Packaging Corp of America (PKG) 2016 Q2 法說會逐字稿

Thank you for joining Packaging Corporation of America's secondquarter 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 Q&A session. I will now turn the conference call over to Mr. Kowlzan. Please go ahead, sir.

Good morning. Thank you for participating in Packaging Corporation of America's secondquarter 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 the packaging business, and Bob Mundy, our Chief Financial Officer.

I will begin the call with an overview of our secondquarter results and then turn the call over to Tom and Bob, who will provide further details. I will then wrap things up, and then we will be glad to take any questions.

Yesterday, we reported record secondquarter net income of $116 million, or a record $1.23 per share. Secondquarter net income included special items of $1.8 million. Excluding special items, secondquarter 2016 net income was a record $118 million, or a record $1.25 per share, compared to the second quarter of 2015 net income of $116 million, or $1.18 per share.

Secondquarter net sales were $1.42 billion in 2016 and $1.45 billion in 2015. Total Company EBITDA, excluding special items, was $290 million for the quarter, compared to $287 million in last year's second quarter. Details of special items for the quarter were included in the schedule that accompanied our earnings press release.

Secondquarter 2016 earnings per share, excluding special items, were $0.07 per share above the second quarter of 2015, driven primarily by higher corrugated products volume, $0.04; lower cost for energy, $0.06; fiber, $0.05; freight, $0.04; and a lower share count resulting from the share repurchases for $0.04. These items were partially offset by lower domestic containerboard and corrugated products prices and mix of $0.04; lower containerboard export prices, $0.03; lower containerboard domestic and export volume of $0.04; lower pump volume, $0.02; lower paper and pulp prices and mix, $0.01; and higher depreciation and other fixed costs, $0.02.

Earnings were also $0.07 per share above our secondquarter guidance of $1.18 per share. This was primarily the result of slightly better results in several areas including pricing and mix, with both packaging and paper segments each coming in $0.01 per share better, Also higher volume of $0.01 per share, and costs for freight, fiber, energy and chemicals all coming in about $0.01 per share lower than our guidance.

Looking at our packaging business, EBITDA, excluding special items, in the second quarter of 2016 of $267 million with sales of $1.125 billion (corrected by company after the call) resulted in improved margins of 23.7% versus last year's EBITDA of $267 million and sales of $1.142 billion, or a 23.4% margin. We successfully completed the scheduled maintenance outages at our Counce, Tennessee, and Tomahawk, Wisconsin, mills, as well as the number two semi-chem medium machine at our Wallula, Washington, mill.

Operationally, we had an outstanding quarter as we continued to see very good results from our numerous cost improvement initiatives as well as from our logistics and freight optimization efforts across our packaging business platform. Containerboard production was 926,000 tons, and our containerboard inventories were about flat with the end of the first quarter of 2016 as well as the end of last year's second quarter and are at the appropriate level to meet our seasonally stronger third-quarter demand.

I'm now going to turn it over to Tom, who is going to provide more details on the containerboard sales and corrugated business.

Thanks, Mark. Corrugated product shipments set all-time records for both total shipments as well as shipments per day. With one additional work day in the second quarter of 2016, our shipments were up 2.2% in total and up 0.6% per workday compared to the record second quarter of 2015. As a comparison, the industry was up 1.8% in total and 0.3% on a work day basis.

To support our corrugated products volume growth during the annual maintenance outages, we reduced our outside sales of containerboard by about 12,000 tons below last year's second quarter and about 8,000 tons below the first quarter of this year. Both domestic and export volumes were lower versus each comparative period.

Export prices were about 8% below second-quarter 2015 levels, or $0.03 per share, and about 3% lower than the first quarter of this year. Domestic containerboard and corrugated products prices and mix together were $0.04 per share below the second quarter of 2015 and up compared to the first quarter of 2016.

I will now turn it back to Mark.

Thanks, Tom. Looking at our paper segment, EBITDA, excluding special items, in the second quarter was $39 million, with sales of $267 million, or 14.5% margin, compared to the second quarter 2015 EBITDA of $37 million and sales of $281 million, or a 13.2% margin. Paper segment price and mix was lower than the second quarter of 2015, but $12 per ton higher than the first quarter of 2016. White paper sales volume was up slightly, and pulp volume was lower compared to the second quarter of 2015, while volume for both white paper and pulp was lower than the first quarter of 2016 primarily due to the scheduled annual outages at two of the mills.

