Packaging Corp of America (PKG) 2014 Q2 法說會逐字稿

Thank you for joining Packaging Corporation of America's second-quarter 2014 earnings results conference call. Your host today will be Mark Kowlzan, Chief Executive Officer of PCA. Upon conclusion of this narrative, there will be a Q&A session. I will now turn the conference over to Mr. Kowlzan and please proceed when you are ready.

Good morning, and thanks for participating in Packaging Corporation of America's second-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. I'll begin the call with an overview of our second-quarter results, and then turn the call over to Tom, Judy, and Rick, who will provide more details. I will then wrap things up and be glad to take any questions.

Yesterday, we reported second-quarter net income of $100 million, or $1.01 per share. Second quarter net income included after-tax charges for the Boise integration and DeRidder mill restructuring of $14 million, or $0.15 per share; including cash charges of $2 million, or $0.03 per share; and non-cash charges of $12 million, or $0.12 per share. Excluding these special items, second quarter 2014 net income was $114 million, or $1.16 per share, compared to the second quarter 2013 net income of $71 million, or $0.73 per share, and first quarter 2014 net income of $106 million, or $1.08 per share. Details of the special items are shown on the schedules included with our press release.

Second quarter net sales were $1.468 billion compared to second quarter 2013 net sales of $800 million and first quarter 2014 net sales of $1.431 billion. Excluding special items, the $0.08 per share increase in second quarter 2014 earnings, compared to the first quarter 2014 earnings, was driven by increased sales volume, $0.07; lower energy cost, $0.07; and improved prices and mix, $0.05. These items were partially offset by higher annual outage repair costs of $0.04; a higher tax rate, $0.02; increased depreciation expense, $0.02; and higher inventory consumption costs from extreme weather that were capitalized in inventory in the first quarter for $0.03.

We had an outstanding quarter, delivering record results that were better than expected, driven by strong corrugated products volume, higher prices, and lower cost than the first quarter.

Synergy realization at both our mills and box plants was also ahead of our projections as we continued to implement a broad range of actions to improve productivity and reduce costs. We estimate that we have realized annual run rate synergies of about $85 million to $90 million, and we are well-positioned to achieve at least $175 million in synergies by the end of 2016.

Looking at more details of second quarter operations, packaging EBITDA, excluding special items, was $259 million on sales of $1.145 billion, which equates to a 22.6% margin. Containerboard production was 846,000 tons, up 25,000 tons compared to the first quarter of this year, driven by two additional production days (16,000 tons) and also by higher mill productivity (9,000 tons). A key synergy with the Boise acquisition was moving lightweight containerboard production from both our Counce, Tennessee number one linerboard machine and Valdosta, Georgia linerboard mill to the DeRidder, Louisiana mill. The production shift is complete, and as a result, we set all-time productivity records on the Counce number one machine and on the Valdosta machine. Productivity on the DeRidder number one machine is also improving even with a lighter weight mix, and we achieved record production on the Wallula, Washington corrugated medium machine.

We had our Tomahawk, Wisconsin medium mill down for six days in May for its annual maintenance outage which resulted in reduced production of about 9,000 tons. Containerboard inventories were up about 24,000 tons compared to the end of first quarter this year.

Of the 24,000 ton increase, about 7,500 tons came from shipments that we could not get out at month-end due to rail and truck availability issues at our Counce and Valdosta mills, and about 3,500 tons of the increase came from our acquisition of Crockett Packaging during the quarter, which Tom Hassfurther will discuss later. The remaining 13,000 ton increase was the result of our plans to optimize containerboard inventories at our box plants to improve supply assurance and reduce transportation costs in light of continuing rail and trucking issues that we are seeing at our mills.

As most of you have heard on the news, U.S. rail industry is facing both railcar shortages and longer shipping times. This has caused delays in scheduled shipments from our mills to our box plants. At times we've had to backfill rail shipments with higher cost shipments by truck in order to meet the needs of our box plants. The trucking industry, however, is also facing service issues driven by limited availability of truck drivers and new regulations governing hours of service.

With the low cost of money, it's much more cost effective for us to maintain a slightly higher containerboard inventory at our box plants rather than increase transportation costs and run the risk of not having enough inventory on hand at our box plants to adequately service our customers.

Our integration level in the second quarter was 91%, and to meet our total containerboard demand, we have purchased 58,000 tons of containerboard from the outside market. Our year-to-date purchases of containerboard are approximately 100,000 tons.

In the third quarter, our Valdosta mill will be down eight days for its annual maintenance outage, reducing production by about 13,000 tons. Also, the Wallula number two medium machine will be down for seven days for its annual maintenance outage, reducing production by about 3,000 tons. In addition, we have planned boiler and lime kiln repairs at our DeRidder mill, which will increase purchased energy and chemical cost during the third quarter.

