Earnings Call Transcript
PACKAGING CORP OF AMERICA (PKG)
Earnings Call Transcript - PKG Q3 2020
Operator, Operator
Thank you for joining Packaging Corporation of America's Third Quarter 2020 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 question-and-answer session. I will now turn the call over to Mr. Kowlzan, and please proceed when you are ready.
Mark Kowlzan, Chairman and CEO
Good morning, and thank you for participating in Packaging Corporation of America's Third Quarter 2020 Earnings Release Conference Call. I'm Mark Kowlzan, Chairman and CEO of PCA, and with me on the call today is Tom Hassfurther, Executive Vice President, who runs the Packaging business; and Bob Mundy, our Chief Financial Officer. I'll begin the call with an overview of our third quarter results, and then I'll be turning the call over to Tom and Bob, who will provide more details. And then I'll wrap things up, and we'd be glad to take questions. Yesterday, we reported third quarter net income of $139 million or $1.46 per share. Excluding special items, third quarter 2020 net income was $149 million or $1.57 per share compared to the third quarter 2019 net income of $182 million or $1.92 per share. Third quarter net sales were $1.69 billion in 2020 and $1.75 billion in 2019. Total company EBITDA for the third quarter, excluding special items, was $323 million in 2020 and $364 million in 2019. Third quarter net income included special items expenses of $0.11 per share related primarily to the impact of Hurricane Laura on our DeRidder Mill during the months of August and September. Bob will discuss that in more detail in a few minutes. Details of all the special items for the third quarter of 2020 were included in the schedules that accompanied the earnings press release. Excluding the special items, the $0.35 per share decrease in third quarter 2020 earnings compared to the third quarter of 2019 was driven primarily by lower prices and mix in our Packaging segment of $0.36 and Paper segment, $0.07, lower volumes in our paper segment of $0.33 and higher scheduled maintenance outage costs $0.04 and higher freight expense, $0.02. These items were partially offset by higher volumes in our Packaging segment of $0.22, lower operating costs of $0.20, which were primarily from lower indirect costs at the idle Jackson Mill as well as lower indirect and fixed costs in our box plants. We also had lower converting costs of $0.04 and lower other costs of $0.01. Looking at our Packaging business, EBITDA, excluding special items in the third quarter of 2020 of $324 million with sales of $1.5 billion resulted in a margin of 22% versus last year's EBITDA of $324 million and sales of $1.5 billion and also a 22% margin. In the Packaging segment, demand was very strong throughout the quarter. And we set new all-time quarterly records for total box shipments and shipments per day. Our flexible containerboard mill system was able to overcome the Hurricane Laura related downtime at our DeRidder Mill and avoid any disruptions to customers. The mill was able to mitigate a portion of the downtime by postponing a previously scheduled outage during the quarter and other productivity gains. However, this unplanned downtime, combined with the extremely strong demand, resulted in an inventory drop of 55,000 tons during the quarter or 58,000 tons below last year's level. As a result, our weeks of supply at the end of the quarter was at an all-time low. We've decided to postpone the large planned discretionary fourth quarter outage at the DeRidder Mill that we had discussed on the last earnings call, in order to enable us to build inventory ahead of next year's annual outage schedule and the expected continued strong demand we're seeing. The mills did a great job of managing through the hurricane-induced production challenges to supply the record-breaking needs of our box plants and the efficiencies and cost improvement at the plants continued throughout the quarter. I'll now turn it over to Tom, who will provide more details on containerboard sales and our corrugated business.
Thomas Hassfurther, Executive Vice President
Thank you, Mark. As Mark mentioned, our corrugated products plants established new all-time quarterly records for total box shipments, up 6.4% compared to last year's third quarter as well as shipments per day, up 4.7% compared to last year. Through the first 3 quarters of 2020, our box shipment volume is up 4.4% in total and 3.3% on a per-day basis. Outside sales volume of containerboard was 28,000 tons below last year's third quarter as we ran our containerboard system to overcome the hurricane-related downtime at DeRidder and supply the record needs of our box plants. Domestic containerboard and corrugated products prices and mix together were $0.34 per share below the third quarter of 2019 and up $0.05 per share compared to the second quarter of 2020, primarily due to a favorable product and customer mix. Export containerboard prices were down $0.02 per share compared to the third quarter of 2019 and flat compared to the second quarter of 2020. Finally, we recently notified our containerboard customers of a $50 per ton price increase effective November 1. And in addition, we have also notified our box customers of a price increase. While we don't comment on forward pricing specifics, we would expect to realize some of the benefits of the increase during the fourth quarter, but the vast majority of the benefit would be expected in the first quarter of 2021. I'll now turn it back to Mark.
