Packaging Corp of America (PKG) 2016 Q1 法說會逐字稿

Thank you for joining Packaging Corporation of America's first-quarter 2016 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 question-and-answer session.

I will now turn the conference over to Mr. Kowlzan. Please proceed when you are ready.

Thank you. Good morning, and thanks for participating in Packaging Corporation of America's first-quarter 2016 earnings release conference call. I am Mark Kowlzan, Chairman and CEO of PCA. 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 first-quarter results, and then I will turn the call over to Tom and Bob, who will provide further details regarding the first quarter. I will wrap things up, and then we'll be glad to take questions.

Yesterday, we reported record first-quarter net income of $104 million, or $1.09 per share. First-quarter net income included special charges for facilities closure costs of $1.9 million. Excluding these special items, first-quarter 2016 net income was $106 million, or a record $1.11 per share, compared to the first-quarter 2015 net income of $100 million, or $1.01 per share.

First-quarter net sales were $1.4 billion in both 2016 and 2015.

Total Company EBITDA, excluding special items, was $272 million for the quarter, compared to $255 million in last year's first quarter. Details of special items for the quarter were included in the schedules that accompanied our earnings press release.

Turning to slide 3, first-quarter 2016 earnings per share, excluding special items, were $0.10 per share above the first quarter of 2015, driven primarily by higher containerboard and corrugated products volume of $0.03; lower annual mill outage costs, $0.08; lower cost for fiber, $0.06; energy, $0.06; and freight, $0.04; as well as a lower share count of $0.04 that resulted from the share repurchases.

These items were partially offset by lower white paper prices in mix of $0.04; lower containerboard export prices, $0.03; lower domestic containerboard and corrugated prices, and mix, $0.03; lower pulp volume, $0.02; higher labor costs, $0.01; higher depreciation, $0.03; higher interest expense, $0.02; and a state incentive that was received in 2015 related to the investments at the DeRidder mill for $0.02.

Our earnings were $0.11 per share above our first-quarter guidance of $1 per share. This is primarily the result of three things. First, we had what I term "best-ever" operational performance, aided somewhat by milder than expected winter weather, which in total contributed $0.07 per share.

Secondly, we had synergy-related benefits from the optimization of freight and logistics costs of $0.02. And, third, we had a lower share count, which contributed $0.02 per share.

Looking at our packaging business, EBITDA, excluding special items, and margins were up over last year's levels, with EBITDA of $235 million and sales of $1.1 billion. Or, a 21.4% margin, compared to the first-quarter 2015 packaging EBITDA of $222 million on sales of $1.1 billion, or a 20.2% margin.

We successfully completed scheduled maintenance outages at our Valdosta, Georgia, DeRidder, Louisiana, and Counce, Tennessee, mills. And containerboard production with 897,000 tons, which was 15,000 tons of increase compared to the first quarter of 2015.

We ran our mill system to demand, and with the D-3 machine at DeRidder now at full capacity, we were able to support first-quarter maintenance outages rather than pre-building inventory during the fourth quarter of 2015. Our corrugated products shipments were solid against a very strong first quarter of 2015, and containerboard inventories ended flat with last quarter and the first quarter of 2015.

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

Thank you, Mark. As Mark indicated, our corrugated products shipments were very good, up 3.4% with one more workday, or 1.7% per workday, compared to a strong first quarter of 2015.

As a comparison, the industry was up 1.4% in total and flat on a workday basis. Our outside sales of containerboard were flat versus last year's first quarter and down about 4,000 tons versus the fourth quarter. For both comparative periods, domestic volumes were higher and export volumes were lower. Export prices were about 7% below first-quarter 2015 levels, or $0.03 per share, and about 1% lower than the fourth quarter. Domestic containerboard and corrugated products prices and mix together were $0.03 per share below the first quarter of 2015 and $0.01 lower than the fourth quarter.

I will now turn it back to Mark.

Thanks, Tom. Looking at our paper segment, EBITDA, excluding special items, was a first-quarter record: $51 million on sales of $281 million, or an 18.2% margin. Compared to the first quarter of 2015 EBITDA of $49 million and sales of $297 million, or a 16.6% margin.

Our office paper shipments, which represent about 70% of our white paper volume, were up versus first quarter of 2015, and overall white paper shipments were flat with last year's first quarter, while pulp shipments were lower. White paper sales volume was flat with the first quarter of 2015, while our price and mix were lower. Sales volume and mix were favorable compared to the fourth quarter of 2015, while prices were slightly lower. All of the mills ran exceptionally well during the quarter with very good costs.

