Packaging Corp of America (PKG) 2014 Q1 法說會逐字稿

Thank you for joining Packaging Corporation of America's first quarter 2014 earnings results conference call. Your host today will be Mark Kowlzan, Chief Executive Officer of PCA.

(Operator Instructions)

I will now turn the conference call over to Mark Kowlzan. And please proceed when you are ready.

Thank you, and good morning, and welcome to Packaging Corporation of America's first quarter earnings release conference call. I'm Mark Kowlzan, CEO of PCA. And with me on the call today is Paul Stecko, our Chairman; Tom Hassfurther, Executive Vice President who runs our packaging business; Judy Lassa, Senior Vice President who runs our White Papers business; and Rick West, our Chief Financial Officer. Thanks for participating in this morning's call, and after the presentation I would be glad to take questions.

Yesterday we reported first quarter net income of $90 million or $0.92 per share. Reported net income included after-tax special item charges of $16 million or $0.16 per share, including the accural costs for the settlement of the antitrust class action lawsuit for $0.11, the Boise integration related cost for $0.03 and non-cash charges related to the DeRidder restructuring of $0.02. Excluding these special items, net income was a record $106 million, or $1.08 per share, compared to first quarter 2013 net income of $62 million, or $0.64 per share. Net sales were a record $1.4 billion in the first quarter compared to $755 million last year. The $0.44 per share increase in earnings, excluding special items, was driven by the acquisition of Boise, which added $0.35 per share of earnings, and by the improvements in PCA's earnings of $0.09 per share.

The increase in PCA earnings was from improved price and mix for $0.21; lower medical, pension and workers compensation costs, $0.03 -- partially offset by higher costs for labor of $0.04; energy, $0.03; freight, $0.02; repairs, $0.02; and other items, $0.04. The details of these special items for the first quarter were included in the schedules that accompanied our earnings press release.

We had an outstanding quarter, driven by strong operations, improved price and mix and the Boise acquisition, which was 48% accretive to PCA's first-quarter earnings. The integration of Boise with PCA's operations is ahead of schedule, resulting in synergies being realized faster than we originally had expected. Extreme weather conditions did impact several of our mills and box plants, driving up the prices paid for fuels, electricity, freight, and also increasing fuel consumption. Significant snowfalls and icy conditions also resulted in 23 of our box plants having to shut down from 1 to 6.5 days.

In total, we estimate the extreme weather conditions equated to about $0.09 per share, of which $0.06 per share was recognized in the first quarter. And $0.03 share was capitalized in inventory and will reduce the second-quarter earnings when the higher-cost inventory is sold. The $0.06 per share in earnings reduction in the first quarter was about $0.03 per share more than what we included in our earnings guidance. On the positive side, medical and workers compensation costs were abnormally low: $0.02 per share lower than last year and $0.02 per share lower than in our guidance forecast. Lower interest expense and taxes taken together were $0.02 per share better than forecasted.

The lower interest cost was from an interest rebate, and the lower tax rate was from a true-up of state taxes owed with changes in tax laws. Other positives were better price and mix, strong operations and higher synergy realization which, in total, exceeded our forecast by about $0.04 per share.

Looking at more details of operations, in our packaging segment, first quarter EBITDA, excluding special items, was $244 million on sales of $1,097 million. Box shipments were up 31% over the first quarter of last year, and up 29% per workday, with one additional workday in the first quarter of 2014. Excluding Boise, PCA's corrugated product shipments were up 3.4% in total, and up 1.8% per workday. The 1.8% increase in PCA shipments per workday is against a tough comp with PCA's first quarter of 2013 shipments up 7.1% over 2012.

Both domestic containerboard and export sales demand remained strong in the first quarter. But with our strong internal demand, we had fewer tons available to supply these markets. So we reduced our shipments by 12,000 tons compared to last year's first quarter.

Our containerboard mills produced 821,000 tons, running extremely well and setting productivity records at our Counce, Tennessee, and Valdosta, Georgia, linerboard mills, and our Tomahawk, Wisconsin, medium mill. One synergy we have achieved ahead of schedule, driving Counce and Valdosta's production records, is shifting some lightweight linerboard production from Counce and Valdosta to our more productive and lower-cost lightweight machine at DeRidder. Counce and Valdosta are now making heaver-weight grades that were previously made at DeRidder. This was a synergy we wanted to achieve early in the integration process, and everyone working on this did an outstanding job.

