Mark W. Kowlzan - Packaging Corp. of America Thomas A. Hassfurther - Packaging Corp. of America Robert P. Mundy - Packaging Corp. of America.

Clyde Alvin Dillon - Vertical Research Partners LLC Mark Weintraub - The Buckingham Research Group, Inc. Debbie A. Jones - Deutsche Bank Securities, Inc. Chris D. Manuel - Wells Fargo Securities LLC George Leon Staphos - Bank of America Merrill Lynch Anthony Pettinari - Citigroup Global Markets, Inc. Scott L. Gaffner - Barclays Capital, Inc.

Philip Ng - Jefferies LLC Derrick Laton - Goldman Sachs & Co. Gail S. Glazerman - Roe Equity Research Mark William Wilde - BMO Capital Markets (United States).

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

Good morning, and thank you for participating in Packaging Corporation of America's first quarter 2017 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.

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 more details. I'll then wrap things up, and then we'd be glad to take any questions. Yesterday we reported first quarter net income of $117 million or $1.24 per share.

First quarter net income included net special items expense of $0.03 per share, primarily due to the insurance deductible related to the previously announced incident at the DeRidder Mill.

Our current estimate of the total property damage and business interruption losses associated with the DeRidder Mill incident is between $20 million and $25 million, including capital costs of approximately $4 million.

The estimated impact to the first quarter earnings, excluding capital costs, is $15 million, of which $5 million, or $0.03 per share, is included in the special items expense for the first quarter, representing our property damage and business interruption deductible.

The remaining loss of $10 million, or $0.07 per share, that impacted our first quarter results is expected to be resolved with our insurance carrier over the next several months and is not included as a special items expense.

Additionally, as part of managing the impact of the additional DeRidder downtime on our containerboard system, we moved a previously scheduled annual machine maintenance outage at our Counce Mill from the first quarter into the second quarter of 2017, which improved expected first quarter results by about $0.01 per share.

Excluding the special items, first quarter 2017 net income was $120 million or $1.27 per share, compared to the first quarter 2016 net income of $106 million or $1.11 per share. First quarter net sales were $1.5 billion in 2017 and $1.4 billion in 2016.

Total company EBITDA for the first quarter, excluding special items, was $299 million in 2017 and $272 million in 2016.

Excluding special items, first quarter 2017 earnings per share of $1.27 was $0.16 per share above the first quarter of 2016, driven primarily by higher containerboard and corrugated products prices and mix of $0.16; sales volume, $0.12, higher paper segment prices and mix, $0.04; higher containerboard production volume, $0.07; and lower wood costs, $0.05.

These items were partially offset by lower Paper segment sales and production volume of $0.06; higher cost for recycled fiber, $0.07; energy costs, $0.06; and freight, $0.02; higher labor and fixed costs, $0.02; and higher expenses for depreciation, $0.03, and interest, $0.02.

If I were to exclude the negative $0.07 impact of the DeRidder incident from our earnings, our results were $0.08 per share better than our first quarter guidance. Higher sales prices and mix contributed $0.03 in our Packaging segment and $0.01 in our Paper segment.

Higher Packaging segment volume added $0.01 per share, lower indirect and fixed operating costs contributed $0.03 per share, and freight costs were lower by $0.01 per share. As mentioned earlier, moving our scheduled outage at Counce from the first to the second quarter helped by $0.01 per share.

These items more than offset recycled fiber costs being $0.02 per share higher than we expected.

Looking at our Packaging business for the first quarter of 2017, EBITDA, excluding special items of $272 million with sales of $1.3 billion, resulted in a margin of 21.7% versus last year's EBITDA of $237 million and sales of $1.1 billion, or a 21.6% margin.

The containerboard mills produced a first quarter record 932,000 tons, driven by strong demand and the need to supply our growth in box shipments, as well as the rapid integration of our new corrugated plants from the TimBar and Columbus Packaging acquisitions.

We ended the quarter with containerboard inventories, including the inventory needs of our two acquisitions, 12,000 tons below last year's first quarter level and over 16,000 tons below the year-end 2016.