To put this quarter's results into perspective, the $51 million of EBITDA is the highest first quarter and second highest of any quarter over the last five years. The highest was a seasonally strong third quarter of 2014, when the average white paper price was $95 per ton higher than this year's first quarter.

The 18.2% EBITDA margin is an all-time best for our paper business.

Finally, we notified customers of paper price increases of $60 per ton effective April 5 for our printing and converting grades, and $60 per ton effective May 2 for our office paper grades. I will now turn it over to Bob Mundy.

Thanks, Mark. If you look at slide 4, we had very strong free cash flow generation in the first quarter, with cash provided by operations of $191 million, and capital expenditures of $53 million, which resulted in free cash flow of $138 million. During the quarter, we paid common stock dividends totaling $53 million, repurchased just under 2 million shares, totaling $100 million, or about $50.49 per share. And we had a $2 million scheduled term loan repayment.

We completed our $150 million stock repurchase program that was authorized in July of 2015, and received authorization from our Board for a new $200 million repurchase program.

We ended the quarter with $162 million of cash on hand.

Finally, our scheduled maintenance outage costs came in about where we expected, and our quarterly estimates for the balance of the year are unchanged from the guidance we gave you on our last call.

I will turn it back to Mark.

Thank you, Bob. Looking ahead to the second quarter compared to the first quarter, we expect seasonally higher containerboard and corrugated products shipments. White paper prices should begin to improve late in the second quarter as a result of our paper price increases, but the vast majority of any price increase will not be realized until the third quarter.

We also expect some seasonal improvement in our energy costs as we move into warmer weather, and our share count will be lower due to our repurchases in the first quarter.

Prices for containerboard and corrugated products are expected to be slightly lower as a result of a published price decrease. Our annual maintenance outage costs will be about $0.08 per share higher, as we have four scheduled mill outages compared to three in the first quarter.

Everything considered, we currently expect second-quarter earnings of $1.18 per share.

With that, we would be happy to entertain any questions. But I must remind you that some of the statements we have 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 in risk factors in our annual report on Form 10-K, on file with the SEC. Actual results could differ materially from those expressed in these forward-looking statements.

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

(Operator Instructions) Mark Weintraub, Buckingham Research.

Congratulations on a great start to the year. I was trying to understand the $0.07 from the best-ever operational performance and the $0.02 from the freight and logistics relative to what your expectations had been. Did a lot of that show up in the paper business, particularly?

And, relatedly, if we think about what is driving that, what has been driving it, if we look at the improvement you had from fiber, energy, freight, were those the major component drivers? And, if so, how much of that was just because fiber and energy costs were lower than expected for the commodity versus a function of you being more efficient in the usage of those inputs?

Yes, as far as the upside that you refer to, it was spread out. I mean, all eight mills performed exceptionally well. As I said, it was truly best-ever operational efficiency across the board. The white paper mills - I Falls, Jackson, and Wallula -- also significantly contributed to this upside. And so, I'm very pleased with three months' work, but it doesn't wasn't just one month, but we saw consistent contribution from the operational effectiveness of the white paper mills. So it was a nice contribution from that side of the business.

But just to remind you, Mark, that didn't just happen because of any activity necessarily that just took place now. But when we were involved over the last 2.5 years, primarily with DeRidder, we continued to make enormous improvements in the infrastructure and operational capabilities in these white mills.

And so when the integration was concluding last year, primarily the work at DeRidder was winding up midyear last year, we were able to move more resources into these white mills and put a much stronger focus day to day in bringing this capability to bear. So, again, that number was between the mills. But, again, a very good contribution came from the white mills.

And the question regarding transportation, Bob, do you want to fill in some of that?

Yes. Transportation was pretty much across the white mills as well as on the packaging side -- the mills and the box plants. So a lot of work has been done(inaudible) there to optimize the freight logistics, and we will continue to see the improvement of those efforts.

If I understand rightly, then, having gotten DeRidder behind you, part of what we are seeing is the ability to focus your resources at some of the other mills, and so that will walk forward improvements more rapidly? Is that a fair understanding of what you just said?

Yes, I think, if you go back over to last two years in particular, although we had the bulk of the spending and the effort at DeRidder -- because, again, that was the important factor in the integration -- we nevertheless were continuing to improve a great deal of the infrastructure within the white paper mills.

And so just as I had called out that we worked on over 400 discrete projects at DeRidder last year alone, we worked on hundreds and hundreds of small projects at the three white paper mills. A lot of them didn't require a lot of capital; they were changing the way we do things, bolt-on technology, working on the process, process control. And so it is all been a cumulative benefit that has come to light.