I'll now turn it over to Tom, who will provide more details on PCA's containerboard and corrugated packaging sales and demand.

Thank you, Mark. Our containerboard and corrugated products demand was strong throughout the quarter, with corrugated products shipments up 4.8% over the first quarter. With the acquisition of Boise, shipments were up 30% over the second quarter of last year, and up 32% per work day. Excluding Boise, PCA's corrugated product shipments were up 5.5% per work day, and up 3.8% in total. On April 29 of this year, we acquired Crockett Packaging, a corrugated products manufacturer, including a corrugated plant and a sheet plant in Southern California. The Crockett acquisition was important for us strategically, giving us a larger presence in the growing Los Angeles and Southern California markets. Excluding the Crockett acquisition, PCA shipments per workday were up 4.3%, while the industry was up 1%.

Prices for corrugated products were up slightly compared to the first quarter, driven by a richer mix.

With strong internal containerboard demand needed to supply our box plants, we reduced our outside sales of containerboard, both domestic and export, a total of 8,000 tons compared to last year's second quarter. During the second quarter, total export shipments of containerboard, including Boise, were down 2,000 tons compared to last year's second quarter. Export pricing remained steady throughout the quarter.

The domestic containerboard market for us also remained steady throughout the second quarter, both in terms of demand and price, and our total company domestic containerboard shipments were down 6,000 tons compared to last year's second quarter.

I will now turn it over to Judy Lassa, who will discuss white papers.

Thank you, Tom. Our paper segment EBITDA in the second quarter of 2014, excluding special items, was $45 million on sales of $295 million, which equated to a 15.2% margin compared to a 13.1% margin in the first quarter.

Our white paper mills produced 275,000 tons with productivity up almost 3% over the second quarter of 2013. Annual maintenance outages were completed during the quarter at our International Falls, Minnesota and Wallula, Washington paper mills. These two outages resulted in reduced production of 14,000 tons and higher operating costs.

In addition to normal outage work at the Wallula mill, we also upgraded the headbox and rebuilt the forming section of the number three paper machine, which will increase the machine's basis weight range and overall paper quality, improve efficiencies and lower operating costs.

The mills started up well after the outages, and in all three of the paper mills, we are realizing productivity improvements and cost reductions through better operating efficiencies.

Our office paper shipments were down 2% compared to last year's second quarter, and printing and converting and pressure sensitive paper shipments were down about 26,000 tons as a result of the fourth quarter 2013 paper machine closures at the International Falls Minnesota mill. Paper inventories were up about 2,000 tons compared to the end of the first quarter of this year.

White paper prices are up in the second quarter as a result of previously announced price increases for office papers, printing and converting paper, and pressure sensitive papers.

Looking at the third quarter, for the white papers business we have no planned annual maintenance outages. Our Jackson, Alabama paper mill will be down in the fourth quarter for its outage. We do expect seasonally higher white paper shipments in the third quarter, and further cost improvements in the mills.

I will now turn it over to Rick West.

Thank you, Judy. Looking at other company-wide costs and earnings change items from first quarter results, we did see significant improvement in our energy cost with warmer weather, driven by both lower consumption of purchased fuels, $0.04 per share, and also lower fuel prices, $0.03 per share.

Our effective tax rate was up in the second quarter to a more normal rate of about 37%, which reduced earnings by $0.02 per share compared to the first quarter.

Amortization of annual outage repair costs and direct outage costs increased by a total of $0.04 per share in line with our expectations. Depreciation expense was up $0.02 per share compared to the first quarter.

Finally, we consumed weather-related, higher cost containerboard inventory which was produced in the first quarter that reduced second quarter earnings by $0.03 per share.

Moving to cash generation and use for the second quarter, PCA generated cash from operations of $185 million. Capital expenditures were $97 million. Common stock dividends of $39 million were paid, or $0.40 per share, and we did not repurchase any shares of PCA company stock. Cash tax payments of $56 million were made, and we paid off $50 million of long-term debt. Our total debt reduction since the acquisition of Boise on October 25, 2013 is $225 million, and our long-term debt is now at $2.432 billion.

We ended the quarter with $162 million in cash.

I will now turn it back over to Mark.

Thank you, Rick.

Before I move to the third quarter outlook, I want to comment briefly on the DeRidder mill conversion project. As you know, on March 26, we announced plans to convert the number three newsprint machine at DeRidder to produce 355,000 tons annually of lightweight linerboard and corrugated medium and exit the newsprint business.

The D3 machine project is on schedule with start up expected by November 1.

The total estimated capital for converting D3 has not changed with $15 million spent in 2013 and $100 million to be spent this year.

Looking ahead to the third quarter, we expect higher sales volumes and lower operating costs from both higher synergies and less scheduled annual mill maintenance downtime. These items will be partially offset by higher amortization of annual outage repair costs, higher electricity prices, higher freight and chemical costs, and increased depreciation expense. Considering these items, we do expect third quarter earnings of $1.25 per share.

