Packaging Corp of America (PKG) 2016 Q4 法說會逐字稿

Thank you for joining Packaging Corporation of America's fourth-quarter and full-year 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, and please proceed when you are ready.

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

I will begin the call with an overview of our fourth-quarter and full-year results and then turn the call over to Tom and Bob who will provide more details. I will then wrap things up and we will be glad to take questions.

Yesterday, we reported fourth-quarter net income of $111 million or $1.17 per share. Fourth-quarter net income included special items of $5.5 million for acquisition-related costs and facility closure and restructuring costs. Excluding these special items, fourth-quarter 2016 net income was $116 million or $1.23 per share compared to the fourth-quarter 2015 net income of $105 million or $1.08 per share. Fourth-quarter net sales were $1.5 billion in 2016 and $1.4 billion in 2015. Total Company EBITDA for the fourth quarter, excluding special items, was $293 million in 2016 and $265 million in 2015.

We also reported full-year earnings, excluding special items, of $462 million or $4.88 per share compared to 2015 earnings, excluding special items, of $443 million or $4.53 per share. Net sales in 2016 were $5.8 billion compared to $5.7 billion in 2015.

Excluding special items, total Company EBITDA in 2016 was $1.2 billion compared to $1.1 billion in 2015. Detailed special items for both the fourth-quarter and full-year 2016 were included in the schedules that accompanied our earnings press release.

Fourth-quarter 2016 earnings per share, excluding special items, was $1.23 or $0.15 per share above the fourth quarter of 2015, driven primarily by higher containerboard and corrugated product volume of $0.16; higher white paper prices and mix, $0.03; lower fiber costs, $0.06; and lower annual outage costs, $0.09. These items were partially offset by lower containerboard and corrugated products prices and mix of $0.04; lower paper volume of $0.04; higher costs for labor, $0.02; and repairs, $0.02; higher expense for depreciation, $0.02; and interest, $0.01; and a higher tax rate of $0.04.

Our earnings were $0.08 better per share than our fourth-quarter guidance. Higher volumes in both our packaging and paper segments contributed about $0.04 per share in total. Operational excellence across all mills and corrugated plants contributed another $0.06 per share, and fiber and chemical usage in the containerboard mills was $0.02 favorable. These items more than offset the lower than forecast price and mix for containerboard of $0.02 and white paper of $0.01 and higher recycled fiber costs of $0.01.

Looking at our packaging business, EBITDA, excluding special items, in the fourth quarter of 2016 of $259 million with sales of $1.2 billion, resulted in margins of 22% versus last year's EBITDA of $252 million and sales of $1.1 billion or a 23% margin.

For the full year, excluding special items, packaging EBITDA was $1.02 billion with sales of $4.6 billion or a 22.2% margin compared to the full-year 2015 EBITDA of $1.01 billion with sales of $4.48 billion or 22.5% margin.

Operationally, the containerboard mills ran exceptionally well with record production of 962,000 tons, driven by the need to support record box shipments and the rapid integration of our new corrugated plants from the TimBar and Columbus container acquisitions.

We ended the year with containerboard inventories, including the inventory needs of our two acquisitions, flat with last year's levels. Inventories were up about 17,000 tons from the end of the third quarter, due to the addition of our acquisitions and to prepare for outages at our three largest mills during the first and second quarter this year.

Additionally, excellent fiber and chemical usage offset the price inflation we experienced in these areas during the fourth quarter.

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

Thank you, Mark. In corrugated products, we set new all-time shipment records, both in total and per work day with total shipments up 9.7% or 11.5% per work day over last year's fourth quarter. Our outside sales volume of containerboard was up almost 5,000 tons versus last year's fourth quarter and about 11,000 tons below the third quarter of this year. Overall, packaging segment volumes contributed about $0.16 per share above last year's fourth quarter. For the full year, shipments in total were up 5% or 4.6% per work day over 2015.

Packaging segment price and mix was lower compared to the fourth quarter of 2015 by about $0.04 per share, but up $0.05 per share compared to the third quarter of 2016 as we began implementing the announced price increases to our containerboard and corrugated products customers throughout the fourth quarter.

Domestic containerboard and corrugated products prices and mix together were $0.02 per share below the fourth quarter of 2015, but up $0.05 per share compared to the third quarter of 2016. Export containerboard prices were down about $0.02 per share below fourth-quarter 2015 levels and fairly flat with the third quarter of this year.

Finally, I would like to add that our recent acquisitions have "bolted on" seamlessly during the fourth quarter. These operations have proven to be an excellent fit, and we are off to a great start towards achieving our goals.

Of course, this could not have been accomplished without the outstanding effort and dedication of all employees of PCA, including our newest teams from TimBar and Columbus Container.

I will now turn it back to Mark.

