Mark W. Kowlzan - Chief Executive Officer Thomas A. Hassfurther - Executive Vice President-Corrugated Products Judith M. Lassa - Senior Vice President-Paper Richard B. West - Chief Financial Officer & Senior Vice President Paul T. Stecko - Chairman Robert P. Mundy - enior Vice President-Elect and Chief Financial Officer-Elect.

Anthony Pettinari - Citigroup Global Markets, Inc. (Broker) George L. Staphos - Bank of America Merrill Lynch Chip A. Dillon - Vertical Research Partners LLC Mark A. Weintraub - The Buckingham Research Group, Inc. Christopher D. Manuel - Wells Fargo Securities LLC Mark W. Connelly - CLSA Americas LLC Alex Ovshey - Goldman Sachs & Co.

Mark Wilde - BMO Capital Markets (United States) Philip Ng - Jefferies LLC Debbie A. Jones - Deutsche Bank Securities, Inc..

Thank you for joining Packaging Corporation of America's Second Quarter 2015 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. And please proceed when you are ready..

Good morning, and thank you for participating in Packaging Corporation of America's second quarter 2015 earnings release conference call. I'm Mark Kowlzan, CEO of PCA.

And with me on the call today are Paul Stecko, our Chairman; Tom Hassfurther, Executive Vice President, who runs our Packaging business; Judy Lassa, Senior Vice President who runs our White Papers business; and Rick West, Chief Financial Officer; and Bob Mundy, who will succeed Rick as CFO effective September 1.

I'll begin the call with an overview of our second quarter results and operations, and then I'll turn the call over to Tom, Judy, and Rick, who'll provide more details. During our prepared comments, we'll be referring to slides that are posted on our website. I'll then wrap things up and we'll be glad to take questions.

Yesterday, we reported second quarter net income of $114 million or $1.16 per share compared to last year's second quarter net income of $100 million or $1.01 per share. Second quarter net income included net charges for the Boise integration and the DeRidder Louisiana mill restructuring of $2 million or $0.02 per share.

Excluding special items, net income was a record $116 million or $1.18 per share compared to last year's net income of $114 million or $1.15 per share. Net sales were $1.5 billion in both the second quarter of 2015 and 2014. As shown on slide four, earnings of $1.18 per share were $0.15 higher than our prior guidance.

Higher than guidance earning of $0.06 per share were driven by outstanding operations in both our mills and box plants, especially considering that five of our mills were down during the quarter for their annual outages.

The benefits from the work we completed in the first quarter at the DeRidder mill during its extended annual outage were realized faster than we expected.

The ability to produce virgin, high-performance linerboard grades on D3, plus the improvements we made on D1, allowed us to make more lightweight containerboard and other specialty grade at DeRidder and shift other grades to accounts in Valdosta mills.

This resulted in record productivity on a tons-per-day basis and lower mill cost at all three of these mills. In corrugated products, our sales mix improved seasonally more than we expected, contributing another $0.05 per share.

In addition, lower mill outage costs, lower purchased pulp costs, a lower tax rate and other items each contributed an additional $0.01 per share in earnings. Looking at slide five, earnings were up $0.02 per share compared to the second quarter of 2014.

Production in sales volume increase has added $0.10 per share to earnings, a richer mix in corrugated products increased earnings by $0.02 per share, lower energy costs increased earnings $0.07 per share.

Lower chemical costs increased earnings $0.02 per share and a lower tax rate improved earnings over last year's second quarter by about $0.04 per share.

These earnings improvements were partially offset by lower white paper prices and mix changes which reduced earnings by $0.10 per share, higher labor and benefit costs of $0.05 per share, lower export containerboard prices of $0.02 per share, higher annual outage costs, $0.03 per share and higher wood costs of $0.02 per share.

EBITDA and margins in the packaging segments were up over second quarter of last year, with EBITDA of $267 million and sales of $1.142 billion, or a 23.4% margin compared to the second quarter of 2014 packaging EBITDA of $259 million excluding special items, with sales of $1.145 billion, or a 22.6% margin. Moving into more details of operations.

Containerboard production in the second quarter was 937,000 tons, up 91,000 tons compared to last year's second quarter, driven primarily by 79,000 tons or 875 tons per day produced on D3 machine at DeRidder. The D3 machine produced 59,000 tons of linerboard and 20,000 tons of corrugating medium.

With the D3 production, we reduced our upside purchases of containerboard by 56,000 tons compared to last year's second quarter. The D3 machine contributed about $0.06 per share to our second quarter earnings.

We plan to take our D3 machine down at DeRidder in September for 13 days to install additional dryers, which will provide the capability to achieve full design capacity of 1,000 tons per day and lower cost. We pulled up some work from next year's DeRidder annual outage to better utilize the downtime and also accrue benefits earlier.

Our containerboard inventory at the end of the second quarter was down 4,000 tons from year-end levels and about 1,400 tons below the end of the first quarter.

Our ending inventory level at the end of the quarter is where we wanted to be to meet our seasonally stronger third quarter demand, especially with the lost production from the planned D3 machine outage in September.

Our containerboard inventories at our box plants are also higher than what we've historically carried as a result of transportation issues, which I think most of you are familiar with. Looking at changes in containerboard mill costs, our overall wood costs are up year-over-year driven exclusively by our Northern mills.