With that, we would be would be happy to entertain your 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. Actual results could differ materially from those expressed in these forward-looking statements.

With that, operator, I'd like to open the call for questions. Thank you.

(Operator Instructions)

Alex Ovshey, with Goldman Sachs.

On the synergy side, the realizations continue to come in very impressively. Would you be able to tell us how you guys are trending in the packaging business in terms of the realization versus target, as well as what the trend is in the paper segment?

Alex, this is Rick West. In terms of the overall synergies, we are getting a number of synergies in the packaging business as well as the white papers business in our mills and in our box plants. If you look at our total synergies, they're basically coming from three or four basic areas: productivity and optimization at our mills, cost reduction in our mills, lower corporate overhead, improvement in our white papers business, and also optimization of our box plant operations. So, it's basically coming from both sides.

Okay, Rick. That's helpful qualitative color. In terms of how the realized numbers so far breaks up between the segments, would you be able to share that? Or are you not willing to give us that breakout?

No, we do not. There are so many moving things, where you are getting improvements that you could classify as synergies, also general improvements that you normally have in the business, so it's very difficult to try to break it out and we're not going to do that.

That's fair. Just one more for me on the white paper segment. I'm estimating that the price moved up about $17 per ton, sequentially. Can you confirm that number, first?

Second of all, is there incremental pricing that we should be thinking about in white papers in the third and fourth quarter of this year?

First of all, we've achieved significant price increases on a significant amount of our business. Some of that, which is tied to indices, but the exact amount is competitive information and we won't comment on that as well as not being able to comment on forward pricing.

Okay. Thank you.

Next question, please.

Chip Dillon, with Vertical Research Partners.

I just want to make sure I got that debt number from Rick. What was quarter-end total debt for the Company?

$2.432 billion.

Does that include short-term debt, as well?

That is correct.

Okay. Got you. The second question --

(Multiple speakers)

Chip, the rest of that, however -- it's Paul -- we got $160 million or so of cash on hand, too. If you want to do a net debt number, you have to take the $162 million off.

Got you. One thing that we've gotten a lot of questions about was this move by RISI on the weekend where they took $10 out of the semi-chemical medium price and I know the writer mentioned that this was an adjustment for things he had seen, I guess, since last fall. I didn't know if you had seen a net reduction in the semi-chemical side over that period, or is all the weakness really just in recycled and that's how he tried to capture that?

Chip, this is Tom. I'll take that question, real quick.

I can tell you that my personal reaction was nothing short of shock when I saw that. Because, we have an advantage, quite frankly, in terms of being able to get a good look at what's happening overall in pricing because we both buy and sell. We have seen absolutely no change in semi-chem medium prices.

In fact, if you look at what happened last month, if you look at the medium operating rates of 100.1%, and yet inventories fell 22,000 tons. It correlates very closely to what we see in the market, which is very tight medium supply. Needless to say, we were quite shocked by the number. Obviously he is trying to capture something that's -- the price depends on quality, I think. It has a lot to do with that, as well. We're having a difficult time securing enough quality medium ourselves in the marketplace.

So, that's the best color I can give you on that question.

This is Paul Stecko.

I think what you said is probably the case, that over the last year there has been start up [tons] primarily in the recycle side and quality varies. We're not big -- we don't purchase very much recycled medium, we purchase primarily semi-chem and that price will remain stable. Just assume what pulp and paper says is correct. Some recycled medium is moved from a $20 to $30.

It's really, as you characterized it, a catch-up event, and the only vehicle they have to catch that up, if that's part of the market, is to throw it into the semi-chem price even though, in our opinion, semi-chem hasn't moved at all. We understand that. We're not really troubled by it.

But, you've got to understand the facts that -- hey, this is not a recent happening. It's a one-off event that happened over seven months that they are choosing to reflect, and much more so than a recent event -- that, hey, this just happened yesterday. Well, it just got reported yesterday. They captured something that's related to the price of semi-chem.

That's kind of a long-winded explanation. But I think that's what your question really started at getting at.

That's helpful. One quick follow-up. I remember in the 1980s and 1990s, 5.5 to 6.5 weeks of supply across the mills and box plants was a normal inventory figure. In recent years, with just-in-time technologies, it seems like we've gotten down into the 4 week, and yet in the last year we've seen that edge back up.

Maybe from another several tenths of a week higher. Is there some reason that -- would that just be that people have too much inventory? Do think there something going on, given the increase in freight and some of the logistical challenges that you mentioned earlier?

Chip, if you look at just the trucking industry alone, late last year, legislation was passed in the United States Department of Transportation Federal Motor Carrier Safety Administration, but it's an hours-of-service laws that has gone into effect that -- very complex regulation regarding how the truck drivers have to account for their time spent behind the wheel each day. How many hours they are allowed to drive between breaks. So, that has added complexity. Again, there is approximately 2.7 million trucks on the road, which means 2.7 million truck drivers having to deal with this new legislation. That's been a big complexity.

