Packaging Corporation of America (PKG) Q2 2016 Earnings Report, Transcript and Summary

Thank you for joining Packaging Corporation of America's Second Quarter 2016 Earnings Results Conference Call. Your host today will be Mark Kowlzan, Chief Executive Officer of PCA. Upon conclusion of his narrative, there will be a Q&A session. I will now turn the conference call over to Mr. Kowlzan. Please go ahead, sir. Mark W. Kowlzan - Chairman & Chief Executive Officer: Good morning and thank you for participating in Packaging Corporation of America's second quarter 2016 earnings release conference call. I am Mark Kowlzan, Chairman and CEO of PCA. With me on the call today is Tom Hassfurther, Executive Vice President, who runs the Packaging business; and Bob Mundy, our Chief Financial Officer. I'll begin the call with an overview of our second quarter results, and then turn the call over to Tom and Bob, who'll provide further details. I'll then wrap things up and then we'll be glad to take any questions. Yesterday, we reported record second quarter net income of $116 million or a record $1.23 per share. Second quarter net income included special items with $1.8 million. Excluding the special items, second quarter 2016 net income was a record $118 million or a record $1.25 per share compared to the second quarter 2015 net income of $116 million or $1.18 per share. Second quarter net sales were $1.42 billion in 2016 and $1.45 billion in 2015. Total company EBITDA, excluding special items, was $290 million for the quarter compared to $287 million in last year's second quarter. Details of special items for the quarter were included in the schedule that accompanied our earnings press release. Second quarter 2016 earnings per share excluding special items were $0.07 per share above the second quarter of 2015, driven primarily by higher corrugated product volume, $0.04; lower cost for energy, $0.06; fiber, $0.05; freight, $0.04; and the lower share count resulting from the share repurchases for $0.04. These items were partially offset by lower domestic containerboard and corrugated products price and mix of $0.04; lower containerboard export prices, $0.03; lower containerboard domestic and export volume of $0.04; lower pulp volume, $0.02; and lower paper and pulp prices and mix, a $0.01, and higher depreciation and other fixed costs $0.02. Earnings were also $0.07 per share above our second quarter guidance of a $1.18 per share. This was primarily the result of slightly better results in several areas including pricing and mix with both Packaging and Paper segments each coming in $0.01 per share better. Also, higher volume of $0.01 per share and cost for freight, fiber, energy and chemicals, all coming in about $0.01 per share lower than our guidance. Looking at our Packaging business, EBITDA excluding special items in the second quarter 2016 of $267 million with sales of $1.25 billion resulted in improved margins of 23.7% versus last year's EBITDA of $267 million and sales of $1.142 billion or a 23.4% margin. We successfully completed the scheduled maintenance outages at our Counce, Tennessee, and Tomahawk, Wisconsin mills, as well the number two semi-chem medium machine at our Wallula, Washington mill. Operationally, we had an outstanding quarter as we continue to see very good results from our numerous cost improvement initiatives as well as from our logistics and trade optimization efforts across our Packaging business platform. Containerboard production was 926,000 tons, and our containerboard inventories were about flat with the end of the first quarter of 2016, as well as the end of last year's second quarter and are at an appropriate level to meet our seasonally stronger third quarter demand. And now I'm going to turn it over Tom who is going to provide more details on the containerboard sales and the corrugated businesses. Tom?

