Packaging Corporation of America (PKG) Q1 2015 Earnings Report, Transcript and Summary

Thank you for joining Packaging Corporation of America's First Quarter 2015 Earnings Result Conference Call. Your host today will be Mark Kowlzan, Chief Executive Officer of PCA. Upon conclusion of his narrative, there will be a Q&A session. I will now turn the conference call over to Mr. Kowlzan. And please proceed when you are ready. Mark W. Kowlzan - Chief Executive Officer & Director: Good morning, and thank you for participating in Packaging Corporation of America's first quarter 2015 earnings release conference call. I'm Mark Kowlzan, CEO of PCA. With me on the call today are Paul Stecko, our Chairman; Tom Hassfurther, Executive Vice President who runs our Packaging business; Judy Lassa, Senior Vice President who runs our White Papers business; and Rick West, our Chief Financial Officer. I'll begin the call with an overview of our first quarter results, and then I'll turn the call over to Tom, Judy, and Rick, who'll provide more details. I'll then wrap things up and then we'll be glad to take any questions. Yesterday, we reported first quarter net income of $91 million or $0.92 per share compared to last year's first quarter net income of $90 million or $0.92 per share. First quarter net income included charges for Boise integration and DeRidder mill restructuring of $9 million or $0.09 per share. Excluding these special items, net income was $100 million or $1.01 per share compared to last year's net income of $106 million or $1.08 per share. Net sales were $1.4 billion in both first quarter of 2015 and 2014. Excluding special items, the $0.07 per share reduction in first quarter 2015 earnings compared to the first quarter of 2014 was driven by increased annual mill outage downtime in costs for $0.08, lower white paper prices and changes in mix $0.05, lower export containerboard prices $0.02, and higher cost for wood $0.04, medical $0.04, labor and benefits $0.04 and depreciation $0.02. These items were partially offset by increased volumes for $0.09 and lower costs for energy $0.06, chemicals $0.02, and purchased fiber $0.02, and the state tax credit related to the investments at the DeRidder mill are $0.03. Lower earnings compared to PCA's guidance of $1.07 to $1.10 per share for the first quarter was the result of extreme weather conditions for $0.03, additional downtime to complete the DeRidder annual outage for $0.03 and lower prices from the retroactive price decrease by trade publications and mixed changes in white papers for $0.03. Extreme weather conditions resulted in higher mill cost and also lower corrugated product shipments with downtime at 20 of our corrugated products plants, including 12 plants with downtime of more than two days during the quarter. The DeRidder annual mill outage took about six days longer to complete than we expected. The additional downtime was the result of vendor design errors, which required equipment to be modified after it was received. Looking at more details of our operations, packaging EBITDA excluding special items was $222 million and net sales were $1,099 million compared to last year's packaging results, excluding special items of $244 million and net sales of $1,097 million. The $22 million reduction in EBITDA was the result of this year's extended annual outage at the DeRidder mill, which did not have an annual outage in 2014 as well as higher wood, medical, labor and benefits and freight costs and lower export containerboard prices. These items were partially offset by corrugated products volume growth and benefits from the DeRidder 3 machine converted. Containerboard production in the first quarter was 882,000 tons, up 61,000 tons compared to last year's first quarter, driven by tons produced on the DeRidder No. 3 machine. We ended the quarter with our containerboard inventory down 3,000 tons from year-end levels. This was our first annual outage at DeRidder since acquiring Boise in October of 2013. The outage was extensive including major projects involving the turbine generator, pulp mill, recovery boiler, and paper machines. The outage is planned for 16 days due to the length of the time required for pulp mill work, but actually required six additional days because of the time required to resolve issues involving incorrectly manufactured equipment for the D1 machine that I mentioned earlier. The D3 machine ran well during the quarter at about 80% of capacity. This rate will sustain our current demand and in September, we'll be installing some additional dryers, which will give us the capability to run at 100% of capacity on both linerboard and medium grades. Current efforts on D1 involve continued product development and cost optimization. The No. 1 paper machine at our Counce, Tennessee linerboard mill was also down five days in March for an annual outage. In early April, we completed the Counce mill outage with the No. 2 machine down for five days. Other second quarter planned outages include five day outages at both our Filer City, Michigan and Tomahawk, Wisconsin medium mills. Looking at changes in mill costs, the most significant increase was wood with costs up compared to both the first quarter of 2014 and also fourth quarter driven by weather conditions. Our Tomahawk, Wisconsin and Filer City, Michigan wood costs are higher primarily as a result of extremely wet weather during the second half of 2014 that did not allow us to significantly build our winter wood inventories. Wet weather at our Valdosta, Georgia mill and four weeks of snow, ice and rain, at our Counce, Tennessee mill in the first quarter, limited harvesting and drove up wood costs. Last week, there were record setting rainfalls in the south and the 90-day forecast caused for wetter than normal rainfall which could continue to impact harvesting and keep wood prices higher. At this time, we do not see wood costs coming down from the first quarter levels. We expect any improvement in wood costs at our Northern mills to be offset by higher wood cost at our Southern mills unless weather conditions improve significantly. I'll now turn it over to Tom, who will provide more details on PCA's containerboard and corrugated packaging sales and demand.

Thanks, Mark. Shipments for the combined PCA and Boise box plants were up 4.4% with one less work day compared to the first quarter of last year and total shipments were up 2.7%. Price and mix was down $0.03 per share, which was comprised of $0.02 per share in export linerboard and $0.01 per share for domestic, medium, and corrugated products mix taken together. Our outside sales for containerboard were up about 15,000 tons compared to last year's first quarter with domestic containerboard sales down 4,000 tons and exports up 19,000 tons. I will now turn it over to Judy Lassa, who will discuss white papers.

