Packaging Corp of America (PKG) 2013 Q1 法說會逐字稿

Thank you for joining Packaging Corporation of America's first quarter 2013 results earnings conference call. Your host for today will be Mark Kowzlan, Chief Executive Officer for PCA. Upon conclusion of the narrative there will be a Q&A session. I will now turn the conference over to Mr. Kowzlan and please proceed when you're ready.

Good morning, and welcome to Packaging Corporation of America's first quarter earnings release conference call. I'm Mark Kowzlan, CEO of PCA, and with me on the call is Paul Stecko, Executive Chairman of PCA, Tom Hassfurther, Executive Vice President who runs our corrugated business and Rick West, PCA's Chief Financial Officer. Thanks for participating in this morning's call, and after the presentation, I will be glad to take any questions.

Yesterday we reported record first quarter net income of $61 million, or $0.62 per share compared to adjusted net income, excluding special items in the first quarter of 2012 of $41 million, or $0.42 per share. The $0.20 share increase in earnings excluding 2012 special items was driven by higher containerboard and corrugated products prices and mix of $0.23 per share, increased sales volume of $0.05 per share and lower recycled fiber cost of $0.01 per share. These items were partially offset by higher costs, including labor and benefits of $0.06 per share, workers' compensation of $0.01 per share, energy $0.01 per share, and transportation of $0.01 per share. Net sales were a record $755 million, up 12% compared to the first quarter of 2012 net sales of $671 million.

We had a very strong quarter in all aspects of our operations with higher pricing and strong volume driving all time records for sales, corrugated product shipments and earnings per share. Corrugated products demand was stronger than we expected throughout the quarter, and our price and mix was also better than forecast. The stronger than expected volume, price and mix drove our earnings higher than our January guidance by about $0.06 per share. Looking at more details of the operations, our corrugated product shipments per workday were up 7.1% with two less work days than last year's first quarter and total shipments were up 3.8%. Excluding our March 2012 box plan acquisition, shipments per workday were up 5.8% and total shipments up 2.5%. The containerboard market has remained tight for us, and our outside sales of containerboard in this year's first quarter were basically the same as in the first and fourth quarters of last year, even with constraints having to build some containerboard inventory to help support our second quarter maintenance downsizing. Our prices for containerboard and corrugated products were up over last year's first quarter, reflecting full realization of fourth quarter domestic containerboard and corrugated products price increases and higher export prices.

Our mix was also richer, as I mentioned earlier. All of our mills ran exceptionally well, producing the first quarter record 646,000 tons of containerboard, up 6,000 tons over the first quarter of 2012. This record performance was driven by lower annual average down time and improved productivity which more than offset one less production day compared to last year's first quarter, which included an additional production day for leap year.

Annual mill maintenance outages reduced linerboard production by about 7,000 tons during the first quarter with number 2 paper machine at our Counce linerboard mill board down for five days in March. The strong mill performance allowed us to meet our strong demand and build 3,000 tons of needed containerboard inventory. Most of our mill maintenance outage work this year will occur in the second quarter, resulting in 30,000 tons of lost production.

Historically, most of our annual mill maintenance outages have occurred in the first quarter. The number 1 machine at Counce was down eight days earlier this month to complete their outages for 2013. At our Tomahawk, Wisconsin medium mill, our larger machine number 4 was down for five days last week, and we now have our number 2 machine down, which is expected to start up this Thursday after a four-day outage. Our Valdosta, Georgia linerboard mill will be down for eight days in May. We will complete our 2013 annual maintenance outages in the fourth quarter with a relatively small outage at our Filer City, Michigan medium mill.

With regard to costs, compared to the first quarter of 2012, higher labor and benefits costs reduced earnings by about $0.06 per share with $0.03 per share from annual wage increases, $0.02 per share from benefits inflation and $0.01 per share from higher incentives. Workers' compensation costs were also up over last year's first quarter, reducing earnings by about $0.01 per share. Wood costs were flat with last year; extremely wet weather conditions only affected our wood costs at our Counce mill in January, after which the weather conditions improved considerably.

Recycled fiber costs were lower than last year's first quarter, improving earnings by $0.01 per share, but up over the fourth quarter, reducing earnings by $0.01 a share. Finally, our transportation costs and higher energy costs from coal prices being up from last year each reduced earnings by about $0.01 per share compared to last year's first quarter. I'm now going to turn it over to Rick West, our CFO, who will give an update on cash generation and uses during the first quarter.

