Thank you for joining Packaging Corporation of America's Second Quarter 2017 Earnings Results Conference Call. Your host today will be Mark Kowlzan, Chief Executive Officer of PCA. Upon conclusion of his narrative, there will be a question and answer session. I will now turn the conference call over to Mr. Kowlzan, and please proceed when you are ready.

Good morning, and thanks you for participating in Packaging Corporation of America's second quarter 2017 earnings release conference call. I'm Mark Kowlzan, Chairman and CEO of PCA, and again with me on the call today is Tom Hassfurther, Executive Vice President who runs our Packaging business and Bob Mundy, our Chief Financial Officer. I'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 more details. I'll then wrap things up and then we'll be glad to take your questions. Yesterday, we reported second quarter 2017 net income of $143 million or $1.52 per share. Excluding special items, second quarter net income was $144 million or also $1.52 per share, compared to the second quarter 2016 net income of $118 million or $1.25 per share. Second quarter net sales were $1.6 billion in 2017, and $1.4 billion in 2016. Total company EBITDA for the second quarter, excluding special items was $328 million in 2017 and $290 million in 2016. Excluding special items, the $0.27 per share increase in second quarter 2017 earnings, compared to the second quarter of 2016 was driven primarily by higher prices and mix of $0.25, sales volume, $0.09 and production volumes of $0.03 in our Packaging segment, lower annual maintenance outage costs of $0.05 and lower taxes, $0.06 and the partial insurance recovery related to the DeRidder Mill incident for $0.02. These items will partially offset by higher energy cost of $0.06, fiber, $0.05, labor $0.03 and chemicals $0.01, higher freight $0.02, interest $0.02 and depreciation $0.02 and other expenses $0.01 and also lower Paper segment prices and mix for $0.01. Our results were $0.07 per share better than the second quarter guidance, primarily due to higher Packaging segment sales prices and volume, a lower tax rate of $0.03 and a partial insurance recovery related to the DeRidder incident for $0.02. These are partially offset by higher recycled fiber prices of $0.01. Looking at our Packaging business for the second quarter of 2017, EBITDA, excluding special items of $303 million with sales of $1.3 billion, resulted in a margin of 23.1% versus last year's EBITDA of $267 million and sales of $1.1 billion, or 23.7% margins. The containerboard mills produced 947,000 tons in the second quarter, driven by strong demand and the need to supply our growth in box shipments, as well as the rapid integration of our new corrugated plants from the TimBar and Columbus Container acquisitions. We also successfully completed scheduled outages at our three largest containerboard mills. Although, higher recycled fiber prices of almost $90 million and higher energy prices of $5 million negatively impacted the mills compared to last year's second quarter, improved the usage of recycled fiber and fuels helped to mitigate some of that impact. I'll now turn it over to Tom, who'll provide more details on the containerboard sales and our corrugated business.

Thank you, Mark. Corrugated products shipments in total were up 10%, with one less workday or 11.7% per workday, compared to last year's second quarter. Our outside sales volume of containerboard was up almost 5,000 tons versus last year's second quarter, but down over 9,000 tons versus the first quarter of 2017. Overall, Packaging segment demand remained very strong with volumes contributing $0.12 per share above last year's second quarter and $0.07 above the first quarter of 2017, even with excellent containerboard production from our mills. Due to the continuing strong demand, we ended the quarter with containerboard inventories, including the inventory needs of our two acquisitions, 25,000 tons below the second quarter of 2016 and over 14,000 tons below the first quarter of 2017. Domestic containerboard and corrugated products prices and mix together were $0.22 per share above the second quarter of 2016, and up a $0.11 per share compared to the first quarter of 2017 as we continued to implement our announced price increases during the quarter. Export containerboard prices were $0.03 per share above the second quarter of 2016 and up $0.02 per share compared to the first quarter of 2017. I'll now turn it back to Mark.

Thanks, Tom. Looking at our Paper segment, EBITDA, excluding special items in the second quarter was $43 million, with sales of $254 million or 17% margin, compared to the second quarter 2016 EBITDA of $39 million and sales of $267 million or 15% margin. We mentioned on our last quarter's call that a key price index for all major uncoated freesheet rates had dropped $20 per ton in February. And as expected, our second quarter 2017, Paper segment prices and mix were lower compared to last year's second quarter, as well as the first quarter 2017. Seasonally, industry uncoated freesheet volumes in the first quarter and second quarters are similar and ours were up slightly versus last year's second quarter as well as the first quarter of 2017. Our pressure sensitive volumes were down slightly versus both periods. I'll now turn it over to Bob.