Both of the scheduled outages were completed successfully, and the mills ran exceptionally well during the quarter with very good costs. White paper prices began to improve late in the second quarter as a result of the announced paper price increases.

I'm now going to turn it over to Bob Mundy.

Thanks, Mark. We had a very good strong free cash flow generation in the second quarter, with cash provided by operations of $180 million and CapEx of $69 million resulting in free cash flow of $111 million for the quarter. We paid common stock dividends totaling $52 million, made a $2 million scheduled term loan repayment, and we made no share repurchases during the second quarter.

We ended the quarter with $214 million of cash on hand.

And, finally, our scheduled annual outage costs will be lower in the third quarter than the original guidance we provided earlier in the year, as we can now operate our Jackson, Alabama, paper mill into the first quarter of 2017 before an outage is necessary. Our new guidance for annual outage costs for the balance of the year is $0.09 per share in the third quarter and $0.11 per share in the fourth quarter for a total of $0.42 per share for the year versus the $0.49 per share we guided to earlier.

I will turn it back to Mark.

Thanks, Bob. On July 6, we announced that we had entered into a definitive agreement to acquire substantially all the assets of TimBar Corporation. ,a large independent corrugated products producer, in a cash-free, debt-free transaction for a cash purchase price of $386 million. This acquisition is consistent with one of the key strategic focus areas we have discussed many times regarding increasing our vertical integration of containerboard to above 90% through organic box volume growth and strategic box plan acquisition. We expect this acquisition to increase our integration by over 200,000 tons, or 6% from our current level of 87%, and will allow for further optimization and enhancement of our mill capacity and other substantial benefits and synergies that we expect to begin realizing soon after closing.

It comes at an excellent time following our recently completed integration of Boise, including the capacity we now have at the DeRidder, Louisiana, mill. We believe that this acquisition will allow us to further enhance our strong balance sheet, financial results and cash flow consistent with our strategy to return significant value to our shareholders. We are on track to close the acquisition subject to certain customary conditions and regulatory approvals later in the third quarter, and we expect to finance the transaction with the new term loan.

Looking ahead to the third quarter, we expect higher containerboard, corrugated products and white paper shipments, and paper prices should move higher reflecting continued realization of the announced paper prices. Also, as Bob mentioned earlier, our annual outage costs will be lower than our original guidance as a result of moving our Jackson, Alabama, paper mill outage into the first quarter of 2017. We do expect a lessrich mix for corrugated products and higher prices for recycled fiber, electricity and natural gas. Considering these items, we expect third-quarter earnings of $1.30 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 constitute forward-looking statements. These statements were based on current estimates, expectations and projections of the Company, and involve inherent risks and uncertainties including the direction of the economy and those identified as risk factors in our annual report on Form 10-K on file with the SEC. Actual results could differ materially from those expressed in these forward-looking statements.

And with that, operator, I would like to open the call for questions. Thank you.

(Operator Instructions) Chip Dillon, Vertical Research Partners.

First question is, looking at TimBar, just from what I gather looking at industry returns in the box business, and I know they vary tremendously, but it seems like that the attractiveness of integrating vertically just continues to increase. Is it fair to say that maybe half of the EBITDA you expect over time will actually come not from what you are buying but from the improvements you will get after you buy them?

You know, Chip, let me start this off, and then I will let Tom add a little color to TimBar. I'm not going to quantify that exactly, but it's -- your premise is correct. A very, very large portion of the contribution will come from the 200,000-plus tons that we are able to pass through the system. Again, it's very valuable in that regard.

Then, a smaller portion would come from synergy-type activity in terms of integrating the actual business, and then the tax step-up opportunity along with the EBITDA we are buying. But keep in mind it's an extremely high-quality, diverse book of business -- high-margin book of business. Tom, do you want to add any color to that one?

Well I would just say, Chip, that I think one of the things that -- yes, you're right, and you are close to right in terms of the EBITDA contribution coming from both areas. But to assure that EBITDA -- and this is why we are so disciplined in these acquisitions -- you've got to have a great culture, so it's got to fit very well. They've got great people and a great leadership team and, as Mark mentioned, a very, very good customer base. It's also geographically a good fit for us and had solid assets as well. So, all in all, we've got great confidence that this is going to be a terrific acquisition for us.

