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Thank you for joining Packaging Corporation of America's Third Quarter 2019 Earnings Results Conference Call. Your host today will be Mark Kowlzan, Chairman and Chief Executive Officer of PCA. Upon conclusion of his narrative, there will be a Q&A session.
Good morning, and thank you for participating in Packaging Corporation of America's third-quarter 2019 earnings release conference call. I am 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 am going to turn the call over to Tom and Bob, who will provide more details, after which I'll wrap things up and we would be glad to take any questions.
Yesterday, we have reported third-quarter net income of $180 million or $1.89 per share, which included $0.02 per share of special items expenses. Excluding the special items, third-quarter 2019 net income was $182 million or $1.92 per share compared to the third quarter of 2018 net income of $211 million or $2.23 per share.
Thrid quarter net sales were $1.8 billion in 2019 and 2018. Total company EBITDA for the third quarter, excluding special items was $364 million in 2019 and $406 million in 2018. Excluding special items, third-quarter 2019 earnings per share of $1.92 was $0.31 per share below the third quarter of 2018, driven primarily by lower prices in mix of $0.36 and volume $0.03 in the packaging segment and lower volume in our paper segment of $0.03. Richer mix in our box plants as well as higher labor and repair expenses contributed to higher converting expenses of $0.06 and we had higher operating and other costs of $0.03. These items were partially offset by higher prices in mix in our Paper segment of $0.09, lower annual outage expenses of $0.09 and lower freight and logistics expenses $0.02.
Looking at the packaging business, EBITDA excluding special items in the third-quarter of 2019 of $325 million with sales of $1.5 billion resulted in a margin of 22% versus last year's EBITDA of $378 million and sales of $1.5 billion or 25% margin. Our containerboard mills operated in an efficient and cost effective manner, as we continue to balance our supply with current domestic and export demand while optimizing our containerboard footprint to minimize freight and logistics costs across the system.
We finished the quarter with inventory 51,000 tons below last year and 30,000 tons below the previous quarter. In addition, we maintained our industry-leading integration rate by supplying our box plants with the necessary containerboard to establish new shipment records.
I'll now turn it over to Tom, who will provide more details on the containerboard sales and our corrugated business.
Thanks, Mark. As Mark indicated, our corrugated products plants established new records for quarterly box shipments per day as well as total third-quarter shipments, both of which were up 1.9% compared to last year's third quarter. In spite of the significant business loss we incurred at Sacramento container due to the purchase of two large sheet customers by another integrated.
Outside sales volume of containerboard was about 26,000 tons below last year's 3rd quarter, as we ran our containerboard system to current domestic and export demand and supply the increased needs of our box plants. Domestic containerboard and corrugated products prices and mix together were $0.23 per share below the third quarter of 2018 and down $0.20 per share compared to the second quarter of 2019. As we have mentioned previously, the majority of the impact from the published index price decreases early in the year would be reflected in our 3rd quarter results. Export containerboard prices were down $0.13 per share compared to the 3rd quarter 2018 and down $0.04 per share compared to the second quarter of 2019.
Thank you, Tom. Looking at the Paper segment, EBITDA excluding special items in the 3rd quarter was $58 million with sales of $243 million or 24% margin. This was compared to 3rd quarter 2018 EBITDA of $44 million and sales of $254 million or 17% margin.
Our seasonally stronger cup size and printing and converting volumes were higher than the second quarter levels as well as slightly above the third quarter of 2018. The average price and mix for our paper volumes during the quarter were about 6% above last year. However, our average price and mix was about 1.5% below the second quarter of 2019, which was less of a decline than indicated by the published industry index prices.
Obviously, overall paper segment volume and revenue were below last year's 3rd quarter due to the exit from the white papers business at our Wallula Mill. We continue to improve our profitability and margins in the paper segment in part by having exited this business at Wallula, rather than continuing to allocate people and capital resources to it.
Thanks, Mark. We had very good cash generation in the third quarter with cash provided by operations of $340 million and free cash flow of $247 million. The primary uses of cash during the quarter included capital expenditures of $93 million, common stock dividends totaled $75 million, $46 million of federal and state income tax payments, pension payments of $49 million and net interest payments of $4 million. We ended the quarter with $738 million of cash on hand.