Thank you, Mark. In the first quarter, PCA generated cash from operations before working capital changes of $128 million. Working capital increased by $32 million, driven by beginning of the year payments including incentive bonuses, increased receivable levels, and other seasonal changes resulting in net cash generated after working capital changes of $96 million. Historically, the first quarter is our lowest cost cash generation quarter with several beginning of the year payments. We expect our cash generated to be significantly higher for the remainder of the year with our fourth quarter being the highest cash generating quarter.

Capital expenditures were $27 million during the quarter. We paid no quarterly common stock dividends in the first quarter as a result of paying our normal January dividend payment in December 2012. We repurchased 121,000 shares of PCA stock in the first quarter for $5 million, or an average of $42.47 per share. As of March 31, 2013, our diluted shares outstanding were 97.4 million shares. At quarter end, we had $268 million cash on hand, and our total long-term debt, excluding capital leases, is $790 million.

During the first quarter, cash tax payments of $4 million were made, and we used $7 million of fuel tax credits. On April 15, we also used $32 million in tax credits to fully offset our scheduled federal tax payment. We currently have estimated remaining fuel tax credits of $37 million, which will be used to offset future tax payments. However, the final amount of the available fuel tax credits and the final cash tax rate is contingent upon the conclusion of the IRS audit currently underway. With that, I will turn it back over to Mark.

Thank you, Rick. Looking ahead, we expect seasonally stronger volume and higher prices in the second quarter. However, the majority of the earnings benefit from price increases will not be realized until the third quarter when the April containerboard price increase pass through to corrugated products is completed. Also, as I said earlier, most of our annual mill maintenance this year will occur in the second quarter with outages at three of our four mills. We expect these outages to reduce our containerboard production by 30,000 tons in the second quarter compared to 7,000 tons of lost production from maintenance down time in the first quarter. The 23,000 tons of additional lost production, along with higher repair and operating costs from these outages, is expected to reduce earnings by $0.08 per share compared to the first quarter. We also expect higher transportation, recycled fiber and purchased electricity costs. Considering these items, we currently expect second quarter earnings of about $0.62 a share. 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.

These statements were based on current estimates, expectations and projections of the Company and involve inherent risks and uncertainties, including the direction of the economy and those identified as risk factors in our annual report on Form 10-K on file with the SEC. 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 to questions.

Our first question comes from Mark Weintraub from Buckingham, your line is open.

Good morning. Mark, is it fair to say that the higher transportation, recycled fiber and purchased electricity costs, might that be order of magnitude of $0.03 to $0.04 per share, 2Q v. 1Q?

Yes, about $0.01 per share for each is a good number, Mark.

Okay, excellent. And then on use of cash, clearly, particularly as this price increase gets implemented, you're going to be generating a lot of excess cash, even relative to where your dividend payout is currently. Are you comfortable building your cash balance, or if you don't find bolt-ons, et cetera, would you look to more aggressively return cash to shareholders?

Short-term we're comfortable, Mark, and again, that's something that we discuss at every board meeting. Currently we're going to stay with our strategy, but short-term, we're comfortable. And Paul, do you want to add any comment to that?

No, I think what you said is exactly right. We're building cash at a little faster rate than we think is optimum. Quite frankly, we felt that with the macroeconomics worldwide that the stock market would have corrected itself in the first quarter and it would be a good buying opportunity to buy back shares. That didn't happen. I mean, we're not unhappy that didn't happen because the stock performed well, but we can't wait for that forever. And so short-term, you know, we're okay, long-term we know we have to do something. And it's the normal vehicles in terms of dividends, share buyback, very high return capital projects.

That's real helpful. And last one, quick one, can you give us an update on what's happening with export pricing, containerboard pricing?

Yes, Mark, this is Tom Hassfurther. Yes, export pricing continues to go up. It goes up differently than what it does domestically, as we've talked about before. They're smaller increments, but it does continue to go up.

Thanks very much.

Next question, please.

Our next question comes from Anthony Pettinari from Citigroup. Your line is open.

Good morning.

Good morning Anthony.

You discussed stronger than expected corrugated demand in the quarter, and I was wondering if you could give any color on that. People have talked about housing recovery, e-commerce and online shopping, return to manufacturing activity as being drivers. Were any of those meaningful drivers in the quarter, and what kind of color can you give us on the improved demand you saw?

