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PCA starts 355,000 tons/yr DeRidder containerboard conversion; reports 8th earnings record, studying MLP

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PCA starts 355,000 tons/yr DeRidder containerboard conversion; reports 8th earnings record, studying MLP

October 24, 2014 - 11:54

OAKLAND, Oct. 24, 2014 (PPI Pulp & Paper Week) -Packaging Corp of America (PCA) completed the conversion of the D-3 machine at its DeRidder, LA, mill to 355,000 tons/yr of containerboard production on Oct. 17, the company told analysts this week during an earnings conference call. The $115 million project included improvements to the former newsprint machine, which ceased production in September, as well as a new 1,000 tons/day old corrugated container (OCC) recycling system.

"The work was completed two weeks ahead of schedule and the startup of the machine is on plan with no major production or quality issues so far," said PCA CEO Mark Kowlzan. "In addition to providing needed capacity, we're excited about the grade optimization potential and freight savings that the D-3 machine will bring going forward."

PCA, the fourth largest containerboard producer in North America, announced in March it was going ahead with the DeRidder conversion project first proposed by Boise, which the company acquired last year. But following a five-month technical review, PCA decided to convert the mill's still operating D-3 newsprint machine instead of the mill's idle D-2 machine as originally planned. The D-3 machine, which is based partly on virgin fiber, will be the lowest cash cost linerboard machine among recent North American conversions from newsprint and printing/writing grades, according to RISI Mill Intelligence estimates.

Growing internal need for tons.Analysts have been concerned about additional containerboard supply in the US market with slow industry box demand growth, but PCA chmn Paul Stecko said that the company has a "home" for the additional tons in its own expanding box plant system.

During the third quarter, the company purchased 47,000 tons of containerboard from the outside market, bringing its year-to-date purchases to 147,000 tons. The company said in an earlier conference call that it would have needed to purchase 250,000 tons/yr of containerboard in the open market without the D-3 conversion.

PCA's box shipments outpaced the industry at 6%/yr over the past three years compared with flat shipments for the overall box industry, according to the company's reports. For the third quarter, PCA said its shipments were up 6.2% in total and 4.5% per workday (with one additional shipping day in the current quarter). The acquisition of Crockett Packaging in Southern California added about 1.5% of the increase, PCA noted.

The company's integration level from its board mills to box plants increased from 88% in the third quarter of last year to 92% in the latest quarter.

Initial focus on medium.PCA will initially make corrugating medium on D-3, but eventually plans to "qualify" linerboard produced on the machine, but declined to specify the time frame.

D-3 will focus on producing lighter weight containerboard from varying amounts of virgin and recycled fiber, and the new machine is to help optimize the company's mill/box plant system for both freight and trim, according to company officials.

"The machine will give us a lot of flexibility and result in big savings in freight costs," Stecko told PPI Pulp & Paper Week.

The converted machine will initially produce 23-lb recycled medium with anywhere from zero to 20% virgin fiber content. Linerboard produced on D-3 will be mainly be made from virgin fiber and will be in the 26-35 lb range. The mill's existing large 620,000 tons/yr D-1 machine, previously based almost 100% on unbleached kraft pulp, will now use anywhere from 0-20% recycled fiber and produce kraft linerboard in the 31-56 lb basis weight range.

Freight and trim efficiencies.With the startup of D-3, PCA will now operate two 300-in containerboard machines at DeRidder, the optimum trim for supplying the latest 110-in wide high speed corrugators, such as the ones PCA runs at its Waco, TX, sheet feeder, Omaha, NE, box plant, and "flagship" Los Angeles box plant, according to a company official.

The company also expects freight savings from supplying its five box plants and the sheet feeder in the Dallas/Fort Worth "Metroplex" area. It no longer expects to ship in medium from its mills in Wisconsin and Michigan or some trims/weights of linerboard from its Georgia or Tennessee mills. The heaviest weight linerboard will be produced at the Valdosta, GA, mill.

Lowest cost conversion.When D-3 is fully ramped up, PCA expects to achieve a 30% return on capital, indicating the machine would generate roughly $60 million of EBITDA on an annual basis, Sr VP/CFO Rick West told analysts.

RISI Mill Intelligence estimates that D-3 will run on slightly higher than average cash costs for North American unbleached linerboard machines, placing it in the mid-third quartile in manufacturing costs. Most previous North American conversions have been in the high-third or fourth quartile in cash costs, RISI estimates.

Eighth quarter of record earnings.PCA reported earnings, excluding special items, of $124 million ($1.26/share) in the third quarter, up 39.3% from earnings of $89 million ($0.92/share) a year ago. Sales increased 79.8% to $1.5 billion, reflecting the Boise acquisition.

"This was our eight consecutive quarter of record earnings (excluding special items), driven in part by strong sales volume, record mill productivity, and mill cost reduction," Kowlzan told analysts.

He said the integration of Boise packaging continues to generate "significant synergies and operational improvements". At the end of the third quarter, (PCA) realized annual synergies at a run rate of about $110 million, up from $85-90 million at the end of the second quarter, and we continue to expect synergies of at least $175 million by the end of 2016."

Studying MLP tax structure.In response to an analyst's question, Kowlzan said the company has "spent a lot of time" analyzing the concept of creating a Master Limited Partnership (MLP) tax structure for its virgin mill assets.

"We have a good appreciation of its merits, both financially and strategically," he said.

Kowlzan said PCA has "engaged legal and financial assistance to provide the information that would allow us to submit a request to the IRS (Internal Revenue Service) for a private letter ruling."

But Kowlzan added that "the big unknown is when the IRS will lift this moratorium on MLPs and more importantly, what are the rulings and the substance of any private letter request?"

PCA's stock price jumped $6/share to close at $69/share on Oct. 21 following the release of the earnings and talk about MLPs..