Finally, our planned annual maintenance expense for the 4th quarter is unchanged from our previous guidance, which reflects a negative impact of $0.06 per share moving from the 3rd to the 4th. I'll now turn it back over to Mark.
Thanks, Bob. Looking ahead, as we move from the 3rd into the 4th quarter in our Packaging segment, corrugated product shipments with one less shipping day should be slightly lower. Containerboard sales volume will be lower, as we continue to run to demand and work toward building some inventory prior to the year-end in preparation for the first quarter of 2020 scheduled maintenance outages at our 3 largest containerboard mills, which will significantly reduce our production early next year.
We expect slightly lower prices as the remain -- as the remaining impact of the published domestic containerboard price decreases from earlier this year work through our system and lower export prices. We also expect to seasonally less rich mix in corrugated products compared to the 3rd quarter as the produce business in the Pacific Northwest, as well as the display in the high-end graphics business for the holiday period normally falls off during the quarter.
In our paper segment, volumes are expected to be seasonally lower along with lower average prices. With anticipated colder weather, energy costs will be slightly higher and we expect certain other operating and converting costs to be higher as well. These higher costs include approximately $0.03 per share associated with the start-up of our new Richland Washington box plant during this quarter.
Finally, as Bob mentioned scheduled maintenance outage should be higher than the third quarter. Considering these items, we expect fourth quarter earnings of $1.70 per share.
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 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. Actual results could differ materially from those expressed in these forward-looking statements.
[Operator Instructions] Your first question comes from the line of Chip Dillon with Vertical Research.
It seems as if Mr. Dillon's line may have -- may have disconnected. And your next question comes from the line of Brian Maguire with Goldman Sachs.
Yeah. Mark, you made some comments just around the seasonality in the less rich mix into the fourth quarter for shipping -- obviously [Phonetic]. Just wondering, if you could comment on what you've seen so far in October on shipments and sort of related to those comments, any early thoughts on the holiday e-commerce season? You know a lot of discussion about that and how SIOC and some of the changes in Amazon's frustration free packaging might impact the 4th-quarter volumes, just any early thoughts on that?
Yeah, Brian. Through 15 days, we started in [Phonetic] October 2% ahead of a year ago. So we're off to a good start in October. Regarding e-commerce, I think e-commerce will have a strong 4th quarter. Again as mentioned previously, you're now comparing e-commerce in total with e-commerce of the past and it's, it's not a mature market totally yet, but it certainly has matured over the years.
So we expect an uptick but not, not to the degree it was when it was in its infancy and it was growing at double-digit rates. I think frustration free and SIOC are having minimal impact at this point in time. I think it will be more so starting next year as we continue to develop that for Amazon specifically. And as I said previously, I think that plays to PCA strengths very well especially the SIOC piece, where it's much required for performance; design based, transportation based, those play very well into our strengths.
Okay, great. Just one last one for me. Just I think you were already asked a little bit about this on the last call, it is about the new recycling index, which is now as it's rolled out. Any thoughts on how customers might react to that? Looking to maybe trade down to the lower quality recycled board or maybe for environmental sustainability reasons, maybe having a preference for recycled packaging just to highlight that it's a recycle paper, I know your mix of customers is a little bit different than the general market, so maybe a little bit more immune to it, but just thinking overall like what impact, if anything, do you think that this new index could have?
Well Brian this, this is Tom again. The index has had virtually no effect on us. As mentioned previously, it's a very different product, it's not performance based. It's not a lot of the other things that we sell to the open market, plus there is not a lot of availability. So I think that there are a lot of reasons why it's had, it's had virtually no impact.
Yeah, first question is on the maintenance again, how does it look next year quarter-by-quarter versus what it looks like this year?
Okay. Okay. And then I don't know if you gave us a year-end debt level, I'm sorry, the quarter-end debt level, does that change at all from the second quarter?
Yeah, we were down, our net debt was a bit above $1.7 billion and leverage is sort of in between that 1.1, 1.2 times.
