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

Chip Dillon - Vertical Research Partners LLC Mark Connelly - Stephens, Inc. Chris D. Manuel - Wells Fargo Securities LLC George Leon Staphos - Bank of America/Merrill Lynch Adam Jesse Josephson - KeyBanc Capital Markets, Inc. Anthony Pettinari - Citigroup Global Markets, Inc. Debbie A. Jones - Deutsche Bank Securities, Inc.

Mark Weintraub - The Buckingham Research Group, Inc. Scott L. Gaffner - Barclays Capital, Inc. Steven Pierre Chercover - D.A. Davidson & Co. Gail Glazerman - Roe Equity Research LLC.

Thank you for joining Packaging Corporation of America's First Quarter 2018 Earnings Results Conference Call. Your host today will be Mark Kowlzan, Chief Executive Officer of PCA. Upon conclusion of his narrative, there will be a Q&A session. I will now turn the conference call over to Mr. Kowlzan, and please proceed when you are ready..

Good morning and thank you for participating in Packaging Corporation of America's first quarter 2018 earnings release conference call. I'm Mark Kowlzan, Chairman and CEO of Packaging Corporation of America.

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'll be glad to take any questions. Yesterday, we reported first quarter net income of $140 million or $1.48 per share.

First quarter net income included special items expenses of $0.07 per share primarily related to the discontinuing paper operations associated with the previously announced conversion of the number three paper machine at our Wallula, Washington mill to linerboard.

Excluding special items, first quarter 2018 net income was $147 million or $1.55 per share compared to the first quarter of 2017 net income of $120 million or $1.27 per share. First quarter net sales were $1.7 billion in 2018 and $1.5 billion in 2017.

Total company EBITDA for the first quarter excluding special items was $322 million in 2018 and $299 million in 2017. Excluding the special items, first quarter 2018 earnings per share of $1.55 was $0.28 per share above the first quarter of 2017, driven primarily by higher prices in mix of $0.39 and volumes $0.19 in our Packaging segment.

Higher volumes in our Paper segment were $0.02 and a favorable tax rate $0.19 resulting from the recent tax reform changes.

These items were partially offset by higher operating and converting cost totaling $0.24 per share, primarily due to the inflation related increases with labor and benefits costs, repair and material costs, environmental and other professional services costs, equipment and building rental costs as well as the addition of operating cost related to our Sacramento Container acquisition.

We also incurred weather related costs at some of our mills and box plants early in the quarter and again in March that did impact some of our box plants in the North East.

In addition, we have lower prices in mix in our Paper segment for $0.05; higher annual outage expenses, $0.11; higher freight expense, $0.07; higher depreciation, $0.03; and higher interest expense, $0.01.

Our results were $0.03 per share above first quarter guidance primarily due to higher volumes and prices in mix in our Packaging and Paper segments, partially offset by higher than expected freight expenses and operating cost.

Looking at our Packaging business, EBITDA excluding special items in the first quarter 2018 of $308 million with sales of $1.4 billion resulted in a margin of 22% versus last year's EBITDA of $274 million and sales of $1.3 billion or a 21.7% margin. Our containerboard mills ran extremely well.

We successfully executed scheduled maintenance outages at three of the mills and the production optimization were completed at our DeRidder Mill during their scheduled outage exceeded our expectations with very strong performance immediately after the start-up.

This outstanding effort, along with the inventory we were able to build prior to the outages, allowed us to achieve record first quarter containerboard shipments and supply a record first quarter box shipments.

We entered the quarter with containerboard inventories over 23,000 tons below year-end 2017 levels and 31,000 tons above the first quarter of 2017 primarily due to the addition of the inventory needs of our Sacramento Container acquisition.

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

Thanks, Mark. Overall, corrugated products and containerboard demand remained very strong during the quarter. As Mark indicated, in corrugated products, we had record first quarter box shipments which were higher in total by 6% with one less workday or 7.7% per workday compared to the first quarter of 2017.

Continued strong demand in both our domestic and export markets improved our outside sales volume of containerboard by about 23,000 tons versus last year's first quarter. Outside volume was 9,000 tons below the fourth quarter of 2017 in order to help supply our internal plants during the scheduled outages at our mills.

Domestic containerboard and corrugated products prices and mix together were $0.29 per share above the first quarter of 2017 and up $0.05 per share compared to the fourth quarter of 2017. Export containerboard prices were up $0.10 per share compared to the first quarter of 2017 and up $0.01 per share compared to fourth quarter of 2017.

I'll now turn it back to Mark..

