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Packaging Corporation of America (NYSE:PKG)

Q4 2013 Earnings Conference Call

February 12, 2014 10:00 am ET

Executives

Mark Kowlzan – Chief Executive Officer

Paul Stecko – Chairman

Tom Hassfurther – Executive Vice President, Corrugated Products

Rick West – Senior Vice President & Chief Financial Officer

Judy Lassa – Senior Vice President, Paper

Analysts

Chip Dillon – Vertical Research Partners

Anthony Pettinari – Citigroup

George Staphos – Bank of America Merrill Lynch

Alex Ovshey – Goldman Sachs

Mark Weintraub – Buckingham Research

Mark Connelly – Credit Agricole Securities

Philip Ng – Jefferies

Mark Wilde – Deutsche Bank

Al Kabili – Macquarie

Chris Manuel – Wells Fargo

Steve Chercover – D.A. Davidson

John Tumazos – John Tumazos Very Independent Research

Operator

Thank you for joining Packaging Corporation of America’s Q4 and Full-Year 2013 Earnings Results Conference Call. Your host today will be Mark Kowlzan, Chief Executive Officer of PCA. Upon the conclusion of his narrative there will be a Q&A session. I will now turn the conference call over to Mr. Kowlzan and please proceed when you’re ready.

Mark Kowlzan

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

Yesterday we reported Q4 record net income of $227 million or $2.33 per share. Earnings included special items of $1.07 per share of income from the reversal of tax reserves for both PCA and Boise related to alternative energy tax credits and after-tax costs totaling $0.41 per share relating primarily to PCA’s acquisition of Boise, Inc. on October 25, 2013.

Excluding special items, net income was $101 million or $1.04 per share compared to Q4 2012 net income excluding special items of $59 million or $0.61 per share. Net sales were a record $1.3 billion compared to $737 million last year.

The $0.43 per share increase in earnings was driven by improvements in PCA’s earnings of $0.23 per share compared to last year’s Q4 and a partial quarter result from the acquisition of Boise of $0.20 per share. The PCA earnings increase of $0.23 per share resulted from an improved pricing mix of $0.36 and volume, $0.04, which was partially offset by cost increases in repairs of $0.03; fiber, $0.03; labor, $0.03; energy, $0.02; depreciation, $0.02; chemicals, $0.01; and other items, $0.03.

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

Whole year earnings excluding special items were $320 million or $3.28 per share compared to 2012 earnings excluding special items of $201 million or $2.06 per share. Net sales were a record $3.7 billion compared to $2.8 billion in 2012. Full year earnings including special items were $436 million or $4.47 per share compared to 2012 earnings of $164 million or $1.68 per share. Detailed special items for both Q4 and the full year were included in the schedules that accompanied our earnings press release.

We finished 2013 with another outstanding quarter, setting all-time records for sales, earnings and shipments. Our demand was steady throughout the quarter for both packaging and white papers and December volume was particularly strong.

We are pleased with Boise’s results which included only two months and five days of operations. Boise’s earnings per share results benefited from early synergy realizations and also by the successful integration of PCA and Boise, which we’ll talk about in more detail later in the presentation. For the year our earnings were up 60% over 2012’s record earnings and strong cash flow has allowed us to pay down $150 million in debt since we acquired Boise on October 25.

Looking at more details in our packaging business, PCA Corrugated Products shipments were up 4.4% in total and per work day over last year’s Q4. Shipments were strong throughout the quarter, up each month on a per workday basis, and again, it’s a very tough comp with PCA’s Q4 2012 shipments up almost 6% over 2011. Including Boise’s shipments from October 25th through year-end, total PCA shipments were up 24%.

For the year, PCA’s total shipments were up 5.7% and up 6.1% per workday compared to 2012, all of which came from organic growth. Including Boise’s partial Q4 shipments, total 2013 shipments were up 10.7% and per workday up 11.1%.

Both domestic containerboard and [export] sales demand remained strong in Q4 except for South America where the impact of cold weather on produce crops has lowered demand. Our containerboard mills produced 803,000 tons in Q4 including 141,000 tons of production by the former Boise mills. We completed an annual outage at our Filer City, Michigan, medium mill in October which resulted in production losses of about 6,700 tons.

For the year, total containerboard production was 2,749,000 tons. PCA’s total containerboard inventories at year-end, which for comparison purposes includes PCA and Boise tons at year-end 2013 and year-end 2012, were down 1,000 tons. The ending inventory is a little lower than we had targeted considering there were two less mill production days in Q1 compared to Q4 and our Counce, Tennessee, linerboard mill will be down for a week in March for its annual outage.

