody can predict really what the future holds other than we know one thing they're going to have to have, they're going to have fiber. So that's probably going to pull from different areas, and different regions of the world and so I think that the global market still should remain very good.

Yes. Chip just keep in mind that over the years the amount of tons we moved offshore has probably been in a range of 8% to 10% of our total production year to year, and that hasn't changed that dramatically, we continue to take advantage of the legacy customer relationships we've had around the globe. We probably sell into about 36 countries still throughout the world. So that's pretty consistent.

Now that's very helpful. And looking at your current footprint and I know things can change. You mentioned that the roughly $100 million, almost $100 million increase in CapEx. Is any of that maybe timing wise attributable to the tax incentives we have, where I guess, you get the full write-off. And maybe directionally, getting back to the first part of the question, when you look at your current footprint, do you think directionally we would see the numbers stay in the same area, in other words, are there opportunities like these to the same magnitude next year? Or do you think it might back off a little bit? Again, assuming no major change in your footprint.

So first part of the question. The fact that the taxes are lower, certainly helps us, but the bigger factor is that we've got tremendous opportunity, especially on the converting side of the business. And that we're aggressively going after on the corrugated side. Well, we've recognized these opportunities. We've got the demand and so we're taking advantage of that demand opportunity and the improved tax position. And then for next year, if you think about it, a lot of the capital this year went into DeRidder activity and Wallula Mill activity. Theoretically, we don't have as much -- because it's a conversion cost, those are big one offs, so those shouldn't be there, unless obviously, something came along in the future. But the spending level will remain higher on the corrugated product side to take advantage of the demand. We should see the mill side coming down accordingly because of the big projects winding up this year. Tom you want to add to that?

Yes, I would just add that you know one thing hasn't changed at all in the way we do business and that is, we're not -- we don't just invest the capital and hope to get the business. We do it based on what our customers tell us and what demands they have and what our opportunities are that are already in place.

So this isn't a build it and they will come. So I think when you look at the future, Chip, you say what kind of opportunities do we have in the future? I would expect we'll continue to have these kind of opportunities because they are our customer group.

Yes, your next question comes from the line of Mark Connelly with Stevens.

I'm hoping you could give us a little more insight into the Wallula ramp versus your expectations. What's still to come and what happens before the engineers turn onto the next thing? And you've said that, that tonnage already has a home. As that adjustment takes place from purchased tons to internal tons, are we going to be able to see that or is that going to get caught up in this cost inflation?

Yes, the first part, talking about the ramp-up. We're extremely pleased with how the machine started up. We are essentially a few days ahead of schedule. Machine was selling very good quality product within a few hours of startup. The performance of the machine, if you think about the terms that I talk about quite frequently, and that's about time efficiency on a paper machine, the Wallula No. 3 machine quickly became, I believe, s the second best running machine in the company in the month of June with an extremely high efficiency performance.

Quality has been great, but again, we are limited in productivity because we don't have the new press section and head box. And so we'll wait for that. In October we're running on a daily run-rate basis. We're running about where we expect to on tons. We don't disclose that, but we're probably somewhere around 60% of the total estimated machine design. But the great thing is that it's -- we took all of the learnings from DeRidder and I mentioned this on a lot of prior calls. We took 3.5 year's worth of learnings at DeRidder and compressed that into this outage this past May and went ahead with everything all at one time essentially and we'll finish that in October. So far we're extremely pleased and then to the other part of your question, we have already for the first half of the year purchased outside tons of about 192,000 tons, 195,000 tons, somewhere in that area, give or take a few thousand tons. Those tons for the remaining portion of the year, we will bring the purchase tonnage rate down we're taking advantage of the productivity at our Wallula and as we said we have a home for those tons, those tons will take the place of some of the purchased tons. And so we'll definitely take advantage of Wallula production.

Just one last question. Once Wallula is fully up and running, what do you think your overall net short position in the company is going to be?

We're going to probably stay in this range of 200,000 tons of outside purchases right now. And that depends, I mean, if you assume that demand remains strong and trending and what we are seeing is in our best interest to continue buying some of these outside tons and because of the transportation benefits we see from the regions we buy them in.

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

Mark, if we just take a step further back on this China issue, you have any thoughts on the prospective changes in the way China sources fiber for paperboard packaging? And what the implications may be for the North American industry and for PCA over the next 5 or 10 years?