We also completed the annual maintenance outage at our Counce, Tennessee, linerboard mill in March which resulted in reduced production of about 22,000 tons.

PCA ended the quarter with its total containerboard inventories down 4,000 tons compared to the end of the first quarter of 2013, including both Boise and PCA inventories. In the second quarter, we will have our Tomahawk, Wisconsin, medium mill down eight days in May for its annual maintenance outage, which will result in reduced production of about 13,000 tons.

Our integration level in the first quarter was just over 90%.

To meet our total containerboard demand, PCA purchased 42,000 tons of containerboard from the outside market during the first quarter.

Pricing for containerboard remained essentially steady with the fourth quarter. Pricing for corrugated products was up a bit, mainly as a result of a few contracts that reset prices annually, and we did have a richer mix than we expected during the quarter.

Looking at our Paper segment, first-quarter EBITDA, excluding special items, was $40 million on sales of $309 million. Office paper shipments were up 5.5%, or 10,000 tons, compared to last year's first quarter, and up 1% compared to the fourth quarter. Printing and converting papers and pressure sensitive paper shipments were down about 20,000 tons as a result of our capacity rationalization at International Falls in last year's fourth quarter.

White paper prices have improved during the first quarter as a result of previously announced price increases for office papers and printing and converting grades. Also in February, we announced a 5% increase of pressure-sensitive papers effective April 1, 2014. We ended the quarter with our total white papers inventories down 25,000 tons compared to the end of the first quarter of 2013.

During the second quarter, our Wallula, Washington and International Falls, Minnesota white paper mills will be down for their annual maintenance outages, which are expected to result in reduced production of about 15,000 tons, so our white paper mills will have to run well.

Looking at costs, our energy costs, particularly natural gas, went up significantly in the first quarter driven by higher demand with cold weather and low inventories. So far in the second quarter, we have not seen natural gas prices go down that much with the current NYMEX futures down only 6% compared to the first quarter average. Electricity rates were also up, and we see these rates going seasonally higher in the second quarter with warmer weather, particularly at the southern mills. I am now going to turn it over to Rick West, our CFO, who will provide more details related to our financials.

Thank you, Mark. In the first quarter, PCA generated cash from operations of $149 million. Capital expenditures for the first quarter were $51 million.

Common stock dividends of $39 million were paid in the first quarter, or $0.40 per share. We did not repurchase any shares of PCA company stock during the first quarter. Cash tax payments of $2 million were made during the first quarter, and we ended the quarter with $186 million in cash.

We paid off $66 million of long-term debt during the quarter, making our total debt reduction since the acquisition $175 million. With the debt pay-down, our long-term debt is now at $2,482 million.

We have finalized estimates for total capital spending. We expect 2014 capital expenditures of about $400 million, which includes the DeRidder conversion project, with expected spending of $100 million in 2014.

Finally, I want to provide you with some information for our scheduled annual mill outages in 2014. As Mark said earlier in the call, we had our Counce mill down in the first quarter for its annual outage, and we have three additional mills scheduled to be down in the second quarter. Current plans are to have one mill down in the third quarter and two mills down in the fourth quarter for their annual maintenance outages.

We amortize the repair costs associated with each outage over the remainder of the year after the outage is completed. While we don't give an annual earnings forecast, we do give some estimates for items that can be unusual or timing-related. And this is the case here. Based on our 2014 schedule, the total earnings impact for each quarter for mill maintenance outages, including higher operating costs, production losses and amortization of repair costs was $0.07 per share in the first quarter, and is estimated to be $0.10 per share in the second quarter, $0.10 per share in the third quarter and $0.24 per share in the fourth quarter.

The significant increase in the fourth quarter is driven, for the most part, by the cumulative effect of amortizing remaining repair costs for all shutdowns that occurred during the year, including the fourth quarter. I will now turn it back over to Mark.

Thank you, Rick. Before I move to the second-quarter outlook, I want to comment briefly on the DeRidder conversion project. On March 26 we announced plans to convert the No. 3 newsprint machine at DeRidder to produce 355,000 tons annually of lightweight linerboard and corrugated 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 startup by November 1, 2014.

The total capital cost for converting D3 is about $115 million, with $15 million spent in 2013, and $100 million to be spent in 2014. Approximately 100,000 tons of low cost, virgin fiber will become available for containerboard production, reducing the amount of higher cost recycled fiber required. The D3 conversion project is expected to produce an after-tax discounted cash flow return of 30% to 35%. Without D3, we estimate that our outside purchases of containerboard in 2015 would have been about 250,000 tons. D3 also allows us to return some tons to our long-term customers in the export market where, for the past several years, we had to withdraw some tons so that we could meet our internal domestic demand. So you can see that our timing for the D3 conversion is pretty good.