Thank you, Tom. Looking at our paper segment, EBITDA, excluding special items in the fourth quarter, was $50 million with sales of $254 million or a 20% margin compared to the fourth-quarter 2015 EBITDA of $28 million and sales of $273 million or a 10% margin.

The EBITDA improvement over last year was primarily due to excellent operational effectiveness throughout the quarter and our Jackson, Alabama, mill being down for an extended period for a planned rebuild of the recovery boiler which reduced production and increased operating costs during the fourth quarter of 2015, versus no scheduled outage in this year's fourth quarter.

Paper segment price and mix was higher than the fourth quarter of 2015, contributing about $0.03 per share and flat with the third quarter of 2016. Paper volume was lower compared to the fourth quarter of 2015, primarily due to the previously announced fourth-quarter shutdown of our market pulp operations at our Wallula Mill and down versus the seasonally stronger third quarter of 2016.

The reduction of pulp volume from the shutdown was the key driver of the decrease of the segment sales for the quarter. Full-year 2016 EBITDA, excluding special items, was $199 million and sales were $1.1 billion, or an 18.2% margin compared to full-year 2015 EBITDA of $161 million with sales of $1.1 billion or a 14.1% margin.

I am now going to turn it over to Bob.

Thanks, Mark. Compared to last year's fourth quarter, depreciation and amortization expense was $0.02 per share higher, and interest expense was $0.01 per share higher due to items related to the recent TimBar acquisition.

Our fourth-quarter 2016 effective tax rate of just over 34% was above last year's due to some one-time benefits received in 2015 when we filed our 2014 returns related to our state tax elections made following the first full year of owning Boise.

Cash provided by operations in the fourth quarter was $213 million after deducting $64 million in cash tax payments and $4 million in pension payments. Other uses of cash included $100 million to pay for the Columbus Container acquisition, capital expenditures of $86 million, common stock dividends totaled $59 million, and $7 million in term loan repayments. We ended the quarter with $239 million of cash-on-hand.

For the full year, cash from operations was a record $801 million, and free cash flow was a record $527 million. Key uses of cash for the year included capital expenditures of $274 million, common stock dividends of $216 million, 2 million shares were repurchased totaling just over $100 million, $100 million for the Columbus Container acquisition, and debt repayments for the year totaled $37 million.

Regarding the full-year estimates of certain key items for the upcoming year, we expect total capital expenditures to be between $310 million to $325 million. DD&A is expected to be about $370 million, up about $12 million over our 2016, primarily due to the TimBar and Columbus Container acquisitions. Pension expense is expected to be $25 million, and we expect to make cash pension payments of $43 million. The combined federal and state effective tax rate for 2017 is expected to be similar to 2016 at just over 34%. Based on our current long-term debt, interest expense in 2017 would be approximately $100 million. The cash interest payments would be about $94 million, both around $7 million above 2016 due to the new term loan from the TimBar acquisition, as well as slightly higher assumed LIBOR rates.

Based on current planned annual maintenance outages at our mills in 2017, the total earnings impact of these outages, including loss production, direct costs, and amortized repair costs, is expected to be $0.51 per share versus the $0.42 per share for 2016. The current estimated impact by quarter and 2017 is $0.09 per share in the first quarter, $0.11 in the second, $0.12 in the third quarter, and $0.19 per share in the fourth quarter.

I will now turn it back over to Mark.

Thanks, Bob. In summary, 2016 was a record year for PCA as we continued to see significant benefits from the DeRidder containerboard mill and white paper mills optimization efforts, we completed the TimBar and Columbus Container acquisitions and fully integrated their volume. We ended the year with containerboard inventories at the lowest levels in two years, and box plant cut up set new records. The dividend was raised 15% making it the sixth increase over the last five years for a cumulative total increase of 320%.

Looking ahead to the first quarter, we expect to realize the vast majority of our previously announced packaging segment price increases, and we expect higher corrugated product shipments resulting from our organic growth and our two recent acquisitions, as well as four more shipping days in the first quarter.

We will have lower containerboard and paper production volume as we have scheduled maintenance outages on one of our machines at both the Counce and DeRidder containerboard mills and on one of our machines at our Jackson, Alabama, white paper mill. We expect higher freight costs, as well as higher labor and benefits costs with annual wage increases and other timing-related expenses.

We also anticipate continued price inflation on recycled fiber, energy and certain chemicals, and seasonally colder weather will increase wood and energy costs.

Considering these items, we expect first-quarter earnings of $1.26 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, projections of the Company and involve inherent risks and uncertainties, including the direction of the economy, and (inaudible) identified as risk factors in our annual report on Form 10-K on file with the SEC. Actual results could differ materially from those expressed in these forward-looking statements.

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

(Operator Instructions) Chip Dillon, Vertical Research Partners.