Thank you, Mark. Corrugated product shipments set all-time records for both total shipments as well as shipments per day. With one additional workday in the second quarter 2016, our shipments were up 2.2% in total, and up 0.6% per workday compared to the record second quarter of 2015. As a comparison, the industry was up 1.8% in total, and 0.3% on a workday basis. To support our corrugated products volume growth during the annual maintenance outages, we've reduced our outside sales of containerboard by about 12,000 tons below last year's second quarter and about 8,000 tons below the first quarter of this year. Both domestic and export volumes were lower versus each comparative period. Export prices were about 8% below second quarter 2015 levels or $0.03 per share at about 3% lower than the first quarter of this year. Domestic containerboard and corrugated products prices and mix together were $0.04 per share below the second quarter of 2015 and up, compared to the first quarter of 2016. I will now turn it back to Mark. Mark? Mark W. Kowlzan - Chairman & Chief Executive Officer: Thanks, Tom. Looking at our Paper segment, EBITDA, excluding special items, in the second quarter was $39 million with sales of $267 million or 14.5% margin compared to the second quarter of 2015 EBITDA of $37 million and sales of $281 million or a 13.2% margin. Paper segment price and mix was lower than the second quarter of 2015 but $12 per ton higher than the first quarter of 2016. White paper sales volume was up slightly and pulp volume was lower compared to the second quarter of 2015 while volumes of both white paper and pulp was lower than the first quarter of 2016, primarily due to the scheduled annual outages at two of the mills. Both of the scheduled outages were completed successfully and the mills ran exceptionally well during the quarter with very good costs. White paper prices began to improve late in the second quarter as a result of the announced paper price increase. I'm now going to turn it over to Bob Mundy. Robert P. Mundy - Chief Financial Officer & Senior Vice President: Thanks, Mark. We had a very good strong free cash flow generation in the second quarter with cash provided to operations of $180 million, CapEx of $69 million resulting in free cash flow of $111 million for the quarter. We paid common stock dividends totaling $52 million, made a $2 million scheduled term loan repayment, and we had no share repurchases during the second quarter. We ended the quarter with $214 million of cash on hand. And finally, our scheduled annual outage cost will be lower in the third quarter than the original guidance we provided earlier in the year, as we can now operate our Jackson, Alabama paper mill into the first quarter of 2017, before an outage is necessary. Our new guidance for annual outage costs for the balance of the year is $0.09 per share in the third quarter and $0.11 per share in the fourth quarter or a total of $0.42 per share for the year versus the $0.49 per share we guided to earlier. I'll turn it back to Mark. Mark W. Kowlzan - Chairman & Chief Executive Officer: Thanks, Bob. On July 6, we announced that we had entered into a definitive agreement to acquire substantially all of the assets of TimBar Corporation, a large independent corrugated products producer, in a cash-free, debt-free transaction for a cash purchase price of $386 million. This acquisition is consistent with one of the key strategic focus areas we've discussed many times regarding increasing our vertical integration of containerboard to above 90% through organic box volume growth and strategic box plant acquisition. We expect this acquisition to increase our integration by over 200,000 tons or 6% from our current level of 87% and will allow for further optimization and enhancement of our mill capacity, and other substantial benefits and synergies that we expect to begin realizing soon after closing. It comes in an excellent time following our recently completed integration of Boise, including the capacity we now have at the DeRidder, Louisiana mill. We believe that this acquisition will allow us to further enhance our strong balance sheet, financial results and cash flow consistent with our strategy to return significant value to our shareholders. We're on track to close the acquisition, subject to certain customary conditions and regulatory approval later in the third quarter, and we expect to finance the transaction with a new term loan. Looking ahead to the third quarter, we expect higher containerboard, corrugated products and white paper shipments, and paper prices should move higher reflecting continued realization of the announced paper prices. Also, as Bob mentioned earlier, our annual outage costs will be lower than our original guidance as a result of moving our Jackson, Alabama paper mill outage into the first quarter of 2017. We do expect a less rich mix for corrugated products and higher prices for recycled fiber, electricity and natural gas. Considering these items, we expect third quarter earnings of $1.30 per share. With that, we'd be happy to entertain any questions but I must remind you, some of the statements we've made on the call constituted forward-looking statements. These statements were based on current estimates, expectations and projections of the company and involve inherent risks and uncertainties, including the direction of the economy and those identified as risk factors in our Annual Report on Form 10-K on file with the SEC. Actual results could differ materially from those expressed in these forward-looking statements. And with that, operator, I'd like to open the call for questions. Thank you.

Sure. Your first question comes from the line of Chip Dillon with Vertical Research Partners.

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

First question is, looking at TimBar. Just from what I gather looking at industry returns in the box business, and I know they vary tremendously, but it seems like that the attractiveness of integrating vertically just continues to increase. Is it fair to say that maybe half of the EBITDA you expect over time will actually come not from what you're buying but from the improvements you'll get after you buy them? Mark W. Kowlzan - Chairman & Chief Executive Officer: Chip, let me start this off and then I'm going to have Tom add a little color to TimBar. I'm not going to quantify that exactly but your premise is correct. A very, very large portion of the contribution will come from the 200,000 plus tons that we're able to pass through the system. Again, it's very valuable in that regard. And then a smaller portion would come from synergy-type activity in terms of integrating the actual business. And then the tax step-up opportunities along with the EBITDA we're buying. But keep in mind, it's an extremely high quality, diverse book of business, a high-margin book of business. So, Tom, do you want to add any color to that one?