Let's wrap it up with our second quarter outlook. We expect higher sales volume in corrugated products and higher prices in white papers and lower fuel consumption with warmer weather. With three of our mills down for their annual outages in the second quarter compared to only one in the first quarter, we expect higher increased costs, particularly higher amortization of annual outage repair costs, and lower production compared to the first quarter.

As I said earlier in the call, we also expect our medical and workers compensation claim costs to increase to a more normal level. And electricity rates are expected to go up with normal seasonal rate increases. Finally, we will recognize the remaining $0.03 per share impact from extreme weather in the first quarter, and we expect a higher tax rate. Considering these items, we currently expect second quarter earnings of about $1.10 per share.

With that, we would be happy to entertain any questions. But I must remind you that some of the statements we've made on this call constituted forward-looking statements. The 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. Actual results could differ materially from those expressed in these forward-looking statements.

With that, operator, I would like to open the call up for questions, please.

Certainly.

(Operator Instructions)

Anthony Pettinari, Citigroup.

First off, I was wondering if you could speak to the trends you're seeing in April on both the corrugated side and, if possible, the white paper side?

Yes. I'm going to let Tom and Judy comment on that. Tom, do you want to start off?

Yes, Anthony, Tom Hassfurther here. The trends in April are very solid. We've got a number of booking days now, we are up very nicely. I think some of that is the result of the carryover from the first quarter, where we had some weather-related issues, which probably cost us about 1% in our total shipments. So we have had some catch-up there.

And everything looks pretty positive going into the second quarter. We are also -- we will also be up about 3.6%, we estimate at this stage, for 10 days of data for April. Judy?

Demand has been definitely pretty lumpy in Q4 and Q1. And with price increases going on and weather-related issues and such, we're looking at market demand being more closer to the normal levels in the lower digits of reduction in uncoated freesheet. I think the underlining fundamentals for demand have not materially changed. And so would expect to see more normal conditions in second quarter.

Thank you.

Judy, given the closures that Boise completed prior to the acquisition, can you remind us what your mix now is between cut size, offset and other grades?

In the majority of the closure, it was around pressure-sensitive, like, the heavier-weight grades. And we also are out of business forms at this point, and would have gone down a little bit on printing converting grades.

So cut size is, as a percentage --

Cut size is not impacted by the closure.

Okay. So that, at this point, is the vast majority of your volumes?

Correct.

Yes, okay. And then just a follow-up question for Rick. You referenced medical and workers comp costs that were abnormally low, and also the interest rebate, I think, that helped you out a bit in the quarter. Can you give a little bit more color on those two impacts?

Well, the interest rebate is something we receive annually from one of our lenders that -- it's not guaranteed, but it normally occurs. And this was our first time of receiving this in the first quarter. So that's probably about $0.005 a share.

If you look at the medical and workers comp costs, generally they run a certain level. And in the first quarter, they were probably about $0.02 per share lower than we expected and what would even be a norm.

And Anthony, from our standpoint, we don't know if that was just the fact -- a catch-up in year-end, certain things not processed by the outside claims agency, or could it have been some particular items that people postponed until the next quarter in order to even go to the hospital with the extreme weather. It's really something we can't judge.

But I would say that we do expect it to go up in the second quarter to a more normal level, especially for the medical. Workers comp is a function of your safety and what happens with ongoing cases. But more so the medical, we think, will go up more in the second quarter.

Okay, that's helpful. I will turn it over.

Next question, please.

Chip Dillon, Vertical Research Partners.

Thanks, Rick, by the way, for the detail on the way the maintenance costs will flow through the year. I just was wondering if you could give us an idea of how much of a swing this is versus what we have seen in the past. I know you haven't called out. But it looks like it's really a $0.14 jump from the middle quarters to the fourth quarter. What would be more roughly typical in past years when you were a smaller Company?

I would say, Chip, that would have been more from a third to a fourth -- maybe a $0.04 per share, $0.03 or $0.04. And it really was a function of the outages. The difference between the outages now and the outages that we had in the past: we would take primarily our two southern mills down in the first quarter, and our two northern mills in the second quarter. Whereas now we are taking more -- you know, the I Falls mills more and the other mills spread out over the year, just because of being able to schedule and get the work done with our internal staff, and also manage it.