Thank you, Tom. Paper segment EBITDA in the first quarter of 2015 increased to $49 million on sales of $297 million compared to first quarter 2014 EBITDA of $40 million in sales of $309 million. Our office paper shipment, which represent about 70% of our volume were up about 400 tons compared to last year's first quarter. And printing and converting and pressure-sensitive shipments were down 5,500 tons compared to last year. Prices were down compared to last year's first quarter as a result of price changes by industry publications, which were retroactive to January 1 and also a less rich mix, which is driven by the timing of customer orders. Despite lower price and changes in mix, our earnings and margins improved as we benefited from operational improvements in synergy realization in our white paper mill. Annual maintenance outages are planned in June at our International Falls, Minnesota mill for nine days and the No. 3 machine for seven days. With these outages, we expect lower mill production, higher mill cost, and lower sales volumes in the second quarter compared to the first quarter. Also, on April 14, at our Jackson, Alabama mill, a severe thunderstorm caused a power failure and total mill outage, resulting in significant damage to the steam turbine drive for the No. 1 paper machine. This machine produces about 325 tons per day of specialty office papers, including colors, and is expected to be down about two weeks. The total cost of the outage including repairs, production losses and additional operating costs will be covered under our property and business interruption insurance subject to a $3 million deductible, or $0.02 per share. I will now turn it over to Rick West. Richard B. West - Chief Financial Officer & Senior Vice President: Thank you, Judy. Looking at other costs, medical costs were up $0.04 per share over last year's unusually low first quarter costs, and labor and benefit costs were up $0.04 per share, primarily from annual wage increases and higher pension expense. Energy costs were lower by $0.06 per share due to both lower purchased fuel prices and reduced consumption. And chemical costs were down by $0.02 per share. Moving to first quarter, cash generation and uses. Cash generated from operations was $108 million, including a $4 million interest rebate payment on a portion of our bank debt, reducing first quarter interest expense. No additional rebate payments are expected until the first quarter of 2016. Uses of cash included capital expenditures of $56 million, common stock dividends of $39 million, income tax payments of $10 million, share repurchases of $8 million, and a scheduled term loan payment of $2 million. We ended the quarter with $126 million in cash on hand. Also in February, we announced an increase in PCA's common stock dividend from an annual payout of $1.60 per share to $2.20 per share, a 38% increase effective with the April 15 dividend payment. Finally, we do not have anything new to report on MLPs, except that the IRS lifted the pause on issuing private letter rulings and we are awaiting their further actions. I'll now turn it back over to Mark. Mark W. Kowlzan - Chief Executive Officer & Director: Thank you, Rick. Looking ahead to the second quarter, we expect earnings improvement from a full quarter of operations at the DeRidder mill, which will increase containerboard production and lower mill costs. We also expect seasonally higher containerboard and corrugated products shipment, and some weather related cost improvements. These items taken together are expected to improve earnings by about $0.11 per share. We also expect lower wage related benefit cost of about $0.02 per share. Cost from annual mill maintenance outages, including amortization of repair cost will be $0.01 per share higher than the first quarter. We also expect a higher tax rate of $0.01 per share, higher depreciation expense of $0.01 per share and the insurance deductible from the Jackson turbine drive failure on No. 1 machine of $0.02 per share. Finally, we will not receive the earnings benefits from state tax credits and the interest rebate in the second quarter, which together totaled $0.06 per share. Considering these items, we currently expect second quarter earnings of $1.03 per share. To put the $1.03 per share in perspective, I think it might be helpful to bridge the last year second quarter earnings of $1.16 per share. Based on current prices and expected changes in mix, earnings are expected to be $0.16 per share lower as follows; $0.09 per share in white papers price and mix, $0.03 per share in export linerboard prices, and $0.04 per share for medium price and corrugated products mix. Costs are expected to be $0.10 per share higher in total for wood, freight, labor and benefits and medical. In addition, annual outage costs are expected to be $0.04 higher, and the cost for our insurance deductible for the Jackson turbine drive is expected to be $0.02 per share. Taken together, these items lower earnings by $0.32 per share. Partially offsetting these items are projected higher volume of $0.09 per share, which includes additional production from the D3 machine at DeRidder, and lower cost of $0.10 per share for chemicals, energy, recycled fiber, and other cost items, or a total benefit from these items of $0.19 per share. With that, we'll be happy to entertain any questions, but I must remind you that some of the statements we've made on the call constitute forward-looking statements. Statements are based on current estimates, expectations and projections of the company and involve inherent risks and uncertainties, including the direction of the economy and those identified as Risk Factors in our Annual Report on Form 10-K on file with the SEC. Actual results could differ materially from those expressed in these forward-looking statements. With that, operator, I'd like to open the call for questions, please. Go ahead with the first question, please.

Our first question comes from Chip Dillon from Vertical Research.

Good morning. Mark W. Kowlzan - Chief Executive Officer & Director: Good morning, Chip.

First question is on – kind of shifting gears a little bit, could you just update us where we are in the process for the uncoated free sheet duties that I think you guys are involved in a petition with the Department of Commerce and my understanding is that there, the next, I guess, date is in June, but could you just update us on that? And it seems like that the preliminary determination from the ITC was, if I read it correctly, was pretty prohibitive in terms of hundreds of percent of duties they'd have to post if they can, if certain people kept sending white paper into the U.S.? Mark W. Kowlzan - Chief Executive Officer & Director: Yeah. I'm going to let Kent answer that one. Kent A. Pflederer - Secretary, Senior Vice President & General Counsel: Yes. Hi, this is Kent Pflederer, General Counsel of the company. We received a favorable preliminary ruling from the ITC in March in the case. The case is pending through Commerce right now against the producers in the five countries. Commerce is expected to make preliminary duty determinations in June, that's about all we're going to say about it at this point.

