Thank you for joining Packaging Corporation of America's first quarter 2016 earnings results conference call. Your host today will be Mark Kowlzan, Chief Executive Officer of PCA. Upon conclusion of his narrative, there will be a question-and-answer session. I will now turn the conference over to Mr. Kowlzan, and please proceed when you're ready..

Thank you, and good morning and thanks for participating in Packaging Corporation of America's first quarter 2016 earnings release conference call. I'm Mark Kowlzan, Chairman and CEO of PCA; and with me on the call today is Tom Hassfurther, Executive Vice President, who runs our Packaging business; and Bob Mundy, our Chief Financial Officer.

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

Yesterday, we reported record first quarter net income of $104 million or $1.09 per share. First quarter net income included special charges for facilities closure cost of $1.9 million.

Excluding these special items, first quarter 2016 net income was $106 million or a record $1.11 per share compared to the first quarter 2015 net income of $100 million or $1.01 per share. First quarter net sales were $1.4 billion in both 2016 and 2015.

Total company EBITDA, excluding special items, was $272 million for the quarter compared to $255 million in last year's first quarter. Details of special items for the quarter were included in the schedule that accompanied our earnings press release. Turning to Slide 3.

First quarter 2016 earnings per share, excluding special items, were $0.10 per share above the first quarter of 2015, driven primarily by higher containerboard and corrugated products volume of $0.03, lower annual mill outage costs $0.08, lower cost for fiber $0.06, energy $0.6, and freight $0.04 as well as a lower share count of $0.04 that resulted from the share repurchases.

These items were partially offset by lower white paper prices and mix of $0.04, lower containerboard export prices $0.03, lower domestic containerboard and corrugated prices and mix $0.03, lower pulp volume $0.02, higher labor cost $0.01, higher depreciation $0.03, higher interest expense $0.02, and the state incentive that was received in 2015 related to the investment shift at DeRidder mill of $0.02.

Our earnings were $0.11 per share above our first quarter guidance of $1 per share. This was primarily the result of three things. First, we have, what I term, best-ever operational performance aided somewhat by milder than expected winter weather, which in total contributed $0.07 per share.

Secondly, we had synergy related benefits from the optimization of freight logistics costs of $0.02. And third, we have lower share count, which contributed $0.02 per share.

Looking at our packaging business, EBITDA excluding special items and margins, were up over last year's levels with EBITDA of $235 million and sales of $1.1 billion or 21.4% margin compared to the first quarter 2015 packaging EBITDA of $222 million on sales of $1.1 billion or 20.2% margin.

We successfully completed scheduled maintenance outages at our Valdosta, Georgia; DeRidder, Louisiana; and Counce, Tennessee mills, and containerboard production with 897,000 tons, which was 15,000 tons of increase compared to the first quarter of 2015.

We ran our mill system to demand, and with the D3 machine at DeRidder now at full capacity, we were able to support first quarter maintenance outages rather than prebuilding inventory during the fourth quarter of 2015.

Our corrugated product shipments were solid against a very strong first quarter of 2015 and containerboard inventories ended flat with last quarter and the first quarter of 2015. I'll now turn it over to Tom, who'll provide more details on containerboard sales and our corrugating business..

Thank you, Mark. As Mark indicated, our corrugated product shipments were very good, up 3.4%, with one more work day were 1.7% per work day compared to a strong first quarter of 2015. As a comparison, the industry was up 1.4% in total, and flat on a work day basis.

Our outside sales of containerboard were flat versus last year's first quarter and down about 4,000 tons versus the fourth quarter. For both comparative periods, domestic volumes were higher and export volumes were lower. Export prices were about 7% below first quarter 2015 levels or $0.03 per share and about 1% lower than the fourth quarter.

Domestic containerboard and corrugated products prices and mix together were $0.03 per share below the first quarter of 2015 and $0.01 lower than the fourth quarter. I will now turn it back to Mark..

Thanks, Tom. Looking at our paper segment, EBITDA excluding special items, was a first quarter record $51 million on sales of $281 million or an 18.2% margin compared to the first quarter of 2015 EBITDA of $49 million and sales of $297 million or 16.6% margin.

Our office paper shipments, which represent about 70% of our white paper volume, were up versus the first quarter of 2015. And overall white paper shipments were flat with last year's first quarter, while pulp shipments were lower. White paper sales volume was flat with the first quarter of 2015, while our price and mix were lower.