Mark Kowlzan, Chairman and CEO
Thank you, Tom. Looking at our paper segment. EBITDA, excluding special items in the third quarter was $17 million with sales of $178 million or a 9% margin compared to the third quarter of 2019 EBITDA of $58 million and sales of $243 million or 24% margin. Average prices and mix were about 5% below the third quarter of 2019 and about 1% below the second quarter of 2020. Although our seasonally stronger third quarter cut size and printing and converting volumes were about 45% higher than the second quarter levels, they were well below last year's levels by almost 24%. We had our Jackson Mill down for the entire third quarter to help manage our supply to these lower demand levels. We restarted paper production at the mill in early October, partly as a result of our demand outlook relative to our inventory levels as well as the scheduled outage at our International Falls Mill earlier this month. We'll continue to assess our outlook for paper demand and we'll run on our system accordingly. I'll now turn it over to Bob.
Robert Mundy, Chief Financial Officer
Thanks, Mark. We had very good cash generation in the third quarter with cash provided by operations of $298 million and free cash flow of $196 million. The primary uses of cash during the quarter included capital expenditures of $102 million, common stock dividends totaled $75 million, pension payments of $71 million, $21 million for federal and state income tax payments and net interest payments of $7 million. We ended the quarter with $949 million of cash on hand or just under $1.1 billion, including marketable securities. Our liquidity at September 30 was just over $1.4 billion. Regarding Hurricane Laura-related costs and expenses at our DeRidder Mill, based on the way our insurance coverages work for named storms such as this. There are separate deductibles for property damage and the time element or business interruption aspects of our coverage. The costs incurred over the months of August and September did not meet the deductibles for either of these, so there will not be an insurance claim filed for these damages and downtime, which together totaled just under $10 million. Finally, as Mark indicated, because of our extremely low containerboard inventory and expected continued strong demand, we postponed a scheduled third quarter machine outage at DeRidder, and we will postpone the mill's large planned discretionary fourth quarter outage that we mentioned on last quarter's call. As a result, our planned outage expense for the third quarter came in $0.04 per share lower than what we last discussed. And a revised estimate for the fourth quarter is now expected to be $0.23 per share or $0.11 per share higher than the third quarter. This would put us at $0.66 per share in total for the full year 2020. We are currently assessing when to reschedule these outages as well as the entire planned outage schedule for 2021, and we'll communicate that to you in January as we normally do. I'll now turn it back over to Mark.
Mark Kowlzan, Chairman and CEO
Thanks, Bob. For three quarters now, our employees across the company ran their operations safely and in a cost-effective manner during the pandemic. They are doing an outstanding job in adhering to the processes and strict protocols we have instituted to help protect them and their families. What makes this even more remarkable is that our employees' focus on these new work requirements is occurring while we are experiencing unprecedented demand within our packaging business, and they continue to successfully meet the expectations of our containerboard and box customers. Everyone has worked very hard to overcome the challenges and obstacles we face this year, and I couldn't be more proud of the entire organization as well as the strong partnerships we have with our customers and suppliers. Looking ahead, as we move from the third and into the fourth quarter in our Packaging segment, we expect corrugated products demand to remain strong. Although box shipments will be lower than the third quarter with three less shipping days, volumes should be higher than last year's record fourth quarter shipments. In early October, a second hurricane, Hurricane Delta, again, impacted operations at our DeRidder Mill by approximately four days and almost 8,000 tons, which further challenged our historically low inventory position. However, we expect higher containerboard production volume compared to the third quarter as we work towards building some inventory prior to year-end in preparation for the first quarter of 2021 scheduled maintenance outages and expected continued strong demand. As we mentioned on last quarter's call, the converted #3 machine at the Wallula Mill as well as the mill itself is currently running to its capacity. However, we do plan to get some additional volume during 2021 after we optimize the OCC plant capital project, we're currently finishing up and complete some reliability improvements. Therefore, to help bring our inventory back to an appropriate level by year-end, beginning in November, we will also be producing high-performance virgin linerboard on the #3 machine at our Jackson, Alabama Mill, in addition to any white paper needs. Most of you know, for some time that the Jackson mill has always been an option for us to address our strategic, integrated containerboard supply needs that's capable of providing the necessary runway to grow our downstream converting demand. We've done numerous studies and estimates over the last few years, and with the depressed demand in the uncoated free sheet market for Jackson products, our integration rate consistently in the upper 90% range, our historically low inventory levels, and limited outside availability of the types of containerboard we need to run the mix our box plants require, now is the perfect time to do some trial work and learn some things relative to the studies we have performed. We're confident, however, of our ability to produce high-quality virgin craft containerboard for use in our box plants during this period. The #3 machine at Jackson is a great, very versatile machine and the mill infrastructure itself allows us the necessary flexibility and optionality to react appropriately to our containerboard and white paper needs during these fluid and dynamic