Also, on the rail side of the equation, if you think about just the number of tanker cars that are in service today compared to three years ago, the number is tripled just over the last three years, in terms of just the number of tanker cars that are primarily handling oil out of the North Dakota region. So, the amount of traffic congestion, now, on the rail lines is significantly increased due to that. Also, with some of the accidents that occurred with oil tank cars, the speed -- and this is across the nation -- the average speed on the rails is down 10% this year alone. So, those few items have compounded this whole issue of just-in-time and what the optimum amount of inventory needs to be.

Chip, this is Paul Stecko -- just to build on, adding to something you said. I've been around that long, when six weeks was the norm. You were right, there has been a structural change in the industry. That was driven by industry consolidation, where a lot of companies reduced the number of box plants they had. So, you get the economy of scale, there. Over that time period, those inventory levels that were required by the industry dropped.

I know there used to be a magic number at which time people considered it a tight market. I think over the last 10 years that number has dropped a little bit, so that number that most people look at, in terms of what it tight, has dropped. I think that's primarily related to the fact that a lot of box plants have closed.

But, we think it's about to turn, at least in our business, because the logistics situation is such that it's a lot cheaper to carry a little more inventory in all of your box plants than incur a huge freight premium for emergency shipments. So, our feel is this thing bottomed out. The number of box plants is fairly stable. Where inventory level go are in part going to be affected by how efficient a logistics system we have to support our box plants.

So, there's been quite a change over the last 30 years.

Very helpful. Thank you.

Next question, please.

Philip Ng, with Jefferies.

D-3 appears to be coming along quite well. The market seems a little choppy at this juncture. Any thoughts on pushing the ramp-up at a later time?

Can you give us a feel for how full you think that plant will be running in year one?

Well, again, if you look at where we are year to date, we've already purchased 100,000 tons of board in the outside market and we anticipate 200,000 tons of outside purchases this year. We had stated, I believe on the first quarter call, that for 2015 we'd probably need 255,000 tons or so on the outside market. So, if you look at where we're going with the machine, we expect to start the machine up on November 1st and will ramp the machine production to full capacity over time. Most of the tons will go to our own box plants as we pull back on our outside purchases. In addition, we'll be better able to supply a few of our long-term export customers.

Again, as far as the ramp-up, if you think about the fact that the box plant business continues to grow at that 4% rate, we'll have a home for these tons in our own system. So, we are not concerned about ramping up to demand at this point.

The only thing I'd add, I don't know what your definition of choppy is, but the industry ran at 97% last quarter -- last month. So, that's still a pretty high operating rate.

Got you. That's helpful. With D3 winding down this year, can you help us peg a CapEx number for 2015?

That's something that we'll need to get the machine started up and we'll need to look at towards the end of the year, and we are not prepared to give estimates at this point.

Okay. That's helpful. In terms of the export market, I know it's a smaller part of your business, with D-3 ramping up. I just want to your view on the export market. I know you said prices had been stable for you.

Is there price increase in the market place by European producers? Just want your thoughts on Europe in general. Do you think that's going to stick? How are market conditions, in general, in the European market?

Phil, this is Tom.

Number one, we can't predict what prices are going to do. We don't give those kind of projections going forward. I can only tell you that what's happening in export prices. We've got some markets that are trying to move up in price. We've got others that have some small amount of price pressures. Our advantage, obviously, is the fact that if prices don't agree with what we think we need to sell for, we can always pull back and move them back here into the domestic market. So, I think it's kind of moving around the world, depending on what's going on in those various economies.

Okay. Thanks. Good luck in the quarter.

Next question.

Mark Weintraub with Buckingham Research.

Rick, I just wanted to clarify. I think you had mentioned that you'd achieved roughly $85 million to $90 million in synergies to date, or that was the run rate at this point, and that you're anticipating to be at $170 million by the end of 2016. Did I hear that right?

That is correct.

I don't think that's correct. It's $175 million, not $170 million. You said $170 million, I think you meant $175 million, because that's what we said.

Okay. Just so that I understand -- that is independent of other types of operational types of improvements that you might get? Or, is that kind of an all encompassing number, the way we should think of it? You made that point about how it is difficult, retrospectively, to look back and differentiate. Is that kind of an assessment of the extra value from synergies, or it more an all-encompassing number?

I'll give you a great answer: some of each. By that I mean we'll capture some of the things that we conclude -- this was really a synergy, but if we make a standalone improvement, at the Counce mill or the Valdosta mill, that's not in the number. The DeRidder project is a standalone project. The returns that we've published about that project, that's not a synergy. We bought the company, but we said upfront that doesn't count as a synergy. That's over and above.