Sales volume and mix were favorable compared to the fourth quarter of 2015, while prices were slightly lower. All the mills ran exceptionally well during the quarter with very good cost. To put this quarter into results perspective, the $51 million of EBITDA is the highest first quarter and second highest of any quarter over the last five years.

The highest was the seasonally strong third quarter of 2014, when the average white paper price was $95 per ton higher than this year's first quarter. The 18.2% EBITDA margin is an all-time best for our paper business.

Finally, we notified customers of paper price increases of $60 per ton effective April 5, for our printing and converting grade; and $60 per ton effective May 2, for our office paper grades. I'll now turn it over to Bob Mundy..

Thanks, Mark. If you look at Slide 4, we have very strong free cash flow generation in the first quarter, with cash provided by operations of $191 million, capital expenditures of $53 million, which resulted in free cash flow of $138 million.

During the quarter, we paid common stock dividends totaling $53 million; repurchased just under 2 million shares, totaling $100 million or about $50.49 per share; and we had a $2 million scheduled term-loan repayment.

We completed our $150 million stock repurchase program that was authorized in July 2015, and received authorization from our Board for a new $200 million repurchase program. We ended the quarter with $162 million of cash on hand.

Finally, our scheduled maintenance outage cost came in about where we expected, and our quarterly estimates for the balance of the year are unchanged from the guidance we gave you on our last call. Now, I'll turn it back to Mark..

Thank you Bob.

Looking ahead to the second quarter compared to the first quarter, we expect seasonally higher containerboard and corrugated product shipments, white paper prices should begin to improve late in the second quarter, as a result of our paper price increases, but the vast majority of any price increase will not be realized until the third quarter.

We also expect some seasonal improvement in our energy costs, as we move into warmer weather. And our share count will be lower due to our repurchases in the first quarter. Prices for containerboard and corrugated products are expected to be slightly lower, as a result of the published price decreases.

Our annual maintenance outage costs will be about $0.08 per share higher, as we have four scheduled mill outages compared to three in the first quarter. Everything considered, we currently expect second quarter earnings of $1.18 per share.

With that, we'd 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.

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

[Operator Instructions] Our first question comes from the line of Mark Weintraub with Buckingham Research..

I was trying to understand the $0.07 from the best-ever operational performance and the $0.02 from the freight and logistics relative to what you're expectations had been.

Did a lot of that show up in the paper business particularly? And relatedly, if we think about what's driving that, what's been driving it, if we look at the improvement you had from fiber, energy, freight, were those the major component drivers? And if so, how much of that was just because fiber and energy costs were lower than expected for the commodity versus a function of being more efficient in the usage of those inputs?.

As far as the upsize that you referred to, it was spread out. I mean, all eight mills performed exceptionally well. As I said, it was a truly best-ever operational efficiency across the board. The white paper mill, I-Falls, Jackson, Wallula also significantly contributed to this upside. So we're very pleased with the three months work.

It wasn't just one month, but we saw consistent contribution from the operational effectiveness out of the white paper mill. So it was a nice contribution from that side of the business. But just to remind you, Mark, that that didn't just happen because of any activity necessarily that just took place now.

But when we were involved over the last two-and-a-half year primarily with DeRidder, we continued to make enormous improvements in the infrastructure and operational capabilities in these white mills. And so when the integration was concluding last year, primarily the work at DeRidder was winding up midyear last year.

We were able to move more resource into these white mills and putting a much stronger focus day-to-day in bringing this capability there. So again that number was between the mills, but again a very good contribution came from the white mills.

And the question regarding transportation, Bob, do you want to fill in some of that?.

The transportation was pretty much across the white mills as well as on the packaging sides, the mill and the box plants. So a lot of work was done there to optimize the freight and logistics, and we'll continue to see the improvements of those efforts..

So, if I understand rightly, then having gotten DeRidder behind you, part of what we're seeing is the ability to focus your resources at some of the other mills and so that will walk forward improvements more rapidly, is that a fair understanding of what you just said?.

I think, if you go back over the last two years in particular, although we had the bulk of the spending and the effort at DeRidder, because again that was the important factor in the integration, we nevertheless were continuing to improve the great deal of the infrastructure within the white paper mill.

And so just as I had called out that we worked on over 400 discrete projects at DeRidder last year alone, we worked on hundreds and hundreds of small projects at the three white paper mills. A lot of them did require a lot of capital. They were changing the way we do things, both on technology, working on the process, process control.

