Thank you for joining Packaging Corporation of America's Fourth Quarter and Full-Year 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 are ready..

Good morning and thank you for participating in Packaging Corporation of America's fourth quarter and full-year earnings release conference call. I am 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.

I will begin the call with an overview of our fourth quarter and full-year results and then turn the call over to Tom and Bob, who will provide more details. I will then wrap things up and will be glad to take questions. Yesterday we reported fourth quarter net income of $111 million or $1.17 per share.

Fourth quarter net income included special items of $5.5 million for acquisitions-related costs and facility closure and restructuring costs. Excluding these special items, fourth quarter 2016 net income was $116 million or $1.23 per share compared to the fourth quarter of 2015 net income of $105 million or $1.08 per share.

Fourth quarter net sales were $1.5 billion in 2016 and $1.4 billion in 2015. Total company EBITDA for the fourth quarter excluding special items was $293 million in both 2016 and $265 million in 2015.

We also reported full-year earnings excluding special items of $462 million or $4.88 per share compared to 2015 earnings excluding special items of $443 million or $4.53 per share. Net sales in 2016 were $5.8 billion compared to $5.7 billion in 2015.

Excluding the special items, total company EBITDA in 2016 was $1.2 billion, compared to $1.1 billion in 2015. Details of special items for both fourth quarter and full-year 2016 were included in the schedule that accompanied our earnings press release.

Fourth quarter 2016 earnings per share, excluding special items of $1.23, were $0.15 per share above the fourth quarter of 2015, driven primarily by higher containerboard and corrugated products volume of $0.16; higher white papers prices and mix $0.03; lower fiber costs $0.06; and lower annual outage costs $0.09.

These items were partially offset by lower containerboard and corrugated products prices and mix of $0.04; lower paper volume of $0.04; higher costs for labor $0.02; and repairs $0.02; higher expenses for depreciation $0.02 and interest $0.01 and a higher tax rate of $0.04. Our earnings were $0.08 per share better than our fourth quarter guidance.

Higher volumes in both our Packaging and Paper segments contributed to about $0.04 per share in total. Operational excellence across all mills and corrugated plants contributed another $0.06 per share, and fiber and chemical usage in the containerboard mills was $0.02 favorable.

These items more than offset the lower-than-forecasted price and mix for containerboard of $0.02 and white paper to $0.01 and higher recycled fiber costs of $0.01.

Looking at our Packaging business, EBITDA excluding special items in the fourth quarter of 2016 of $259 million, with sales of $1.2 billion, resulted in margins of 22% versus last year's EBITDA of $252 million and sales of $1.1 billion or 23% margin.

For the full-year, excluding special items, Packaging EBITDA was $1.02 billion with sales of $4.6 billion for a 22.2% margin compared to the full-year of 2015 EBITDA of $1.1 billion with sales of $4.48 billion or a 22.5% margin.

Operationally the containerboard mills ran exceptionally well with record production of 962,000 tons, driven by the need to support record box shipments and the rapid integration of our new corrugated plants from the TimBar and Columbus Container acquisitions.

We ended the year with containerboard inventories including the inventory needs of our two acquisitions flat with last year's levels. Inventories were up about 17,000 tons from the end of the third quarter due to the addition of our acquisitions and to prepare for outages at our three largest mills during the first and second quarter this year.

Additionally excellent fiber and chemical usage offset price inflation we experienced in these areas during the fourth quarter. I'll now turn it over to Tom, who will provide more details on containerboard sales and our corrugated business..

Thank you, Mark. In Corrugated products, we set new all-time shipment records both in total and per workday with total shipments up 9.7% or 11.5% per workday over last year's fourth quarter. Our outside sales volume of containerboard was up almost 5,000 tons versus last year's fourth quarter and about 11,000 tons below the third quarter of this year.

Overall Packaging segment volumes contributed about $0.16 per share above last year's fourth quarter. For the full-year, shipments in total were up 5% or 4.6% per workday over 2015.

Packaging segment price and mix was lower compared to the fourth quarter of 2015 by about $0.04 per share but up $0.05 per share compared to the third quarter of 2016 as we began implementing the announced price increases to our containerboard and corrugated products customers throughout the fourth quarter.

Domestic containerboard and corrugated products prices and mix together were $0.02 per share below the fourth quarter of 2015, but up $0.05 per share compared to the third quarter of 2016. Export containerboard prices were down about $0.02 per share below fourth quarter 2015 levels and fairly flat with the third quarter of this year.

Finally I would like to add that our recent acquisitions have bolted on seamlessly during the fourth quarter. These operations have proven to be an excellent bet and we’re off to a great start towards achieving our goals.

Of course this could not have been accomplished without the outstanding effort and dedication of all employees of PCA, including our newest teams from TimBar and Columbus Container. I'll now turn it back to Mark.