But, basically, when you look at these things -- and it gets complicated. That's why when you report these numbers you've got to give that disclaimer. Some of these things are hard to separate and we do the best we can. If it occurs that a mill that had nothing to do with the combination with Boise, that doesn't count. If we move paper from Counce to DeRidder, and we save freight, that does count.

What's complicated is we've got hundreds and hundreds of these items. We don't want to make the accounting more work than the money we're saving. So, some of these things are estimates. It's just a pretty grey area to be perfectly frank.

Okay. One other small one. If you're comfortable with that. I think you had Wallula and I-Falls down in the second quarter. The old Boise used to give indications on how much the down time in the different quarters would cost. I don't know if that's something you are not planning to do, or is that some color that you could give us? Just in helping as we do quarterly modeling.

Well, as we said last quarter, Mark, the one thing that's going to change a lot for us is repair-job amortization as we take the outages throughout the year and amortize the total cost of the repairs over the remainder of the year. If we look at that in the second quarter, the repair-job amortization was $0.03 per share. It's going to go to $0.07 per share in the third quarter, and then up to $0.13 per share in the fourth quarter.

Now, if you look at the other impact of the outages, the production losses, the rent cost associated, the inefficiencies you have in an outage, we are going to pick up a little bit in the third quarter compared to the second quarter, and then we'll pick up a little bit more in the fourth quarter in earnings, compared to the third quarter. So, those two items will be going down some as we progress through the two quarters. But, it will be the repair-job amortization that is increasing-- that is the predominant factor in the rest of the year.

That is very helpful. That was for total company, though, is that correct?

That is total company including the PCA mills and the previous Boise mills, white papers and packaging.

Okay. Thank you very much.

Next question, please.

George Staphos, with Bank of America.

Congratulations on the quarter. Couple of questions, if I could. Back to synergies. I realize it's a long way from 2016. But, given the progress that you're making already with synergies and run-rate that you've achieved, given the progress that you been seeing at the mills, at Counce and Valdosta, which is being helped by the synergies and the acquisition of Boise, does there come a point, potentially, where you have an opportunity to reassess the synergies and perhaps see there might be additional amounts that you benefit by? Or, is that run rate of $175 million by 2016, that's the number going forward, no matter what?

George, at this point, we said at least $175 million. This is Rick West. There is the potential for more, but we prefer to give you an update on the total number at the end of the year as we continue to assess things.

In terms of achievability and timeframe before the end of 2016, it may be possible, but it's too soon to tell. We'd like a little bit more runway because a number of the synergies you get up front, we had a plan to get the productivity objectives done, in terms of synergies and the corporate overhead, and now we're working through the other items. So, it's really too soon to tell.

Let me add a little technicolor on that. We just recently had one where we made some changes in the way we run our recovery boiler at DeRidder. We saw some savings. We saw some productivity. That number is in our second-quarter earnings.

The question you have is -- can we sustain that? In other words, did we just create another bottleneck some place else that eventually is going to wipe out that savings? Some of these things you can't just rattle off and claim them right away. You've got to make sure you continuing this thing for three or four months. Hey, this thing's permanent.

It's not just a one-time thing that another bottleneck eventually wipes out. So, you can't claim victory too soon in some of these things, and that's why we won't give updates quarterly on this. We want to make sure that the number is a good number and then we will release it.

That's fair, and we appreciate the Technicolor, as you said Paul, on that. Two additional questions and I will turn it over. First, as we look out to early third quarter, could you give us any update on bookings or billings on an adjusted basis? There's been some evidence from some of the other companies that we track, not necessarily in corrugated, that there was some de-stock that occurred in the second quarter. Any effects that you are seeing in our numbers?

Mechanically speaking, to the extent you feel comfortable talking about this, does the $10 drop in Pulp & Paper Week really affect much of your business mechanically? How much effect would it have, at all, on your outlook?

Thanks, guys. Good luck in the quarter.

George, it's Tom. I'll take the first part, how we look early at the third order. This is going to be a little tough comparison in this particular month, because we've got 11 days. But, last year the FBA recognized two holidays, this year, one holiday.

The best way to look at it is on a total basis, our volume is up 9%. But, we are flat on a per workday basis, obviously, because of that extra holiday. So, probably, I would estimate that the month is probably going to come out somewhere in between, probably 4.5% is probably where we're really tracking on a per workday basis by the time the month ends.

The $10 drop in medium is very little effect, less than $0.005 share at this point is what we would project. It could be even less than that, quite frankly.

Thank you.

Next question, please.

Anthony Pettinari, with Citigroup.

Regarding the acquisition in Southern California, I was wondering if you could quantify or give us any color on the size and maybe the multiple paid? Maybe just more broadly, as we look towards second half of the year and 2015, how do you think about bolt-ons? Do have a certain amount of money that you've budgeted for bolt-ons that you try to ramp up your integration rate? Any kind of color you can give would be appreciated.

