Thank you for joining Packaging Corporation of America’s Fourth Quarter and Full Year 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’re ready..

Good morning, and thank you for participating in Packaging Corporation of America’s fourth quarter 2017 and full year earnings release conference call. I’m Mark Kowlzan, Chairman and CEO of PCA, and with me on the call today is Tom Hassfurther, our Executive Vice President, who runs Packaging Business; and Bob Mundy, our Chief Financial Officer.

I’ll begin the call with an overview of our fourth quarter and full year results, and then I’ll turn the call over to Tom and Bob, who’ll provide more details. I’ll then wrap things up, and then we’d be glad to take your questions. Yesterday, we reported fourth quarter net income of $269 million, or $2.84 per share.

Fourth quarter net income included special items of $122 million primarily for changes related to the recently enacted tax reform bill, which Bob will discuss further in a few minutes.

Excluding the special items, fourth quarter 2017 net income was $147 million, or $1.56 per share, compared to fourth quarter 2016 net income of $116 million, or $1.23 per share. Fourth quarter net sales were $1.7 billion in 2017 and $1.5 billion in 2016.

Total company EBITDA for the fourth quarter excluding special items was $351 million in 2017 and $293 million in 2016. We also recorded full year earnings excluding special items of $569 million, or $6.02 per share, compared to 2016 earnings excluding special items of $462 million, or $4.88 per share.

Net sales in 2017 were $6.4 billion compared to $5.8 billion in 2016. Excluding the special items, total company EBITDA in 2017 was $1.34 billion compared to $1.15 billion in 2016. Detail of the special items for both the fourth quarter and full year 2017 were included in the schedules that accompany the earnings press release.

Excluding the special items, the $0.33 per share increase in fourth quarter 2017 earnings compared to the fourth quarter of 2016 was driven primarily by higher prices and mix of $0.51 and higher volumes of $0.12 in the Packaging segment.

Volumes in our Paper segment were up $0.01 per share and the final insurance recovery related to the DeRidder Mill incident was $0.07 per share.

Partially offsetting these items were lower prices and mix in our Paper segment of $0.03, higher freight expense of $0.04, and operating and converting costs were up $0.13 in total primarily due to higher labor and fringe cost – fringes cost most of which was the result of working additional hours, which included holiday periods to meet our customer needs as well as our higher medical costs.

We had higher input costs of $0.04 driven by higher recycled fiber and chemical costs and our annual outage expenses were higher by $0.10 per share. Lastly, corporate costs were up $0.04 per share due to higher depreciation and interest expense.

Comparing our $1.56 per share in the fourth quarter to our guidance of $150 per share although recycled fiber prices were lower than expected, this was offset by higher labor, medical and benefits costs in our box plants.

Results were negatively impacted by $0.01 per share due to a slightly higher tax rate and offset by the final insurance recovery related to the DeRidder Mill incident of $0.07.

Looking at our Packaging business, EBITDA excluding special items in the fourth quarter 2017 of $340 million with sales of $1.4 billion resulted in a margin of 24.4% versus last year’s EBITDA of $259 million and sales of $1.2 billion or 21.7% margin.

For the full year excluding special items, Packaging EBITDA was $1.3 billion with sales of $5.3 billion or a 24% margin compared to full year 2016 EBITDA of $1 billion with sales of $4.6 billion or a 22% margin.

Record production of 1,006,000 tons allowed our containerboard mills to support record box shipments and prepare for the integration of our corrugated plants from the Sacramento Container acquisition as well it help to manage our inventories and scheduled – as we get ready for the scheduled outages at four of our mills during the first and second quarters of this year.

We ended the year with containerboard inventories including the inventory needs of our Sacramento Container acquisition about 48,000 tons above the end of the third quarter and 38,000 tons above last year’s level. This year end inventory level represents our lowest weeks of inventory supply in the last four years.

Higher year-over-year inflation came in close to where we expected and the employees at our containerboard mills and corrugated products facilities did a great job working extra hours during the quarter and over the holiday periods to meet our customer needs in a very timely manner.

Additionally, we’re off to a great start with the integration of Sacramento Container facilities and we’re able to finalize our claim related to the DeRidder Mill incident with our insurance carrier which enabled us to offset the negative impact to earnings from earlier in the year.

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

Thanks, Mark. Overall corrugated products and containerboard demands remained very strong during the quarter. As Mark indicated in corrugated products we had record box shipments, which were up in total by 9.8% with one additional workday or 8% per workday compared to last year’s fourth quarter.

For the full year, corrugated product shipments in total were up 8.6% or 9% per workday over 2016. Continued strong demand in both our domestic and export markets improved our outside sales volume of containerboard by about 26,000 tons versus last year’s fourth quarter and over 6,000 tons versus the third quarter of 2017.

