Packaging Corp of America (PKG) 2015 Q4 法說會逐字稿

Thank you for joining Packaging Corporation of America's fourth-quarter and full-year 2015 earnings results conference call. Your host today will be Mark Kowlzan, Chief Executive Officer of PCA. Upon conclusion of his narrative, there will be a Q&A session.

I will now turn the conference call over to Mr. Kowlzan, and please proceed when you are ready.

Good morning and thank you for participating in Packaging Corporation of America's fourth-quarter and full-year earnings release conference call. I am Mark Kowlzan, Chairman and CEO of PCA; and with me on the call today is Tom Hassfurther, Executive Vice President who runs our packaging business; and Bob Mundy, our Chief Financial Officer.

During our prepared comments, we will be referring to slides that are posted on the website. I will begin the call with an overview of our fourth-quarter and full year results, and then I am going to turn the call over to Tom and Bob, who will provide more details. I will wrap things up, and then we will be glad to take any questions.

Yesterday, we reported fourth-quarter net income of $104 million, or $1.07 per share. Fourth quarter net income included net nonrecurring charges primarily from the Boise integration of about $400,000. Excluding these special items, fourth-quarter 2015 net income was $105 million, or $1.08 per share, compared to the fourth quarter of 2014 net income of $114 million or $1.16 per share. Fourth-quarter net sales were $1.4 billion in both 2015 and 2014.

We also reported full-year earnings excluding special items of $443 million or $4.53 per share compared to 2014 earnings, excluding special items, of $459 million or $4.66 per share.

Net sales in 2015 were $5.74 billion compared to $5.85 billion in 2014.

Excluding special items, total Company EBITDA in 2015 was $1.106 billion compared to $1.144 billion in 2014. Details of special items for both the fourth quarter and full year 2015 were included in the schedules that accompanied our earnings press release.

Turning to slide 3, fourth quarter 2015 earnings per share, excluding special items, were $0.08 per share below the fourth quarter of 2014, driven primarily by lower white paper prices and mix of $0.10; higher annual mill outage costs, $0.03; lower corrugated volume, $0.02; lower containerboard production, $0.02; lower export containerboard prices, $0.02; and higher depreciation expense, $0.02. These items were partially offset by lower costs for energy, $0.05; mill repair costs, $0.03; and freight, $0.02; as well as our lower income taxes of $0.04 per share.

Our earnings were $0.05 per share better than our fourth-quarter guidance. Operational performance contributed about $0.06 per share in total, which included about $0.02 for energy, $0.02 for mill repair costs, $0.01 for wood, and $0.01 for chemicals. Also, as we continue to optimize logistics, freight was $0.02 better than forecast; and our tax rate was also $0.02 per share better. These items more than offset the lower than forecast containerboard production and box volume of about $0.04 per share.

Looking at our packaging business, EBITDA and margins, excluding special items, were up over last year's levels, with EBITDA of $252 million and sales of $1.09 billion, or a 23.1% margin, compared to the fourth quarter of 2014 packaging EBITDA excluding special items of $250 million on sales of $1.1 billion, or a 22.3% margin. For the full year, excluding special items, packaging EBITDA was $1.009 billion with sales of $4.48 billion, or a 22.5% margin, compared to the full-year 2014 EBITDA of $1.015 billion with sales of $4.54 billion, or a 22.4% margin.

During the quarter, our containerboard mills operated in a very cost effective manner. Containerboard production was 903,000 tons, which was a 24,000-ton decrease compared to last year's fourth quarter. As we ran to demand and, unlike last year's fourth quarter, we did not need to prebuild any inventory for our first quarter 2016 maintenance outages. As a result, we reduced containerboard inventory by 2,500 tons from the end of September, and year-end inventory was flat with 2014 year-end levels.

I am now going to turn it over to Tom, who will provide more details on containerboard sales and our corrugated business.

Thank you, Mark. As Mark indicated, our corrugated products demand was lower than expected during the quarter, down 1% in total and per workday compared to last year's record fourth quarter, and up 1% for the full-year. Pricing for corrugated products during the quarter remained stable compared to the third quarter of 2015 and the fourth quarter of 2014. As expected, mix was seasonally weaker in the fourth quarter compared to the third quarter.

Our outside sales of containerboard were flat with the third quarter and up about 7,000 tons compared to last year's fourth quarter. For the full-year, outside containerboard sales were up 52,000 tons over 2014.

Export prices were about 2% lower than the third quarter and about 6% lower than last year's fourth-quarter levels. Domestic prices for linerboard were flat with the third quarter and last year's fourth quarter. Domestic prices for medium were flat with the third quarter and lower than last year's fourth quarter due to published medium price changes.

I will now turn it back to Mark.