Okay, that's very helpful. And then on the third question I had was just quickly if you could talk a little bit about what you're seeing in the export markets at least in terms of, it looks like we've seen another leg down in October at least in Europe.
And do you think that some people out there are getting close to a point where they might take some downtime and maybe even over in those markets just because it seems like there's not a whole lot to gain by continuing to supply those markets?
Chip, this is Tom, I'll take that question regarding export markets. Yeah, we did see another trickle down in price here just recently. But I think that we're getting at or very near the bottom, given the, given the reaction, I think to the marketplace on this last one. So I think your -- I think your thesis is pretty close.
Thanks very much. Hi, everyone. Good morning. I just wanted to perhaps get at the paper performance, which was a lot better than what we were looking for. Mark, could you parse perhaps what the Wallula not being in their meant [Phonetic] in terms of the earnings bridge and any other factors, if not to the dollar, just keep buckets in terms of year-on-year performance in the paper segment.
Well, again, a lot of it has to do with just the overall performance operationally and then just where we are in the marketplace with that business. As I said before, we've worked very hard over the last six years to take cost out of that business. And then, exiting Wallula in particular in the finally exiting completely year-over-year lapping that has helped again with the entire cost structure in the business and again we're just very pleased with where the sales held up.
And don't forget, we've talked about this over the years that one of the strong suits in that business is the legacy Boise logistics capability in the value proposition and that logistic capability brings to the equation. So again nothing different, which is very pleased with business and the volumes been in a good place for us.
Okay. Congratulations on the performance there. And, and packaging I would just want to get at vertical integration. By our calculations, vertical integration probably moved up a couple of hundred, 300 [Phonetic] basis points in the quarter, could you comment to that effect, could you comment where vertical integration is for you right now and if you would prefer not to give a percentage. How far off are you in basis points from where you would like to be optimally?
Let me answer this way. We're currently in the low '90s as we've been talking this year. We're getting ready to start up the new Richland box plant. As that ramps up on the curve into next year, we fully expect to see if the marketplace holds up as we are looking at the world, we would be starting to approach the mid '90s where we were a couple of years ago as the year unfolds next year. That's, that's -- I don't want to give any specific numbers, but that's how we're looking at things.
Okay, I appreciate that Mark. Last one from me and I'll turn it over. You know as you look at 2019, obviously it hasn't been as full of year perhaps as had been 2018 at least through the first half, but you know in years that maybe aren't as strong from a demand standpoint, there are other things that company like PKG would do to improve the earnings profile and years ahead obviously Richland is one of the things that you're doing, what other key initiatives do you have right now to improve the performance of the business, which remains good in a more -- in a stronger environment and what are you doing in particular on the converting side to the extent that you can comment relative to the continued growth of e-commerce in terms of the channel. What are you doing in terms of printing or converting to the extent that you can comment there. Thank you, guys, good luck in the quarter.
Yeah, I'm going to start that off and then let Tom finish it. Across the board, we're continuing to look at opportunities to take cost out, we mentioned earlier this year that with the big projects completed at DeRidder and Wallula on the conversions, we've taken the engineering and technical resources and we're deploying them companywide now into the corrugating converting operations and that's also allowing us to observe and see some new opportunities that we're able to go forward with.
In addition, we're annual hiring of new engineers. We're beginning to place engineers into these box plant operations, but overall, we'll continue to drive cost and volume opportunities in that side of the business with the, with the effort we have. Tom, do you want to add to that?
Yeah, George. I would just add that, as you well know, we take a, we take a pretty long-term approach to our business and we've, we make investments at times when there can be, there can be slow periods. This is one of them where the demand hasn't been incredibly robust. It's been OK, but not, but not robust and we're making some significant capital investments.
We're doing some things that will position us for the long haul. And it's, it's a good time to be doing that because as business does ramp up, as demand does ramp up when we go through a little bit higher growth period, we're able to absorb that.
So you know the W3 [Phonetic] machine is a good example of that where we built some runway in terms of tons, and we're doing some of the same thing in the box plants.
Mark, just to start off, you've been talking more in recent quarters about really just running to demand. And I wondered if you could just share a few thoughts on what the most effective strategies have been for throttling back production and running to demand. What are kind of the key elements there?