Good morning. First question is, obviously it sounds like you did a great job getting the Columbus and TimBar plants into your system. How much of the benefit do you think we have already seen? In other words, how much is left, do you think, as we look into the first half of 2017?

As far as benefit from the integration of the tons, we have significantly integrated the tons that we committed to. But, again, as we work through the quarter -- first quarter, there's obviously benefits that will continue to roll in. We are very pleased with the acquisition.

Tom, do you want to give some more color to that?

Yes, Chip, I would just add that in the case of Columbus, we don't have one month of Columbus in the numbers for the fourth quarter. So there is more to realize there. TimBar rolled in very nicely, and there is probably a little bit more there. But, for the most part, we got most of the benefit in the fourth quarter.

Okay. And just one quick follow-up. Can you talk a little bit about how the first part of January looked? Often, you give us a look as to how the first few days have gone. And then, it is interesting today being the last day of January, this at least historically tends to be the high water mark for industry inventories, looking at the industry data. And I suppose, as you look at your system, how loose or tight does the market feel today versus what you normally would expect to see in January?

Let me ask answer the last half of that question, and I am going to let Tom give you the first half of your question. I mean, for us, we are tight. We have to run hard. We have got these shutdowns that are coming up, facing right now for the first and second quarter. With the integration of these acquisitions, our inventories, as I stated, were basically at a two-year low. And so I would characterize the market as tight for us in particular. And so, again, it behooves us to continue to do what we do well and just run hard and run very effectively.

Tom, why don't you answer that first part of the question for the first 17 days?

Yes, Chip, I would say, coming out of a very strong fourth quarter, we had a very strong January as well. Organically, the legacy plants were up about 3% to date. So we are off to a very good start, and demand continues to be very good.

Great. Thank you.

Mark Wilde, Bank of Montreal.

Good morning. First, just kind of a detailed question for Bob. Bob, can you give us some sense of kind of what that maintenance cost was like in the fourth quarter? Just to help us bridge into the first quarter and the rest of the year.

Yes. Mark, it was just over $0.11 per share in the fourth quarter.

Okay. And then, a little bigger picture. I wonder if, Mark or Tom, what is your integration level right now once we have Columbus and TimBar fully in the saddle?

As we indicated on the October call and through some of the other public discussion we had in the fourth quarter, we expected to end the year and start this year at around 95% integration, and that was a cumulative effect of our organic growth and the acquisitions last year. And that is right where we are. We are right about that 95% level.

So, again, we are where we expected to be, and we have adjusted our business for that, and we are looking at how we go forward.

Okay. And I guess just along with that, Mark, can you give us some sense of what sort of the incremental debottlenecking opportunities might be across PCA system in terms of size, cost, timing, things like that?

Yes. If you think about it, we have raised the capital estimate for this year. There are some projects that we have already identified in the past that, as I have said before, working in our files. We have pulled those, and we are beginning to execute. These primarily work at the DeRidder Mill, and it involves both machines at DeRidder. But the work won't be done until the annual outages of 2018. But it fits in nicely with our growth platform and how we fully take advantage of the DeRidder Mill. And its capital, it is not any one big item. It is, as we've said before, the smaller amounts of $10 million, the $5 million, but it is basically enhancing both machines' capability to optimize the mill. We are doing some other work at the mill on energy. We have got another turbine generator that we had acquired along with the one that was installed up at I Falls, so we will see similar benefits on cost take-out over the course of the next 18 months at DeRidder. But that is a good example of where we are looking at taking care of some nice, high return capital with some tons that we can place into the system.

All right. That's helpful. Thanks.

Mark Connelly, CLSA.

Thank you. Mark, two things. There is a lot of light and heavy weight grades of containerboard where you don't really compete, and I'm curious if you see any of those grades as strategically attractive to PCA or whether you think that, as you continue to grow your footprint, as you talked about, you're going to stay sort of in the middle.

Well, if you look at our grade mix currently, we are participating in just about everything that is out in the marketplace with the exception of the ultra, ultra lightweights that were used in some very specialty cut applications. And I think we view that as just not a current opportunity.

Tom, you can add some color to that, but, again, I think this discussion with that over the last two years about the size of that market on that superlight weight.

Yes. I think, Mark, as Mark alluded to, we're not participating in that super ultra lightweight category, and there is a reason why, and that is because our customer demand doesn't really call for it. If it called for it, I suppose we would take a look at moving in those kind of directions. But I want you to keep in mind one thing that we have been talking about for a number of quarters now, and that is that we really are in the performance grades, and that is really what we focus on and maximizing performance for directly contributing to our customers' needs. And that is how we gear our mill system.

So we really do, in essence, participate in the great majority of everything, but it is on a performance basis.

And just one more question. It doesn't appear that trade protection has given white paper producers the boost that some people had looked for. Have you been surprised by the level of competitiveness in those markets, even with improved rate of decline that we saw in 2016, and are you expecting any better in 2017?