Thanks, Tom. Looking at our paper segment, EBITDA and sales were lower compared to fourth quarter of last year, with EBITDA of $28 million and sales of $273 million, or a 10.3% margin, compared to the fourth quarter of 2014, with EBITDA excluding special items of $45 million and sales of $284 million, or a 15.8% margin. As we mentioned on our third quarter earnings call, our Jackson, Alabama, mill was down for an extended period for a planned rebuild of the recovery boiler which reduced production by 28,000 tons and increased operating costs.

The drop in revenues versus last year's fourth quarter was driven by lower prices and mix as total shipments were 5,000 tons above last year's levels. Office paper shipments, which represent about 70% of our total paper volume, were up 4% versus last year.

Prices held up very well. And as we indicated on our last earnings call, volumes were seasonally lower versus the third quarter. Overall, the white paper mills had good cost control during the quarter, and the rebuild of the Jackson mill recovery boiler was successful.

For the year, white paper 2015 EBITDA, excluding special items, was $161 million; and sales were $1.14 billion, or a 14.1% margin, compared to full-year 2014 EBITDA of $186 million, with sales of $1.2 billion, or a 15.5% margin.

Office paper shipments improved 1.1% versus full-year 2014, and although sales prices and mix negatively impacted our EBITDA by 31%, we were able to cut that impact by over half through our cost reduction, efficiency, and mix improvement efforts. I am now going to turn it over to Bob Mundy.

Thanks, Mark. If you turn to slide 4, cash provided by operations in the fourth quarter was $221 million after deducting $75 million in cash tax payments for federal and state income taxes. Other uses of cash included capital expenditures of $97 million, common stock dividends of $54 million, share repurchases of $57 million, and debt repayments of $17 million. We ended the quarter with $184 million of cash-on-hand.

Our fourth-quarter 2015 effective tax rate of 32% was about 2% below last year's fourth quarter, related primarily to state rate reductions that we were able to achieve compared to our estimates filed in the fourth quarter of 2014, and 3% below the third quarter of 2015, primarily due to the passage of the Tax Extenders Act just prior to the end of the year.

For the full-year, cash from operations was a record $763 million, and free cash flow was also a record $448 million. Key uses of cash for the year included capital expenditures of $315 million, common stock dividends of $201 million. We repurchased 2.3 million shares for a total of about $155 million, and we had debt repayments for the year totaling $48 million.

As we normally do at the beginning of each year, PCA provides estimates of certain items for the upcoming year. We expect total capital expenditures to be between $250 million to $265 million. DD&A is expected to be about $352 million, or about $5 million higher than 2015 recurring DD&A.

Pension expense is expected to be $27 million, $5 million below 2015, primarily due to our adopting of the spot rate approach for 2016 versus the single discount rate approach for calculating expense. We expect to make cash pension payments of $37 million, and our combined federal and state effective tax rate for 2016 is expected to be about 35%.

Based upon our current long-term debt with current LIBOR rates, interest expense in 2016 would be about $91 million, and a cash interest payments would be about $84 million. Based on the current planned annual maintenance outages at our mills, the total earnings impact of these outages, including lost production, direct costs, and amortized repair costs, is expected to be $0.49 per share. The current estimated impact by quarter in 2016 is $0.07 in the first quarter, $0.16 in the second, $0.10 in the third quarter, and $0.16 per share in the fourth quarter.

I will now turn it back over to Mark.

Thank you, Bob. In summary, 2015 was a very successful year for PCA as we completed the integration of Boise and achieved full design capacity on the converted DeRidder, Louisiana, No. 3 paper machine. A significant part of the integration effort was related to the rationalization and optimization of the Boise legacy box plant system, as well as optimizing the product mix, freight, and warehousing logistics of our containerboard system.

Regarding synergies, we achieved, on a run rate basis, our $200 million target. And finally, we achieved record cash from operations and record free cash flow in 2015.

Looking ahead to the first quarter, we have scheduled maintenance outages at our Valdosta mill, one of our machines at our Counce mill, and one machine at the DeRidder mill. Labor and benefit costs will be higher with annual wage increases and other timing-related expenses, and seasonally colder weather will increase wood and energy costs. Our tax rate will also be higher in the first quarter. These items will be partially offset by slightly higher containerboard production and corrugated product shipments, and lower scheduled outage costs.

Finally, over the weekend, Pulp and Paper Week, a trade publication, lowered its published price for domestic linerboard and medium by $15 and $20 per ton, respectively, which will adversely affect earnings. Everything considered, we currently expect first-quarter earnings of $1.00 per share.

With that, we would be happy to entertain any questions, but I must remind you some of the statements we have made on the 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 the forward-looking statements.

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

Mark Weintraub, Buckingham Research.

First, two questions if I could -- first one being, just quickly, could you give us a sense as to what was happening to demand and volumes as the quarter progressed. You noted that fourth quarter was a little weaker than you had anticipated. Was that towards the end of the year, or was that towards the beginning of the quarter?