times. Obviously, to fully utilize the potential of the mill to produce containerboard at an optimal cost and quality, future capital investments and process changes in a phased approach will be required, and we'll use this period to further refine our estimates and assumptions as well as our volume and capital spending plans for 2021. Continuing on, as Tom mentioned, we expect to begin realizing in the Pacific Northwest, as well as the display and high-end graphics business for the holiday period normally falls off during the quarter. In addition, we expect average export prices to move higher in the fourth quarter versus the third quarter. In our Paper segment, although demand during this period is well below historical levels, as schools and businesses have reopened, to some extent, volume has improved since the low point reached during the second quarter. However, we believe our sales volume in the fourth quarter will be lower than the seasonally stronger third quarter although with the scheduled outage we had at our International Falls Mill earlier this month, our Jackson Mill was restarted on October 6. Beginning sometime in early November, the mill will be in a position to begin producing an appropriate amount of white paper to maintain the optimal inventory levels and service our customers require as well as begin the trials and production of containerboard that I just referred to. We also expect freight costs to be higher and with anticipated colder weather, energy costs should be higher as well. And finally, as Bob mentioned, scheduled maintenance outage costs should be about $0.11 per share higher than the third quarter. As certain areas of the economy continue to reopen, shelter-in-place and lockdown conditions are expected to continue changing across the country, especially considering the upcoming colder weather and holiday gatherings. There continues to be numerous events and actions that could impact our expectations for the upcoming quarter and the operation of not only our facilities but also adversely impacting the needs of our customers and the availability of services and products we rely on from our suppliers. As a result, we are still not able to appropriately quantify our guidance for the fourth quarter. And with that, we'd be happy to entertain any questions. But I must remind you that some of the statements we've made on the call constituted forward-looking statements. The statements were based on current estimates, expectations, and projections of the company and involved inherent risks and uncertainties, including the direction of the economy and those identified as risk factors in our annual report on Form 10-K and in subsequent quarterly reports on Form 10-Q filed with the SEC. Actual reports could differ materially from those expressed in the forward-looking statements. And with that, I'd like to open the call for questions. Go ahead.
Operator, Operator
I'd like to open the call for questions now. Go ahead.
George Staphos, Analyst
Mark, could you provide us with more information on Jackson? Should we understand that you are still deciding whether to convert the third paper machine at Jackson, or is there a possibility that it will remain a flexible machine capable of running uncoated?
Mark Kowlzan, Chairman and CEO
I think as we look at the paper machine at Jackson and the mill in general, you have to keep in mind that for eight years now, we've not only thought about this, but we've worked towards enhancing the capability of the mill and its flexibility. We would run the mill to supply both our white paper needs and our containerboard needs as such. We believe where we are currently, we're in a good place to do that. The costs that you talk about, it's truly the fact that we will have higher input costs in terms of production of containerboard on that machine. The mill obviously is not fully configured as you would think about an integrated containerboard mill to run high capacity at the speeds to get the big tonnage out. But nevertheless we can produce a good quality sheet. And at the same time, maintain the flexibility of the mill to provide our paper customers what is required. And it gives us a chance to see what and how long this pandemic plays out. And then at the end of this pandemic, what the paper demand will ultimately look like. So it's an elegant way for us to understand the capability of Jackson long term, while at the same time, understanding how we need to supply our paper business short-term and long term. With that, Bob, do you have anything on the cost side? George, does that satisfy that?
George Staphos, Analyst
Yes, I guess. I mean, there's no way to quantify what the trialing and further understanding might cost you? Or given all the work you've done in the last eight years, it wouldn't be worth calling out.
Mark Kowlzan, Chairman and CEO
Well, again, for anybody that knows us, you would have to believe we have done an awful lot of work with our annual maintenance work, with the annual upgrades that we do to bolster and beef up the capability of the infrastructure. That being said, we have a lot of knowledge in this arena. And as far as the cost, there should not be a great deal of cost in terms of the trialing. But again, I would expect us to be able to get on grade rather quickly and produce a very high-quality sheet, albeit at lower normal production rates than you would see at our conventional containerboard virgin mills.
George Staphos, Analyst
Okay. The next question is around the movement of the maintenance, the discretionary outage that you're planning for the fourth quarter. How that would likely come into results in 2021, I assume it would be in 2Q? And I know you didn't really want to guide too much for the fourth quarter or you don't want to quantify, but can you give us some of the larger buckets we should consider? I mean, you're starting at $1.57 entering the quarter from 3Q, the deferred outage based on your numbers in the past should add $0.30. Then you have seasonal factors and some of the other factors. Is there any way to quantify what some of those larger buckets would be or as we sit here, kind of a range between 2Q and 3Q seems reasonable, but any thoughts on that would be helpful. And then my last one would be any quick thoughts on how volumes are starting in the quarter.