Thanks, Mark. Looking at a few of the other earnings share variances compared to last year and our guidance, our second quarter of 2017 recurring effective tax rate of 31.3% was almost 3.5% below the last year's second quarter. This was primarily due to adoption of new accounting guidance related to employee share-based payments, which took effect beginning in 2017. This key – the key of accounting change required all excess tax benefits or efficiencies of share-based payment awards, including dividends paid on those awards, to be recognized in the income statement when the awards pass. Previously, this was reported in the equity section of the balance sheet. While we anticipated some benefit in the second quarter, when almost all of our employees grants vest, the fact that our stock price grows to almost 25% from the time we prepared our guidance, together with unanticipated favorable tax law changes in a couple of states, the benefit came in $0.03 per share above our expectations. We expect our third and fourth quarter rates to be what you would normally see, have been under 35%. But our full year rate for 2017 now looks to be just under 34%, which would be at least 1% below our 2016 full-year rate. Also, as mentioned when providing our second quarter 2017 guidance of $1.45 per share, this did not include any potential additional cost or anticipated recoveries related to the DeRidder Mill insurance claim. Discussions are continuing with our insurance carrier, but of the estimated $0.07 per share that impacted our first quarter 2017 recurring earnings, we were able to record a partial recovery of $0.02 per share during the second quarter. Our estimate of total property damage and business interruption losses, including capital costs, remains in the range of $20 million to $25 million. Moving on, cash provided by operations during the quarter was $221 million. Uses of cash include capital expenditures of $82 million, common stock dividends totaling $59 million and $2 million in term loan repayments. We ended the quarter with $321 million of cash on hand. Finally, our planned annual maintenance outages for the balance of the year is unchanged from our previous guidance, with an impact of $0.11 per share in the third quarter and $0.23 per share in the fourth quarter, still totaling $0.51 per share for the year. I'll now turn it back over to Mark.

Thanks, Bob. Looking ahead to the third quarter, we expect to realize the vast majority of our previously announced Packaging segment price increases and we expect higher Packaging segment shipments resulting from strong demand. White paper sales volumes should be seasonally higher, although price and mix should be moving lower and scheduled outage cost of the Paper segment will be higher. We also anticipate continued price inflation in recycled fiber and certain chemicals, higher freight costs and higher tax rate. Considering these items, we expect the third quarter earnings of $68 per share. This does not include any potential additional costs or anticipated recoveries that are related to the DeRidder Mill insurance claim. 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 constituted forward-looking statements. 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. The actual results could differ materially from those expressed in these forward-looking statements. With that, Krista, I'll open up the call for questions. Thank you.

Your first quarter comes from the line of Chip Dillon from Vertical Research Partners. Your line is open.

Yes. Good morning, Mark and Bob.

Good morning.

Good morning.

And Tom as well. First question is on the really solid performance that we're seeing in the Paper segment , you mentioned, of course, that prices had dropped both, I think, sequentially and year-over-year and yet you were able to show higher margins. And I didn't know if you could give us a little help of what is causing that. Is it all operationally or did you shift some production to a lower cost machine?

Well, it really had to do with the outage schedule. As we had outlined this year, we had planned outage with the Wallula mill, as an example, in the third quarter, and IFalls will come in October. Traditionally, we used to shut International Falls down in June and Wallula would have a second quarter outage also. So, that's one big factor. And also, we also in terms of what would impact the EBITDA margins, don't forget we took the pulp business and eliminated that at the end of last year, and so that was a very low margin contribution to that segment. So, that's no longer in the equation. So, those two factors are really the difference.

Okay. That's very helpful. And then if you could just let us know, I don't know if Tom has some idea of what the organic volume improvement was. I know there is 10%, 11.7% per day. But, if you excluded Columbus and TimBar and other M&A moves, what would those numbers have been? And while you're at it, if you could let us know how the volumes looks so far this month?

Chip, this is Tom. I'm not going to break that out. I'll tell you why. As I explained last time, it's very hard for us to break out the organic now, because we move business around to take advantage of the synergies of these acquisitions and to maximize the profit potential. So, it's very hard for us to get a total grasp on what happened organically, so that's why we're reporting it in a total, but I will say that demand so far through 13 days of this month is running at about 14% increase, which is, of course, very good.

Yeah. That's very helpful. The last one, then I'll turn it over is, Mark, if you could talk a little bit about what you see as the potential for the fleet that's out there, both yours and others in the white paper world, to be potential sources of new kraft linerboard capacity. And I say that noting that demand so far this year is up 3%. You see virgin board prices outside of North America going up almost every three months and we've had two increases here in the last year. And some of us think we could be close to running out in the next couple of years. So, given that it's difficult to permit new mills, what are your thoughts about white paper mills being converted?

It's something that the industry has talked about. We talked about it for the last few years. There are a handful of potentially good mills that could be converted, primarily because of the wood basket they're in. And so, you have to consider that as a primary factor in the conversion opportunity, besides the amount of capital it takes to convert the asset. And so, the capital required is a given. And then the ability to fiber the mill with the right kind of fiber at the right prices is the other major factor, so there are a few mills that fit that criteria.

Got you. Thank you.

Next question, please.

Your next question comes from the line of Mark Wilde from BMO Capital Markets. Please go ahead. Your line is open.

Good morning, Bob. Good morning, Mark, Tom.

Good morning, Mark.