Wood costs in our Southern mills are actually slightly down. Energy costs in our packaging business were down compared to both the second quarter of last year and the first quarter of this year, driven by lower purchased fuel prices and also lower usage. Purchased electricity prices were up compared to last year's second quarter.

However, purchased electricity consumption was down about 20% from both the conversion of D3 machine from newsprint to containerboard, which requires less electricity. And we also self-generated more electricity at our mills, which more than offset the higher prices.

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

Thank you, Mark. Corrugated product shipments were up 2.1% in total and per work day over a very strong second quarter of last year. As Mark said earlier, in corrugated products, our sales mix was better than we expected when we provided guidance and also compared to last year's second quarter.

Part of the richer mix, we believe, is coming from additional higher value-added volume as we migrate the Boise packaging plants towards higher-margin business. We are making progress, but the migration takes time to complete, and we have more work to do.

Our outside sales of containerboard were up about 21,000 tons compared to last year's second quarter, with domestic containerboard sales down 4,000 tons and exports up 25,000 tons. Domestic prices were comparable to last year and export prices were lower. I will now turn it back to Mark..

Thank you, Tom. EBITDA and sales were down in our Paper segment compared to the second quarter of last year, with EBITDA at $37 million and sales of $281 million, or a 13.2% margin compared to the second quarter of 2014, with EBITDA of $45 million excluding special items and sales of $295 million, or a 15.3% margin.

I'm pleased with our Paper segment results considering the earnings impact from lower paper prices, which we were able to partially offset with improvements in operations. I'll now turn it over to Judy Lassa, who will provide more operating details..

Thank you, Mark. Office paper shipments, which represent about 65% of our volume, were up 3,000 tons compared to last year's second quarter, or 1.7%. Printing and converting shipments were also about 6,000 ton over last year's second quarter.

Pressure-sensitive paper shipments were down about 8,000 tons compared to last year, driven by market conditions and pulp shipments were up about 2,000 tons versus last year.

Paper prices were down compared to last year's second quarter, driven primarily by changes in industry trade publications for major grades and changes in the mix of paper products we sold.

With the most recent published paper price decrease of $10 per ton, the current published price per office paper is $35 per ton lower than the average price for the second quarter of 2014.

Fortunately, we've been able to offset some of the earnings reduction from lower published paper prices and mix changes with continued improvements in both paper mill cost and productivity. During the second quarter, we also completed annual outages at the International Falls, Minnesota and Wallula, Washington mills.

Wood costs were comparable to last year, while energy, chemical and freight costs were lower than last year's second quarter. I will now turn it over to Rick West..

Thank you, Judy. As mentioned earlier, earnings improved by about $0.04 per share compared to the second quarter of last year from a lower tax rate.

Our second quarter 2015 effective tax rate of 35% was about 2% lower than the second quarter last year primarily due to an increased domestic manufacturers' deduction, resulting from having less tax net operating losses applied against taxable income that we had – the net tax operating losses were acquired with the acquisition of Boise.

The third quarter tax rate is expected to be about the same as the second quarter of 2015. As shown on slide six, cash provided by operations in the second quarter was $196 million after deducting $78 million in cash tax payments for federal and state income taxes.

Other uses of cash included capital expenditures of $86 million, common stock dividends of $54 million, share repurchases of $36 million and a scheduled term loan payment of $2 million. We ended the quarter with $164 million of cash on hand. I'll now turn it back over to Mark..

Thanks, Rick. Before I move to the third quarter outlook, I want to update you on the progress in achieving synergies from the Boise acquisition. As we reported in our fourth quarter earnings call in January 2015, we realized $100 million in synergies in 2014.

The remaining $100 million of targeted synergies consists of both capital project initiatives and other identified opportunities, to increase productivity and optimize operations. Through the first half of 2015, we've realized about an additional $30 million of synergies, with more in the second quarter than the first quarter.

This brings our total earnings improvement from synergies to $130 million. At the end of the second quarter, our annual run rate realization of synergies is at about $170 million, or 85% of our $200 million synergy target.

Looking ahead to the third quarter, we expect higher containerboard, corrugated products and white paper shipments, and lower mill annual outage costs and lower chemical costs. White paper prices are expected to be lower with announced price changes in industry trade publications.

And finally, the September outage on D3 machine at DeRidder will result in about 13,000 tons of lost production. Considering these items, we expect the third quarter earnings of $1.28 per share.

Finally, yesterday, we announced that our board of directors authorized the repurchase of an additional $150 million of the company's outstanding common stock. Together with the remaining authority under previously announced programs, the company can repurchase $205 million of additional shares.

This share repurchase program, together with our dividend increases announced earlier this year, demonstrates PCA's strong operating performance and cash generation, as well as our continuing commitment to return value to shareholders.

With that, we'll be happy to entertain any questions, but I must remind you that some of the statements we 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 to questions please..

The first question comes from the line of Anthony Pettinari with Citi..

Good morning. And....

Morning, Anthony..

...congratulations to Rick and Bob on their transitions..

Thank you very much..

On DeRidder, I was wondering if you could give some color on what work was completed maybe a little bit faster than expected in the quarter.

And then following the installation of the dryers in September, it's principally all of the large work on DeRidder done and then the $60 million EBITDA contribution that you had guided to, I think, late last year, is that still intact on an annualized basis?.