Well, Mark, the trade case did exactly what we thought it would do. It created a level playing field with some of the folks that we needed to address.

But, keep in mind, there has been competition over the last 35 years from all over the world that we will be looking at, cut size office paper, weak graphic type grades. We were dealing with world competition back in the 1980s and 1990s. But nothing has changed. It is just you have the Asian side of the supply chain now, but imports did drop significantly last year, and then they picked back up at the end of the year. But we expected that would happen. At the same time, we are pleased with where our volume is. We are pleased with our business, and so, again, the trade case has achieved exactly what we hoped it would achieve.

So you are not looking for much different in 2017, then?

No.

Okay. Perfect. Thank you.

Chris Manuel, Wells Fargo Securities.

Good morning, gentlemen, and congratulations on a very strong finish to the year. If I could come back to an earlier question, I know you said that organic volumes were up about 3% so far in January, but you ran up somewhere between 9% and 11%, depending how we wanted to think about the days in 4Q. Given that you still have that integration going forward of the TimBar and Columbus, I mean is that a reasonable rate for us to think about, at least the first three quarters of 2017 as you have the extra piece in there and then just continue the growth, or how we would think about that 9% to 11% on an organic basis, perhaps?

Yes, Chris, that is our plan. I mean, we have the funds that we can put through the system. Tom has got his plan for the year, and so you assume that demand is there and we continue to fulfill that demand. So it is not unreasonable to think that just what we achieved last year and what we are seeing this year. Again, it is demand driven, and we are pretty pleased with where we are, and we know we can take care of the business for the time Being. Tom, you want to provide us some more color?

Yes. Chris, the main reason I gave you the legacy of organic growth for January is that is what we have real visibility into right now. So -- and that is probably the most meaningful number. You can tack on, obviously, TimBar and Columbus to that number, and then you can get to the number that you can forecast going forward. So we wanted to emphasize the growth that is going on organically, and that should get represented across our entire system. And so you're probably looking at 10% to 11% as -- if you tack on the TimBar and Columbus on top of that 3% number I gave.

Okay. That's helpful. That is what I was looking for. As a follow-up question, from where you sit today, the balance sheet is in great shape. You are roughly 2 times levered . How do you think about a balance through the rest of the year? You gave us your capital plan, but I know you always look at dividends. But how do -- you are thinking about incremental opportunities in the box side? Are you thinking about maybe just the share repurchase here? How do you think about incremental opportunities from here?

I think you just said it all. We will remain opportunistic in all opportunities that we see, whether it is being mindful of paying down some debt, acquisitions that came along that were great opportunities, such as Columbus Packaging or TimBar, and an opportunity to acquire a mill and expand containerboard capacity. We purposely set this balance sheet up to have this flexibility to do what we require and continue delivering value to the shareholders, and we continue growing the value proposition.

Okay. Thank you. Good luck.

Philip Ng, Jefferies.

Good morning. Demand was obviously quite strong for you in the fourth quarter, as well as the industry, and January seems off to a good start. I just want to get your view on how you are thinking about box demand this year, and you are expecting a stronger demand backdrop in 2017. What are some of the key drivers? Are there any end markets that really stand out for you?

Tom, go ahead and put some color on that.

Well, I would say, Philip, we could kind of predict a quarter, given the indicators and how they start out, what goes on going forward is anybody's guess. However, if the administration does some of the things they talk about doing and with all our focus right here in the United States, that probably bodes quite well for PCA.

In terms of demand going forward and markets, I think there was some discussion about e-commerce on our last call and what it might mean to the fourth quarter. And I think you see those statistics that e-commerce did set records beyond what the expectation was for the fourth quarter. I think the entire industry was helped by that. We don't have a tremendous exposure to that area. Ours are more a third-party, but, nonetheless, that probably helped us as well, and I think the prospects going forward are quite good, and like you said we are off to an incredibly good start.

Okay. That is good color. Then, just looking at the December industry data, operating rates are 97% range, and Mark, I think you mentioned you are pretty tight, and obviously Pensacola -- I mean, it is anybody's guess how long it is going to be down. It is going to take another 0.5% of capacity out of the market. I'm just curious, are you seeing any change in behavior from order patterns from your customers? Are they kind of ratcheting orders and doing a little pre-buy just because we are going to head into a time where there is a lot of downtime being taken as well?

We talked about that in the fall. We didn't see any significant pre-buy. So I would characterize that as a no, and I think the market was tight. Again, we have to run full, as I said.

Tom, do you want to elaborate?

I would just say there are virtually no opportunities for pre-buy. The tons aren't available.