And then, second, if perhaps we could just get a bit more detail on the bridge from 4Q to 1Q. I imagine that the adverse price maybe is $0.02 or something like that, but what are the other, bigger elements? If you could sort of size them for us a little bit, that would be really helpful. Thanks.

Yes, Mark. Let me start off with the volume discussion. Your question regarding how did the quarter go -- we indicated on the first 10 days that we were flat with the third quarter. What we saw happening -- by the latter half of October, we saw some decline that we had not expected. That continued into the early part of November.

And then through that mid-November/Thanksgiving holiday, we saw the volume pick back up, and it was a rather nice recovery. And so, again, there was again sustained recovery through the latter half of the quarter. And also I think Tom can add a little color to the quarter itself. And obviously, the volume wasn't what we expected. But again, there were a lot of moving parts taking place, as I mentioned on the script, with the rationalization and optimization effort. Tom?

Yes, Mark, I would just add to that that we did take out some pretty significant volume and facilities, quite frankly, regarding the Boise legacy business -- specifically the Tharco business, which quite frankly just did not fit our model from a margin standpoint or from a long-term strategy standpoint.

So we went through a lot of that in the fourth quarter, got that behind us. As Mark indicated, the volumes tailed off in the second half of October and into early November but ticked up quite significantly all the way through the end of December going into January. So that kind of gives you an idea what the trend was.

And then regarding the bridge, Bob will walk you through that bridge question.

Yes, Mark, you had indicated what you -- you know, thought that the price impact would be a small number. I think we would agree, it is something that we don't see that being very large for the first quarter.

The other items, seasonal items, like having to do with weather-related types of things -- you know, energy and wood -- I think you would normally expect, as well some of the timing items, which there's timing items around labor and wages-type things and items like FICA, FUI and SUI that reset at the beginning of the year. They certainly don't stay with us throughout the year, but they are heavy in that first quarter.

And then you have some timing things, just from a fixed cost perspective, of things in the mills, repairs, and materials -- things that as you start a new year, and getting onto new initiatives, and whatnot. So those are a timing thing, too, that picks back up at the beginning of the year. So those would be some of the bigger items going from the fourth quarter to the first quarter.

Next question, please.

Chip Dillon, Vertical Research Partners.

I guess one quick sort of cleanup question is: do you have a good idea, Bob, of what the deferred tax will be -- or, said differently, how the cash tax rate might differ from the book tax rate in 2016?

It is about a 1% difference, Chip. There is about 1% difference between the two. I think the tax -- the cash rate is 35.9%, just below 36%. The other is just about 35%.

Got you. And did you say what the year-end 2015 debt was again?

Year-end 2015 debt was -- well, net debt was $2.1 billion, with cash of $184 million.

Okay, got you. So the debt was $2.284 billion, then?

Well, the debt was $2.309 billion less the cash of $184 million, so the net is $2.125 billion.

Got you, okay. And then you mentioned the Pulp and Paper Week adjustment over the weekend. I guess two questions: how does that flow into your box prices? In other words, is there more of an impact we should expect in the second quarter, which I guess there would be a lag? And maybe talk a little bit about how much of your business is affected by it. And then lastly, were you -- at least on the kraft linerboard side, was there any surprise to you in that move?

Let me start off with that, then I am going to hand it over to Tom. Obviously, it took us all by surprise. And we are not going to quantify the impact. We are still trying to analyze the total impact. It is in our guidance, but again, there are various trigger points that take place for pricing. And where we have upwards of 15,000 customers, everybody is different in terms of how the triggers take place. But Tom, why don't you add a little color to this?

Okay, yes. Chip, I hope you can understand that basically, when it comes to discussing the lags or how much the impact is with our customers and things like that -- those are contracts that we have with our customers. That's the only people we really discuss that with.

So it is hard to add any real color to that. As Mark indicated, we are still sorting through it, to some extent. But nonetheless, this Pulp Paper move, of course, came out to be a great surprise, I think, to everyone. And keep in mind that's the first linerboard decrease that we have seen since 2009.

Now, I will just give you some of my takes on it and what I think is perhaps going on. But one is -- the large decline in the size of the open market has made it much harder, I think, for trade publications to assess what's really happening. I think that, basically, they have cited a move in a fraction of the market associated with a small region, and then broad-brushed that across the entire country and translated that into linerboard pricing -- kraft linerboard pricing, specifically.

So I can speak for PCA; we have not seen any changes in kraft linerboard. So we are very different from what Pulp and Paper is reporting. Now, they did give some specific pricing associated with recycled linerboard and apparently used that as part of their rationale to take down kraft linerboard prices. And, of course, that is bothersome, because they know that there is a big difference between recycled and kraft, and they are essentially two different products when it comes to linerboard. So it seems that they are heavily influenced by this pricing of recycled linerboard and tried to translate that into lowering kraft linerboard across the board.