Yeah. Anthony, if you go back to the April call when we talked about coming out of the March outage, we explained the problems we had had with the vendor-supplied equipment on D1. And so, we were essentially running a crippled to that period of time until we could get the corrected hardware.

And also we're still ramping up D3 and working on overall cost efficiencies and productivity and continuing to fine-tune the grade mix. But we've learned very quickly on D1 how to overcome the vendor issues. And by the end of April, we had the corrected equipment supplied to us.

We took the downtime and primarily changed out few of the components that had to be corrected and then came on strong with the machine for the month of May and June on D1. So, D1's proven to be very successful. We're very pleased with where we are with the work we did.

And then D3, we talk on the call that we are – it's that basically 80% range in terms of 1,000 ton a day goal. And so, we moved up in productivity and efficiency and achieved our goals in terms of product trialing and also worked on cost. And so, D3 has proven to come on very quickly.

And then we also identified during the same time, and this is going into your question about the September outage. We had mentioned that we're going to install probably four dryer cans during the September outage. We realized that with the benefits of the capability to produce linerboard that we had additional dryers available.

So rather than just take an outage and then install four dryers, we have the ability to install additional dryers and rearrange the last section on a machine to achieve this.

And so we're actually installing six new dryers, and we are rearranging some of the earlier section dryer cans, so that we have a full dedicated high-pressure section, which will ensure us that we have the ability to dry at 1,000 ton a day rate..

Okay. That's very helpful.

And the initial guidance on $60 million EBITDA, and I think the initial design capacity was 355,000 tons, are those two still unchanged?.

Yeah. We're still standing by the $60 million EBITDA, which – or $0.09 per share per quarter basis. We still have that as our target. And the 355,000 tons a year is based on the 1,000 ton a day productivity on the machine..

Great. Great. And just one follow-up on containerboard. During the quarter, Pulp and Paper Week lowered Western liner prices $10 a ton.

I'm curious if that's something that you saw in the market and if there's any impact to PCA in the second half of the year?.

Anthony, this is Tom. I would say that it's very little impact. That was just basically a reflection of what has taken place in the past. So it was no big impact. And of course, we're not big net outside sellers on the West Coast anyway..

Got it. I'll turn it over..

Thank you. Next question, please..

The next question is from George Staphos with Bank of America Merrill Lynch..

Thanks, everyone, good morning. Again, congratulations, Rick and Bob. Rick, really appreciate all the help over the years with the Investor Relations.

I guess, the first question I had, could you give a bit more color, Mark, in terms of – or Tom, how you were able to get a richer mix through your efforts within the Boise system and then more broadly, within the legacy PKG system?.

Yeah, let me start that off and then we'll turn it over to Tom. And if you think about the acquisition when we acquired Boise, there were few different parts of Boise.

One of them is the Tharco business, which are really a stock-block business and the Hexacomb business which, at the time of the acquisition, were being run as separate entities within the Boise system. And so, we quickly identified the opportunities to integrate that entire system. I'm going to let Tom elaborate on it now..

Yeah, George. What we've basically been able to do is kind of break PCA's DNA, if you will, to Boise. And you've heard us over the years talk about the kind of mix we run, the hard to do, the things we want to get paid for, et cetera.

And so, we've been working hard on both the Boise legacy box plants, the Hexacomb plants and the Tharco plants to be able to do that. There are some segments of the business that quite frankly don't make some sense, and there are others that need to be enhanced. So, we work very hard on doing that.

I'm not going to go into great details, but that's essentially what we've done and what we'll continue to do..

Was there any operational effort that you brought to improving the mix as well? So, obviously, you always focus on the hard-to-do content in the market.

Was there anything that operationally you did different that allowed for that without getting into specifics? Or was it really just – which markets you targeted?.

Well, I think from an operational standpoint, certainly one of the benefits comes in freight, and that's getting the business to run in the right place. So, businesses move back and forth depending on best locations. And in addition, we did have – this was seasonally stronger in the second quarter than we actually thought.

I'll just add that especially in the ag business in the Pacific Northwest, with the record heat they had out there, the crops came in earlier than they expected. So that was somewhat of a lift for us as well..

Okay. I appreciate that.

The next question I had, again, just on pace of activity early in the third quarter, can you give us your normal review of shipments and bookings? Are you seeing any signs that back-to-school or things like Halloween are trending better than expected, quicker than expected or being pushed out relative to what your customers have traditionally pulled at?.

Our early third quarter trends, and we've only got about 10 or 11 days of July to base that on, but we're up about 2% again over the previous year, which of course was a larger number and a good year than previous year. So we're kind of tracking about the same.

Regarding some of these promotional trends and things like that, I think we saw a little bit of that a little earlier in the second quarter than we typically would. And – but I think overall, it's pretty stable..

Okay. Last one, housekeeping, I'll turn it over. Both the D3 ramp and the Boise synergies in total, where would we see those if you – where would we see those in the 2Q-to-2Q bridge table that you provided? Thanks very much and good luck in the quarter..

George, this is Rick. In the 2Q-to-2Q bridge table, if you look at the components that we talked about, it's really in all of the areas. We had said in our – in fact, in our second quarter 2014 conference call that the packaging mills, we were looking for productivity, optimization and cost reduction.