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

Looking at white papers, our volume was up about 1% compared to last year’s Q4 driven by growth in office papers which more than offset declines in printing and converting and pressure sensitive papers. The grades that declined in volume were significantly impacted by the permanent closures of two machines and lost machine [color] at the International Falls mill in October. The closures reduced capacity by about 115,000 tons annually. These closures, however, brought the mill into pulp balance and eliminated the need for purchased pulp, which should improve profitability in 2014.

White papers’ income was disproportionately affected in the partial quarter of PCA’s ownership by the annual shutdown of the Jackson, Alabama, mill which occurred in November. This shutdown reduced production by about 10,000 tons and increased operating costs. We ended the year with our white papers’ inventory down about 14,000 tons compared to last year and 11,000 tons below Q3.

In Q4 we notified customers and began implementing price increases of $60 per ton for office papers and printing and converting grades. In February we notified customers of an additional price increase of $70 for printing and converting grades, $50 for branded business papers, and $70 for private label. The price increases are effective March 3, 2014.

Finally, we continue to make improvements in day-to-day mill operations and are finding additional opportunities for synergies in the process. I’m now going to turn it over to Rick West, our CFO, who will provide more financial details.

Rick West

Thank you, Mark. In Q4 cash generated from operations was $188 million and for the year was [$608 million]. Capital expenditures for the quarter were $104 million and for the year were $234 million. Common stock dividends of $39 million were paid or $0.40 per share, and for the year, dividends of $109 million were paid. We did not repurchase any shares of PCA common stock during Q4 and for the year share repurchases totaled $8 million. [Cash tax] segments were $45 million in Q4 and for the year were $91 million.

We ended the year with $191 million in cash. We paid off $109 million of debt in December and an additional $41 million in January, making our total debt reduction since the acquisition $150 million. With the debt pay down our long-term debt is now at $2.509 billion. I am happy to report that the IRS audit of PCA’s 2008 and 2009 tax returns were completed during Q4 and all claimed alternative energy tax credits were allowed. As a result, we were able to reverse the tax reserve recorded for the Filer City biofuel tax credit of $104 million which we have fully used to offset past taxes owed.

In addition, as a result of an IRS Chief Counsel Memorandum published in Q4 we were also able to release a Boise tax reserve of $62 million related to the taxability of the alternative fuel mixture credits.

As we normally do at the beginning of each year, PCA provides estimates for certain 2014 items. We expect total capital expenditures to be between $380 million to $400 million including normal capital, required capital for synergies, [Foiler Mac] and the DeRidder Conversion project.

DD&A is expected to be about $340 million. Pension expense and funding is expected to be about $25 million and $5 million respectively. The combined federal and state effective tax rate is expected to be about 36.5% with a cash tax rate at about 31.0%. Based on our current long-term debt with no additional debt pay downs and current LIBOR rates our interest expense in 2014 is expected to be about $87 million, and cash interest payments are expected to be about $80 million. That’s about $10 million [along with] combined interest expense for Boise and PCA prior to the acquisition.

I’ll now turn it over to Paul Stecko who will comment on synergies in our Boise integration efforts.

Paul Stecko

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

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

When we announced the agreement to acquire Boise on September 16, we estimated synergies of $105 million which would be achieved over three years, or about $35 million per year. Our synergy estimate is now $175 million and we think we can get to a run rate of $75 million to $80 million by the end of the first year. Actions taken immediately after the acquisition on October 25th and essentially completed by the end of the year were the elimination of about $25 million in overhead costs primarily from reduced headcount and lower corporate governance costs.

Although not counted in our synergy estimates with the acquisition of Boise we also inherited tax-loss carry forwards of $135 million which we can utilize. These loss carry forwards are front-end loaded and already reduced our 2013 tax payments by $9 million and will reduce 2014 tax payments by $38 million. The remaining tax loss carry forwards will reduce payments by about $6 million per year from 2015 through 2028.

Finally, a few comments on the DeRidder paper machine conversion project. After the closing of the acquisition on October 25th we announced that we were putting the project on hold until we could perform a complete technical review. This was expected to delay the startup of the project from mid-2014 till Q4 2014. This is still the case. In addition to ensuring technical accuracy we also wanted to fully utilize our expertise and make any changes to the project that could further improve its returns. That process is continuing and we have found ways to improve the returns. We expect to be in a position to provide an update on the cost of the project and the expected returns sometime in March.

With that I’ll turn it back to Mark for the Q1 outlook.