Thanks, Tom. Looking at our Paper segment, EBITDA excluding special items in the first quarter was $31 million, with sales of $269 million or 12% margin compared to the first quarter of 2017 EBITDA of $42 million and sales of $259 million or 16% margin.

Although we have strong cut-size and printing and converting volumes for the quarter, up 33,000 tons compared to the first quarter of 2017, the decline in EBITDA versus last year was primarily due to the lower volume and higher cost in our pressure-sensitive business as we continue to phase out those products out of our Wallula mill.

Also, we experienced lower prices and mix across all grades, inflation on input costs and operating costs, as well as higher freight expenses.

However, compared to the fourth quarter of 2017, and excluding the pressure-sensitive business, we continue to see realization of our recent price increases, with average cut-size and printing and converting prices up 1% and volumes continue to be strong, up almost 5%.

As mentioned previously, we are phasing out of the paper business supplied by the number three machine at our Wallula mill, and we are on schedule with the conversion of this paper machine to a 400,000 ton per year, high performance, 100% virgin kraft linerboard machine beginning next month in May. I'll now turn it over to Bob..

Thanks, Mark. We ended the quarter with $102 million of cash on hand.

The primary uses of cash during the quarter included $150 million for the March retirement of the note that we mentioned on our last call with capital expenditures of $108 million common stock dividends totaling $59 million, $10 million for state tax payments and interest payments of $9 million.

I want to update you on the full-year tax guidance we provided on last quarter's call. As mentioned, the tax rate ranges provided were based on currently available information, and that over time, assumptions and estimates could change as federal tax reform was better defined in the states and (8:33) related changes.

The estimate range for our 2018 combined federal and state tax rate has changed to 14% to 16% versus the 12% to 14% range provided previously.

This is due to certain states decoupling from the federal change, allowing 100% expensing of most capital spending as these states believe they are not prepared for the negative impact this would have on their tax revenues.

Excluding the overpayment of taxes in 2017, which we made in December just prior to the tax reform changes being enacted, our combined federal and state tax rate would be in the range of 19% to 21% versus the 17% to 19% we provided earlier.

The state changes had a minimal impact on our booked effective tax rate for 2018, so our estimate for this remains in the range of 24% to 26%. Our effective tax rate for the first quarter of 2018 was 24.9%. I'll now turn it back over to Mark..

Thank you, Bob. Looking ahead, as we move from the first quarter and into the second quarter, we expect continued strong demand in our Packaging segment to result in higher corrugated products and containerboard shipments, and we will continue to implement our previously announced Packaging segment price increases.

In our Paper segment, we expect volumes to be lower as we begin the conversion of the number three machine in our Wallula mill from paper to linerboard. And we'll continue implementing the previously announced paper price increases.

We also anticipate continued price inflation in chemical and freight costs, incremental wage pressure with a tighter labor market or slightly lower recycle fiber costs and improving energy costs that will move into the seasonally milder weather. Scheduled maintenance outage costs should move lower and we expect a slightly lower tax rate as well.

Considering these items, we expect second quarter earnings of $1.96 per share. 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 constituted forward-looking statements.

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

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

Your first question comes from Chip Dillon with Vertical Research. Your line is open..

Yes. Good morning, gentlemen. Thanks for all the details..

Good morning, Chip..

First question I had is I think a big issue is thinking about how the whole Wallula transformation is going to impact next year versus this year.

Obviously, this year, you're going to lose the benefit of the pressure-sensitive volumes and there's going to be startup costs that I assume will flow through the income statement and then next year, obviously, you would hopefully have most of that 400,000 tons available.

And I didn't know if it was reasonable to think the swing factor could equal something like a $100 or $200 a ton as – of those new tons as you swing from this year to next year.

I guess said differently, could it be a $60 million or $80 million swing again going from this year startup costs and the lack of pressure-sensitive business to next year's having those extra volumes of containerboard?.

Chip, I don't want to get into the details on our cost per ton and margins but if you look at our history and you look at our current estimated cost and margins, you would have to assume if we do what we're supposed to do and bring the machine up to full capacity by the latter part of the fourth quarter, then we will have the full benefit coming on for next year.

So, this year, as we called out in the first quarter it was going to be the choppy year as we exited the release liner business and incurred those costs and then incurred the conversion and startup cost and the ramp-up cost.

And because this is a two-phase project in one year where we're seeing the work beginning in May and then hopefully the plant calls for the startup of the machine in the early part of June, you'd see a certain level of production of linerboard through the summer months at a steady pace.