So that's pretty much the extent of my comments at this point. I can assure you, we will continue to assess and monitor things going forward.

Thank you, that is very helpful. And I guess the last quick one is -- and I know it is very early days, but you mentioned a great point, Tom, about the very limited open market that is out there. So, obviously, that makes it a big challenge to -- for anyone to sort of gauge where that is. It's really about boxes. And in that vein, would there be any thought to maybe changing at least how PCA might index their pricing of boxes to something else that is more broad, that is very easy to observe, like fiber costs or maybe even like the PPI?

Chip, we've had that discussion before. Think back over the last number of years. Obviously, that is something we don't want to get into on the call. It is complex, and it is not as straightforward as some people might think it is. So, obviously, there are different ways. But again, this is something that right, wrong, or indifferent, the market has changed. So -- but that is all I want to comment on.

Okay, that is all very helpful. Thank you.

Scott Gaffner, Barclays.

I just was wondering -- could you talk a little bit -- Tom, I think you mentioned you walked away from some of that Tharco business. It sounded like that was in the fourth quarter. If so, it was just a margin issue with the Tharco business? And so should we be feeling the effects of that throughout 2016?

Well, Scott, I am not going to get into great details about that business, but obviously you know that is primarily a distribution business. And as I said, it didn't fit our margin models, nor did it fit our long-term strategies. Some of it is significantly different than what -- than the way we go to market, and so therefore some of that business was not a fit. I'm not saying all of it; I am just saying some of it in this particular case.

But, you know, in addition -- I mean, if you look at our volume, one of the other reasons that the volume was off somewhat is that I don't think we got the economic tailwind that we expected in the fourth quarter. GDP numbers suggested the economy grew at only about 0.5%, and the last two months of the ISM data indicates that manufacturing activity may have contracted for the first time since 2011 during that fourth quarter.

So I think that's -- and I think some of that is clearly due to the strong dollar that is impacting exports. And we are hearing some of that from our customers as well. So I think that we have got this Boise legacy business that we adjusted somewhat behind us now and will allow us to focus on the things that we do best at PCA and get back to growing the business like we expected.

I think a simple metric, Scott -- if you look at the year-over-year margin contribution from Tom's side of the business, it speaks for itself in terms of what this rationalization effort has contributed.

Right.

So again, as Tom just lastly mentioned, we needed a little more economic tailwind to boost that.

Understood. And then, just following up on the commentary before, you mentioned during the quarter you saw some acceleration in demand -- I think you said late in the quarter. Has that carried forward so far into 1Q, or are we back to more November-like numbers?

Tom has got the data for the first 13 days of the month.

Yes, the first 13 days of bookings and billings are flat with last year's January, which was a very robust year -- a very robust month, I should say, up 4.1%. So I would say that the demand pick-up that we had in December has carried over into January.

Okay.

And again, we were very pleased right through the holiday weeks that the volume was very good.

All right. And just lastly on the outside sales, I think you said you had an increase in outside sales during the quarter. Was that to the export market or something domestic?

Both. Both were up a little bit.

Okay, thanks for the color.

Mark Wilde, BMO Capital Markets.

A couple questions: Tom, without putting too fine a point on this, would it be fair to say that if we backed out the Tharco -- shedding of the Tharco volume, that your corrugated volume would have been at or above the industry numbers?

I am not going to get into that detail, Mark. You can just -- you know, but you can kind of do the math like that and get -- you're not far off.

Yes, okay. And then the other question I had: Mark Kowlzan, if you could give us any color on the duties on uncoated freesheet imports and whether that has changed anything, and kind of where you see the market moving in the first half of the year?

You know, the published data shows a significant reduction in imports starting in the third quarter, which is after the preliminary rulings were issued. The imports were down around 200,000 tons in 2015, and most of the decline was in fact in the second half of the year, as we previously mentioned.

We do have some customers that are buying imported paper. We know that many of them bought additional inventory earlier in the year before the rulings came up. So, typical market dynamics were in play. And it's a little bit too early to tell, but it is very obvious that the trade case has significantly slowed the imports. And -- which, really, it's just really creating a level playing field. But I think you see that in our volumes.

Again, one indicator, I think our total paper volume for January -- we are up 3%. And so we had finished the year strong in paper volumes, and going through the first three weeks of January. So, again, I think the trade case is having a positive impact.

Okay, and then finally, if I could: Bob Mundy, can you just give us an update on sort of what is still sitting out there on share repurchase authorization, and how you are thinking about use of cash this year, particularly in light of the big drop we have seen in the stocks in recent weeks?