Yes. Everything is so dynamic in that regard. The news we see every week, I think, is quite interesting coming out of China. If you think about in the last 20, 25 years on the containerboard side, they've build about a 50-million-ton system. What that says is they have to get fiber from somewhere. What that fiber source is, if they're going to run that system. So I really don't have a good answer. It'd be pure speculation on my part, and I'd rather not get into a speculative discussion with you, so -- but to your point, they have to get fiber if they're going to run their containerboard system, or buy linerboard from essentially the U.S. market to ship linerboard to supply their box needs. Tom, you want to add to that at all?

Mark, you know, I mean, it just depends on what you read and what you hear from other, I'd say, knowledgeable people, but they tend to -- it looks like they may be trying to create more of a closed-loop system like Europe has down the road, where they are collecting their own recycled fiber that feeds back into the mills. But of course, as we all know, you got to have virgin to be able to have that system, which I think it would indicate that they're either going to -- they got to get their virgin fiber somewhere and then it's primarily, probably, going to come from the U.S., and that may be reflective of some of the investments that some of the Chinese firms are making in the United States as well. I think they're probably looking at the potential of exporting containerboard or pulp or whatever the case might be back into China. And that also could revolve around tariff issues as well, who knows, but that's the way we see it right now.

Yes, okay. The other question I had is just, you seem, Tom, to be growing the box business more rapidly than I can recall in the 20 or so years you've been a public company. Can you give us some sense of where you think you're going to be at in terms of integration level by the end of '19, with this incremental investment you're making in the box business and the high growth rates you've had?

Let me answer this, and then I'll let Tom comment. We continue to run and we just define it as fully integrated. We're moving some containerboard tons outside the domestic and export. We're buying some of those tons to net that out, but whether you call it a 95% integrated or 99% or 100%, 102%, we're running fully integrated. And I would expect that as time goes on, especially with the Wallula tons coming up about the end of the year, next year, we'll continue to be in that position, fully integrated and that's a place we feel really comfortable. It's a good place for us to be. It gives us the ability to source our containerboard in ways that we find advantageous to us. We're fully -- especially within our own containerboard system, we're able to run it full out and take advantage of our own efficiencies, and so I would expect that next year we'll be talking along the same lines. Tom you want to...

Yes, this is Tom, I'd just say, Mark, if you think about prior comments that we've made around the fact that we don't add capacity just for the sake of adding capacity, we know we have the demand for that and we said that prior to the Wallula project, we said we were at 95% plus integration and that's exactly where we'll be when Wallula is fully ramped up. So yes, it's -- and you know I just add that one of the reasons we do the outside purchases, we don't make all the grades, and so it's more advantageous for us in some cases to buy those grades on the outside as opposed to try to make those grades internally.

Yes, okay. One other thing, just related to these conversions, your cost per unit on the conversions seems to be quite a bit lower than some of the other projects we see out there, Mark, you have. Just a couple of general thoughts on that?

Yes. Every mill is unique. Every mill has certain design characteristics. And I've said this for a number of years now. Any mill can be converted to make virtually any kind of paper product or board product. It's how much you're willing to pay. And obviously, people are willing to pay more and less in some cases. We happen to be very good at understanding how to apply minimum effective capital and get the most return for that dollar. Part of what we do and we've done this for decades is somewhat of a phased approach and so we go in with 1 or 2 phases at a minimum and make sure we don't overspend. And then when the first phase is done, it's easier to look at what opportunities did you leave on the table. And that's part of our engineering excellence and operating prowess. So -- but again I think -- it goes back to every mill is unique and every mill has its strengths and weaknesses. So that's pretty much it.

Yes. Now the next question is from the line of George Staphos with Bank of America Merrill Lynch.

I wanted to start on the investments that you're making in converting, Tom and Mark, and recognizing you are not going to get into much detail on a live mic presentation. Can you give us a little bit more detail in terms of what changes you see in end markets? How they're evolving over time? Whether it's more growth in one versus another or changes within one, say like e-commerce that may be framing the investments that you're making in Wisconsin or Pennsylvania. And any other color around those areas that would be helpful to start.