Robert Mundy, Chief Financial Officer
George, looking at the transition from the third quarter to the fourth quarter, I’m uncertain about your model. However, we anticipate outages to be $0.11 higher than in the third quarter. Regarding freight costs, when compared to the last two or three years during this period, I expect our freight expenses to be higher than historically. Energy costs may also increase somewhat, particularly due to demand in the Packaging segment as we approach the holiday season, which will lead to higher overtime and labor benefit costs. As Mark mentioned, it involves managing operations and production. Additionally, as we undertake planned improvements to the linerboard production, we should expect some cost fluctuations. Therefore, there are anticipated costs in variable areas that wouldn't typically occur during the transition from the third to the fourth quarter.
Mark Kowlzan, Chairman and CEO
Thank you. Next question please?
Mark Wilde, Analyst
I wondered, Mark, if either you or Tom could just talk a little bit about what has changed so dramatically in the last three months on the demand side of the industry? I mean, if we go back to July, you talked in your second quarter release about running the demand. One of your bigger competitors took nearly a million ton mill in Oregon out in mid-July, extensively for kind of market downtime. And all of a sudden, we're in a situation where lots of people are saying, this is the tightest market in 25 years. So what's driving this from your perspective? Where is the incremental demand really coming from?
Mark Kowlzan, Chairman and CEO
I'm going to have Tom start that answer off by answering George's last question and then getting into yours, Tom, why don't you talk about the volume and then get that?
Thomas Hassfurther, Executive Vice President
Well, first of all, Mark, let me just tell you, our volume through 16 days this month is trending up 15%. Did you hear that number? 15%...
Mark Wilde, Analyst
Yes, I heard that number.
Thomas Hassfurther, Executive Vice President
Okay. All right. Yes, because I have to remind myself of that number occasionally, trust me.
Mark Wilde, Analyst
Yes, you're not the only guys throwing that kind of number around, Tom.
Thomas Hassfurther, Executive Vice President
Yes, and let me share this. When you look closely at the segments that are performing well, nearly every segment has shown significant growth. As we discussed in the previous call, the foodservice sector had seen a dramatic decline, dropping nearly 80% in some areas. It has recovered somewhat, but it's still far from its previous levels, which presents an opportunity for improvement. Anecdotally, the increase in demand can be attributed to consumers who are not spending their discretionary money on travel, entertainment, or movies like they used to. Instead, they are purchasing a variety of products that come in boxes, be it for home improvement or other needs. Additionally, the e-commerce segment has also seen substantial growth. This sums up the situation as I see it right now. I can't offer any other explanation for it, except to note that our customers have mentioned that their inventory levels are critically low, which aligns with what we're experiencing with our containerboard. They are eager to replenish their stock while facing very strong demand. I hope this clarifies things, Mark.
Mark Wilde, Analyst
Your backlog for a box customer look like right now?
Thomas Hassfurther, Executive Vice President
I'm sorry, you didn't come through clearly.
Mark Wilde, Analyst
Yes. What would your backlogs for a box customer look like right now? In other words, somebody comes into you with new volume, how long is that going to take to fill? Because I've been hearing numbers out the kind of 3, 4, 5 weeks.
Thomas Hassfurther, Executive Vice President
We will meet our customers' needs as they arise. Our system is incredibly flexible, and we don't typically discuss lengthy lead times. However, the demand trend for November mirrors what we've seen in October. This relates directly to our earlier conversation about the Jackson Mill. We cannot source containerboard from the open market, which is currently not an option. Given the high demand, it's the ideal time to trial Jackson and incorporate some brown into our offerings. Additionally, we've been planning for this moment for quite some time. Our history shows that we manage our needs effectively, and we are committed to being fully integrated. This situation is just another example, and we will proceed based on market demand.
Mark Wilde, Analyst
Yes. Okay. Mark, for people who aren't familiar with that Jackson Mill, can you just help us? I think there are 2 machines. There is the #3, the machine that they put in the late '90s? Or is it the smaller machine down there?
Mark Kowlzan, Chairman and CEO
No, the #3 machine is the big machine from the 1990s. It's about 365 inches wide. It's a big, high-speed, modern machine, lots of capability. Quite frankly, we've always spoken in terms of relative quality of machine. The machines at DeRidder were good machines; the machine out of Wallula that we converted, the #3 was a better machine than what we converted at DeRidder. But quite frankly, this Jackson machine's a better machine than all of those put together.
