Packaging Corp of America (PKG) 2018 Q3 法說會逐字稿

Thank you for joining Packaging Corporation of America's Third 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 over to Mr. Kowlzan, and please proceed when you're ready.

Good morning, and thank you for participating in Packaging Corporation of America's third 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 the packaging business; and Bob Mundy, our Chief Financial Officer.

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

Yesterday, we reported third quarter net income of $207 million or $2.18 per share. Third quarter net income includes special items expenses of $0.05 per share, primarily for certain cost related to discontinuing paper operations associated with the previously announced conversion of the No. 3 machine at our Wallula, Washington Mill to linerboard.

Excluding special items, third quarter 2018 net income was $211 million or $2.23 per share compared to third quarter of 2017 net income of $159 million or $1.68 per share.

Third quarter net sales were $1.8 billion in 2018 and $1.6 billion in 2017.

Total company EBITDA for the third quarter, excluding special items, was $406 million in 2018 and $364 million in 2017.

Excluding special items, third quarter 2018 earnings per share of $2.23 was $0.55 per share above the third quarter of 2017, driven primarily by higher prices and mix of $0.38, and volumes, $0.37 in the Packaging segment, higher prices and mix in our Paper segment of $0.13. Lower fiber costs, $0.04, which was a combination of improved fiber usage and lower OCC prices, and a favorable tax rate of $0.26, primarily resulting from Tax Reform changes.

These items were partially offset by lower volumes in our Paper segment of $0.14, higher operating costs totaling $0.28 per share and converting costs, $0.02. These higher cost were primarily due to inflation-related increases with labor and benefits expenses, repair and material costs, environmental and other professional service costs, equipment and building rental costs as well as the addition of converting costs related to our Sacramento Container acquisition.

We also had higher freight and logistics expenses of $0.08 per share, annual outage expenses of $0.05, as well as higher depreciation of $0.03, and other costs, $0.03 per share.

Our results were $0.09 above the third quarter guidance of $2.14 per share, primarily due to higher prices and mix in our Packaging and Paper segments, and higher volumes in our Paper segment.

Looking at our packaging business, EBITDA, excluding special items in the third quarter of 2018 of $378 million with sales of $1.5 billion resulted in a margin of 25% versus last year's EBITDA of $343 million and sales of $1.3 billion, or a 25% margin.

We achieved all-time record containerboard shipments and record third quarter box shipments. Our containerboard mills operated very well, and we successfully executed the scheduled maintenance outage at the Valdosta mill. The newly converted No. 3 machine at our Wallula mill to high performance, 100% virgin kraft linerboard continued to meet or exceed expectations throughout the quarter.

This now puts us in a position to begin optimizing our entire containerboard system platform and improve our manufacturing and freight costs going forward. Also just as importantly, this allows us to respond quickly and efficiently to future growth and service our customers needs in a timely manner.

We ended the quarter with containerboard inventories of about 50,000 tons above the second quarter of 2018 levels, and almost 84,000 tons above the third quarter of 2017, primarily due to the addition of the inventory needs of our Sacramento Container acquisition, along with our need to build inventory in certain regions of the country to help mitigate the higher freight and logistics issues that we continue to face.

In addition, higher inventory levels were required to prepare for the fourth quarter extended outage at the Wallula mill to complete the containerboard conversion work that we've spoken about previously, as well as preparing for the first quarter of 2019 scheduled maintenance outages at our 2 largest containerboard mills that will significantly reduce our production early next year.

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

Thanks, Mark. As Mark indicated, we achieved a new all-time record for containerboard shipments with continued strong demand in our box plants as well as our domestic and export containerboard markets. We also had record third quarter corrugated product shipments, which were up 8.2% in total with 1 additional workday and shipments per day of 6.5% over last year's third quarter.

Our outside sales volume of containerboard was 20,000 tons above last year's third quarter, and 35,000 tons higher than the second quarter of 2018.

We continued to implement our Packaging segment price increases very well during the quarter. Domestic containerboard and corrugated products prices and mix together were $0.31 per share above the third quarter of 2017, and up $0.19 per share compared to the second quarter of 2018.

Export containerboard prices were up $0.07 per share compared to the third quarter of 2017, and flat compared to the second quarter of 2018.