Okay. And then second one, just -- we have noticed that in this year, despite some of the, I guess, lower realizations for Kraft liner board in the export markets that exports are up. But as we dig through the numbers, it looks like that the actual Kraft liner board exports were down, and you are seeing the total number go up because we are sending more recycled medium and other grades offshore, at least as an industry. And is that a reflection of some of the quality issues you think that we are seeing with some of the recent recycled additions, or do you have any other view on that?

Let me start this out, Chip. This is Mark. Again, I think, as you have seen the consolidation take place in the last couple of years and you read what you and others have been publishing, obviously the integrated tons have grown. And so, to date, it is probably 92% of all of the containerboard tons passing through integrated activity, so it is becoming less and less in terms of an outlet for independent mini-mill type activity to move their tons through, so as we stated in order to accommodate our own needs, we took tons out of the export and domestic outside sales to support our own growth activity. But, again, I think it's safe to say that there is less of an outlet domestically as more and more tons are passing through integrated activity. Tom, do you want to go ahead and elaborate?

I don't have a lot to -- I don't have really a lot to add to that. I think Mark is absolutely correct. You've just got to look at the supply and say supply has got to gravitate to where the demand is. If most of the demand is tied up with integrated, and we are much more performance-oriented, of course, here in the US, the Kraft liner board meets that criteria. So I think you are going to have a lot more here. I think you also have some situations where some people have decided to supply their own facilities out of this country with their own liner board, and they will determine what grades they want to supply. So I think that's why you're seeing it. Yet, really export demand is relatively stable.

I see. Thank you.

Mark Weintraub, Buckingham Research.

June -- the numbers for the industry were very robust. Was hoping to get a sense as to how July has been looking for you and whether you feel there has been a shift in tenor in the market in the last month or so.

Tom, why don't you go ahead and provide that?

Well, Mark, the first 10 days of July, our billings are up about 1.5%, so we are off to a decent start. It's a little muddy getting started in July just because of the way the fourth fell. So it's a -- when it falls on a weekend like that, it's tough to get a really good take on where things are headed, but I think we are off to a pretty good start.

And is there a different feel to the market given what we've been seeing from the overall industry data in the last six, eight weeks, or is it more a continuation of how you have been experiencing the market year to date?

Yes, Mark, this is Mark again. I think what we are seeing as we went through the second quarter and what we are seeing these couple of weeks after the holiday is flat. Again, we are pleased to see the numbers where they are at this stage in July. But other than that, no other color to add to that one.

Okay. Fair enough. And kind of a in-the-weeds question, but -- so $0.42 I think is now the revised expectation for maintenance and outage costs this year. Would you consider that to be a fairly standard number or a bit below normal? I think you are as much -- in the high 50s if I remember last year.

You know, Mark, that number -- now that we've got all of our integration activity behind us, that number is going to float depending on the extent of an annual shutdown of work that has to be done on our mill. So in an example, too, we have the capability as well as others in the industry to move shutdowns into the following year so we are not tied to necessarily a 12-month window. So, there is a range somewhere within that $0.40 range unless we call out some unusual type of maintenance activity that would occur.

Okay. Thank you.

Mark Wilde, BMO Capital Markets.

Is it possible, Mark, to get some sense on TimBar of how the benefits will roll through just from kind of a timing standpoint? In other words, how quickly can you bring things like those board purchases in-house?

If you assume we get this closed by the end of the third quarter, we will be able to immediately start moving tons through, and our plans would be to have this heavily integrated by the end of the year. Tom, do you want to --

I would just add, Mark, as you can probably well imagine, TimBar has some contracts that they've got out there that we will honor. Some of those roll up by the end of the year. But the great majority of it, we will be able to accomplish in the fourth quarter, I would expect.

Yes, okay. That's exactly what I was hoping to pick up.

And just on the converting side, you've been buying, converting businesses, increasing your integration. I wonder though, Tom, could you also talked about what you might be doing in the way of just investment in your existing converting operations? We hear a lot from other players over the last five or six years about investments in mega plants and evols and things like that.