Mark Wilde, Analyst
Okay. Just finally on Jackson. Would it be possible to think about kind of making that a white top mill over time? The market seems to be moving toward white top. I don't think you produce any right now.
Mark Kowlzan, Chairman and CEO
It has that capability if we determine that, that would make sense to us. Obviously, the machine that we're willing to think about it. White top, you would have to put a top sheet on with a mini fourdrinier. But in capital spending and upgrades to a machine that was going to be permanently converted in the future years, you would more than likely put many fourdrinier on that machine that can handle brown or a bleached fiber. And then the machine currently has a size press, so you wouldn't have to add a size press, so it just determines in terms of where we believe, where we need to take that mill and what's the demand look like. So there's lots and lots of opportunity.
Mark Connelly, Analyst
Two questions. You obviously have a reputation for being service-intensive and flexible. But I'm curious, as this volume expands, is your mix moving away from value-add orders more towards regular orders? And do you see that as a permanent shift if it is happening?
Thomas Hassfurther, Executive Vice President
Mark, I don't see that shift happening. As I mentioned before, I mean, virtually in every segment of our business, I mean, we're up significantly. So I think our customer base has remained very much the same. Obviously, we continue to grow our business and first of all, grow with our existing customers. But no, I think part of our service flexibility is a driver of our growth as well. So I don't see it changing significantly.
Mark Connelly, Analyst
Okay, super. And just one more question. You've talked about the dramatically increased flexibility of your newer machine at Wallula, at DeRidder. Is there a productivity lag that comes with that increased flexibility? Or do you get the flexibility without those lags?
Mark Kowlzan, Chairman and CEO
You pretty much get the flexibility without the lags. Next question, please?
Brian Maguire, Analyst
Just a couple more just on the paper segment and Jackson in general. Just in the last couple of months when you weren't running Jackson and you were just running International Falls. Obviously, not probably the best environment for demand in paper. But just wondering if you were able to provide the variety of paper to your customers and service them and have you had any feedback from customers on the quality of the paper you were producing there versus what they were getting at Jackson? Any kind of issues with kind of eventually transitioning to just a 1 mill system in paper?
Mark Kowlzan, Chairman and CEO
No. It's important to note that International Falls and Jackson have both contributed to the marketplace. For example, in terms of cut size, it's the same product. We have the capability, and have had it for years at International Falls, to produce color grades using the smaller machine. We produced some of these color grades during this time while depleting inventory. To directly answer your question, International Falls can supply our current customer portfolio if that is what's needed due to future demand destruction. However, it still needs to be determined where we will end up with that. International Falls is a very versatile and capable mill.
Brian Maguire, Analyst
Okay. I think this question has been asked a bit already, but more directly, is there an estimate for the capacity number or tonnage of linerboard that you could produce on the #3 machine if it were run at full capacity? I understand that trialing is part of the process, but is there an expectation of what you might be able to achieve if everything goes smoothly?
Mark Kowlzan, Chairman and CEO
No. We'll update you in January. We have some numbers in the back of our mind that we think we're capable of, but I don't want to put that out until we prove it ourselves. And then as time goes on, you would have to imagine a mill the size of Jackson with the appropriate level of capital has a tremendous opportunity to supply just about anything that the Packaging side of the business needs for the foreseeable future. If growth demands that. So we've got lots of optionality in that regard, and we'll play it out that way.
Brian Maguire, Analyst
Okay. And just one last question for me. With the strong demand we're experiencing and the need to increase paper supply, how is the utilization at the box plant level? Do you anticipate needing to add more capacity to the box plants, or will adding shifts to the existing operations be sufficient to meet the demand?
Thomas Hassfurther, Executive Vice President
Brian, this is Tom. We have consistently invested in our box plants over the years because our customers drive our business. We are definitely stretched and incredibly busy. It's not easy to meet sudden surges in demand. I want to highlight that our employees have done an outstanding job during the COVID pandemic, as Mark mentioned earlier. Meeting these demand levels during such challenging times is truly remarkable. We will continue to invest and are positioned to do so, with projects ongoing all the time. Our operations are driven by what our customers need, which goes back to the mill level. This is why it is crucial for us to get some output from Jackson to replenish inventory and ensure our customers have enough boxes.
Operator, Operator
Gabe Hajde with Wells Fargo.
Gabe Hajde, Analyst
The first one, I guess, with the delaying the optional, I guess, DeRidder work that you're looking to do, I'm assuming that goes into next year. Has anything changed on the CapEx side of the equation for this year since you're targeting $400 million?
Thomas Hassfurther, Executive Vice President
Yes, we're still right in that ballpark.