Domestic containerboard and corrugated products prices and mix together were $0.40 per share higher than the fourth quarter of 2016 and as we expected were lower as we moved out of the seasonally stronger mix in the third quarter of 2017.

Export containerboard prices were $0.11 per share above fourth quarter 2016 levels and up $0.03 per share compared to the third quarter of this year. Finally, I would like to add that our fourth quarter 2017 acquisition of Sacramento Container and the two sheet leaders have bolted on seamlessly.

These operations proven to be an excellent fit and we’re off to a great start toward achieving our goals. Of course, this could not have been accomplished without the outstanding effort and dedication of all the employees of PCA including our newest teams from Sacramento Container, Northern Sheets and Central California Sheets.

I will now turn it back to Mark..

Thanks, Tom. Looking at our Paper segment, EBITDA excluding special items in the fourth quarter was $26 million with sales of $267 million or 10% margin compared to the fourth quarter of 2016 EBITDA of $50 million and sales of $254 million or 20% margin.

The decrease in results was primarily due to the scheduled outages at two of our three mills in this year’s fourth quarter with no outages last year. Lower sales prices and mix as well as price inflation on fiber and chemical costs and higher freight expenses.

Paper sales volume was up about 12% as volumes in all three of our major paper grades were above last year’s fourth quarter levels. However, this was offset somewhat due to no pulp volume this year compared to last year as a result of our exit from the market pulp business. Paper volumes were about 2% below seasonally stronger third quarter.

We began the implementation of our announced price increases and we ended the fourth quarter with average prices slightly above third quarter levels. However price and mix were still about 3.5% below the four quarter of 2016.

Full year 2017 EBITDA excluding special items was $153 million and sales were $1.1 billion or 15% margin compared to full year 2016 EBITDA of $199 million with sales of $1.1 billion or an 18% margin. I will now turn it over to Bob..

Thanks, Mark. As Mark mentioned earlier, during the quarter we were able to finalize the insurance recovery related to the incident at the DeRidder Mill.

Just keep in mind that while we did not include any potential recovery in our fourth quarter EPS guidance of $1.50 per share, this final recovery is included in our recurring earnings for the full year as it offsets the negative impact to recurring earnings that we experienced in the first half of 2017.

The final recovery for our claim is consistent with the estimate range we provided to you on our three previous earnings calls. Our fourth quarter 2017 effective tax rate on a recurring basis was just under 35%.

Due to the late December enactment of the tax reform bill, various tax-related items in fourth quarter were impacted, creating a tax benefit that we’ve excluded from our fourth quarter recurring earnings.

As you may have seen on one of these schedules we provided with yesterday's earnings release, the tax reform benefit, we excluded from our fourth quarter recurring income, was just over $122 million or $1.29 per share.

The primarily item that generated this benefit is the revaluation of our net deferred tax liability to the new lower federal tax rate of 21%. We ended the quarter with $217 million of cash on hand.

The primary uses of cash during the quarter included $274 million for the acquisition of Sacramento Container, $90 million for federal and state tax payments, capital expenditures of $117 million, common stock dividends of $59 million and interest payments of $29 million. Total capital spending for 2017 was $343 million.

Regarding full year estimates of certain key items for the upcoming year, we expect total capital expenditures to be between $440 million to $460 million. DD&A is expected to be above $390 million, pension and postretirement benefit expense of $27 million and we expect to make cash pension and postretirement benefit plan contributions of $23 million.

Based on our current long-term debt including the fourth quarter 2017 refinancing of our two term loans to fixed rate notes and the expected retirement of $150 million note in March 2018. Full year interest expense in 2018 will be approximately $101 million and cash interest payments of about $94 million.

Based on current plan annual outage, maintenance outages at our mills in 2018, a total earnings impact of these outages including lost volume, direct costs and amortized repair costs is expected to be $0.60 per share versus the $0.50 per share for 2107.

The current estimated impact by quarter in 2018 is $0.18 per share in the first quarter, $0.11 in the second quarter $0.15 in the third and $0.16 per share in the fourth quarter.

You will note that the $0.18 per share in the first quarter of 2018 is significantly higher than what you’ve seen historically due to the heavy scheduled outage work this year primarily at DeRidder.

Finally, regarding tax reform, based on currently available information, the estimate for our 2008 combined federal and state cash tax rate is in the range of 12% to 14%.

I do need to point out though that our 2018 cash tax rate benefits from an overpayment of cash taxes that were due on December 15, 2017 prior to the enactment of the tax reform, which will reduce cash taxes paid in 2018. Excluding this overpayment, our federal and state cash tax rate is in the range of 17% to 19%.

Our booked effective tax rate for 2018 is expected to be in the range of 24% to 26%. Pre-tax reform, our cash tax rate was approximately 36% and our effective rate was about 35%. I'll now turn it back over to Mark..