Thank you, Tom. Looking at our Paper segment, EBITDA excluding special items in the fourth quarter was $50 million with sales of $254 million or a 20% margin, compared to the fourth quarter 2015 EBITDA of $28 million and sales of $273 million or a 10% margin.

The EBITDA improvement over last year was primarily due to excellent operational effectiveness throughout the quarter and our Jackson Alabama mill being down for an extended period for a planned rebuild of the recovery boiler with reduced production and increased operating cost during the fourth quarter of 2015, versus no scheduled outage in this year's fourth quarter.

Paper segment price and mix was higher than the fourth quarter of 2015, contributing about $0.03 per share and flat with the third quarter of 2016.

Paper volume was lower compared to the fourth quarter of 2015, primarily due to the previously announced fourth quarter shutdown of our market pulp operations at our Wallula Mill, and down versus the seasonally stronger third quarter of 2016.

The reduction of pulp volume from the shutdown was key driver of the decrease in segment sales for the quarter. Full-year 2016 EBITDA, excluding special items, was $199 million and sales were $1.1 billion or an 18.2% margin compared to full-year 2015 EBITDA of $161 million with sales of $1.1 billion or a 14.1% margin.

I'm now going to turn it over to Bob..

Thanks Mark. Compared to last year's fourth quarter, depreciation and amortization expense was $0.02 per share higher. Interest expense was $0.01 per share higher due to items related to recent TimBar acquisition.

Our fourth quarter 2016 effective tax rate of just over 34% was above last year’s due to some one-time benefits received in ‘15 when we filed our 2014 returns. Related to our state tax selections made following the first full-year of owning Boise Inc.

Cash provided by operations in the fourth quarter was $213 million after deducting $64 million and cash tax payments and $4 million in pension payments.

Other uses of cash included $100 million to pay for the Columbus Container acquisition; capital expenditures of $86 million; common stock dividends totaled $59 million; and $7 million in term loan repayments. We ended the quarter with $239 million of cash on hand.

For the full-year, cash from operations was a record $801 million and free cash flow was a record $527 million.

Key uses of cash for the year included capital expenditures of $274 million; common stock dividends of $216 million; 2 million shares were repurchased totaling just over $100 million; $100 million for the Columbus Container acquisition and debt repayments for the year totaled $37 million.

Regarding full-year estimates, certain key items for the upcoming year. We expect total capital expenditures to be between $310 million to $325 million. DD&A is expected to be about $370 million, of about $12 million over 2016 primarily due to the TimBar and Columbus Container acquisitions.

Pension expense is expected to be $25 million and we expect to make cash pension payments of $43 million. The combined Federal and State effective tax rates for 2017 is expected to be similar to 2016 at just over 34%. Based on our current long-term debt, interest expense in 2017 would be approximately $100 million.

The cash interest payments would be about $94 million, both around $7 million about 2016 due to the new term loan from the TimBar acquisition as well as slightly higher assumed LIBOR rates.

Based on current planned annual maintenance outages at our mills in 2017, the total earnings impact of these outages, including lost production, direct cost and amortized repair costs is expected to be $0.51 per share versus the $0.42 per share for 2016.

The current estimated impact by quarter in 2017 is $0.09 per share in the first quarter, $0.11 in the second, $0.12 in the third quarter and $0.19 per share in the fourth quarter. I'll now turn it back over to Mark..

Thanks Bob. In summary, 2016 was a record year for PCA as we continued to see significant benefits from the DeRidder containerboard mill and white paper mills optimization efforts. We completed the TimBar and Columbus Container acquisitions and fully integrated their volume.

We ended the year with containerboard inventories at the lowest levels in two years and box plant cut up set new record. Dividend was raised 15% making its sixth increases over the last five years for a cumulative total increase of 320%.

Looking ahead to the first quarter, we expect to realize the vast majority of our previously announced Packaging segment price increases, and we expect higher corrugated product shipments resulting from our organic growth, and our two recent acquisition, as well as four more shipping days in the first quarter.

We have had lower containerboard and paper production volume, as we have scheduled maintenance outages on one of our machines at both the Counce and DeRidder containerboard mills and on one of our machines at our Jackson, Alabama white paper mill.

We expect higher freight costs as well as higher labor and benefits costs with annual wage increases and other timing related expenses. We also anticipate continued price inflation on recycled fiber, energy and certain chemicals, and seasonally colder weather will increase wood and energy costs.

Considering these items, we expect first quarter earnings of $1.26 per share. With that, we would be happy to entertain any questions. But I must remind you that some of the statements we have made on the call constitute 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 up the call to questions please..

[Operator Instructions]. And your first question comes from the line of Chip Dillon with Vertical Research Partners..

Yes, good morning..

Good morning, Chip..

First question is you obviously - it sounds like you did a great job getting the Columbus and TimBar plants into your system.