Mark, this is Tom again. We continue -- as has been our tradition at PCA, we have consistently spent what we consider to be the correct amount of CapEx to reinvest in our businesses, to stay up with the trends, to stay up with our ability to be a very low-cost producer and to meet the demands of the customers that we have. And, of course, you know one of their -- our mantras for doing this is that we don't just build it and hope they will come. We do what our customers need, and we are very responsive to that. So, I'm not going to go into great detail, obviously, on this call about all the things that we've done, but rest assured we're doing all the things that we need to do.

Okay. Now, last question I had is, Mark, can you put any more color around what you're expecting from input cost pressures in the second half? We can see that OCC prices have been ticking up for the last three months here. And I think things like natural gas are up as well.

Yes. Primarily, we are talking about three buckets that we have been watching, and it's our recycled fiber, OCC/DLK prices moving up as they have this year. And then natural gas year over year; pretty obvious that a year ago we were down at the low point, and it's moved up now. And so when you look at that, transportation elements -- we are watching what's going on there. Even though there hasn't been a big move, we are seeing some of the class I railroads already raising rates. And then there is the seasonal electric. Summertime electric rate spike in increased activity through the July/August period and September depending on weather conditions around the country. So, again, for the first time in the last year and a half or so, we are seeing some of the inflationary activity that we are watching closely.

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

Mark Connelly, CLSA.

If I could come back to the question of exports for just a second, it's pretty clear that other producers are looking at that business differently than they used to, and we are not seeing the level of export sensitivity to FX rates that we used to see. Is that changing the way you think about the strategic value of exports for PCA?

Then a second question on white paper. The label paper business was a strategic move for Boise a number of years back. And I'm curious how important the specialty grades are to you in the context of your white paper mix.

First question regarding currency and export -- we viewed, again, our exports. We have had a legacy export customer base for 25 years. We have shipped product out to about 35 different countries around the world. And so, obviously exports remain a little less than 10% of our total production.

That being said, as Tom continues to grow his own integration level higher and we have an internal need, that's our best use of tons produced. And so, again, it's been easier for us to look at where to best place those tons to capture the best margin, as we see in these currency swings over the last year.

Regarding that second part of the question, the specialty business - the release liner grade, the coated business, especially primarily from the Wallula machine now, it has proved to be good business for us. We've done a tremendous amount of grade development and refinement over the last two years. And with the other improvements we have built into the mill -- it's, again, label business, primarily performing very well. And label in general still grows with GDP. So as long as GDP continues to move forward, label business, which is the bulk of that release specialty coated business, continues to move forward. So it's a pretty good little business for us in the paper segment.

Would you have any thoughts of moving further into specialty?

As we have said over the last couple of years, we are primarily a corrugated products business and we're going to stay concentrated in that. We are not really compelled to grow that business as much as just nurture what we have and take advantage of the EBITDA contribution from the paper business. Keep in mind that in today's world, it's probably 15%, 16% or so of our total annualized EBITDA. But it does generate a nice cash flow for us and doesn't require an awful lot of capital to maintain right now. So I guess a long way of saying I would not have preference to explore expansion in that area.

Super helpful. Thank you.

Debbie Jones, Deutsche Bank.

I have a question that I recognize you may not be able to answer, but I'm going to try it anyway. With TimBar, obviously this is a great acquisition for you guys strategically. Not much to criticize. But as you pointed out, the industry is far more integrated. I think you pointed to 92%. Does this concern you at all, just broadly speaking, about how PPW now has a much smaller set or sample size to measure when trying to determine what industry pricing is? And I just think it's important just considering that impacts a lot of your contracts and industry contracts going forward.

Well, I think -- I'm going to say a few things, and I will let Tom add some color. But, again, I think it's that issue that there is a mechanism in place, and how that mechanism functions is -- again, that is -- Pulp and Paper is -- utilized that base. And so, rather than getting into any forward discussion about pricing or speculation, I would rather -- again, to your point -- not even go there. Tom, I think you feel the same way.

Yes, I do. Obviously, there are not a lot of other alternatives. And Pulp and Paper has been -- over the long haul, seems to get it right. Now, there are times when we would disagree, but we would have to see what happens going forward. I think the most important thing is that Pulp and Paper reports the news as opposed to trying to make the news. So we will just see what transpires going forward. But your observation is correct; it is a smaller segment of an open market.