Thank you, Bob.

Looking ahead, as we move from the fourth quarter and into the first quarter, we expect to continue strong demand, although our corrugated volume and mill operating costs will be impacted due to the extreme early January weather conditions experienced from the Dallas Metroplex across the Gulf Coast states regions and up the East Coast.

Also, our containerboard volumes will be lower due to scheduled outages at three of our mills during the quarter. We'll continue to implement our recently announced price increases in our Paper segment and we expect volume to be slightly lower. We expect inflation in almost all areas across our entire cost base.

We anticipate continued higher freight costs as well as higher labor and benefits costs with annual wage increases in other timing related expenses. Although we anticipate price inflation on recycled fiber to be fairly flat, we do expect inflation in our energy costs and most of our chemical and repair and material costs.

Also, seasonally colder weather will increase energy usage and wood costs. Our depreciation and interest expense will be slightly higher as well. Considering these items, we expect first quarter earnings of $1.52 per share. This $1.52 does include our best estimate of the effective tax rate resulting from the tax reform changes.

With that we will be happy to entertain any questions, but I must remind you that some of the statements we have made on the call constituted forward-looking statements.

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

Actual results could differ materially from those expressed in these forward-looking statements. With that, operator, I’d like to open up the call for questions, please..

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

Good morning and thanks for all the details. First question is noting really the paper business was certainly a lot lighter than we had expected, but you’ve explained very well that you had the two mills down.

And I suppose as we move forward, is there – should we expect any dramatic seasonality this year? What sort of the downtime schedule looking like for that segment in 2018?.

Along with what I called out on the outages, and everybody just keep in mind, we talked about this on the October call, we had mentioned this that the declining release liner business, volume and price was going to impact a little of profitability, which it did.

And at the same time with that volume decrease and the anticipation of the conversion this spring, we are in a period right now in this first quarter that prices are fairly flat with the lower prices as price declined last year and volumes are in that same area.

So people just need to understand that we are in a transition year with the Wallula operations and don't forget that Wallula business was a major contributor to the rich mix component of the paper business over the years. So that is a factor.

But also, when you think about the outages year-to-year and the fact that Q3, there was a Jackson outage this year.

Bob, do you want to do anymore?.

Yeah, I will just say Chip that with what's going on at Wallula, from a Paper segment standpoint, there is no scheduled outage impact versus previous year.

So obviously there was a Paper segment impact for Wallula outages and that will show up in the Packaging segment this year in addition to there will be some cost that we call out in the non-recurring aspect related to the actual conversion activities that we will be going through as well, but those will be excluding recurring earnings..

And just a quick follow up – that’s helpful, a quick follow-up. As you finished the second phase of the conversion late this year and obviously you’ve refined I would image the engineering.

Can you give us an idea of what the ramp up curve looks like? Is it fairly immediate as we get into the first half of 2019? Or how should we expect that to ramp up?.

Yeah, Chip, we’ve done our job as well as we should – the ramp up should be very quick. With the first phase, we should have a significant amount of the conversion behind us. The last phase is just some of the new bolt-on equipment we needed to enhance the capability of the machine.

So if that equipment has been engineered properly and then we've installed it in a precision manner, we should come up very quickly and get right up on the curve..

Okay, and then I will turn it over just – as I turn over could you just update us on maybe how business looks so far in the first quarter of 2018?.

Yeah, Tom, why don’t you go ahead?.

Yeah, Chip, through 18 days we’re up 6.5% per workday. I'm not going to add something that that Mark mentioned in the earlier and that is that we have been impacted by the weather.

We have a very large footprint of plants through Texas, the Gulf Coast, Florida and up to East Coast and we have a number of plants and customer plants that were down somewhere between 1 to 3 days during that period, so a pretty significant impact. But still even with that we’re up 6.5% per workday. So demand remains strong..

Very helpful, thank you..

Next question, please..

Your next question comes from the line of Mark Wilde with BMO Capital Markets..

Good morning, Mark..

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

Good morning..

Good morning..

Mark, I am just curious with the change in the tax law does that shifts at all? How you think about sort of the attractiveness of M&A versus internal CapEx?.

Well, if you think about from the time, value and money and immediate expensing opportunities, there is a value there that we haven’t seen, but we’re still mindful of overall return metrics and what our hurdle rate needs to be internally.

So we’re still maintaining the discipline of quality of projects that we're discussing and entertaining that will not change in this period. So as we continue to go forward, we look at every dollar, penny of earnings, very, very valuables and precious. So I think that's how we look at the current situation..

Okay, that’s helpful. Just as a follow-on, I wondered if you could just talk about kind of uses of capital, your leverage is about two times right now as well a little ramps and with some of this pricing activity in the market, looks like your cash flow want to ramp up as we move through the year.