Anthony, this is Tom again. The only thing we really disclose on acquisitions is a purchase price, which was $21 million for Crockett. Again, these acquisitions have to meet the criteria that we've set forward. We got to be able to have a great customer base. A great management team, as well as being accretive to earnings. Crockett meets all those objectives, and it happens to be in a market where we definitely had some capacity constraints, so it fills a lot of needs for us.

Regarding acquisitions going forward, it will be the same strategy we've always had. When they come along, and they are a great fit and they meet all our needs, we move forward. But, as I've said many times, these are not acquisitions that come along every day.

We look at many, many acquisition opportunities throughout the year and, quite frankly, very few of them meet the criteria because our bar is very high. We continue to make them as they come along and as it fits into our needs. We are getting up there, to a reasonably high integration level, and will keep moving that forward.

Okay. That's helpful. Given the success you've had with Boise and the investor response to that, is it fair to say that mill acquisitions are also, at least on the table? Or, do you have to wait to deleverage further before you would consider something like that?

Right now, we've got plenty of opportunity with the integration activity going on. The optimization that's going on at a daily basis within the mills that were part of the Boise fleet. We've got plenty of runway opportunity with these mills that we've got right now. So, we wouldn't actively be looking at any other mill assets.

Just to amplify what Mark said, this is Paul Stecko. We've never had a goal to get bigger. We've always had a goal to make more money. So, right now, we think Boise is a good fit. The Boise acquisition is a good vehicle to do that, and we've got a full-court press on those activities.

Once we're through that, then other possibilities could arise. But, we are not going to put the cart before the horse.

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

Next question, please.

Mark Connelly with CSLA.

Two quick things. First, Boise improved your liner/medium mix. Is that having a fast impact or are we going see that show up over time in efficiency? Second, can you tell us whether the white paper system is still short pulp after all the changes that we've had over the last year or so?

Judy, Why don't you take the white paper one.

From a standpoint of being pulp-short, we still purchase pulp at our Jackson mill.

Okay.

I think with regard to the first part of your question, regarding containerboard, again, there was a big benefit. We've seen being able to utilize the assets at DeRidder on the D-1 machine and optimizing grade-mix and also taking advantage of the West Coast Wallula medium machine has proven to be very beneficial to us.

What you said about the Boise being heavier in liner than medium is certainly true. That did improve our balance. It actually maybe improved it a little too much, and that's why the D-3 conversion will put us right where we need to be. So, that's how we get back to the perfect balance.

Okay. So, you've already gotten a significant part of the benefit, but there's more coming with D-3?

Yes. Absolutely.

Perfect. Thank you.

Next question.

Debbie Jones with Deutsche Bank.

Most of my questions have been answered. I just want to ask. Correct me if I'm wrong, but I think your total corrugated shipments, increased 4.8% quarter over quarter, is a bit lower than the industry, which grew 5.3%. And if I back into your legacy growth, it's actually a little bit higher than the industry. I'm just curious if you're shifting some of your Boise business into the PCA legacy plants, and if we should expect going forward?

What you're seeing in those numbers -- we are just reporting the PCA legacy plants right now because it's very difficult for us to get our arms completely around the Boise plants because we are shifting business back and forth. I would not necessarily conclude that the PCA legacy plants are a big beneficiary of that.

The one thing I would add to what Tom said, this is Rick West. Our numbers for going from the first quarter to the second quarter do include the entire shipments of the company. But when making year-over-year comparisons, so that you can reflect it compared to the industry, and it is only the PCA numbers.

That's helpful. I guess my second question is just -- you had said that the boiler MACT spend for you guys is going to be about $25 million, and I didn't know if you'd given any timing on that?

Yes. The spend is still in that range, right now. We're on track, we're currently working on the Tomahawk boiler. We don't see any changes there.

Great. Thank you very much.

Next question, please.

Chris Manuel, with Wells Fargo.

With respect to some of the new capacity you've got coming online with D3, you still talked about how you would have been short, but with what's coming on-stream you'll still have a little more than maybe what you needed. Industry practice has been -- the stuff that came on last year, that some of those tons get discounted a bit in the marketplace until they get filled for a period of time.

Can you talk about a couple different things. One, what might contribution look like from DeRidder, November 1 when that comes on-stream. Does that take six months to get all the way up to speed or how that works? Two, how do you have to go to market with those extra tons.

Well, again, just reiterating. If you think about 2014, we'll anticipate that we're going to buy about 200,000 tons on the outside market. We start the machine up, as we're planning, in November. We currently have the home, moving those tons into our own system and then the original plan calls for curtailing the outside purchases as time went on.

So, we have got immediately on a net balance a home for a significant portion if you thought the machine was going to ramp up very quickly. Then, if you look at our growth rate on corrugated box cut up, 4% per year is about 90,000 to 100,000 tons more requirements. So, very quickly through 2015, you'd be consuming the vast majority of these tons coming off the machine to our own box plants.