Hey. Mark, is it possible to get an update on your plans for kind of debottlenecking down at DeRidder, where we stand and what the timeline looks like?

Yeah. Work is proceeding very well. A lot of the work that we had started on number one machine is progressing very nicely and we're seeing what we expected to see on the incremental improvements with DeRidder. Also the work that is planned that will give us the big incremental increase for next spring is still on track and that would be the press section rebuild in the new forming section work that we'll be doing. And so that will finish out the incremental activity that gives us the approximate 150,000 tons year-over-year, so. But everything's looking very good, and DeRidder is running very well, extremely pleased.

Okay. And that 150,000 tons would start to flow in the second half of next year?

Some of it's already flowing through work we did earlier in the year on the DeRidder number 1, as an example, and some of the work we did on DeRidder 3 is already flowing through. And then as we go forward, we will continue to make some of the improvements. Primarily it's pressing, drying-type enhancements that allow us to handle the available fiber we have. And so we are seeing some of that benefit this year already.

Okay. Then, Tom, I wonder if it's possible for you to talk, just in general terms, about the pace of the current box site. How you see it rolling in versus kind of past hikes?

Are you talking about price hike? Is that what you're talking about Mark?

Yeah. Yeah. Yeah. The box price hike.

Yeah. Yeah. Yeah. The pace is exactly as we said it would be. As I said on the last call, the vast majority will roll in over 90-day period. So, our results in the second quarter show some of that increase. And we'll get the – great majority of the remainder in the third quarter with a few laggards that trigger at the beginning of the year.

And should that, Tom, should that net out to be more than the containerboard hike itself?

Well, yes. But keep in mind that, we're – for us, I mean, we may have a different set of circumstances that somebody else may have relative to all the contracts and all those sorts of things that go on and the number of accounts that we have in addition to the smaller accounts we have, which are negotiated each time a price movement takes place.

Okay. All right, and then my last question is just there's this supplemental corrugating medium hike out in the market. I think it's $30 on an average. Will that have any effect on PCA?

Mark, we're such a small player in the external domestic medium market. We probably, move less than 50,000 tons a year of medium out into the North American system. So, we're such a small player, but the fact is, yes, our price has gone up accordingly...

Okay.

...seeing in the index.

Okay. All right. It sounds good, guys. I'll turn it over.

Thank you.

Thank you. Next question, please.

Your next question comes from the line of George Staphos from Bank of America Merrill Lynch. Please, go ahead.

Morning, George.

One moment please. Mr. Staphose, please go ahead.

Hi. Can you hear me okay?

Yeah.

Good morning George.

Good morning George.

Great. Good morning again, everybody. Piggybacking on Mark and Chip's questions, can you talk at all to the extent, which priorities are maybe, moving or which of the potential solutions to your vertical integration high-class problem are rising and which might be less of a priority, and to the extent that maybe you can't talk per se to that, can you talk about other projects, other initiatives that might be underway to improve returns, either in the mills or the box plants we're beginning to see input cost starting to rise again. Are there any things in that regard that might be helpful to your returns over the next couple of years?

Okay. Regarding the first question about capacity, we're not going to get into the details on that as we've been talking for the last few months publicly. We obviously have an array on our metrics of opportunities that we're studying and evaluating. And when we've made some decisions, we're ready to announce. Obviously, we'll make that as a public announcement. Regarding the opportunities within the mills right now, we obviously across the higher legacy fleet, we're working everyday to enhance the efficiencies and opportunities. But, keep in mind, as we've always said, that's more in line with a creep (20:54) opportunity. And then I'll jump to this, you talked about some of box plants, some of the other opportunities. This is a capital spending question that somebody maybe wondering. We've identified a number of opportunities in the box plants side of the business with Tom, and we are funding a number of these projects. So, we had called out that the capital for the year would be somewhere in the $325 million area. Now, we're moving that up to the $350 million for the year target and that's to take advantage of the identified opportunities that these are high-return, low-risk opportunities to enhance the margin and the mix of the volume on the box plant side.

Okay. Mark, thanks for that color. I guess, one thing I wanted to turn to is, you would appear to be running relatively tight right now heading into the third quarter given your inventory position. Can you confirm that or correct that view. And, if you were in fact running a little bit tighter perhaps than you would have expected to aside from the obvious, what other things might you do to alleviate the production relative to the pull situation you've got right now in your corrugated system, again, a high-class problem.

Well, we're running right where we thought we would be. When we looked at the plan for 2017, and knowing what our shutdown schedule is looking like and what the box plant cut-off demand was going to be modeled as. We're pretty much right where we thought the inventories would be. That being said, you're right, we have to run extremely well, and yet historically we proven that's what we do well. And so pressure's on the folks in the mill side of the business to run extremely tight and that's what the plan is. But, yeah, we need every ton we can get out of our mills.