Again with the, with the capability at Wallula Mill, we've been able to rebalance that whole system. And without shutting machines down, we've been able to throttle back and that gives us the ability again to adjust in real-time as the market dictates as customer requirements flow through a quarter. We're much more nimble in how we service that market. But at the same time, it's given us a lot more confidence in how we manage our inventories. And if you think about the year-over-year inventory being down 50,000 tons in the second quarter to third quarter inventory being down 30,000 tons that ability now to truly work the mill system as dictated by the demand is truly paid off for us and we now have the nationwide coverage of containerboard supply and we're taking advantage of it.
Okay. And then I just wanted to turn to this growth in recycled containerboard. It seems like some of the new mills and a number of the new machines are running really high portion of mixed waste and with mixed waste being somewhere near zero right now that's definitely a cost advantage from, I wondered if you or Tom could talk a little bit about the puts and takes that using a containerboard process product with a lot of mixed waste it would involve. What is a good for and what can't used it for?
Well again, a mixed waste generally speaking, the fiber quality from a strength point of view is not anywhere near what you would expect with the kraft or OCC or VOK. Also, the contaminant level is significantly worse traditionally unless you're getting sorted office paper, but again the overall performance characteristics are much lower than traditional containerboard fiber furnishes [Phonetic]. And so it's not that you cannot use some of that, but it's in very limited applications and again, we don't use mixed waste.
Okay. Just going back to kind of Brian's question. Is, is including more recycled containerboard in the mix, is that something that would be interesting to you over the next, say, three to five years?
As a matter of fact one of the projects we just had approved at the Board level in August was for a new OCC plant to be built at the Wallula Mill starting next year, and we hope to have it online by the end of the year. It's a thousand ton a day OCC project that will provide the plant, all the necessary recycled fiber and we'll have -- as we've used this word before many times the ultimate fiber flexibility at Wallula, where fiber is most expensive in terms of the mill system. So we're going to take advantage of the availability of the OCC and take advantage of it on the machines. And so, Tom, do you want to add to that? [Speech overlap]
Well, I'll just answer the last part of your question there, Mark. And that is to our customers asking for 100% recycled. Occasionally they do but once they get the education and understand that in order to run this closed loop system that we have, it has to start with virgin. Everybody understands that, everybody knows that. So I think that they're much more sensitive to performance based and what it does for them, and how the box performs for them and delivers at a cost effective way. More so than saying, I have to have a 100% OCC. They understand [Indecipherable] customer said that we wouldn't have, we wouldn't have a system anymore of closed loop with it. That material degradates very fast over a period of time. So that's, that's essentially where we are and that's why I think that this whole recycled linerboard discussion is somewhat muted at least regarding PCA.
Just a little bit more, on a little more on that project, we're looking at that again is an opportunity for cost reduction. And the supply in that whole region if you go out to the coast and down to the Intermountain region, we've identified our sources. And so again, we expect to have that project online by the latter part of next year.
Thanks. Mark, you've said that Wallula has an unusually wide range of mix without having the efficiency hit that we usually see. Has that mix of business so far stayed within your expectations even as the market has gotten softer and is Richland going to change the great mix that you're producing there?
No, it's worked out quite well. As we had planned on two years ago the Wallula Mill in order to be successful had to produce the heavier weight high performance grades, all the way down to the lighter weight high performance grades. And we've been doing that all year. And so we obviously have not been running the mill up to its full capacity but if Richland comes on, we'll be able to take full advantage of that remaining capacity. And we're very pleased with the quality. We are very pleased with the flexibility of the machine in terms of the heavyweight high performance down to the lightweight high performance. So it gives us ultimate flexibility to provide the Pacific Northwest and the West Coast with all the board, we need.
That's great. And just one more question, you've talked about the strategic importance of your export partners. But has that strategic importance of export markets changed as your system has grown and diversified?
Well again, keep in mind that probably thirty plus years, forty plus year, we've had this legacy customer business around the world to probably 36, 38 different countries. Tom, here you want add to that?