Okay. Thanks. And my second question, I just wanted to understand in your guidance what do you have rolling through on white paper? Just what has been put through so far by PPW? And just thoughts going forward on whether or not there could be more to come.

Debbie, if you think about our business and what has been announced by publications on the printing and converting grades, the announcement was made for a $60 increase in March. And the indexes picked up $10 in April and $15 in May and $5 in June for a total of $30 as reported at the latest update.

On office papers, that announcement was for April to be commencing in May. So, the -- again, the indexes picked up $5 in May and $5 in June. So, that's what basically would be tied to contract paper sale. And also understanding that in our paper business, roughly 65% of our uncoated free sheet is tied to contracts, and so the balance of it is not tied to contracts. So we have a heavy portion of that that is tied to these indices.

Okay. Thanks. I'll turn it over.

Phil Ng, Jefferies and Company.

Energy prices were up sequentially. Impressed if you saw that type of cost savings on the energy line and transportation. How much of that is being just more efficient now? And is that cost-saving sustainable in light of some of the moves that we are seeing in nat gas prices?

I think to your point, as we continue to improve not only the white paper mills -- the folks that run the brown business -- containerboard mills are always out making improvements year after year, and fuel utilization in terms of consumption efficiencies. And so we have reaped the benefits year after year on how we utilize our fuels. But that being said, natural gas, as an example, bottomed out a year ago. And so now it's moving up, and so --. Bob, do you want to add anything?

No. I think that's -- what you said is exactly right. That's how we see things going forward.

Okay. That's helpful. And I guess even post TimBar, based on our math at least, your balance sheet still looks pretty strong and integration is going to be pretty high. Can you just talk about how you rank your capital deployment priorities from here on out, M&A? And how does that look on a converting front or is there more opportunity now on the paper side of things?

Well, again, concentrating on corrugated products side of the business, that's our highest-margin, highest-opportunity area to concentrate on in terms of the capital utilization. And so we would continue, as Tom is always doing, looking at opportunities and box plant acquisitions. And also he said something important earlier: how he grows his existing business organically with existing customers.

So I think, again, prioritizing use of cash and capital -- it's Tom's corrugated business in high-margin activity within the corrugated business. And so Tom, do you want to add anything to that?

Phil, I would just say that we will still be very disciplined in our hurdle rates that we have for our M&A activity and also for our CapEx. That's not going to change. And as we get to -- our integration level gets up to a point where we are a little bit capacity constrained. Obviously those -- we are not going to have quite the synergies for some of those acquisitions, but that doesn't mean we won't do them if they are right for the business.

Got you. That's actually a good segue to what I was going ask next. Once you integrate TimBar, how much more capacity do you guys have on the Board side of things? Do you need -- is there one-year's-left runway? And once you are tapped out, are you guys looking at M&A, or is there organic opportunities internally for you to kind of produce more tons?

I'm not going to answer that specifically. But as we've always done, we always have the ability to creep and to stretch our capability. But the technology organization and the group that runs the containerboard mills are always challenged to produce more when Tom needs it.

And so we have a portfolio of capital items and improvement plans in the files on how we would go forward over the next couple of years to support Tom's growth needs. And so we are comfortable for the time being for the next couple of years.

And don't forget, as we did back in 2012, we still have the lower-margin export tons to move through Tom's higher-margin book of business as he needs it. So we've got a few years to do this.

Okay. Really helpful. Thanks a lot.

Scott Gaffner, Barclays.

When I look at the vertical integration, I think you said -- you didn't get specific, but you said 87% now, plus 6% from TimBar. So assuming somewhere in the low 90s on an integration level. Where was the integration level for the Company as a whole before you did the Boise acquisition?

We were at that low 90%, 92%, 93% level when we did Boise. It was the same opportunity matrix we looked at as far as how were we going to support Tom's growth trajectory over a longer period of time. And Boise presented tremendous opportunities to do just what was done over the last three years.

Okay. And maybe a different question there just on the vertical integration. And you mentioned before TimBar had some high-margin business that came along with it. Is there the potential to prune maybe some lower-margin business from portfolio and vertical -- vertically integrate with more higher-margin business going forward?

We are not going to comment on that question.

Okay.

That's proprietary.