We expect corrugated products demand to remain strong as we move into the fourth quarter, although, we expect shipments to be lower compared to the third quarter with 2 less shipping days.

Also, beginning in the fourth quarter, year-over-year volume comparisons will now include Sacramento Container in both periods. Our corrugated products mix will be seasonally less rich in the fourth quarter versus the third quarter as the produce business in the Pacific Northwest, as well as the display and high-end graphics business for the holiday period normally falls off during the quarter.

I'll now turn it back to Mark.

Thanks, Tom. Looking at the Paper segment, EBITDA, excluding special items in the third quarter was $44 million with sales of $254 million or 17% margin compared to the third quarter of 2017's EBITDA of $38 million, and sales of $271 million or 14% margin.

Strong market conditions continued during the quarter, and our prices and mix were slightly better than we anticipated. Volume for our cut size and printing and converting products continued to be on allocation as we managed our already tight inventory levels along the scheduled outage at the Jackson mill.

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

Thanks, Mark. We had very good free cash flow generation in the third quarter with cash provided by operations of $301 million. The primary uses of cash during the quarter included capital expenditures of $130 million, common stock dividends, which reflect our recent 25% dividend increase totaled $75 million, $51 million for federal and state income tax payments, pension payments of $18 million, and interest payments of $7 million.

We ended the quarter with $294 million of cash on hand.

The 2018 tax estimate ranges continue to be 14% to 16% for our federal and state cash tax rate and 24% to 26% for our book effective tax rate.

I'll now turn it back over to Mark.

Thanks, Bob. Looking ahead to the fourth quarter, we expect Packaging segment demand to remain strong, although, as Tom mentioned, we will have 2 less shipping days. And we expect a seasonally less rich mix in corrugated products compared to the third quarter.

And in our Paper segment, we will continue implementing our recently announced price increases but expect a seasonally less rich mix. Although paper volumes will be seasonally lower, we expect demand to remain strong as we manage our already tight inventory levels. With seasonally colder weather, fuel costs are expected to be higher across the company and we expect continued inflation in most of our operating and converting costs, including incremental wage pressure with the tighter labor market. We'll also have an extended outage at our Wallula mill to complete the remaining work related to the conversion of the No. 3 machine from paper to linerboard.

Considering these items, we expect fourth quarter earnings of $2.15 per share.

And with that, we'd be happy to entertain any questions. But I must remind you that some of the statements we've made on the call constitute forward-looking statements. The statements were based on current estimates, expectations and projections of the company and involve inherent risks and uncertainties, including the direction of the economy and those identified as risk factors in the annual report on Form 10-K and on file with the SEC. Actual results could differ materially from those expressed in the forward-looking statements.

With that, Heidi, I'd like to open up the call to questions, please?

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

Mark, we saw a really big jump in exports in the third quarter according to the industry data. I know September was the biggest month we ever saw. And it'd be one thing if there was obvious softness in the economy but we saw the industry really stretch with these operating rates to, I guess, supply that. I didn't know if you could explain just what made the export market so appealing, -- at least that's what apparently was the case given the strong numbers?

Well, I think, in our case, we typically see when we come out of the first part of the year because of the annual outages we're limited on how much ability we had to service our long-term legacy customers around the world. And so in that case, as we've done in the past coming into the third quarter, the mills are running and the shutdowns are behind us. And so we're able to now pick up and service the export order. So that was certainly the case for us. We had the ability. The mills were running well. And we had the demand from the legacy customers. Tom, do you want to add to that?

I would just add that at least in -- from PCA's point of view, I mean, we're a little more back-loaded in the year for our exports. But in addition, demand was very good worldwide.

Okay. That's helpful. And just the second question. A lot of us on this call pretend to know what to do in the market. Your experience has been terrific. Noting that you last bought back a lot of stock in late '15 and '16. I think, we just calculated an average price of $57. And so for that, I would congratulate you for not buying back the stock earlier this year like probably everyone was telling you to. With the situation having changed a lot, is that something that you're taking a deeper look at? I mean, you could consider that your after-tax cost of the dividend is probably now more than the after-tax cost of borrowing money?