Again, just recapping when we talked in January, we started out the quarter saying that the bookings were up 4.5%, and we felt comfortable that we had a good quarter starting. I think specifically, and I'm going to let Tom add some color, but we saw a strong volume across the board, again, much stronger than we expected. But Tom, why don't you add some specifics to that.

Thanks, Mark. Yes, I would agree. Interestingly enough, and the good news is that the volume did come from numerous areas and it wasn't concentrated just in a particular industry or a particular business. And I think really for PCA, I think most of it is a result of our strategic capital that we've invested, the outstanding acquisitions that we've made, and basically it's our value proposition that we have out there. Most of the growth was organic and from existing customers.

The other thing I might add is, is that we had an a very unusual March this year in terms of 20 work days versus the norm, which would be closer to 22 work days. And so on a per workday basis, it looks like March was very high, but overall, it was level with the previous March. Now, those numbers will reverse in April because April in the second quarter is typically a 20-day month, and it will be a 22-day month this year. So, our demand will be up maybe 1% or so in total, but on a per workday basis, it will come up to about 10%. So, it's just a little unusual what went on in the first quarter versus what will happen the second quarter.

Okay. That's helpful. And just to be clear, so for the first three weeks of April on per workday basis, can you repeat what you're seeing?

Yes, starting out on these first 13 days and we talk bookings and billings. Bookings were up 4.7%. Billings always lag. We're at a 1% increase, and we always see this as the month closes out, the bookings and billings close the gap and billings catch up to the bookings. And so again, we're right at that 4.7% round off 5% for the first 13 days on bookings orders.

But up one on billing, this is Paul Stecko. And you got to be careful with that number because last year was a very tough comparable. We were up 4% in April -- excuse me. We were up 8.4% in April, so it's a tough comparable. And as Tom Hassfurther was pointing out, we're up about 1% on a per workday month to date, but with two more days, up 1% translates into up 10% for the month in total volume, so it could be a very, very strong quarter. Bookings are indicating that we may do better than that because as Mark said, we're up 5% on bookings, but that seems like a pretty hard number to sustain the rest of the month. We'll have to see, and I don't think we'll sustain that rate for the month or the numbers get real big.

Okay. That's helpful. I'll turn it over.

Next question, please.

Our next question comes from Chip Dillon from Vertical Research Partners. Your line is open.

Yes, and good morning.

Good morning, Chip.

The revenue number you guys put up, at least versus our motto, was quite impressive, and I think you mentioned the box demand was particularly strong. Could you -- and I know last year your integration level, I believe was 83%. Can you tell us what, as you look at it, the integration level was in the first quarter? And are you seeing your mix of boxes change, at least on the revenue side where you're getting -- you're selling to more of a valued added product?

On the first question, integration we were right at 84.5%, 85% for the first quarter. And so again, we continue to improve that integration level for our plan. The next part of your question, again, we specifically stated we did see a richer mix in this first quarter, more so than we expected to see in our product. Tom do you want to add any color to that?

Well, Chip, I would just say that if you do more of the hard to do, you're going to get paid more for that, and that's what we set out to do a long time ago, and we continue to take on those challenges and try to do it in the most cost effective manner. So, I think that's one of the keys that drives our revenue.

Yes, and I guess the other point, Chip, on integration,is tht it's one of our main goals. Get that integration level up because we make money not only on the board we sell, we also make money in the box plants as opposed to just selling paper on the outside. And what makes getting the integration level up more difficult is we continue to improve the productivity in the mills. We were up 6,000 tons over last year's first quarter. So, you've got to sell those six thousand tons and you haven't moved the integration level at all. So, it's a steeper slope when you have to offset high productivity. And that's a high class problem I'll admit, but that makes getting the integration level up more difficult.

Got you. And then could you talk a little bit about your wood costs? And maybe as you look out, it would seem like the -- in the upper Midwest that you're seeing, I think wood costs come down as lumber production picks up. And would you expect to see that as chip production's higher, or on the other hand, do you think your wood costs are going to edge up as we go through the year?

Chip in general, across the board we're flat. Regionally, we see some movement up and down a little bit. Obviously, earlier this winter we saw some activity in the Counce region with the wet weather. In general, nationwide up north, as you just referred to, we started seeing a year ago the increased activity in the sawmill business, and that did bring more chips to the marketplace. And so the net effect, again though, our pricing was pretty flat. We seen a little bit of moving in the Southeastern region as far as pine pricing, not as high as indicated in some of the periodicals and publications. But we've seen some of the weather effect and also some of the dimensional lumber in the pine market increasing. But again, in general, we're pretty flat across the board.