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

Okay. And then, a second one, just – we've noticed that in this year, despite some of the, I guess, lower realizations for kraft linerboard in the export markets that exports are up. But as we dig through the numbers, it looks like that the actual kraft linerboard exports are down, and you're seeing the total number go up because we're sending more recycled, medium, and other grades offshore, at least as an industry. Is that a reflection of some of the quality issues you think that we're seeing with some of the recent recycled additions, or do you have any other view on that? Mark W. Kowlzan - Chairman & Chief Executive Officer: Let me start this out, Chip, this is Mark. Again, I think as you've seen the consolidation taking place in the last couple of years, and you read what you and others have been publishing, obviously the integrated tons have grown. And so, today, there is probably 92% of all of the containerboard tons passing through integrated activity. So it's becoming less and less in terms of an outlet for independent mini mill type activity to move their tons through. So, as we stated, we – in order to accommodate our own needs, we took tons out of the export and domestic outside sales to support our own growth activity. But, again, I think it's safe to say that there is less of an outlet domestically as more and more tons are passing through integrated activity. Tom, you want to go ahead and elaborate?

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

I see. Thank you. Mark W. Kowlzan - Chairman & Chief Executive Officer: Next question, please.

Your next question comes from the line of Mark Weintraub with Buckingham Research.

Thank you. June, the numbers for the industry were very robust. I was hoping to get a sense as to how July has been looking for you and whether you feel there has been a shift in tenor in the market in the last month or so? Mark W. Kowlzan - Chairman & Chief Executive Officer: Yeah. Tom, why don't you go ahead and provide that?

Well, Mark, the first10 days of July our billings are up about 1.5%. So we're off to a decent start. It's a little money to get started in July just because of the way that 4th fell. So it's – when it falls on a weekend like that it's tough to get a really good take on where things are headed. But I think we're off to a pretty good start.

And is there a different feel to the market given what we've been seeing from the overall industry data the last six weeks to eight weeks, or is it more a continuation of how you've been experiencing the market year-to-date? Mark W. Kowlzan - Chairman & Chief Executive Officer: Yeah, Mark. This is Mark again. I think what we're seeing as we went through the second quarter and what we're seeing these couple of weeks after the holiday is it's flat. Again, we're pleased to see the numbers where they are at this stage in July, but other than that no other color to add to that one.

Okay. Fair enough. And kind of the in the weed question. So $0.42 I think is now the revised expectation for maintenance and outage cost this year. Would you consider that to be a fairly standard number or a bit below normal? I think it was much in the high 50s if I remember last year. Mark W. Kowlzan - Chairman & Chief Executive Officer: You know, Mark, that number – now that we've got a lot of integration activity behind us, that number is going to float depending on the extent of an annual shutdown, work that has to be done on our mill. And so, in an example too, we have the capability as well as others in the industry to move shutdowns into the following year. So we're not tied to necessarily a 12-month window. And so, there is a range somewhere within that $0.40 range, unless we call out some unusual type of maintenance activity that would occur.

Okay. Thank you. Mark W. Kowlzan - Chairman & Chief Executive Officer: Next question.

Your next question comes from the line of Mark Wilde with BMO Capital Markets.

Good morning, Mark, Tom, Bob. Mark W. Kowlzan - Chairman & Chief Executive Officer: Good morning, Mark. Robert P. Mundy - Chief Financial Officer & Senior Vice President: Good morning, Mark.

Good morning, Mark.

Is it possible, Mark, to get some sense on TimBar of how the benefits will roll through, just from a kind of a timing standpoint? In other words, how quickly can you bring things like those board purchases in-house? Mark W. Kowlzan - Chairman & Chief Executive Officer: Yeah. I mean, if you assume we get this closed by the end of the third quarter, we'll be able to immediately start moving tons through and our plans would be to have this heavily integrated by the end of the year. Tom, do you want to?

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

Yeah. Okay. That's exactly what I was hoping to pickup. And just on the converting side, you've been buying converting businesses, increasing your integration. I wonder though, Tom, could you also talk about what you might be doing in the way of just investment in your existing converting operations? I mean, we hear a lot from other players over the last five years or six years about investments in mega plants and EVOLs and things like that?

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

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

Yeah. Primarily, we're talking about three buckets that we've been watching and that's our recycled fiber, OCC, DLK prices moving up as they have this year. And then, the natural gas, year-over-year, pretty obvious that a year ago, we were down at the low point and it's moved up now. And so, when you look at that, transportation elements we're watching what's going on there, even though there hasn't been a big move, we are seeing some of the Class 1 railroads already raising rates. And then, there are other, the seasonal electric, summer-time electric rate spike in increased activity through the July-August period and September depending on weather conditions around the country. So again, for the first time in the last year and a half or so, we're seeing some of the inflationary activity that we're watching closely.