I think, what we've always said publicly is that we will always be opportunistic. That's been the key word we've always used in our decision-making on how we decide and when to buyback stock. Also, any discussion is a board level discussion. And so all things being considered, we like to remain in a position with a lot of flexibility, strong balance sheet, cash on hand and just being able to take advantage of whatever opportunity presents itself, whether it's share buyback, dividend increases or acquisitions or capital opportunity. So I guess that being said, we certainly have opportunities but, again, that's a matter for the board level.

From the line of Mark Connelly with Stephens.

This is Ashish Gupta for Mark. Based on what we calculated in terms of your cost per ton at containerboard, we're just kind of wondering how you were able to get the cost per ton down? It was very impressive performance, just surprising, given the inflation we're seeing. Is there something structural in the mills? Is there more tailwinds that we can expect in the future? Just if you could give us more color on that, that would be great.

No, I think, it's a testament to the high-efficiency operations. The focus we have day-to-day. We've said this for years and years that the daily focus in the mills is on operating cost and operating efficiency. Box plants, it's all about profitable volume, and we watch our cost, obviously. But with the mills, 7 days a week, 24 hours a day, it's about high-efficiency, low-cost operation. So we have a very large team of engineers full-time working in the mills in a large corporate technology organization that's dedicated to that very effort.

Great. And if you just allow me one more. Can you give us an idea of what the split is between commodity and specialty paper? It just seemed like there was a much higher price realization in the quarter in white paper? I just wasn't sure if that was -- , it had to do with the premium versus commodity split?

I don't have that number on the top of my head. That's something that we don't pay particular attention to in terms of that level. We can always get that -- get back with you on that one.

From the line of Mark Wilde with BMO Capital Markets.

I wondered is it possible to get some sense of sort of same-store box volumes if we didn't have Sacramento in the mix?

Tom?

Yes, yes. Mark, I think the best indicator is probably where we are so far this month because we're -- so I'll just share those numbers with you. We're averaging a little over 2.5% so far this month and that's everything baked in. So you got a complete apples-to-apples comparison there.

Okay. That's helpful. And just kind of following on that, it seems like given the growth in your box volumes over the last couple of years, and assuming some kind of momentum into next year, you're going to actually have offset all of that Wallula capacity by sometime late next year, early '20, and you'll be pretty close to fully integrated. So I just -- I wonder what kind of options you might be considering if we look out a couple of years here in terms of containerboard supply?

Well, Mark, we've said this before. We always have opportunities, whether it's internal how we look at the assets we operate. But we certainly have the opportunities into and through next year to fully take advantage of the Wallula capacity. We certainly have to finish the work we're doing right now. The machine is scheduled to start back up early next week from it's planned outage this month. And so if we've done our homework and executed well, we should be in a great position to take advantage of the productivity opportunities at Wallula. That being said, I think, you're right. If you assumed that growth continues on this trajectory, we'd be looking out in the future years at various alternatives. And, that's -- again, we said that, it would include further conversions, asset acquisitions in terms of a one-off mill opportunities. So we've got a wholesale opportunities, but I'm certainly not concerned about that at this point.

Okay. All right. Just one quick one. Is there any -- is there a chance to get a view on 2019 CapEx, Bob Mundy?

No, Mark, we'll talk about that on the next call as we normally do.

From the line of George Staphos with Bank of America.

I wanted to check into the price mix result in the third quarter relative to your guidance. If you could talk a little bit to the extent possible about what materialized better than you were initially guiding to in the quarter? And I had a couple of follow-ons.

Well, there were a couple of things, you know George, on the paper side, we were -- we had some favorability there. And, of course, on the box side, that was a little bit improved versus what we were anticipating. It just goes back to always trying to maximize the benefit of the products that we have available and the brands that we can offer.

Bob, If I could, is it-- was it the mix is a little bit richer than you expected? Or anything else that you could share, again, realizing it's not something you initially want to advertise live mic, but anything else you could share into what realized a little bit more favorably than you'd expected?

No, it was certainly the mix, George. But it is also just very good execution on the box plant side, on the corrugated side of things that was certainly a piece of that as well.

Okay. I appreciate the commentary there. Mark, with Wallula, what are kind of the key milestones over the quarter to the extent that we can check in? Or what we should be asking about on the next call? What would they be in terms of the last bit of work being done successfully?