Okay. All right. That is helpful. And then, just one last one for me. You guys obviously baked into inflation sequentially in the first quarter combination of recycled fiber prices, energy, and stuff of that nature. Can you provide some color what the sequential year-over-year hit will be, and when we think about fiber collectively, just given your mix in virgin versus recycled, are you expecting a year-over-year headwind? Just because I think virgin prices at least comp pretty favorably in the first half. Thanks.

Let me just start that one, and then I will turn it over to Bob. He can walk you through a bridge between first quarter of last year and first quarter of this year to help you understand where the inflation is.

Obviously, recycled fiber is up somewhere 45% year over year. To remind everyone, we still remain the least impacted in total. We use about 20% OCC DLK combination. So we are impacted $0.20 on the dollar compared to everybody else. So there is an impact, but it is smaller -- much smaller compared to the rest of the industry.

With that, Bob, why don't you give some color in terms of some of the other line items inflation impact?

Yes. It is -- our input costs, certainly over last year's first quarter with what we were expecting and what we've been seeing at the latter part of 2016 and you will see it as we go into 2017. But taking the $0.12-plus per share over last year's first quarter on recycled, chemicals, energies, all those things that we are all reading about. And on top of that, we expect freight costs to be up a bit, and then we always have labor and benefits that go up every year. And so that will certainly be slightly higher than it was last year first quarter as well.

Okay. Great. Thanks for the color.

Deborah Jones, Deutsche Bank.

Hi, good morning. I just wanted to follow up then on Phil's question related to fiber. You did call out the $0.06 benefit, but also that you see prices were higher. So can you talk about really how you got the benefit on the wood fiber side, and then, specifically, if there was any kind of usage benefit or utilization that helped you and if that will continue?

Bob, why don't you go ahead?

Yes, Debbie, the fiber is )for the total company, it was $0.06. But when you look underneath that, certainly, recycled fiber for the packaging segment, primarily due to inflation, was $0.06 per share higher over last year's fourth quarter. It just happened to be offset by, we had good usage on the paper side and good usage in our virgin wood fiber as well on the packaging side.

We are also doing some things with fiber on the paper side relative to less recycled pulp at our Jackson Mill, which is saving us a lot of cost. So net net, we are $0.06 favorable, but when you look underneath, you see that it really was, in fact, the packaging segment.

Okay. Thanks. That's helpful. And then, Mark, my second question is on price mix. I think you said the $0.04 headwind in the quarter was actually below target in your prepared remarks. Can you just confirm what you meant by that? Because it was actually a pretty big improvement from the year-over-year delta in Q3 and just kind of how that is trending in the quarter.

Well, again, we talked on the third-quarter call in October about the price leakage that had occurred year over year through the year 2016. And so as we went into the fourth quarter, we continued to see the impact of the price decline that had occurred earlier in the year on a year-over-year benefit. Now, that was against, as we started raising prices, we saw the net benefit of price increase.

Bob, do you want to elaborate on that?

No.

So, really, it was a logging event and then the benefit of the price increase starting to roll in.

Anything else, Debbie?

No, that is good. I will turn it over. Thank you.

Mark Weintraub, Buckingham Research.

Thank you and congratulations on a very good year. And maybe just following up on that last one for clarity. I think you mentioned that, sequentially, that corrugated was a $0.05 benefit 3Q to 4Q, and then the containerboard separately -- domestic containerboard was a $0.05 benefit from 3Q to 4Q? Did I hear that right?

Corrugated as a segment. Again, net -- we saw the $0.05 benefit, but that was against some of the leakage that had occurred, and it finally netted itself out.

Okay. I'm sorry. I thought you -- and maybe I misheard, but had you said something about 3Q to 4Q, the sequential benefit?

Yes. On volume, Mark? Is that -- yes, it was $0.05 for corrugated and domestic containerboard. That was the benefit. And then export was flat.

Okay. So it is $0.05 -- and I apologize. But I thought I had heard you say that pricing was a benefit 3Q to 4Q by $0.05. Pricing and mix.

That is correct.

Okay. And that was for boxes and the small amount of board you were detailing.

Domestic containerboard, yes.

Okay. Thank you. And then, just on the -- perhaps a little bit more color on the demand in the fourth quarter. So how much would the organic growth have been in the fourth quarter? The 11.5% type of year-over-year box shipment improvement you saw?

Tom, why don't you walk him through that?

Mark, the organic growth in the fourth quarter would have been 3.2%. Okay? So again, as you take -- and you add on what TimBar and Columbus added to that, to that fourth quarter. And keep in mind, that the first quarter of 2017 is going to have four more days than the fourth quarter of 2016. So, on a per day basis, the number goes up a little bit in that fourth quarter, just because you have fewer days.

Okay. And that 3.2%, that was an average day?

Per day basis. Yes.

Great. And then, lastly, and I realized that exports are quite small for you, but what are you seeing in the export markets have been a number of price initiatives and the Europeans also now seeing price increases for March. Can you give us a little color on what you are seeing?