Mark Kowlzan

Thanks, Paul. Earnings improvement is expected from a full quarter’s operation of Boise including synergies and lower amortization of annual mill outage costs. White papers’ prices are expected to improve in Q1 as a result of our announced price increases. Our largest containerboard mill in Counce, Tennessee, will be down in March for its annual maintenance outage which will reduce production and increase operating costs.

We normally have increased costs from colder weather of about $0.06 per share compared to Q4 for such things as wood, energy, and transportation. So far this year however the extreme cold temperatures and significant snowfalls across the country have impacted all of our mills with higher-than-normal cost increases for these items.

Costs at our conversion plants are also being impacted and we’ve had some plant closures. It’s very tough to predict how these extreme weather patterns will impact PCA for the entire quarter but it’s probably cost us $0.03 per share already with about a month and a half left to go in the quarter.

Labor costs are expected to be higher with beginning of the year wage increases for both salary and hourly employees and certain benefit costs will be higher, primarily FICA during Q1. We also expect a higher tax rate. Considering all these items we currently expect Q1 earnings to be from about $1.00 to $1.05 per share excluding special items.

With that we’d be happy to entertain any questions, but I must remind you that some of the statements we’ve made on this call constituted forward-looking statements. These statements were based on current estimates, expectations and projections of the company and do involve inherent risks and uncertainties including the (inaudible) in the economy and those identified as “risk factors” in our annual report on file on Form 10(k) with the SEC. The actual results could differ materially from those expressed in these forward-looking statements.

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

Question-and-Answer Session

Operator

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

Chip Dillon – Vertical Research Partners

Yes, good morning. My questions, the first one is on the synergy target which you just raised and is impressive to see certainly. Can you give us an idea of where you found the increments of what you thought at the beginning, and were some of those increments maybe in ways the white papers business is run as part of PKG?

Mark Kowlzan

As a matter of fact the biggest area was in the white papers. We didn’t have much in it initially and as we started to operate the business we discovered a lot of opportunities. And on the brown side we have the big things such as [braid] optimization and transportation opportunities along with sales mix, but as we got into the actual operations of the mills and the box plants again a lot of smaller items made themselves available to us.

Chip Dillon – Vertical Research Partners

Okay, and then just one quick follow-up. You all mentioned that the Jackson outage impacted white papers in Q4, and of course the $15 million in the paper segment was certainly more than we were looking for to begin with, not even being aware of that or building that in consciously. How much of an impact was that and should we sort of add back that number and then make our own judgment on pricing as we look at 2014 per quarter?

Mark Kowlzan

Yeah, I’m going to let Judy comment on that.

Judy Lassa

Yeah, that’s about a $4.5 million impact here on EBITDA in Q4.

Chip Dillon – Vertical Research Partners

Okay. But I would imagine you would have other outages you take in your system so I mean is that sort of a normal per quarter amount or was that an outsized amount?

Judy Lassa

No, it was pretty close to a normal amount with a little bit longer run than our other outages.

Paul Stecko

Hey Chip, this is Paul. I think the point that we were trying to make is we only had the business for two months and so we had an annual shutdown in the two-month period, and usually Boise would have a shutdown once every three months. This was once every two months so it was disproportionate because of the stub period only that we owned it. They did not have a full quarter to absorb that hit – it was over a much shorter period.

Chip Dillon – Vertical Research Partners

Gotcha, very clear. And the last quick one, can you talk a little bit about your box demand experience so far this year, maybe in January?

Mark Kowlzan

Yeah, if you look at January, this is both combined PCA and Boise, we were up 2.5%. And again, considering where we were from the tough comps a year ago we were looking at a combined Boise/PCA 11% last year in January over the prior year. So our 2.5% performance in January, we felt good and again it was up against a tremendous prior year number.

Paul Stecko

And the weather hurt us a little bit on demand. That’s hard to quantify and hopefully we’ll make that up over the rest of the quarter if this weather ever improves.

Chip Dillon – Vertical Research Partners

Thank you.

Operator

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

Anthony Pettinari – Citigroup

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

Tom Hassfurther

Yeah, Anthony, this is Tom. All I can tell you is we really only have the information for the sub period which was very flattish over the previous year, so that’s really all I can comment on in terms of the comparison.

Anthony Pettinari – Citigroup

Okay.

Tom Hassfurther

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

Anthony Pettinari – Citigroup

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

Mark Kowlzan

We’ve been fortunate that we haven’t had any direct impact on the productivity per se but we’ve obviously had the impact on raw material goods transportation issues along with finished goods transportation issues because of the icy roads and the rail problems. And nationwide, if you go all the way from the I Falls, the Canadian border down to the Gulf coast we’ve seen massive railroad problems with the extreme cold, snow and ice. So in that regard the mills have been productive but again the cost impacts are there.