But again at a higher cost because of just lower tonnage and then we take the machine down again for the few weeks in October. So, it's a choppy year but I think if you model and you know what our traditional cost and margins are, you can get to that number that you're talking about.

Bob, do you want to add some color to that one?.

Yeah. I would just say, Chip, that once things are up and running at the level that you mentioned as far as the capacity of that new machine, that you're in the ballpark as far as what you're seeing as far as (13:54)..

Okay, that's helpful. And just a quick follow-up. As you – we've seen now, I guess, three years or four years of what we used to see in terms of demand growth before outsourcing in the last decade. Obviously, there are different mixes now, less industrial demand, more e-commerce.

What are your customers saying in terms of what you think they will need going forward? And how do you all think about e-commerce? And can you share with us some idea of how important that is, if not to your overall business maybe to the growth of your business?.

Yeah. I'm going to let Tom give you color on that. We've spoken about that in the past few calls.

So, Tom, why don't you go ahead and elaborate on that one?.

Chip, one thing I would have to say based on your commentary is I don't see less industrial demand.

In fact, I think we've called out a number of times, when we look across our customer base, that not only did not accrue anymore but that it started to turn up, and we've continued to see that the industrial sector has been a good sector for us as well.

But when you look at e-commerce, I mean, obviously, e-commerce has become an important segment for the packaging sales. And we'll continue to grow, and it's certainly the biggest growth engine going on right now.

And it occurs in a lot of different ways, and of course, we've got a lot of customers that have entered the e-commerce segment outside of your traditional big e-commerce customers. But it's a growth segment, it's going to be important to the industry. It's a whole new way of delivering to customers, and it will continue to grow.

And I think it's, as I said, an important sector that we're certainly focused on as well..

Okay. Thanks..

All right. Next question, please..

Your next question comes from Mark Connelly with Stephens. Your line is open..

Thank you. Mark, with WestRock doing KapStone and IP trying to do Smurfit Kappa, some investors seem to think that you have to do something. So what I'm wondering is do these two deals make you think differently or leave you more worried about the strength of your overall competitive position and what you're doing now..

To answer the first part of your question; we don't have to do anything differently. We have the open flexibility built into the plan, great balance sheet. We've got well capitalized assets. We've got an organization that can execute on anything with the balance sheet and the financials where they are.

It allows us to move on any opportunity that we would determine make sense for us. We have a number of opportunities as you would expect as we call out internal organic type of opportunities to continue enhancing our activities. We will continue to take advantage if opportunities to buy box plants as we've done over the last number of years.

If those opportunities present themselves, we will continue to take advantage of that. So, long story, no, we don't plan on changing anything right now but we certainly have tremendous amount of opportunity to move in many different directions..

You probably just disappointed a bunch of bankers.

Can we talk about projects? I mean, Wallula is obviously big but with DeRidder done, does that free up your people to take on other significant debottlenecking projects and you have those sorts of things already lined up or any big rebuilt like a boiler or something coming up?.

As we've stated over the years, we always have a portfolio of opportunities that we've already done pre-engineering on and that's on the mill and the box plants.

And so with the number of people that we've been able to hire, just to reiterate, just in the last three years, we brought on over 155 new engineers into the company, and they're all gainfully employed on all these projects. And so we had the ultimate opportunity now to utilize our internal strength on these types of projects.

And I guess to answer your question, yes, we certainly are looking on a going forward basis at opportunities in the box plants and the mills on high return capability in terms of returning value to shareholders on how we deploy our free cash.

And so I think without getting into details because I don't want to – again, I don't want to give away all the goodness you've – I think if you look at our history, we always have these opportunities. And I want to say something too about DeRidder.

During a three-month period of DeRidder, we had over 80 people at DeRidder from our technology organization and about 30 people from a number of our mills assisting in the run-up to the conversion in the final phase of DeRidder.

No sooner was that done, a number of those forces moved out to Wallula and then out to the remaining shutdown activity that we had going on. So, we have tremendous capability built into this organization now to do projects, to do acquisition activity. So, we've got a lot, but again, I don't want to give details on what we're going to be working on.

But you have to trust us when we say we've got some good opportunities for high return. It's all on the capital..

It's just what I was looking for. Thank you, Mark..

Good. Next question..

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

Good morning, gentlemen, and congratulations for the strong start to the year..

Thank you..

Thank you..

Two questions I wanted to kind of get at. One is – we'll take the easy one first. Freight is a component. A lot of freight contracts are coming due – most of my understanding kind of come due in that April-May timeframe.