Okay. Got you. And then, shifting gears – looking at DeRidder, obviously, this was the first full quarter that I believe the D3 conversion had been up and running and could you just talk a little bit about whether you are satisfied with the design of this reconfigured machine and what you feel about the progresses made so far? Mark W. Kowlzan - Chief Executive Officer & Director: Speaking of where we are, I want to remind everyone that when we originally conceived the conversion, the machine was intended originally to produce primarily medium. Early on we recognized the opportunities that we could actually produce linerboard and take advantage of the pulp that was available. So we shifted gears into the end of last year and to the first part of this year with lot of grade development and fine tuning the machine. So, quite honestly we're very pleased. The machine is primarily producing about 70% of its production at linerboard, but again we've learned a lot and we've achieved a lot. We've been working on the cost, but again it's machine that can produce quite a variety of grades from the light weight medium and liner and take advantage of the pulp mill. Paul, do you want to expand on it?

Yeah, the only thing I'd add to that, Chip and Mark hit it, but I'll just amplify it. Most of these new spring conversions are somewhat limited, if they could only run pretty light weight grade mix, and with the things we did on the machine, we were figuring originally we'd probably run 70% medium, 30% liner. But some of the things have turned out better than we anticipated, a lot better, which is a testament through our technology and our people and we can make higher weight grades than we originally thought we could. And with the fact that the open market price of medium is now $70 over the liner and we can move up in higher basis weights, that gave us the opportunity in our system to make a lot more liner than we originally conceived. Now that's the good news. The bad news is, it takes some time, there are harder grades to develop on the machine, but we're well along on that development. And as Mark said, we're making well over half of our production now, in medium – in linerboard and that's going to pay dividends long term. So, that's one of the reasons that we're not quite up the capacity. We need a little more drying because of the heavier weight grade mix and during the annual outage, not annual outage, during a short outage we're going to take in September, we're going to put in four more dryer cans, which is at a minimal cost and we think we'll be at 100% when we do that on a much heavier grade mix.

Okay. Got you. That's helpful. And just as a quick follow-up to that. I know that when you all did the D3, I believe we were talking about $115 million, $120 million project that was going to create around $60 million in EBITDA on an annualized basis. And it sounds to me you still see yourselves getting there. I don't want to put words in your mouth, but it's more like late in the year after the driers go in. And so when we think about the second quarter, with the $1.03, what kind of run rate would you say the project would achieve in the second quarter versus that $60 million target? Mark W. Kowlzan - Chief Executive Officer & Director: Without getting specific, we did a lot of work in the first quarter and also with the fact that March was truly an annual shutdown at the mill, which skews all of your input costs, and so even though D3 ran during the month, it wouldn't have been a normal comparison in terms of cost per ton produced. But again, we've been able to achieve a number of successes with the chemistry that would qualify to hit the target. Capital, we're probably going to be right at that $120 million all in. And as we said, we expected the $0.36 per share contribution. As time goes on, we fully expect to see that, again part of this year, the first quarter, we have that contribution that was impacted by the March annual outage. So we're more backend loaded, but what Paul just said and what I said about the success of the machine, we expect it to be there.

Yeah. Chip, just hang on – this is Paul. The only thing I'd add, the way the accounting system works here, we don't split the cost of No. 1 machine and No. 3 machine. We basically measure mill profitability and then we estimate what we think the costs are in both machines. And so it's not an exact science at this point. But I would say this, when you bring a machine, when you ramp up, you do two things. You get the machine up total capacity. And once you do that and at the same time, you try to work to optimize cost, because as you learn, you build in a lot of conservatism, the run on a machine with regard to chemicals and things of that nature. So you've got to do two things: you got to get up to speed and you got to optimize the costs. And we've complicated that a little bit by going to a more complex mix, but that's going to pay long-term dividends. And then the other thing you have to – we're running about 800 tons out of 1,000 tons, but when you get up to 1,000 tons, that brings your costs down a lot too, because those last 200 tons cover all your fixed costs, covers all your direct costs, they've already been covered. So you're going to get a nice bump on that. But our best estimate at this point is that by the end of the second quarter, we'll have a full quarter operation of that machine. We said originally this machine could make $0.09 a share when it was up to speed per quarter. So that's 36% a year. I think by the end of the second quarter, and this is a guess on our part, we think we'll be about halfway there. And that's the best way we can answer the question.

That's very helpful.

When we get up to speed and the new grade mix, I think we got some upside potential to those original numbers, but that remains to be seen. Mark W. Kowlzan - Chief Executive Officer & Director: And Chip, just adding to that, and I commented on the first quarter earnings call, I believe the DeRidder No. 3 machine is, to our knowledge, the only converted newsprint machine producing virgin linerboard grades and so we are quite pleased with that. But also knowing what we know about the cost at our other legacy mills, we are very pleased with where we are in the total input cost on wetting chemicals and energy conversion costs on machine now that we've come through this first quarter. So, again, with the shutdown behind us and as the year rolls on, we feel very confident with where we are with the machine.

And we've learned a lot. I mean, this has been a tough startup, it's a lot of new technology for us, and we've learned a lot and we think we'll apply that going forward.

Okay. Thank you. Mark W. Kowlzan - Chief Executive Officer & Director: Next question please?

Our next question is from Mark Weintraub from Buckingham Research.

Thank you. I appreciate that color on what's going on at DeRidder, that's very helpful and better understanding. And just two quick follow-ups on that. Will hopefully most of that $0.36 be achievable by 2016 with some of the additional work you are doing at the end of this year, or might it take even a little bit longer than that to get to those targets? Mark W. Kowlzan - Chief Executive Officer & Director: Yeah, we're very confident again with what was accomplished in the – all of the chemistry fine-tuning. Now that the mill is back running and we're coming through getting the mill lined up, we feel comfortable that that's achievable through the course of the year.

And Mark, just to amplify on that, as Mark said earlier, we thought we'd run primarily medium, 23-pound, and then when we got into it, we were amazed at how high we could get the basis weight. That's why we didn't put in those extra driers. There is spots for four more driers in the machine where there was an old breaker stack we removed. But our theory has been, don't spend the money unless you think you have to. We didn't think we have to at the beginning, but we didn't realize that we'd have this opportunity on heavy weight liner either. So when we popped those four driers in, in September, we're going to feel pretty good about getting where we need to get by the end of the year for certain.