One good example, Mark, on the white paper side, we called out last year the new turbine generator that was being started up at I Falls in September. That was one big example of a $20 million capital spend. But, besides that, the turbine, we spent less than $10 million on the Jackson recovery boiler bottom. But those couple of items in particular really helped those two mills really rebalance their capabilities.

An example at I Falls of that turbine, that turbine was a 53-megawatt turbine. We didn't believe we had enough steam to power that turbine up to its full capacity. After we started it up, we were able to completely rebalance the steam distribution within the mill -- the steam generation, steam consumption. And we originally budgeted for about 70% own make electricity. First quarter was an all-time record; we averaged 85% of our own make electricity in the mill. And we had days when we were essentially right on the verge of being self-sufficient with our own make electricity.

So that turbine generator is one example of a real game changer in that mill that has allowed us to stand back and look at a number of opportunities now that are very no-capital, low-capital, but just process control, process fine-tuning. And, of course, the Jackson mill outage last year allowed us to really rebalance our Jackson runs.

That is really helpful. I apologize -- I know the first question had a lot in it. And I think you started to answer part of it, which was, when you look at the fiber and the energy and the freight, year-over-year that was $0.16 in total improvement. And I just try to get a sense as to how much of it was just a function of the underlying commodity, i.e., the price of gas being lower, versus the efficiency improvements such as what you were just talking about with that I Falls.

Yes. Bob, why don't you give some more color on that?

Yes, Mark, that -- I would say about -- maybe like 60% or so is all price related. And the things that Mark just spoke of, 40% or so is more on the usage side of the improvements that have been made.

Chip Dylan, Vertical Research Partners.

First question is -- I know that you all very clearly laid out about $200 million in synergies you were looking for in the wake of the Boise deal. And that has been a couple and a half years. Could you just give us kind of a view of how you look at -- if there are further opportunities as we think about your current footprint? Do you see a certain amount that you -- of additional -- maybe not synergies, but just cost reduction opportunities? You certainly laid out a couple of that have been very impressive in white paper.

But as we look through the rest of 2016 into 2017, are there more things you will be doing on the cost side that will maybe even offset inflation and then some?

Yes, Chip. Every day, the technology and engineering organization is not only involved in the eight paper mills, but we have got, on Tom's side of the business, the group that is working on operational effectiveness and efficiency in the box plants.

But your question about the $200 million run rate in synergies and where do we go from there, we called out last July on the call that we wouldn't be detailing and defining synergy contributions, per se. But we did indicate that, obviously, these numbers would continue to compound, but it would be -- as we run PCA, we make continuous improvements. And that is what we are all about. We are about operational execution, continuous improvement.

So, we work on hundreds and hundreds of these opportunities at any given time during the year. And so it is safe to say when we have done this historically for the better part of 16 years now, we will continue to make improvements. We have a portfolio of opportunities that we are currently working on on both sides of the business. And I am talking about the paper mills, legacy brown mills and then the corrugated products side of the business.

And so, some of them are cost reductions; some of them are business enhancing. But the fortunate aspect of this is we have our own engineering group; we have our own technology organization. We work -- most of the engineering is done ourselves, so we can execute and move forward very quickly. And so I am very, very pleased with the opportunities as we go forward that we can continue to work on at least a piece of the inflation.

Got you. Looking at the white paper, I think you said in your commentary that, for the guidance for the second quarter, that very -- I am assuming not very much of the price increase. And, of course, earlier, other parts of the white paper spectrum saw announcements for increases away from cut size.

So as I think about it, I know typically we don't normally get the full price increase that gets announced, but that is not always the case. But if we were to sort of think about whatever -- what do you have in mind in the second quarter in terms of how much will be felt? Are you basically saying it is a third-quarter event for you, and, therefore, very little of it is in the second quarter or none of it? Or can you just give us some feel for how much of it would be in the second-quarter guidance?

Obviously, I can't speculate and quantify the amount we expect regarding the price in the third quarter. But, yes, because of the way this would flow through, any pricing that has been achieved, would come in the late second quarter. And, as an example of that, we do have a good portion of our business tied to indexes, and so printing paper is one thing that is part of printing and converting . That was in April and, basically, the price was -- we know it by customers. We are invoicing. Office papers, cut size reprographic, that will be a May event.

So, then you would look at something coming out in a June publication, see what is being picked up. And then you would wait to see a July publication to see what was picked up and go from there. But we can't speculate. That is how the system works.

I understand. I guess, said differently, if it does all go through, which, again, we don't know -- it is speculation. But if it did all go through, probably more than two-thirds of it would not be felt until the third quarter. Is that a fair statement?