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

Your next question comes from the line of Mark Connelly with CLSA.

Thank you. If I could come back to the question of exports for just a second, it's pretty clear that other producers are looking at that business differently than they used to and we're not seeing the level of export sensitivity, the FX rates that we used to see. Is that changing the way you think about the strategic value of exports for PCA? And then, a second question on white paper. The label paper business was a strategic move for Boise a number of years back. And I'm curious, how important the specialty grades are to you in the context of your white paper mix? Mark W. Kowlzan - Chairman & Chief Executive Officer: Yeah. First question regarding the currency and export, I mean, we view again our exports, we have legacy export customer base for 25 years. We ship products out to about 35 different countries around the world. And so, obviously exports remain little less than 10% of our total production. That being said, as Tom continues to grow his own integration level higher, we have an internal meet. That's our best use of a ton produced. And so, again, it's been easier for us to look at where to best place those tons to capture the best margin as we see in the currency swing over the last year. Regarding that second part of the question, the specialty business the release liner grade, the coated business, especially – primarily from the Wallula machine now. It's proved to be good business for us. We've done a tremendous amount of grade development and refinement over the last two years, and with the other improvements we've built into the mill. It's again label business primarily performing very well. And label, in general, still grows with the GDP. So, as long as GDP continues to move forward with label business, which is a bulk of that, release specialty coated business continues to move forward. So, it's a pretty good little business for us in the Paper segment.

Would you have any thoughts of moving further into specialty? Mark W. Kowlzan - Chairman & Chief Executive Officer: As we said over the last couple of years, we are primarily a corrugated products business, and we are going to stay concentrated in that. We are not really compelled to grow that business as much as just nurture what we have and take advantage of the EBITDA contribution from the Paper business. Keep in mind that in today's world it's probably 15%, 16% or so of our total annualized EBITDA but it does generate a nice cash flow for us and doesn't require an awful lot of capital to maintain right now. So, I guess, a long way of saying, I would not have preference to explore expansion in that area.

Super helpful. Thank you. Mark W. Kowlzan - Chairman & Chief Executive Officer: Okay. Next question please.

Your next question comes from the line of Debbie Jones with Deutsche Bank.

Hi. Good morning. Mark W. Kowlzan - Chairman & Chief Executive Officer: Good morning, Debbie.

I have a question that I recognize you may not be able to answer, but I'm going to try it anyway with TimBar. Obviously, this is a great acquisition for you guys strategically, not much to criticize. But as you pointed out, the industry is far more integrated. I think you pointed to 92%. Does that concern you at all just broadly speaking about how PPW now has a much smaller set or sample size to measure when trying to determine what industry pricing is. And I just think it's important just considering that impacts a lot of your contracts and the industry contracts going forward? Mark W. Kowlzan - Chairman & Chief Executive Officer: Well, I think, I'm going to say a few things and then I'll let Tom add some color, but again, I think it's that issue that there is a mechanism in place and how that mechanism functioned is – it's again that's – pulp and paper has utilized that base. And so, rather than getting into any forward discussion about pricing or speculation, I'd rather, again to your point, not even go there. Tom, I think, you feel the same way.

Yeah. I do and I mean obviously, they're not a lot of other alternatives and pulp and paper has been over the long haul seems to get it right. Now, there are times – there are times when we would disagree but we'll have to see what happens going forward. I think the most important thing is that pulp and paper reports the news as opposed to trying to make the news. So, we'll just see what transpires going forward. But your observation is correct. It is a smaller segment on that open market.

Okay. Thanks. And my second question, I just wanted to understand in your guidance, what do you have rolling through on white paper, just what has been put through so far by PPW, and kind of just thoughts going forward on whether or not there could be more to come? Mark W. Kowlzan - Chairman & Chief Executive Officer: Yes, Debbie, you know, if you think about our business and what has been announced by the publications, on the printing and converting grades, the announcement was made for a $60 increase in March, and the index has picked up $10 in April and $15 in May and $5 in June for a total of $30, as reported in the latest update. On office papers, that announcement was for April, to be commencing in May. And so, again the index has picked up $5 in May and $5 in June. So, that's what basically will be tied to contract paper sale. And also understanding that in our Paper business roughly 65% of our uncoated free sheet is tied to contracts. And so, the balance of it is not tied to contracts. So, we have a heavy portion of that that is tied to these indices.

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

Your next question comes from the line of Phil Ng with Jefferies & Company.