Okay. Two last ones and I'll turn it over. In terms of this quarter, even relative to the first quarter, it seemed like there's a little bit more pressure on you and I think now other companies in the sector results from input cost. Obviously, OCC is the headline pretty much every day, but also even from non-fiber based variable cost. What can you comment to in terms of what pressure or benefit you're seeing there and the outlook for the second half of the year? Are you seeing any kind of freight or logistics challenges like we had a few years ago that you also have to manage against either logistically or potentially through other margin improvement efforts?

Energy is a key factor. If you go back a year ago, year-over-year 2Q/2Q, energy is up $0.06, and freight is up $0.02 year-over-year. And so those are types of examples. And then you have – we called out chemicals. If you move into going from 2Q to 3Q, all right there's still some upward pressure on a little bit of the fiber with what we're seeing, but these are the type of the penny for this and a penny for that freight, but it's still in an upward trajectory, just slightly from where it has been. So, that's why we're calling it out. And that's about where it is. Year-over-year, it's really the natural gas rise that we slowly picked up throughout the system.

Okay. Mark, thanks for the thoughts. You know what? I'll turn it over to everybody else, and good luck in the quarter.

Thanks, George. Next question, please?

Your next question comes from the line of Phil Ng from Jefferies. Please go ahead. Your line is open.

Hey, guys.

Good morning, Phil.

Good morning. When you think about M&A going forward, would you consider buying some of the uncoated freesheet mills you kind of called out that would fit that fiber basket as well as your current mill system on the white paper side, do they have that fiber basket that could make it interesting? I'm not saying you are moving forward. Can you just give us some of the parameters?

Let's stop there. I don't care to talk about it. Again, any discussion around that is proprietary and confidential. So, and then anything else is speculative.

Okay. Very nice. I guess pricing was pretty robust, more than offset cost I think for the most part in Packaging. So, I was a little surprised margins were flattish, which was good regardless. Was there any mixed dynamic in quarter? And just given the strength that you saw in box demand, did you have to buy little more board in the open-market?

Well, primarily, and Tom and Bob could weigh in on this too. But, if you think about the lagging that we have seen in the price increase, we saw the bleed off all the year along in 2016 for corrugated products. And then the price increase announcement last fall started to flow through, so we saw a primary benefit moving into the first quarter. And then this latest price increase is really a third quarter event. And, so that if you think about year-over-year, there is still that pressure on the pricing in the total margin. We haven't picked-up a full benefit. Bob, Tom, you want to weigh in on...

No. You are right. The recovery – the cost pain from the rough and (26:36) recycle and these other things happens quicker than the price relief comes through and – but as Tom said, the third quarter is, we'll get to do the vast majority of that and we would expect that to sort of flip in the third quarter.

Got you. That's helpful. And I don't know – exports in these open market tons are not a big portion of your business. But just given the strength that you're seeing here, I think, you called off 14% box shipments in July. Are you starting to pull back some of those open market tons and just repatriating those tons, because the spread is pretty attractive, I would imagine? Thanks.

I'll let Tom talking little bit this, too, but as we called up earlier in the year, we look at those tons and we move the tons to the best opportunity. And so, we're very, very cognizant on it. Tom, you want to add a little color to...

I would just say that in the export market, I mean, we're taking care of those long-term customers that we've had and that we value and especially since they buy the specialty grades that we produce. We will take care of those people, but we're not actively pursuing additional business in the export market.

And it's still only a few hundred thousand tons a year of our total production.

Right.

Okay. Fair enough, thanks a lot. I appreciate the color.

Okay. Next question please.

Your next question comes from the line of Anthony Pettinari from Citi. Please go ahead. Your line is open.

Good morning.

Good morning, Anthony.

You've had TimBar for about 10 months and I think Columbus for about 8. Are your integration and synergy activities are basically completed? Are you supplying basically all the board for the box plants systems. Just wondering if you could give us sense of what inning you are in for those integrations, and if there's some incremental benefits you might pull through in the second half?

Yeah. Tom, why don't you walk him through that one.

All right. Our TimBar and Columbus acquisitions have gone very well. They're fully integrated. We're very pleased with the results. They continue to grow at, what we consider the PCA growth rates, and we've been able to, as I mentioned earlier, we've been able to move the business around, which has been very valuable to us in terms of some under synergy savings. So, we're very pleased with where that is.

Okay. That's helpful. And then Tom, I thought this might be a difficult question to answer, but is it possible to estimate what percentage of your box volumes, it'd be moved through e-commerce or have exposure to e-commerce. And then also in the past you've talked about manufacturing, re-shoring, being a potential driver of demand, I guess Foxconn had their big announcement about big Midwestern plant. How much has manufacturing and industrial manufacturing renaissance been a driver for the very strong growth you've seen this year?

Anthony, let me talk about e-commerce first, because I get a lot of attention and I think a lot of people want to say that the increase in demand in boxes is generally driven by e-commerce. It certainly is a driver, but I don't think it's the only driver at all. Because, as you just mentioned, some of the re-shoring of manufacturing or what I would really consider at this point, it's been more of a retention of manufacturing base, which we've seen growth in some areas, bleed off in others, things like that. We're not seeing the bleed off as we would have seen in the past. They're staying here. And I think that's very helpful to the base of the business. And I think like e-commerce, they're a growth engine on top of that. And then, as you mentioned, this Foxconn announcement that's coming out, which is a major facility moving into Wisconsin, at least that's the indication at this point in time. In addition to Samsung announced a big facility that's coming to the United States. So, I think the future is very bright in terms of box demand.