Paul Stecko

I would add to that just what Mark said – we’ve been a little bit lucky, too. One of the problems is the rails in this long, cold weather, they are having maintenance problems and the rail system has slowed noticeably. And in January we had at several of our mills less than a day’s worth of chemicals, and if we did not get a rail ship in time we would have had to shut those mills down. And we were fortunate, we did get some just in time, switching the rail cars and we were able to keep our mills running. And knock on wood, we’ve got another month and a half to go to get through this but transportation is as big an issue in and out of mills as your other costs.

Anthony Pettinari – Citigroup

Okay, that’s helpful. I’ll turn it over.

Operator

Your next question comes from George Staphos with Bank of America Merrill Lynch.

George Staphos – Bank of America Merrill Lynch

Thanks, hi everyone, good morning. Congratulations on the year. Two quick questions actually on papers: I was wondering if you could talk a little bit more about the size of the synergy increment, the question being previous to Boise you didn’t have a white papers business. Now you do and so it’s interesting that you had so much incremental synergy gain in a business where there was no direct overlap with your existing business. I was hoping you could provide a bit more color on that, and then more broadly having owned the business now for a few months and it seems to be performing well certainly relative to your expectations could you advise the community here how you see the papers business fitting in ultimately to your strategy, guys? Thank you.

Paul Stecko

Yeah, let me take that one, George. With regard to the synergies, we do have a lot of synergies – and the synergies is in operating expertise. We weren’t in the white paper business but we operate mills, and there are a lot of practices, preventative maintenance being one of them that we think we’re pretty good at and we’ve applied those principles in the white paper business.

Now that said we actually did a poor job upfront estimating the white paper synergies because we’re primarily a packaging company and we focused on those synergies. But again, as we got into the white paper business a lot of synergies came out of it, and I would say that about half the increment – and that’s just an estimate at this point – came from additions to white papers; the other half came from things we found in the brown.

With regard to your second question, what we think about the white paper business, I’ll say again we’re primarily a packaging company. But when it comes to white papers we see some excellent opportunities to create shareholder value, and that’s what we’re here to do – create shareholder value. And the first way we can do it is by obviously improving operations in white papers and we’ve already stated to do that; and then we got a little bit of help in that market conditions as you know have improved significantly since we made this acquisition for white papers.

And third, we feel we have the ability to build on a very, very strong competency that this business has and that is excellence in logistics and customer service. So overall I would tell you that compared to the time of the acquisition we’re very encouraged and we feel we have a real opportunity to create significant shareholder value in this part of the business. Although it’s not nearly as big as packaging it’s going to add a lot of value to the enterprise.

George Staphos – Bank of America Merrill Lynch

Thank you, Paul, I’ll turn it over.

Operator

Your next question comes from the line of Alex Ovshey with Goldman Sachs.

Alex Ovshey – Goldman Sachs

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

Mark Kowlzan

Judy?

Judy Lassa

I don’t have a comment on that.

Alex Ovshey – Goldman Sachs

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

Paul Stecko

Let me handle part of that and we’ll let Tom take some of that. Regarding the integration level we’re currently looking at about 90% integrated. If you think about what we said over the last four years we expected to be at 90% plus by the end of 2014. We are there so everything we’ve been talking about regarding the importance of DeRidder and the ability to supply tons is still very true.

Regarding the export and the balance of domestic and export, I’ll let Tom get into that.

Tom Hassfurther

Alex, I’d just say that on the balance between domestic and export with the combined company, it’s still virtually the same. We’ve reduced our export footprint as we talked about in previous quarterly calls during the year and Boise has pretty much maintained theirs. But going forward we’ll still be very much what I call a small, specialty strategic player in the exports market.

Alex Ovshey – Goldman Sachs

And then just one last quick one from me: the increased synergy target, I think looking at the D&A number today it’s a little bit lower than what I think you’ve previously talked about. Is any of these increased synergies due to lower D&A or is it all higher cash synergies that you’re seeing?

Rick West

No, the synergies did not have any impact on DD&A. In fact, the synergies to DD&A came in about what we expected. And one thing I’ll point out, when you look at the step up in value of the fixed assets and the overall assets it’s probably not as great as you would expect because the Boise assets were revalued in 2008. So in total I would say that the total step up in DD&A only impacted depreciation expense year-over-year from 2013 is if we’d acquired Boise on January 1st through the entire year to 2014. DD&A only went up about 15 with DD&A going down in the paper business some and up in the packaging business.