How much of the benefit do you think we've already seen and how much - in other words, how much is left do you think as we look into the first half of 2017?.

As far as benefit from the integration of the tons, we’ve significantly integrated the tons that we had committed to. But again, as we work through the first quarter, there is obviously benefits that will continue to roll in. We're very pleased with the acquisitions.

Tom, you want to give some more color to that?.

Yes, Chip, I would just add that in the case of Columbus, we only have one month of Columbus in the numbers for the fourth quarter, so there is some more to realize there. TimBar rolled in very nicely and there is probably a little bit more there, but for the most part we got most of the benefit in the fourth quarter..

Okay. And just one quick follow-up. Could you talk a little bit about how the first part of January looked? Often you give us a look as to how the first two days have gone.

And then it's interesting today being the last day of January, this at least historically tends to be the high watermark for industry inventories looking at the industry data, and I suppose as you look at your system, how loose or tight does the market feel today versus what you normally would expect to see as we’ve - in January?.

Let me answer the last half of that question and we’ll let Tom give you the first half of your question. For us, the - we’re tight, we have to run hard. We've got the shutdowns. We are coming up placing right now for the first and second quarter.

With the integration of these acquisitions, our inventories as I stated were basically a two-year low, and so I would characterize the market as tight for us in particular. And so again, it moves to continue to do well and to run hard and to run very effectively.

Tom, why don’t you answer the first part of the question for the first 17 days?.

Yes, Chip, I would say coming out of a very strong fourth quarter, we have a very strong January as well. Organically that's legacy plants we are up about 3% to-date. So we are off to a very good start and demand continues to be very good..

Great. Thank you..

Thank you. Next question please..

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

Good morning..

Good morning, Mark..

First, just detailed question for Bob.

Bob, can you give us some sense of what that maintenance cost was like in the fourth quarter, just as so as to help us bridge into the first quarter and the rest of the year?.

Yes, Mark, it was just over $0.11 per share in the fourth quarter..

Okay. All right, and then a little bigger picture.

I wonder if Mark or Tom, what is your integration level right now once we have Columbus and TimBar fully in the saddle?.

As we indicated on the October call and through some of the other public discussion we had in the fourth quarter, we expected to end the year and to start this year at around 95% integration, and that was cumulative effect of our organic growth and the acquisitions last year, and that's right where we are.

We are right about that 95% level, so again we are where we expected to be and we’ve adjusted our business for that and we're looking at how we go forward..

Okay.

And I guess just along with that, Mark, can you give us some sense of what’s sort of the incremental debottlenecking opportunities might be across PCA system in terms of size, cost, timing, things like that?.

Yes. If you were to think about we've raised the capital estimate for this year, there is some projects that we already identified in the past, as I've said, we're working our files. We pull those and we are beginning to execute.

These are - as you can primarily work at the DeRidder Mill and it involves both machines at DeRidder but the work will be done until the annual outages of 2018. But it fits in nicely with our growth platform and how we fully take advantage of the DeRidder mill. And to capital, it's not anyone big item.

As we've said before, the smaller amount $10 million, the $5 million, but it's basically enhancing both machines capability to optimize the mill. We are doing some other work at the mill on energy.

We've got another turbine generator that we had wired long with the one that was installed at the I Falls, so we'll see similar benefits on cost take out over the course of the next 18 months in DeRidder.

But that's a good example of where we are looking at taking through some nice high return capital with some tons that we can place into the system..

All right, that's helpful. Thanks. I'll turn it over..

Thank you. Next question please..

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

Thank you. Mark, two things.

There is a lot of light and heavyweight grades of containerboard where you don't really compete, and I'm curious if you see any of those grades as strategically attractive to PCA, or whether you think that as you continue to grow your footprint as you talked about, you’re going to stay in the middle?.

Well, if you look at our grade mix currently, we are participating in just about everything that's out in the marketplace with the exception of the ultra lightweights that would be using some very specialty type applications. And I think we view that as just not a current opportunity.

Tom, you can add some color to that, but again I think this discussion we’ve had for the last few years about the size in that market on that super lightweight..

Yes, I think, Mark, as Mark alluded to, we are not participating in that super ultra lightweight category and there is a reason why and that is because our customer demand doesn't really call for it. If they call for it, I suppose we would take a look at moving in those kind of direction.

But I want you to keep in mind one thing that we've been talking about for a number of quarters now and that is that we really are in the performance grades and that's really what we focus on maximizing performance for directly attributing to our customers’ needs and that's how we gear our mill systems.

So we really do in essence participate in the great majority of everything but it's on a performance measure basis..

And just one more question, it doesn't appear that trade protection has given white paper producers the boost that some people had looked for.

Have you been surprised by the level of competitiveness in those markets even with the improved rate of decline that we saw in 2016, and are you expecting anything better in 2017?.