And so it's all been a cumulative benefit that's come to light. A one good example, Mark, on the white paper side, we called out last year the new turbine generator that was being started up at I Falls in September, that was one big example of a $20 million capital spend.

We tried that the turbine, we spent less than $10 million on the Jackson recovery boiler bottom. But those couple of items, in particular really helped those two mills really rebalance their capabilities. An example at I Falls of that turbine was a 52 megawatt turbine. We didn't believe we had enough steam to power that turbine up to its full capacity.

After we started it up, we were able to completely rebalance the steam distribution within the mill, the steam generation, steam consumption. And we originally budgeted for about 70% own make electricity. First quarter was an all-time record. We averaged 85% of our own make electricity in the mill.

And we had days where we were essentially spot right on the verge of being self sufficient with our own make electricity. So that turbine generator is one example of a real game changer.

And that mill that has allowed us to stand back and look at a number of opportunities now that are very no capital, low capital, but just process control, process fine-tuning, and then, of course, the Jackson Mill after the owners last year allowed us to really, really rebalance our Jackson run..

I know the first question had a lot in it, but I think you started to answer a part of it, which was when you look at the fiber, the energy, and the freight, year-over-year that was $0.16 in total improvement. And I just tried to get a sense as to how much of it was just a function of the underlying commodity, i.e.

the price of gas being lower versus the efficiency improvement such as what you were just talking about with that I Falls?.

Bob, why don't you give some more color on that?.

Yes, Mark. I would say about maybe like 60% or so is more price-related. And the things that Mark just spoke of, 40% or so was more on the usage side of the improvements that have been made..

Next question, please..

Your next question comes from Chip Dillon with Vertical Research Partners..

First question is I know that you all very clearly laid out about $200 million in synergies you were looking for in the wake of the Boise deal and that's been 2.5 years. Could you just gives us a kind of view of how you look at, if there are further opportunities as we think about your current footprint.

Do you see a certain amount of additional, maybe not synergies, but just cost reduction opportunities.

You've certainly laid out a couple of that have been very impressive in white paper, but as we look through the rest of '16 and '17, are there more things you'll be doing on the cost side that will maybe even offset inflation and then some?.

Yes, Chip, everyday technology and engineering organization is not only involved in the eight paper mills, but we've got Tom's side of the business, the group that's working on operational effectiveness and efficiency in the box plants, but your question about the $200 million run rate synergies and where do we go from there, we've called out last July on the call we wouldn't be detailing and defining synergy contributions per se, but we did indicate that obviously these number would continue to compound, but it would be as we run PCA we make continuous improvement and that's what we're all about.

We're about operational execution, continuous improvement, so work on hundreds and hundreds of these opportunities at any given time during year, and so it's safe to say, we've done this historically for the better part 16 years now. We will continue to make improvements.

We have a portfolio of opportunities that we're currently working on, on both sides of the business. And I'm talking about paper mills, legacy brown mills and the corrugated product side business. And so some of them are cost reductions, some of the business enhancing, but fortunate aspect of this is we have our own engineering group.

We have our own technology organization. Most of the engineering has done ourselves, so we can execute and move forward very quickly and so I'm very pleased with the opportunities as we go forward that we can continue to work on at least a piece of the inflation..

Looking at the white paper, I think you said in your commentary that for the guidance for the second quarter that very -- I'm assuming not very much of the price increase. And of course, earlier other parts of that white paper spectrum saw announcements for increases away from cut size.

So as I think about it, I know typically we don't normally get the full price increase that gets announced, but that's not always the case. But if we were to sort of think about of whatever -- what do you have in mind in the second quarter in terms how much will be felt.

Are you basically saying it's a third quarter event for you, and therefore very little of it's in the second quarter or none of it or can you just give us some feel for how much of it would be in the second quarter guidance?.

Obviously, I can't speculate and quantify the amount we expect regarding pricing the third quarter, but yes, because of the way this would flow through, any pricing that has been achieved would come in the late second quarter.

And as an example of that we do have a good portion of our business tied to indexes, and so printing paper is one thing, that is part of printing and converting. That was in April, and basically the price was -- we know it by customers. We are invoicing.