Although recycled fiber prices negatively impacted us approximately $11 million and higher energy costs another $9 million compared to last year's first quarter, improved usage of chemicals and fuels helped mitigate some of the impact. I'll now turn it over to Tom, who'll provide more details on the containerboard sales and the corrugated business..

Thanks, Mark. In Corrugated Products, shipments in total were up 10.7% or 8.9% per workday compared to last year's first quarter. Our outside sales volume of containerboard was up over 6,000 tons versus last year's first quarter and about 2,000 tons below the fourth quarter of 2016.

Overall, Packaging segment volumes contributed about $0.12 per share above last year's first quarter and a penny above the fourth quarter of 2016, with higher box volumes being offset somewhat by lower mill containerboard volumes.

Domestic containerboard and corrugated products prices and mix together were $0.16 per share above the first quarter of 2016 and up $0.17 per share compared to the fourth quarter of 2016 as we continued to implement our October 2016 announced price increases during the quarter and we began the implementation of our mid-March increases.

Export containerboard prices were up slightly versus the first quarter of 2016 and up $0.02 per share compared to the fourth quarter of 2016. I'll now turn it back to Mark..

Thanks, Tom. Looking at our Paper segment, EBITDA excluding special items in the first quarter was $44 million, with sales of $259 million, or a 17% margin compared to the first quarter of 2016 EBITDA of $51 million and sales of $281 million or an 18% margin.

The $7 million decline in EBITDA versus last year was primarily due to the scheduled maintenance outage at our Jackson, Alabama, mill in this year's first quarter with no outage in last year, as well as higher energy and freight costs.

Paper segment price index was higher compared to last year's first and fourth quarters of 2016 due to improved mix in our pressure-sensitive business, as well as from lower pulp volumes due to our previously announced shutdown of the pulp operations at our Wallula Mill.

Both office paper and printing in converting paper volumes were slightly lower and pressure-sensitive volumes slightly higher than the first quarter of 2016, while all paper volumes were up compared to the fourth quarter of 2016. The elimination of market pulp volume was the key driver of the decrease in segment sales for the quarter.

I'll now turn it over to Bob..

Thanks, Mark. Compared to last year's first quarter, depreciation and amortization expense was $0.03 per share higher and interest expense was $0.02 per share higher due to items related to the recent TimBar and Columbus acquisitions.

Our first quarter 2017 effective tax rate of just under 35% was about the same as last year's first quarter, as well as the fourth quarter of 2016. Cash provided by operations during the quarter was $164 million.

Uses of cash and for the capital expenditures up $58 million, common stock dividends totaling $59 million, and $32 million in term loan repayments. We ended the quarter with $254 million of cash on hand.

As Mark mentioned earlier, we adjusted our plant annual maintenance outages for 2017 to help mitigate the effect of the prolonged outage at DeRidder in the first quarter.

The revised estimated earnings impact by quarter, including the loss production, direct costs and amortized repair costs, is now $0.07 per share in the first quarter, $0.10 in the second quarter, $0.11 in the third, and $0.23 per share in the fourth quarter. The total for the year of $0.51 per share is unchanged from our previous guidance.

I'll now turn it back over to Mark..

Thank you, Bob. At this point I'm still unable to provide additional details regarding the incident at our DeRidder Mill because of the ongoing investigation. I want to reaffirm that safety and the well-being of the people working at our facilities is of the highest of priorities at PCA.

As we first indicated subsequent to the incident, the annual outage work at the mill was delayed by one week and the mill resumed full operation approximately three days after that.

Looking ahead to the second quarter, we expect to continue implementing our previously announced Packaging segment price increases, and we expect higher corrugated product shipments resulting from strong demand in our two recent acquisitions.

Mill maintenance outage costs will be higher as we have scheduled outages at our three largest containerboard mills this quarter. We expect flat paper volumes, although pricing mix should move lower.

We also anticipate continued price inflation in recycled fiber, certain chemicals and freight costs, but our energy costs should improve as we move into seasonally milder weather. Considering these items, we expect second quarter earnings of $1.45 per share.