Mark, the trade case did exactly what we targeted to do. They traded a level playing field with some of the folks that we needed to address. But keep in mind, there has been competition for the last 35 years from all over the world. We'll get cut-size office paper. We could go out and set up grades.

We were dealing with the world competition back in the 1980s and 1990s, so nothing has changed. It’s just you have the Asian side of the supply chain now, but imports did drop significantly last year and then they picked back up [indiscernible] and now with the end of the year. But we expected that would happen.

At the same time we are pleased with where our volume is. We are pleased with our business. And so like in that trade cases has achieved exactly what we hoped it would achieve..

So you're not looking for a much different in 2017 then?.

No..

Okay, perfect. Thank you..

All right. Next question please..

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

Good morning, gentlemen, and congratulations on a very strong finish to the year..

Good morning, Chris. Thank you..

If I could come back to an earlier question, I know you said that organic volumes were up about 3% so far in January but you ran up somewhere between 9% and 11% depending how we wanted to think about today in 4Q.

Given you still have that integration going forward of the TimBar and Columbus, is that a unreasonable rate for us to think about at least the first three quarters of ‘17 as you have the extra piece in there and then just continued growth, or how would we think about that 9% to 11% on an organic basis perhaps?.

Yes, Chris, that's our plan. We have the funds that we can put through the system. Tom has got his plan for the year, and so you assume that demand is there and we continue to fulfill that demand. So it's not unreasonable to think that just what we achieved last year, what we are seeing this year.

Again it's demand-driven and we are pretty pleased with where we are and we know we can take care of the business for the time being.

Tom, you want to add more color [ph]?.

Yes, Chris, the main reason I gave you the legacy organic growth for January is that's when we have real visibility into right now so - and that's probably the most meaningful number. You can tack on obviously TimBar and Columbus to that number and then you can get to the number that you can forecast going forward.

So we want to emphasize the growth that's going on in organically and that should get represented across our entire system. And so you're probably looking at 10% to 11% as the - if you tack on TimBar and Columbus part of that 3% number I gave you..

Okay, that's helpful. That's what I was looking for. As a follow-up question, from where you sit today, the balance sheet is in great shape, you’re roughly 2x leverage.

How do you think about a balance through the rest of the year? You gave us your capital plan but I know you always look at the dividends, but how do - you’re thinking about incremental opportunities for on the box side.

Are you thinking about maybe there is the share repurchase here, how do you think about incremental opportunities from here?.

I think you just said it all. We will remain opportunistic in all opportunities that we see whether it's being mindful of paying down some debt, acquisitions that came along that were great opportunities such as Columbus Packaging or TimBar, an opportunity to acquire a mill and expand containerboard capacity.

We've purposefully set this balance sheet up to have this flexibility to do what we require to do and continue delivering value for the shareholders and continue growing the value proposition..

Okay, thank you. Good luck guys..

Thanks. Next question please..

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

Hi guys. Demand was obviously quite strong for you in the fourth quarter as well as the industry and January seems off to a good start. Just want to get your view on how you're thinking about box demand this year, and are you expecting a stronger demand throughout 2017.

What are some of the key drivers? Are there any end markets that really stand out for you?.

Tom, go ahead and put some color on that..

Well, I would say, Philip, we could predict the quarter given the indicators and how they’ve started out, what goes ongoing forward is anybody’s guess however.

If the administration does some of the things they’ve talked about doing and with all our focus right here in the United States, that probably bodes quite well for PCA in terms of demand going forward.

End markets, I think there was some discussion about e-commerce on our last call and what it might mean to the fourth quarter, and I think you see those statistics that e-commerce did set reference beyond what the expectation was in the fourth quarter. I think the entire industry was helped by that. We don't have a tremendous exposure to that area.

Ours are more a third-party but nonetheless that probably helps us as well, and I think the prospects going forward are quite good, and like you said, we’re off toward a [indiscernible]..

Okay. That's good color. And then just looking at the December industry data, operating rates are in that 97% range. And Mark I think you mentioned you're pretty tight and obviously Pensacola - it's anybody's guess how long it's going to be down. That is going to take another one-odd-percent of capacity out of your market.

Just curious are you seeing any change in behavior from order patterns from your customers? Are they kind of ratcheting orders and doing little pre-buys just because we are going to head into time where there is a lot of downtime being taken as well?.

We talked about that in the fall. We didn't see any significant pre-buy, so I’d characterize that as a no, and I think the market is priced looking again what we have to run fall as I said.

Tom you want to elaborate?.

I would just say there are virtually no opportunities for pre-buy..

Okay..

The funds are available..

Okay. All right, that's helpful. And then just one last one from me. You guys obviously baked in some inflation sequentially in the first quarter combination of recycled fiber prices, energy and stuff of that nature.