Can you just talk with us about perspective uses?.

Yeah and it falls in line with where we've been traditionally. You have dividend considerations, share buyback considerations, acquisition opportunities and just reinvestment in great high return projects that enhance our volume on the box plant side and our capabilities on the mill side.

So those are the four buckets that we have to consider and again you have to imagine that there’s something that will be discussed at the board level..

Okay, very good. I will turn it over. Thanks..

Next question, please..

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

Thanks. Hi, everyone. Good morning..

Good morning..

Thanks for all the details and congratulations on the year. If possible I was hoping maybe to get a little bit more quantification in bridging either fourth quarter to 1Q or 1Q versus the prior 1Q. If I look at – I will do it sequentially.

I think last year you said that maintenance would be somewhere around $0.18, $0.19 for the fourth quarter of this year that just concluded. 1Q, I think, you’re guiding Bob around that level too. So sequentially that doesn’t impact the numbers that much. Correct me if I am wrong there.

Tax would add something around $0.20 that’s really back of the envelope. So is the residual basically what you are seeing in terms of inflation and how would you parse that? And I had a couple of follow-ons..

Yeah, George, again – using the comparison that that you were, we certainly get that benefit as you mentioned $0.19, $0.20 from the tax rate this year, 4Q to 1Q. But….

Yep….

As you know – but pricing is flat. Last year, we picked up $0.21. So sort of negate each other, if you are sort of looking at that type of comparison. And so what you had, last year, we had a $0.04 increase 4Q to 1Q this year.

Again, you have to take that into consideration and you also have to remember that DeRidder even though from a timing perspective, it would showed up in our fourth quarter numbers, the impact was actually earlier in the year. So if you’re looking at through 4Q to 1Q you have to back that $0.07 out.

So you back that $0.07 out and you look at where we’re going to the first quarter, you will see about a $0.03 increases which is about the same thing we had last year 4Q to 1Q…..

Bob, the $0.03 increased you just mentioned – what was that $0.03 related to did you say?.

I will say if you – so if you back-out the DeRidder impact that would show fourth quarter that $1.56, you’re sort of starting out $1.49 going to the $1.52..

Yes, understood..

So a three stand increase versus – and last year it was a sequential forced in increased. So this year we had the more challenging things that we mentioned you know the inflation is higher, freight is a bit up, the weather related things that Tom and Mark mentioned.

W3 is a direct sequentially where it was as much of a drag last year, so also we have to overcome those things as well. So when you look at from that perspective it fits – it’s inline even considering the tax rate though..

Sure. I wasn’t complaining, I was just trying to get at the numbers. The thing that you have mentioned in terms of again the input inflation, W3, the weather I think I left out one as well.

Are they equally sized or is one particularly penalizing into the first quarter and more than normally would be the case?.

No, they’re more than normal, as I was saying. And they're all within the range of $0.01 to $0.03, each one of us..

Okay, okay.

The second question and I recognize it's difficult to talk live mic about pricing strategy, but just if you could give us a couple of thoughts in terms of your considerations in announcing the containerboard price hike and broadly what you would relay to customers recognizing, you typically like to have those conversations one on one and not on the conference call.

And similarly within uncoated freesheet, can you comment it all in terms of the rationale you’re providing to your customers in terms of the need to take prices up?.

George, let me handle the paper side and I will let Tom walk through the containerboard side. Again, the prices increases from the fall indexes have picked up, what appears to be about $8 on cut-size and probably $13 or so on offset converting grades. And so, again, the paper business is based on cost inflation input factors and demand.

And so, there is not a lot balance to say about the paper side of the business. We’re still net, net down year-over-year about 3.5% on average paper price..

Right..

Tom, do you want to handle the containerboard announcement?.

Let's just – we will just leave it at this basically. We have notified our containerboard customers that we will implement the $50 a ton increase effective March 1st and we will begin billing that increase on that day.

Regarding the flow through, as we've already said before, that's really between us and our 17,000 plus customers and handled that individually with each customers..

Okay, I saw it is worth an attempt. I appreciate the color. I will turn it over. Thank you guys..

Thank you. Next question please..

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

Mark, can you remind us of the key deliverables from the – through the debottlenecking and with this new price hike, I think your profitability is even higher.

Should we expect you to announce some more debottlenecking projects there assuming that the IRRs on those things are going up?.

Yeah, well, we announced a year ago approximately the DeRidder opportunities. We talked about 150,000 tons of opportunities coming out of projects on number one machine, but primarily number three machine. And so, on a run rate basis, we fully expect to see that achieved. We've got to the outage at DeRidder that starts a week after next.

And then, when that shutdown was completed by the end of the month, we should be done technically with our conversion and it's just a matter of getting the equipment up and running and then we should be at the annualized 150,000 ton contribution run rate.