In our white paper mills, we were looking for just basic improvement. In our box plants, we said in the second quarter of 2014, we were looking at optimization of box plant operations and also lower corporate overhead.

And so, when you look at the 2Q-over-2Q, a lot of that is driven in each of the areas, as you can see, in the volume area, an optimization, and as we said on the call, productivity does two things for you, it's not just giving tons that makes it a cheaper mill cost per ton produced, and I think you can see that in our energy and chemical costs, somewhat in labor and benefit costs.

So in terms of the synergy realization, it's coming in each of those areas as part of the bridge. We don't specifically bring it up because there's other things we do..

And George, this is Paul Stecko. One real simple fact that substantiates what Rick said, once we got DeRidder in a position to make the optimum grade, not optimum for DeRidder but optimum for our system. All three mills, Counce, Valdosta, and DeRidder had all-time production records. And that translates into very good cost also. So....

And the mix, I would imagine..

The fact that we produced those – that level of efficiency on cost and volume is a testament of the integration that got put into place once DeRidder could do its thing..

Got it. Well, congratulation on the quarter..

The next question comes from the line of Chip Dillon with Vertical Research..

Yes..

Good morning, Chip..

Good morning. Good morning. Congratulations, Rick. And Bob, good to be catching back up with you again..

Thanks Chip..

First question has to do with, I guess, D3. And you mentioned it added $0.06 in the quarter, so you annualize that, that's about two-thirds I think of the ultimate goal. And I was just wondering, I would imagine the other third should come from, I guess, about another 15% or so of production.

And then, I would imagine the additional dryers would lower your cost there, especially as you make linerboard.

Do you think those two activities, that is the additional dryers, plus the production, could actually allow that to exceed your original goal?.

Where we are – we've committed to the fact that we know we're running the machine obviously better than we did at the beginning of 2Q. And as we ended up the quarter, we started 3Q. We're somewhere in that 90% of goal range.

But more than that, we really worked on the quality and the cost input, the performance of the machine, it's running extremely well. And we fully expect that the financials will be there. The extra tons in terms of finishing up the incremental tons to get to the $1,000 (sic) [1,000 tons] (26:45) target, your overhead is already covered.

And so, the contribution is very significant. So, going from the $0.06 2Q earnings contribution to the goal of the $0.09 is what we're planning on and we see that as achievable. Again, the machine's performing very well and its cost structure is very competitive with the rest of our system..

Got you.

I know it's early days, but do you see your CapEx edging down further next year, assuming no major obvious changes in your footprint since you won't be doing as much work at, say, DeRidder? And also, could you talk a little bit about downtime? I would imagine, I think you said in your comments, you're doing some things now that might have been done later.

So, could that actually reduce the amount of downtime you take next year?.

Regarding the capital level for next year, until we have a better chance to really assess what the opportunities are, we're going to say that our CapEx for 2016 would be in the same range of $275 million to $300 million, and that's providing that we have opportunities, now which – obviously we've identified various things that we're analyzing.

That being said, we plan on looking at a shutdown plan for next year. I mean, we saw the opportunity to move up some of these items that would have waited until next year, some boiler work, pulp mill work that will give us an immediate advantage in terms of operating efficiency at the mills coming out of September.

So, again, that does change how we look at the outage plan for 2016. Hopefully, all the work we're doing at DeRidder allows us to get DeRidder going forward into the normal shutdown mode that we see in our legacy system. Don't forget, I mean, this year hasn't been just about D3, the mill.

We've worked on over 300 various capital projects at the mill that was part of that capital spend for the year. So we're very, very aggressively going after opportunities to capture the benefits at DeRidder..

And, Chip, let me just add to that. DeRidder is a huge mill. The good news is – we have some problems at DeRidder. And the good news is, when we overcome those problems, that's going to get more money to the bottom line. Mainly, there's opportunities at DeRidder that we can capitalize down the road that were not in the original synergy plan.

In other words, when we put our original synergy plan together to tell you what happens when you put the two companies together, immediately, what are the benefits? But after you do that, and we're pretty close to having that done, then you get into normal, continuous improvement-type activity.

So, just because we'll be done with the $200 million in synergies, that does not mean – that was just an initial one-shot program, you get these synergies. But there'll be a long-term operations improvement program at DeRidder as exists in all of our mills, and we continue to want to take costs out of our system, and that will happen.

And that's kind of reflective also on D3. We're highly confident that this dryer change will get us everything we want from that machine. What's really significant about that, in our original design, we contemplated making a lot more medium than we are.

And we complicated the drying situation on that machine when we're making probably two-thirds linerboard on that machine. So, not only will we get to the 1,000 tons a day, we'll get to it a much tougher grade to make than we originally contemplated.

Now, beyond that, looking down the road a year or two, I certainly feel that I'd be disappointed if we can't get more out of that machine in terms of lower cost and a little more productivity, but that's down the road a year or so until we get through with the first phase of this operation, and that's the point Mark made earlier.

But I wanted to emphasize it..

Got you. And last quick one is, I know you guys being so largely integrated (31:23) the market, you mentioned that you've reduced your purchases.

And I sit here and you think on the linerboard side, especially the virgin quality, whether it's recycled that's made at a virgin level or virgin itself, there's just basically no capacity coming on because we know Pratt doesn't really fit that bill. And yet, the market's growing.