Can you provide some color what the sequential year-over-year hit will be and when we think about fiber collectively, just given your mix in virgin versus recycle, are you expecting a year-over-year headwind just because I think virgin prices at least comp pretty favorable in the first half? Thanks..

Yes, let me just start that and then I’m going to turn it over to Bob. He can walk you through bridge between first quarter of last year and the first quarter this year just to help you understand that we’re self-inflation driven [ph]. Obviously recycled fiber is up somewhere 45% year-over-year.

To remind everyone, we still remain at least impacted in total. We use about 20% OCC PLK combination. So we’re impact $0.20 on the dollar compared to everybody else, so there is an impact but it's smaller - much smaller compared to rest of the industry.

With that, Bob, why don’t you give some color in terms of some of the other line items inflation effect?.

Yes, Phil, it's the our input costs certainly over last year's first quarter what we are expecting, we’ve been seeing at the latter part of ‘16 and we'll see it in as we go into ‘17 but $0.12 plus per share over last year's first quarter on recycled chemicals, energy, some of those things that we’re all thinking about, and on top of that we expect freight costs to be up a bit and then we always have labeled benefits that go up every year, and so that will certainly be slightly higher than it was last year first quarter as well..

Okay, great. Thanks for the color..

Okay. Next question please..

And your next question comes from the line of Deborah Jones with Deutsche Bank..

Hi. Good morning..

Good morning, Debbie..

I just wanted to follow-up on Phil’s question related to fiber. You did call out the $0.06 benefit but also that OCC prices were higher.

So can you talk about really how you got the benefit on the wood fiber side, and then specifically if there is any usage uses benefit or utilization that helped you and if that will continue?.

Bob, why don’t you go ahead?.

Yes, Debbie, the fiber is - again that’s company, for the total company it was $0.06 but when you look underneath that certainly recycled fiber for the Packaging segment primarily due to inflation was $0.06 per share higher over last year’s fourth quarter.

It was just happened to be offset by we had good usage on the paper side and good usage in our virgin wood fiber as well on the Packaging side. We are also doing some things with fiber on the paper side relative to less recycled pulp at our target Jackson mill which is saving us a lot of cost.

So net-net we are $0.06 favorable but when you look underneath you can see that it really was impacted the Packaging segment..

Okay, thanks. So that’s helpful. And then Mark, my second question just on price mix. I think you said the $0.04 headwind in the quarter was actually below target in your prepared remarks. Can you just confirm what you meant by that, because it was actually pretty big improvement from the year-over-year results in Q3.

Just how that's trending in the quarter?.

Well, look, again we talked on the third quarter call on October about the price leakage that had occurred year-over-year through the year 2016. And so as we went into the fourth quarter, we continued to see the impact of the price decline that had occurred earlier in the year on year-over-year benefit.

Now that was against - as we started raising prices, we saw the net benefit of price increase. Bob, you want to elaborate on that? So really it was a lagging event and then the benefit of the price increase starting to roll in.

Anything else Debbie?.

No, it’s good. I'll turn it over. Thank you..

Okay, thank you. Next question please..

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

Thank you. Congratulations on a very good year. And maybe just following up on the last one for clarity. I think you mentioned that sequentially that corrugated was a $0.05 benefit 3Q to 4Q, and that the containerboard separately, domestic containerboard was a $0.05 benefit 3Q to 4Q.

Did I hear that right?.

Corrugated as a segment. Again we saw the $0.05 benefit but was against some of the leakage that had occurred and that finally netted itself out..

Okay. I'm sorry.

I thought you - and maybe I misheard but had you said something about 3Q to 4Q the sequential benefit?.

Yes, on volume, Mark, yes, $0.05 for corrugated domestic containerboard that was the benefit and then export was flat..

Okay, so with $0.05 - and I apologize if I'm getting this wrong [ph], but I thought I heard you say that pricing was a benefit 3Q to 4Q by $0.05, pricing and mix?.

That's correct..

Okay.

And that was for boxes and the small amount of board you would be selling?.

And domestic containerboard, yes..

Okay thank you. And then just on the - perhaps a little bit more color on the demand in the fourth quarter.

So how much would have the organic growth have been in the fourth quarter, the 11.5% type of year-over-year box shipments improvement you saw?.

Tom, why don’t you walk him through that?.

Mark, the organic growth in the fourth quarter would have been 3.2%. Okay? So again then you take and then add on, then what TimBar and Columbus added to that fourth quarter. Now keep in mind that the first quarter of ‘17 is going to have four more days than the fourth quarter of ‘16.

So on a per day basis, the number goes up a little bit in the fourth quarter just because you have fewer days..

Okay.

And that 3.2%, that was average day?.

That was per day basis..

Per day, great. And then lastly, I realize that exports are quite small for you, but what are you seeing in the export markets have been a number of price initiatives and the Europeans also announcing price increases for March.

Can you give us a little color on what you're seeing?.