Okay. That's very helpful. So presumably, when you say you are at the end of the second quarter, you'll be at halfway, that means during the second quarter, you are at that level or lower so we have a lot more yet to come once all this is put in place.

Correct.

Okay. And then if we were to try and assess Boise synergies, second quarter versus the year ago, could you give us a sense of how much benefit you are seeing there and what the progression or the trajectory on the Boise synergies has been as maybe there's – has there been anything that's made that to come in a little bit more slowly or a bit more quickly than you might have been thinking coming into this year? Mark W. Kowlzan - Chief Executive Officer & Director: Rick, why don't you go ahead and address that? Richard B. West - Chief Financial Officer & Senior Vice President: Last year, Mark, there was a lot of synergies upfront that we were able to take, probably in the first three months, with the corporate overhead, that was in place. We also were able to significantly improve the earnings in the white papers business, absent price dramatically in the last year with all of the improvements made at the mills, et cetera. In the Boise converting side of the business, Tom and his team was able to take certain actions across all of the plants. It's a little bit more of a in-depth longer process to optimizing the Boise converting plants than in the paper mills, which are more evident upfront. But to put the numbers somewhat in perspective, and I think this is what we want to get across the synergies that we achieved last year and that what we are achieving now are offsetting the inflation and the price difference year-over-year. We gave the bridge from the first quarter year-over-year and the second quarter year-over-year. But if you look at what we made in the first half of last year, it was a total of $2.24 per share. If you look at what we have in price differences and mix in the first quarter and then add to that what we had in the bridge for the second quarter for how much earnings has dropped as a result of price and mix, that's $0.23 per share. Then compare to the first half of last year, annual outage costs, which would include having DeRidder this year and no outage last year for the entire year, was a $0.12 hit compared to the first half of last year. So combining price and annual outages alone before any synergies and we did have synergies in the first half of last year, so I said earlier what we achieved upfront, we would be at $1.89 per share of our earnings. So what we've been able to achieve were the synergies that we are continuing to get and what we got last year is to offset that $1.89 to come back to our guidance of $2.04 with synergies being partially offset by inflation. And we said inflation – for the year, we said that – we expect that to be 1% or 2% of cost of sale. So, the synergies are coming through, but in the first half of the year it's the fact that the outages were more with DeRidder and we've had the significant impact of price and mix.

And Mark, this is Paul. Just to add to that. What we said is that we achieved 100 tons in the first year and we expected a total of 200 tons, so that's another 100 tons to come. But we said we'd get that over the next two years, because they were not quick hits like head count reduction where we got basically $30 million, $35 million in corporate overhead up right away. A good example of that is we have been working at DeRidder to increase pulp-making capacity, because that's a pulp limited mill and it's taken us a year, but we feel we're about to the point where we think we can produce another 300 tons of pulp a day. I have a pulp mill, which again is the synergy that's baked into our numbers. The complicating thing, and I don't want to make this too complicated, is how do you evaluate what's the value of 300 tons. Well, today the value of 300 tons comes from the fact that you could buy less OCC, and you eliminate your highest OCC, you also can make more linerboard because you got more virgin fiber. So right now, the price between liner and medium, open market, is about $50 to $70, that's a synergy, but the real big bang for the synergy is if you improve the productivity at DeRidder over the next couple of years, and increase its capacity and sell those tons, you're talking $250 a ton or so in synergies. So some of the synergy numbers you get, you get a bump upfront but then you get a bigger bump later when you get a better use for what you've created. So it's a fairly complex thing. Mark W. Kowlzan - Chief Executive Officer & Director: Another example that capital contribution is the IFalls turbine generator that will come online, again, that's a distinct capital project that we identified well over a year ago, that will be coming up in September, but that again is a significant example.

Helpful. And so and recognizing it's very complicated, if we were to think of where we are on that $200 million targeted run rate, say, in the first half of 2015, are we closer to the $120 million range now, or we might be closer to the $160 million range, just trying to see the pace of how we go from that $100 million to $200 million? Mark W. Kowlzan - Chief Executive Officer & Director: Anything I'd say would be speculative of – let's say – it's back-end loaded. We're confident that the numbers are there. So as the year goes on, there will be falling to the point bottom line, but again, with all the shutdown activity and then with distinct project related contributions, it's really difficult to try to quantify that.

And, Mark, when you got machine down, when you're down at DeRidder for basically 22 days in a month, you don't get any synergies when you are down. So we need to get up, we need to get our system up and running before we could put together our estimates that are what you are talking about. So we're going to have to wait a while before we do that, but we'll certainly talk about it on our next earnings call. We'll have it hopefully a full quarter of steady operations on the containerboard side of the business behind us. Mark W. Kowlzan - Chief Executive Officer & Director: And also when we said, back at the end of last year that by the end of 2016, we expect to achieve the extra 100 ton. Another item, the end of this year, we'll be taking Jackson Mill down, another capital project that we have slated into the capital this year was the rebuild of the recovery boiler that was badly needed. So, that's two examples between the turbine at IFalls and the rebuild of the recovery boiler that will contribute nicely to these efficiencies.

Thanks very much. Mark W. Kowlzan - Chief Executive Officer & Director: Next question. Next question, please.

Next, we have Mark Wilde from Bank of Montreal.

Judy, I wondered if you can talk a little bit about sort of interplay of price and mix, because you identified both of them, but you do it together and I wondered if you could particularly talk about sort of the mix side of things and the impact of that and also the impact of foreign exchange right now as you see it in the white paper business.

And are you talking first quarter?

Yes. First quarter, if there is going to be – if you foresee any changes as we move into the second quarter?