Yeah, I would just say, Mark, that it remains strategic from the standpoint of these are long, long-term customers have been with us a long time, the grades are very good fit. The seasonality is a very good fit. There are lot of things that go into the equation, but they still remain strategic.
Mark, you made a comment about some outage plans for next year. So I'm going to take that as the end. Can you quantify any sort of lost production tons that occurred here in 2019 and maybe I guess [Indecipherable] contrast that to what you're expecting for 2020 and really the nature of the question is in 2018, it seemed like the industry was running full tilt, coming into '19 things were throttled back a little bit. And my impression was that you guys have taken a little extra time to do some other maintenance projects around the mill, such that 2020 you could run a little bit harder. But it sounds like from your comment that you guys have a pretty heavy maintenance scheduled again in 2020. So just trying to understand that.
Yeah, no, we didn't take any inordinate downtime this year to do any extra work, we executed our normal planned annual outages. And then again taking advantage of the Wallula capability, now we're able to truly supply all of our demands in the containerboard side of the business with a six mill system. And truly run to demand and then that capability has allowed us to really move the inventory levels down to a much more comfortable level with that capability. That being said, we will continue to run to demand.
Thank you. And then I guess, trying to understand customer dialog, a little bit here not obviously trying to get anything specific. But just how are conversations going? And I guess our folks looking for a little bit more efficiency from their suppliers, I mean when things start to slow down. I guess, when things are going well, maybe folks don't dial-in as much on the cost side. But now things are that there is a little bit slower, is it a more of a conversation around cost or efficiencies on the converting side?
We don't generally talk about customer specific activity and you can only imagine again part of our proposition -- our value proposition is just that we provide tremendous value for our customers in many ways.
Good morning. Over the past couple of years, you've done some process things on the [Phonetic] side with DeRidder and Wallula and then this year, I think you focus more on the box plant side with Richland and Wisconsin among the others. Would it be fair to say that capex could step down in 2020 given all this work has been put in over the past couple of years.
Well, again without answering that will give you a better assessment in January when we have the January call, just keep in mind that we will be able to take advantage of opportunities as we see fit. And so, just I'd rather answer it that way that whatever opportunities we deem as true opportunities, we have the ability, we have the cash on hand, we have the resources to execute. And so we're in a good place in that regard.
Okay, that's fair. I guess coming at it from a different angle, you've been using your internal technology organization to improve your box plant system for a couple of quarters now [indecipherable] looking at it, what inning would you say that processes in. We're still in first or second inning, or is Richland and the other projects in Wisconsin is that a decent chunk of what you expect?
Which means we have tremendous, tremendous runway opportunity over the future years to continue to build up at that side of our opportunity and much the same way we did in our mills 25 years ago.
Understood, understood. That's very helpful and then just switching gears quickly. I know you just announced the new OCC plant at Wallula historically I think your recycled fiber mix has been somewhere around 15% to 20%. In your opinion, is there a natural limit to where that could go, while still maintaining the performance that your customers expect from you or just how you think about that?
We don't have any current plans to move that significantly within our legacy mill system. But we do have the flexibility to ramp up and down at any given containerboard mill, but again there are limits as we've called out over the year. So again with the exception of the Wallula project, the remaining legacy mills will remain in the same range they've been in terms of OCC utilization, VOK utilization.
Thank you. First on the box demand side, you were up close to 2% in the just-ended quarter you suggested, that's how October is running. I think that previously you've also indicated that the Sacramento related business loss was about a 1.5% drag. So is it fair to say that you're kind of in an environment where you might expect to once you lap the Sacramento business, be growing at about a 3.5% type rate, is that a fair way to look at it?
Well, let me start and then Tom gives you some color. Obviously I'm not going to speculate on what volume is going to do next year, understanding we're, we're in a much better place. And again, you mentioned the keyword we've lapped as of the December period, we will be coming up on the year that that business has exited. And so, into next year, it's a different -- different metric, but again it all depends on what the demand looks like and so I can't speculate on that.
And then Bob, when you're -- you mentioned you just said something about developing for Amazon when related to the SIOC conversation and I just was -- was that a Packaging Corp specific comment, was that an industry comment, and if that's a Packaging Corp specific comment. Can you provide any more color on what we were supposed to kind of take away from that -- that mentioned?