This does not include any of the potential additional costs or anticipated recoveries related to the DeRidder Mill insurance claim. With that, we'll be happy to entertain any questions, but I must remind you that some of the statements we've made on the call constitute forward-looking statements.

The statements were based on current estimates, expectations and projections of the company and do involve inherent risks and uncertainties, including the direction of the economy and those identified as risk factors in our annual report on Form 10-K on file with the SEC.

The actual results could differ materially from those expressed in these forward-looking statements. With that, operator, I'd like to open the call to questions, please..

We'll pause for a moment to compile the Q&A roster. Your first quarter comes from the line of Chip Dillon from Vertical Research Partners. Your line is open..

Yes, and good morning.

First question, obviously things are humming along quite nicely in the Packaging segment, but when I think about the Paper segment, are you all happy with your footprint size given some of the erosion we've seen in the volumes in the overall marketplace? Does your position – is it typical of what we're seeing overall? Or are you in a different situation?.

Well, as we've said before, we have a good position in that through the years with our mill down in Jackson, Alabama, and our mill up in International Falls. We can support the southern tier customer base and the northern tier customer base along with a portion of the western region.

But the logistics supply chain capabilities within the Boise paper segment is the key to that business. And so in that regard, it's a good size business for us. It's we're able to take care of the customer base that we've built. And it's, again, the logistics supply chain is the unique aspect of what makes that business work so well for us..

Okay. And then I had a second one, just to clarify. It looks to me that the DeRidder situation impacted you to the tune of $0.10 in the quarter and that, in other words, you would have made maybe $1.37.

And is that, first of all, the right way to look at it? And as we look to the future guide of $1.45, I would imagine that some portion of that $0.07 deductible comes back that you're not including apparently.

And if that's true, could you just clarify that and also let us know sort of over what period of quarters you think that $0.07 does come back to you?.

Chip, you're $0.03 over on what you're counting and we'll let Bob walk you through how that incident was accounted for..

Yeah, Chip, you wouldn't get to $1.37 because that $1.27 that we said was our recurring number already had called out the $0.03 for the deductible. So it's really $0.07 on the $1.27 so you get to $1.34. But you consider the fact that we moved the Counce outage out of the first quarter, it'd be more like $1.33.

And that $0.07 that is in our recurring earnings, yeah, we do expect, hope to have that resolve by the end of the second quarter is what we're shooting for..

But it's not included in the $1.45 guidance..

Yes. That's correct..

So that's not included..

That's correct..

Anything else?.

Understood, thank you. No, I think that does it. Thank you..

Next question, please..

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

Thank you and congratulations on an excellent financial performance in the quarter.

First, I just wanted to get a current read on how business is looking in containerboard, if you can give us a sense of what box shipments in April are shaping up to be?.

Again, we've had a great start to the quarter. I'm going to let Tom give you the color on that..

Yeah, Mark, through 14 days we're trending at approximately 11% over April of last year on a per day basis..

Okay. Great..

So things are looking strong right now..

And also I believe this time around you – many in the industry, and I believe you as well, announced box prices going up simultaneous with containerboard.

Does that potentially change the cadence with which the containerboard price increase might flow through to boxes? Could we see it happen faster this time around, and would that be built into the guidance that you gave?.

Again, Mark, I'm going to let Tom get into the color of that but, yeah, timing is important in how this rolls out earlier in the year.

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

Mark, I don't know if you know the – as we mentioned in the script somewhat, we've already announced the increases in mid-March on containerboard and of course that just was reflected recently in the publication. So we'll now begin the rollout of the box price increase.

And we don't publicly get into what is exactly happening in our box price increase other than I'll say that traditionally for us we would roll that out in a very disciplined manner. And we'll achieve the great majority of that box price increase over the next 90 days..

Okay. So we should look at history as a guide for the likely cadence of this increase, would that be..

I think that's fair..

Yes..

Okay. And then lastly, if I could, you had mentioned that in the quarter itself you had $0.03 of benefit from lower indirect costs and then also $0.03 better from price mix.

Maybe if you could give me a little bit more color? What are the lower indirect costs? And then on the price mix was that, I don't know if you can share with us, is that mostly price or mix and were you able to get better than full pass-through on the board price increase?.