Yes. Tom, go ahead..

Yes, Mark, the export pricing is definitely moving up and demand is quite good. South America is very good this year. So there is - the demand trend even in export continues to be quite good..

Okay, thank you..

Thank you. Next question please..

And your next question comes from the line of George Staphos with Bank of America Merrill Lynch..

Thanks. Hi, everyone. Good morning. Thanks for the details. I want to take a step back and maybe go a little bit different direction on the paper segment, the performance at least versus our model, was excellent. You mentioned Mark operationally you did very well.

Can you comment a little bit more on what some of the drivers were in that segment because the performance was - certainly you had an easy comp versus last year, but nonetheless was quite good..

Again we were pleased, volume itself office papers was up slightly year-over-year, so volume was a very good story. But also all of the work we have done over the last three years has continued to be accretive.

The turbine generator, we used that example last year, but we continue to work on the white paper mills effectiveness week after week, so throughout 2016 we had our technology organization doing what we do well and that's helping the white paper mills continue to drive costs out and run more effectively.

So the big contribution for the fourth quarter as well as the full-year was the fact that volume is up slightly, but also that we were able to take significant costs out by actually all-time record setting uptime efficiencies at the white paper mills..

And with costs being taken out but not necessarily headcount reduction and all that, it was just running better in operational excellence and all things that you normally do..

Right, it’s I think interesting question. If you look back and look to three years ago, we actually had more people working in the white mills than we did three years ago. And again we are just running a world-class efficiencies, world-class uptime performance month after month.

Last year 2016 set an all-time performance record at the Jackson and I Falls mills in terms of their uptime efficiencies..

Okay.

So with that as kind of a jumping off point if we go now to corrugated and containerboard and operations, when you're done with the next phase, let's call them, projects at DeRidder and you said you'd be done with that by the outage season in 2018, and recognizing you need to project some growth into the future for this, what do you think your vertical integration rate will be at that point on an annualized basis and what next moves would you likely need to consider? Would they be - would there still be more in the file book in terms of these types of products, or would you need to do something more substantive and perhaps more externally driven?.

George, I think we are at a point now, once you're at 95% integration and were working on these projects to take care of our organic needs, we have opportunities. We’ve said this fact that you can - depending on the amount of capital you want to spend, you can add capacity. So if it’s a capital versus benefit price analyses.

But at the end of the day we are fine for the time being. We are right back where we were in 2012 period looking at this type of high integration level and how we go forward.

Obviously over the next few years, we’re going to have to make some different decisions on how we set the growth platform for higher level but we will talk about that when we’re ready..

Understood. I appreciate the color there. Last thing and I'll turn it over.

Is there any way you could perhaps give us your views on what you think the administration's potential policies might mean for the business broadly whether you think it'd be more net positive or net challenge? Tom, you mentioned perhaps that we could see some pick up the domestically, I don't know, if there is anything specifically that you were pointing to or more aspirational in terms of if we see GDP growth picking up, but if you could give us a bit of color there, that would be appreciated.

Thanks and good luck in the quarter guys..

Yes. It’s demand-driven and demand is tied to GDP pretty significant once again. And so I would just say that if GDP grows in any meaningful fashion, you will see box demand, box cut-up move in that same trend line.

So your guess is as good as mine in terms of what actually happened, so I think we are believing that we are better positioned in terms of we are still American-based manufacturing, and so far our customers here in the United States are in that regard would like to wait and see what Washington finally does..

So it's more of a demand versus trade point of view you're making.

Correct?.

Yes..

Thank you..

Next question please..

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

Good morning..

Good morning, Anthony..

Following up on the CapEx guidance with the new acquisitions, Bob, I was wondering what we should think of as PCA’s normal maintenance CapEx? And then just following up on George’s question on debottlenecking at DeRidder. You said that work would be done until maintenance outage season in 2018.

I was wondering if it was possible to put a finer point on that in terms of the quarter or even the tonnage estimate..

So let me answer that second part of the question first and I’ll let Bob go back to the breakout between the capital piece [ph]. Because of the long lead items for a few pieces of capital equipments that are required, we'll do this in two phases.

We’ll do some of the work on this year’s annual average at DeRidder through the winter and spring period and then we have to wait to fully capitalize on that for some of the equipment to be delivered at the end of this year into early next year to install some of the equipment, and then fully take advantage of our plants.

I don’t want to call out the incremental capacity. All I would say is that it allows us to continue the growth trajectory that we have plans to look for the next two years..

Yes, Anthony, and then the first part of your question for what we have planned for 2017, as far as the non-discretionary maintenance type items in our capital, it's about 50-50. It’s about 50% is what we would call non-discretionary type spending..

Great. That's really helpful. And then just switching gears, Pulp & Paper Week has indicated they will roll out a list price for recycled liner I think in March. In terms of how you engage with your customers, is that list price, is it positive, is it negative, is it neutral, or is it just a non-event.