So, I'm just wondering even with you all backing off the market, are you having any difficulty getting virgin board out there, or is that not a problem?.

Well, Chip, this is Tom. I'll just say this, number one is that's one of the reasons why we're doing D3 in terms of the linerboard because we internally need linerboard in our system. And our purchases, you know, I mean, were very high before. We did the acquisition. We did the D3 conversion mainly because we needed to supply ourselves.

And so, we're doing okay. We think we're definitely in a sweet spot, there's no question about that. And you're absolutely right, there is very little growth, if any, in terms of virgin capacity out there. And yet, there is still – that's the primary market. And there's a very large demand for that.

And of course, as I think you've stated before, the outside market has shrunk dramatically.

So, the integration in terms of demand, not necessarily with supply, but in terms of demand has gotten to the point where anybody looking at doing anything in terms of adding mill capacity, if you don't have it internally integrated, there is very few customers out there that are net buyers in the marketplace..

Thank you..

Next question, please..

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

Thank you.

One or two housekeeping, first off, can you give us an update on the EPS impact from outages as it rolls through the year?.

Yes, Mark. Just to give you what we've said previously, we had said, of course, it was $0.15 actual in the first quarter. In the second quarter, we had guided to $0.16, we were able to pick up $0.01 with lower cost at our I-Falls mill, so the second quarter was an actual of $0.15.

As we go to the third quarter, we were looking at $0.09, but that's up to $0.11 in the third quarter, the DeRidder outage for 13 days is an extra $0.04 per share. But we were able to reduce the Jackson outage by $0.01 per share, so the net difference would be $0.02 lower in the third quarter.

And then in the fourth quarter, we had said $0.19, and it's up to $0.20 with that. So we're now at $0.61 of annual outage cost compared to $0.59. So a pickup of $0.04 from DeRidder, but a reduction of $0.02 with the I-Falls second quarter, and the Jackson third quarter..

Okay. Great.

And then is that a number you kind of consider normal for a year, order of magnitude?.

No. As we said previously in the second – in our first quarter call, you'd probably look at a normal year of about $0.55 a share, $0.56. It's premature because it depends upon the amount of work you would do.

But considering the fact that we had the extended outage at DeRidder in the first quarter, it'd probably be more in line still with about $0.55 or $0.56..

Okay. Great. Now, you'd mentioned the West Coast liner, really no impact, that there were some, also, shifts in medium pricing.

Does that likewise have minimal impact in terms of your corrugated pricing, et cetera?.

Yeah, Mark. This is Tom. Yeah. That was – I mean, there is some impact. There is no question about it, but it's very, very small for us..

Okay. And then lastly, you did pick up the pace of share repurchase in the quarter.

And how should we read that? Is that being opportunistic on stock price or is that just a function of where your financial strength is right now and you would intend to continue at that type of rate, pretty much regardless of share price in terms of repurchase activity?.

Primarily, that was based on an opportunistic situation when the stock started dropping..

Okay. Terrific. Thank you. And thank you, Rick, for all your help over the years..

Thank you, Mark..

Next question, please..

Our next question comes from Chris Manuel with Wells Fargo..

Good morning, gentlemen, and congratulations again, Rick, and welcome, Bob..

Thanks..

A couple of questions for you. First, let me start with, just kind of taking a step back, it's been a couple of years since you bought Boise and you've done a lot of work. And it sounds like you still have a little bit more on the synergy side. You're working through particularly on the corrugated side.

As you kind of take a look at the businesses acquired, getting back into the – or getting into the papers business that you hadn't done much in the past with, how do you assess that as you look today? I mean, you've done some work. You've got what you wanted mostly done there.

Is that still something that you view as a long-term fit within the organization or something you're still kind of taking a look at or how do you think about it?.

Without getting too far ahead of ourselves, we're continuing to make operational improvements. The business does not require an inordinate amount of capital to take care. And so, it generates a lot of cash.

And we stated this on prior calls, in spite of some of the markets pressures, it's a good cash generator and it doesn't take a lot of our attention right now in terms of resources. And so that being said, we're going to continue just running the business for the time being.

And – but we will obviously assess all opportunities that come along in the future..

And, Chris, just to amplify on that, this is Paul Stecko. It's only, our EBITDA in the white business is about 12% of our total EBITDA. And that number will decrease over time as, if we grow the brown business as we like. But that 12% or 13% of EBITDA doesn't require a lot of capital support.

And we like that free cash and we like having the ability to do something with it. And so, the white business has performed in line with our expectations and maybe beat it a little bit because of the synergies..

Okay. That's helpful. The second question I had was, as you look at – you mentioned inventory as being a little higher with freight logistics and different elements there and then timing of outages.

Is there a way to estimate, A, are you at a level that you're comfortable with, you're happy with as you look through your corrugated operations? Is there a way to estimate how much that's going to add? Is that the logistics, the freight, some of the other problems that'll end up staying with you? Is that two, three, four days? How do you think about that?.

Let me go back and – last year, when we were into the full first year of integration of the Boise legacy systems and giving us a West Coast presence of Pacific Northwest primarily, but a bigger West Coast presence. And looking at how we supplied the system with tons, obviously, you're reaching out further on a transportation cost basis.