Gabe Hajde, Analyst
Okay. Regarding containerboard inventories, I think you may need to restore around 55,000 to 65,000 tons this quarter, which could help with fixed overhead absorption by about $15 million. Bob, can you provide some insight on this?
Robert Mundy, Chief Financial Officer
No, I think you're right, Gabe. You're in the right range, and that will certainly assist with our cost absorption this quarter as we increase production to raise our inventories.
Mark Kowlzan, Chairman and CEO
Thank you. Next question, please?
Mark Weintraub, Analyst
Is it too early to discuss the potential capacity of the mill? Clearly, you need paper as much as possible. Can you provide any insights regarding short-term capabilities? Additionally, in the past, you've mentioned the possibility of expanding at Wallula with some additional investment. Is that still being considered?
Mark Kowlzan, Chairman and CEO
Let me provide some clarity to that question. When we began this process at Wallula nearly four years ago, we predicted that the machine would produce around 700 tons of quality craft linerboard daily, even without all of the major capital benefits. It's important to note that the Wallula machine is narrower, nearly 100 inches less than the one at Jackson, which is wider. However, we hope to achieve similar production levels of 700 to 800 tons daily at Jackson, although this still needs to be validated. The challenge now lies with the team at the mill and our technology organization in the coming weeks. Theoretically, the machine is capable of that production, but its future capability will depend on capital investment.
Mark Weintraub, Analyst
Great. And the potential to do something incremental at Wallula, is that still something to be considered?
Mark Kowlzan, Chairman and CEO
Well, not in a big way. We know that we've got some opportunity with the OCC plant. We'll be starting that up after the first of the year. We'll be finalizing the actual project work as we wrap up this fourth quarter. And then getting ready to start it up. That will lend itself to a benefit in terms of fiber furnish makeup and drainage, pressing, drying capabilities, quality characteristics. And then also, we've had some ongoing project work on the #2 machine at Wallula. That's a smaller machine. But as of next year, we'll be adding a new head box and new wetting capability, we'll see tremendous more reliability and quality benefits from this work. So incrementally, we'll see improvements. But as we've always said, Wallula Mill, on a run rate basis, was probably going to be around 600,000 tons a year. And we're there. As of this past summer, we've been running the mill depending on grade mix, right at that run rate tonnage on an annual basis of about 600,000 tons a year. And we're very pleased with that.
Mark Weintraub, Analyst
Great. And one last quick question. You mentioned that the indirect costs at Jackson were lower in the third quarter compared to the second quarter. Were there still significant costs related to Jackson? Or were we getting a fairly clear view of the white paper system's performance without Jackson's influence? I assume there were still some costs associated with Jackson.
Robert Mundy, Chief Financial Officer
No. Yes, Mark. Clearly, your fixed costs remain constant regardless of production levels, meaning you still incur significant expenses, including some indirect costs. Therefore, I would argue that this doesn't provide a clear picture of a one mill paper system.
Mark Weintraub, Analyst
Okay. Any chance of getting additional color on that or...
Robert Mundy, Chief Financial Officer
No. I’m not going to quantify that for you, but it will improve somewhat in the fourth quarter because we are currently running Jackson. However, we're not going to provide a specific cost estimate for what a one mill system would look like right now. Perhaps next year, as we see how packaging demand and our paper demand evolve, we can offer more clarity.
Mark Kowlzan, Chairman and CEO
Next question, please.
Adam Josephson, Analyst
Mark, back to Jackson, if you assume that white paper demand stays at roughly these levels, maybe it bounces a little bit next year, just given how much it's fallen this year. But if it stays at roughly these levels, do you envision needing to produce much paper at that mill next year? And if not, then what do you think the containerboard/white paper mix could look like at that point or if not next year, then once you fully configure the machine to produce containerboard?
Mark Kowlzan, Chairman and CEO
Yes. If the pandemic-related impacts persist into next year, we would expect about 50% production of white paper from the mill. This would give us the flexibility to produce some additional brown linerboard for the system. Therefore, we anticipate around 50% of white paper output from that mill to meet our expected customer demands.
Adam Josephson, Analyst
Which would result in roughly how much containerboard production, Mark?
Mark Kowlzan, Chairman and CEO
I'm not going to provide specifics until January, when we will have three months of data and can present more definitive numbers and greater confidence in our insights.
Tom Hassfurther, Executive Vice President
Okay. Adam, let's go back three months. We had limited visibility because it was uncertain where the pandemic was heading, but we knew the economy would gradually reopen. The pace at which different states reopened influenced the demand levels. Additionally, since the impact was swift and our customers' operations were affected, inventory levels for both us and our customers dropped significantly. As demand has increased, there are two distinct types of demand: one is to meet the needs of the end consumer, and the other is to replenish inventory. This situation feels somewhat challenging. I believe that as inventory levels stabilize, the surge in demand will taper off to some extent, although we anticipate it will still remain positive. Currently, the outlook for our box business is very encouraging, and I expect that to continue. Conversations with customers about their forecasts indicate a positive sentiment, and they are looking for suppliers that can adapt to their needs. Overall, the future looks optimistic.