Well, just to remind everybody, during the May outage, we converted the machine from coated paper machine to a virgin kraft linerboard machine. But we are running in a slowbacked capacity, while we were waiting on our final permits to be issued for air permits. And so running to that permit level, as we called out, we're running in that 700 to 800 tons a day range. Now we have the permit in hand, and so it allows us to run the productivity up to the planned 1,150 ton a day, or about 400,000 tons a year annual run rate. Now that's assuming, as I said, a few minutes ago that, that we've done our homework well and the folks out there are executing well. This work we're doing currently involves the new shoe press installation; rebuilding of the forming unit, adding the final dryer section that we were waiting on, and then pulp mill changes. So we have a host of different things that we're doing. But I've got confidence in the group to execute. We should be starting up next week. And so I think, in January, you should be hearing us talk about how we came up and ran on the July call, like I mentioned that, when we started up on the first week of June, within the first 2 hours, we were selling premium high-performance virgin kraft linerboard within 2 hours. And so that's going to be the key is making sure we come up and run as planned. And then basically supply our needs as we go through the fourth quarter and prepare for next year. And I said this on the call a little while ago too that this gives us the opportunity to rebalance out our supply system in terms of how we're supplying linerboard throughout North America through our mill system and, of course, take advantage of that.

Last one for me and I'll turn it over. Obviously, conversions and increase in capacity in North America have been very topical in the trade press. And certainly everyone has a view on that and it's effect for the market. Has your view on the implications of this capacity changed at all? Why or why not? What would you sort of remind us about as we're trying to analyze the industry relative to this capacity and the implication again for the future?

George, if you look at it from our perspective, if you go back and when we announced Wallula almost 2 years ago, that was purely based on our internal demand as we saw our needs growing through the future period of time. The majority of the other announcements, if you go back and look again, over this period of time and through this year, the majority of these announcements are based on these integrated players internal demand for this product. And so there is very little that has been talked about that, would flow to the very limited outside open market. Tom, do you want to add to that?

Yes, I think, Mark, hit the key point there, George. And that is that, as you mentioned, given the demand that we have right now in the industry and you just look at the run rates, we're going to need additional capacity in this market. Now that said, most of the additions that have been either executed or on the drawing board are integrated suppliers. And they've got a home for those tons, obviously. When we went through this before, not that long ago in the industry, there was a lot of consternation about it. And it turned out that the industry did absorb this tonnage, and that most of the suppliers, certainly ourselves, I mean, we run to demand and that's what we'll continue to do. But if you look at a number of other things that are going on as well, we've talked in the last couple of calls about the situation in China, the fact that they absolutely need fiber. I think the 9 dragons move into the United States as well as a couple of others demonstrates that in spades. They're talking about shipping pulp back. They're talking about shipping a limited amount of containerboard back with what they can convert. It's expensive to do. But given the situation over there, they need fiber. And so that's all going over to China as we see it. Mark also mentioned the limited open market that we have here. I mean, this -- the dynamics in this industry has changed dramatically as we've talked about and said that integrated producers are generally somewhere around 90% of the demand. And so you've got a very, very limited open market to sell to. If somebody doesn't have a customer, they're probably going to have to look overseas for that. In addition, some of the other things that we've seen announced may be the one-offs tend to be recycled. Or maybe it's a virgin but it's not the best virgin, it's very high cost. And a lot of these conversions are not in very good wood baskets. So -- and they are also limited to lightweights and super lightweights, which again is a limited market. So overall, I think, that we don't have tremendous concerns about this because we know what the demand is on the conversion side and that tells us -- I mean, on the box side I'm talking about and that translates into some need for new capacity.

From the line of Anthony Pettinari with Citi.

Just one question. It didn't seem like you had any direct impacts from the hurricanes. I was just wondering if there were any kind of secondary impacts either on demand or maybe higher fiber costs or supply chain cost in the Southeast? And then just generally, you talked about continued inflation in most of your categories into Q4. I was wondering if you could talk specifically about freight, are you seeing any maybe just stabilization year-over-year in terms of freight rates? Any kind of color you could give there?