Mark, what I would, what I would say is I would say that we are on the -- we are on the Amazon team to help develop SIOC and help work on that and help define what that is and help meet the objectives that Amazon has. So we're actively involved both with Amazon and with our direct customers as well as some prospects in developing that SIOC program.
So, I'm making a comment regarding PCA and obviously this is -- this is an industry initiative as well.
Okay, great. And then just for this year, capital spending to the first 9 months, it's running about 264, I guess it seems to me like you're going to [Phonetic] spend a whole lot of money in the 4th quarter, you're probably going to come in lighter than what I had previously anticipated. Any update on what your capex for 2019 is likely to come out at?
Yeah, Mark. That's a good observation. We had called out through the July call that we [Indecipherable] we'd be a little over 400 million in the summer period, we were able to reassess some opportunities and we shifted gears. That's basically how the Wallula projects came about. And so that gave us the opportunity to pull back on some of the capital.
So we're going to be lighter than the original estimate probably not over 400 but somewhere below that, but again we're shifting gears on some of these opportunities. But I think it's worth calling out that in PCA's tradition, we have that ability to step back and reassess what's the right thing to do with our dollars and again, it was a summer time period of reevaluating what the opportunities looked like, what the best opportunities were for us. And so we, we shifted some things around. So it's just the timing issue.
So is it that we would expect that of the spend to flow into next year, or is it -- or maybe a bit more color. Are there other options that are under consideration potentially that obviously you can't speak to necessarily, but that can play into it. Or I guess the 3rd alternative would be if you were, and I think that's unlikely, but if you are less confident on where your cash flows --your cash flow generation on a go-forward basis. Any help you can give us with it.
Well, without giving you the exact capital number, the Board approved in August two big projects at Wallula Mill, one being the the OCC project and the other being a new wood yard project. And so that spend, although not all of it next year, some of it will roll over into 2021, but a good portion of the spend will start next year on these two big projects at Wallula, but those are too high return projects.
So again we reserve the right to be able to, to move the capital up and down, but within, within a range of somewhere that we've been and that we're comfortable with. Part of what we're doing is we are making sure that all these projects that we do that we are doing the engineering, we are managing the projects ourselves, and we are maintaining tight control of these project executions and so that gives us the optimum return.
Until the end of 2017, you guys were pretty voracious, acquirers of converting capacity but since Sacramento, you've kind of taking your foot off the gas and I'm just wondering has anything changed philosophically or is it perhaps valuation perspective.
Now, let me comment on that, then Tom can add to that. Part of it's the opportunities that exist and in what you're paying for that opportunity. So again, we're pretty, pretty judicious in how we evaluate those opportunities and pretty particular about the opportunities we would -- we will be attracted to. Tom?
I would just add that. We've been incredibly disciplined in our acquisition strategy. It's been a, it's been a very specific approach. The opportunities are less today as the -- especially as the independent market has shrunk so dramatically. So are there, are a few opportunities out there? Yes, we, we explore every opportunity that we think makes sense. We just haven't found any that fit -- that absolutely fit our criteria that we're looking for so it's, it's still a very important part of our strategy and we'll continue to look and explore every opportunity and those that makes sense, we'll move forward on. That's the best I can say.
Okay, thanks. And just a quick follow-on, I guess on e-commerce, which is still growing, maybe not as fast and SIOC is an interesting development but as people try and diminish the overall packaging, we've seen plastic pouches kind of reemerge and I don't think that's very environmentally friendly at all. Do you guys have any capabilities or do you foresee any benefits of a migration toward kraft paper or kraft sacks?
We're not, we're not obviously in the kraft sack business but I think there are corrugated opportunities that are coming about as a result of consumers really moving away from plastics understanding what that does to the environment and, and in many cases, we've got a lot of e-commerce and we talk about Amazon all the time with regard to e-commerce, but virtually everybody who manufacturers anything and sales through retail environment is in some form of e-commerce today. And they're all saying the same thing and that is that many of the consumers don't want to receive their products either in plastic pouches or some other form of plastic container and even in the SIOC program.