Office papers, cut size reprographic that will be a May event, so then you would look at something coming out in June publication to see what's being picked up. And then, you would wait to see a July publication to see what was picked up and we go from there, but we can't speculate, that's how the system works..

So I guess, said differently, if it does all go through, which again, we don't know it's speculation, but if it did all go through probably more than two-thirds of it would not be felt till the third quarter.

Is that the fair statement?.

Yes. Again, it would be primarily a third quarter event..

And then last question is, again, looking at the environment, it seems like that we've seen a tremendous amount of continued industry vertical integration. It seems like barely, a few weeks go by, and you hear about another sheet feeder or box plant either being bought or consolidating somehow into a group that also involves mills.

And I was just sort of wondering, are you seeing that we're kind of close to the end of that, and therefore, it's continuing to be tougher to find solid box plant opportunities to acquire? I know you said, that had been a big focus a few years ago, and I just didn't know if you felt that, but is something that that, whether time has passed for that or could there be more out there?.

Especially with the integration completed now, and I'm going to let Tom weigh in, in just a minute, but obviously the way we view the world, there are opportunity that exist. We're continually keeping our eyes open for what is out there. And there are fewer opportunities, naturally you would think to the consolidation.

But Tom, why don't you weight in and add a little color on that?.

First, Chip, I'll just mention that there is no question that industry consolidation has taken place.

Of course, we can't speak for the industry, and I had no idea to what extent we're at the end by any means, but because there is still a relatively large independent market out there in terms of numbers of plants, certainly smaller in terms of their market share, because of the consolidation.

But there are some, as we've said in the past, we virtually explore any and all opportunities that are out there. Some opportunities don't meet the requirements that we have for acquisitions. And we have a very disciplined approach. And if it's not a good fit, based on the criteria we have, we move on.

We're not going to make acquisitions just for the sake of making them, but at the same time, I will tell you that there are always I think some opportunities out there that can present themselves..

Your next question comes from the line of Mark Wilde with Bank of Montreal..

Mark, I just wonder, we're getting more questions from people about just sort of potential growth opportunities for Packaging Corp.

And I wondered if you could just talk about that in general terms, you and Tom have both just talked about box plants, but opportunities beyond that?.

I don't want to speculate in terms of what we would do, could do, but obviously in the last couple of quarters, speaking to investors and analyst we've made it clear that all of the heavy lifting is behind us regarding Boise integration.

And balance sheet is in great shape generating a lot of cash and so we have an enormous amount of flexibility and capability as we go forward to look at small one-off deals and/or some larger deals if it made sense and was the right thing to do. And the other thing that's significant, we've got the organization to do it.

We've got the people in place in both operationally, marketing and sales to do some significant opportunity. So we'll continue to look at the horizon but you just can't speculate. But right now, we're at a great place..

I wondered kind of going back to kind of Boise that was the first time since you've been a public company that you really went out and bought any mill assets and it seems like the performance there has been even better than you expected.

Has that made you think a little differently about sort of what kind of options you'd look at going forward?.

I think, two things, Boise was attractive to us because we absolutely needed the containerboard tons.

We were, at that point in 2012, and we were buying outside tons, as a matter of fact, we're buying couple of hundred thousand tons of outside containerboard to support our growth, and so the key to Boise was truly the DeRidder mill and then obviously the legacy brown side of the business. That being said, we have been very successful.

And yet the paper business -- and we call this out early.

We felt compelled that we could improve that paper business and continue to bring cost out of it and enhance the capability, but that being said, we are and will remain a corrugated products containerboard business, basically that's our concentration, that's what we do and that's what we will continue to focus on.

As we grow our integration which is currently about 87% level, we will look at how we support Tom's need for containerboard tons and that would play into other opportunities..

Just a couple of other follow-ons. One, a lot of your pears in paperboard packaging have been starting to expand down in Mexico.

I think you guys were down there briefly after you bought Boise because they had the Hexacomb business down there? Any thoughts on that market?.

Mexico is a good market, but we've never had the reach in terms of operating offshore. Once you start operating offshore, you've got a lot of legal and financial matters that you have to deal with and we're not good at that. We operate here in the United States and we just don't have the desire to start getting into that complexity.

We've got a plenty to do here..

Last thing I wondered, Tom Hassfurther, I notice the investor productions non-durable goods has been pretty sluggish and the box volumes have been doing well.

Any thoughts on that disparity?.

Go ahead, Tom..