Certainly. If you look at the price and mix piece for first quarter, again, the cut size index is down about $10 per ton, which we have a lot of index business which we've mentioned before. And then, within that office business, we had a pretty big swing in commodity versus premium mix. So that's a big piece of it right there. The P&C, our printing and converting index is also down by about $20 and offset that has impacted us. Pulp price is down as well and this will impact both quarters, it's about $50 domestically down in RISI (35:44) and about $70 to China. And then, if you look at our entire business mix, office is about flat in first quarter, we are down about 5,500 tons, like we said, in P&C and pressure sensitive, not too much in P&C. The pressure sensitive is driven heavily by the fact that last year we were still shipping products out of inventory from IFalls to our customer. I mean, also we've had some impact of internationally of the port slowdown that we're still working through. If you look at Q2 it's actually more of the same. Again, the cut-size index is dropping about $25 per ton. We expect that we still have a higher commodity mix within that business. Offset is going to be down, year-over-year $20 a ton. We also have a mixed within our printing and converting business such that we have more offset than envelope business and so that it takes a little bit of a price away as well. And the pressure sensitive side of things in Q2. We have couple of new contracts that are going to impact us in Q2, which are down in price, and also it's been very price competitive in South America. Again, pulp is going to hit us with the $50 domestically and $10 to China, and again overall business mix is going to be more printing and converting, we basically use that as a flex grade to balance our asset, less pressure sensitive, we do have some more comp against last year as far as selling out of inventory on the IFalls grade, and then we have a little bit more pulp.

Okay. And, Judy, can you just expand a little bit on what you just said about Latin America? Is that a currency related issue is you said?

Yeah. I did. like I said, our currency as well is pretty competitive, I mean, it's one of the higher margin areas of business and there have been a lot of, again, because of currency a lot of exposure from Europe in there.

Okay. All right. And then Tom Hassfurther, any thoughts on sort of how you're seeing kind of converting volumes across the country relative to expectations both from the first quarter and as you move into the second quarter?

Mark, I can just really comment on what PCA has done. And....

Yeah. It's all I'm asking.

Yeah. Coming out of the first quarter, of course, our numbers were good in spite of the fact we were very much impacted by weather especially in the South and the North East where we have a large footprint. Looking at just April and I gave you an indication of what's happening so far in April. For the first time shipping days, PCA legacy box plants, bookings are up about 7.5%, shipments are up about 4.2%. Now, keep in mind, on the shipment side, Good Friday did fall early in April and we did have a number of plants working on Good Friday. So the shipment number maybe just a touch high. Now, of course, the Boise box plant represents about 20% of our shipment and they're not in our numbers yet. Beginning in May we'll have those fully converted to the PCA systems. So, we'll have daily data starting in May and we'll be able to update you much better starting in July of this year. But overall, we're off to a good start. And so, I think, demand remains very steady.

And can you give us any sense Tom on what you're seeing in terms of just export conditions, say where we're today versus where we were during the first quarter?

Well, I think exports still remains good. I mean, it remained strong. In terms of our opportunities, we do have some currency headwinds of course and seeing some pricing variances around the world but RISI (39:33) just announced Europe was up 25%, that's a positive.

Okay. Your volume is mainly in export, mainly SKUs to Latin America, is that right?

It's Latin America, South America primarily, yeah.

Okay. All right. Last question I had is just wood costs. I just wonder in the Southern U.S., is there any impact from these pellet plants, which have been opening up? Is that, in addition to weather, incrementally putting any pressure on fiber costs? Mark W. Kowlzan - Chief Executive Officer & Director: Yeah, Mark. We've seen definitely the trend over the last couple of years that the pellet plants, particularly in southeast have been a competitor within the wood basket, so you combine that with wet weather and the overall harvest conditions. So, it definitely has put pressure on the ability to distribute that wood out of those wood baskets into the traditional mill needs.

Okay. Very good. I'll turn it over. Thanks. Mark W. Kowlzan - Chief Executive Officer & Director: Next question please.

Our next question is from Anthony Pettinari from Citigroup – excuse me, our next question is from George Staphos from Bank of America Merrill Lynch. George L. Staphos - Bank of America/Merrill Lynch: Hi, everyone. Good morning. Thanks for all the details. I guess, I want to try one more crack at the bridge-type question specific to the packaging segment to the extent that you can answer, any of the details will be appreciated. So when we look at the $20 million reduction year-on-year in EBITDA, would it be safe to say that roughly half of that was the variance in maintenance outage expense versus first quarter 2014, the rest was the price mix issues that you enumerated and that the various cost factors, labor cost, wood cost, energy and so on were more or less a wash, just trying to put in bigger buckets if that's possible. And, you didn't get much synergy because of the fact that you were down so much in the first quarter. Would that be a fair summary of the packaging segment? Richard B. West - Chief Financial Officer & Senior Vice President: Yes, it would, Mark (sic) [George]. If you look at last year, we had about $0.07 per share in annual outage costs and that was all in the paper mills and then we had $0.08 per share more this year, which would equate back to about $12 million. Then you got the second item would be, what you said with export containerboard prices, plus inflation, and I would point out especially in our packaging side and legacy, we have an unusually low medical cost in first quarter last year and just in that side alone, we were up about $6 million in medical. So you're correct in what you've said about the drop and that also applies to going from 4Q to 1Q, I think you had read where the drop was. We made about $250 million in 4Q and you take off the annual outage cost from that, it was an incremental $12 million off of that. So that's the key bucket and you're correct in your assumptions.

And George, this is Paul, a little bit of technicolor around that number. We did not have an outage at DeRidder last year. We had our huge outage this year, fixed a lot of things that needed fixed for a long time. And when we look at our – in total maintenance cost, outage cost year-over-year, including amortization, loss production etcetera, we're going to be up year-over-year, because the addition of the Valdosta outage - Richard B. West - Chief Financial Officer & Senior Vice President: DeRidder outage.