There is a lot of discussion about taking plastic out of the primary package. So I think your promise [Phonetic] is correct and I think there are opportunities for the corrugated industry going forward regarding this potential opportunity in e-commerce.
Good morning. Thanks everyone for taking my questions. I appreciate it. Tom, you're -- you commented in response to a question in the last call about the trend of the quarter starting out quite strong and then slowing toward the end of the quarter, and it seemed like 3Q is much the same.
I think you said in July, you're up 5.8% in the first couple of weeks and for the full quarter you're up a little under 2%. Can you just reiterate why you think you're seeing these patterns and do you expect 4Q to be similar to what you've seen over the past however [Phonetic] many quarters along those lines?
Adam, it's impossible to predict exactly what's going to happen with our 18,000 plus customers, but I think the trend is because our customers are keeping their inventory so low and in check that in the quarter they, beginning of the quarter, they replenish the inventories to some extent. And by the end of the quarter they perhaps are running them down because as you know, the economy is such that it's quite unpredictable. It's not robust, if you will, and I think our customers are managing their cash, their inventories, everything very close to the vest and so do I expect the same thing to happen in the 4th quarter. Well, the 4th quarter is pretty, it is a little more predictable in terms of holidays and all the other things that occur starting Thanksgiving and rolling into Christmas.
So I would be surprised if the level stay at this level, but I still think the 4th quarter will be pretty solid.
And just to be clear in the 3rd quarter, did you see the same sort of thing that the trends slowed toward the very end?
Okay and then, thanks Tom. And just Bob one on the bridge for 4Q. I know you mentioned maintenance would be $0.06 drag and obviously you're guiding to $0.22 lower overall. So that leaves 16. Can you roughly, talk about the other factors, lower prices, lower volume, weaker mix, higher cost? Can you just give us a rough sense of what each of those, you expect each of those to be?
Well, and obviously, those are the categories that we pointed out, but is -- we never have given specific numbers for those different buckets. So just have to go with our comments for now.
Okay. And then I think you said on the next call, you'll talk about what maintenance will be by quarter, it sounds like 1Q will be particularly heavy maintenance quarter, is that the right way to think about it?
Well, I'll just say that we do have our, as we said in our, I think in the earnings release, we have our three largest containerboard mills with annual outages in the first quarter. So that does point to a lot of work going on them.
Hey, thanks for taking my follow-up on. I just want to make sure I have this straight, you all are premium from OCC capability in Wallula and I know there is another organization trying to raise money to build a recycle mill in Utah and you all I think have the most box converting presence in that state. With the Wallula Mill pretty much take care of all the recycled lead you would have for that for your box plants if they need it, recycled board in Utah?
Yeah. Chip, as we were analyzing this project opportunity again. We have looked at from the Intermountain region, all the way up to the Pacific Coast all of our supply opportunities. And so we feel confident, we've got discussions ongoing and in some cases locked in with where the supply will come from. So we're very confident and again the project is ongoing and we're pushing ahead full speed with, we're getting this executed for next year.
Okay and then just quickly also, I believe it is asked about the White Paper business and $48 million in one quarter was, I think you're best performance in one of the best you've had since the Boise deal six years ago and was there anything unusual in the 3rd quarter, whether it was just super good performance or is this sort of a decent baseline to think about as we go ahead and obviously we factor in maintenance, we factor in price and volumes from here.
Well, keep in mind, we did not have an outage in the 3rd quarter of this year. And again, there was the seasonal volume was there, but again a part of it is just, it's a, I'm going to use the word, it's a tiny little business for us, it's the two mills; the Jackson mill and I Falls mill and we've got this great nationwide distribution capability. So we've got a very good customer base and the logistics capability is very valuable to that proposition and so if you can understand that we will have outages scheduled for next year at some point in time during these quarters, you'll have these big puts and takes of outage cost impacts, but net-net, it will -- it remains a good business for us. Bob, do you want to say on this.
No, no, I agree. It's just the cost structure, and I think there is, it's just going to continue to do an outstanding job of just managing costs, Chip and turning as many costs as possible into variable-type costs as opposed to fixed in things like that and it just continues -- they continue to do just an outstanding job.