Well, I would say, Mark, certainly one of the things that probably is really unique of the box business today versus what it was just compared to even three years ago or five years ago. Of course, you know the e-commerce side of the business has picked up dramatically. And that's a growth engine for us.

So I think that's been an area that has probably presented some opportunities for the industry in total to help get our numbers up a little bit over what we [technical difficulty]..

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

This is Scott Lehman in for Mark. Just two quick ones. First off, you mentioned exports being a smaller part of the mix of outside board sales in the quarter.

And with export prices falling recently, how do you guys view that? Do you still view exports as a regular part of the business, as it has been in the past?.

That hasn't changed. As we said many times, we continue to support a number of our legacy customers that have bought containerboard from us for the better part of a few decades. We do supply in to about 35 different countries. So we have no one big customer that we're tied to.

And if you recall from our comments last year and this year, because the first quarter starts heavy annual shutdown season, we tend to sell less on the export side of the equation and retain those tons for our own internal consumption. But the number on a percentage basis has ranged from 8%, 10% or 12%, and we're still in that range in total.

As a matter of fact, that really didn't change from last year, where we are right now year-to-date..

And then just another quick one from a freight/logistics standpoint. This is kind of two quarters in a row that you've pointed to positives from a logistics endpoint.

And I know last year, the industry saw lots of issues and a lot of competitors in the industry used that as an excuse for keeping higher inventories and even last quarter that kind of lagged into there.

So I wanted to know from your perspective, do you think that those logistic issues for you guys are in the rearview mirror? And how is that going to affect your inventory management going forward? And second, what makes you guys different than some of the other guys in the industry, where you saw these logistics issues kind of fall off a lot earlier?.

Well, I think we don't consider it in the rearview mirror. Freight continues to be something of concern to us.

What we've been able to take advantage of is, a good example is the fact that with DeRidder fully optimized and capable of producing liner and medium and all of the key grades, we have a lot of flexibility with how we move product from our containerboard mills into our box plants.

And so we've developed some really good capabilities with the carriers on how to move those tons through the various lanes in a very efficient manner.

Now, also with the fact that the economy did slow down a little bit, there has been some slight improvement in carrier availability to us, trucks that is, but that doesn't mean that pricing has necessarily improved there, it just that we have developed a very good efficiency and capability within that side of the business in terms of how we move product..

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

When I look at the guidance for the second quarter, just looking at the sequential trends on the operating performance, how do you think about, you mentioned best-ever operating performance in 1Q, you sort of look at that normalizing a little bit when you give guidance for the second quarter around operational performance or how should we think about that?.

The goal is always to continue to improve. We feel pretty good about where we are, because what we saw of the last three months wasn't just something that happened, it was a combination of what has been going on in the white paper business for the last couple of years.

And then on the ground side, quite frankly, well, this has been going on for 20 years, and then DeRidder obviously has been a key focus of. Everyday we'll continue to enhance the capability, but we are at a very high efficiency. We work everyday to maintain that high efficiency. And so that is the goal and that is what we've build our basis on..

And if I look at the packaging business for a minute, I think you said on the last call, the first 13 days of 1Q, the bookings and billings were flat year-over-year. You finished up 1.7% on a per work day basis.

So did demand grow as the quarter went on? And what does it look like so far in April?.

Tom, why don't you go ahead and put some color on that one?.

Scott, yes, demand did grow as the quarter went on. That's pretty typical for our first quarter. Second quarter starting out, for the first 11 days we're up 1% over tough comps from the previous year. So we're pleased with where we are at this point..

And then the share buyback in the quarter, you did $100 million, what was the average price per share on the buyback?.

$50.49 is the average price..

You bought the stock fairly well, I would say, being as how it's $64 and changed today.

On a go-forward basis, how should we think about the share buyback versus capital allocation of some of these other opportunities that you mentioned in regards to Mark's question, so basically the balance between share buyback and acquisition?.

We always view share buyback from an opportunistic perspective. And so that's truly the key word right there, opportunistic. I've said this on the last few calls as far as acquisition opportunities, we will reserve the right to use cash to apply to great growth acquisition opportunities.

And so again, if you're spending, using the cash for dividends, share buyback, debt reduction, acquisition, CapEx or some sort, and so very mindful of that. But again, we are in at position right now that would be, the stock is up obviously over that low average $50.49 acquisition of the 2 million shares that we did. So then you look at your hand.