From the standpoint of overall, it's probably about, as you would expect -- outages in the past would have been a total impact of maybe $0.25 a year per share. Now, with four more mills, it's about double -- just about what you would expect.

Okay, that's very helpful. And then, thanks for the update on the CapEx. When we look at the future years -- and of course, things can change, obviously -- but based on your footprint and what it looks like today, what is a good range to use for CapEx in 2015 and beyond?

Chip, this is Rick again. I'll take that one. I think if you look at it -- and of course, it can depend upon if we have additional strategic projects. But I would say once the DeRidder project is completed and some of the synergy capital that we have identified, and once the Boiler MACT, of course, is completed, you would be looking at a number of around $250 million. Then of course, if there's strategic projects that really add value, we would entertain those projects and it would go up from there.

Okay. And the last question: you mentioned that you were out buying board in the market to supplement your needs in the box plants in certain areas. I was just wondering what your experience has been so far with some of the purely recycled newsprint conversions out there, especially Georgia, Oregon and Ontario?

Hi, Chip; Paul. Let me take this one. The answer is: there's some good, 100% recycled product out there, and there is some stuff that simply will not run, at least in our system. And I don't want to point out any of the stuff that doesn't run on this call -- I don't want to downgrade any people that are making it. But there is a wide variety of board out there. Some of this stuff is pretty bad. Obviously the stuff we're buying is not. But we really can't comment further than that.

Got you. Okay, thank you.

Next question, please.

George Staphos, Bank of America Security.

Congratulations on the progress. First question, just more of a housekeeping question, guys. With Boise now in the mix, could you mention to us how much OCC, or how much recycle is of your overall tonnage? And we can do the math, but I'm assuming with D3, that, that will go up a few percentage points. If you can give us some specific numbers on that, that would be helpful.

Currently today, if you net out what we take back in from our own box plants on [DLK], we are around 15%. And then after the conversion, at the rate we are going, it would be about 19%. So just under 20% after the project is completed.

Okay, thanks for that, Mark. The next question I had, just staying on paper capacity and production: when D3 comes on, it can be adding over 300,000 tons to you. It adds, as you said, much-needed capacity. If you continue growing at the rate you would expect, which I realize is a little bit of a -- subject to question, and you obviously have your own internal forecast -- when you think that you might start running up against capacity limitations again? Would that be two years out, three years out? Can you give us any kind of a view on that?

And overall, the related question, as you continue to grow -- looking at the historical data, you have continued to improve the profit per ton and your return on capital. Do you expect that your returns and profit will at least be maintained as you grow into the future? Thanks, guys.

Yes, George, that's a hard question to answer because of what we will do going forward. Obviously we are bringing on 355,000 tons. It will come on immediately. We will ramp it up from startup through 2015.

And you can do the math yourself. We have been growing at 6% a year, so you've got to make an assumption will we grow with that? Will we grow less, will we grow more? And you get to a number that could be anywhere from two, three, four, five years, depending on what you assume is a growth assumption.

But the big wild card then is that we also have a lot of tons that we will be selling into the export market that, if we need those tons, we can bring them back home, as we have done the last three years. And so we can probably extend that time period two, three, four years if we chose not to participate at all in the export market.

That's unlikely because, quite frankly, as you know, we've had the position the world is going to eventually run out of recycled fiber. And virgin fiber producers are going to be very advantaged, particularly in the export market. So we are keeping our place in the export market. It may prove five years from now to be a very good place to be doing business. And that could change the numbers.

So there's not a simple answer to your question. But I think I've got you into at least the right church. You've got to figure out what pew we are in, okay?

Understood.

(multiple speakers) another, we will take any other question.

Philip Ng, Jefferies.

In terms of the Boise integration, it seems like it's ahead of schedule. Can you talk about if you have any new updates in terms of timing in your targets overall?

Again, on a run rate basis, we are about $50 million annualized, which is $0.08 to $0.09 a share. But we have anticipated that over the next couple of years, we've got a $175 million opportunity on synergies going forward.

Okay, that's helpful. And then, can you give us a little more color for the on the D3 ramp? It's coming online in Q4. Do you expect it to have a negative or positive contribution from the early get-go? And how is that going to scale up over time?

We expect [someone]. And it should have a positive contribution immediately.

Okay.

We will ramp up the tons into the system.

Okay.

One of the reasons for that is that we do have a home for the production.

Okay.