And lastly on volumes, I mean there's been a lot of moving pieces with the imports up, but a lot of capacity removed and one competitor actually leaving the market. As you look into 2020 and 2021, you see anything, any step functions in the demand side or should it continue to be hopefully flattish or maybe just declined slightly or do you see something different than that.
Well, you know if you read the index information with what the trade is saying, obviously they predict a continuing market demand destruction over time. But yeah, we've been dealing with that for better part of a few decades now. So we just have that ability to manage that. Our volume will run to the market demand, and that's about all I can really say. We have the ability to flex that capability a little bit, and we also again -- it allows us to move within the customer base, which used to be within.
Hey, Mark. I wanted to just come around to the cash balance, which is about 3 quarters of $1 billion right now. Would you be comfortable kind of continuing to build cash for at least the next 2 or 3 quarters?
I'm not going to talk about too far out. We're comfortable where we are right now. We'll use some of the words we've used this year in terms of, we still are living in uncertain times. We feel it's very prudent for us right now to remain very conservative on how we treat that cash. It gives us utmost optionality in how we take advantage of that cash. And I said this on the July call with every dollar of cash sitting on hand is not being wasted. And so we reserve the right to allow that to continue on for the time being, but it gives us tremendous opportunities in the future to create shareholder value as we have done many years over .
Yeah, look Mark, you've been great capital allocator over time I think everybody can see that. I'm just kind of curious, it's a big position, I mean this is obviously more cash than you'd need that to buy a couple of box plants. So can you give us some sense of sort of what types of situations might be interesting and whether there's been any change in the types of things you're willing to consider historically, you've said, you didn't want to go offshore, you didn't want to go to Mexico, you didn't want to go to Europe. Any change in those positions?
No changes in that position of being offshore. We are American based and we will continue to be American based. Again I just have to believe, we're going into an election year next year. We have a lot of uncertainty in the world around us. And so this cash gives us tremendous opportunity, no matter what happens in the future.
Okay, that's fair. Again, I think if you look at your track record over the last 20 years, it speaks pretty clearly. I'll turn it over.
Thanks for taking the follow-up. I'll turn make it brief. In the press release, I think in the prepared comments you talked about running to demand but also trying to build some inventory in anticipation of maintenance next year. Is there anything, anything specific you want us to take away from that?
No, again, just as we look at the outages next year. And if we assume a certain demand, which you have to build a model, whether or not that's what happens in the world. But if we assume we're going to take these outages next year and what the implication is on the tons we're taking down for the first quarter, you have to -- and also you're dealing with winter weather phenomenon, which is a big uncertainty throughout the country and what that can do to transportation. So, you certainly have to have somewhat of be of an increased inventory to supply the demand in the box plants, while you're taking these mills down.
So we're just saying that there is some number that we're going to move up from the end of the 3rd quarter and get a little bit more comfortable as we in December and go into January. We're not going to call that number out, but it will be somewhat higher than we end of 3Q .
Hi, everyone. Thanks for fitting me and I'll be quick, just a quick question on e-commerce one more time. Mark and Tom, I mean to the extent that you're working on more SIOC projects, perhaps rightsizing products for customers given dimensional weight protocol. Are there any important elements that you're working on, on the converting side, anything that you're doing, perhaps on printing maybe digital as you're trying to further your penetration or share what you do for the customer there and then if you could update us on your views again relatedly on white top line or whether you need to build any capability to a larger degree in-house or not.
Let me take the white top question first and then Tom can finish the rest of the question. Currently we do have the capability, if we had to, we could produce white top, but it's not economical for us to do that and so we, we will not be pursuing that as you would expect. Tom?
George, just real quick on e-com, obviously I'm not going to go into any details about what we're planning to do other than, other than to just say we explore all of the alternatives, we explore what's best for our customers. What we think are best solutions in the marketplace, and we'll continue to do so.
Okay, thank you. Zetania that wraps up our call today and I'd like to thank everybody for joining us and look forward to talking with you in January as we give you the full year and fourth quarter wrap up. Have a nice day.
Post time: Oct-30-2019