Excuse me, because of the DeRidder outage, we're going to be up $0.11 year-over-year and of that $0.11, DeRidder is $0.13 and they hit all in their first half of the year. George L. Staphos - Bank of America/Merrill Lynch: Okay. So, Paul thanks for that. Rick thanks for that. So, you segue to my next question which is as we try to again bridge given that there are number of moving pieces, I remember that last year if our maintenance expense was roughly $0.48. So, we're running then, if I take that $0.11 closer to $0.59, $0.60 year-on-year would you confirm that and then assuming normal operations, I know there is no way to define normal, but we'll give it a shot. Is there a way to take a crack at what the maintenance expense might look like in 2016 versus 2015? Richard B. West - Chief Financial Officer & Senior Vice President: Well, I will take the first shot, from the standpoint of where we're at right now, for total annual outage costs, this is Rick West... George L. Staphos - Bank of America/Merrill Lynch: Hey, Rick. Richard B. West - Chief Financial Officer & Senior Vice President: Annual outage volume loss is direct expenses and repair amortization. The numbers in the first quarter will be $0.15 a share, in the second quarter $0.16 per share. It drops down to only basically $0.085 per share in the third quarter because we have very – of the only outage we have in the third quarter is on the D3 machine a short outage to replace the dryers. So, then in the fourth quarter, it goes back up to $0.19 per share because you have to add additional outages in the fourth quarter that we have planned plus all the remaining repair job amortization. So, that should equate to a total for the year up $0.59 per share. Now, we have not done anything to really look at 2016, this year for example, we don't have the Valdosta outage, next year we will have to have a Valdosta outage in one of the quarters, but in terms of trying to determine at an annual outage cost, it's going to be a moving target based upon what we have to take each year, but I would say the DeRidder outage, which is by far probably our most expensive outage, especially with the extended part of it, would cause you to probably have – and I don't want to speculate to the any extent, but I would think that it's going to be a little bit lighter than next year.

Just adding some color to that. Through the course of last year, we've recognized these opportunities at DeRidder. And if you go back to the legacy history of PCA, we decided based on the fact that we understood what we needed to do. We have the manpower to do with the technical resources. We identified number of these opportunities that historically if you went back into a Counce mill or Valdosta, we took a number of years to correct. We corrected in this one outage in March, a number of items that probably would have taken five years worth of outages 10 years ago in our legacy business. So we accomplished a great deal. We took on a great deal, but it's behind us theoretically. And so, that's where we'll obviously get the benefits, but again, if anything going forward is speculative next year in terms of what cost would be. Richard B. West - Chief Financial Officer & Senior Vice President: And just to qualify what Rick said on Valdosta, with the energy project at Valdosta, and other things we've done, we have been able now to go to an annual outage every year and a half instead of every year and so that's why Valdosta has one year, but then it skips, and so you work to a year-and-a-half and that's the reason there is no Valdosta shutdown next year. George L. Staphos - Bank of America/Merrill Lynch: Paul, I will turn it over here, but would an average Valdosta be $0.06 a share roughly in a year?

Not sure. Well, we don't want just throw a number out right now, George. George L. Staphos - Bank of America/Merrill Lynch: Understood. Richard B. West - Chief Financial Officer & Senior Vice President: Probably closer to a nickel than $0.06. George L. Staphos - Bank of America/Merrill Lynch: Okay. Thank you, guys. Good luck in the quarter.

Thanks. Next question please.

Our next question is from Anthony Pettinari from Citigroup.

Good morning. Mark W. Kowlzan - Chief Executive Officer & Director: Good morning, Anthony.

Just to follow-up on George's question. If we take your 2Q guidance, your first-half earnings are down year-over-year by about $0.20, as you look into the back-half of the year, assuming flat product prices, would you expect earnings to be flat or higher or lower versus the second-half of last year, and I understand you don't give full year guidance, but with DeRidder ramping up and some of these synergies flowing through and lower maintenance outages in 3Q. Is there a reason to think that second-half earnings wouldn't be higher year-over-year versus last year? Mark W. Kowlzan - Chief Executive Officer & Director: Again, sticking to tradition, we only give guidance one quarter at a time, so I'm not going to speculate.

Okay, okay. And regarding the vendor design errors, is there an insurance recovery associated with that? Are you seeking compensation from the vendor? And then, regarding the dryer installation is there any incremental CapEx on that in the second half of the year, and can you just refresh our view on full year CapEx? Mark W. Kowlzan - Chief Executive Officer & Director: On your first question, we've been working with the vendor to obviously correct what needs to be corrected and so rather than get into any legalities or implications there, I'd rather not comment. But again, we're confident that we've been able to rectify the problems that we encountered in a timely manner and take care of the machine. And the second part of your question, refresh my memory – yeah, cost of the dryer; that was baked into the capital when we said $275 million to $300 million. So, that's not additional capital.

Okay. That's helpful. And just a last one, how much free cash did you generate in this quarter? Mark W. Kowlzan - Chief Executive Officer & Director: Rick. Richard B. West - Chief Financial Officer & Senior Vice President: Well, we generated cash from operations of $109 million and we had $56 million in CapEx, so about $55 million.

Okay. That's helpful. Richard B. West - Chief Financial Officer & Senior Vice President: And I'll just point out, this is a quarter where we have a lot of working capital hits in the first quarter, and our cash...

Right. Richard B. West - Chief Financial Officer & Senior Vice President: ...generally gets better through the rest of the year.

Right. Okay, that's helpful. I'll turn it over. Mark W. Kowlzan - Chief Executive Officer & Director: Next question please.