Any kind of general thoughts on that?.

Just a quick statement.

We’ve said before that appeared as though recycled pricing had been used in the past as a rationale to take down craft line board and medium, and as we know there is a significant difference, as Tom mentioned earlier, in terms of performance characteristics between recycling craft as they are essentially two very different products when it comes to performance.

So in that regard, I think what's been talked about probably makes sense to have two different price points.

Tom, you want to ahead?.

I've got nothing else to add..

Anything else?.

No, great. That's helpful. I'll turn it over..

Next question please..

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

Thanks. Good morning..

Good morning, Scott..

Question is maybe for Tom. I guess if you look at 4Q box shipments obviously very strong both for PCA and for the industry, but if you look at industrial production of non-durable goods which shipments have tracked fairly closely recently over the last few years, it was actually down in the fourth quarter. Is there - Tom, you mentioned e-commerce.

Anything else that you're seeing that would account for the stronger than non-durable goods, industrial production shipment?.

No, Scott. I don't think there is anything in particular. I mean, e-commerce obviously is enormous in the fourth quarter. It’s the by far the biggest quarter of the year, so that probably helped to offset a little bit on that. But the other thing is, is that I get a lot of questions about our customers replenishing inventory and things like that.

For now for a number of years, our customers have maintained their inventories at very low numbers, so I don't see any replenishing of inventories either, which is good news because that means this demand trend can continue on. And there is probably just a seasonal disconnect would be my guess on the non-durable side..

Okay, fair enough.

And Mark, you mentioned obviously the capital projects over the next, call it, 12 to 14 months, some debottlenecking et cetera, but when you look further out, are there any significant investments you could make in the system that you have today without actually going out and adding through M&A, or through any large projects? Is there anything else, maybe at DeRidder or anywhere else in the system to add capacity?.

Well, again without giving you any details, there is always capacity that could be increased. It just depends on how much capital we choose to spend and then it becomes a decision on where is the best place to apply that capital. So we've got some decisions to make as we go forward over the next two years.

Again but I’ll reiterate it’s the same place we were in 2012 and evaluating a runway through our containerboard supply. I look at it - it’s a high class place to be..

Sure. Okay. Last one for me, just you mentioned to earlier question in the prepared remarks, you had $0.05 of positive price sequentially into the fourth quarter.

When you look at 2017 now, and now that you’ve got the pricing increase fully implemented, what are you thinking price versus inflationary, some of these inflationary pressures that you have? Do you have enough price to offset the inflation that you've already seen in the system going into 2017?.

I'm not going to answer that absolutely, but if you look at our performance historically, given our capital application and how we run the mills and how we run the box plants, we go to market, in general we have been able to keep up with inflation and go up or do better than inflation with cost take out and organic volume growth acquisition contributions.

And so that will continue to be our plan..

Okay, thanks Mark. Thanks guys..

Thank you. Next question please..

Your next question comes from the line of Brian Maguire with Goldman Sachs..

Hi, good morning. Thanks for taking my question..

Good morning..

Just wanted to dig into the 2017 outlook a little bit more. I appreciate all the color you give. It sounds like from the $1.26 or so starting point in the first quarter, you're looking for maintenance to be sequential headwind throughout the year.

Just wondering what offsets you’d have that would cause the EPS to go higher through the year? I know normally you’d get some seasonal pickup, but sounds like you're going to be starting the year off from a pretty full volume run rate.

Just trying to get a sense of what the other tailwinds would be in 2Q and 3Q as we go through the year?.

Obviously containerboard volume and containerboard price are the big positives and paper price positive year-over-year, and then you would have to say that if again GDP continues to pull the demand, that supports the volume.

And then we would have to assume that we continue to do what we do well and that’s operate our mills very effectively to work on the cost side of the equation. So that's pretty much the big pieces right there..

Do you think you would have the incremental tons to meet that better demand given how well you ran in 4Q and seems like the 1Q guide assumes a pretty good run rate, or do we have to wait more to 2018 when the DeRidder debottlenecks come online to get some more tons?.

We’re confident. We’ve got options. We got mix changes within our very flexible manufacturing system. We still got the exports and domestic volumes as we continue to assess the value that we derive per ton sold. And so again we’ve got various options and we’re confident we can supply that organic need as we could anticipate into next year.

So we’re feeling pretty good about where we are..

Okay. Just a related question.

Just wondered if there is any opportunities to given the tightness in the market and the strong demand you're seeing, any opportunities to shorten or push out the maintenance at Counce or DeRidder? I know those have to be on a pretty consistent timeline but just given the tightness in the market and with the Pensacola mill outage, just wondering if there is - if you’re seeing any opportunities to maybe defer some maintenance to take advantage of the market..