Okay. That's great color. I'll turn it over.

All right.

Next question, please.

Your next question comes from the line of Debbie Jones from Deutsche Bank. Please go ahead. The line is open.

Hi. Good morning.

Good morning, Debbie.

Starting off on what Anthony just said on demand trends, is there anything from like a regional perspective that you are noticing that is surprising to you? And then do you have any color on how trends have been through July?

Tom, why don't you go through that one?

Debbie, I would say on demand trends, the only thing that really I mean we're seeing right now is, I mean, we're seeing the recovery of the West Coast Ag market. So, the West Coast is definitely up for us. The remainder of the country is pretty steady in terms of demand and demand growth.

Okay. And anything on July?

Well, in July, we're having, as I said, we're up. We're trending up 14% right now, and that demand is pretty well evenly distributed across the country.

Okay. Thank you. And then in Paper, typically, mix and volume improve seasonally. Can you just talk about kind of your confidence level on that and just remind us what exactly is driving that?

Well, third quarter is always the higher volume quarter, and traditionally, a richer mix quarter. But that being said, prices are down for the year, as the index has indicated earlier in the year. And so, back-to-school is always a big time in the third quarter. You've got all the school systems nationwide restarting, so that's what pushes volume on that side. So, in that regard, that's truly what drives the third quarter.

Okay. Thanks. And just one quick one, this might be pretty simple but you have experienced higher freight cost, which I think is understandable, but is there anything in that that's related to availability or having issues getting freight?

The availability isn't our concern right now. It's just the general increases in costs through the year. So, it's not like it was four, five years ago with driver and tractor trailer shortages.

Okay. Great. Thank you. I'll turn it over.

Thank you. Next question please?

Your next question comes from the line of Mark Weintraub from Buckingham Research. Please go ahead, the line is open.

Thank you. So, the 14% and I realize it's only a few weeks, but that seems like a pickup even from the 10% to 12% that we had in the prior quarter. Are there some additional acquisitions that kind of are feeding into that number or is that indicative at least that your business has actually even picked up from the torrid pace (33:42) we were seeing?

That's just our business in general, picking up and in a higher trajectory. So, we're very pleased with where we are.

And, as you've been growing quite fast, has your customer base shifted at all? What I mean by that is, are you selling even more to local accounts, for instance, versus national or the other way around or any changes as you're going through this relatively fast growth?

No. I mean, nationwide, if you look at our box plant footprint, we're seeing robust activity nationwide. And we're taking advantage of the TimBar and Columbus acquisitions and integrating those regional activities. So, again, that's the good news that we're not seeing it in any one area. It's across the board. And don't forget we've got an extremely large customer base, 18,000-plus customer nationwide. And so, it's a very well spread out nationwide activity. Tom, do you want to put a little more color on that?

No. I don't have anything else to add.

Yeah.

Okay. Thanks so much.

All right. Thank you. Next question, please?

Your next question comes from the line of Chris Manuel from Wells Fargo. Please go ahead. Your line is open.

Good morning, gentlemen.

Morning.

Just a couple of follow-ups. One, kind of along the lines of previous question, you said 14% versus up 10%. Did you start to see an acceleration as the quarter went on or was that sort of all incremental in July? Can you remind us what you comps kind of look like the next couple? Are they still relatively simple or can we kind of annualize this rate until this is all through?

Chris, as Mark just mentioned, I mean, the demand has been substantially a pick up across the board. We usually have a pretty robust third quarter anyway. Looking forward, though, is the 14% number if you look into the third quarter, I mean, we are going to have some little tighter comps, because TimBar came on in September. So, when you get to the September number in the month in that quarter, and you start to make those comparisons, I mean, this number comes down, because you now got TimBar in both years' comparison. So, we'll break some of that out for you and give you a little color on that in the next quarter.

Okay. That's helpful. Just two last questions. First was, when we think about the 150,000 tons that you've got kind of debottlenecking and work for that across your roughly 3.8 million rated tons is about 4%. Could you just maybe estimate for us, you mentioned, you had some of it already D1 and D3, with some improvements there, but do you feel you've got a quarter of that, half of that? How much of that do you think you have already kind of flowing through versus yet to come?

Just using a number, we probably get 50,000 tons of pick up this year out of all those projects on both machines, and then we'll get the balance of 100,000 tons next year, just...

Okay. That's very helpful. That's helpful. Last question I had was with recycled mix. If memory serves, and correct me if I'm wrong, you use kind of 10% to 15% OCC into your part of your basket today, even though most of your paper comes out as kraft. With some of the changes of Chinese waste paper exporting in such, do you have an opportunity being that the rest of your mix, as you put that in there is pulp? If you have an opportunity to maybe, use some more waste paper versus OCC, how do you think about that mix or what it might do? Would it degrade the quality of what you'd have coming out or how do you think about that as an opportunity?