Yes. Again, it would be primarily a third-quarter event. Whatever did go through(inaudible).

I see. And then, last question is, again, looking at your -- looking at the environment, it seems like that we have seen a tremendous amount of continued industry vertical integration. It seems like barely a few weeks go by and you hear about another sheet feeder or box plant either being bought or consolidating into a -- somehow into a group that also involves mills.

And I was just sort of wondering, are you seeing that we are kind of close to the end of that and, therefore, it is getting -- continuing to be tougher to find solid box plant opportunities to acquire? I know that had been the big focus a few years ago. And I just didn't know if you felt that was something that -- where the time has passed for that. Or could there be more out there?

Especially with the integration completed now -- and I am going to let Tom weigh in in just a minute. But, obviously, the way we view the world, there are opportunities that exist. We are continually keeping our eyes open for what is out there. And there are fewer opportunities. Naturally, you would think, through the consolidation. But Tom, why don't you weigh in and add a little color to that?

Yes. First, Chip, I will just mention that there is no question that industry consolidation has taken place. Of course, we can't speak for the industry, but -- and I have no idea as to what extent we are at the end, by any means. But, because there is still a relatively large independent market out there in terms of numbers and plants, certainly smaller in terms of their market share. But -- because of the consolidation.

But there are some. As we have said in the past, we virtually explore any and all opportunities that are out there. Some opportunities don't meet the requirements that we have for acquisitions. And we have a very disciplined approach. And if it is not a good fit, based on the criteria we have, we move on. We are not going to make acquisitions just for the sake of making them. But, at the same time, I will tell you that there are always, I think, some opportunities out there that can present themselves.

Mark Wilde, Bank of Montreal.

Mark, I just wonder -- we are getting more questions from people about just sort of potential growth opportunities for Packaging Corp. And I wondered if you could just talk about that in general terms. You just -- you and Tom have both just talked about box plants. But, opportunities beyond that?

I don't want to speculate in terms of what we would do, could do. But, obviously, in the last couple of quarters in speaking to investors and analysts, we have made it clear that all of the heavy lifting is behind us regarding Boise integration. And balance sheet is in great shape, generating a lot of cash.

And so we have an enormous amount of flexibility and capability as we go forward to look at small one-off deals and/or some larger deals if it made sense and was the right thing to do.

And the other thing that is significant: we have got the organization to do it. We have got the people in place in both operationally, marketing and sales to do some significant opportunities. So we will continue to look at the horizon, but you just can't speculate. But, right now, we are in a great place.

Okay. Yes. I wondered, going back to Boise, that was the first time since you have been a public Company that you really went out and bought any mill assets. And it seems like the performance there has been even better than you expected. Has that made you think a little differently about what kind of options you would look at going forward?

Well, I think two things. Boise was attractive to us because we absolutely needed the containerboard tons. We were at that point in 2012. And as we were buying outside tons -- as a matter of fact, we are buying a couple hundred thousand tons of outside containerboard to support our growth. And so the key to Boise was truly the DeRidder mill and then, obviously, the legacy brown side of the business.

That being said, we have been very successful And yet, the paper business -- and we called this out early -- we felt compelled that we could improve that paper business and continue to wring costs out of it and enhance the capability. But, that being said, we are and will remain a corrugated products, containerboard business. Basically, that is our concentration. That is what we do, and that is what we will continue to focus on. As we grow our integration, which is currently at about an 87% level, we will look at how we support Tom's need for containerboard tons, and that would play into other opportunities.

Okay. Just a couple of other follow-ons. One, a lot of your peers in paperboard packaging have been starting to expand down in Mexico. I think you guys were down there briefly after you bought Boise because they had that Hexacomb business down there. Any thoughts on that market?

Mexico is a good market, but we have never had the reach in terms of operating offshore. Once you start operating offshore, you have got a lot of legal and financial matters that you have to deal with. And we are not good at that. We operate here in the United States, and we just don't have the desire to start getting into that complexity. We have got plenty to do here.

All right. Last thing I wondered. Tom Hassfurther, I noticed the industrial production of nondurable goods has been pretty sluggish, yet the box volumes have been doing well. Any thoughts on that disparity?

Go ahead, Tom.

Well, I would say, Mark, one of the -- certainly, one of the things that I probably -- is a little unique to the box business today versus what it was, if you just compared it to even three years ago or five years ago. Of course, you know, the e-commerce side of the business has picked up dramatically. And that is a growth engine for us. So I think that has been an area that has probably presented some opportunities for the industry in total to help get our numbers up a little bit over what the comparable periods were.