Yes, yes. It's about $93 million remaining of the authorization, so -- and then our use of cash, I think we gave you a little bit of color as to where we see some of that for 2016. And I think it's -- and Mark can sort of comment on share repurchases. I think that our strategy of continuing to be opportunistic will continue.

Of course, you know, CapEx, as I indicated and Mark had said in last quarter's call that we expected it to be down versus 2015 because a lot of the heavy lifting is behind us. So that will not be as, obviously, as high as it was in 2015.

Anything else, Mark?

I think that is it. I will turn it over.

Mark Connelly, CLSA.

Your stock got shellacked yesterday, pretty much in line with everybody else, but your business model in the past has tended to outperform somewhat. Do you think your business model is less able to outperform at this point? Are the internal opportunities less attractive?

You heard us talk about the rationalization. Our priority in 2015 was completing the two-year integration of Boise and executing well on that. And so a big piece of that, as we have indicated, was this rationalization and readjustment of the entire Boise legacy box system.

And so in doing so, we concentrated on that. As you think about it, we haven't made any acquisitions of box plants. The last one was in April of 2014. And so we are -- right now, through this last year, we have purely have been on organic growth mode. We've been avoiding overextending ourselves.

So recapping, right now, where we are, we are poised for growth. If you go back to the 2012/2013 period, we are open market buyers. We had integrated up into the low 90s, and we had gone through roughly five acquisitions of box plants. We built a new plant in Reading, built a new plant in Bedford Park.

And so we had a lot of acquisition and organic capability. And so we have reset the stage for that. We've got the containerboard tons for Tom. We've got -- the acquisition integration is done. All the work that Tom did on the legacy Boise Tharco system is behind us. So I think, again, the model remains fairly strong and relevant.

And so that is what we are going to plan to execute on. Again, we've got the balance sheet, and we've got the tons to move into the market as we see fit.

So would it be fair to say that we should expect you to be more aggressive on upping your integration levels now?

Well, we talked about that on some calls last year, that the goal would be to move back up into the low 90s. And we will do that with a combination of desired box plant acquisitions and organic growth. So be mindful on acquisitions side, looking at the quality and the multiple you are paying; but again, we are looking at that. We are ready and capable of executing on that.

Super, thank you.

George Staphos, Bank of America Merrill Lynch.

Thanks for taking my questions; most of them have been already asked and answered. I guess maybe, Mark, a question for you, although maybe it is probably more for an economist. You mentioned that ISM got progressively more negative in the back portion of the quarter, yet you saw volumes for your business pick up as we approached quarter-end. How do you reconcile that? And should we be worried, if at all, that what we saw in the last two months in terms of macro data doesn't translate to your business in the first quarter?

And then, the related question I had: the rationalization effect of primarily the Tharco business -- how long will that be a headwind for you? Will it be more or less, if maybe not line-item detailed, visible in terms of your overall growth rate through the third quarter this year? Does it continue all the way into the fourth quarter? Do you feel you have most of it behind you, and that a lot of it had been done already in the first quarter of 2015?

On the first question, regarding the economy and the ISM, obviously the last reported ISM data showed a contraction. What we think was happening, and what we have to believe happened as the holiday period came on, Internet commerce, as reported in the various segments, was very strong. So I think we were a player in the Internet commerce, but that also plays into the fact that we said that mix was not as rich as we expected. And so I think that is a large portion of what you see.

Regarding the -- any overhang and impacts of the integration and rationalization of the Tharco business, I think, again, we need the economy to give us some tailwind. But that being said, Tom and the group are fully prepared and focused now on growing that business instead of just how they go about rationalizing. Tom, do you want to add some color to that?

Yes, I would just add, George -- the ISM numbers tend to be somewhat of a trailing number also. So the way we go to market, and as fast as you know people can need boxes, and the trends we see are kind of leading edge as opposed to maybe the ISM being both trailing edge. I'd say the ISM data probably ended up showing what we saw in October but probably hasn't come out really to represent what happened at the end of November/early December, or through December, I should say.

And the rationalization effect at Tharco -- of course, you know whenever you eliminate something or resize something, you are going to be dealing with that certainly going forward. But that said, I mean, it is totally behind us now. We are -- not in terms of comparing numbers month over month or quarter over quarter, but we are very poised now to move forward and have gotten all those efforts behind us which were important to us. We will be back to operating like PCA operates.

Okay. Thanks for that, Tom. A related question, perhaps -- and my sense is what you think you saw in the fourth quarter was more inventory contraction and then, hopefully, more of a back-to-normal approach from your customers. But I don't want to put words in your mouth. Is that what you think you saw?

And then a related question: have you seen your bad debts move up at all? Is there anything in your data right now that's suggesting whatever we've been going through, both within the sector and broader economy, is the front edge of a recession? Or do you think it is more inventory contraction; we are back to normal at this juncture?