Were buying stuff in the open markets. And the other thing that's occurring, of course, is that it's replacing newsprint, which will go down. So we pick up 100,000 tons of fiber, of very low-cost fiber that is really earning no return now. Because we are basically at roughly breakeven in newsprint. When we sell this into containerboard, we have good margins in containerboard. So we're going to pick up a hefty margin on that first 100,000 of virgin fiber. And then a positive margin on the recycled fiber also.

Got you. And what are your longer-term plans for D2? Do plan on permanently shutting it down? Or temporarily mothballing it?

The machine has been down for a few years now. And so, again, that's just a future opportunity down the road years from now that would be presenting itself. It's not even in the plans now.

Okay.

Long-term, it's in a building that you could put a paper machine in. But you're basically talking about putting in a completely new machine.

Okay.

And then you'd have to put in a massive investment in the pulp mill to supply that machine fiber. And it's one of those situations: if we are right and the world runs out of OCC in five years, maybe in 10 years that could be a greenfield site for another machine. But you're talking $500 million to $600 million, $700 million investment to do something like that.

Got you. And any thoughts on the West Coast drought from an impact standpoint?

No. I'm not sure what you mean by that question.

Do you expect it to have a meaningful impact on demand with the West Coast drought?

Philip, this is Tom. Yes, there's some impact, there's no question about it, with the ag business out there. Not a large footprint for us, fortunately. But I think that those plants that are very focused on that Central Valley there are going to have some impact, just based on the mere fact that they can't get water in there and the crops are going to be significantly lower. But it will be concentrated just to that area.

Okay.

Just to build on what Tom said, we are big players in the Florida ag business. We are not that big of a player in the California ag business, at least to this point.

Okay. Good luck on the quarter, guys.

Thank you. Next question?

Mark Weintraub, Buckingham Research.

You had mentioned that you thought the weather maybe had hurt the first quarter -- your box shipments to the tune of about 1%. Which I think would suggest that adjusting for that, maybe you are at a 2.5%, 3% type of year over year for the legacy business growth.

Is that -- in a normal, growing market, is that a reasonable expectation go forward? Or can we start seeing -- is it a potential that we are going to be back at the 6% type of growth rates that we had been seeing previously? And at least give a little color on how we should think about that.

Well, the main color we will give you is red. We don't give growth rates forecasts. That's proprietary. We would not want to share that with our competitors.

That said, the last four years, we have been growing at 6% a year, which makes each year even more difficult, because the comp is very high. And so, you would expect that we would probably grow less than 6%, because it's hard to sustain 6% a year forever.

And the 6% growth that we had included acquisitions of box plants, as you recall, and that will also affect the numbers. So with acquisitions, could it be 6%? Yes. Without them, could it be 6%? Very doubtful.

Fair point. And I think in the past, you have given some indication on the acquisitions were -- was it 1% to 2%? I forget.

Yes, the last few years we have made a fair number of acquisitions. So it was at 2%. And that's a pretty big number.

And then just, was it last year though -- did you have a disproportionably strong first quarter last year?

Last year, I believe we were up --

Mark, this is Tom. I can tell you, we were up 7.2% on a per workday basis last year. So we had a very tough comparable for this year. And this year, of course, we were up 1.8% on a per workday basis. And again, it's an industry that was down about 1.6%, if I recall. So that spread is about normal for us in terms of the industry.

Okay.

And again, it was very tough comparable. So to Paul's point, depending on the quarter, we are going to have some of those very high comparables.

Okay. Thanks very much.

Next question?

Alex Ovshey, Goldman Sachs.

Looking at the customs data for uncoated freesheet, it look like there's been a significant jump in imports of white paper into North America. Can you talk about whether that's having much impact on your business?

This is Judy. I will take that one. You know, imports are out there. We are not going to stop them from coming in. They are another option in our customers' portfolio. Our focus is more about continuing to offer a solid value proposition to the entire supply chain. We have a world-class logistics network, and we believe we can exceed on service. That's really our position.

Got you. Thank you, Judy. And that --

Let me amplify on that a little bit. We were up 5.5% in cut size. And cut size is our main business. It's the biggest segment of our uncoated white. It's where we bring some unique capabilities to the marketplace in terms of logistics and sales support and customer service. It's something that a box supplier, such as export, really can't compete on total value, in our opinion.

And so we are putting a lot of our eggs in the basket that -- cut size is what we want to make our place in the market. Because what we can offer, others can't. And others include exports. And exports, because of a 40-week or, I don't know, 13-week supply chain to get the stuff here, it's tough to compete on service.