Yes. The first part of the question regarding the hurricane impact, we saw a minimal impact from Hurricane Florence in the Carolina region. And basically, it was around transportation impacts for that, a couple of weeks just slowing things down on finished goods outflow and raw material inflow. Again, some of our customers having the impact. Tom, do you want to talk a little bit more about that because otherwise the latest hurricane that went through the Panhandle had no impact on us.

Yes, we didn't have any impact on our facilities but certainly some of our customers did have some impact. And So that -- that did -- that will on a short-term impact some of the demand on those particular markets and also a little impact in the ag area as well.

And then regarding inflation, Bob, why don't you?

Yes. So just a couple of on storms, not so much hurricanes. Anthony. But we did have a sort of an odd storm that came through one of our large modern Chicago container plants. And it hit us for a couple of pennies in our third quarter results with the damage and so forth that occurred there, but not hurricanes but it was certainly storm related.

That was a July storm, Anthony.

And then, on freight, freight is we talked about our inventory, managing our inventories, and doing what we had to do to help mitigate some of those freight logistics cost. I think that's what you're -- we're seeing is that, that -- we held that in a good place during the third quarter and we anticipate doing that, again, in the fourth quarter. Other than that, there were other operating cost and what have you, including the labor and fringes and so forth. We still see that again creeping up again as we move into the fourth quarter.

Okay. That's very helpful. And just then following up on the last question. I guess industry exports have gone up in the last couple of months. Your outside sales of paper are up. Do you export meaningful amounts of board to China? And then, with customers or traders in China, are you seeing an increase in demand given the very strict import restrictions that they've put in place on recycled fiber?

We've never had -- well, let me start that, we export to about 35 different countries all around the world, very small amounts relatively speaking. China happens to be one of those outlets that we have, again, some very good legacy customers. And so we did supply a very minimal amount of extra tons during this quarter. But it was a minimal amount of incremental tons that flowed to China. But we did see some extra demand to the legacy customers.

From the line of Debbie Jones with Deutsche Bank.

My first question is, I wanted to ask about volumes kind of through the year. If you've seen any like notable trends or differences? And what do you think is really driving the growth for PKG ahead of the market beyond Sacramento Container going forward?

Let me -- I'll start and then I'll turn it over to Tom. I think, again, in general, what you see is that we have a very strong manufacturing activity nationwide. That has continued to show a positive impact across many different sectors. And then, just the ag business in various regions. Tom, do you want to give a little more details with that?

Yes. Debbie, I would say that our volumes have continued to track up throughout the year. We're bullish on that. I would say that the only thing that interrupts that at all at any point in time is inventory adjustments that our competitor -- that our customers go through. And those are just cyclical to some extent but no sooner do those adjustments take place, that the demand ramps right back up again. So when you look at it across the year, I mean, it's a steady improvement.

Okay. Thank you. My second question is on inventories moving higher, there's a cost associated with that. Obviously, you're trying to offset some of other headwinds. I'm wondering if there was ever any discussion about investing in your own fleet or anything like that, as you think about the idea that transport headwinds are probably here to stay, cost are going potentially go higher in 2019?

Yes. Debbie, we'd mentioned before on our earnings calls this -- earlier this year that we've been certainly taking advantage through some of our acquisitions, the TimBar acquisition, Sacramento Container, Columbus. And then the Boise system has it's own transportation organization. And so we have certainly bolstered that capability. We've been investing over the last 1.5 year in rolling stock and drivers. And so we have certainly been growing that nationwide capability to service more of our regional activity. So that's certainly been a factor in helping us with our efficiencies.

From the line of Mark Weintraub with Seaport Global.

I was hoping to get if possible more color on Wallula. And how much of the profit potential we might already have been seeing and/or will have seen in the second half of this year versus what it can be when it's fully ramped? Because I realize there are a lot of moving parts here.

We've never called out the specific contributions we expected from the Wallula conversion. Obviously, people have been modeling that. We did say that it had a positive contribution after it started up in terms of the -- that's one of the reasons we -- our numbers in the second quarter were a little bit better. And then I will put it to you, we are very pleased with the contribution that we saw through the third quarter, but again, we're not going to quantify that. Bob, do you want to add a little color to this?