And again, I'm not going to provide any detail other than that..

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

I guess, I want to put together a couple of topics that were discussed earlier, as it relates to the white paper business.

Given the performance that you've seen, has it changed at all what might have been your strategic view of its fit in the portfolio, say a couple of years ago to the present time? And I know the answer is, there is more to come, but is there a way at all to quantify, Mark, how much more opportunity you have to improve operations within the white paper business?.

George, that's a tough number. Again, all we can do is tell you that history provides the answer here. We'll continue to go ahead and make improvements in efficiencies and working on cost. Ultimately, I don't know what that means. I mean, you've got inflationary factors with energy, wood, hard raw material.

But for the fact that we can control, we'll continue to work on these things. I think one factor that is important, we're at a point with the white paper mills, we're not faced with any one enormous amount of capital requirement in these white mills, they're in very good condition, well capitalized. So what we do is we look at the small opportunities.

But if you do a 100 small things, the result can be worth an enormous amount to you. And so I'm very encouraged that all things being equal, we continue to generate a good return for what we have invested in this white business. And it generates a lot of cash, as we said before, and we'll continue to apply improvements to it.

But I really can't quantify going forward what that means..

Mark, that's fair. I wouldn't assume that you could, but I wanted to ask it anyway. But on the strategic side, has your view of its fit in the portfolio changed at all? And you said this more than once, you certainly said it on this conference call earlier a year, ultimately a packaging company.

But would you ever consider, given your success here, growing the white paper business?.

Again, we are going to maintain our focus on the containerboard, corrugated product side of business. That's where in terms of what we're really good at, what we're focused on, that's our business, that's our core business. And we're going to remain heavily involved in that. Again, the paper business it hasn't hurt us per se in terms of valuation.

And we're not in a position, where we have to do one thing or another with that business. It's a great business for us right now as it stands and we will just continue to operate it and generate a lot of cash with it..

I wanted to switch for my last question, and I'll turn it over. Again, obviously, you did very well this quarter, certainly better than our forecast, a lot of that was from operations. When we look back last year that was obviously an atypical quarter for Packaging Corp.

in terms of operations, you had some trouble coming out of the outages at D1 and you had issues with D3.

Is it possible to quantify how much of that $0.08 benefit, I think you said it was from maintenance outages were related to just getting over what were the problems in last year's quarter? And then, if possible, is there a way to quantify how much anniversarying the D3 ramp was, a drive of the increase in production year-on-year this quarter versus last year's quarter?.

Regarding the first part on the quarter-to-quarter, the $0.08, the bulk of that was the DeRidder outage. It was a massive outage last year. And not just the fact that we had the delayed number 1 work that went on and the heavy lifting on number 3, but that was a massive outage, total mill-wide work going on.

And as you look at this past first quarter, we had an annual outage at DeRidder, addressed all of the things that we would normally address, and so it wasn't nearly as impactful.

And so again, the bulk of that $0.08 will come from the fact that it was just a second shutdown we would have experienced and we were putting a lot of corrective action to mills. So, yes, that was the total..

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

I have a couple of questions on Slide 3. First, related to labor. I actually thought that was going to be a bit more of a headwind. If you take a look at what happened last year in the first quarter, I think it was a low-teens impact on a cent basis.

And I'm just wondering is there something different here that we should not be expecting going forward or something else offsetting this?.

Bob, why don't you go ahead and answer that?.

Yes, when we gave the guidance, we were talking about fourth quarter to first quarter. And labor actually was that negative, those timing items that hit you at the beginning of year that actually occurred as we expected. But year-over-year it was maybe not as fierce it was in the previous year-over-year comparison.

And some of that has to do with some of the things Mark has done on the hourly side of optimizing some of the things, the workforce and the mills and somewhat in box plants as well. So that certainly helped us year-over-year..

And then, if I could just stick with the slide on containerboard and corrugated prices and mix, is that was also a little bit less of a hit than we expected? And you said on the last call that you're trying to get a sense of what the liner decrease was it going to have and the impact on your contracts.

And I was wondering if you just can talk about what you're sense is of how much this might be an impact? The delta from Q1 to Q2, anything around that would be helpful?.

Let me answer that, Debbie. We're anticipating for the second quarter. We'll probably see on the containerboard sales side probably $0.50 on export containerboard, $0.50 on the domestic containerboard and probably about $0.001 in our corrugated products. So about $0.02 in total on Tom side of the business..