To say it another way, we are our own market. So, how do you go-to-market to yourself? It's a lot easier than going to the open market.

With regard to projections on the ramp-up, we are going to ramp up first and report about it. We're not going to forecast how a ramp-up is going to go. That's a lot less predictable than other things, although we're pretty confident. We're going to skip the second half of that question.

Fair enough. Second question I had was if we look at some of the data through the quarter that we view, it looks like it was a bit choppy, obviously some months better than others. I think April better, May a little softer. Could you comment on -- did you see any changes in trajectory through the past quarter? Were there any differences between categories? Maybe between food and different elements of that nature within your customer set? Some that were better, some that were worse, that we should be mindful of?

Chris, this is Tom. Our shipments were pretty steady throughout the quarter. There was not a significant amount of change. We might have had a little bit more in April just as a catch-up for some of the weather-related things that we mentioned in the first quarter. For the most part, it was very steady.

Regarding market segment, we never break out by market segments and report on that stuff, so I can't handle that question for you.

That's helpful. Good luck, guys.

Next question.

Scott Gaffner, with Barclays.

A couple of quick follow-ups. You talked about the synergy realization, but I didn't catch the number on the cost to achieve. I think before you said $70 million to $80 million cost to achieve. Is that still a reasonable number on the synergy side to achieve?

Yes. That's still a good number.

Okay. On DeRidder, the $100 million of CapEx that you plan to spend in 2014, where are we on that process? How much have we spent to date? What is the timing of that capital spend for the balance of the year?

For an annualized run rate, by the end of the year, we'll have spent $100 million to complete that project and bring the D-3 onto containerboard machine.

I would only add one thing. We do have a lot of capital in the second half of the year. We've done a lot of work preliminary to shutting down the machine, we've made a lot of down payments. I would say we'll have more capital the second half of the year than the first half.

Okay. Is there anything that you see with that project or anything in the market that you see that would affect the after-tax? I think you said after-tax DCF return of 30% to 35%? Is there anything that would make that either lower or higher?

No. Again, we still feel good about that number. As Paul said, we make our own market and those tons are spoken for.

Sure. Lastly on the office paper shipments, you said they were down 2% in the quarter. I think there were up 5.5% in the first quarter. Anything that's shifting within your business there as you move through the year, other than the market?

No. Our second quarter shipments were lower than first quarter. That really because we had a really strong first quarter and needed to rebuild inventory, going into our outages at I-Falls and Wallula.

Great. Thank you.

Next question.

Al Kabili with Macquarie.

I wanted to circle back on the inventory discussion. Just for perspective, is there a sense you could give us of maybe how much additional inventory and tons you might be optimally wanting to carry more, given some of the logistical and transportation items you've talked about?

This is Paul. We think we're at the number, now. We had to bump it up roughly 10% and we think that's the right number. We think we can service our business optimally at this number, where our inventory is up roughly 10%.

If logistics get better and better, we'll pull that number down. Hopefully, we don't have to put anymore in there, because that would be indicative of even further exacerbation of transportation problems. We made about a 10% adjustment. We think that's going to hold. Time will tell.

That's helpful. I appreciate that, Paul.

Second question is just along the lines of some of the recycled startup tonnage. Any thoughts as far as kraft liner versus recycled liner spread? If there is any additional appetite or risk for some customers to -- that are currently using boxes with virgin or kraft liner going to recycled?

Al, this is Tom. I think, really, what the requirements of the customers are revolve around quality and their ability to move their products safely and efficiently from point A to point B. The recycle start ups are going to have to meet a high criteria, I think, to really compete in the marketplace. That requires a lot of capital to get there. So, it's going to be -- I don't see -- I think there's markets for each, to some extent. But, the majority of the market will still revolve around the quality of the sheet and the quality of the box you provide the customer.

Okay. All right. That's helpful.

Rick, thanks for the commentary on the amortization of maintenance. As far as production pickup in tons, is there any way -- I know you've mentioned third-quarter and fourth-quarter we'll see a little bit of that from just maintenance schedules. Is there a way you could quantify this for us as far as number of tons picked up in third-quarter and fourth-quarter sequentially?

No. We do not out project tonnage. There is a lot of factors there. I would say, as we did earlier, we said higher sales volume, but we are not going to get into that. How much we're going to produce the next quarter.

I'm not talking about produce, but just from a maintenance schedule perspective, how much pickup you get just from your maintenance?

We don't give the exact tons that we are going to take out the next quarter. But I will tell you, as I said earlier, with the fact that we have our Valdosta mill down and our Wallula mill down, there's not that much difference in production losses between the two quarters. But, I'm not going to be able to give you the exact number.

Okay. Thanks for that additional insight, anyway. Thank you very much. Appreciate it.

Next question.