Yes. Tom, go ahead.

Yes, Mark, the export price -- export pricing is definitely moving up, and demand is quite good. South America is very good this year. So the demand trends, even in export, continues to be quite good.

Okay. Thank you.

George Staphos, Bank of America Merrill Lynch.

Hi, everyone and good morning. Thanks for the details. I want to take a step back and maybe go a little bit in a different direction. On the paper segment, the performance, at least versus our model, was excellent. You mentioned, Mark, operationally you did very well. Can you comment a little bit more on what some of the drivers were in that segment because the performance was certainly you had an easy comp versus last year but, nonetheless, was quite good.

Again, we are pleased. Volume itself, for office papers, was up slightly year over year. So volume was a very good story. But, also, all of the work we have done over the last three years has continued to be accretive. The turbine generator, we used that example last year. But we continue to work on the white paper mills' effectiveness week after week.

So throughout 2016, we had our technology organization doing what we do well, and that is helping the white paper mills continue to drive costs out and run more effectively. So the big contribution for the fourth quarter, as well as the full year, was the fact that volume is up slightly, but also that we were able to take significant costs out by actually all-time record setting up-time efficiencies at the white paper mills.

And with costs being taken now but not necessarily headcount reduction and all of that, it is just running better in operational excellence and all things that you normally do.

Right. I mean, interesting question. If you went back and looked three years ago, we actually had more people working in the white mills than we did three years ago. And, again, we are just running at world-class efficiencies, world-class uptime performance month after month. Last year, 2016, set an all-time performance record at the Jackson and I'Falls mills in terms of their uptime efficiencies.

Okay. So with that as kind of a jumping off point, if we go now to corrugated and containerboard and operations, when you are done with the next phase, let's call them, projects at DeRidder, and you said you would be done with that by the outage season in 2018, and recognizing you need to project some growth into the future for this, what do you think your vertical integration rate will be at that point on an annualized basis, and what next moves would you likely need to consider? Would they be -- would there still be more in the file book in terms of these types of products, or would you need to do something more substantive and perhaps more externally driven?

George, I think we are at a point now. Once you are at 95% integration and we are working on these projects to take care of our organic needs, we have opportunities, and we have said this fact that you can -- depending on the amount of capital you want to spend, you can add capacity. So it is capital versus a benefit type analysis. But, at the end of the day, we are fine for the time being. We are right back where we were in the 2012 period, looking at this type of high integration level and how we go forward. Obviously, over the next few years, we are going to have to make some different decisions on how we set the growth platform for a higher level. But we will talk about that when we are ready.

Understood. Appreciate the color there. Last thing and I will turn it over. Is there any way you could, perhaps, give us your views on what you think the administration's potential policies might mean for the business broadly, whether you think it would be more net positive or net challenge?

Tom, you mentioned perhaps that we could see some pickup domestically. I don't know if there was anything specifically that you were pointing to or more aspirational in terms of if we see GDP growth picking up, but if you could give us a bit of color there, that would be appreciated.

Thanks and good luck in the quarter, guys.

It is demand driven, and demand is tied to GDP pretty significantly once again. And so I would just say that, if GDP grows in any meaningful fashion, we will see box demand, box cut up move in that same trend line.

So your guess is as good as mine in terms of what actually happens. I think we are believing that we are better positioned in terms of we are still American-based manufacturing and supplying our customers here in the United States. So, in that regard, we will have to see wait and what Washington finally does.

It was more of a demand versus trade point of view you were making, correct?

Yes.

Thank you.

Anthony Pettinari, Citigroup.

Good morning. Following up on the CapEx guidance, with the new acquisitions, Bob, I was wondering what we should think of as PCA's normal maintenance CapEx. And then, just following up on George's question on debottlenecking at DeRidder, you said that work wouldn't be done until maintenance outage season in 2018. I was wondering if it was possible to put a finer point on that in terms of the quarter or even the tonnage estimate.

Let me answer that second part of your question, first, and then I will let Bob go back to the breakout. Because of the long lead items for a few pieces of capital equipment that are required, we will do this in two phases. We will do some of the work on this year's annual outage at DeRidder through the winter and spring period, and then we have to wait to fully capitalize on that for some of the equipment to be delivered at the end of this year into early next year to install some of the equipment and then fully take advantage of our plans. I don't want to call out the incremental capacity. All I will say is that it allows us to continue the growth trajectory that we have plans for for the very next two years.

Yes. Anthony, and in the first part of your question, what we have planned for 2017, the sort of nondiscretionary maintenance type items in our capital, it is about 50/50. It is about 50% is what we would call nondiscretionary types of capital.