George this is Tom. I'll just give you a general answer to this and then if you really want to get into more specifics, you can follow-up. But our investments in the converting area are around a couple of things. One is that I told you it's based primarily on customer demand and what a customer wants. But also when we're making these investments, obviously, we're looking at the cost side of the equation as well. We're looking at better efficiencies. We're looking at lowering our labor costs, as an example, and more automation, those sorts of things. Those are really the primary drivers that we're looking at in terms of these investments. The end markets that are evolving, I think what you're seeing right now is in, we'll see the GDP number tomorrow, I believe, for the past quarter, but it's projected to be up around 4%. And in order to get those kind of GDP numbers, obviously, we've had a lot of sectors have to be growing and a lot of things have to be happening in those sectors. I think we're fortunate because we're aligned with so many thousands of customers and so many different businesses that we're already entrenched there and we're able to react quickly to whatever those changes are and what those demands are that are driven in those particular markets. So and then subsequently we're making those capital investments around those particular needs that our customers have.

Okay. Tom, and then going from bigger picture maybe to some more nut and bolt types of questions and I'll turn it over. In terms of the variance and the change in EBITDA and packaging, when I look at second quarter '18 versus '17 and looking at the year-on-year that occurred in the improvement of performance there. It works out to roughly about $58 a ton in the second quarter of this year versus $39 a ton in the second quarter of '17. And both of these quarters, obviously, had a price increase at the beginning of the quarter. Is all of that change and improvement explained by the timing difference in pricing or are there other factors at work? That's question number one. The other question. When we think about third quarter of '18 versus third quarter of '17 and the sequential trends that you're seeing in inflation, overall are you seeing more inflationary pickups this year versus last year? And if you could put some numbers or some source on that, that would be great.

Yes, let me start out with this and then Bob can add to this or Tom can add. To your first question it's primarily timing, and then the second question, we called out in January and reminded everyone in April that factors such as energy, chemicals and freight were significant this year and that's what we've seen. And so the logistics issues not just the cost of rail or cost of truck but again just the availability and what that does to certain lanes and certain regions, but Bob or Tom you want to add to that?

Yes, well obviously, freight, George, as Mark mentioned, in addition to some of the chemicals and whatnot, labor and fringes in the tight labor market, that's a big change compared to the same period last year. As well as just inflation and all those things that don't get talked about a lot, like repairs and materials and supplies and all these outside services and contractors and people who are service providers to our -- to your company, they're having to pay more and they're charging you more. So all that is more than we've seen in prior periods for sure.

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

The first one centers around the Wallula conversion and sort of looking at the task ahead of you in October, can you highlight for us maybe some of the key risks that you see with putting in the head box and the press section? Is it more risky, less risky than what you've already done? Either operationally or from the cost side?

Yes. The risks are the same. It comes down to 2 factors that the vendor that has supplied you with this equipment has done a proper job in building this equipment to proper specifications. And then it comes down to us installing this in a precision manner and yet we've proven we're very good at that. So I'm saying that the risks are no different than what we've done over the years.

We just have to execute well and do it very efficiently. So quite frankly, the work we just completed this spring was more complex and more demanding than what we have coming up in October. In October we have discrete work going on. It's a head box change out. It's press section component change out, so it's more concentrated with that smaller region compared to what we've just gone through this spring. So I'm, again, I'm not worried about the risk.

Okay. And then, Tom, you normally try to give us a sense for how things are trending in the corrugated business thus far in the third quarter. Can you do that for us?

Yes, through 14 days of July, we're up about 5.5%. July is an unusual month usually every year, because it's tends to be just a little bit slower. So it's trending that way, it will continue to ramp up through the month, so we see demand still very strong. And we had a little unusual 4th of July in the middle of the week, which really caused some changes with some of our customers. But again, that's why it'll ramp up, it'll continue to ramp up through the month. So all in all, it's still very strong.

From the line of Debbie Jones with Deutsche Bank.

I just wanted to ask about the commentary you had around inventory management related to your Jackson mill. Is that something just related to the project there in the quarter or should we expect anything to move through into Q4? And could you just give us a sense of how material it is in the quarter for guidance?

Yes, let me answer the first part of that. Obviously, we've been running under an allocated mode in the paper business, so with the fact that you have a shutdown, we only have 2 mills in the paper business so you're taking half of your paper business down for its annual shutdown. And so we are in allocations to many of our customers and we've already depleted inventories down to certain levels that we have to manage. And so it's just a case of -- business is strong. We have a scheduled outage and we will get through that. And so in the fourth quarter, both mills will run theoretically, if demand continues to run in the range it's been at, you continue to be running in an allocated mode, and so it's just -- we'll update you in October on where we are with inventories, but certainly the outage does change some of the metrics on what you're able to do and not do in terms of supplying customers. So we plan that for the year, and that's how it works out.