Obviously, we said earlier in the year that it'd be a lumpy year for that conversion and what it was doing to our results. It certainly was a hit in the second quarter of about $0.05 sequentially. But then we had a nice pick up in the third. But again, going from the third to the fourth, there'll be $0.07 or $0.08 hit to do all the work that we have to do in the fourth quarter. So -- but once we come out of that, then we'll see -- I think, we're going to hit our expectations as far as the profit improvement in the Packaging segment but also to mitigate what we were seeing in the pressure-sensitive business as decline in margins, which is why we took advantage of that machine the way we did.

So if I understand correctly, so it's something of a hit in the second quarter and then nice contribution to third, and then, at least, some of it coming back in the fourth. So if we net all that together in 2018, would it be a positive, negative or kind of neutral-ish?

It'd be a slight negative.

Okay. So is it fair to say all the goods really on the net basis to come in 2019, making sure that I understand.

Yes, that's correct.

From the line of Scott Gaffner with Barclays.

Mark, when I look at the -- historically, looking back at Wallula, and some of the time to convert that mill, a lot of it was around equipment backlogs and just waiting for some of the new equipment from your suppliers to come in. And I'm just thinking about on a go forward basis, as you look to maybe upgrade some of your other capacity, what are you seeing as far as equipment backlogs, just with all the conversions taking place in the industry right now? Is that lengthened material or something you're concerned about on a go-forward basis?

Yes. Let's just -- let's make it clear that we're not considering anything right now on a going forward business as far as conversion. But it is public knowledge in terms of some of the major equipment deliveries that head boxes, dryer cans, refiners, press sections, you're talking about 18 to 20 months of deliveries for our critical pieces of equipment from the vendors around the world. So that's moved out even further than it had been a year ago.

Okay. And when you look at your fiber sourcing that we've heard from a few other producers around increased wood fiber cost following the hurricanes. Is that something that you've seen as well?

We have not been impacted directly because of the Carolina Florence hurricane or the Panhandle event. Again, our mill, Valdosta, in particular, and Jackson mill were out of the way. And so we've really not seen any impact in terms of deliveries or gatewood pricing. Going forward, obviously, theoretically, we would anticipate that there's a lot of pine that will be on the market as landowners have to harvest wood before it becomes unusable in pulp and paper and lumber. So there could be an opportunity for some in terms of an availability in some of the regions that were impacted by the hurricane. But, again, well, we're not seeing anything significant.

Okay. Last one for me is just on the export market. I mean, you mentioned strong shipments in the export marketing. Obviously, you got a 30-plus countries but anything that you're seeing on the -- on pricing in the export market, just given it seems like growth outside the U.S. is may be slowing a little bit. Anything you can give us there, would be helpful.

Scott, this is Tom. The only impact we've really seen in the export market is around tariffs. Those -- and currency exchange. So that's -- those are the primary factors going on right now. As I mentioned earlier, the prices are flat compared to last quarter.

From the line of Brian Maguire with Goldman Sachs.

I wanted to come back to demand may be from a little bit of a different angle. But -- I mean, a lot of concern in the market these days just around macro and sort of where the forward demand outlook is. And some of the industry data in September was a little bit lighter than the trend that had been on. Just wondered if you could comment, if you saw that as well? I think you talked about may be periodic customer inventory adjustments being made. Not sure if you saw that sort of in the middle of September like some of the trade periodicals reported? And just as you're looking into October, can you just clarify on that 2.5% number, was that at a absolute basis or on a per-day basis?

Okay. Brian, this is Tom. The September numbers were a little lighter you said than the trend. In any given month, it's hard to estimate what really the trend is. You've got to look over a longer period of time. And so we see the trend is remaining pretty good. The number, I'm talking about for the month of October is essentially where we are right now. We're still having a difficult time getting all the data out of Sacramento. They are not on our systems and that sort of stuff. So I'm trying to blend Sacramento into what our current plants are and that's where we're running right now.

Okay, great. And earlier Mark, you talked about different options for cash, the buy backs. Obviously, one, M&A, in the past, you've been active but not so much since Sacramento. I'm just wondering in the current environment, how much of the focus is M&A? And if there are conversations still going on there? Are you seeing any signs? Some of the asking prices and multiples might be coming down to reflect sort of what's going on in the public equity markets here?