Bob, why don't you walk him through that?.

Yes, lower indirect costs, Mark, are things at the mills like in the repair materials, the size, a little bit labor, a little bit – things of that nature. So that's what that is about..

And then on that $0.03 price in mix, that was primarily from the box side, corrugated products side, containerboard price increase pass-through on how we achieved that..

Okay. Thank you very much..

Next question, please..

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

Hi. Good morning..

Morning, Debbie..

Congratulations on a great quarter. I'm going to ask this question even though we kind of beat you up on this issue in the last couple of years. But you mentioned that your inventories were down 16,000 tons. You're headed into a seasonally strong quarter, and then you also suggested that you need higher levels of inventory due to the acquisition.

So I was wondering if you could just kind of parse that out for us, how you feel about your system heading being in Q2 here?.

Well, again, as I said on the call, we had run levels down to a point we haven't been at for quite a few years, but we are getting basically in a range that we were comfortable with. And so the TimBar and Columbus acquisitions, as we anticipated, required us to supply that system.

And so that inherently brings our total supply requirement to a point that we haven't seen. So in that regard we're at a low point. With DeRidder, and then shifting Counce, we actually ended up a little bit higher than we had planned on. But nevertheless, we're tight and we need to continue to run very hard. And so that's the plan.

We'll get through these shutdowns. And so we're wrapping up the last of our containerboard mill activity this week as we speak.

So we get that mill up and running and then we just need to run hard again to take care of this because we are in a position with the inventory management at a place where – again, if you go back a few years ago, with transportation issues, weather-related issues, we found it was necessary to run the inventory up to the higher levels.

Transportation is not the issue it had been. And so, with that being said, again, I'll wrap it up by saying we're tight and we need to run hard. .

Well, again, on the paper side of the business, as you would expect, 2Q is always at a point – third quarter is always the most robust quarter. So coming off the first quarter and second quarter, you're pretty typically flat 1Q to 2Q, and that's what we're seeing. Our orders are where we expect them to be.

We're quite comfortable with where the order activity is. And regarding how we're running the mill system, which is primarily Jackson, Alabama, and International Falls, we're running basically to demand, which is pretty well full out for those mills. And so we're in pretty good position right now.

Again, we've just gone through outages at Jackson, and so we've come through the winter months, but we're quite pleased where we are with the paper business..

Okay, great. Thanks. I will turn it over..

Next question, please..

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

Good morning, gentlemen..

Good morning, Chris..

And congratulations on a good year thus far. I'm trying to get my arms around – and I know whenever you buy things you integrate them pretty quickly, but a sense of – you talked about volumes up the first quarter in the box business and shipments a little under 11%. You talked about thus far being up 11% through April.

Could you give us a sense of sort of in structure versus acquired? I mean, my guess is that I think industry is up about 2% through the first quarter and you were up 11%.

I mean, is that a reasonable proxy of acquisition added 8% to 9% and industry 2%? Or how would we think about that?.

We're not going to get into the details of what was the acquisition-related piece going forward. We called that out on the January call for the fourth quarter and for the full year last year. We've used the term before.

We're one company now with these acquisitions, and so rather than trying to break that out – because quite frankly during the course of the fall and the early part of the winter months, we were able to move business, integrate business and take advantage of the geographic locations of the acquired plants.

So it's not we were trying to break out and parse what's acquisition-related volume. So again, we're looking at the total system, and again, we're very pleased with where see the volume. And we see this occurring nationwide.

Tom, do you want to add anything to this?.

I really don't have anything to add.

I think the important thing is, and the reason, as Mark mentioned, that we're now going to just report one company is also because of this movement of business and taking advantage of all of the synergies that are offered to us as a result of these acquisitions and making sure we drive that to the bottom line as soon as possible.

That's why we really can't at this point in time try to break out what – where we used to be and where we are today. And we're just going to report it at this point..

I think regarding asking us how we looked at it going forward, we're not going to comment about our forward expectations..