Okay. All right. Good luck with the balance of the year.

Mark Connelly, CLSA.

This is Scott Liebman in for Mark. Just two quick ones. First off, you mentioned exports being a smaller part of the mix of outside board sales in the quarter. And with export prices falling recently, how do you guys view that? Do you still view exports as a regular part of the business as it has been in the past?

That hasn't changed. As we have said many times, we continue to support a number of our legacy customers that have bought containerboard from us for the better part of a few decades. We do supply into about 35 different countries, so we have no one big customer that we are tied to.

And, if you recall from our comments, last year and this year, because the first quarter starts heavy annual shutdown season, we tend to sell less on the export side of the equation and retain those tons for our own internal consumption. But the number on a percentage basis has ranged from 8%, 10% or 12%, and we are still within that range in total. As a matter of fact, that really didn't change from last year where we are right now year to date.

Okay. That's very helpful. And then, just another quick one from a freight logistics standpoint. This is kind of two quarters in a row that you have pointed to positives from a logistics standpoint. And I know last year, the industry saw lots of issues, and a lot of competitors in the industry use that as an excuse for keeping higher inventories. And even last quarter, that kind of lagged into there.

So I wanted to know from your perspective, do you think that those logistic issues for you guys are in the rearview mirror? And how is that going to affect your inventory management going forward? And, second, what makes you guys different than some of the other guys in the industry where you saw these logistic issues kind of fall off a lot earlier?

Well, I think, we don't consider them in the rearview mirror. Freight continues to be something of concern to us. What we have been able to take advantage of is -- a good example is the fact that with DeRidder fully optimized and capable of producing liner and medium and all of the key grades, we have a lot of flexibility with how we move product from our containerboard mills into our box plants.

And so we have developed some really good capabilities with the carriers on how to move those tons through the various lanes in a very efficient manner.

Now, also, with the fact that the economy did slow down a little bit, there has been some slight improvement in carrier availability to us -- trucks, that is. But that doesn't mean that pricing has necessarily improved there. It is just that we have developed a very good efficiency and capability within that side of the business in terms of how we move product.

Scott Gaffner, Barclays.

When I look at the guidance for the second quarter, just looking at the sequential trends on the operating performance, how do you think about -- you mentioned best-ever operating performance in 1Q. Do you sort of look at that normalizing a little bit when you give guidance for the second quarter around operational performance? Or how should we think about that?

Well, the goal is always to continue to improve. We feel pretty good about where we are because what we saw of the last three months wasn't just something that happened. It was a culmination of work that has been going on in the white paper business for the last couple of years.

And then, on the brown side, quite frankly, this has been going on for 20 years. And then, DeRidder, obviously, has been a key focus. So every day we will continue to enhance the capability. But we are at a very high efficiency. We work every day to maintain that high efficiency. And so that is the goal and that is what we build our basis on.

Okay. And if I look at the packaging business for a minute, I think you said on the last call, the first 13 days of 1Q, the bookings and billings were flat year over year. You finished up 1.7% on a per-workday basis. So did demand grow as the quarter went on? And what does it look like so far in April?

Tom, why don't you go ahead and put some color on that one?

Yes, Scott. Yes, demand did grow as the quarter went on. That is pretty typical for our first quarter. Second quarter starting out for the first 11 days, we are up about 1% over tough comps from the previous year. So we are pleased with where we are at this point.

Okay. And then the share buyback in the quarter, you did $100 million. What was the average price per share on the buyback?

$50.49, the average price.

Okay. You bought the stock fairly well, I would say, being as how it is at $64 and change today.

On a go-forward basis, how should we think about the share buyback versus capital allocation and some of these other opportunities that you mentioned in regards to Mark's question? So basically, the balance between share buyback and acquisitions.

We always will view share buybacks from an opportunistic perspective. And so that is truly the key word right there: opportunistic. And I have said this on the last few calls as far as acquisition opportunities, we will reserve the right to use cash, to apply it to great growth, acquisition opportunities.

And so, again, if you are spending -- using your cash for dividends, share buyback, debt reduction, acquisitions, CapEx of some sort, and so we are very mindful of that. But, again, we are in that position right now that, with the stock is up, obviously, over that low average $50.49 acquisition of the 2 million shares that we did. So then, you look at your hand and, again -- so we are not going to provide any detail other than that.

Sounds good. Congrats on the strong operational performance in the quarter.

George Staphos, Bank of America Securities.