Hey, guys. Energy prices were up sequentially. Impressive you saw that type of cost savings on the energy line and transportation. How much of that is being just more efficient now, and is that kind of cost saving sustainable in light of some of the moves that we're seeing in nat gas prices? Mark W. Kowlzan - Chairman & Chief Executive Officer: Well, I think to your point, as we continue to improve not only the white paper mills but the folks that run the brown business containerboard mills are always out making improvements year after year in fuel utilization in terms of consumption efficiencies. And so, we have reaped the benefits year after year on how we utilize our fuels. But that being said, natural gas, as an example, bottomed out a year ago, and so now it's moving up. So, Bob, do you want to add anything? Robert P. Mundy - Chief Financial Officer & Senior Vice President: No. I think what you said is exactly right. That's how I would see things going forward.

Okay. That's helpful. And, I guess, even post TimBar, based on our math at least, your balance sheet still looks pretty strong and integration is going to be pretty high. Can you just talk about how you rank your capital deployment priorities from here on out, M&A? And how does that look on a converting front or is there more opportunity now on the Paper side of things? Mark W. Kowlzan - Chairman & Chief Executive Officer: Well, again, concentrating on the corrugated products side of the business, that's our highest margin, highest opportunity area to concentrate on in terms of capital utilization. And so, we would continue, as Tom is always doing, looking at opportunities in box plant acquisitions. And also he said something important earlier, how he grows his existing business organically with the existing customers. So, I think again, prioritizing the use of cash and capital, it's Tom's corrugated business and high margin activity within the corrugated business. And so, Tom, do you want to add anything to that? I mean, that's....

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

Got you. That's actually a good segue to what I was going to ask next. Once you integrate TimBar, how much more capacity do you guys have on the board side of things? Do you need – is it like one year's less (32:35) runway? And once you are tapped out, are you guys looking at M&A or is there organic opportunities internally for you to kind of produce more tons? Mark W. Kowlzan - Chairman & Chief Executive Officer: I'm not going to answer that specifically, but as we've always done, we always have the ability to creep and to stretch our capability, that the technology organization, and the group that runs the containerboard mills are always challenged to produce more when Tom needs it. And so, we have a portfolio of capital items and improvement plans in the files on how we will go forward over the next couple of years to support Tom's growth needs. And so, we're comfortable for the time being, the next couple of years. And don't forget, as we did back in 2012, we still have the lower margin export tons to move through Tom's higher margin book of business as he needs. So we've got a few years to do this.

Really helpful. Thanks a lot. Mark W. Kowlzan - Chairman & Chief Executive Officer: Thank you. Next question please.

Your next question comes from the line of Scott Gaffner with Barclays.

Thanks. Good morning. Mark W. Kowlzan - Chairman & Chief Executive Officer: Good morning, Scott.

Good morning.

So, when I look at the vertical integration, I think you said – I mean, you didn't get specific but you said 87% now plus 6% from TimBar. So assuming somewhere in the low 90s on an integration level. I mean, where was the integration level for the company as a whole before you did the Boise acquisition? Mark W. Kowlzan - Chairman & Chief Executive Officer: We were at that low 90%, 92%, 93% level when we did Boise, and it was the same opportunity metrics we looked at as far as how are we going to support Tom's growth trajectory over a longer period of time and Boise presented a tremendous opportunity to do just what we've done over the last three years.

Okay. And maybe a different question there just on the vertical integration. I mean – and you mentioned before, TimBar had some high-margin business that came along with it. Is there the potential to prune maybe some lower margin business from the portfolio, and vertically integrate with more higher margin business going forward? Mark W. Kowlzan - Chairman & Chief Executive Officer: We're not going to comment on that question.

Okay. Mark W. Kowlzan - Chairman & Chief Executive Officer: That's proprietary.

Fine. Then, when I look at the organic growth rate, I know I've asked this one before, but you said you were up 0.6% on a per workday basis in the quarter, the industry was up 0.3%. So, organically your level of growth relative to the market is narrowed somewhat. How long do you think you can continue to outgrow the market organically on a go-forward basis excluding any sort of additional vertical integration? Mark W. Kowlzan - Chairman & Chief Executive Officer: Obviously, I can't answer that. All I can say is that's Tom's challenge every day of the week and it's been his challenge for years, and that's what we're going to continue to do, and that's how we look at the world. And I would be terribly disappointed if we didn't continue to perform in that manner.