Got you. And then just a last question, Paul, I know your contract as executive chairman struck a few years ago. I think it expires on June 30. Could you let us know what your plans or the Company's plans might be going forward?

Yes, but not today. That's something that obviously has to be answered in the next couple of months. We have a board meeting in early May, and at the appropriate time, we'll give everybody an update on that situation, but it's premature to answer that question now.

Got you. Thank you.

Thank you. Next question, please.

Our next question comes from George Staphos from Bank of America Securities. Your line is open.

Good morning, everyone. I wanted to get into the impact of outages this second quarter versus last year's second quarter. Now, this year you mentioned it's going to be $0.08 penalizing sequentially. If I'm not mistaken, last year the impact was only $0.03 or so in terms of the sequential negative. This year you've said, I think there's 30,000 tons of production that you're losing. Last year I want to say that the lost production was in the range of 20,000 tons or so. If you could confirm that, and then just give us a bit more color in terms of why this year's second quarter has that much more of an EPS impact, it'd be appreciated. And also Mark, do you have a goal for inventory build this quarter that you could share with us?

I'm going to let Rick handle the first part of that. Then we'll talk about inventory.

Sure. Hey, Rick.

Good morning, George. You're correct in your numbers, but I would point out three things just as far as the length in outages and the components of costs. You have basically three costs, the cost of the production losses, the cost of the operations being down, startup, shut down, probably some additional fuel costs while you're down and operating -- continuing to operate the mill parts of it. And then the third part is the amortization of repair job costs.

Right.

And what happened this year in the first quarter, we had a very abnormally low repair job amortization cost as a result of the Counce outage being in the last week of March. Basically, the repair job amortization costs in the first quarter were only two-tenths of $0.01 per share. Now, when you go to the second quarter, that number goes up to about $0.04, so that's really the big difference this year, is just the additional production losses compared to last year, plus the amortization of repair jobs.

If you look in total for the first quarter, annual outages impacted us about $0.02 a share. In the second quarter, we expect it to impact us $0.10 per share, thus being the $0.08 difference, made up of the two components I talked about -- or three components. For the most part, the additional production losses plus the additional repair job amortization, plus to a lesser extent, operating costs. Now, when you go to the third quarter, we do not have any production losses nor do we have the incremental operating costs. You only have the repair job amortization, and with the timing from the second to the third quarter, that's probably less than a half a cent per share increase. So you're going to -- the pickup from the second to the third quarter from the annual outage impact is you get a $0.06 per share improvement going from the second quarter to the third quarter. So, that's basically the math, why it changes, and why this year is so much, I would say higher going from the first to the second, is both the timing of the outages and the repair job amortization is the big item.

Rick, that's great. I appreciate all the detail on that. On the inventory build, do you have a goal that you'd like to hit for the second quarter that you can share with us?

George, we never really specifically quantify the goal. Obviously we talked about our increase, the number going up for the first quarter, that was our desire. This being a heavy shutdown period, actually, you'd assume that the inventory would be a draw down quarter. That being said, a lot of it depends on how well the mills run through the shutdown period and after the shutdown period and also on export demand and export sales. So, with that -- but we never disclose the absolute inventory targets.

Understood. I guess the last two questions, I'll and them in sequence and turn it over. One, from the demand trends that you saw, Tom, any signs that maybe customers were trying to get ahead of the price increase in April and that's why demand was a little bit better than expected? And then back to costs Mark, you saw a 6 cent per share increase in costs this quarter in aggregate. Certainly, you delineated what those factors were. Should we anticipate that this is going to be the run rate, if you will, on cost performance for the Company over the intermediate term? Thanks guys, and good luck in the quarter.

Thanks George. This time I'll take the first question. As far as demand trends are trying to -- or seeing if customers were trying to perhaps beat the increase by ordering early, I would say no. The demand was very steady throughout the quarter, and as I mentioned, on the per workday basis, March jumped significantly, but it's because of a 20-day month. With that I'll turn it over to Mark or Rick and let you handle that second half.

In terms of the costs, George, if you look at the labor of what we said, $0.03 per share was from annual wage increases, $0.02 per share was from benefits and $0.01 per share was from variable based incentives. I would say on the first one, the $0.03 per share, you're probably going to get that every quarter going forward. The second one on incentives, that's going to drop off a little bit in the second quarter because as we said earlier, we pay a lot of our statutory based incentives --

Let me just correct him, Rick, you said incentives you meant benefits.