Alex Ovshey – Goldman Sachs

Great help everyone, thank you.

Operator

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

Mark Weintraub – Buckingham Research

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

Rick West

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

Mark Weintraub – Buckingham Research

Okay, thank you. And then second, so Boise was roughly $0.20 accretive in the just over two months that you had it. Is it fair to think of the acquisition that if you’d had it for the whole time it would have been closer to $0.30? And if you times that by four it would have been close to $1.20? And then hopefully you’ve even got good things going on with price and some other things and [encoded] for instance so that again, we’ll see how things play out but potentially you can get even more accretion – throw synergies on top of that as well – which assuming that there’s some validity to that process of thinking how do you think about the dividend which really was established before you had Boise and now we’ve got all this additional earnings and cash flow? Is it appropriate to think about sooner rather than later repositioning some of that cash flow into raising the dividend again?

Paul Stecko

Mark, this is Paul. I would say as a general answer it’s yes to about everything you said. But let me clarify that now with regard to the dividend. What we said initially, our number one objective with regard to proceeding was to pay down debt. And our goal was, and we said it at the time of the acquisition, was to pay down $1 billion worth of debt over say the next three years. And that was based on what we thought we could do.

Now admittedly we underestimated the synergies and we’ve also got this tax benefit on a tax loss carry forward. So I think there’s a possibility that we can be in the position to do both because the one negative of your stock price going up, and there’s only one, is that the yield on your dividend goes down. And so we may be in the position to be able to meet both goals and then both goals would be to pay down that $1 billion in debt and with the excess cash do something to continue to improve the yield on our dividend as we go forward. And so I think there’s more of a possibility of doing what you said than less of a possibility.

Mark Weintraub – Buckingham Research

Thanks very much.

Operator

Your next question comes from the line of Mark Connelly with Credit Agricole Securities.

Mark Connelly – Credit Agricole Securities

Thanks. Mark, as we think about the synergy optimization it sounds like you’re already talking about re-optimizing the mills in the existing expanded synergy targets. Should we think about this as a two-step process then where you’re going to re-optimize the mills and then you’re going to figure out what D2 is going to make and then probably re-optimize again after that? And the second question, do you expect your overall fiber mix to change very much? I mean some of the past repositioning of mills that Boise has done have made some pretty major changes in fiber over time. I’m just wondering if that’s a piece of your strategy here?

Mark Kowlzan

Regarding the first part of your question on optimization, the way we’ve been approaching Boise is just what we’ve done at PCA over the years. We’ve got a very strong technical organization that is dispatched to the mills on a weekly basis, and so we basically just incorporated the Boise mills into that routine. So we have multiple activities taking place at all of the mills and so there’s a parallel path forward on how we’re optimizing, and that’s also including the DeRidder piece of the equation. So everything’s happening in a parallel fashion so we’re not doing anything in a linear fashion by any means. And then regarding fiber I don’t expect to see anything change in that regard.

Paul Stecko

And I would add again, back on your first question, we don’t view this as a two-step process. We have a big picture that says “These are the capabilities we have, these’ll be the capabilities after the DeRidder conversion is online; this is our supply, this is the demand.” As Mark said earlier, our integration level got to our goal of 90% and that’s the main driver for doing the DeRidder conversion. We need a bigger runway for the next five years. We are growing; we need tons from somewhere and the DeRidder conversion is where we’ll get them or our integration level will get too high and we don’t want that to happen because it impedes your ability to serve customers.

But no, we know what we’re going to do. We know what we’re going to make. We’re just figuring out again on a project what’s the optimum way to do that, to construct that to make sure we get the highest return. But it’s a one-step plan, albeit that the last step in the process is the conversion project.

Mark Connelly – Credit Agricole Securities

Alright, that’s helpful. Thank you.

Operator

Your next question comes from the line of Philip Ng with Jefferies and Company.

Philip Ng – Jefferies

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

Mark Kowlzan

When you say we’re the only national producer on the West Coast, that’s not-

Philip Ng – Jefferies

Yeah, that has a footprint out there on the West Coast.

Mark Kowlzan

We don’t have a [milk] footprint on the West Coast.

Tom Hassfurther

Obviously the media machine at Wallula and the DeRidder machine puts us much closer to the West Coast from a transportation point of view, so we get help there and that’s our transportation synergy.

Paul Stecko

But all the big players have box plant capacity on the West Coast.