Well, maybe – look, I appreciate this is difficult, but maybe if I ask the question just slightly different. Historically, you've grown in line or better than the market. Nothing's changed with how you're going to market or recent competitiveness in the marketplace such that you wouldn't at least be keeping pace with the market.

Would that be – maybe give me a sense of that's nothing changed. You're not losing big chunks of business..

Well, again, I think if you looked at history, it's always our goal to outpace the industry. But, again, it's a quality book of business and the type of business we're going after, so, again, I'll answer that question in July..

Okay. Thank you. Let me switch gears one second and ask about inflation in flat pulp prices and some other things. As you look across – I know you flagged OCT was an issue. I know that the majority of operations though are kraft or virgin-based.

There are some – can you maybe talk about some of the other inflation that you're seeing in the marketplace today? Energy seemingly peeling back a little bit. We do see some pulp going up.

Do you make any other pulp that you sell externally? I think you had an op that you closed up in the Pac-Northwest, but are there elements of inflation that you're seeing through the system today?.

Yeah, Chris, you were breaking up a little bit, but I think you were talking about some of the inflationary items we're seeing and obviously with recycled fiber is the largest, although we are less impacted than anyone else in the industry because of our 20% or so use of recycled fiber. Yeah, energy prices, they certainly have been moving up.

They've tailed off a little bit lately, but we still see those at a higher level than they have been, as well as chemical inflation on caustic soda and certain coatings and sodium chlorate and other things. Those prices have continued to increase.

And freight, you know, freight was up this quarter, and we expect it to move up a little bit more as we move into the second quarter..

Okay. Thank you, guys. Good luck..

Thanks..

Thanks. Next question..

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

Thanks, everyone. Good morning..

Good morning..

Thanks for the details. How are you? Sorry, I joined the call a little bit late. I guess my first question, if you hadn't already answered it, can you talk about your level of integration currently and whether you're, at this juncture, beginning to encounter any supply chain issues with it being too high? Any thoughts around that would be helpful.

And then – well, let me leave it there and then I had a couple follow-ons..

Yeah. No. We're at currently 95% integration and planning for that as we wrapped up 2016 on how we were going to supply the system. We're comfortable with how we're supplying the system. Again, we had anticipated looking at what we were doing with our outside volumes, also looking at what we're doing with mills like DeRidder.

We had announced previously that we're working on some opportunities in real time at DeRidder to continue producing additional funds there. We just completed the first phase of the opportunities on number one and number three machines.

And so as we move forward into 2018 with work that we already planned and that we talked about, we would look at an additional incremental supply base coming out of DeRidder. But in that regard, again, I'll go back to use the word tight. We have to manage our business very carefully. And it's you use some of the terminology from 2012.

We're kind back in that same place again looking at all options on how we're going to supply the system going forward, but we've got quite a few options right now..

Okay. Thanks for that, Mark. My second question, the performance, again, was certainly quite good versus your guidance, and congratulations to you and the team on that.

If you take a step back and look at the performance in the quarter, and you certainly had your share of challenges in the quarter, you know, whether it be operationally for issues you talked about earlier or cost, what – was the performance as good as you expected or was it better? And if was better, where was the source of the positive variation? Was it on operating leverage at the mills? Was on the fiber flexibility you have in the system? I recognize it's all of the above, but if you could give us some color? If in fact performance was a bit better than you thought relative to the challenges you faced, what was the source of that?.

Well, again, across the board the entire system delivered on the volume side, on the box side. The volume was strong across the board. Operationally plants and mills performed very well, very efficiently. The paper side of the business continues to perform exceptionally well, very efficient performance out of the white paper mills.

And so, again, and you asked the question and I'll answer that. I'm never really pleased with our performance. I always expect more. But again, I'm satisfied with where we ended up.

Bob or Tom, you want to add to that?.

Yeah. No. I'm just saying there was no one other than with better execution, I think, on our packaging segment pricing. I think that was executed a little better there. Other than that it was just little $0.01 things here and there, which is good to see. It was sort of across the board, as Mark indicated..

Okay..

I would also add real quick that the integration of our acquisitions was exceptionally good and we really worked very hard to make sure that we captured the opportunities that were there. And the team at the acquisition plants have just done a phenomenal job of adapting to the PCA system..