If you think about last year alone, year-over-year from 2016 to 2017, we produced a 145,000 more tons of containerboard in the system, a significant amount of that did come from DeRidder as well as other mills just running extremely well.

But everything we worked on at DeRidder last year and everything we talked about – has occurred, as planed DeRidder, again, by spring time should be at that run rate of the incremental 150,000 year-over-year. Very pleased with what we're seeing..

Very helpful. One more question. On Wallula, can you give us a sense of how much exposure you're going to have ones that conversion is done to California produce? Thinking about basis the way I assume is not that high.

But when we think about the long term weather outlook, it seems like the West Coast is not necessarily a market you want to double down unless you got a place to go if produce doesn't come through?.

You said something there. We are uniquely in a position that we will be making heavier weight product on that machine.

We are, to my knowledge, the only company in the world that has understood how to convert this type of paper machine to produce not only the lightweight liner mix, but also, the heavier weight mixes that Tom's financial need in the West Coast. We have a big presence in the Washington state area and the Pacific Northwest in General.

So as far as Sacramento Container, when we do come online fully with the Wallula conversion this year, we'll be fulfilling eventually what we would require on the West Coast..

That is helpful. Thank you.

Next question please..

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

Hi, good morning..

Just following up on George's question on the cost inflation you are seeing in 1Q, the reference is to higher labor and benefit costs.

Is that just the normal annual wage increases that you would expect? Or are you seeing any kind of incremental wage pressure with a tighter labor market that you might not have normally expected?.

There is two pieces. It's the normal inflationary effect that you see every year with our wage increases benefits and fringes but also, we are in a tight labor market. And as you would expect, we are going to manage that tight labor market.

We have again for the first time that I can recall, we have a robust economy that presents an opportunity for us to grow significantly with the customer base. In order to do that, again, you have a labor factor that we haven't seen in this country probably in 20 years..

Okay, that is helpful. And then, Mark, when you talked about capital allocation and you listed your priorities, I think, you talked about acquisitions.

I'm just wondering if you would be potentially open to acquisitions on the mill side as well as the box side? Obviously, you had a major competitor announced an acquisition of another commentator, when you think about the mill side, do you still think there are opportunities out there from an acquisition perspective in North America or any color you can give..

Yes, we’ve stated this right along. We would be open to the right acquisition at the right price. We are very mindful of that, but we still don't have various opportunities on how we grow the system, and again, we are surely not without opportunities. I'll leave it at that..

And may be just a final one for Bob.

In terms of CapEx guidance for 2018, is it possible to parse out how much of that is related to Wallula that might roll off in 2019?.

Yeah, there is about $130 million maybe just slightly more than that Anthony than this year..

Okay, that’s helpful..

None of that will be 2019. That CapEx will be finished this year. So it is off..

Got it. Thank you..

Next question please..

Next you have Debbie Jones with Deutsche Bank..

Hi, good morning..

Good morning, Debbie..

I wanted to ask about transport cost, since it is clearly an issue for the industry, in some cases access to transport.

Can you just comment on how big of an issue this is for you relative to other things you are concerned about and just things that you have thought about kind of eliminate some of the risk around this?.

Yes, Debbie. As a matter of fact, what we saw in the fourth quarter, especially through the robust holiday period, transportation has become my significant Number 1, concern, the availability and the cost of transportation. On the trucking side, we have these matter of new laws that has been enacted now as of December, regarding electronic logs.

Last year, we worked through the hours of service within the trucking industry. So we've had two big factors that have now taken a number of trucks and drivers off the system.

And then you combine that with a very robust economy, that’s putting the demands on that remaining fleet of tractors and trailers and drivers and then you also, on the rail side, you have some rail inefficiency obviously due to one in particular, Class I rail carrier. And so, transportation cost and availability has become my Number 1 concern.

Tom, you want to add to that?.

Yeah, I’ll say, certainly from the box plant perspective, rail service is a real issue for us and the quality of rail cars, et cetera, that creates real issues for us.

Especially on the trucking side, the new laws that Mark just mentioned, plus the lack of drivers, lack of equipment and generally, what’s boosting the economy, I mean, we're competing with everybody for that same shortage of labor and equipment.

So it's a clearly a headwind for us that we are going to have to work very hard to manage and minimize as much as we possibly can..

Okay, thank you. My second question on e-commerce. I think on the last call, you said that you felt that the impact if you just look over the last few years has had kind of smooth impact in terms – or how it's impacting you.

As you went through the fourth quarter and looking into Q1, do you have any updated thoughts on just how e-commerce is impacting the numbers on a year-over-year basis? Do you see the growth accelerating? Or is it kind of similar to what you've seen in the past?.

Tom you want to?.