And then with the transportation issues, with the trucking availability, trucking costs, rail availability, rail cost, we realized obviously it makes sense to reassess the overall inventory in our box plant system. And so, where we had assumed we would run it obviously was not an ideal situation.

And so, we talked about this in the last October's call that we intended to move our inventories up to take that into account. And then as we work through 1Q and 2Q, I think where we are today, we're feeling comfortable that this is a manageable inventory at the year-over-year higher level.

That being said, it's all being determined by what happens with transportation availability and cost. But again, I think where we are in today's world, our inventory is around a manageable level and a necessary level for us to service our customers..

Okay. That's helpful. Thank you. Good luck in the quarter..

Next question..

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

Thanks, couple of things. You've obviously talked a lot about optimization and productivity in the quarter since you did Boise.

But as we think about D3 coming online, is it fair to assume that the re-optimization of the containerboard system that happens after D3 settles in is going to be similar order of magnitude opportunity of what you've already accomplished with D1?.

That's really speculative. We'll continue to focus and fine-tune on the great mix opportunities. And as Tom grows his business, it gives us that much more flexibility with how we supply the box plant's needs now. But truly, I'd only be speculating on anything regarding that question..

Okay. So if we come back to the question of outside board purchases being down, last quarter, you said, I think, that D3 could help you eliminate 200,000 tons of outside purchases over time.

Can you give us a better sense of what period of time that might be?.

Well, we are not purchasing basically at commodity grade outside linerboard. And we continue, as we always have, to purchase small amounts of specialty linerboard such as white top grade. But when you think about – the machine itself truly allowed us to cease being dependent on the outside market for ground commodity-type linerboard grades.

And so – and we've done for years and we've always gone out and taken advantage of what was available for the specialty type linerboard.

Tom, do you want to add to that?.

Probably just say also, I mean, it's provided us an opportunity in the lightweight arena that we didn't have before..

Exactly..

And that was an area where we purchased and we had a desire for a higher virgin content obviously. So these – the work we're doing on D3 is actually satisfying the demands that we have (43:04)..

And Mark, to get to the bottom line, you mentioned the 200,000 ton a year number we gave you?.

Yeah..

The actual number for last quarter, which is one-fourth of the year, was 56,000 tons. So if you multiply that by four, you can see if we continue at that rate, we'll see the 200,000 tons. And the reason is we're growing.

So not only do you have to add the 200,000 tons of outside, you're going to add the tons we'll need (43:38) growth, and you know, our growth this year is up a couple of percent, then a couple of percent on a big number gives you a fair amount of tons to add to that total. So, we'll be well over the 200,000 ton target..

Okay. That's what I was looking for.

And just one last simple question, what's driving the decline you saw in label paper? Obviously, that's a business Boise has put a lot of effort into building?.

Judy?.

Yes, this is Judy. So a couple reasons, Q2 of last year, we were still selling discontinued pressure-sensitive grades out of I-Falls as a result of both of the closure. Also, the strong dollar is impacting our international sales, as well as kind of having a weaker demand globally. We've also had some mix changes domestically.

So we really think this will improve as we ramp up those new products on W3. It's a pretty long transition time because they're very technical, very – but we've got a lot of things in the hopper right now..

Okay. Super. Thank you, Judy..

Next question, please..

Our next question comes from the line of Alex Ovshey with Goldman Sachs..

Thank you. Good morning..

Good morning..

Good morning..

Looking at the balance sheet, you've really de-levered since the Boise acquisition.

Can you talk about what the appetite is to potentially look for other transformative type of M&A opportunities for you?.

You know, again, historically, we've always looked at opportunities, we've always been conservative. We consider what the value of an acquisition would be? What the returns would be? How much you're going to pay? What's the multiples? But, yes, to your point, we're obviously – the balance sheet's in good condition.

And so, if the right opportunity came along, as we've said over the years, we'd be evaluating it..

And I guess from a perspective, I just want to make it very clear because you raised an important point, we don't let the money burn a hole in our pocket. If we've got a lot of cash, that doesn't mean we're just going to go out and spend it. If we didn't have enough cash and it was a terrific M&A opportunity, we'd borrow the money.

So, we look at an M&A not from a respect that we've got the money. We look at it strictly, is it a good thing to do? So, the fact that we have money, it's a consideration, but it is far from the main consideration..

That makes sense. And then in terms of smaller opportunities, you have been active in terms of increasing integration rate with box plant acquisitions.

Can you talk about what the marketplace currently looks like in terms of opportunities to pick up box plant assets?.

Alex, this is Tom. I would say that there are some opportunities. They're limited. Obviously, we were – we initially started this process quite some time ago, and a number of independents have been bought up over this time period that alludes to the fact there's very little outside purchases going on anymore domestically.

So, they're not as abundant as they use to be, but there are some opportunities. And obviously, as Mark said, we're exploring any of them that make any sense to us..

Got it. And just last one from me, looking at your shipment number for the quarter, it looks like it's about 100 basis points better than where the industry is. Over the years, I think you've grown faster than that relative to the industry.

And so, the question is, given the larger footprint, do you think it becomes more difficult for you to be able to really grow 3% above the market, which is where I think the business has been over the last decade?.