That's helpful. And my second question, thank you for the disclosure on the updated capital allocation or CapEx, specifically. I'm just curious if we should read into this at all that the attractiveness of acquiring bolt-on acquisitions, specifically, converting assets is something that's less desirable for you at this point? Really just looking at multiples for converting assets currently or is there something else that we should read through from this?

No, no, not at all, Debbie. If the opportunities come along that present themselves in terms of acquisition opportunities, we will fully take advantage of that. In the meantime, as Tom mentioned, we're fully taking advantage of growth with customer demand and taking advantage of that within the regions and within certain plants and so we're going to take advantage of both sides of the equation.

Your next question is from the line of Mark Weintraub with Buckingham Research.

First just on the corrugated pricing side. You'd mentioned that it was better than normal, I believe, in terms of the way the increase has been put through. But with that -- just an observation on the pace of which the price increase is being put through, or does that also characterize the degree of pass-through you feel you're going to be able to get? And if there's any color you can provide as to whether or not you might get more than full board pass-through into boxes at this juncture?

Yes, Mark, what you have to understand, demand has been obviously very strong, and the first part of your question was truly just a timing related factor that the index picked up the pricing, we were able to execute on that and Tom's group did a great job executing on that. Tom you want to add a little more to that?

Yes, I think, probably one of the best examples would be this, in regards to timing. So if you have contracts that go up on a quarterly basis, and you have a price increase as we did this year, in March -- announced in March, you can capture that in the second quarter. Last year price increase was RISI in April, therefore, that didn't -- that catch-up wasn't until the third quarter. So that's probably the best example, as an example of timing that you have, Mark, and you know, relative to the rest of the price increase, we'll have to just talk about that at a future date, you'll see that in our earnings.

Okay. But when you'd mentioned that the majority was recognized in the quarter, I assume that's a reference to by quarter end as opposed to the average price during the quarter? Is that fair?

That's fair.

And then lastly. I guess I'm just trying to understand the industry data the last couple months and not yours. Your performance obviously was very, very strong on the volume side. But the industry data has been a little bit softer the last couple of months, even while, as you referenced GDP is very -- is likely going to be coming in very strong. Any thoughts as to what might be happening?

It just depends on where you are, it depends on the business. I mean, you know, we see a lot of strength in some areas and we see a little more softness in other areas. We talk to a lot of our customers who talk about reducing inventories and doing other things like that, that can create some swings over a 30 or 60day period. If I look across our almost 20,000 customers, I can tell you that for the most part, they are reporting strong demand and you'll see some seasonal swings in terms of agriculture, some other things, the graphics business has -- is seasonal. So if you just look in the last few months, they would tend to be -- they sometimes tend to be the softer months anyway in any given year.

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

Just 2 questions. One back to the CapEx issue for 1 second, sorry to harp on this, but it sounds like your CapEx will be up about $200 million '18 versus '17, obviously some of that's the Wallula conversion, but -- and I think someone asked you this earlier, but can you give us some sense as to what you think a normalized number is? Or a maintenance number is, such that we have some idea of the degree to which CapEx is likely to drop off in '19 versus '18?

Well again we have been talking about the discrete opportunities. If you think about the big buckets of capital, you had the DeRidder spend, you had the Wallula project spend and then you had some of the converting side big projects, a new plant we're building up in Wisconsin, and then some of the big regional reconfiguration projects that are very discrete one-off type opportunities. And then as we go forward, you will normalize in terms of ratios of maintenance to profit enhancing capital opportunities, and so over the long-term, the ratio of maintenance CapEx to profit improvements should remain somewhere in the normal range we've seen historically. But for the time being, while we've got this, the demand has allowed us to take advantage of this growth opportunity. We will apply capital and continue to do that. Bob you want to add to that?

Yes. I'll say, Adam, the delta you've mentioned between '17 and '18 and your question around '19, I'd say, because of the investments on the box plant side of the business with the mill side coming down from the DeRidder and Wallula spending we had this year, I'd say the delta for '18, '19 would be about half of what you saw for '17 to '18 right now, would be a good ballpark.

Perfect. And then just housekeeping. Just how much of the box and White paper price increases did you realize in Q2 and how much do you have remaining in 3Q or second half?

We're not going to get into the specific on that. We've got obviously some contractual type activities, some of that kicked in on July 1. You'll have a little bit of that, kicks in later in the quarter, and then it's the lion's share is in the quarter and just wrapping up a few odds and ends in terms of customers. And then the paper is the same thing. We've got -- the bulk of that was picked up in the second quarter. We've got some contractual that kicked in as of the 1st of July and then we've got a few others rolling in as we speak, so, but I'm not going to get into the details on that.