On the bad debt piece of that, we have actually seen our bad debt losses actually decline. And so that has been very favorable for us.

And then on the question about the economy -- and we have said this before -- our customer base being two-thirds local accounts, you know, they are very nimble. They are very capable of responding very quickly. And I think Tom said it: I think there was a response from a lot of our customer base to -- as the economy in the news, the daily news that we saw every morning as we watched the first business news, I think people got cautious and probably ran some of their own inventories to lower levels.

But that being said, they can respond on the positive side just as quickly. So I don't want to try to qualify or quantify that in one -- Tom?

George, I would agree with that. And what we have seen over the last few years, quite frankly, this isn't something that just happened recently; we have been seeing this, that our customer base is very sensitive to inventory levels. And they are very apt to make quick adjustments.

So, let's say, going into October they were a little less optimistic about the Christmas season or something like that, they can adjust inventories very quickly. So this is something we see, and so it has actually changed the seasonality a little bit of our business as well.

Okay, I appreciate it, guys. We'll turn it over.

Debbie Jones, Deutsche Bank.

You guys talked about being a player in e-commerce; I was just under the impression a lot of this growth is in recycled boxes. Maybe that is not the case, and you can correct me. But does this impact your ability to kind of grow with this trend?

Debbie, this is Tom. I will handle that. So, we had -- I mean, as you can well imagine, at the rate e-commerce is growing, virtually anybody who has got a consumer-related product is in e-commerce in some way or another. It is not all just recycled anything. It still requires performance boxes; it still requires graphic boxes. It requires all sorts of things that we currently supply. So, no, we don't feel the least bit limited in growing in that arena.

Okay. And then I guess as I move to kind of growth from M&A, how important is this to your strategy? You mentioned quality and the multiple, but are there things out there that actually fit your criteria?

Yes, we continue to explore acquisitions. And there are some things that would fit our criteria. Now, it takes two to tango, as they say. So, we need somebody who wants to sell at the same time we are an anxious buyer to make this thing work.

But nonetheless, there are some quality assets out there -- fewer than there were before, but I think as Mark indicated earlier, we will remain a disciplined acquirer. So we are not going to change that part of our strategy.

Okay, great, thanks. I will turn it over.

Anthony Pettinari, Citi.

You referenced export prices, lower sequentially in 4Q. And I am wondering if you could speak to what you are seeing in the beginning of the year in export markets, either in terms of pricing with the strong dollar or what underlying demand looks like? And then can you remind us what percentage of your containerboard last year was exported?

Anthony, as far as demand goes, demand is pretty flat right now. Again, we are a relatively small player in the export market, so you have got to keep that in mind. But we are in numerous regions.

You've got some that are down. I mean, obviously, as you take China and some of the affected Asia, that is down. And then you've got some others that -- Europe actually is back a little bit. And then Latin America, South America is relatively flat. So, you know, it is pretty flat on an overall basis.

We don't talk about forward pricing. I gave you some indication of what has happened up to this point in time in pricing. But anything going forward is really between us and our customers. But I will say that obviously the strong dollar is a headwind for us when it comes to that.

And Anthony, regarding the export volumes, we are currently just under 10% of our total containerboard volumes going export. But again, we are moving that into about 35 different countries worldwide. That is up from a few years ago, when we were open-market buyers of containerboard and needed those tons, and we shifted some of those tons back into our own needs.

So with DeRidder and our capability, we've been able to service some of our legacy customer requirements around the world. But it's, again, a small portion, less than 10%.

Okay, okay. That's helpful. And then switching to white papers, the $0.38 headwind you saw last year from lower price mix -- in terms of the mix piece of that, is there anything in 2016 between the mix, between office paper, pulp, specialty papers, that would be a meaningful tailwind or headwind in 2016 in terms of your mix in white paper?

Again, just elaborating a little bit on the mix, what we saw happening last year, a lot of the -- on cut-size in particular, you saw a lot of shift from the high-end, super-bright laser/inkjet-type cut-size into the more commodity-type cut-size, the 92 bright cut-size paper. So that trend continues.

It's just the market that we are living in right now. So that being said, we are comfortable there -- when we get our volumes up. So we are feeling good about that.

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

Philip Ng, Jefferies.

I understand PPW's cut was largely backward-looking and certainly appreciate the color you provided earlier. But the market industry reaction to your stock -- you know, investors are obviously concerned that there could be further price erosion. Can you just provide any color on pricing in terms of outlook, supply/demand, and just competitive activity in the broader market? That will be helpful.

Again, for antitrust reasons, we are not going to get into a discussion about pricing. We just can't go there.

Can you just talk about supply/demand and just the competitive activity in the marketplace in the start of the year?