Fine. Then when I look at the organic growth rate, I know I've asked this one before, but you said you were up 0.6% on a per-workday basis in a quarter. The industry was up 0.3%. So organically, your level of growth relative to the market has narrowed somewhat. How long do you think you can continue to outgrow the market organically on a go-forward basis excluding any sort of additional vertical integration?

Obviously I can't answer that. All I can say is that's Tom's challenge every day of the week, and it's been his challenge for years. And that's what we are going to continue to do, and that's how we look at the world. We would be terribly disappointed if we didn't continue to perform in that manner.

I guess maybe asked a different way, has it become more difficult to outgrow the market at this point in time?

I wouldn't say that. Again, it's -- I don't want to comment on that.

Okay. Last one for me, just on inventories. You noted that they were flat -- sequentially flat year over year, I think is what you said. I thought in some previous comments maybe on the last call you noted that inventories could come down just based on better freight availability. Has that not been the case during the quarter, or is something -- some other sort of dynamic played out?

We have commented that we are in a range that we are very comfortable with supporting Tom's business. And if you go back to what we called out last fall that we -- because of the DeRidder success, we did not have the need to have to grow inventory and build inventory in the fourth quarter of last year. So we are quite pleased with the fact that we went through all of our annual shutdowns in the first and second quarter and not only supported Tom's business but maintained a range of containerboard inventory that we feel is where we need to be plus or minus quarter to quarter. And so it goes back to the fact that even though transportation availability and cost for transportation had abated and the availability improved in the last two years, nevertheless our footprint with Boise and acquisition activity is a nationwide footprint.

We have called this out before. So we are mindful of that. And again, this range we are in for the last year now is a good range that we identified. But also keep in mind that as we integrate TimBar, they do have the corrugating plants that we are going to have to support. So it will be a reevaluation of what is the right inventory level to support a much bigger whole-line corrugating system.

Okay. Thanks, Mark.

Chris Manuel, Wells Fargo Securities.

Good morning, gentlemen, and congratulations on a strong quarter. Just a couple questions -- follow-up questions for you. Most of the stuff I wanted to ask has kind of been answered.

But first on the papers side of the business, is there any reason that perhaps -- and, again, I appreciate you don't like to comment on forward -- so much on forward-looking pricing. But is there any reason that the white paper side might not kind of work out the way that the specialty papers side did in that it kind of takes two, three, four months to trickle through pricing? We're kind of a couple months into that. But any reason to suspect that we couldn't continue to see a little more of the increase that most of the participants announced get realized?

I don't want to speculate on it. That is forward-pricing speculation. That's someplace that -- we don't need to go there. Again, just have to wait and see what RISI and Paper Trader, what the indexes call out.

All right. Thank you. Let me skip ahead to the -- you have had a few questions around how you balance tons on a future basis from an allocation standpoint. So if you kind of -- as TimBar gets fully put together out in 2017 and integrated into your network, as you would sit today it would look like either -- you stop selling so much of the domestic guys, or you could stop exporting one or the other. If I'm getting -- sort of putting this together right, it sounds more like if someplace gets shorted, you prefer to pull back out of the export market. Is that a fair way of thinking about it, or how do you balance --

Yes, there's a couple ways to do that. You're looking at what is your ultimate margin per ton in terms of where you're placing those containerboard tons that we produced. And if it's -- if the math tells you to go ahead and sell one less ton and move it through Tom's system, that's what you do.

And so there is another element to that and it also -- as we did in the 2012 period, 2013, we were buying some tons on the open market where it made sense. So if it makes sense for us to buy tons in the open market and still sell some tons offshore. Again, it's a trade-off of margin and how it flows to the bottom line. So we've got that trigger to pull.

Okay. That's helpful. And then last question I had -- and, again, I know you don't like to get super-granular with this stuff. But was there any kind of differential either geographically, regionally, et cetera, with how your box shipments and volumes were through the quarter? Was it a little better in certain regions of the country versus others? Anything -- variance even month-to-month; it seems like things got better as the quarter progressed -- that you could share with us?

Yes, I'm going to let Tom put some color on that one.

Yes, Chris, you're right. It did get better as the quarter progressed. And regionally, most of our regional trends come from what is happening in ag business in various parts of the country or something like that. Beyond that, it is relatively static.

But the ag business was -- how would you characterize that?

Good in some parts and not so good in other parts. That's mostly weather-related.