You just summarized. Well, you got to be very careful about what you're putting into the furnish in regards what the impact on the quality is going to be. And so, I don't even want to speculate about that that kind of opportunity or what that means.

Okay. Thank you.

All right. Next question please.

Your next question comes from the line of Adam Josephson from KeyBanc. Please, go ahead. Your line is open.

Thanks. Good morning, everyone.

Good morning.

Good morning, Adam.

Mark, just one question, back to just Packaging margins for a second. I know you talked about all the OCC, energy, freight, chemical inflation that you've experienced. Were you expecting going into the quarter your margins to be flat or down or did you actually expect margin expansion knowing what you knew going into the quarter?

We're right, where we expected to be. Because of what I told you about the leak-off last year, we had to overcome in the pricing alone. It is against the fiber in OCC contemplation and chemicals and energy. And so, we're right exactly where we thought we'd be.

Okay. And Tom, you talked about demand and the e-commerce impact and how much play that's getting. If you don't think, e-commerce is driving most or all the growth, what do you think, is driving up OCC, to the extent that is gone up? Do you think, it's half China, half e-commerce? What exactly, what do you think is going on? And, do you see any end in sight to this highly unusual OCC run we've seen.

Well. Let me first comment. I didn't say that e-commerce is not a growth engine. It is a growth engine. It's clearly a growth engine. Because if you just make the comparisons about deliveries to home of even let's say apparel as an example, apparel did not go in boxes when it went to big-box stores, but it does end up in a box when it comes to your home. So, that alone is a pick up for us. And, but e-commerce is a lot bigger than just an Amazon as an example. I mean, e-commerce everybody's got e-commerce sites, everybody's, every day they're opening up new sites, everybody is trying to cut into what Amazon is doing to them et cetera. So it's a huge moving target and it's very hard to get your arms around it completely. Now that said, moving to OCC, e-commerce clearly has an impact in OCC collection as well, because the big box stores used to collect all the corrugated, used to bale it and send it – ended up back at the mills. Today, you've got a lot of these boxes showing up at apartment building, condos, homes where the municipalities may not have collection. And, consequently, it ends up in landfill. So, there has been a little bit of a curtailment in terms of the ability to collect. But we saw this trend in OCC coming way back in 2005-2006 timeframe, before the Great Recession hit. If you go back, you looked at collection rates and the demand, because all of the additional mill capacity that came on over the last few decades has all been 100% recycled. So at some point, there was going to be push comes to shove in terms of supply versus demand and we're at that point right now, where OCC is in very tight supply and consequently the prices remain high. And even when – a few months ago when China curtailed some of their purchases and everybody thought OCC would retreat back to levels that had taken place the previous six months. It didn't do that at all and came down a little bit. And then, as soon as China reentered the market, it went right back up. So, we think it's clearly going to be – it's going to be an issue.

So, you think essentially, we're in kind of a new paradigm for OCC now?

I do. Yeah. I do. And I think that, as those people that know that business well, know that we collect up to 90% at this particular point in time, that last 10% is very expensive to get. So..

Right.

...OCC has – they priced significantly higher in order for people to have interest in getting into really what in essence is sorting trash and try to recover the paper from that.

So, just last question on that, so you don't think there'll be a huge push right now among recycling companies and others to try to collect more of the stuff?

Well, I think they're trying to collect all they can.

Yeah. We're at an inflexion point of the opportunity, as Tom said, it's a diminishing return at this point...

Yeah.

It's just expensive to get...

Well, yes, very expensive to collect beyond where we are right now.

Thank you very much.

Yeah. Next question, please.

Your next question comes from the line of James Armstrong from Armstrong Investment. Please go ahead. Your line is open.

Good morning.

Good morning, James.

In the quarter, could you remind us, what was your mix of virgin versus OCC? And, do you think you have any room to reduce your OCC usage further or are you pretty much maxed out on virgin?

We're not giving the exact number. We're somewhere around 20% total usage of OCC week. We can move that up and down a few percent. But don't forget, running the mills full and with the demand we have, it's probably, if you look at the math map, it's in our best interest to use what we need to use for OCC and be okay to fill out that demand we have for containerboard. So, so it's somewhere around 20% and that's, well, we did obviously take advantage of our system this year, in fact, and we really stretched out our kraft capability in mills. And so, the 20% is a good number.

Okay. That works. Switching gears and coming back to capacity. If you were another producer to decide to convert a white paper mill, how long do you think it would take to complete that conversion? And can you compare that to what you believe, how long it would take for a greenfield operation?

Well, let me start with the greenfield operation, nobody's permitted a greenfield mill in decades.

Okay.