Benefits, excuse me. In benefits, they do drop off in the second quarter because of the FICA and other statutories that we reached certain levels for certain employees and we stop deducting. So, that will go down. As far as the variable based incentives, that would depend upon our final payout for the year, so I can't give you an answer on that. And the other items, we put into our forecast higher electricity for the second quarter, that's more driven by summer rate increases, so that's hard to tell for the remainder of the year. And of course recycled fiber and transportation, it depends on the price for recycled fiber and for the transportation diesel prices.

And the only thing I have to add George, this is Paul, on incentives, our incentives are tied to the level of profitability, and so there's a performance factor here. The more we make, the higher incentives go, the less we make, the lower they go. So obviously, they may go up, but consider that good news because that means we're doing very, very well. And that's the number you like to see go up rather than down because there's a huge leverage on that number, and so we're hoping that number goes up because we're hoping to do even better.

High class problem. All right, thank you, Rick, for all the color. I'll turn it over.

Next question please.

Our next question comes from Mark Wilde from Deutsche Bank. The line is open.

Good morning.

Good morning Mark.

Tom I wondered if you can talk a little bit more about that mix improvement that you saw? Is that kind of a one-time thing, or is there just structurally a continuing trend in your mix moving up?

Well, I'd say, Mark, it's a couple things. One is obviously we have -- some seasonal mix changes with regard to the display and graphic side of the business. Those hit at various times, and March is typically one of those times when it begins to ramp up. I would say in addition, I think that with the targeted customers we've had, the things we do for those customers, the value we add, and some of the things we do in addition to, I would call the normal course of business for those customers, that has proved to be, it does pay better, and that does help improve our mix.

Okay. And you --

Does tend to carry out through the year.

You've talked in the past about the interest in acquiring box plants. I'm just curious about just what you're doing in terms of organic expansion in your converting capacity.

Well, the organic side to the business was -- the organic expansion and growth in our business was primarily driven by our strategic capital investments that we made, which were driven around a particular customer base,. And as we pointed out before, these were primarily in facilities that we were out of capacity. We needed additional capacity to be able to grow with our customer base, and we've done that, and those have obviously paid nice dividends.

Yes, and are you actually adding any new facilities?

No, we're not adding new facilities at this point in time. What we will continue to do with our strategic capital investments, we'll continue to take advantage of opportunities as they present themselves, but -- and if we need to rebuild and build new, consolidate, whatever, we consider all the above.

This is Paul, the thing I'd add and just amplify it on the point that Tom made, we spent $40 million a year and two years ago, $40 million last year to complete this internal growth project, and we did add a new plant in Reading, Pennsylvania, which is doing very, very well. That was in a market where we needed capacity.

And the returns have been very good, obviously that's reflected in our numbers. And one of the reasons for that and the real advantage of internal growth is that you may put a new piece of equipment in or a bigger piece of equipment, but basically, all the overhead is already amortized across your existing customer base. So, those incremental tons of box business you bring in there carry not only the normal profit, there's no overhead to absorb. So, the incremental profit levels are very good on these internal growth projects, and we continue to look for more opportunities to do that. But our policy has been, do it in regions where you know you have business and you need it. Don't be speculative and just do it. We don't do it that way.

Yes, okay. All right. The last question I had is, Rick, can you just remind us, when we look into the fourth quarter, about how much should we assume for that Filer City outage?

It's a little premature right now, Mark, to give that number. They're still trying to determine the scope of the Filer City outage. It's basically about a five to seven-day outage, and you can calculate the tons, and then there will be the repair job costs that will have to be amortized in the fourth quarter because you have to amortize all the costs after you have the outage. But at this point we'll be able to give you a better update when we have the second quarter earnings call in July.

Okay. Fair enough. Good luck in the second quarter and through the year.

Thanks. Thank you Mark. Next question, please.

Next question comes from Scott Gaffner from Barclay. Your line is open.

Good morning.

Good morning.

I just wanted to talk a little about the potential for productive and capacity creep in 2013. I think on the last call we talked about it maybe moderating back down to something closer to 1%, the production in the first quarter seemed a little bit better than what we were expecting. Is there potential that capacity creep in 2013 could be greater than that 1%?

I think the 1% is a number we're comfortable with, and I think that's a realistic number. That's a good number that -- there's a lot of activity around that, but the 1% is a number that we believe is realistic.