Okay, guys. Thank you very much, and good luck on the go-forward.

Anthony Pettinari, Citigroup.

Regarding M&A, you obviously have a great history with box plant acquisitions. Given that the independents are maybe now 8% of the market, are there still converting assets out there that are attractive? Or when you look at asset quality and valuation, are there not really many opportunities left there?

And then just continuing on M&A side, would we ever see Packaging Corp. look at other substrates? I'm thinking folding cartons or box boards and then also other geographies outside the US.

The first part of the question, there's -- obviously with the activity on box plant acquisitions over the last couple of years, the opportunities have become less. But nevertheless there are opportunities that will always be there. Tom is aware of what's out there. And we are pretty particular, as we have proven to be over the last number of years, in what we are interested in and what we are willing to pay for it. And so, again, that's the best way to answer that.

Folding carton, that's just speculation. I don't even want to get into that dialogue. As I said earlier, we are primarily a corrugated products business, and that's what we do well and that's what we will remain concentrated in.

Okay. And in terms of overseas or outside of the US -- interest level there?

Again, we are US-based, and I think the US is the place to be.

Okay. That's helpful. And just a last one on export pricing, understanding that exports are a small part of your business and are probably going to get smaller, the July Pulp and Paper Week pricing data seemed to show some stability in export pricing. I'm just wondering if maybe Tom if you could give any color in terms of what you're seeing in the export markets that you're serving.

Yes, I would agree with you, Anthony; the prices have stabilized. We have currency issues that remain. Of course, the biggest being in the UK, which is a very, very small piece of our business. But -- and there is pricing increase activity going on there we've announced actually as well. And that's mainly to cover this enormous currency change that took place with Brexit.

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

George Staphos, Bank of America Securities.

Appreciate you taking my questions. Most of them have been already answered. I guess the first question I had -- so if I look at third quarter versus second quarter, traditionally you will tend to see upwards of about a $0.10 sequential move from whatever the 2Q base was. This quarter you're guiding to $0.05. Is that variance largely related to input costs? Would there be anything else related to it?

And then kind of a separate but related question, in the past, you gave us a view on what you were expecting in terms of the January price declines to show up in terms of your P&L and corrugated. Did you more or less see that realized as expected? Then I had a couple of follow-ons.

Yes this -- regarding that last question, we called out in the first quarter about a penny of impact on containerboard price. And then 2Q -- $0.02, and then we are anticipating the third quarter following in line with that $0.02.

Yes, on the other, George, moving sequentially from the second to the third, you are right. Your input costs -- last year, moving second to third, were actually a favorable trend environment. And this year, as Mark has pointed out, with the energy side and recycled and whatnot, you have the opposite thing going on. So that would be really what drives that difference.

Bob, I recognize you are not in a position right now to talk much about TimBar, and so I preface my question with that and understand whatever answer you can give we respect it. Would we -- if we could get into the numbers, would TimBar be a more cash-generative business to you relative to your existing converting operations? How would you have us think about that business? It sounds like it's higher-margin, but maybe it also takes a little bit more capital to get at those margins.

George, this is Mark. Again, and you have heard Tom say this and I believe I have called this out, the TimBar assets are very well-capitalized. Really nice facilities. So the only thing -- and, again, this is just speculation -- as Tom does every quarter and every year, he looks at the book of business within that region and how you satisfy the customer growth needs. And so on a going-forward basis, there's no current big overhang of what we would have to do with capital to see that cash accretion to the bottom line.

Okay. So, conclusion then. This should be a more cash-accretive business relative to your existing converting margins. Because I think you have already said it's higher-margin -- very high-mix -- high-margin mix. Excuse me. And no big capital programs. You would agree with that, then?

I'm not going to quantify that. I'm just qualifying that it's a very accretive opportunity for us, and you'll see very quickly that that benefits the bottom line.

Totally. Two last ones. And I think you've already answered the question, but I just want to get precision on it. So in the second quarter, your production was down I want to say 25,000 tons from last year. I'm assuming that is purely a function of you didn't need to run as much into inventory ahead of maintenance outages this year and the flexibility you get from DeRidder. Is there anything else in terms of why production would've been done other than what I just -- down other than what I just relayed?