Our strategy is built primarily around cut size, and being the best supplier in total value, which includes price as one element, but a lot of other things. I think that's a very important difference, especially when you want to compare what we do versus exports.

I appreciate that, Paul. And then, would you be able to say how much of the cut size price increase you have been able to implement? Looking at the industry, it seems like so far, they only recognize $30 on your business -- that's more open market. Can you just talk about how you have been able to perform there on the pricing side?

I will take that one as well. In the first increase, we realized the majority of the announced increase on our non-indexed business. As you mentioned, we do have business tied to an index, and those have only moved about $30 through the end of the quarter. But we do expect to see those indices go higher, as we just saw in pulp paper we had just moved this week.

And then on the second increase, we are just out there talking to our customers now, and so that one is still in progress. And so we are not in a position to comment about that one yet.

Okay. Just a clarification. When you say majority, is that 50? Or is that 60? Or somewhere in between that 50 to 60 number?

The majority of our customers.

Okay. Thank you very much.

Thank you. Next question, please.

Mark Connelly, Credit Agricole Securities.

Two questions, Mark. This shift of heavyweight accounts in Valdosta from DeRidder: obviously there's always optimization when you add a new mill. I'm just curious whether that was a productivity or a fiber decision. Are you debottlenecking? I'm just curious who wins the most or what drove that decision.

It was considered both opportunities for fiber and taking advantage of what the big machine at DeRidder can do. But also the transportation component of that, and where the containerboard was going. So we were able to take advantage of, again, the fiber base and transportation logistics and the capability of the DeRidder machine to ship some of the lightweights out of the No. 1 machine, primarily at Townsend and the machine at Valdosta.

Said another way, we are pulp-limited at DeRidder. And we are not pulp-limited at Valdosta and Counce. So you want to make as much lightweights at DeRidder as you can, because you will make more square feet with the same number of tons. That is what we're doing.

And as you pointed out, it helps our -- it maximizes our fiber balance. And then from a productivity point of view, the DeRidder is a much better lightweight machine than Counce No. 1 and Valdosta. We can make lightweights on Counce No. 2. So this is a triple. This is the hat trick of optimization: we get three benefits.

Okay. And just one harder question: if you think about the weather impacts that you saw, you mentioned some box plants lost some days. Did we see a mix shift that might have affected your average revenue per ton? And may we see that shift back in Q2?

Mark, I would say that the mix shift -- we had a little bit better mix. Our price was affected by the mix, which I don't think is significantly going to change going forward. But also we did have a very large account whose price increase went into effect the first of the year, which (multiple speakers) impact the quarter.

Okay. So that's enough to swing around. Okay, thanks very much.

Next question, please.

Debbie Jones, Deutsche Bank.

Beyond the weather impact, I'm wondering if you notice any specific differences in the regional demand trends you can comment on, either positive or negative? So just changes in boxes targeted for e-commerce or things like that?

Well, I would just say that from a regional demand standpoint, it's very hard to look back on this quarter and say that there's any significant trends. Because you had -- three areas of the country were dramatically impacted by weather. That is the Midwest, the Northeast and the Southeast. That's where the primary impact was for PCA, which by the way, is also where the largest footprint of box plants are.

So it's very difficult to draw any conclusions from the first quarter, other than to say where are we now, now that the weather has settled down? That sort of thing. And I think we are back to much more normal demand trends, really, across the country, with the exception of the one small pocket we talked about out there in California regarding ag.

Okay. And then on that ag question that you got earlier, can you just remind us: if you don't have as much exposure to what the outcome might be for the California drought, what are your end-markets over on the West Coast that you can point to?

Well, we are primarily industrial market on the West Coast.

Okay. All right, thank you very much.

Thank you. Next question?

Chris Manuel, Wells Fargo.

Just a couple follow-up questions here. First, could you comment a bit on export pricing? Have you seen any movement up or downward with what you are realizing in the export markets?

Chris, this is Tom. I will take this one. The export markets in the first quarter drifted down a little bit. They have since stabilized -- that's primarily Western Europe and Latin America I'm talking about. China, as an example -- Japan. They have been very stable. So on an overall basis, I would say that things are pretty stable.

Okay, that's helpful, thank you. And then with respect to some of the weather issues as they played out, thank you very much for the color and quantifying -- or trying to give your best guesses there as to how that flows. But is your anticipation that some of that potentially gets made up as the year goes on? Or is some of that permanently lost? What does your gut tell you that -- how that may or may not translate through?