And I could just one more on the fiber side.

Was there like a regional difference there? Were there certain parts of the country where you and your benefit was a little bit better than others?.

No. We were fortunate because of the truly mild winter weather that we saw all the way from the International Falls, Canadian Border for the Gulf Coast, East Coast, West Coast. We certainly did not have anything near that would have been typical winter weather that would have put pressure on the wood baskets.

Little bit of that rain issue about a month and half ago in Louisiana, but the DeRidder mill was spared. Most of the rain went into that north and much further west of the DeRidder basin, so wood basket has been spared this year in terms of any unusual issues nationwide.

Next question, please?.

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

Just following up on Debbie's question on fiber costs, following the benefit you saw in the quarter. Do you have a view on fiber inflation in the second quarter both in pulpwood? And then in OCC it seems like we've had prices tick up a little bit for the first time in nine, 10 months.

Can you just talk about the fiber cost environment in 2Q?.

Again, going into the second quarter, I mean it's pretty flat with where we left the first quarter, but that being said, if we get into a hurricane season in the Gulf Coast and we start putting some more widespread rain throughout the Gulf Coastal region that could change the fiber cost make up.

But right now everything, as far as, in line with how we came out of first quarter. Obviously, what's been mentioned in the publications, but keeping in mind, we still have the lowest consumer user OCC in the industry. And so on a dollar-to-dollar basis least impacted..

And then pulp and paper weak kraft liner prices have been flat since the cut in January, but they've talked about discounting and recycled liner, which seems like its widened a bit.

Is that something that you're seeing in the marketplace or is it something that really impacts PCA or is this kind of discounting more in regions or categories or customers where you're not really participating?.

Tom wants to go ahead and put some color on it..

Anthony, I would say that, it's certainly an impact if pulp and paper continues to rationalize the two together, but we see recycled linerboard and kraft linerboard as being two very different products especially when it comes to performance. And the majority of our customer base is very performance oriented.

So from the standpoint of actually direct competing with this, it's not that much of an impact. But certainly, w what pulp and paper does, it could impact..

And Tom from your comments, is it fair to say you think pulp and paper, you should formally breakout recycled list price in the way that they have kraft liner list price..

I can't comment on that Anthony. All I can say is, is that the two products in our opinion are very different..

Next question please..

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

Mark thanks for providing some color on how you at least expect export prices to be from a head standpoint in 2Q. But can you talk about what are you seeing pricing probably on export? Are you starting to see that stabilize a bit? Certainly the dollar has strengthened a little bit.

Can you kind of help frame what portion of your export business is tied to Europe specifically?.

Regarding that I mean truly all of our export pricing activities has been primarily related to currency fluctuations. And so that being said just pure speculation on what's going to happen at this week or next week regarding dollar versus currency. So that's truly the impact of -- we did see some slight decrease from 4Q into 1Q as we call out.

But other than that, I don't want to speculate. And what was the rest of your question, we didn't quite hear you..

What portion of your export business is tied to Europe specifically?.

Tied to Europe?.

Yes..

Probably less than half. Total offshore containerboard sales..

And then I guess switching gear a little bit. How you think about box shipment demand broadly for the full year? 1Q certainly turning a little better and least start April decent, but at least we're starting to see some green shoots on the industry timing.

Are you seeing that side of business pick up a little bit?.

Again, I don't want to speculate anymore. One quarter at a time where we are right now, but all I want to say about that, truly if the GDP and the economy starts improving in a significant manner you're going to see, theoretically, box demand grow with it. And so it's truly a GDP economic growth relationship here. That's all I want to say about that..

And just one last one from me, just piggy backing off of a Debbie's question earlier. I mean, I guess, the sequential decline in box prices with the VBW adjustment back in January, it seems a little smaller than we would have thought.

Is it, I guess, much smaller portion of your business tied to box contracts that triggered the $15 level versus maybe higher number just because it seems pretty modest or is it more 3Q event?.

I will answer it this way, we talked about this in January. We've got 15,000 plus customers. We're highly integrated.

And there are various trigger points that flow through to a box and so it's very complex and there is no one size fits all there, and so that $15 and $20 change in containerboard, would feel in that we understand what the implication is, and we call that out, but again that's all we ever want to say about it..