Adam Josephson, Analyst
I appreciate it. And just one last one for Mark or Bob, on guidance. So obviously, you're quite confident on box demand heading into next year, but there are a number of uncertainties. Can you just kind of walk us through your hesitation in giving current quarter guidance, given that you're pretty much a month into the quarter? And then just more broadly, does this experience change your thought process about giving any sort of guidance? In other words, if it's this unclear, if it's been this unclear for three straight quarters, is there any compelling reason to give quarterly guidance thereafter?
Robert Mundy, Chief Financial Officer
Well, Adam, if you examine our internal numbers for the last three quarters, particularly the third quarter compared to where we ended up, there was a deviation. I'm not going to state whether we were better or worse. If we had disclosed those figures, it would have sparked considerable discussion about why we didn't meet our guidance. As we've mentioned in previous calls and as Mark noted today, along with Tom's comments about demand and its fluctuations, the situation remains very fluid. Looking ahead to the fourth quarter, especially considering how we plan to run Jackson, there are many assumptions regarding our containerboard production and paper requirements. Depending on how those factors fluctuate, costs can vary significantly. This further adds to the uncertainty in providing guidance for the fourth quarter.
Adam Josephson, Analyst
Is there a compelling reason to provide guidance at this time?
Robert Mundy, Chief Financial Officer
That's something we'll discuss at a later time, Adam. What we have previously done is working well for us. These are unusual times, which is why we have paused our usual practices. Once things normalize, we will reassess how we proceed moving forward.
Mark Kowlzan, Chairman and CEO
Next questoin, please.
Neel Kumar, Analyst
Can you just talk about what you're seeing in terms of box demand for the holiday e-commerce season? It seems that retailers are trying to have an earlier and more evenly spread out holiday season. So are you seeing any evidence of that so far, given your strong October volumes?
Thomas Hassfurther, Executive Vice President
I'll just respond real quick, Neel. E-commerce and the holiday and et cetera, is up dramatically. And the forecast is it's going to be incredibly busy all the way through. The limitation, I think, on the holiday season for e-commerce is going to be getting the product to the consumer. You've heard FedEx, you've heard UPS both say that they're basically maxed out for the season. And that's why they're encouraging people to get their holiday deliveries earlier than normal.
Neel Kumar, Analyst
Great. That's helpful. And then you referenced expecting a less rich mix in corrugated products in the fourth quarter relative to the third quarter. Can you just provide some more color on what's driving that and the pension magnitude?
Thomas Hassfurther, Executive Vice President
Yes, that's primarily around our graphics business, our point of purchase displays and other graphics business. That tails off quite dramatically in the fourth quarter. That's all done primarily throughout the year for the various holidays. And of course, Christmas is a big holiday, and that's already been delivered. So that just tends to drop off and then that begins to come back in and it's strongest in the second and third quarters.
Mark Kowlzan, Chairman and CEO
Thank you. Next question.
Anthony Pettinari, Analyst
Tom, going back to Mark's earlier question, do you expect that Jackson will prevent you from purchasing externally in the fourth quarter and possibly in 2021 as well? Is there a chance that if demand exceeds expectations or based on trial results, you might need to make external purchases? How significant is that risk? Additionally, are you exploring other capacity options beyond what you've discussed for Jackson and Wallula to address that risk?
Thomas Hassfurther, Executive Vice President
Okay. Anthony, due to the work we've done at Jackson, I am very confident that this will turn out well for us, and we will continue to have a supply for our box system. As I mentioned earlier, we really have no other option since there is currently no board available in the external market. Everyone is extremely busy, and the situation is incredibly tight. Therefore, we will need to proceed with our plans in Jackson to keep our box plant supplied, which is simply driven by the current demand we have.
Anthony Pettinari, Analyst
Okay. That's helpful. And then just trying to understand that 15% growth you're seeing. Obviously, it's been a big increase in COVID cases heading into colder weather. I'm just wondering, when you talk to your customers, especially on the CPG or grocery side, is there any early indication that they're seeing consumer stockpiling, like what we saw in March and April? Or has that been a part of customer conversations?
Thomas Hassfurther, Executive Vice President
No, we're not seeing anything like the stockpiling that we experienced at the beginning of COVID.