I don’t think there is any doubt that it continues to grow. The challenge I think for all of us when it comes to e-commerce is how seasonally it is and how strong it is, the fourth quarter versus the other quarters of the year.

So that probably creates the biggest angst for us, but it's fairly a growing part of the economy and it's been good for the box business..

Does it change the way that your customers in terms of level of service, whether it be helping them with rightsizing, packaging, the type of containerboard that you want exposure to?.

We always working on those things, Debbie. So it doesn't change the way we do business. We always try to add value to our customers..

Okay thanks. I’ll back it over..

Thank you, next question please..

Next question comes from Adam Josephson with KeyBanc..

Thanks good morning everyone..

Good morning..

Bob couple of questions, Bob or Mark. Just one on the sequential bridge, again. I know you talked about some of the labor costs I think being timing related and the seasonally colder weather, it's obviously temporary.

Can you just give us some sense as to, on a per share basis, how much of that you expect to go away post 1Q?.

I’d say probably a couple of cents Adam, something in that ballpark..

Okay, and just on this cost inflation issue as well, Bob or Mark, last year, it was OCC, this year, it's transport and energy and chemicals. And it seems like it's something every year, right.

So how would you have us think when you announce these price increases, right, of $50 at a time? How do you have us think about the flow through to your earnings, or to your EBITDA of these increases given this constant cost inflation that exists in the business?.

I don't want to get into that question and the detail you want, but you have to keep in mind that if you understand how robust the entire economy is and what it is doing across all input costs, whether it’s raw materials and then transporting finished goods to the customer, it is a constant factor now. Now as I said, it's a high-class factor.

And so, I'd rather be in this environment than what we’ve experienced over the last 25 years. And it's something that as a nation, we have to figure out how to manage. Transportation, logistics issues, and all – the labor shortage phenomena, skilled workers, so I'll look at it as an opportunity.

And so, we're not going to get into the price and kind of that thing..

Sure and just one last one, Mark. Someone referred to the acquisition announced earlier this week on your call.

Can you share any thoughts you have about that deal?.

No..

Thank you..

Next question please..

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

Thank you. I’m just also trying to parse a little bit when you have that for 4Q to 1Q bridge and I appreciate all the colors that you have given. I'm just trying to get a sense as to how much, on a percent basis you might be able to relay would be normal inflationary pressures from wages et cetera.

Would you give us trend line versus may be what you would term as more exceptional increases above and beyond normal because of freight and not so on the wages that you are talking about.

Is there a way to sort of give us a sense of how much it's just kind of normal inflationary versus what is indicative of what's been a pickup?.

Yeah, Mark I’d say this year, it's $0.03 to maybe $0.04 above what we would normally see. It’s how we're looking at it right now..

Okay, great. That is super helpful.

And lastly just on the uncoated free sheet business, any update on business conditions there for us?.

Volume is good. We are pleased with where we are with the demand. Again, we are pretty well winding down the specialty business out of Wallula. So it’s pretty well, if you think about the Jackson mill and the I Falls mill producing cut size and converting grades business is – volume is good. Again, I'm pleased with where we are in the month of January.

Volume is lighter than the fourth quarter, but that's normal, but year-over-year were doing quite well with volume..

And obviously there is a lot of capacity takeout across the industry going on in uncoated freesheet, which presumably is tightening things up. Are there any other factors that play that you think are influencing the market and helping provide support to price initiatives, be it pulp cost or.

Again, just overall input cost inflation has a dramatic factor on some people's decision on what's happened I think in the industry with some of these shuts that were announced. And the thing about cost, of pulp, that had flowed through some of these mills that are dependent on 100% purchased fiber.

So again, out of the for us, as we've said this before, the paper business generates a lot of cash and I Falls and Jackson mill require a lot of capital right now. So we are just – we've got a tidy little business there. We don't have an outage this year at the Jackson, at I Falls rather. So again, shaping starting up in good shape..

Thank you..

Next question please..

Next you have Chris Manuel from Wells Fargo Securities..

Good morning gentlemen. I have a couple of set questions. First, Bob, if you just could help me a little bit with tax cuts. I think you said this year would be kind of normalized 17% to 19% on the cash side if not for the payment that you made in December.

Is that a reasonable run rate, 17 to 19, what we should think about ongoing say 19, 20 ongoing past that or does it kind of ….

Obviously, things could even change this year, but to answer to your question, I'd say, that's where I would use if I were trying to model something right now, but obviously that can change..

Okay that is helpful. And then Mark if you could help us may be just a little with phasing, it sounds like that W3 machine goes down this week, it will come back on March 1, and then will be running at….

The DeRidder will be going down the week after next for it’s conversion work and then the DeRidder annual work. The Wallula 3 machine will be down during the month of May..

During the month of May, okay..

For it’s first phase..

