Packaging Corporation of America (NYSE: PKG) announced today that it will not convert the idled No. 2 paper machine (D2) at its DeRidder, Louisiana mill to produce containerboard. Instead, PCA will convert the No. 3 newsprint machine (D3) at DeRidder to containerboard, producing lightweight linerboard and medium, and exit the newsprint business. The D3 machine will continue to produce newsprint for PCA customers through mid-September 2014 at which time it will be shut down and converted to containerboard production with an anticipated start-up by November 1, 2014.
PCA estimated that the capital cost of converting D2 would have been approximately $160 million, and the D2 machine would have had annual containerboard capacity of 300,000 tons. The cost of converting D3 is estimated to be $115 million with annual containerboard capacity of 355,000 tons. In addition, by discontinuing newsprint production, approximately 100,000 tons of low cost, virgin fiber will become available for containerboard production, thereby reducing the amount of higher cost recycled fiber (OCC) required. The D3 conversion project is expected to produce an after-tax discounted cash flow return of 30% - 35% compared to less than a 20% return on the D2 project.
The shutdown of the newsprint-related assets will result in non-cash charges totaling about $30 million, and from a profitability standpoint, the newsprint business has been operating at slightly below breakeven.
Mark Kowlzan, Chief Executive Officer of PCA said, “The D3 conversion project provides us needed capacity with a much higher return than the D2 project. Without the D3 project, we estimate that our outside purchases of containerboard would be about 250,000 tons in 2015 in order to support PCA’s total containerboard demand. We will also be able to supply more containerboard to our long term export customers as we have had to withdraw some tons from this market the past several years to support our domestic demand. We regret the impact this decision may have on our newsprint customers, but we are committed to providing them a competitive product and outstanding service until the machine closure.”