Again, we have commented our volume is in line with where we were last year -- you know, we are flat. But again, I think we have indicated that we need a better economy, a stronger economy as far as some tailwind. And so at the end of the day, we have a system that can respond. We have a system that is ready for growth. But Tom, do you want to add a little more color to that?

Yes, I would say that -- you know, I think you need to think of it like this, at least from a supply standpoint, from a kraft linerboard standpoint: you are talking about kraft linerboard that really hasn't grown significantly in years, and so, very much in balance. And again, run rates that are probably on average something closer to 94% or 95%, which is very healthy. And demand that -- all we can do is go off what our trends are, which we indicated was -- moved upwards in December, carried over into January. And we are now -- compared it to the 4.1% jump we saw January a year ago.

So those are the best we can tell you in terms of the trends. And I think that the -- I think there's a lot of industries that would -- are very envious of the fact that we have got a 95% run rate in an industry like this, at least from a kraft linerboard point of view.

Okay, that is helpful. And I guess, obviously there has been a big focus out on pricing coming -- slipping a little bit here. But on the offset, are you seeing any major cost tailwinds with this pullback in energy costs, chemical prices? It did seem like freight was a larger tailwind. Can you kind of help quantify what the potential net impact would be on margins in 2016?

I will let Bob give you little more color, but obviously through the year last year, we did see the benefit of -- as an example, natural gas pricing. And so there is a benefit to the lower petroleum input cost factor. And we did -- as we indicated on calls last year, we are concentrating heavily on the transportation efficiency and capabilities within our system and how we supply Tom's side of the business from the mill. So we saw that. Bob, do you want to give a little more color?

Yes. I would say, obviously -- you know, what Mark said is absolutely correct; plus there are things that -- on the energy side Mark talked on the last call about, as an example, the turbine project we did at International Falls that we got partial benefit of this year. That will continue for the whole year. So we see pretty much on all the inputs, nothing really -- you know, those favorable trends should continue.

One of the reasons in the fourth quarter we did better is because at I-Falls, we overcame -- actually, the electrical rate went up, as an example. But because we are purchasing so much less electricity, we turned that into a $2 million-plus benefit year-over-year, just at that mill alone. So those are the types of things that will certainly help us as we go into 2016.

Okay, helpful. And just one last one for me. You guys mentioned that you guys are ready for growth. M&A -- you guys have been kind of absent from that market, whether it is the box market or paper. I know valuation has been an issue, or something that is a reason why you've been reluctant to be as aggressive. Given the pullback in valuation across the board, has the pipeline kind of improved? Or have you see that valuation come in as well in the open market? Thanks.

I don't think we -- you know, at the current time I don't think anybody has a real good feel for what these current valuations are. We just know that, again, compared to historical valuations on box plant acquisitions, the multiples had gone up. And at the time, as Tom mentioned, the number of plants and books of business that were available that we would be interested in were fewer.

And so we had plenty to do with the integration and optimization effort at Boise. So we were less compelled to go and chase these last year, as an example. But that being said, we are looking. We won't get into what we believe is a fair multiple. We will -- when we do something, we will let you know.

Okay, thank you.

Chris Manuel, Wells Fargo.

A couple questions for you, one sort of on a volume; and then I want to come back to kind of the price/cost element a little bit. As you look forward to 2016, I know you already said when you laid out your guide for 1Q that you are anticipating a little bit higher volume. But even kind of thinking about the industry or yourself specifically, however you wish to address it, as you look forward at 2016, I mean, we had 1 point, 1.5 points of corrugated consumption improvement in 2015.

Looking at 2016, with half of it still going to food and bev, and e-commerce continuing to pick up, and an extra shipping day this year because of leap year -- that is worth 0.5% -- how do you think, on a go-forward basis, as you assess the economy and what you are seeing and feeling, that -- if you think the industry can enjoy another 1 point, 1.5 points kind of year?

Let me start off with that, and I will turn it over to Tom. Again, if you go back in the last few years, for the first time in a long time we started to see box demand fall in line in a trend line with GDP growth. That being said, in 2014 the GDP numbers were coming on much stronger. Economists in general, people in general were pretty bullish as 2014 fourth quarter proceeded.

We went into the first quarter of 2015. People were talking about, you know, in the 3% GDP range. Obviously that got revised down as the year went on; the GDP numbers themselves fell far below where -- earlier expectations. So again, that being said, if you believe what we saw happening over the last few years, that box demand was much more closely tied to GDP, I think -- again, all things being equal, and from an industry perspective, you have got to have an economy that is going to give you that tailwind. Tom, do you want to --?

I would just say, Chris, we are not economists and don't spend a lot of time trying to be economists. But we do look at what those that claim they are economists say about the business going forward. And I think it is fair to say that most of them -- consensus would be around probably the 1% to 1.5% growth, barring any unforeseen circumstances. So I think you are probably in line with what our expectations are.