Your next question is from the line of Scott Gaffner with Barclays.

Mark, just couple of quick questions on input cost. You've mentioned higher recycled fiber going into 3Q versus 2Q. Can you talk a little bit more detailed about that and then also what are you seeing around virgin fiber? Are you seeing increased inflationary rates on virgin fiber, or still sort of a couple of percent a year inflationary pressure on virgin fiber?

Yes, regarding recycled fiber, 2 components of that, the OCC that we use in the containerboard side and then some of the sorted office waste, sorted office paper and sorted white product that we use in the paper mill side of the business. We have seen, within regions, OCC has moved up, DLK and OCC moved up in fewer of the regions where there is very strong demand, sorted white ledger and some of the recycled, white grades stayed up and moved up, so that continues to be on the high side. Bob?

Yes, I'd say, Scott, just relative to Wallula and then you know, as we bring more of that capacity on as we've talked about when we announced that project, fiber in that part of the country is higher than it is for the company on average. So as that becomes more, we purchase more of that to supply Wallula, that would move up the average on the virgin fiber side of things so relatively what you've seen in the past.

Within the legacy side of the business, we haven't seen much change. Again, it's typically weather-related phenomena within the regions and everything is pretty flat quarter-to-quarter, year-over-year right now.

Okay. And when you look at the CapEx that you're spending, obviously, recycled fiber, input cost coming down in total, even if they're going to go back up in the second half of the year some. Are you looking at potentially investing in some of your mills to up their capacity or the ability to take on some of this recycled or mixed waste paper as part of your production process?

Not currently.

Okay. One last one for me. Just around the increases in inventory. As you bring these new facilities up online, like Wallula. Is there some view to pulling inventories back down because you'll be in a better situation from a location perspective around freight cost?

Well theoretically that's what you want to do and so we'll continue to monitor the logistics freight issues on daily, weekly, monthly basis and see what we're capable of doing as Wallula comes on to full capability at the end of the year. But theoretically that's where we want to be.

I'd say, one other thing,Scott, to your question, about our mills and using recycled, it's about what our -- who we sell our products to. All fiber is not equal, that's why when you look at the capacity coming on if it's recycled capacity versus virgin, it's a big difference, because it serves different customers and we and the products that we sell are primarily virgin based and that's a big difference, because all fiber is not the same. You can't just start running it through your mill system because the price is low. You don't end up where you want to be from servicing the customers.

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

I want to take the opposite tack of that thing on the inventory levels. If freight is increasingly expensive and perhaps a bottleneck does it make sense to hold more inventory at some of your box plants, simply to reduce that cost?

Well again, from a real-time point of view, we will do whatever makes sense, whether it's on a weekly, a monthly or a quarterly basis to understand how we take advantage of the mill production capability and the box plant need. And so the fact that we have Wallula coming on now really helps us fill out our U.S. regional requirements on how we have to supply these box plants. But it's something that you are monitoring again daily, weekly, monthly and we'll have a much better capability on how that works out. But again, a lot of work. Everything depends on transportation availability and transportation cost.

Your next question comes from the line of Brian Maguire with Goldman Sachs.

Just wanted to ask on the paper side of the business. It seems a little a bit stronger than we were expecting in the quarter and you mentioned kind of being on allocation. Just wondered if you saw some pull forward in volumes ahead of some of the announced price increases and hoping you can also just comment on where those price increases stand at the moment if you got any of it in the quarter or how much you expect to get in 3Q?

Yes, on the first part of your question, we didn't see any pull forward. It's just that, all year it's been a very robust type market for cut size and converting grades, offset printing and the envelope type grade. So we're living through a very, very robust market. We're running full out and so it's that simple. And regarding pricing we're not going to comment on pricing any more than we already have in terms of what we captured in the second quarter and then the few remaining contractual obligations that are rolling through the third quarter. Bob you want to add anything?

No. I think that covers it.

Yes, I just want to follow-up on, with respect to the $100 million of incremental CapEx, would it be reasonable to assume something around a 20% return that you'd be targeting on that investment and in what year, what kind of cadence of realizing that should we kind of expect?

Well, again, we generally are more ambitious than 20%, and so I'm not going to qualify that, except to say that the projects that we've identified are right in line with our historical return expectations, and so we're just going to -- we'll answer it that way.