Okay. And going back to the capital allocation share repurchase question at the beginning, you're producing a significant amount of free cash flow here. If predictions around the industry are correct, you're going to continue to produce that free cash flow and potentially the shares never pull back. At what point do we sort of move to a more normalized repurchase focus rather than waiting for the shares to pull back?

Well, as I said, this is Paul Stecko, as I said earlier on the call we've wait -- we can only wait so long, and we've waited -- we're getting close to having to make a call on that because we cannot let the cash continue to build. And quite frankly, if the stock keeps moving up and we keep generating cash, that not only puts pressure on us to increase our share buyback, but to raise the dividend also because we do have some desire to continue to have a good yield and it's great that the share price goes up, but that does put pressure on your yield. So, the only way to fix that problem is to increase the dividend, and that's the kind of thing we're chewing on right now.

Okay. I appreciate that. And just lastly, when we look at your energy costs, specifically at the -- in the mill system, I think you mentioned higher coal prices earlier. What's the mix now, coal versus natural gas on the energy side?

Coal is -- I don't have that exact percentage, but it's a very small amount right now. We've burned a lot of natural gas over the last 1.5 years, so we can get back with you on specifics.

I appreciate it. Good luck in the quarter.

Thank you. Next call.

Next question Phil Gresh from JPMorgan, your line is open.

Good morning, guys.

Good morning, Phil.

A couple quick questions, the first one is the recent trade press has talked a lot about box customers putting more out to bid here with this second increase. I guess I just have two questions on that. The first is, are you seeing this at all? And perhaps with some of the larger customers actually coming to you as an alternative supplier even more than normal in the last month or two? And then the flip side of that question is with all this talk, do you have any concerns as to whether the full 50 per ton can get passed through to the box side?

Phil, it's Tom. I'll take that real quick. With regard to bids, the truth is always in the trenches, and you'll have some will bid, many will not. The bids that are out there right now, most are in the, what I would call the normal course of doing business. It's more timing than it is anything else. And overall, I would say there's nothing really unusual with regard to what's going on in the bids. The -- speculating on the amount of the increase and that sort of stuff when it comes to boxes, we don't do that kind of speculation so I can't really go there.

Okay, fair enough. Then just in terms of the actual number in the guidance for the second quarter, Rick, are you expecting some portion of the price increase on the box side in the second quarter, and is it fair to say that the full run rate of your expectation would kind of be in there by the July time frame?

I will only comment as to what we said in our press release, and we did say that we expected higher prices in the second quarter. But the majority of the earnings benefit, as we said, would be from price increases will be in the third quarter when our April containerboard price increase pass through to corrugated products is completed. We do have some of the price increase in there in the second quarter, but as we said earlier, the majority will be in the third quarter.

Okay. That's all I had. Thanks a lot.

Thank you. Next question.

Next question comes from Mark Connelly from CLSA. Your line is open.

Thank you. Mark, you talked a lot about improvement in mix from targeted customers. Can you tell us which part of your customer base is really showing you the best improvement right now? And second, a broader question, looking back over the years, your mix has always been quite different from the major producers. Is it getting more different these days, based on both your behavior and the behavior of the major producers? Are you moving further away than when you normally would have thought of yourself?

Again, the first part of your question, we've seen that improvement across the board, and yet if you look at our customer base in terms of national comp type business, our top 30 accounts still account for roughly 30% of our business, that being the national account type of customers. And then the other two-thirds is the local account, and you know, we've grown with both the local accounts and the national account footprint. Tom, do you want to add anything to that?

Yes, I would say Mark, with regard to the mix, and in comparison to the rest of the industry, I can't really compare to the rest of the industry. I just know we do what we do, and we do it well, and we pursue our targets, and that's what we do. It's proving to be good for PCA.

Okay, thanks.

Next question, please.

Next question, Alex Ovshey from Goldman Sachs, your line is open.

When you look at the $0.23 benefit on the year-over-year basis on price index, is there a way to parse out what the benefit was from improved mix?

Yes, there is. We rarely do that because it's hard to completely know separate price and mix because they may buy different -- we may sell a thousand items to somebody and they may buy more of the higher priced items as opposed to something high end graphics versus a plain brown box. So, we take a guess at it, and -- but the safest thing for us when we report is to combine the two because we know the combined number is totally accurate, and if we break it in two, there's some uncertainty around both numbers, and so we do have -- we do have an internal estimate of the difference, and it's probably close, but we don't break them apart.