Philip Ng – Jefferies

Okay, that’s helpful.

Paul Stecko

We didn’t have capacity in the Pacific Northwest so we joined… We can now say we are on the West Coast. Others could have said that before us.

Philip Ng – Jefferies

Okay. That’s helpful. And then based on some of the moves you guys are making in terms of pushing out D2 and some of the synergies you’re looking to unlock can you provide some clarity on how we should be thinking about CAPEX for 2015 and 2016?

Rick West

Not at this point.

Mark Kowlzan

Yeah, we stated earlier that our target for the year is around $400 million and so that’s what our plan is calling for for this year. We haven’t really taken a look out into ’15-‘16.

Philip Ng – Jefferies

Okay, and then one last housekeeping question. Can you give us some color on the tons you guys are looking to take in terms of a maintenance standpoint for the full year? I know there’s some comparison differences – last time you guys took a lot more in Q2 than in Q1, so I just wanted some more color on that front.

Mark Kowlzan

You know, we generally don’t comment on forward quarters regarding tons, but just obviously we have Counce down for its annual this quarter and then at least to help you understand Q2 without getting into tons we’ll have the I Falls and the Wallula mills down primarily and Tomahawk for Q2. But I don’t want to get into going forward tons impacts. We’ll do that quarter-by-quarter when we talk about the quarter.

Philip Ng – Jefferies

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

Mark Kowlzan

No. Counce is down for its annual at the end of the March period so it’s just one week.

Paul Stecko

Historically Q1 was our heaviest downtime quarter. That will not be the case this year because one, we have more mills; and two, because of equipment deliveries for example even Counce is pushed out until the end of Q1. So it will not be our normal pattern; it’ll be more uniform this year than skewed towards Q1.

Philip Ng – Jefferies

Alright, thanks guys.

Operator

Your next question comes from Mark Wilde with Deutsche Bank.

Mark Wilde – Deutsche Bank

Yeah, good morning. I wonder if it’s possible within that CAPEX number of about $400 million for this year, is it possible to get a sense of how much of that is the D2 project?

Mark Kowlzan

No, we don’t want to get into that right now. Again, as Paul mentioned we’ll be discussing probably that during the month of March more in detail.

Mark Wilde – Deutsche Bank

Okay, away from that, Mark, is it possible to get a sense of sort of what the CAPEX looks like at the other Boise mills and what that looks like relative to depreciation at the Boise mills?

Mark Kowlzan

No, we’re not prepared to do that on this call, Mark. It’s primarily an earnings review and we’re not, we don’t really want to get into that today.

Mark Wilde – Deutsche Bank

Okay, the one other question I had then going back to kind of Mark Weintraub’s question about debt reduction and potentially a higher dividend, is it fair to say that the targets that you set initially with that three-year debt reduction goal of $1 billion, that that wouldn’t have assumed all the news we’ve had on pricing on [uncored free sheet] over the last three months?

Mark Kowlzan

That would be fair to assume.

Mark Wilde – Deutsche Bank

Alright, fair enough. Thanks.

Operator

Your next question comes from Al Kabili with Macquarie.

Al Kabili – Macquarie

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

Paul Stecko

I think we may have misstated; I’m not sure exactly what we said. We said that the cost of getting the synergies would be from $80 million to $100 million, so you got the $80 million to $100 million part right. But those costs were not all capital. They also included such things as severance costs for the headcount reduction. So that number’s an all-in. Some of it’s capital; some of it’s not – it’s a one-time expense.

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

Al Kabili – Macquarie

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

Paul Stecko

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

Al Kabili – Macquarie

Okay, terrific. Then on a related topic on the synergies, can you help us with how much, and maybe I missed this but how much synergies you realized in Q4 and what the run rate today is on the synergies?

Rick West

I would say that we said, I’m not going to get into the specific EPS amount, Al, but if you look at it what we said on the call was immediately after October 25th and through the end of the year we had got about $25 million in corporate overhead costs. So I’ll let you do the math on that because it’s kind of difficult if you’re coming in through to the corporate, and that’s an annual number – taking out $25 million in annual costs of corporate overhead. And then Paul mentioned that we would be at an annual rate of about $75 million to $80 million by the end of the year, so that’s about as much granularity as we’re able to give at this point.

Al Kabili – Macquarie

Okay, alright, that’s helpful. And then to the degree you can comment on just the order book – I believe you mentioned volumes were up 2.5% combined Boise and PCA. As you sort of look at the order book to the degree it gives you some visibility there, how is that looking versus last year? Are you seeing a notable uptick there because we’ve heard from some others that they have seen that?