My two last ones, and they're quick ones. On that one, Tom, recognizing you're not going to break it out for us, was the contribution progress, however you want to define it, on the acquisitions greater this quarter than it was in the fourth quarter? Logic would say perhaps, just because you now have more time with those assets to work with them.

Question number one. And question number two, back on the price mix benefit, and I think Mark had asked on this, the $0.03, that was obviously related to the prior increase that you were referring to? Or was there something else that we had missed there? Thank you, and good luck in the quarter..

Okay. George, yes I think the progress was better in the quarter than what we may have anticipated. I think that as I indicated, we realized benefits sooner than maybe we even anticipated with these recent acquisitions. And yes also to the $0.03 primarily related to the price increase..

Okay. Thank you so much..

Good deal. Next question, please..

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

Hi. Good morning..

Good morning, Anthony..

In your prepared remarks, you said you expect continued price inflation in OCC and I was wondering if you're referring to year-over-year or quarter-over-quarter inflation? Do you expect additional inflation relative to I guess the $150 a ton RISI published for April? Any kind of color you had there? And if there's anything specific to the OCC markets that you're buying in that maybe is different from what we might be seeing in the national averages?.

Yeah. I'll just say that we do see some slightly higher recycle on average second quarter, first quarter prices, so as we look first to second. And then, of course, versus last year's second quarter, you know, up substantially is what we're looking at as far as recycled fiber..

Yeah, Anthony, again, supply is very tight even though the price has come down a little bit from its peak. People are replenishing inventory so we're into annual shutdown activity and so again, I know there's been a lot of tightness in the supply so just along with what Bob said on the average price..

Got it. Got it.

And then just as TimBar and Columbus settle out, is it possible to quantify your integration rate in the quarter?.

No. Again, at a point in time we're 95%, but..

Understood. I'll turn it over..

Okay. Next question, please..

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

Thanks. Good morning, guys..

Good morning, Scott..

Mark, I think you said your outside sales were up 6,000 tons in the quarter, but as you get relatively tight in the system, I mean should we expect that to reverse and have you actually purchasing outside tons as we go forward through the year? Or how should we think about that?.

Well, you know we always purchase some outside tons. We've historically purchased specialty grade, as an example, various white top SBS-type grades, some of the very unique base weights. We're anticipating where we'd be with our integration level. We've taken advantage for transportation reasons, some close-in purchases.

So we've always purchased and we will continue to purchase opportunistically as we go forward through the year.

Tom, you want to add anything to that?.

I would just say, Scott, I think the important thing is is that we've always had our outside customers. They're long-term relationships. We'll continue to supply them both domestically and in those export markets.

Those are – as we've said many times, I mean, we're really small in those markets anyway and those are long-term customers and long-term commitments that we've had, and we'll continue to supply those as well. But we like where we are..

Okay. And just taking that another step further. If I look at the CapEx, I think the CapEx was $58 million in the first quarter, which would take you well below the full-year run rate you'd outlined on the fourth quarter call.

Was some of that just the maintenance timing issues, or would any of those projects normally just take place in the middle of the year? How should we think about that?.

Yeah, I mean a lot of it was really involved in DeRidder and the work that had to be done in DeRidder to take care of the mill and get the mill back up and running, and then take advantage of some opportunities that we had seen as the annual shutdown activity was taking place..

Okay. Last one for me on – you mentioned rail availability, or you didn't mention rail availability, but you mentioned freight not being an issue anymore.

Is that a matter of rail availability, or is it more not having increased truck freight rates and last-minute needs in your system?.

It's both. If you look at rail and truck over the last few years, we've had an easing up in terms of issues around rail, on-time shipments and deliveries, and truck availability. So again, from an availability point of view, trucks and rail have improved significantly over the last year..

Okay. Thank you..

Next question, please..

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

Lower wood costs was a $0.05 tailwind, which was a little better than we expected.

I'm just curious, how much of that was a function of just reducing the amount of fiber you use or just lower prices? And how do you think about that progressing the rest of the year?.