Okay. Understood Paul. And then as you think about your outlook for demand and the fact that we're entering a seasonally strong part of demand, inventories are pretty lean. You have extensive maintenance down time scheduled for the quarter, are you concerned that you may not be able to fully meet all the customer commitments that you have for the second quarter?

We planned on that fact, and we also commented previously that we would move our export tonnage down to accommodate our domestic business. And so again, right now we're not concerned. We plan on getting through this quarter and taking care of our customer base and again, we'll utilize the -- and rationalize the export side of the equation.

Yes, and I guess Mark used a very important word, plan. We could have built more inventory in the first quarter, but we would have had to cut off some export customers. And we're a dependable supplier, so we told our customers, yes, you're going to get what we promised you in the first quarter. You may only get this much in the second quarter. If we have more productivity than we put in our plan, we may be able to get you some more tons in the second quarter, but you ought to plan on this number for the second quarter. And so we made a decision to make sure we met all of our commitments in the first quarter and gave customers some notice so they could do some planning in the export because that is our bellows. That's what we can swing on, our export tonnage, and we're hoping the productivity is better than we forecast, although we have aggressive forecasts, and -- but our customers knew a quarter in advance what they could expect in the second quarter.

Got it, appreciate the color.

Next question, please.

Next question comes from Steve Chercover from D.A. Davidson. Your line is open.

Thanks, it's tough to go near the end. Just a couple quick ones. In January, you predicted both higher OCC and higher virgin fiber, and we know that OCC turned out to be a $0.01 tail wind. How much did the higher virgin fire -- fiber expectation factor into your Q1 guidance?

It was a minimal amount, this is Rick West, going from -- into our first quarter. We don't break down every item, but it was not a great amount because we didn't think the weather would continue. But we were looking at the first quarter as basically a risk more so to our guidance with the wood costs continuing throughout the quarter, and we just want to make it clear when we gave the first quarter guidance that that was a risk item. So, not a substantive change from what was in the guidance, but more so a risk.

When we started up the first part of the January, we were suffering some very, very bad weather in the Counce area, and it put some tremendous pressure on the wood basket in the Counce region. And then by the latter part of January the weather had turned and improved and so, again, that risk factor was taken off the table.

Got you. Ask the second one, it sounds like your inventories are verging on being too low. Is that why the transportation costs go up because you're really moving from mill to mill? Because it seems like otherwise oil and gas prices are on the decline.

It's a combination. Primarily, though, diesel rates move up and down. But sure, quarter to quarter we can move tonnage from plant to plant as need be. And an example right now, we've got some transportation impact in the Michigan area with the flooding going on, and specifically we're moving some tonnage out of rail into truck right now with some of the rail lines being underwater up in Michigan for the next few weeks. So, there's various activities, but diesel fuel usually the big driver.

Understood. Thanks for taking my questions.

Next question, please.

Next question comes from Al Kabili from Macquarie.

Hi, thanks, good morning. Just a question on the -- boy, the volume out performance, you never seem to cease to amaze on the out performance versus the industry. And I would have guessed that it's probably more than you would have thought last year. Do you think that this level of out performance from what you can see thus far would be sustainable throughout the remainder of the year?

That's something we don't want to comment on from a forward point of view. Again, we stick to our plan, and again, we've been very pleased with the outcome of our strategic efforts over the last three years in the box plants and the mills. So other than that, we really can't comment.

But I will add one further comment on the volume expectations for the fourth quarter, it was stronger than we thought. The -- just driven by the macroeconomics, what you read in the paper, what's going on, what's going on in Washington. Is there going to be a drag on the economy, et cetera, et cetera. And you do factor some conservatism into your estimates, and the economy's trudging along better than the papers would lead you to believe and I think that translated into better volume for us.

Okay. That's great. And it sounds like on a related question, I think it sounds like from the commentary you're still thinking $50 million of investment for strategic investments in the box plants or acquisitions. Do I have that right? That's still the number you're thinking this year? And if you continue to grow at this rate, does that -- does that number need to go up?

The first part, the number's still accurate. We're still looking at that type of spend on the box plant side, and again, we've reserved the ability for Tom, if he comes forth with some great opportunities on acquisitions, we can discuss that matter with the board in a realtime matter. At the same time from a specific customer base opportunity, organic growth opportunity, we have the ability to support capital and growth in that manner. But the $50 million is still on plan right now.