Then it will be 240,000 ton a year clip until some point in 3Q when you put the rest of the equipment in. Is that right? Or 4Q or when is that last piece..

We will run at the reduced rate through the summer months and then October, we take the machine down again and all of that was dependent on the deliveries on the few pieces of Capital One lead items that we had to wait for. And then we come out of that October shutdown and we should be ready to run at the full rate..

That’s a full rate. That is helpful. So I guess where I am kind of going with all this is, if I put this together, if you continue to run at present levels you are, I think, you mentioned up 6% to 7% here through 18 days this first half of the year is going to be incredibly tight.

How do you balance meeting customer demand? Are you having any issues in the marketplace trading for and procuring paper? I'm guessing you probably happened to buy a little bit on the outside as we sit today.

Can you maybe give us a little color or some thought there?.

And we had talked similar about this last year, for the year, we purchased about 250,000 tons of containerboard on the outside and in a very opportunistic manner and we'll continue on that pace this year until we get Wallula fully ramped up and behind us.

And so, again, taking advantage of transportation opportunities by region within the country, and also, we built some inventory. We ran extremely hard through the latter part of the year, making sure that we will prepare for these early outages i.e. the DeRidder one coming up in a couple of weeks. But to your point, we are going to be very tight.

And we have to run well. What is going to run has to run well and Tom you want to add to that..

Yeah, Chris I’d also add to this. I think another good way to look at it is that even after Wallula comes up, we will be at the same integration level, 95% plus integration level that we were going into that. So those tons are all accounted for. And so there is no question. It's going to be, it's tight.

It's going to remain tight and we are going to have to hit on all cylinders to make sure that there is no bloops in the system..

I guess my last question is how do you think about other opportunities that you have? Do you have other machines that you could target over the next one to two years to do similar type conversions? Or how do you also balance that with thinking of other assets that you could acquire or potentially partner with to convert..

That is something that we think about all the time. And we have plans on how we would go forward and So, we have various alternatives. So when we announce something, we will. Other than that, we are not going to start speculating on what's the best direction for us. So we have different opportunities..

Fair enough. Thank you gentlemen..

Thank you. Next question please..

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

Thanks good morning..

Good morning, Scott..

Just a couple of follow ups.

Specifically on transportation can you sort of parse out your mix between rail versus truck? And how you balance maybe one versus the other?.

Well, Scott obviously, rail is primarily what’s used coming out of the mills, truck is primarily used for our corrugated shipments. If you're looking at it from a dollar standpoint or number of load standpoint, what have you..

Dollars would be great..

Yeah, certainly dollars, I think dollars, it is probably 65% or so rail..

Okay, and if look at your inventory positions then, how is the rising cost and availability inventory decisions 2017 and maybe going into 2018?.

Container board inventory..

Correct.

Again we have to run hard in order to satisfy the needs that we had last year, we had to run hard all year long and execute well, which we did.

And the big consideration, as we were coming into the fourth quarter was could we build some inventory that would give us a little more of insurance policy through three big outages that we have coming up in this first quarter and the few outages we have in the second quarter.

So again, I think, the key is, we have built inventory to the best of our ability to run through this period and then, Tom just said it, everything else, we have to run extremely well. No other explanation..

Okay, and then on the labor inflation piece, I think, in the prepared remarks or in the press release, you mentioned labor inflation on the box side of the business.

Is that, should we expect that tight labor markets to be more acutely felt on the box side of the business, maybe because you don't have as many unionized employees on the box side of the business versus the mill side of the business..

Well I think, hey Scott this is Tom. I think one of the things that you're going to find is, number one is you got a lot more employees when you go through the box plants. So obviously, they're going to be impacted more. But also, you do have a mix of union, non-union. We try to take care of our people the same way. So we're really good one to that.

The fact of the matter is, it is a tight labor market and is becoming tighter. And depending on the marketplace you are in, you could have a lot of competition for that same labor market. So this is going to be a headwind for a long time I think until we get a lot of policies in this federal government straight down.

So that we can figure some of this out. But it's clearly an issue and even with capital expenditures on the things we do inside these box plants requires a different talent level. Obviously, that requires some different skill sets and perhaps a different labor rates. So it's going to be a problem to having this business for quite some time to come..

Alright, thank Tom. Last one for me is just around some of the consolidation potentially taking place in the Pacific Northwest. Are there any added concerns or considerations that you would take into place with the Wallula conversion with that potential consolidation on the table? Thanks..

No. Again, when we announced Wallula, we already [indiscernible] in conjunction with the Sacramento Container acquisition. And the existing business that we do in the West Coast. So, we don't see that as any issue..

Okay, good luck in the year thanks..

Thank you. Next question please..

Next you have Steven Chercover with D.A. Davidson..

My principal question was answered but I was wondering if you could give us bit of an update on virgin fiber prices both in the South and Pacific Northwest..