It was primarily in pricing. Obviously, we always continue to work on yield improvements within the mill process itself. But we've had a good harvest season.

If you went back to last summer and looked at the weather patterns into the fall with the winter wood build, we were able to take advantage of a much better weather pattern throughout the entire system that we operate our mills.

And as we've gone into the springtime period, again, so far, we've experienced, again, very complementary weather patterns that have allowed us to harvest at better than expected wood costs..

And I'd just add one other thing, Phil. From the pulp operation we had out at Wallula, one of the things we mentioned there was that it would help just from a chemical and a wood usage standpoint. I think we saw on the paper side, we certainly saw some good wood usage improvement in this quarter's results..

That's helpful color.

And when did prices start falling? Was it the back half – of wood prices? Do you start lapping some of those benefits in the back half of this year? Or how does that play out throughout the year?.

Well, again, we've already seen benefit. And so, again, I can't predict what the future's going to be as far as weather, but it's been a gradual – if you went back over the course of the last year and you looked at average wood costs, you would have seen a trailing off, a nice steady decline in delivered wood costs throughout the entire system..

Yeah, but I would say we're probably getting close, to your point. Maybe a little bit more benefit, but I think you're right. It's getting about to that point..

Got you. And then I guess shifting gears, you guys have obviously done a nice job with some of these recent tuck-in box acquisitions.

Would you need to do more debottlenecking at your mills or pursue another mill acquisition before you kind of continue some of these tuck-in acquisitions, which you've done a nice job adding value? And at current multiples, just how do you assess the attractiveness of a greenfield mill versus M&A? Thanks for the color..

We're not going to get into our strategy on how we're going to supply. We talked a little bit about some of the opportunities at a mill like a DeRidder that we'll take advantage of to bring on the necessary content that the corrugated side is going to require over the course of the future.

Commenting on how we view an acquisition versus a greenfield mill, we've always believed and we think if you look at the financials around acquiring an existing asset versus building a new asset, especially with the capability that we bring to bear, it would be much better for us and in general for anybody to acquire an asset, especially an underperforming asset, and then go run it.

And so that's how we look at asset acquisition versus greenfield.

Anything else?.

No, that's all. Thanks..

Okay. Next question, please..

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

Hey, good morning. It's Derrick Laton on for Brian. Thanks for taking my questions. Yeah, I just wanted to maybe go back to the last question there on the DeRidder potential bottleneck.

Does any of that change now kind of given some of the movement going on in first quarter and then some of the outages in second quarter? Are you expecting that to get pushed out a bit? Or should we expect that to be pretty much as planned?.

The DeRidder incremental improvement that we've talked about publicly over the last few quarters is still on track, and we would expect the final piece of that to be showing up on next year's annual outage.

Number three machine will go through its phase two portion of the work where we put in a new headbox and do some wet end work and a new shoe press to help with wet end pressing and drying and the overall productivity on the machine..

Great. That's helpful, thanks. And maybe just one more? You mentioned already in April pretty strong demand, and it looks like that's continuing from the last several months.

In there anything in particular that's really standing out to you guys in terms of what's driving that demand? Maybe it's e-commerce or industrial production? Is there any one that really just stands out that's outperforming the rest?.

Again, we're very pleased across the board how the system demand looks. And we've looked also, and you've seen this in the news, West Coast agriculture appears to be stronger than it's been in quite a few years, and we expect a good, robust harvest season throughout the entire West Coast.

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

I just think if you look across our thousands and thousands of customers, I mean, we've got reasonably good demand across the entire base. So I think we feel good about that, and it's always more desirable to have solid demand across the base than in particular segments..

Great. I appreciate the color, guys. Thank you..

Okay. Next question please..

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

Hi. Good morning..

Good morning, Gail..

You touched on this a little bit, but can you take a step back on OCC and maybe just give your best take on what you think drove the spike and just how sustainable you think it might be, particularly compared to maybe the last spike we saw in 2011?.

Well, again, China got into the buying pattern very significantly. And then again with demand, domestic demand being what it was, we saw the system get very tight. If you went back to 2010 we reached an inflection point on supply and demand in the U.S. system at that point and at that point we had actually had gone beyond the point.