Congratulations on the quarter. Thanks for the details, as ever. I guess -- I wanted to put together a couple of topics that were discussed earlier as relates to the white paper business. Given the performance that you have seen, has it changed at all what might have been your strategic view of its fit in the portfolio, say, a couple of years ago, to the present time?

And I know the answer is there is more to come, but is there a way at all to quantify, Mark, how much more opportunity you have to improve operations within the white paper business?

George, that is a tough number. I mean, again, all we can do is tell you that -- and history provides the answer here. We will continue to go ahead and make improvements in efficiencies and working on costs. Ultimately, I don't know what that means. You have got inflationary factors with energy, wood, hard raw materials. But with the factors that we can control, we will continue to work on these things.

I think one factor that is important -- we are at a point with the white paper mills, we are not faced with any one enormous amount of capital requirements in these white mills. They are in very good condition. Well-capitalized. So what we do is we look at the small opportunities. But if you do 100 small things, the result can be worth an enormous amount to you.

And so I am very encouraged that, all things being equal, we can continue to generate a good return for what we have invested in this white business. And it generates a lot of cash, as we have said before, and we will continue to apply improvements to it. I really can't quantify going forward what that means.

Mark, that is fair. I wouldn't assume that you could, but I wanted to ask it anyway.

But on the strategic side, has your view of its fit in the portfolio changed at all? And you have said this more than once -- certainly, you said on this conference call earlier -- you are ultimately a packaging Company. But, would you ever consider, given your success here, growing the white paper business?

Again, we are going to maintain our focus on the containerboard, corrugated product side of our business. That is where -- in terms of what we are really good at, what we are focused on, that is our business. That is our core business. And we are going to remain heavily involved in that.

Again, the paper business, it hasn't hurt us, per se, in terms of valuation. And we are not in a position where we have to do one thing or another with that business. It is a great business for us right now as it stands, and we will just continue to operate it and generate a lot of cash with it.

Okay. I appreciate the thoughts on that. I wanted to switch over from my last question, and then I will turn it over. Again, obviously, you did very well this quarter; certainly better than our forecast. A lot of that was from operations. When we look back last year, that was obviously an atypical quarter for Packaging Corp in terms of operations. You had some trouble coming out of the outages at D-1. You had issues with D-3. Is it possible to quantify how much of that $0.08 benefit, I think you said, was from maintenance outages was related to just getting over what were the problems in last year's quarter?

And then, if possible, is there a way to quantify how much anniversarying the D-3 ramp was a driver of the increase in production year on year this quarter versus last year's quarter?

Thanks, guys, and good luck the rest of the year.

Thanks. Regarding the first part on the quarter-to-quarter, the $0.08, the bulk of that was the DeRidder outage. It was a massive outage last year. And not just the fact that we had the delayed number 1 work that went on and the heavy lifting on number 3, but that was a massive outage.

You look total mill-wide work going on. And, as you look at this past first quarter, we had an annual outage at DeRidder. Addressed all of the things that we would normally address. And so it wasn't nearly as impactful. And so, again, the bulk of that $0.08 would come from the fact that it was just a second shutdown we would have experienced and we were putting a lot of corrective action to the mill. So yes, that was the total.

Other than that, next question, please.

Debbie Jones, Deutsche Bank.

I have a couple of questions on slide 3, first related to labor. I actually thought that was going to be a bit more of a headwind if you take a look at what happened last year in the first quarter. I think it was like a low-teens impact on a cent basis. And I am just wondering, is there something different here that we should not be expecting going forward or something else offsetting this?

Bob, why don't you go ahead and answer this?

Yes, when we gave the guidance, we were talking about fourth quarter to first quarter. And, actually, labor actually was the -- that negative those timing items that hit you at the beginning of the year. That actually occurred, as we expected.

But year over year, it was maybe not as severe as it was the previous year-over-year comparison. And some of that has to do with some of the things Mark has done on the hourly side of optimizing some of the things with the workforce and in the mills and somewhat in the box plants as well. So that certainly helped us year over year.

Okay. And then if I could just stick with the slide on containerboard and corrugated prices and mix. That was also just a little bit less of a hit than we expected. And you said on the last call that you are trying to get a sense of what the liner decrease is going to have -- the impact on your contracts. And I was wondering if you just can talk about what your sense is of how much this might be an impact, the delta from Q1 to Q2. Anything around that would be helpful.

Let me answer that, Debbie. This is Mark. We are anticipating for the second quarter -- we will probably see on the containerboard sales, probably half a cent on the export containerboard, half a cent on domestic containerboard and probably about $0.01 in our corrugated products. So about $0.02 in total on Tom's side of the business.