We are pretty well set on the maintenance plans. Again when you look year-to-year on what you have to do with those big integrated mills, the plan is pretty well get set and you have a basic high confidence of inspection requirements. And so in that regard, we don't see any changes that the plant is coming up..

Okay. Thanks very much..

Thank you. Next question please..

[Operator Instructions]. And your next question comes from the line of Gail Glazerman with Roe Equity Research..

Hi, good morning.

I know OCC is not a huge expense for you, but I'm just wondering, can you give some insights into what you think has been driving OCC, whether it’s China, whether there has been some talk of domestic collection issue, and are you seeing any signs of stabilization?.

Again just you read everything we read in the indices in terms of greasy [ph] information. So actually China got back big into the marketplace last year. And then demand, again just domestic containerboard activity in the mills and the utilization here domestically is caused the uptick in demand.

So I think again it's demand-driven here in the United States and then with China picking up their own requirements.

Tom, do you want to add some color to that?.

Well, I would just add Gail that we've been talking for quite sometime that collection rates during start are very high numbers and then of course we had a little decline in collection rates.

Some of that’s related to the e-commerce issue we just talked about where boxes are going to consumers’ homes and if their municipality doesn’t collect, they choose not to recycle. Some of those boxes end up in landfill as opposed to go to recyclers.

Also the price has ticked down to a point where some of the municipalities chose to get out of the collection systems.

So you’re finding that there is just - there is a bottom to this thing which makes good sense and of course coupled with China who is out of the OCC market for quite sometime with very large inventories, lender inventories run down to almost nothing.

And so they are very active back in the market and can't - quite frankly can't even get everything they need. So going forward, we look at OCC as being a headwind and I think the price will continue to move up..

Okay. You didn't call it out, so I'm assuming it wasn't an issue but there have been a few headlines about it, some storm activity around Valdosta.

Any issues to impact the quarter with supply moving forward?.

No. We've not had any issues at Valdosta, no, regarding any storm outage impact and/or wood availability or pricing impact..

Okay. And just on - I know obviously you’re full up and at this point absorbing TimBar and Columbus are probably the priorities. But just can you talk a little bit about the M&A landscape particularly maybe on the converting side just as critical math of integration continues to gain.

Are you seeing any more or fewer opportunities out there? I mean at this point are the last remaining independents pretty resolute or maybe thinking more and more about getting out just given how many of their competitors on the independent side have?.

Tom, why don’t you….

Yes, I would say that we've talked before that as the independent market continues to shrink quite dramatically that the opportunities of course in sheer numbers are less but there are still good quality opportunities out there and those that are interested and those that we have relationships with et cetera, we are going to take a good hard look at.

So we'll still be active in that M&A arena, and we’ll acquire those that make good sense and fits the criteria that we've laid out before..

Okay. Thank you..

Okay. Next question please..

Your next question comes from the line of David Coleman with Argus Research..

Hi, good afternoon. With regard to your mention of 2% organic growth, I was wondering if you could give some color on a few of your largest top line growth drivers..

We don't get into details of our customer base. That's proprietary information..

Okay. You did mention….

And also you talked about the amount, the organic is actually 3%..

Okay. You did mention though that you don't have a tremendous exposure to the online retail sales, but what is your definition of the tremendous exposure I guess..

Well, again, David, we are not going to get in those details but I did say that our exposure is more in, what I'd call, third-party as opposed to what you might consider to be the traditional e-commerce providers. So having exposure but it’s not in some of your more traditional markets and I’ll leave it with that..

Okay.

Just to clarify, so the majority of your products are not used in sending products to the end-user?.

That would be fair to say..

Okay. Thank you..

All right, thank you. I think we have time for one more question operator..

You do have a follow-up from the line of Mark Wilde with Bank of Montreal..

Yes, just a couple of smalls ones. One for Bob. One for Tom.

Bob, can you give us a sense of what your cash tax rate is likely to be in 2017?.

It should be just above - I think we’re up 34% - 34%, 35% somewhere in there Mark..

All right, so pretty close to the reported rate then?.

Yes..

Okay. All right.

And then Tom, just to be real clear on sort of how pricing rolls through, would you assume if we look at the second quarter that there will be any sort of quarter to quarter carryover benefit from price or will you get most of your price early in the first quarter, so that there is not really much quarter-to-quarter shift as we go into the second?.

Mark, as we mentioned and as the best we can educate that the vast majority of the increase goes in the first quarter of that. That said, we do have some contracts that rollover on a quarterly basis or a midyear basis, so there is a little lead over [ph]..

Okay, that’s fair. Good luck in the first quarter and through the year guys..

Thank you, Mark. Appreciate it. And with that operator, we’re out of time. I appreciate everybody taking the time to be with us today and look forward to talking with you after the first quarter results are in for the April call. Have a nice day. Thank you..

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect all lines..