Great. That is really helpful. And then, just switching gears. Pulp & Paper Week has indicated they will roll out a list price for recycled liner, I think, in March. In terms of how you engage with your customers, is that list price -- is it positive? Is it negative? Is it neutral? Or is it just a non-event? Any kind of general thoughts on that.

Just a quick statement, we have said before that it appeared as though recycled pricing had been used in the past as a rationale to take down kraft linerboard and medium. And, as we know, there is a significant difference, as Tom mentioned earlier, in terms of performance characteristics between recycled and kraft as they are essentially two very different products when it comes to performance.

So, in that regard, I think what has been talked about, it probably makes sense to have two different price points.

Tom, do you want to add anything?

No, I've got nothing else to add.

Anything else?

No. Great. That's helpful. I will turn it over.

Scott Gaffner, Barclays.

Thanks, good morning. A question, maybe, for Tom. I guess if you look at 4Q box shipments, obviously very strong both for PCA and for the industry. But, if you look at industrial production of nondurable goods, which shipments have tracked fairly closely recently, over the last few years, it was actually down in the fourth quarter. Is there -- Tom, you mentioned e-commerce. Anything else that you are seeing that would account for the stronger than nondurable goods industrial production shipment?

No, Scott, I don't think there is anything in particular. I mean, e-commerce, obviously, is enormous in the fourth quarter. It is by far the biggest quarter of the year. So that probably helped to offset a little bit of that.

But the other thing is that I get a lot of questions about, are our customers replenishing inventory and things like that. For now, for a number of years, our customers have maintained their inventories at very low numbers. So I don't see any replenishing of inventories either. So -- which is good news because that means this demand trend can continue on. And it is probably just a seasonal disconnect, would be my guess, on the nondurables side.

Okay. Fair enough. And, Mark, you mentioned -- obviously, the capital project over the next, call it 12 to 14 months, some debottlenecking, et cetera. But when you look further out, are there any significant investments you could make in the system that you have today without actually going out and adding through M&A or through any large projects? Is there anything else maybe at DeRidder or anywhere else in the systems to add capacity?

Well, again, without giving you any details, there is always capacity that could be increased. It just depends on how much capital we choose to spend, and then it becomes a decision on where is the best place to apply that capital. And so we have got some decisions to make as we go forward over the next two years. Again, but I will reiterate, it is the same place we were in 2012, evaluating our runway for containerboard supply. I look at it -- it is a high-class place to be.

Sure. Okay. Last one for me. Just you mentioned -- to an earlier question in the prepared remarks you had $0.05 of positive price sequentially into the fourth quarter. When you look at 2017 now, and now that you have got the pricing increase fully implemented, what are you thinking price versus inflationary, some of these inflationary pressures that you have? Do you have enough price to offset the inflation that you have already seen in the system going into 2017?

I am not going to answer that absolutely, but if you look at our performance historically, given our capital application and how we run the mills and how we run the box plants and go to market, in general, we have been able to keep up with inflation and/or do better than inflation with cost take-out and organic volume growth, acquisition contributions. And so that will continue to be our plan.

Okay. Thanks, Mark. Thanks, guys.

Brian Maguire, Goldman Sachs.

Good morning. Thanks for taking my question. Just wanted to dig into the 2017 outlook a little bit more. I appreciate all the color you gave. It sounds like from the $1.26 or so starting point in the first quarter, you are looking for maintenance to be sequential headwind throughout the year. Just wondering what kind of offsets you would have that would cause the EPS to go higher through the year? I know normally you get some seasonal pickup, but it sounds like you are going to be starting the year off from a pretty full volume run rate. Just trying to get a sense of what the other tailwinds would be in Q2 and Q3 as we go through the year.

I mean, obviously, containerboard volume and containerboard price are the big positives. Paper price positive year over year. And then, you would have to say that if, again, GDP continues to pull the demand, that supports the volume. And then, we would have to assume that we continue to do what we do well, and that is operate our mills very effectively to work on the cost side of the equation. And so that is pretty much the big pieces right there.

Do you think you would have the incremental tons to meet that better demand, given how well you ran in Q4 and it seems like the Q1 guide assumes a pretty good run rate, or do we have to wait more to 2018 when the DeRidder debottlenecks come online to get some more tons?

Yes. I mean, we are confident. We have got options. We have got mix changes within our very flexible manufacturing system. We have still got the exports and domestic volume that we continue to assess the value of it that we derive per ton sold. And so, again, we have got various options, and we are confident we can supply that organic need as we would anticipate into next year. So we are feeling pretty good about where we are.

Okay. Just a related question. Just wondered if there's any opportunities to -- given the tightness in the market and the strong demand you are seeing, any opportunities to shorten or push out the maintenance headcounts at DeRidder? I know those have to be on a pretty consistent timeline, but just given the tightness in the market and with the Pensacola Mill outage, just wondering if there's -- do you see any opportunities to maybe defer some maintenance and take advantage of the market?