And then Bob, just housekeeping, there was no buyback in the quarter. Was that a function of just what you thought of the value of the stock? I know it's hard to answer that. Or just you were in blackout because you knew you were going to do the TimBar deal? Thanks, guys, and good luck on the quarter.

Yes, let me answer that first part, George. This is Mark. If you recall last year, we actually produced 937,000 tons during the second quarter. And this year we have called out the production of 926,000 tons. Now, again, there are two things that are in play there. It's the timing of the actual outages that occur in the containerboard mills that can move that quarter to quarter. But year over year, last year in particular we were in a heavy-lifting mode to get DeRidder optimized and delivering for us. And so we also had come out of the 2014 fourth quarter and we called out the need to pre-build inventory because of the rather heavy shutdown activity that was going to occur, primarily the DeRidder activity and fine-tuning of DeRidder. So, DeRidder was an event that went through the first and second quarter last year, which really forced us to run hard and make sure that we had the adequate inventory by the end of the second quarter to build the typical seasonal higher third quarter.

So we built to that 937,000-ton production to make sure as we entered July and August we were in good shape.

But the fact that, as of last September, we concluded the DeRidder number three upgrade activity and proved that that machine can perform as we need and as demand requires, we had truly -- if you want to use the term running to demand, we were not compelled to have to run to any higher inventory levels.

So that is truly -- and if we called this out that, because of the annual shutdown activity, we sold less on the outside but also there was no need to build and run in a different way and also how to shut themselves. So that is really a long way of explaining about 12,000 tons of difference between last year's 2Q to this year's 2Q.

And on the buyback, certainly we remain to look for those opportunistic situations on share buybacks. And in the second quarter, you are correct. The pending TimBar deal certainly was something we had to consider that we normally wouldn't have to consider.

All right. Appreciate the color. Good luck on the quarter, guys.

(Operator Instructions) Gail Glazerman, Roe Equity Research.

This might be a little out-there question, but the last time we saw the dollar this strong was really at the turn of the century when there was a lot of offshoring activity. And I'm just wondering are you hearing anything from your customers that they might start to reconsider obviously that it played out and just any concern from the domestic demand side in terms of the strong dollar?

Tom, do you want to touch that one --

I'll just answer that real quickly for you, Gail. One of the things that certainly has had a bit of an impact with the strong dollar is the exports from our -- from industry in general. And you have read a lot about that. So that has had a little bit of an impact.

And relative to offshoring, I'm seeing more of a trend of offshoring today as labor rates continue to go up elsewhere in the world, and quality issues and supply chain issues and all these other sorts of things that exist. I think we've got more companies today considering bringing business back to the United States than sending it overseas.

Okay. And you guys may disagree with it, but it certainly feels like there's been -- despite the shrinking independent size of the box market, there's been more and more activity. Do you feel that the transition of some of the recent box plant deals have been done as tons have been integrated has been managed well? Or any concerns of disruptions in the market just as things get readjusted?

Gail, I don't want to comment on what others are doing and how they've done it. That's -- you should be talking to them.

Okay. And can you just talk finally a little bit on wood costs, what you are seeing in the near-term. And we've heard less and less about pellet activity. Is that less of a concern for you looking out over the medium-term than it might have been two, three years ago?

Wood costs over the last few quarters have been pretty flat. We saw a little bit of the heavy rains down in the Texas/Louisiana region in the spring that caused some short-term spikes in disruption in fiber. But it was nothing significant for our DeRidder mill. Again, we watched it. But in general for the rest of the system, it has been very flat through the year, and we expect to see that flat unless again we get into an unusual fall/winter rain event period later in the year. But otherwise we are flat with fiber -- on virgin wood fiber.

Okay. And just kind of on a longer-term basis on pellets, I think that was a concern for you a couple years ago. Is it still a concern? Less a concern?

Again, you have seen in particular the Southeastern region and Gulf Coastal region with more pellet activity. I think it has kind of come to an equilibrium, from all indications. So we watch it, but I'm not concerned about it at this point.

Okay. Thanks very much.

(Operator Instructions) Mr. Kowlzan, I see there are no further questions. Do you have any closing remarks?

Yes. I would like to thank everybody for participating in the call today, and look forward to talking with you on October for the third-quarter results. Have a good day. Thank you.

Thank you. That does conclude today's second quarter 2016 earnings conference call. You may now disconnect.