Anthony Pettinari, Analyst
Okay. And then just quick last one, if I could. On DeRidder, I'm wondering if you could talk about Laura and Delta's impact on the fiber basket around that mill. And in terms of elevated fiber cost and availability, is that something that is sort of largely dissipated in 4Q? Or how long-lived could that be given what looked like pretty extensive damage to the timberlands around there?
Mark Kowlzan, Chairman and CEO
Whenever a hurricane occurs, it leads to an abundance of wood due to the damaged trees. The key is to get the producers into the woods to collect the wood and transport it to the mill promptly, so that the landowners and producers can avoid any deterioration from rotting and decaying. Besides the temporary effects of localized flooding, I do not anticipate any significant long-term impact on the fiber supply or fiber costs for the mill.
Operator, Operator
Whenever you see a hurricane like this, there is usually an excess of wood available due to the damaged trees. It's essential to get the producers into the woods to collect the wood and transport it to the mill. Landowners and producers need to remove the wood quickly to prevent it from rotting and decaying. Aside from the short-term effects of localized flooding, I do not anticipate any significant long-term impact on the fiber supply or fiber costs for the mill.
George Staphos, Analyst
I didn't analyze the data beyond a few years, but it appears that your inventories are at their lowest point since 2017. Could you confirm or correct that perspective? Is this the lowest inventory level you've ever had? Any insights or guidelines you could share would be helpful. Now, a question for Tom. This topic has come up several times during the call. Many investors are curious about containerboard and corrugate, particularly regarding what happens after we stop ordering for direct-to-consumer. Eventually, box volumes will likely return to normal as people resume activities like going to movie theaters and dining out. How much of a permanent level of consumption do you think has been established in the corrugated market? We've adopted new behaviors, such as ordering more online for convenience. Do you have any insights from your customers or any research on the consumer side regarding the new sustained volume in corrugated due to our recent experiences?
Thomas Hassfurther, Executive Vice President
Okay. This is Tom. I'll first explain what we mean by normalized demand. One reason we aren't providing a forecast is that we don't have a clear understanding of what that normalized demand is. If we look back at the average for this year up until October, we might have thought it indicated future trends. However, we've seen a significant spike recently, making it unpredictable. Our customers seem to be in a similar situation and are responding reactively. There are many factors at play, including consumer demand, the impacts of COVID, and the upcoming Presidential Election, which could also lead to changes in administration. There are many uncertainties out there, and we will have to wait and see how things unfold. What I can say is that we are on a promising path, and I believe that will continue.
Robert Mundy, Chief Financial Officer
And George, regarding your inventory question, I looked back as far as 2013, and from a supply standpoint, we're lower than we were back then. I didn't go back any further because that's when the transformation of the company occurred with the Boise acquisition. So yes, these are historically low levels of inventory.
George Staphos, Analyst
Tom, without putting a number on it, are your customers of the view that corrugated demand has been permanently benefited by what we've gone through or even that's too hard to discern at this time? And if that's the case, totally understand. Just want to try it one more time.
Thomas Hassfurther, Executive Vice President
Yes. I think that's just too hard to discern at this point in time.
Mark Kowlzan, Chairman and CEO
I think we've got time for you to go ahead.
Mark Wilde, Analyst
One, I wonder if we could just get some comment on the cash position of the company. I mean, $1.1 billion with the marketable securities is a pretty impressive war chest. And I just wonder about the need to maintain such a big position if we're at the front-end of a cyclical upturn. And then the other question I had is for Tom Hassfurther, and that's just whether there's any portion of the corrugated market that you think may be moving away from a reliance on kind of pulp and paper as the escalator de-escalator. I think particularly there about some of these big e-commerce firms and whether they're striking different deals?
Mark Kowlzan, Chairman and CEO
Let me answer the cash question. I think we went back to the first quarter, a similar question. And I think I answered and I said I wasn't concerned about the level of cash, and we were basically in very uncertain times. But I think I said at the time that I would let you know when I thought we had too much cash. And I still have that same position that we are still living in very uncertain times. And I'll let you know when we have too much cash.
Thomas Hassfurther, Executive Vice President
And Mark, I would say that I'm still not interested in stepping on landmines. So I'm really not going to even discuss anything regarding pulp and paper. And of course, any agreements we have with our customers are between us and our customers. And we don't publicly disclose those. So although I'd like to give you a little more clear answer to your question, I really can't at this time.
Mark Kowlzan, Chairman and CEO
Operator, I believe we're out of time.
Operator, Operator
Do you have any closing comments, Mr. Kowlzan?
Mark Kowlzan, Chairman and CEO
Yes, everyone, thank you for joining us today, and we look forward to talking to you at the end of January. Stay safe, stay well. Have a nice holiday. Thank you.
Operator, Operator
This concludes today's conference call. We thank you for your participation. You may now disconnect.