If Virgin fiber prices in the South has been primarily affected by the weather phenomenon and that is something that you always think about as far as, especially during the late fall, winter periods with wet winter weather conditions. And in this case, the first 18 days of January with snow and ice through much of the wood baskets.

And in my commentary earlier from that Dallas Metroplex across the Gulf states, we had the DeRidder mill, Counce mill and Valdosta containerboard mills are all severely impacted for a number of days. And the Jackson, Alabama paper mill was severely impacted.

And in terms of raw material deliveries, in particular wood deliveries and wood costs and so it’s a different scenario right now compared to what we have seen in other years with the way this winter shaped up..

So, I guess we’ve called that extreme seasonality.

But as saw mills ramp up, will chips become more available? Is that your expectation going forward?.

Well theoretically that is the case, and then regarding question on Pacific Northwest, we are seeing pretty stable fiber pricing. It's been up over the last few years, but there is no dramatic changing currently.

But the big story for us right now is what's happening in the Southeast and Gulf Coast region with winter weather phenomena in the last month..

Very good thank you..

Thank you next question please..

Next you have Gail Glazerman with ‎Roe Equity Business..

Hey good morning.

Maybe just sticking on with fiber can you give us a little bit more perspective on what you are seeing in OCC and how you expect it to play out over the rest of the year? And particularly, are you seeing any kind of structural adjustments to the Chinese shift in policy, like incremental demand for DLK and stuff like that?.

Well regarding year-over-year OCC recycled fiber, still on average of $50 higher than it was a year ago. And then, we said this many times, OCC and recycled fiber is very dependent on what China does.

China will swing that either way and you would assume and we see some evidence of this, they are issuing new licenses and permits that demand will go up. And so, again, I think that's always the wildcard.

I think, the demand here in the United States is pretty well known, but China is what will move the needle significantly, one way or the other as it did last year in going up and coming down.

Tom, you want to?.

I think, the important thing is, when you think about China is they have to have virgin fiber. And they're going to get it one way or the other, whether it's OCC, DLK or importing linerboard. They've got to have virgin fiber in their system in order to run their system.

So it could come from any of those sources, and I think it's kind of dependent on price.

But one thing is kind of surprising is if you think about with as little OCC as they've been importing and how OCC stayed – the price stayed up and as Mark indicated the EBITDA over the same quarter a year ago, that's kind of surprising, which I think is an indicator of which direction OCC is probably going..

Okay, thank you.

Just on box demand, can you give some perspective on, I guess, just what your outlook is may be over the medium term in terms of box growth? And beyond just kind of a cyclical pickup in the economy, are you seeing anything structural in terms of investments from your customers manufacturing or just anything structural that would drive demand..

Yeah, Gail. I think all that above which you just said is absolutely true. And as I indicated, I said demand remains very strong even though we had some weather related issues earlier this month, but clearly, demand is strong.

And we're in a phase now where the box business is tracking the GDP a lot closer than it had been and that's primarily related to manufacturer. We've definitely seen number one, you're not seeing manufacturing moving out of this country anymore.

So that trend is kind of behind us in a great way, and now we are seeing a lot more on shoring of manufacturing and we are seeing a lot more investment that our customers are talking about in terms of what they're going to do with our facilities. So I think, demand is going to be – is going to remain very strong..

And just the last one on the labor side, are there any kind of capital projects and investments or equipment that you guys could look to invest in as a structural kind of relief on some of the labor tightness?.

Well, that’s an ongoing opportunity. And since we do that all the time.

But also, keeping in mind that there is a limit on which how much capital you choose to spend and can justify spending and also how much you can actually physically deploy in terms of the groups that we have on the box side and on the mill side that you can take on so many projects.

And you have to prioritize those opportunities and we do that all the time. And so, that's an ongoing opportunity that we deal with..

Okay, thank you..

Thank you. I think we have time for one more quick question if anybody needs to ask anything then we will call it.

Operator, anymore questions?.

You have a question from George Staphos from Bank of America..

Hi guys just a quick one to clean up. If we look at the Paper segment, 4Q versus 4Q and reflecting on I think, you said prices are down still 3.5% or so year-on-year.

How much of the residual gap in EBITDA would you expect to ultimately go away as we get into 2Q and then the rest of the year is definitely a way to parse, again, that 4Q to 4Q performance. Thanks guys and good luck in the quarter..

George, I don't think we thought about that in those terms year. So I don't want to answer anything. We don't have that for you. We’ll talk about it and we’ll get back to you after the call..

Okay, fair enough, thank you very much..

Alright. With that, operator, thank you everybody for joining us on the call today. We look forward to talking with you in April. So with that thank you..

This concludes today’s conference call. We thank you for your participation and ask that you please disconnect your line..