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

To kind of delve into a little different direction into what you're saying in some of your board markets. Given the fact and you talked a little bit about this, but some of the different grades have moved more in price than others, 42-pound linerboard holding up better than so many other pieces. We're seeing some substitution on the medium side.

Folks go into more recycled versus semi-camp. Have you had any of your customers or folks come back to you looking to substitute some cheaper price to stuff in and kind of embedded in the box.

I mean one of the assumptions we've long made is that boxes are largely kind of over engineered in North America, any color you have will be helpful?.

Tom, why don't you go ahead and get into that..

Well, Chris it's a complex subject obviously, when you start talking about substitution. I would contend that our objective is to give our customers what they need to perform and not more, not less, tailored to what they need in their performance, and I think that's pretty much the direction of the industry.

I think it's been stated in the past that there has been the case for over-packaging and all these other sorts of things, but I think that the statistics now support the fact that we become very much performance based industry and certainly we have with PCA. So that's what we sell and that's what quiet frankly what our customer's expect.

So they don't typically get into demanding substitutions or demanding this or that or that sort of thing and ends up thus to provide the right solutions for them. So those that are heavily in that recycled arena they're selling one product primarily, and so it's a different animal to some extent. So hopefully that kind of explains where we are..

When you think about -- and I don't think this is an issue that you have, but when we look at some of the newer capacity that has come on stream, it's mostly been recycled, but yet you and some others still have -- and you flexed it a bit this quarter when you ramped up DeRidder to kind of full steam, while you did some other outages.

You still seem to have some sort of latent, whether it's virgin or some other capacity that isn't all the way utilized.

How do you think about being able to kind of get all of that back to full steam as you look forward to next six to 12 months? It seems to be there is not as much incremental capacity coming on stream, but do you think that that's a fair path?.

Tom, why don't you go ahead?.

Well, I'm not sure I completely -- you might restate that just a little bit more for me, Chris, so I can really understand exactly what it is you're asking, it's kind of broad question, so if you wouldn't mind it, I'd appreciate it..

No problem. I guess, really what I am getting at is I think, this quarter you ran DeRidder really hard, closer to full capacity. And now you did so because you had some other outages.

So kind of implicitly within there is in some ways you're sort of holding back production through your system over the past year or at different times, that you had some incremental capacity.

How do you think about being able to utilize all your incremental all the capacities you have and kind of get into running full as opposed to just running the demand, you need to run the demand, but when do you think those began to intersect, is that a 12 months window?.

Yes, I got it now. That's very had to predict, I mean of course we just run the demand, that's what we do. Our extra capacity that we have will be utilized as we growth the business. That's pure and simple.

I mean, if we make a sizable acquisition or something that's obviously going to suck up a lot of it, as opposed to organic growth, but we'll continue to grow in those segments that we've always tried to grow in before. If you think about it anyway, we're at 87% integration.

And so if you did have any capacity, you would be back to where we were in 2012 as net buyers of outside containerboard tons and so again we're at pretty good balance right now running our system and being able to flex with Tom's need..

Our next question comes from Steve Chercover with D.A. Davidson..

You articulated the factors for the $0.11 beat, and we will take you at your word. But when you establish the guidance for Q1, the economic backdrop was pretty gloomy.

So I am just wondering, did demand exceed your expectations at all? And then, how are you feeling about the economy today? Maybe better than you were two months ago?.

When we had the January call, obviously we just had probably 11 days of consumption on Tom's side of the business at that point. And we were feeling okay. But as the quarter went on, we did see demand pick up. Again, we're not economist, so I can't fully explain. But I think we were pleased with what we saw especially coming off last year's big numbers.

We had tough comps to run against last year. So in that regard, I think we are pleased.

Tom, why don't you add something to that?.

Yes, Steve. I'd just say that one of the things that have taken place if you recall late last year and midway through the third quarter and certainly in the fourth quarter, as we alluded to on our calls, we had existed some business. And that we had gotten in the Boise acquisition. That was all part of our synergies.

And I think that obviously can help on our market side. But we were coming out of that, and so it was a little tough for us to forecast what that impact would be.

Continuing to go into this year, we felt like we had it all behind us, it turns out we did and how quickly we can turn it and get back into that growth mode was important to us and quite frankly a little difficult to predict. End of Q&A.

With that, operator, I believe we're out of time. And so thank everybody for joining us. I look forward to talking with you all in July. Have a good day..

Thank you. This concludes today's conference call. You may now disconnect..