Let me answer it this way. We plan on continuing to grow it in the manner that we've done over the last 15 years. And again, that's taking advantage of opportunities in terms of being mindful of the margins from the business. And looking at what that contribution is from each component of business you take.

So, but yes, I mean, the plan hasn't changed, the model hasn't changed. And so we certainly have the – the bigger footprint actually gives us more flexibility and more opportunity to go out and continue doing what we've done. So, that's our plan..

Thank you..

Next question, please..

Our next question comes from Mark Wilde of BMO Capital Markets..

Yeah, good morning and congratulations on a very good quarter. Mark, I just wondered thinking about D3, you're about 75%-25% kind of a liner-medium.

What's the ultimate mix going to look like there?.

I think where we are right now, we're satisfying what Tom needs in his box plants. That being said, we have an enormous amount of flexibility on the machine because of the virgin capability on a machine making the high performance liner.

But this 70%-30%, 75%-25% range that we're at is ideal for us right now, but reserving that condition as things change, we certainly have an enormous capability to move with whatever Tom needs..

Yeah, I might add this, Mark. Your question is hard to answer until you know what the demand situation is out there. But in an ideal world, what D3 should make would be above 75% liner and 25% medium. And the only reason medium fits in there is that it would supply only a very low cost freight on medium.

So it's a lot cheaper to ship medium into the Metroplex in Dallas from DeRidder than it is from Tomahawk, Wisconsin or Filer City. So that's a big freight savings when you can do that. And linerboard always wins over medium unless the freight penalty changed that equation. So, if the demand for liner gets higher, you might have to eat some freight.

But again, in an ideal world, 75%-25% right now unless the marketplace changes..

Yeah. Okay.

Tom Hassfurther, where is your integration level right now?.

We're at 85%, Mark..

And you want to get that to north of 90% still, is that right?.

Yeah. Yeah. We want to continue to get it up, yes..

That's still our goal, Mark..

Okay. All right.

And then, the last question I had, Mark, and this isn't specific to PCA, but can you just address the issues of what would be required to convert uncoated white paper capacity over the linerboard? I mean, if we've got very little virgin capacity coming into the market, it seems like one of the things you could do is you can take an uncoated freesheet mill, where you've got a kraft mill, and you've maybe got big paper machines and look at a conversion there.

Any thoughts on the difficulty of that?.

Well, I'm going to answer that a couple different ways. First, we don't have any plans to convert anything. But also, we talked on the last few calls about the complexity of that. And then, again, and I've stated this over the number of years that you can convert anything to do anything, but again, at what cost and about what opportunity.

DeRidder was a unique example because we have the virgin kraft fiber that we made available to the machine. And so, it not only, not only made sense at the time to convert it to the medium production as originally planned two years ago, but because we had the virgin kraft availability, it was that much more compelling for us.

But that being said, it takes a unique set of technical capability, a lot of what we did on the machine was our own in-house technical expertise. So, again, the degree of difficulty is great, the cost is great, and again, you have to weigh that with your opportunities. So, that's how I want to answer that..

All right. That's helpful. Thanks very much. Good luck in the third quarter..

Okay. Thank you. Next question, please..

Our next question comes from the line of Philip Ng with Jefferies..

Hey, good morning, guys. Congrats on the quarter. Quick question, price mix was awash in 2Q, certainly illustrating you're well insulated due to your integration level. But pricing was a lot more choppy in 1Q.

So what I'm trying to figure out on a quarter-to-quarter basis, what's changed and in your 3Q guidance, are you baking any slippage on export prices or the West Coast price cut?.

Well, it's pretty flat actually, Philip. But, we did, of course, tell you that exports were up about $0.02. So that was a bit of a headwind for us.

But other than that, we continue, as we talk about, to manage our mix and continue to proceed forward with that and start to transition some of this – continue to transition this Boise legacy business, (53:02) into kind of what PCA's model, little bit more like PCA model..

Okay. I guess it's that transitioning piece, right, because 1Q caught us by surprise in some of the volatilities on price. But, okay, that's helpful. And I guess a question for Judy. On the uncoated freesheet business, I know you took some downtime in 2Q.

But with prices coming down sequentially in 3Q, do you expect margins getting back to that double-digit level next quarter? And just curious to get your thoughts on your outlook on uncoated freesheet prices now that the tariff should be starting to kick in in the back half of the year..

Philip, this is Judy. So, third quarter is a seasonally stronger quarter, so our expectation that that would still happen, that will help us. It usually has a typically a heavier mix to the office side of the business.

And, of course, with no planned outages and no J1 turbine incident and our mills running better on costs and productivity, we would hope for that to improve. As far as the tariff situation, the preliminary ruling, cut size imports to date are down about 33,000 tons through June with about 21,000 of that being in 2Q.

But we really haven't seen any of the effects of that in the market yet. But as customer inventory decrease, we expect to see some impact. How much? We're not really sure at this time. That remains to be seen. The short answer there, it's really too early to tell what's going to happen..

Okay. Very helpful. And just one last one for me. Glad to see the synergy ramp up, back on track. Appreciate the color you provided earlier. If we take the first half run rate and (54:47) a slower 1Q ramp, seems like you'd be able to realize most of that $200 million synergy target this year.

Can you kind of help frame what the opportunity is for 2015? And is there some opportunity for upside going forward?.