Okay. That's really helpful. And just one more on the fiber side. Was there a regional difference there? Were there certain parts of the country where your benefit was a little bit better than others?

No. We were fortunate because of the truly mild winter weather that we saw all the way from the International Falls/Canadian border to the Gulf Coast, East Coast, West Coast. We certainly did not have anything near that would have been a typical winter weather that would have put pressure on the wood baskets. We had a little bit of that rain issue about a month and a half ago in Louisiana, but DeRidder mill was spared. Most of that rain went to the north and much further west of the DeRidder basin. So, wood basket has been spared this year in terms of any unusual issues nationwide.

Okay. Great. Thanks. Congratulations on the quarter, and I will turn it over.

Anthony Pettinari, Citigroup.

Just following up on Debbie's question on fiber costs, following the benefit you saw in the quarter. Do you have a view on fiber inflation the second quarter, both in pulpwood and then OCC? It seems like we have had prices tick up a little bit for the first time in nine, 10 months. Can you just talk about the fiber cost environment in 2Q?

Again, going into the second quarter, everything is pretty flat with where we left the first quarter. But that being said, if we get into a hurricane season in the Gulf coast and we start putting some -- more widespread rain throughout the Gulf Coastal region, that could change the fiber cost makeup. But, right now, everything starts in line with how we came out of first quarter. .

Okay. That's helpful.

I forgot to mention OCC. Obviously, you see it was mentioned in the publications, but keeping in mind we still are the lowest consumer user in OCC in the industry. And so on a dollar-to-dollar basis will be least impacted.

Sure. And then, Pulp and Paper Week kraft liner prices have been flat since the cut in January. But they have talked about discounting and recycled liner, which seems like it has widened a bit. Is that something that you are seeing in the marketplace, or is it something that really impacts PCA? Or is this kind of discounting more in regions or categories or customers where you are not really participating?

Tom, why don't you go ahead and put some color on that?

Anthony, I would say to that, that we certainly -- it's certainly an impact if pulp and paper continues to rationalize the two together. But we see recycled liner board and kraft liner board as being two very different products, especially when it comes to performance. And the majority of our customer base is very performance oriented. So from the standpoint of actually directly competing with this, it is not much -- it is not that much of an impact. But, certainly, what pulp and paper does could impact.

Okay. That's helpful. And, Tom, from your comments, is it fair to say you think Pulp and Paper Week should formally break out a recycled list price in the way that they have kraft liner list price?

I can't comment on that, Anthony. All I can say is that the two products in our opinion are very different.

Philip Ng, Jefferies.

Mark, thanks for providing some color on how you at least expect export prices to be from a head standpoint in 2Q. But can you talk about what you are you seeing pricing broadly on exports? Are you starting to see that stabilize a bit? Certainly the dollar is strengthening a little bit. And can you kind of help frame what portion of your export business is tied to Europe, specifically?

Regarding that, I mean, truly, all of our export pricing activities has been primarily related to currency fluctuations. And so that being said, it is pure speculation of what is going to happen this week, the next week regarding dollar versus currencies. So that is truly the impact. We did see some slight decrease from 4Q into 1Q, as we called out. But, other than that, I don't want to speculate.

What was the rest of your question? We didn't quite hear.

What portion of your export business is tied to Europe, specifically?

Tied to Europe?

Yes.

About probably less than half total offshore containerboard sales.

Okay. And then switching gears a little bit, how do you think about demand -- box shipment demand broadly for the full year? 1Q certainly trended a little better and least start April decent. But at least we are starting to see some green shoots on the industry economy. Are you seeing that side of the business pick up a little bit?

Again, I don't want to speculate any more than one quarter at a time and where we are right now. But, all I want to say about that, truly, if the GDP and the economy starts improving in any significant manner, you're going to see, theoretically, box demand grow with it. And so it is truly a GDP economic growth relationship here. That is all I want to say about that.

Okay. And just one last one for me, just backing off of Debbie's question earlier. I guess the sequential decline in box prices with the VBW adjustment back in January, it seems a little smaller than we would have thought. Is it a much smaller portion of your business tied to box contracts that triggered the $15 level versus maybe a higher number? Just because it seems pretty modest. Or is it more of a 3Q event? Thanks.

Yes. I will answer it this way. We talked about this in January. We have got 15,000-plus customers. And we are highly integrated. And there are various trigger points that flow through to a box. And so it is very complex and there is no one-size-fits-all there. And so that $15 and $20 change in containerboard. We are feeling that we understand what the implication is, and we have called that out. But, again, it is all I really want to say about that.