And so the rise in prices was due to the lower OCC generation. And then that was coupled with strong demand, as I said, from China, and again, very robust domestic mill demand..

Okay.

And switching gears, I know it's not a major market for you, but just what you're seeing in export markets right now?.

Tom?.

Export demand remains pretty good and prices are trending up. That's what we see in our export market..

Okay.

And this was touched on a few times as well, but just in terms of the purchase tonnage at TimBar and Columbus, have you integrated as much as you can at this point? Or is there still some opportunity to displace purchases there?.

Yeah, we've optimized the integration, as we had called out when we announced the acquisitions. We're very pleased on the tons that we moved through the system..

Okay. Thank you..

Okay. Next question please..

Your next question comes from the line of Ketan Mamtora from BMO Capital Markets. Your line is open..

Hey. It's Mark Wilde. Good morning, Mark. Good morning, Bob and Tom..

Good morning..

Good morning, Mark..

I wondered just to start, I jumped on the call a little late here.

Did you actually quantify, Mark, the amount of debottlenecking potential at DeRidder?.

Yeah. I mean, we've talked over the last few quarters at times, the number three machine, when we're done with it from where it was, we should see 100,000, 125,000 tons of improvement on that machine.

But also on number one machine we've been doing various work, so between what we started earlier this year and then through next year we should be net gain of about 150,000 tons of incremental productivity out of the DeRidder system by mid-2018 coming out on the spring shutdowns..

Okay. That's helpful. And then switching gears, I wonder, Tom Hassfurther, these box volumes that we've seen, really since about August of last year, have really been up pretty sharply, and that's after a lot of years where box volumes just didn't seem to move at all.

What do you think has changed here? Because if you look at some of the other economic indicators and they really wouldn't tell you that we get this sharp of pick up?.

Yeah. I think, Mark, I think there's a number of things that have changed, and obviously we've talked about e-commerce being a big plus. I think the ag business in the United States continues to grow. And I think, as Mark indicated earlier, we're seeing significantly greater outputs coming out of the West Coast now.

So some of it is new growth areas and I think others is seeing a recovery from markets that have been down for a number of years. So, like, the West Coast ag as a result of the drive, again. So I think there's a number of moving parts here, and we're certainly pleased with the increase in demand..

Okay. And last question I had. Mark, a lot of your peers seem to be focusing on things like, kind of, Latin America and other overseas markets.

Is the focus for PCA going to stay really on the North American market?.

Exactly. This is our base of operation. This is where we plan on staying..

And does that – would that include Mexico? Or you really want to stay in U.S.

and maybe in Canada?.

U.S.-based..

Okay. All right. Sounds good. Good luck in the quarter..

Thank you..

Thank you.

Next question, please?.

Your next question comes from the line of James Armstrong from Armstrong Investments. (48:01) Your line is open..

Good morning, and thanks for taking my question..

Morning, James. (48:07).

First one a follow up a little bit on the integration question.

If the right opportunities presented themselves, would you be willing to be short liner board and medium for a certain period of time? In other words, would you be willing to go over that 100% integration level?.

Well, it depends on the metrics on the financial analysis. If the deal was justifying returns and you were justifying based on having to go out and supply with outside content, then that's a pretty straightforward decision..

Okay. Perfect. That makes sense. And then switching gears, what do you think your OCC versus virgin mix is now? I thought I heard you say a – give a 20% number.

And with OCC prices high, do you have any ability to swing to even more virgin in your system?.

We're currently at that 20% OCC, 80% virgin kraft-type ratios. And we obviously took advantage of our flexibility in the mill system through the course of time now, so the fact is, though, with us having to run the mills full out, you really don't have the flexibility of reducing OCC if you choose to run the mills full.

So again, we remain the lowest consumer of recycled fiber in the system as far as the industry in the United States at that 20% level..

Perfect. That's all I had, and great job on the quarter..

Thanks. Next question, please..

Mr. Kowlzan, I see that there are no more questions.

Do you have any closing comments?.

Again, thank you, everybody, for joining us on the call. We look forward to talking with you in July. Take care..

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