Again, we've stated that the goal is $200 million of synergies. And we are quickly approaching that on a run rate basis. We've also mentioned in the past, we've got some discrete opportunities and the biggest opportunity that is looking at us right now is the International Falls turbine generator, which will come on line at the end of September.

So, that's another example of how we get to the final run rate, $200 million goal in synergies. But as Paul mentioned earlier also, synergies typically associated with bringing two companies together and then integrating the companies.

And so the goal of getting the $200 million by the end of 2016, we see us finishing up the integration into next year. And obviously, we're well on our way to accomplishing the $200 million run rate goal.

And that being said, after that, the opportunities are just to continue to be accretive for the company as we go forward, as we've done in the legacy business. But I don't want to speculate on anything else on synergies except that we've got – identified a number of discrete opportunities that we're very comfortable with..

Appreciate the color, Mark..

Thank you.

Next question?.

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

Hi, good morning..

Good morning, Debbie..

To the extent you can, can you just talk about your customer exposure? Kind of – I know this is very broad based, but which customers would you say in the corrugated market are really either outperforming or underperforming? And then your exposure to the e-commerce, I realize it's hard to kind of estimate, but what kind of growth are you seeing or expecting in that market?.

I'm going to start off and I'm going to hand it off to Tom. We're not going to get into specific customers. But across the board, we've seen growth in our system. Obviously, a little bit of weakness in the last few years with the West Coast drought. But other than that, I think again, it's across-the-board growth.

Tom, do you want to add a little more color to that?.

Yeah. Debbie, we have thousands and thousands of customers. So, it's you know....

Yeah. We have 30,000 customers..

Yeah. I know. I realize that. I thought just maybe more kind of housing-related versus e-commerce, like broader bucket..

Well, I think, if you look at some of the – if you just look at some of the industry trends, obviously, e-commerce has been strong and continues to grow. The housing market, depending, if you're in straight building materials, that's – you can just go on housing starts and kind of dictate what kind of demand you're going to have there.

I think remodeling and that sort of stuff has probably picked up just a little bit. Those are reasonably strong. But you can go through lots and lots of segments and come up with a lot of different answers here.

So I would just leave it at that and just say that on an overall basis, I mean, you know what the demand is doing for boxes and it's tracking a lot closer to GDP and certainly very close to the non-durable numbers. And I think that will continue to be the same going forward..

Okay. Thanks. And just one final question.

When DeRidder is fully ramped up, what would you expect your OCC virgin fiber mix to be?.

That's something that we consider proprietary. But again, we have the capability with the pulp mill right now to supply again the current ratio is between OCC and virgin kraft. Again, it's no different than what we're doing at Counce. So again, we've got a lot of flexibility there.

But I don't want to get into the specific ratios of virgin versus recycled in the sheets..

Yeah. But an important aspect of that question, and I'll add to it, is that we also want to pursue – we're not only working on paper machines.

We're also working on pulping capacity at DeRidder because if and when, and I think it's more a question when, OCC prices start to go up again, and if they go up a lot, we like the fiber flexibility of being able to put in more virgin and eliminate OCC in the facility and not be dependent on it totally.

And so, pulp capacity to us, virgin pulp capacity is another very important part of what DeRidder brought us. And that's the same model that we use at Counce, same flexibility..

Okay. Thanks. That's helpful. And, Rick, congratulations on the retirement..

Thank you..

Next question, please..

And the next question is a follow-up question from George Staphos with Bank of America Merrill Lynch..

Hi, guys..

Hey, George, go ahead..

...make it a quick one. As we look at historically what you've done with share repurchase, you've always said that you would be opportunistic. In fact, that's how you framed the second quarter repurchase activity, and we were certainly happy to see it.

Considering, though, that a lot of the operating issues in the first quarter were from things that are usually one-off, Packaging Corp. tends to run very, very well. 1Q wasn't as good of a quarter.

Would you have wanted to buy back more stock in the quarter given that you had gotten an opportunity in the market driven by a one-off factor that was operational? Or did you really acquire the stock that you would have liked in 2Q? If you can frame it anyway you can, that'd be great. Thank you and good luck in the quarter again..

Yeah, I'm going to let Paul get into that. That's a board matter, and we've discussed that in depth at the board level..

Yeah. What we've said, George, is we're opportunistic. And if the stock is down and we think the reason is not a good reason. And my favorite comparison is every time for the past couple of years, there were problems in Greece, we got hit by it too, and we don't have any plans in Greece. We don't sell any paper to Greece.

So, why are we being hit? And we used that opportunity to buy stock. So, we don't have a list of specific types of opportunities. You look at what's going on at the time and you make a decision. And at times, we have bought stock just to buy some and keep up with our buying program, but we mix that with opportunities.

So, we just don't sit around and wait for an opportunity that may or may not materialize. We have a plan to buy so much stock over some period of time, but we'll accelerate or de-accelerate that rate depending on what we see in the marketplace. So, that's kind of a long-winded answer to your question..

All right, Paul. Again, thanks for the thoughts and you have a good quarter. Talk to you soon..

Okay. With that, operator, we're out of time, so I'd like to thank everybody for joining us today, and I look forward to talking with you on October for the third quarter call. Have a good day. Thank you..

Thank you. This will conclude today's conference call. You may now disconnect your line..