Our next question is from Alex Ovshey from Goldman Sachs. Alex Ovshey - Goldman Sachs & Co.: Thank you. Good morning, guys. Mark W. Kowlzan - Chief Executive Officer & Director: Morning. Alex Ovshey - Goldman Sachs & Co.: I wanted to go back to the input costs side. We didn't really talk about freight. So diesel prices are down very materially year-over-year. Are you not seeing any benefit of the decline in diesel prices on your business? Mark W. Kowlzan - Chief Executive Officer & Director: The issue has been not just the diesel costs, but it's been the availability of truck and rail, and obviously rail rates haven't been coming down. And truck rates, because of the demand for the truck fleet that's available in this country, prices have remained high and are going higher because they have the ability to command price in terms of the trucking industry. So even though diesel's come down, in general we're not seeing the benefit of it. Alex Ovshey - Goldman Sachs & Co.: Got it, Mark. And maybe thinking about the balance of the year, is it fair to think about freight as more of a push on the cost side? Mark W. Kowlzan - Chief Executive Officer & Director: It's just, yeah, speculative on my part. So I really don't want to comment. Alex Ovshey - Goldman Sachs & Co.: Okay. And then, just going back to D3, wanted to clarify a couple of things that you said. So you said you'd be running at about 80% of the stated annual capacity in the second quarter? Mark W. Kowlzan - Chief Executive Officer & Director: We are actually – we've run at the 80% rate year-to-date and, obviously, part of that was because again we made the conscious decision to shift the machine over to predominantly linerboard machine. And so the drying rates are a little more demanding in terms of the heavier weight mix we have on the machine. So we'll probably be in this 80% range until we add dryers in the September outage to take advantage of the incremental dryer opportunity. Alex Ovshey - Goldman Sachs & Co.: Understood. And so the mix currently right now is about 70% linerboard and 30% medium? Mark W. Kowlzan - Chief Executive Officer & Director: Correct. That's a good number. Alex Ovshey - Goldman Sachs & Co.: Okay, got you. Very helpful. And then, last question. So on the export side, can you just remind us again what your export position is, kind of a rough number of how many tons you expect to put into the export market on an annual basis and how that breaks out between the different regions around the world? Mark W. Kowlzan - Chief Executive Officer & Director: Yeah. I'm not going to break out the various regions, Alex, but I will say that we're about 5% export, so it's a fairly small piece of our total revenue and total output. We are more concentrated in Latin America and South America, and Asia to some extent and less in Europe, but that's kind of – that's about the best color I can add to that for you.

Yeah, let me just clarify that a little bit. It's around 5% of our tonnage, but since paper sells for, pick a rough number, half of what a box costs, it's really only 2.5% or 3% of our sales. Mark W. Kowlzan - Chief Executive Officer & Director: Yes. Alex Ovshey - Goldman Sachs & Co.: Okay, okay. Thanks for everybody's input. I'll turn it over. Mark W. Kowlzan - Chief Executive Officer & Director: Next question, please.

Our next question is from Mark Connelly from CLSA.

Two questions. First, Tom, are you making any significant changes in your existing box plant converting capacity to accommodate the new D3 volumes or should we expect you to be spending some money there? I'm just wondering how much your existing system can handle of new tonnage. And second, a question for Judy. Does the decline in tonnage in white paper help or hurt margins? I'm just trying to get a sense to – it's specialty volume that was lost, but then you have the offset of the purchased pulp.

Mark, this is Tom. I'll take the first question. Let me remind you that we have been purchasing outside 200,000 tons. So...

Right.

...the D3 output will go into our box plants and that's why it's so vitally important that we were able to produce linerboard as opposed to just lightweight mediums, because that's where the important need is in our box plants and, of course, in the conversion process you use two liners to every one medium. So we will absorb this D3 output right into our box plants as a result of the outside tonnage that we currently purchase and the growth rates that we've had on a pretty consistent basis.

Okay. So that rebalancing process is more or less eliminating the issue for you?

Right.

Okay. Thank you.

Well, it's eliminating the issue of having outside purchases.

Right, exactly.

And being able to consume internally, yes.

Right. Perfect. Okay. Mark W. Kowlzan - Chief Executive Officer & Director: Again in the first quarter, we did not purchase any outside tonnage except for specialty grades, which is what we've traditionally done.

Perfect. Okay.

Okay. So the second half, if I understand your question correctly, it's around the impact of pressure-sensitive and market pulp on the margin. If you look at it, the pressure sensitive is a pretty small business. And so it's not a huge – it does – I mean, like I said, it does take the margins down a little bit as well as pulp, but again it just kind of piles on to the bigger – what's going on in office.

Okay. So on balance, it was probably a net positive overall then, just those two items, right?

Yeah, yeah, yeah.

Okay. Perfect. Thank you very much. Mark W. Kowlzan - Chief Executive Officer & Director: Next question, please?

Next we have Philip Ng from Jefferies.

Hey, guys. You've highlighted export prices as a headwind. How much of that is tied to you selling more tons into the export market post-D3, or is that just a function for the erosion in export prices? And ultimately, what are you guys baking in into your 2Q guidance for export prices?

Well, again, we're not – the D3 production is staying within our own system. So that is not being produced for export. So where we are in terms of any export/domestic sales is just balancing out our system quarter-to-quarter.

Okay.

Mark, do you have anything to add to that? Richard B. West - Chief Financial Officer & Senior Vice President: No, I don't have anything to add, no.

Okay. And then can you provide some color more on the mix headwind that you guys called out? It's a bit more pronounced than I would have expected. Mark W. Kowlzan - Chief Executive Officer & Director: Yeah, Rick, go ahead. Richard B. West - Chief Financial Officer & Senior Vice President: I don't – I think Judy, in terms of price and mix, we calculate it all together. When we gave the numbers in the bridge, $0.09 per share year-over-year in white papers and Judy explained all the components, and then we gave $0.03 in export liner prices year-over-year in 2Q. And then in domestic medium and corrugated products mix, we had $0.04 per share, which gave us a total in 2Q to 2Q, and then you had the amount in the bridge, Phil, for the first quarter. So it's a combination of price and mix; it's predominantly more price than mix, but it's – in general, it's been through the different product lines that Judy expanded upon in white papers.

Got you. I mean on the corrugated and medium side, I guess it was – it is a big – larger hit than I would have expected since most of your business is integrated. So were there any dynamics, just the way you're selling in terms of boxes or is it just a function of more – I'm just curious, because it seems to be more pronounced than I would have expected, the white paper part, I could appreciate it. Mark W. Kowlzan - Chief Executive Officer & Director: Phil, it's just more a function of when the specialty products happen to ship in a particular quarter, something like that. So it was a little lighter in the first quarter than in comparison to the same timeframe a year ago. So it's just more timing more than anything else. It's a small number. Medium, obviously, those published prices dropped, now up to $20, so – and as Paul alluded to earlier, there is quite a spread now between liner and medium. So that's a larger portion of the $0.04 that Rick's talked about.