I think you've got -- some is going to get made up, but some is going to be lost. When you just have people in their houses with these conditions and not being able to get out and shop and do some of the normal things that they do, you are going to lose some of that. But it's -- again, I think we will return to economic trends that were forecast primarily for the year. And by the end of year, we will be pretty close to those numbers.

Just to add to that on the cost side: Mark mentioned earlier that natural gas prices have not dropped dramatically, even with warmer weather. And part of the reason for that: inventories are very low. So another effect that we may see is that we expect natural gas prices to eventually drop. But It may take more time than we think, because inventories are so low right now. And that could affect results, at least in the second quarter a little bit.

Okay. One last topic I wanted to mention. Any additional requirements that you have or investments that you will need to make to comply with Boiler MACT?

Nothing identified at this point. We are actually well on our way to engaging in the work that had been identified two years ago. So, again, no new capital.

And you are set. Okay. Thank you much.

Next question, please.

Scott Gaffner, Barclays.

Just a couple of quick follow-ups here. Just on the ramp-up of DeRidder: what sort of timeframe are we talking about to get from starting a machine to fully rated capacity? Is it three months, six months? And is the period shorter simply because you're not having to qualify these tons with outside customers?

You know, we are anticipating three to six months to bring the machine up to full productivity. And on the question of qualifying, we will certainly, even with our own plants, make sure that we are using the term qualified, producing what they expect out of us. So three to six months is a good timeline.

Okay. And then just looking at your shipments versus the industry. I think you said you were up 1.8% in the quarter, and we were up close to 6% last year. I just wondered if there was anything that you have seen as far as a competitive response in the industry. You did mention that you had a box plant acquisition. But I just didn't know if there was any competitive response that you have seen around other players going after the same business that you're going after now. Anything you can point out.

This is Paul Stecko. I don't think there's any changes. We basically have been outpacing the industry by a given amount for the last 10 years. And I don't think -- there's always pockets where there's competition, and there's always business you lose and gain.

But as we have said many times, our biggest source of demand comes from existing customers, getting more of their business either as they grow or, again, as the things that we provide in terms of service and technical features and quality. Instead of maybe splitting an account 50-50, over time, we will get more and more of that customer's business because we do a very good job. So that still remains the biggest source of growth: growing with existing customers.

Okay. And then just a last question, maybe for Rick. It looked like you changed your inventory accounting here in the start of 2014. Was there any meaningful impact, old versus new, on the first quarter? Meaning, if you had used the old accounting methodology, would these numbers have been higher or lower in the first quarter?

No. There will be no meaningful impact to the bottom-line earnings with the change to eliminate LIFO.

Okay, thank you.

Next question, please.

Al Kabili, Macquarie.

I guess the question, Judy, is it possible for you to just give us the average, sequential change in price realization in the paper business, sequentially in dollars per ton?

No. I think I gave -- I talked to you about what we realized, and can't break it down any further than that.

Okay, All right. Thank you. And then to follow-up, a broader question, either -- or, for Mark or for Paul. As you are growing faster than the industry and continue to do so, with your bigger size now, with Boise, do you have to start to think about more of the impact on the broader industry? And what impact that has as your growing factor or as you are growing? Or are you still -- or, you're far away from that in terms of relative size to that meaningfully impacting your thinking and strategy there?

This is Paul. The only people we worry about impacting is our customers. Period. Exclamation point. We are here to serve our customers. We will grow whatever we have to grow to service them. And they are really the only ones that matter, in our way of thinking.

Okay, that's helpful. Rick, thanks for the detail on the maintenance schedule. Is that now a more normalized -- with Boise, is that a more normalized way to be thinking about it on an annual basis? Or is there more or less maintenance this year than would be typical going forward, with Boise?

I think it's a pretty typical amount for maintenance. But it could change each year, depending upon when you schedule your outages throughout the year. So I can't say that it will be the same impact per quarter. And I think that's something that we will have to provide each year as we schedule our outages. But in totality for the year, it's a pretty representative number.

Okay, great. That's helpful. And then finally -- and that you had highlighted some of the costs, you didn't mention too much on the wood side. And I was wondering if you're seeing any seasonal relief right now on your wood costs, or how you're thinking about that into the second quarter so far?

If you think about what happened in the Southeast, starting at the end of September last year, the entire Southeast saw rains right through the winter into the spring. We haven't seen much relief there. But through the mid-South and over towards Louisiana-Texas area, that's normalized. So it's gotten better. It's not -- compared to what was going on this winter, it's not as bad. So pricing has seen some relief.