Chris Manuel, Wells Fargo.

I wanted to kind of delve into a little different direction into what you are seeing in some of your board markets. Given the fact -- and you have talked a little bit about this, but some of the different grades have moved more in price than others. 42-pound liner board holding up better than some of the other pieces.

We have seen some substitution on the medium side, folks going to more recycled versus [semi-chem ]. Have you had any of your customers or folks come back to you looking to substitute some cheaper-priced (inaudible) and embedded in the box? I mean, one of the assumptions we've long made is that that boxes are largely kind of over-engineered in North America. Any color you have would be helpful.

Tom, why don't you go ahead and get into this?

Well, Chris, this is a complex subject, obviously, when you start talking about substitution. I would contend that our objective is to give our customers what they need to perform. And not more, not less, tailored to what they need in their performance. And I think that is pretty much the direction of the industry.

I think it has been stated in the past that there has been this case for over-packaging and all these other sorts of things. But I think that the statistics now support the fact that we pick up very much performance-based industry and certainly we have at the PCA.

So that is what we sell and that is what, quite frankly, what our customers expect. So they don't typically get into demanding substitutions or demanding this or that or that sort of thing. And it is up to us to provide the right solutions for them.

So, those that are heavily in that recycled arena, they are selling one product, primarily. And so it is a different animal, to some extent. So hopefully that kind of explains where we are.

Okay. That makes sense. When you think about -- and I don't think this is an issue that you have, but when we look at some of the newer capacity that has come onstream, it has mostly been recycled. But, yet, you and some others still have -- and you flexed it a bit this quarter when you ramped up DeRidder to full steam, why you did some other outages. You still seem to have some sort of latent, whether it is virgin or some other, capacity that isn't all the way utilized. How do you think about being able to get all of that back to full steam as you look forward to next six, 12 months? It seems to be there is not as much incremental capacity coming onstream. But do you think that that is a fair path?

Tom, why don't you go ahead ?

Well, I am not sure I completely -- you might restate that just a little bit more for me, Chris, so I can really understand exactly what it is you are asking. It was kind of a broad question, so if you wouldn't mind I appreciate it.

Yes. No problem. I guess really what I'm getting at is I think this quarter you ran DeRidder really hard, closer to full capacity. And you did so because you had some other outages. So kind of implicitly within there is in some ways you are sort of holding back production through your system over the past year or at different times, that you had some incremental capacity. How do you think about being able to utilize all your incremental -- all the capacity that you have in kind of getting to running full as opposed to just running the demand? I mean, you need to run the demand, but when do you think those begin to intersect? Is that a 12-month window?

Yes. I get it now. That is very hard to predict. I mean, of course, we do just run to demand. That is what we do. Our excess -- extra capacity that we have will be utilized as we grow the business. That is pure and simple. If we make a sizable acquisition or something, that is obviously going to suck up a lot of it as opposed to organic growth. But we will continue to grow in those segments that we have always tried to grow in before.

If you think about it, we are at 87% integration. And so if you did have any capacity, you would be back to where we were in 2012 as net buyers of outside containerboard tons . And so, again, we are at a pretty good balance right now running our system and being able to flex with what Tom needs.

(Operator Instructions) Steve Chercover, DA Davidson.

You articulated the factors for the $0.11 beat, and we will take you at your word. But when you establish the guidance for Q1, the economic backdrop was pretty gloomy. So I am just wondering, did demand exceed your expectations at all? And then, how are you feeling about the economy today? Maybe better than you were two months ago?

When we had the January call, obviously, we just had probably 11 days of consumption on Tom's side of the business at that point. And we were feeling okay. But as the quarter went on, we did see demand pick up. Again, we are not economists, so I can't fully explain. But I think we were pleased with what we saw, especially coming off last year's big numbers. We had tough comps to run against last year. So in that regard, I think we are pleased. Tom, why do you add something to that?

Yes, Steve. I would just say that one of the things that had taken place, if you recall, late last year, midway through the third quarter and certainly in the fourth quarter, that, as we alluded to on our calls, we had exited some business that we had gotten in the Boise acquisition. That was all part of our synergies. And I think that obviously is -- can help on our margin side.

But we were coming out of that. And so it was a little tough for us to forecast what that impact would be, continuing to go into this year. We felt like we had it all behind us; it turns out we did. And how quickly we could turn it -- get back into that growth mode was important to us and, quite frankly, a little difficult to predict.

With that, operator, I believe we are out of time. And so thank you, everybody, for joining us. And look forward to talking with you all in July. Have a good day.

Thank you. This concludes today's conference call. You may now disconnect.