Okay. That's helpful. And I guess I'll just take a crack at what Anthony was trying to parse out earlier. I mean if you – can you help us frame what the headwinds – how much of the headwinds that you saw in the first half would dissipate in the back half? And I'd appreciate, a big chunk of that to D3, weather and then perhaps adjusting for maintenance, but can you kind of help us quantify what can roll off in the back half? Mark W. Kowlzan - Chief Executive Officer & Director: No, it's – again it's too speculative.

No problem. And just one last one for me, then I guess on capital employment. I appreciate you guys raised your dividend. Historically, you guys have been very opportunistic when your stock sells off. Do you kind of viewed the recent pullback as buying opportunity, how should we be thinking about stock buybacks this year? Mark W. Kowlzan - Chief Executive Officer & Director: Well, again, we talked before CapEx, acquisitions, dividends, and share buybacks, so again those are – it remains those four talking points. So, again, we'll consider all of that and that's generally a board matter.

Just to amplify on the dividend, because we did announce a dividend increase. We thought in this low yield environment that we're in, that yield would be important to our investors, because it's – you get that while you wait for better things to happen if you will. And so, we think having a good yield to import and then our story on share buybacks has never changed. We tend to remain opportunistic in share buyback and if something happens in a world like group debt causes things to happen that we don't think should affect us, that could create a buying opportunity and we've been fairly successful in doing that over the past three years or four years. And we're going to continue that sort of philosophy as opposed to just steadily buying a little bit every day.

Okay. Thanks for that. Mark W. Kowlzan - Chief Executive Officer & Director: Next question. We'll take one more question if anybody has anything.

Next, we have Al Kabili from Macquarie. Al Kabili - Macquarie Capital (USA), Inc.: Hi. Thanks. Good morning. I just wanted to follow-up and that we really appreciate the bridge that you laid out. You did in the second quarter really explicitly talk about the synergies year-over-year. Are you netting those synergy benefits against inflation so that underlying inflations actually higher than what you have in that bridge? I'm just trying to understand where the synergies fit in the second quarter bridge that you highlighted to us. Thanks. Richard B. West - Chief Financial Officer & Senior Vice President: Al, this is Rick West. You're absolutely correct. Our accounting systems don't allow us to really bridge the two, some you can, but you're definitely right. If had there not been synergies and that's what I alluded to when I did the first half of the year comparison, the bridge numbers would have been worse. So there is an embedded benefit of synergies in those numbers. Al Kabili - Macquarie Capital (USA), Inc.: Okay. I appreciate that Rick, that helps. And then just my last or follow-on question is just on DeRidder and it sounds like we're at 80% production. We are at well below that in terms of expected run rate to full earnings. So is this just higher costs until you optimize it and where, specifically, you mentioned the dryers, but again just bridging the gap between the 80% production levels and the earnings contribution, where that gap really lies and again confirming that you think you're going to get there at the end of the year?

Well, again, if you go back to a normal startup curve on the paper machine or any paper machine whether it's a new machine or a converted machine, first quarter, we're still on the curve of learning, but also when we shift to the grade mix, significantly to liner, liner inherently has a higher input cost wetting chemicals, et cetera. And so, we very quickly were able to address the input cost, chemicals and so, again, we feel going forward we have a very competitive cost position, but I think you also said there's inflation at play. And so, inflation is there, but just summarizing, we feel confident the machine is going to contribute what we've been saying and it's more back end loaded obviously. Richard B. West - Chief Financial Officer & Senior Vice President: But, let me just add to that. You're right on cost. Our costs are higher than they will be when we optimize, but don't forget the thing that I mentioned earlier on the call, we're running at 80% of capacity. The last 20% that we get is probably has a cost of $150 a ton lower than the first 80%, because all your fixed costs have already been absorbed, all your labor is already been absorbed. So as last 20%, the cost is really low and that will bring down your costs a lot because the incremental margin is so high, because you've already absorbed all these other costs on the first 80%. And then, in the meantime, as we develop these grades and learn to make them better, the costs are coming down. But you're right, our costs are disproportionately high to the production rate because of the reasons I just gave you. Al Kabili - Macquarie Capital (USA), Inc.: Okay. That's really helpful. I appreciate that. Okay, last question for Judy. Just on the white paper side, the office papers, you guys markedly outperformed the industry in the first quarter, and I wondered if you could talk to that and sort of – if that outperformance you think is sustainable?

So (1:05:36) shipment piece of the office papers business, we have just seen strong performance with our key customers and we'll continue with those key customers and hope to see that going throughout the year. Al Kabili - Macquarie Capital (USA), Inc.: Okay. All right. But, I mean, any sense of just that level of outperformance, Judy, like you said being up in a down market is pretty notable. So I don't know if that's something you think you can continue to do or is there some timing variances in there?

So the bulk of our performance in Q1 is synergies and that will continue. And, again, from a standpoint of our strong office business, performance by our customers and we expect that to hold. Al Kabili - Macquarie Capital (USA), Inc.: Okay. Got it. Mark W. Kowlzan - Chief Executive Officer & Director: Just to add on that, we've got a lot of synergies in a white paper business on a much smaller volume than is in the brown business. So synergies really made a big difference there because they are substantial and they're on a lot smaller business than the brown business. Al Kabili - Macquarie Capital (USA), Inc.: Okay. That helps. It's good to see. All right. Thanks and good luck. Mark W. Kowlzan - Chief Executive Officer & Director: Okay. With that, operator, the time is up, and thank everybody for joining us today, and we'll talk to you on the 2Q call in July. Thank you very much.

This concludes today's conference call. You may now disconnect your line.