Mark Kowlzan

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

Paul Stecko

Let me say it another way – we’ve had some quarters last year where we were up 6%, but last January was an anomaly when you’re up 11%. And so beating an 11% up by a lot is hard to do so yes, the 2.5% we were pretty pleased with compared with what we were comparing it against. So if you wanted to call it an uptick I guess you can – I don’t know if I’d want to go that far. And then as I said earlier things were exasperated by weather. We had box plants down from several storms and that’s hurt our volume a little bit, but you’re going to recover some of that and we’ll probably recover that if the weather changes in February. So it’s kind of a hard question to answer.

Al Kabili – Macquarie

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

Rick West

I don’t want to predict for the year because we’re continuing to go through the corporate line, and as you get synergies it may change. But I would say that in the past we have kept all corporate overhead as one item when we were one segment; whereas with our reporting in Q4 we are allocating a portion of the corporate overhead to both the paper and the packaging segments, and only retaining the part that’s not allocated which would be more true corporate functions in corporate. So I think it’s a little too soon to do that. We can probably give you a better idea after the end of Q1.

Al Kabili – Macquarie

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

Operator

Your next question will come from Chris Manuel with Wells Fargo.

Chris Manuel – Wells Fargo

Good morning gentlemen, and just a couple follow-up questions for you. First could you maybe help us a little bit with the timing or the phasing as you anticipate the two price increases coming through? How much have you realized thus far, how does that kind of fade through over the balance of the year? Does it typically take a quarter or two for the UFS pricing to phase in?

Judy Lassa

This is Judy, I’ll take that one. So the price increase that we announced back in last quarter, depending on product or grade mix our price realization to date is about $40 to $50 a ton excluding the volume that’s tied to indices. And as we’ve commented in the opening remarks we do have another price increase announced out there but we won’t talk about how that’s going to come in.

Chris Manuel – Wells Fargo

Okay.

Paul Stecko

And I think Mark and I and Rick, we’re new again to the white papers business having not been in that segment for about twenty years. But if you look at some of the indices they have tended to but in a little bit of the increase each month. It’s almost like a box price increase as opposed to a containerboard increase that usually goes in on one date. And so that will probably be the case this year but we’ll see.

Chris Manuel – Wells Fargo

Okay, so it sounds like you’ve got maybe two thirds of it in there as of the end of the quarter, so the first price increase – but the rest will be in during this quarter maybe?

Paul Stecko

No, what Judy said is on the businesses that we have unilateral ability to raise the price we’re up the numbers that she gave you; but we have stuff also that’s tied to indices and that moves only when the index moves. So the answer to your question is you have to know how much is tied to indices and how much isn’t and that’s company proprietary information that we don’t discuss with anybody because that information would be useful to our competitors also. So we don’t talk about it.

Chris Manuel – Wells Fargo

Got it. Second question is with respect to, you talked about – and I know you discussed this a few months back as well – moving up the D2 conversion from kind of midyear towards the end of the year. You alluded to a couple elements in there where you said that you would improve returns and what you wanted out of the business. Can you maybe give us a little color as to how you intend to improve returns? Is it coming from maybe it costing less to put in? Is it coming from maybe it having more capacity from the 300,000 I think that was originally slated to come on? Or is there even an element that you figured out how to lower the cost curve of the new mill when it does come online but at the same capacity? Can you maybe help us a little bit there with what you were able to do?

Mark Kowlzan

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

Paul Stecko

And I would add that we will not share that information with the public until we share it with our Board of Directors. And we’ve got a Board meeting at the end of this month and we owe them a status report on what we’ve found, what we’re going to do, how we’re going to improve the return, etc. Once we do that then we’ll be free to discuss that.

Chris Manuel – Wells Fargo

Can you maybe share with us that the plan is still that it’s going to be 300,000 tons when it comes on stream or is it…

Paul Stecko

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

Chris Manuel – Wells Fargo

Okay. Last question I had is I used to have an old number I used for kind of making the CAPEX in the $125 million range for PCA. Including appreciating now that you’re a little bigger with the Boise element in there what would you sort of estimate that sort of a maintenance CAPEX number would be?

Rick West

We’re still looking at that, Chris, and I’m not going to break out and parse out the estimated capital. You know, it’s something that takes a while. As Mark looks at the integration of the mills and what we need to do it’s just too soon. We’ve got the full number and I can’t parse that out at this point.

Mark Kowlzan

Yeah, but you are incorrect about the number. Our CAPEX number varied through the last decade say from $110 million to $125 million. About half of it was maintenance; the other half was a project to improve profitability and reduce costs. So you had the right number but only half of that is pure maintenance capital. The other half involves the capacity addition and things of that nature.