I guess, maybe asked a different way, has it become more difficult to outgrow the market at this point in time? Mark W. Kowlzan - Chairman & Chief Executive Officer: I wouldn't say that. Again, it's – I don't want to comment on that.

Okay. Last one for me. Just on inventories, you noted that they were flat sequentially, flat year-over-year, I think is what you said. I thought in some previous comments, maybe on the last call, you noted that inventories could come down just based on better freight availability. Has that not been the case during the quarter or is it something – some other sort of dynamic played out? Mark W. Kowlzan - Chairman & Chief Executive Officer: We've commented that we're in a range that we're very comfortable with supporting comps business. And if you go back to what we called out last fall that we – because of the DeRidder success, we did not have the need to have to grow inventory, and build inventory in the fourth quarter of last year. So, we're quite pleased with the fact that we went through all of our annual shutdowns in the first quarter and second quarter, and not only supported Tom's business but maintained a range of containerboard inventory that we feel is where we need to be, plus or minus for the corrugated. And so, it goes back to the fact that even though transportation availability and cost for transportation had abated and the availability improved in the last two years, nevertheless, our footprint with Boise and acquisition activity is a nationwide footprint. We called this out before. So, we're mindful of that and again this range we're in for the last year now is a good range that we identified. But also keep in mind that as we integrate TimBar, they do have the corrugating plants that we're going to have to support. So, it will be a reevaluation of what is the right inventory level to support a much bigger full-line corrugating system.

Okay. Thanks, Mark. Mark W. Kowlzan - Chairman & Chief Executive Officer: Next question, please.

Your next question comes from the line of Chris Manuel with Wells Fargo Securities.

Good morning, gentlemen, and congratulations on a strong quarter. Mark W. Kowlzan - Chairman & Chief Executive Officer: Thanks, Chris.

Just a couple questions, follow up question for you. Most of the stuff I wanted to ask has kind of been answered. But first on the Papers side of the business, is there any reason that perhaps, and again, I appreciate you don't like to comment so much on forward-looking pricing but is there any reason that the white paper side might not kind of work out the way that the specialty paper side did in that it kind of takes two months, three months, four months to trickle through pricing. I mean, we're kind of a couple of months into that. But any reason to suspect that we couldn't continue to see a little more of the increase that most of the participants announce get realized? Mark W. Kowlzan - Chairman & Chief Executive Officer: Yeah. I want to speculate on it. That's forward pricing speculation that's some place that we don't need to go there. I guess, we just have to wait and see what RISI, Paper Trader, what the indexes call out.

All right. So, thank you. Let me skip ahead to the – you had a few questions around how you balance tons on a future basis from an allocation standpoint. So, if you kind of – as TimBar gets fully put together out in 2017 and integrated into your network, as you would sit today, it would look like either you'd stop selling so much to the domestic guys, or you could stop exporting kind of one or the other. If I'm getting this or putting this together right, it sounds more like if some place gets shorted, you prefer to kind of pull back out the export market. Is that a fair way of thinking that or how do you balance... Mark W. Kowlzan - Chairman & Chief Executive Officer: Yeah. There's a couple of ways to do that. I mean, you are looking at what's your ultimate margin per ton in terms of where you are placing those containerboard tons that we produce. And if the math tells you to go ahead and sell one less ton and move it through Tom's system, that's what you do. And so, there is another element to that and it also as we did in the 2012 period – 2013, we were buying some tons in the open market where it made sense. So, if it makes sense for us to buy tons in the open market and still sell some tons offshore, again, it's a tradeoff of margins and how it flows through the bottom line. So, we've got that trigger to pull.

Okay. That's helpful. And then last question I had, and again I know you don't like to get super granular with this stuff, but was there any kind of differential either geographically, regionally, et cetera with how your box shipments and volumes were through the quarter? Was it a little better in certain regions of the country versus others? Anything, variance even month-to-month. It seems like the things got better as the quarter progressed – that you could share with us? Mark W. Kowlzan - Chairman & Chief Executive Officer: Yeah. I'm going to let Tom to put some color on that one.

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

But the ag business was – I mean, how would you characterize that?

Good in some parts, and not so good in other parts, and mostly weather related.

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

Thank you. Mark W. Kowlzan - Chairman & Chief Executive Officer: Welcome. Next question please.

Your next question comes from the line of Anthony Pettinari with Citigroup.

Hi. Good morning.

Good morning, Anthony.