Steve Chercover, with Davidson.

Thanks for the color on the semi-chem news. You guys have long been proponents of the importance of virgin. Do you think that this could be the beginning of a true schism between the pricing of the two products?

No.

All right. That's a brief answer.

With respect to DeRidder, I think you said that your costs are going to come down, but should we be modeling any start-up expenses in the fourth quarter, or is it just kind of accretive because you are exiting newsprint?

We are not giving fourth-quarter guidance on startup expenses, at this point. We'll give more of a projection of the D-3 machine and the total picture with our third-quarter -- really, after we start up, it's something that you have to wait and see.

On that previous question, we do give maintenance downtime numbers for the upcoming quarters. So, we told you today how many tons we would lose at Valdosta and Wallula, but we only do that one quarter in advance. We don't give it full year. We don't do two quarters in advance. It's the same thing when you're getting into cost elements of the fourth quarter.

We talk about things one quarter in advance. We'll talk about the fourth quarter when we have this meeting again reporting on third-quarter results. That's been our policy for the last 15 years.

Understood. With your Crockett acquisition, are you getting any early read on the California agricultural season?

Again, Crockett is just a small way in the ag business just like we are, as well. That ag business, it depends on what crop you're in, there's a whole bunch of different moving parts out there. Some are hurting much worse than others, depending on the time of the harvest. But, needless to say, the drought has some effect.

Thank you.

Next question, please.

Mark Wilde, with BMO Capital Markets.

Mark, just curious. It seems like these other conversions that went on over the last 12 to 18 months, newsprint and the containerboard, were pretty rough for the guys that attempted them. Have there been any lessons that you guys have taken from that?

Again, we said over the last few years, you can convert just about anything, but part of that equation is how much capital does it take to produce the quality that you really require. Knowing what we know how to do well, we've been addressing those issues and understanding how we have to apply that capital to achieve the ultimate goal.

So, again, I think part of the equation, too, is the D-3 machine will have a much bigger virgin make-up opportunity with the virgin fiber. It's not just a recycle converted machine. So, in that regard, I think this is not quite comparable to other conversions that have been attempted.

I guess you guys have a market, too. Have a question for Tom Hassfurther, if I could.

Tom, there's been some talk about changes that some of the shippers are going to make and how they charge for packaging shipments going forward, charging for size as well as weight. I just wondered whether you think this is going to have much effect on the business? Also, whether it's going to lead to more use of these on-site customized box machines, and whether those might be interesting niches for PCA?

Mark, I would say that I don't think it's going to have any -- overall, it's not going to have any big impact on one way or the other. These changes that are occurring at UPS and FedEx, as an example. But, I do think that regarding these -- with fanfold conversion, that start of stuff, to make it more customized box.

That market has been there, it's growing. I think it slowed down in terms of its growth, and there's some applications for it. But, I think that it will continue to grow to some extent. There are some opportunities for us, I think for anybody, probably. It is a consumption arena that is growing.

We're taking a look at that, as well as other things. I don't see it as being a huge change or shift in terms of demand in that arena.

Finally, Judy, can you just comment on the release liner market? My sense has always been that that kind of ramp up at Wallula went a little slower than Boise expected, and I wondered if you could give us a sense of how the market looks right now?

Yes, certainly. Really, in that market, the demand is pretty solid with a slight growth still going on. The opportunity at Wallula is going to allow us to get in some different segments and some different capabilities.

To build on that, Mark, a little bit, we just did a project out their on annual shutdown that Judy talked about in terms of the head box and former improvements. And you are right, that slowed the ramp-up in the sale of that product when Boise ran the operations. And one of the first things, actually, that was identified both between Judy and Mark, was that that needed to be fixed in order to get what we really want to get out of that machine. So far, we've been extremely pleased with what that machine's done since that rebuild.

Okay. That's helpful. Thanks very much. Good luck in the third quarter.

Very good. Operator, we're just about out of time. We could probably take one more question.

Your final question comes from Garo Norian, Palisade Capital.

You've talked for a few years about OCC prices likely moving up and making virgin more attractive, probably driven by demand coming from Asia. It seems like this hasn't really started to play out, and I was just curious as to why you think it hasn't yet? Or, I might just not seeing it in the numbers?

Well, this is Paul Stecko -- it's a real simple answer. We predicted that the world would run out of recycled fiber, and that would've happened in 2009 had the financial collapse not occurred. The supply-demand line had just about crossed. What's happened since then, it comes down to one thing.

As China goes, so goes the world. China's appetite for OCC could be insatiable. They come to the US for most of it. If China starts growing again, at a rate that even is close to resembling what they did in the past, we think that, indeed, will happen. When it happens, it will be more a function of China's growth than anything else.

Thank you.

With that, we'll conclude the second quarter call and I look forward to talking to you during the third-quarter call in October. Have a nice day. Thank you.

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