And so, the likelihood of somebody trying to go through the permitting process and the site locations, that's probably a little probability. On the other hand, if somebody was just starting to think about converting a facility, you're probably talking about couple of years. By the time, you would do your pre-engineering, your detailed engineering and order equipment, vertical pieces of equipment for paper machine conversion, pulp mill requirements a lot of this equipment now is up to 14- to 16-month delivery, just on the delivery phase of this, so it takes quite a while to do your engineering and scope the project out. So you're talking about couple of years and in many cases to do a good project.

Perfect that's exactly what I need.

James, I'd also like to add that more important than even the mill or the potential fiber base, you better have a place to sell your output. So, the open market is so small today that, it'd be virtually impossible for somebody who doesn't have the integrated cut up (46:04) to go in and convert mill. And then try to find home for those tons.

Right. So, what Tom is saying is, if you think about just in the past year with the acquisitions of the independent box plants that the industry has been announcing. We've probably taken the independent activity down from probably 9% or 10% down to 5% or less of the open market containerboard purchasing.

Perfect. That's exactly what I needed. Appreciate it.

Okay. Next question please.

Your next question comes from the line of Scott Gaffner from Barclays. Please go ahead. Your line is open.

Thanks. Good morning, gentlemen.

Good morning, Scott.

Just a follow-up question on inventory, you seem to be relatively tight on inventory now. And, I think, normally you would build some inventory this time of the year in anticipation of a strong 4Q trend or 4Q demand, or 4Q has been stronger recently than it has been in the past. How you think about the inventory position sort of as you move through 3Q and 4Q?

Well, it's a high-class problem right now. We got to run well and just keep running well. So, the point you're making, the fourth quarter is no longer a seasonal downturn that the industry used to see, but that's been going on for about – a better part of a decade now that the 3Q is always your highest volume quarter and a better – richer mix. But 4Q, because of the holiday activity is actually requiring us to run just as hard. So, good news is, we've got to run hard, we try to meet the tons. So, plan right now is to get ourselves back in balance and keep running well to supply what the box plants need.

Okay.

No absolute – we have a range of our inventory tons and we know when we come out of the annual shutdowns and we're moving there, but also the key is, the box plant demand. It's, I'll use the term, a high-class problem to have.

Sure. Maybe a follow-on to that for Bob. How should we think about working capital associated with inventory, because as you got tight inventory situation, but you have the prices increases coming through the system, how should we think about inventory as a source or use of cash for the year?

Well, I think, to Mark's point, producing to meet the box demand and keeping those in sync, we don't see a lot of movement up or down with inventory. So you wouldn't get one or the other.

Okay. Last one from me, just on input cost. We've talked about a lot of inflationary pressures, but what about virgin pricing trends? Are you seeing anything there as far as deflationary trends on virgin fiber pricing?

Year-over-year, that's been the bright spot. If you look nationwide across our legacy system, we've seen from the 2016 timeframe into this year, while we've seen some price decreases, it is primarily related to weather events, rain, winter activity. And so, we have one mill location in the South that's had a little bit more rain this spring. And we saw some uptick in the (49:45) at that particular location for a few months. But in general, across the board year-over-year, what's helped us mitigate the OCC, DLK price impact has been the fact that we've been able to buy at better pricing year-over-year on virgin, so that's been a positive so far. But again, that can change in a heartbeat with hurricanes, tropical storms, and winter weather. But so far, it's been positive.

Okay. Thanks, guys.

Thank you. Next question, please.

Your next question comes from the line of Brian Maguire from Goldman Sachs. Please go ahead. Your line is open. Brian Maguire - Goldman Sachs & Co.: Hey. Good morning, guys. Thanks for taking the question.

Good morning, Brian. Brian Maguire - Goldman Sachs & Co.: A lot of discussion today about the recent demand trends, which obviously are strong and your commentary around the go-forward seems fairly constructive there and your commentary around OCC, maybe being in a new paradigm, also seems to make it clear that the world's going to probably need some more virgin capacity at some point. Was wondering if you could follow upon James' question and your response there and provide some color on what you think the capital cost might be on a conversion like you were talking about. And would you comment on whether you think the current margins in the industry are attractive enough to justify that kind of an (51:10) investment, acknowledging that it would be a little bit risky, because it would take a couple of years to come online and the world's an uncertain place?

That's a very speculative question, because depending on what quartile you wish to achieve a conversion ultimately end up, and also, as Tom said, assuming you have a home for these tons and where are those tons going, you'd have to run the math. But taking an older bleached mill, white mill into a containerboard conversion can get extremely expensive in terms of hundreds of millions of dollars of conversion, if you wish to do it and place yourself in a cost competitive position. But again, it's not just the capital. It's the sale side on the margin to make the math work, but it's a timing issue in terms of a couple of years from inception, the amount of capital to do it properly. I think if you go back and look at what's been done up in Canada with the latest conversion, we know what they spent and, again, the time it took. And then, the biggest thing, and Tom mentioned is truly the biggest factor, where are we going to go sell the stuff. So... Brian Maguire - Goldman Sachs & Co.: Okay. Appreciate that. And I was curious the comment you made about better usage of recycled fiber has been a little bit of a benefit. Is there much you can do on the operating side to kind of adjust? And I don't imagine there is huge benefits, but maybe switching from OCC to sort of paper or DLK or any other kinds of recycled fiber. Any more color on that comment?