No, again, we'll continue to be opportunistic and look at one off box plant businesses that would make sense for us. As far as multiples dropping, again, there's still -- if it's a high quality book of business, there's still a big demand for that out in the marketplace. So I'm not seeing a big change in that. Tom, do you want to go ahead and add a little color to this?

I would say that's what's dropping is the availability of good businesses. As I mentioned earlier, I mean, with the independent market has reduced so dramatically that there are much fewer options. I also would just mention that we did close on a small acquisition. It's -- that's not -- and we're not going to discuss but it's just a small one that we just continue to complete it. More strategic in nature, but those are some of the things we'll continue to do.

From the line of Steve Chercover with Davidson.

I just have quick ones. So first of all, I guess, is a follow on to Chip's question, can you just remind us, please, what your repo authorization might be at this stage?

Yes. It's $193 million, I believe, Bob, that's the number?

Yes.

Yes. $193 million dry powder, okay. And then secondly, I appreciate your perspective on the industry changes and the ability to absorb new -- any new capacity. But assuming your system is virtually sold out a couple of years from now, can you give us a sense geographically where would be the most advantageous to add, given your box system in the freight environment?

Again, I don't want to speculate, and I don't want to get into this. It's very proprietary at a minimum and so that's something we're not going to discuss.

From the line of Adam Josephson with KeyBanc.

Tom, just one clarification back to the box comments, you're up 6.5% in 3Q, including Sacramento. And then, I think, you said in October you are up 2.5%, exclusive of Sacramento. Should we assume that the entire delta between the 6.5% in 3Q and the 2.5% in October, at least thus far, was the impact of Sacramento? Or was there anything else going on there?

Well, I don't think you can assume that in general, no. I think there's a lot of moving parts to our business. There's a lot of timing associated with when we're busier and when we're not busier. And the third quarter is a very strong quarter for us. Fourth quarter we've got 2 less selling days and we really don't know on any given -- in any given fourth quarter, it's just hard to predict exactly what the volumes are going to be. So this is just a very small snapshot of what's -- what the start to October is.

Sure. And just one follow-up to, something you were talking about earlier with the capacity and coming from the integrateds versus nonintegrateds, and you talked about the small open market that exists. That it would be markets 90% integrated. So the idea is being that given how small the open market is, that would perhaps prevent market entrants. But obviously, we've seen Nine Dragons as well as in Midwest, Verso, McKinley, all of which are nonintegrated announced capacity into what is a very small open market. So any thoughts as to where all that paper would go, given how small you talked about the open market being?

That's the point. Also, you mentioned McKinley, but they are, in fact, integrated into Mexico. And that's the point that Tom's made and we've been talking about that. It's such a limited opportunity. Some of the Chinese activity that they have clearly called out that they would be moving that fiber back to China. And so if you have somebody that's going to try to produce a product in this country, they are very constrained within a geographic region, transportation cost phenomenan, and then just the market opportunity. Tom?

Yes. I would also add, Adam, that, we've already seen some demonstration of what's happening in the marketplace. And we're seeing most of this paper trying to find a home in export markets, which is also somewhat difficult to do. I mean, export primarily focuses on virgin as opposed to recycled. And then it's got to be a pretty good virgin sheet in order to enter into somebody's system. Otherwise, it needs to move into the Middle East or something like that. So -- and we're already seeing some of that. So we're already getting the answers to what happens if you put in mill capacity and you don't have an integrated outlet for it. The other thing is I think everybody needs to keep in mind that just because something was announced and this is to take place 2 or 3 years from now depending on demand, depending on markets, everything else, that may or may not ever take place because these are huge, huge capital investments that have a high expectation for return. And if those returns aren't there, given the fact they may not have an outlet, that may never occur.

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

Tom and Mark, just had a question about any thoughts you had about demand more longer-term. I know we talked a lot about what the third and the fourth quarter is. But you noticed that Amazon, despite it's size has doubled it's fulfillment square footage in the last 30 months, which is about half the size of Manhattan, but it fortunately fell flat. But when you look at that kind of investment that the market seems to think makes sense, you would think that e-commerce alone could be adding quite a bit to demand. And as you all know from what we saw before the outsourcing days, we would typically see box demand mirror GDP all the way through till the year 2000. And now we're past outsourcing. But back then, we didn't have e-commerce. So how do you think about the impact of e-commerce as you look out the next 3 years?