That's helpful. And then second question I had -- I do get that we look in the publications, and we see $15 and $20 of a price decrease. But, I mean, I also -- kind of help me think this through. With the page after that article finishes up, we -- they list key consumables. So, effective cost to produce a ton of kraft linerboard and a ton of kraft medium, both of those are down. Granted, these were 3Q over 3Q numbers, and we don't have all 4Q yet; but they are down $25 to $30 a ton because of lower fiber, energy, transportation, etc.

So on one hand, seeing pricing down a little bit, less than what cost to produce is, would sort of imply that on a per-ton basis, you're actually making the same or even more money. Looking at your results and looking at your margins getting a little better might suggest that. Does it seem like an unreasonable way to kind of think about things? Or -- I know you said you were surprised to see price come down, but considering some of the cost came down as well, is that maybe not such a ridiculous thing?

I think what people, again, are not taking into full appreciation is the labor cost benefits inflation that takes place year after year. If you go back, the last price increase was 2013. So this would be -- we are coming up on three years. And yet that would be three full years of a company's labor cost benefits inflation. That is a significant factor in that cost. So even though you get some tailwind between energy costs, some of the other input costs, you throw medical into that -- and so then you have got a big piece of that people are not appreciating.

Okay, that's helpful. Thank you.

Steve Chercover, D.A. Davidson.

Just two quick ones, please. One of the rationales over the last few years of keeping inventories at high levels has been freight, and it sounds like the railroads are now easing. So I am just wondering if you will revisit this strategy; or perhaps the bottleneck in boxcars hasn't changed, it is just on frack and other commodities.

I think we are seeing some boxcar availability that we did not see. Obviously the rates are not as good in some cases as we would like to see. So it is not that the railroads have lowered rates, necessarily. And in some cases, some of the full mainline service rail -- they truly choose not to want to still serve at some of the locations.

So it is not as easy and a straightforward assumption as you might think. Our costs are down due to the actions that we took to optimize the inventory and, last year, establishing higher inventory level. We believe we are at a level that sustains and balances out and optimizes the transportation piece of the equation.

But that being said, that does offer you a little bit of relief in terms of what the rail industry is going through. And so a lot is taking place with how we are managing transportation. But again, on the trucking side of the equation, there has not been any let-up on the regulatory pressures that the trucking industry is facing. And so, again, although more boxcars may be out there available, it's how you can utilize them and at what price.

I would say the margins have been sufficient to say that you are being quite rational. Just the last question, then: you're obviously reluctant to discuss price, and that is just fine. Is it fair to say you are sure as heck not talking to RISI as well?

No comment on that.

All right, thank you very much.

Andrew Feinman, Iridian Asset Management.

First question is CapEx for 2016 -- I don't know if you can give a number, but I know you said it would be lower.

Yes.

But how about -- can you tell us what it would be in terms of the percent of depreciation and amortization?

Well, yes, let me give you the number. And we commented we are probably going to be targeting that $250 million to $265 million, which is down from the $314 million actual. I don't have the calculation on -- unless Bob's got it.

Yes, that was the number I gave earlier, I think, and I think indicated that depreciation was going to be about $350 million.

So we are at the 75% area. So we are back to historical levels. And that's what -- you know, if you think about the last two years, 2014 we spent about $425 million. Last year, $314 million -- high-return opportunity. This year, we have instilled the continued discipline to reduce capital. But yet at that $250 million and $265 million level, we do reserve the right -- as Tom comes forward as an example -- with good acquisition opportunities, and/or good cost reduction, high-return opportunities that might get identified in a box plant or a mill, we would update you on future calls.

Great. So when you say reserve the right, you're saying that if you had an opportunity, it could go a little higher?

Absolutely. And as far as uses of cash, Andy, if you take -- and remember, either you buy back stock, pay dividends, pay down debt, or make some high-return acquisitions or high-return investments that go right to the bottom line. So the discipline was instilled for that very purpose, to really focus everyone's attention on where we want to go.

Well, okay, thank you for that. So I -- your stock is down from $80 to -- right now it's at $49. It was over $80. So I just wonder how you -- whether you could comment on that in terms of whether it presents an opportunity for you. I will stop with that.

Let me just comment. We purchased 914,000 shares of stock in the fourth quarter. So we are going to be opportunistic. That being said, 2015 was a very strong year. We were only off 2014's all-time record earnings by a couple of percent. And so earnings were down just a couple of percent, and yet the stock is down and doing what it is. So I don't understand that rationale totally.

So we are going to keep doing what we do. And again, we've got a strong balance sheet. We are poised for growth, as I said earlier. And we are going to keep doing what we know how to do and what our model has told us works.

And with that, Operator, I think we are out of time. So I think I would like to basically end it there. And appreciate everybody joining us today, and look forward to talking with you on the April call.

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