No, we're in balance right now and it's for quality and for where we need to be presenting the right kind of containerboard into our system. The amount of DLK, the amount of OCC we are using, we wouldn't consider a mixed waste. Brian Maguire - Goldman Sachs & Co.: Okay. Thanks very much.

All right. Next question, please.

Your next question comes from the line of Steve Chercover from D. A. Davidson. Please go ahead. Your line is open. Steven Pierre Chercover - D. A. Davidson & Co.: Thank you and good morning.

Good morning. Steven Pierre Chercover - D. A. Davidson & Co.: I just wanted to verify a couple of volume figures, if you would. I think you said offshore sales were 200,000 tons?

No. Use 300,000 tons as a number. Steven Pierre Chercover - D. A. Davidson & Co.: 300,000. Okay. Thanks. Recycled medium was 50,000 tons a year?

No. Recycle – medium sales...

No. Medium sales to domestic customers.

Domestic customers are somewhere in that 40,000 to 50,000 tons of domestic activity a year. That's just a range. Steven Pierre Chercover - D. A. Davidson & Co.: I think I've got to get a hearing aid. And finally, could you tell us what your total open market purchases are?

We're not going to quantify that. We've always been an open market buyer of containerboard, primarily in the specialty grades, and so we continue to do that as we need to and as the opportunities present themselves. Steven Pierre Chercover - D. A. Davidson & Co.: Okay. Would it be fair to say that's part of your secret sauce to generate margins that exceed those of your counterparts?

No. Steven Pierre Chercover - D. A. Davidson & Co.: Okay. Thank you.

Thank you. Next question, please.

Your next question comes from the line of Gail Glazerman from Roe Equity Research. Please go ahead. Your line is open.

Hi. Thank you. Good morning.

Good morning, Gail.

Just going back to your options as you look at potential incremental board supply, understandably a lot of the focus has been on virgin, but could you envision a scenario where you might look to have some recycle capacity, just given how low your relative share is?

That would be a low probability in the matrix that I mentioned of our opportunities. That's in the low opportunity, low probability corner of the matrix.

All right. And then, just in terms of the converting strategy moving forward, as you look to the independent share shrinking, as you said, possibly down to 5% already, obviously, the opportunity to continue a strategy of acquiring independents is going to get tougher. Is the math – can you just – how are you thinking about, given where the recent valuations have been relative to perhaps doing some organic work in the systems to the extent that you're talking about putting some money into the converting system in your CapEx plans?

Regarding acquisition of the box plants, we would continue to evaluate and take advantage of opportunities that presented a good, rich mix of business. And so that's how we are looking at it.

But is the balance shifting and all compared to when it's been the past when the available opportunities have, obviously, contracted so much for the last several years?

Yeah. But Tom will give some color on that.

I'd say it's shifting a little. There is no question about that. I mean, as Mark mentioned earlier, I mean, we've got additional CapEx spending going on in box plants, not only for growth purposes, but also to be more cost effective. That's something we believe that we'll probably ramp that up a little bit more. And, yeah, there is no question that the acquisition opportunities are going to be a little fewer and more selective, but that's not to say they don't exist and that's certainly not to say, we won't do them if it fits in our criteria.

Okay. Thank you. And just one last quick one. OCC, just a near-term outlook. Obviously, the print was up in July. Is your guidance expecting that that goes up further in August, just kind of what you're expecting maybe in the third quarter?

Yeah. Gail, we do expect the third quarter prices to be above the average we saw in the second quarter.

Okay. Thank you.

All right. Thank you. I think we've got time for one more question.

Your final question comes from the line of George Staphos from Bank of America Merrill Lynch. Please go ahead. Your line is open.

Hi, guys. Thanks for taking the follow-on. Very quickly to the extent that you can comment. Bob or Mark, can you remind us what kind of returns you typically seek to get with your capital spending? Said differently, if we hold fiber cost constant and pricing constant, what sort of organic EBIT or EBITDA improvement do you think you can get within the Packaging segment over the next call it two years from the products that you're contemplating? Thank you.

I don't want to get into that forward analysis. And the range of – in terms of our targets we're evaluating capital spending, there is a range of opportunity. It depends on the amount of capital and the complexity of the project looking at the ultimate returns that it presents. And so we don't have one metric, that's the target that has to be bid on in an evaluation. So it's – a lot of factors go into the capital spending decision.

Would you say the returns are as good as they've been in the past, if you can put a number on it?

Absolutely.

Okay. Thank you, guys. Again, good luck on the quarter.

Thank you.

Thank you. With that, operator, I believe that concludes the questions. Thank you for joining us today. We look forward to talking with you in October on the call.

This does conclude today's conference call. You may now disconnect.