Well, e-commerce is much bigger than just Amazon. Many of our customers would be approximately 18,000 or 19,000 customers. Many of our customers utilize e-commerce to move their finished product out to their customer base. It just so happens that Amazon, obviously, is the big player in the United States. And so it captures a lot of the attention. That being said, it's certainly been a growth factor, e-commerce in general and Amazon. And so again, it presents an opportunity for the industry on growth going forward. And Tom, do you want to add some comments, you spoke about?

Yes. I would say Chip, that -- I mean, it is amazing the growth rate that Amazon has. There's no question about that. It is absolutely amazing. They're at the rate they're growing. But in addition, I think the other good news is that big box isn't dead either. And so brick-and-mortar is readjusting and they're actually growing. So I think that really bodes well for consumer spending and equally bodes well for our box business.

We have a question from the line of Gabriel Hajde with Wells Fargo Securities.

Just 2 quick ones. The $0.14 decline in the paper business from lower volumes, is there something seasonal or other in the third quarter? Or is that something that we can kind of extrapolate out over the next couple of quarters as you flip to containerboard?

No, that was related to the exiting pressure-sensitive business that we talked about during the year.

So nothing to do with the Wallula mill?

Well, it was the Wallula business. And, again, that's -- we talked about that when we announced the project prior to this year and we've spoken about that in January and April, in July in terms of the quarter-to-quarter impact as we were unwinding that business and through the summer months and through the remaining portion of this fourth quarter. We're selling out the rest of the inventory we had on hand. So it's just a declining volume that happens to be in the Paper segment.

Yes. In addition to the tight conditions that Mark spoke of earlier when we're on allocation and inventories are extremely low. So we're just having to really watch what we can sell right now to properly manage our inventories for the future, which also will add downward push on volumes.

Okay. And I think you'd addressed it a little bit before Bob in the previous question, the 50,000 tons inventory build and then what you're planning to do taking Wallula down again this quarter to complete your work. Depending on, I guess, how demand shakes out, would you anticipate that inventories would be up at the end of the year versus the third quarter or flat? And then, you mentioned Q1 being a heavy maintenance year. I think this year it was pretty large as well. Would you envision it being bigger than Q1 of '18 or any sense for that?

This is Mark. Let me answer the inventory. We'd anticipate that year-end inventories for 2018 would be similar to year-end inventories for 2017. And then, regarding second part of your question, we will call out specifically during the January call what the annual shutdown impact will be in terms of the cost for the year.

And we have a follow-up from the line of George Staphos with Bank of America.

Two quick ones for me, guys. First of all, piggybacking Chip's question, does the growth of e-commerce and the packaging required for that have any implications for the sheet of paper? So might we see more lightweights with e-commerce or not necessarily . Question two, flexibility has always been something that PKG tries to manage across it's system, across it's converting network. We recovered paper price as being as low as they are. Does that suggest perhaps you'd be a little bit more open to having more recycled content, more OCC in your mix or whatever RCP in the future?

Yes. Second part of the question, we anticipate that OCC as a fiber supply to the world will establish a new equilibrium over time. The world still needs essentially the same amount of fiber it did at the beginning of the year. And China still requires the most fiber than any country and still consumes more total cellulosic fiber than anybody in the world. And so we would anticipate longer term that OCC continues to be volatile and we would rather not be tied to that in any significant manner. But we would, obviously, remain flexible and opportunistic and how we're able to utilize it. The first part of the question, Tom, do you want to?

Yes. I would just -- I would say that the growth in e-commerce, I mean, does not necessarily dictate more lightweights. I mean, it could be -- it's a mixed bag as well depending on the size of the box, depending on the performance that somebody's looking for, et cetera. So I think if there's any change, it's minimal.

Mr. Kowlzan, I see there are no more questions. Do you have any closing comments?

I just want to thank everybody for joining us on the call and we look forward to talking with you in January to wrap up the full year '18 and the fourth quarter of 2018. Have a good day. Thank you.

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