Okay. Final question is just with the April price hike, what are you hearing from customers in terms of light weighting? Are you hearing any accelerated appetite or desire for lightweight given on the back of a second price hike now in seven months? Thanks.

That light weighting, that's not even in the equation, we don't hear that in our discussions. Tom do you want to add anything to that?

That's absolutely correct Mark.

Thanks, good luck.

Next question comes from Phil Ng from Jefferies & Company. Your line is open.

Good morning, guys. A longer-term question, you guys have done a phenomenal job outpacing the market from a gross standpoint on a very consistent basis for some time now, but your mills are running from very full out right now, and if creep past these closer to 1%, it would seem like that could potentially stunt your growth down the road. I'm just curious, do you have any other projects in place that could be de-bottlenecks and contain more capacity down the road?

Two parts to that question. Obviously, we've said in the commentary an ability to rationalize our export business where we need to supply the domestic piece of the business, and then it's a matter of capital. We've stated this before on various calls. How much investment do you need to make and are you willing to make for a ton of production? And so that's always on the table, and that opportunity always exists.

Okay.

And just to add to that, we stated very clearly two years ago our number 1 priority is to increase our integration level from the low 80s to the low 90s, and we're working on that, and we're not there yet. So, we are not going to lose sight of that goal. And so in terms of debottlenecking mills, if the return was really attractive, yes, we got some opportunities, but that's not going to get in the way of our integration level goal.

Okay. That's helpful. And then from a growth versus M&A, at least on the bolt-on side, how quickly does it take for you to bring on some of these organic projects that you guys were getting close to midpoint and you've obviously set forth $50 million, give or take, for some of these projects?

Well, again, we said this on prior calls, both on the box plants and the Mills, we always maintain a portfolio of opportunities. And we visit that during various times of the year to look at the current opportunities update that list and talk to the board and talk to the various group managements on where they see their needs and opportunities. We always have a portfolio that can be acted upon very quickly and brought to bear.

And then just one last final question, Q1 you guys mentioned how mix was better than expected, part of that was seasonal. Should we expect some of that mix benefit that you saw in Q1 fade over the course of the year?

Tom, do you want to comment.

Well, I think -- basically, I think the part of the mix that improved, there's a part that's going to be pretty steady that will continue throughout the year, and then there's a part that is seasonal, so -- and as Paul eluded to earlier, it's very difficult to break all those out ask to be able to determine exactly what's what. But I think you've got a portion that will continue, and you've got certainly a reasonable portion that is mix related.

Okay. Thanks guys.

Okay. Thank you. Next question.

Next question comes from Mark Wilde from Deutsche Bank. Your line is open.

Just one follow up here. If you look back over the last fifteen years to when the Company was LBO'ed, it just seems like the business has become more stable across the economic cycle. And I just wonder if that's leading you to make any changes in how you think about managing the business or how you think about the right capital structure for the business?

Yes, Mark, let me take that. You bring up a very, very interesting point, and that is what's going to happen -- let's look at a decade in advance. And I kid Mark and Tom a little bit, you guys, this next decade's going to be a lot better than the one that I had in the 2000 to 2010 because corrugated growth obviously stagnated for that decade, but we're very optimistic about the next decade.

If the US is going to get out of its employment dilemma -- its unemployment dilemma, I should say, the huge deficits, we think the only way that can happen is better economic growth in the US, some rebirth of manufacturing. And there's anecdotal evidence that that's going on all over, and if we're right, that bodes well for the next decade in corrugated, and that will modify some of the things you need to do going forward. And we're also strong believers in the fact that if China continues to grow, the world is going to run out of recycled fiber, and we like our position of being a virgin producer. That bodes well for us, both domestically and internationally.

And so a lot's changed in those -- it's not quite fifteen years, but it's getting up there, and we think it's for the better for the industry. That will make some changes, and that's one of the things that Mark, Tom, Rick and I spend a lot of time on talking about, not so much the short-term, but where are we going to be at the end of the next decade, not that we have specific plans. We like where we are, but there's some issues that we have to plan for, deal with, and -- but our feeling is the next decade for not only us, the entire industry is going to be a lot better than the decade from when we went private in '99 to 2009. That was a tough decade.

Yes, and would you agree that it does seem like the business is -- has become a bit more stable across the cycle?

Absolutely.

Okay. Very good. Thanks.

Thank you. Next question, please.

(Operator Instructions).

With there being no more questions, I would like to thank everybody for joining us on the call and look forward to seeing you on the second quarter call and thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You all may disconnect and have a wonderful day.