Regarding M&A, you obviously, have a great history with box plant acquisitions. Given that the independents are maybe now 8% of the market, are there still converting assets out there that are attractive or when you look at asset quality and valuation, are there not really many opportunities left there? And then just continuing on the M&A side, would we ever see, Packaging Corp book at other substrates, I'm, thinking, folding cartons or box board, and then also other geographies outside of the U.S.? Mark W. Kowlzan - Chairman & Chief Executive Officer: The first part of the question – obviously with the activity on box plant acquisitions over the last couple of years, the opportunities have become less, but nevertheless, there are opportunities that will always be there. And Tom is aware of what's out there, and we're pretty particular as we have proven to be over the last number of years in what we're interested in, and what we're willing to pay for. And so, again, that's the best way to answer that. Folding carton, that's just speculation. I mean, I don't even want to get into that dialogue. We're going to – as I said earlier, we are primarily a corrugated products business and that's what we do well and that's what we will remain concentrated in.

Okay. And in terms of overseas or outside of the U.S. interest level there? Mark W. Kowlzan - Chairman & Chief Executive Officer: Yeah. Again, we're U.S. based and I think the U.S. is the place to be.

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

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

Okay. That's helpful. I'll turn it over. Mark W. Kowlzan - Chairman & Chief Executive Officer: Next question please?

Your next question comes from the line of George Staphos with Bank of America Securities.

Thanks. Hi, guys. Mark W. Kowlzan - Chairman & Chief Executive Officer: Hi, George.

Appreciate you taking my questions, most of them have been already answered. I guess, the first question I had, so if I look at third quarter versus second quarter, traditionally you'll tend to see upwards of about $0.10 sequential move from whatever the 2Q base was. This quarter you've guiding to a $0.05. Is that variance largely related to input cost? Would there be anything else related to? And then, kind of a separate but related question. In the past, you gave us a view on what you were expecting in terms of, I guess, the January price declines to show up in terms of your P&L and corrugated. Did you more or less see that realize as expected? And then a couple of follow-ons? Mark W. Kowlzan - Chairman & Chief Executive Officer: Yeah, regarding that last question, we called out that first quarter about a $0.01 of impact on containerboard price, and then 2Q, $0.02, and then we're anticipating the third quarter following on with $0.02.

Yeah, on the Other, George, yeah, I mean, moving sequentially from the second to the third, you are right, input cost last year moving second to third were actually a favorable trend environment. And this year, as Mark has pointed out, on the energy side and recycled and whatnot, you have the opposite thing going on. So that would be really what drives that difference.

Bob, I recognize you're not in a position right now to talk much about TimBar. And so, I preface my question with that and understand whatever answer you can give, we respect it. If we could get into the numbers, would TimBar be a more cash generative business to you relative to your existing converting operations? How would you have us think about that business? It sounds like it's higher margin, but maybe it also takes a little bit more capital to get at those margins? Mark W. Kowlzan - Chairman & Chief Executive Officer: George, this is Mark. Again, and you heard Tom say this and I believe I've called this out, the TimBar assets are very well capitalized, really nice facilities. So the only thing that – and again, this is just speculation, as Tom does every quarter and every year, he looks at the book of business within that region and how you satisfy the customer growth needs. And so, on a going-forward basis, there is no current big overhang of what we would have to do with capital to see that cash accretion to the bottom-line.

Okay. So, conclusion, then, this should be a more cash accretive business relative to your existing converting margins because I think you've already said it's higher margin, very high mix – high margin mix, excuse me, and no big capital programs. You'd agree with that then? Mark W. Kowlzan - Chairman & Chief Executive Officer: Yeah. I'm not going to quantify that. I'm just qualifying that it's a very accretive opportunity for us, and you'll see us very quickly put that benefit to the bottom line.

Totally. Two last ones. And I think you've already answered the question, but I just want to get precision on it. So in the second quarter, your production was down – I want to say 25,000 tons from last year. I'm assuming that's purely a function of – you didn't need to run as much into inventory ahead of maintenance outages this year, and the flexibility you get from DeRidder. Is there anything else in terms of why production would have been down, other than what I just relayed? And then, Bob, just housekeeping, there was no buyback in the quarter. Was that a function of just what you thought of the value of the stock? I know it's hard to answer that, or just you were in blackout because you knew you were going to do the TimBar deal? Thanks, guys. And good luck in the quarter. Mark W. Kowlzan - Chairman & Chief Executive Officer: Yeah. Let me answer that first part, George. This is Mark. If you recall, last year, we actually produced 937,000 tons during the second quarter.