Chris Manuel – Wells Fargo

Okay, thank you and good luck, guys.

Operator

Your next question comes from the line of Steve Cherecover with D.A. Davidson.

Steve Chercover – D.A. Davidson

Good morning, welcome to the Pacific Northwest. Just a couple quickies to kind of follow on to Mr. Weintraub’s questions. It’s appropriate that Walulla’s now in packaging. Am I correct that newsprint is still in the packaging segment as well?

Rick West

That is correct.

Steve Chercover – D.A. Davidson

Okay, and along that line it appeared that Boise’s packaging margins were well below your historical margins and that made us a little nervous, but your margins in Q4 were kind of in line with your generally terrific margins. Have you already fixed the system or is that due in part to the re-segmentation?

Mark Kowlzan

We’ll let Tom Hassfurther answer that.

Tom Hassfurther

Steve, this is Tom here, I’ll comment on that. You know, we’ve already done a lot on the packaging side of the business, obviously starting with headcount which we discussed earlier. We’ve brought a lot of operation expertise to Boise which has already begun to yield some results. The geographic footprint is important to us and has allowed us to expand some customer base into the Pacific Northwest where we did not have a footprint before.

But I’d just say as we talk about many acquisitions, one of the most important aspects of any acquisition – and that includes all of PCA – is the people. And you know, the people that make the difference at Boise, we’re very, very pleased with them, the progress they’re making. There’s a great opportunity in my opinion to continue to bring Boise into the PCA culture which gets them focused on much more hard-to-do value added business and getting paid appropriately for it. So I think there’s a lot of upside in those plants and we’re very, very encouraged with the improvement they’ve made already.

Steve Chercover – D.A. Davidson

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

Rick West

I would say yes. And you have to remember when you look at Boise, even in terms of volume, we were about three times the size of Boise anyway. So acquiring the Boise packaging business was about a quarter bigger than us so you have to factor that into how you look at the margins and the average. But as Tom said we’re very happy.

Steve Chercover – D.A. Davidson

Terrific. And one other quick clarification please. I think you said embedded in the $0.20 accretion from Boise there was $0.06 associated with interest. Can you just clarify was that to your benefit or it might have actually been $0.26 without that interest hit?

Rick West

You’re correct in your last statement. What we did is we had to take on debt to acquire Boise so we felt it was appropriate to take the entire interest expense on that new debt and for reporting purposes this one quarter apply that interest expense of $0.06 against the Boise earnings on a standalone basis. So therefore before interest it was $0.26 per share; after the full interest to acquire Boise it was $0.20 a share.

Paul Stecko

And the other reason we did that is we had given guidance to the street before the Boise acquisition of $0.84 for PCA. So we wanted to have a valid comparison of how did we do against the $0.84 target, and so that’s why we isolated that interest to Boise. And PCA actually came in at $0.84 on that side and Boise took the entire brunt of that interest expense, which we thought that was a fair way to do it. So without that interest expense it would have been $0.06 higher at Boise. (Inaudible) going forward as we do a more normal allocation.

Steve Chercover – D.A. Davidson

And by extension if we annualize it, it could be more like $1.40 than $1.20 I suppose, the accretion.

Paul Stecko

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

Steve Chercover – D.A. Davidson

Okay, well you’re one company. Congratulations, thank you.

Operator

Your next question comes from the line John Tumazos with John Tumazos Very Independent Research.

John Tumazos – John Tumazos Very Independent Research

Thank you for taking my question and congratulations on all your great achievements. In terms of the DeRidder project, my question is do you believe that the capital costs can be accurately estimated? My impression is there’s a plethora of natural gas and oil-related projects in Louisiana. There was just a project of Shell that the capital overran 60% in the first four months of studies and they canceled it. My impression is it’s very hard to get contractors these days because of the oil and gas boom.

Mark Kowlzan

You know, as we’ve looked at the project we’ve also been meeting with the general contractors and I’m not concerned with that right now. We currently have contractors onsite working on part of the capital program at DeRidder regarding the OCC plant that was again a critical component to the announced plans at DeRidder, and again, we’re not having that problem that you discussed. So that’s all I’m going to say about that.

John Tumazos – John Tumazos Very Independent Research

Thank you.

Mark Kowlzan

And with that we’ve basically run out of time. And so thank you for joining us today and I look forward to talking with you at the end of Q1 on the April call. Have a good day, thank you.

Operator

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

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