Okay, all right. And then final question is just on -- with your leverage in pretty healthy shape, as far as the balance sheet goes, how should we be thinking about how you're thinking about prioritizing cash flow going forward between additional deleveraging versus buybacks versus the dividend? How should we be thinking going forward on that?

This is Paul. Our answer is the same as last quarter. Our number one priority for cash is to pay down $1 billion of debt in the next three years. We think that's an important value creator for our shareholders. If there's excess cash above that, we would probably look at a dividend increase before share buyback at this point.

Okay, all right. Thank you, and good luck the rest of the year.

Thank you. Next question, please.

(Operator Instructions)

George Staphos, Bank of America Security.

I just want to come back to an earlier question, Paul. I think you were saying earlier that, ultimately, you expect most of your growth, as you've said in the past, to be with your existing customers. So would it be fair to say then that if it's with your existing customers -- holding price constant, obviously, because we can't talk about future pricing -- that you would expect your margin and your return to basically be in line or better over time with historical trends as you grow in the future? That's question number one.

Question number two: Hexacomb -- you used to own what is part of Tenneco. You had experience with it. What experience have you had in utilizing in your mix right now and with your customers? Any observations with that so far?

And then last clean up: can you remind us what is the Boiler MACT CapEx outlay over the next several years? Thanks, and good luck in the quarter.

On the Boiler MACT: I believe we have said it was around $25 million.

Thank you.

And with regard to Hexacomb, we did own Hexacomb. PCA did through 1999. When we separated from Tenneco, we were sold to private equity firm Madison Dearborn. Hexacomb remained with Tenneco as part of their protective packaging business. It subsequently got sold. It subsequently got resold to Boise. And when we acquired Boise, we got it back.

It's got a very nice natural synergy with us, in that we have 80 box plants who are potential salespeople for that brought up. And so it gives us a lot more possibilities than Boise would have had in growing the business.

And secondly, it's a grade that uses very lightweight paper, 30 pounds or less. And with the DeRidder 3 conversion, we've got a really great place to make paper for Hexacomb. It will run very well there. So that's another synergy. Hexacomb is probably a better fit for us than anybody else in the country. And so we are glad to have it.

The questions on where we're going with margins, that's -- and pricing and all that stuff, that's between us and our customers. And that's not something that we want to get into on this call.

All right. Fair enough, Paul. Thank you.

Next question, please.

Chris Manuel, Wells Fargo.

Just one quick follow-up. I appreciate that you don't want talk about what your plans are, or how you may grow above or beyond, or different things within the industry. But as you look at fundamentals and components today, what do you anticipate out of containerboard shipments for the balance of year? Not necessarily box shipments, but containerboard shipments.

Do think that fundamentals and such today support getting back to a point or so -- give or take a point or two -- of containerboard shipment growth? Or do you think that we're still stuck in this flattish environment for the next 6 months, 12 months, 18 months?

Chris, this is Tom. I would just say that the -- we hope to get back to a level of growth and GDP growth that is healthier than where we have been. We certainly can't predict that, that's going to be the case. I don't think any economist is out there is predicting any gloom and doom or going backwards necessarily.

I think that there's a -- most predictions show a ramp up through the year. We would like to think the same thing is going to occur. I'm sure our customers feel the same way.

But I would like to also add, regarding this whole growth strategy, our growth strategy has not changed by any stretch of the imagination. We had talked about strategic capital being directed towards areas where we have either capacity constraints or proven demand from a customer base. We will continue to acquire when the opportunities present themselves. And as Paul went into great detail about the value proposition that we have and we provide our existing customers. So we will continue to grow on that platform.

Okay. I appreciate the color. And then, the last question I had was: when you look at how you did this quarter, you again outpaced the markets of it. Was that pretty uniform across the whole network of box plants?

Was that more weighted towards what you have done historically with some of the legacy packaging core plants? Or how did the -- was there much differential with how that found a home?

Well, you will always find some differential regionally, depending on demand trends and that sort of stuff, by region. But for the most part, I would just consider it to be pretty uniform.

Okay, thank you.

Thank you. Next question, please.

Mr. Kowlzan, I see that there are no more questions. Do you have any closing comments?

Yes. Thank you for joining us today. We look forward to talking with you in July with the second-quarter numbers. Have a good day.

Again, thank you for your participation. This concludes today's call. You may now disconnect.