We are pretty well set on the maintenance plans. Again, when you look year to year, what you have to do with its big integrated mills, the plans pretty well get set, and you have a basic high confidence of inspection requirements. So, in that regard, we don't see any changes to the plans coming up.

Okay. Thanks very much.

(Operator Instructions) Gail Glazerman, Roe Equity Research.

Hi, good morning. I know OCC is not a huge expense for you, but I'm just wondering, can you give some insights into what you think has been driving OCC, whether it is China or there has been some talk of a domestic collection issue, and are you seeing any signs of stabilization?

Again, just -- you read everything we read in the indices in terms of RISI information. So, obviously, China got back big into the marketplace last year. And then, demand. Again, just domestic containerboard activity in the mills and the utilization here domestically has caused the uptick in demand. So I think, again, it is demand driven here in the United States, and then with China picking up their own requirements, Tom, do you want to add some color to that?

I would just add, Gail, that we have been talking for quite some time that collection rates are at very high numbers. And then, of course, we had a little decline in collection rates, and some of that is related to the e-commerce issue we just talked about where boxes are going to consumers' homes, and if their municipality doesn't collect, they choose not to recycle, some of those boxes end up in landfills as opposed to going to recyclers.

Also, the price has ticked down to a point where some of the municipalities chose to get out of the collection business.

So you are finding that there is a bottom to this thing, which makes good sense and then, of course, coupled with China, who was out of the OCC market for quite some time with very large inventories, let their inventories run down to almost nothing. And so they are very active back in the market and, quite frankly, can't even get everything they need. So going forward, we look at OCC as being a headwind, and I think the price will continue to move up.

Okay. You didn't call it out, so I am assuming it wasn't an issue, but there have been a few headlines about some storm activity around Valdosta. Any issues to impact the quarter or with supply moving forward?

No, we have not had any issues with the Valdosta Mill regarding any storm outage impacts and/or wood availability or pricing impact.

Okay. And just on -- and, obviously, you are full up in at this point. Absorbing TimBar and Columbus are probably the priorities. But can you talk a little bit about the M&A landscape, particularly maybe on the converting side? Just as critical mass of kind of integration continues to gain, are you seeing any kind of more or fewer opportunities out there? I mean, at this point, are the last remaining independents pretty resolute or maybe thinking more and more about getting out, just given how many of their competitors the independent side have?

Tom, why don't you add some color to that?

Yes. I would say that we have talked before that, as the independent market continues to shrink quite dramatically, that the opportunities, of course, in sheer numbers are less, but there are still some quality opportunities out there. And those that are interested and those that we have relationships with, et cetera, we are going to take a good hard look at.

So we will still be active in that M&A arena, and we will acquire those that make good sense and fit the criteria that we have laid out before.

Okay. Thank you.

David Coleman, Argus Research.

With regard to your mention of 2% organic growth, I was wondering if you could give some color on a few of your largest top-line growth drivers?

We don't get into details of our customer base, and that is proprietary information. (multiple speakers)

Okay. You did mention --

(multiple speakers) Also, you talked about the amount that the organic is actually 3%.

Okay. You did mention, though, that you don't have a tremendous exposure to the online retail sales, but what is your definition of a tremendous exposure?

Well, again, David, we are not going to get into those kind of details, but I did say that our exposure is more in what I call third-party as opposed to what you might consider to be the traditional e-commerce providers. So it is that exposure, but it is not in some of your more traditional markets. And I will leave it at that.

Okay. Just to clarify, so the majority of your products are not used in sending products to the end-user.

That would be fair to say.

Okay. Thank you.

We have time for one more question, operator.

Mark Wilde, Bank of Montreal.

Just a couple of small ones. One for Bob, one for Tom. Bob, can you give us a sense of what your cash tax rate is likely to be in 2017?

It should be just above -- I think around 34% -- 34%, 35% somewhere in there, Mark.

All right. So pretty close to the reported rate, then?

Yes.

Okay. All right. And then, Tom, just to be real clear on sort of how pricing rolls through, would you assume if we look at the second quarter, that there will be any sort of quarter to quarter carryover benefit from price, or will you get most of price early in the first quarter so that there is not really much quarter to quarter shift as we go into second?

Mark, as we mentioned, the best we can indicate that the vast majority of the increase goes in on the first quarter. Okay? That said, we do have some contracts that roll over on a quarterly basis or a midyear basis. So there is a little bit of bleed over.

Okay. That's fair. Good luck in the first quarter and through the year, guys.

Thanks, Mark. Appreciate it. And, with that, operator, we are out of time. Appreciate everybody taking the time to be with us today and look forward to talking with you after the first-quarter results are in for the April call.

Have a nice day. Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you would please disconnect all lines.