Yeah. Mark W. Kowlzan - Chairman & Chief Executive Officer: And this year, we've called out the production of 926,000 tons. Now again, there are two things that are in play there. It's the timing of the actual outages that occur in containerboard mills that can move that quarter-to-quarter but year-over-year, last year in particular, we were in a heavy lifting mode to get DeRidder optimized and delivering for us. And so, we also had come out of the 2014 fourth quarter and we called out the need to pre-build inventory because of the rather heavy shutdown activity that was going to occur, primarily the DeRidder activity, and finetuning of DeRidder. So, DeRidder was an event that went through the first quarter and second quarter last year, which really forced us to run hard and make sure that we had the adequate inventory by the end of the second quarter to fulfill the typical seasonal higher third quarter. So, we built to that 937,000 ton production to make sure as we entered July and August we were in good shape. But the fact that as of last September we concluded the DeRidder number three upgrade activity and proved that that machine can perform as we need and as demand requires, we had truly – if you want to use the term running to demand, we were not compelled to have to run to any higher inventory level. So that's truly, and we called this out, that because of the annual shutdown activity we sold less on the outside, but also there was no need to build and run in any different way and also, how the shutdown fell (50:34). So, that's really a long way of explaining to you the 12,000 tons of difference between last year's 2Q to this year's 2Q.

Right. Robert P. Mundy - Chief Financial Officer & Senior Vice President: And on the buyback, certainly, we remained to look for those opportunistic situations on share buybacks in the second quarter, you're correct. The pending TimBar deal certainly was something we had to consider that we normally wouldn't have to consider so that certainly had an impact (51:05)

All right. I appreciate the color. Good luck in the quarter guys. Robert P. Mundy - Chief Financial Officer & Senior Vice President: Thank you. Mark W. Kowlzan - Chairman & Chief Executive Officer: Next question, please.

Your next question comes from the line of Gail Glazerman with Roe Equity Research.

Hi. Good morning. Mark W. Kowlzan - Chairman & Chief Executive Officer: Good morning, Gail.

This might be a little out there question, but the last time we saw the dollar this strong was really at the turn of the century when there was a lot of off-shoring activity. And I'm just wondering, are you hearing anything from your customers, that they might start to kind of reconsider, obviously that have played out, and just any concern from the domestic demand side in terms of the strong dollar? Mark W. Kowlzan - Chairman & Chief Executive Officer: Tom, do you want to....

I'll just answer that real quickly for you, Gail. One of the things that certainly has had a bit of an impact of the strong dollar is the exports from the industry in general, and you've read a lot about that. So, that had a little bit of an impact. And relative to off-shoring, I mean, I'm seeing more of a trend of off-shoring today as labor rates continue to go up elsewhere in the world and quality issues and supply chain issues and all these other sorts of things that exist. I think, we've got more companies today considering bringing business back to the United States than sending it overseas.

Okay. And, you guys may disagree with it, but certainly it feels like there has been – despite the shrinking independent size of the box market there has been more and more activity. Do you feel that the transition of some of the recent box plant deals have been done as tons have been integrated has been managed well or any concerns of disruptions in the market just as things get readjusted? Mark W. Kowlzan - Chairman & Chief Executive Officer: Gail, I don't want to comment on what others are doing and how they've done it. You should be talking to them.

Okay. And can you just talk finally a little bit upon wood cost and what you are seeing in the near term? We've heard less and less about pellet activity. Is that less of a concern for you kind of looking at over the medium term than it might have been two years, three years ago? Mark W. Kowlzan - Chairman & Chief Executive Officer: Wood cost over the last few quarters have been pretty less. We saw a little bit of heavy rains down in the Texas, Louisiana region this spring that caused some short-term spikes and disruption in fiber, but it's nothing significant for our DeRidder mill, again which is – we watched it. But, in general, to the rest of the system it's been very flat through the year and we expect to see that flat, unless again we get into an unusual fall winter rain event period later in the year but otherwise we are flat with fiber on virgin wood fiber.

Okay. And just kind of on a longer term basis on pellets. I think that was a concern for you a couple of years ago. Is it still a concern, less a concern? Mark W. Kowlzan - Chairman & Chief Executive Officer: Again, you've seen in, in particular the Southeastern region and Gulf Coastal region with more pellet activity. I think it's kind of come to an equilibrium from all indication. So, we watch it but I'm not concerned about it at this point.

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

Mr. Kowlzan, I see there are no further questions. Do you have any closing remarks? Mark W. Kowlzan - Chairman & Chief Executive Officer: Yes. I would like to thank everybody for participating in the call today and look forward to talking with you on October for the third quarter results. Have a good day. Thank you.

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