Your next question comes from the line of Gail Glazerman with Roe Research -- my apologies, Roe Equity Research.

I just wanted to dig into demand a little bit further. When you speak to your customers, are you hearing any concerns or any thoughts that they might adjust their business given all the trade issues that have been roiling for the last couple of months?

Gail, this is Tom. We hear a little bit, obviously, they are concerned to some extent, but it hasn't impacted demands as of this point in time.

Okay. And then when you look at uncoated freesheet and you're on allocation, you kind of seem to expect that to continue for the foreseeable future. I'm just wondering are you -- any sense that customers are looking -- starting to look abroad again and that imports might start to creep up?

Well publications have called out that there is some incremental tonnage coming in from offshore, it's nothing significant but you would expect some of that. But again, in total, the imports are a small percentage of the total demand in the United States, so.

All right. If I could sneak in just one last one. Trade publications have talked about Chinese producers looking to process wastepaper outside of China and then import it to China. I'm just wondering do you have any perspective on whether that makes any sense cost wise like whether there is -- there's a scenario that you can see that would make sense to create recycled pulp sheets in Southeast Asia and then ship it to China?

Gail, you got to talk to them. I'd be just offering speculation. They are the ones running their own models and trying to understand how they satisfy their own needs.

(Operator Instructions) And we have a follow-up from Chip Dillon with Vertical Research.

This morning we saw Cascades indicate that they're going to convert a mill in Virginia. At least, from what I kept hearing from folks like you and others in the industry say is simply that if you can convert anything, you said on the call, if you put the money into it. What I'm asking is, it seems like the only announcements we've seen and it seems like 7 of the top 8 have either said they're not doing something like WestRock or where they've actually made announcements for the next 4 years. The only ones involving $100 million or more dollars of real money are the top 8 integrated or within that top 8 integrated players. And question is, does the level of vertical integration in the industry make it just unwise to do a project without having a box plant system? Or just say differently, if you decided to enter the U.S. industry today would you need to also build a whole network of box plants, at least as you look at the economics?

Well, again, looking at 2 parts of that question. Cascades is an integrated company and so they already have demand as you'd expect an integrated company would have. That would seem to be the logic of why they would be looking at capacity. And so it's not as if somebody is just thinking about building a mini mill and then trying to understand how they go to market. In this case, they're an integrated, North American participant. And that has converting capacity and converting demand. Tom do you want to answer?

Chip, I would just say that -- my opinion is that you are absolutely correct when you say you have to have some sort of a level of vertical integration in order to take on a project like this, and of course, you know, when you're talking about the level of integration in the total industry, it's incredibly high and so if we modeled a mill that we said we were going to do with no customers, it would appear that we would have to sell from coast-to-coast and we would have to get a significant market share just to be able to continue to operate that mill. So, I think you're right on in terms of what people would have to do in order to really get these conversions in place. And as Mark said regarding Cascades, they can export back into Canada, they can do a whole lot of different things. But again, that's -- you're -- very few have been virgin and most all of these have been 100% recycled, which as Bob alluded to again, that's -- you narrow your market when you have -- when you're producing just that grade.

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

Just following up on Scott's earlier question on CapEx. With the high-return projects on the mill side, is it accurate to say those are purely cost-reduction projects and that you're not debottlenecking any capacity, either virgin or recycled? And does any of the work on the mill side carry through to maybe first half of 2019?

Yes, there are 2 discrete projects that we move forward with funding on. One is a high-return energy project, and that's at the Filer City mill, and the other is a fiber related project, it's a virgin woodchip related capacity opportunity at the Counce mill, but it's a high-return investment at Counce for woodyard enhancement. Those are 2 good examples of high return cost.

Okay, okay. That's helpful. And then on the converting side, Tom, you reminded us you don't add capacity in anticipation of demand or waiting for demand to come. Is it fair to say that you're sold out or running on allocation and maybe in some areas of your corrugated business?

Well I never like to use the word "sold out" or anything like that because we do have other plants that can pick up the slack and with literally just under 100 plants around the country. We work very hard to service our customers totally, but yes, you could say that in these particular cases, demand is outstripping our ability to supply in some particular markets with our current customer base. So therefore, that's why we're doing these things that we're currently doing in the box plants.

Mr. Kowlzan there are no more questions. Do you have any closing remarks?

Yes, Heidi, thanks a lot. Everybody, I appreciate you joining us on the call and look forward to having you join us on the third quarter call in October. Have a good day, everybody. Thanks.

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