Do you have a sense as to what you're seeing freight being up on a year-over-year basis? Is it in that 10% to 15% range?.

That's a good number, to your point, and it's varying by region, by lane. We have a number of mechanisms that we transport finished goods. We have a number of carriers that we have arrangements with in terms of contractual arrangements. We have a lot of spot market opportunities that we work with carriers.

On any given day, we're probably moving 2,000 truckloads of finished products around the lower 48 states. And so the key to that was establishing good relationships with carriers over the last number of years. But nevertheless, we are facing those inflationary cost pressures. I think that's a good number..

Okay. The second is more of a – and it's a much more difficult question to answer.

But how do you – when I think of the state of the industry right now, it would seem to me as though profitability, in particular in the recycled grades, not as much in the kraft grades, but at least in the recycled grades where OCC and mix paper and different things are is exceptionally good or potentially too good.

And is it a spot where things stay as they are could incite significant amounts of capacity. Can we see some of it light up in the Fox River Valley just in the last few months.

How do you think about the balance of the industry in the intermediate term, I think, the next year or two? And the profitability and the opportunity for recycled grades to more capacity come in the market or do you think perhaps either OCC goes up or the spread between kraft and recycled widens? How do you think of that?.

Right. First, the comment regarding entry into the business from conversions, some of what's been announced is very small capacity. Some of what's being announced is just that they're discussing that. They're talking about bringing some of that on.

In fact, just in the last few years, how many projects had been discussed and talked about that never came to be. And so there's a minimal amount of what is coming on. And at the end of the day, you have to go back to and say you're going to convert something.

Where are you going to sell it? Who is your customer and what's the product line you're going to produce into this market and what type of profitability, opportunity can you convert? And so, part of that is you think about the shrinking number of independents in the last number of years and what's been taking place there.

And so, in terms of where to go with tons, freight market tons is a very limited opportunity. And so, Tom, do you want to add some color to that because, again, I think we talked about this for a number of a few years..

Yeah, I would say....

Story hasn't changed..

Yeah. I know.

It hasn't changed and if you – you have to look historically those you see and if you pick a certain point in time like it is right now, yet, yes, OCC is down, but I think anybody that looks at that, if that's their primary furnish for fiber, they're going to have to look at the historic trends and the historic trend is going to be significantly higher than what it is right now over the long haul.

So, I think that's a decision that needs to come into being. And I think just generally, as Mark indicated, you've got to be able to move those tons somewhere and the dynamics of the marketplace is certainly the outside marketplace to change dramatically..

The other fact that I think people are sometime not appreciating this, when you think about input costs across the board on all of your input, fiber is a major component, but you have all of your – the raw materials and labor and energy, now transportation.

So, you have a significant number of costs that have to go into the analysis to tell somebody whether they can make a project make sense financially. And so, you have to believe that with the lack of conversions so far that have truly taken place that the math just doesn't work in many cases..

Okay. Well, thank you very much for the color. I appreciate it. Good luck, guys..

All right. Thank you..

Thank you..

Next question, please..

Your next question comes from George Staphos with Bank of America Merrill Lynch. Your line is open..

Hi, everyone. Good morning. Thanks for the details. How are you doing, Mark? Hey, I guess the first question I have – and you've touched on it a bit, can you talk about why it would appear that DeRidder came up so well.

What do you have now in DeRidder in terms of capabilities and if you'd look back relative to when you first bought the asset, what have you been most surprised by in terms of the asset? And a related question and I had a follow-on and I'll finish there.

The related question is, what are the tie-ins or parallels to Wallula and what you might be able to do there from a process standpoint?.

Yeah. Regarding DeRidder, there was never any doubt in our minds that we have tremendous opportunity to create tremendous value at DeRidder.

What I'm most pleased about is the execution from the organization and not just making it a great facility but I would have to say, based on what we've seen coming out of the startup on February 26 and the performance of the mill during the month of March, as a two-machine containerboard mill, that mill, I would be willing to bet, is the most productive two-machine linerboard mill containerboard because we do mix a medium on number three, but the most productive machine, just a two-machine system in the world.

And you have to assume the costs that go in line with that. And so, over a four-year period, we've taken that mill and created just a tremendous opportunity. At today's basis on a run rate basis, we've far exceeded what the plan had called for.

On an annualized basis, depending on the basis weight mix you apply that mill, that mill now sits at a 1.2 million ton capacity type of opportunity, depending on what we choose to make there. And so, it's a tremendous platform for us to go forward.

That being said, we've taken the lessons learned from DeRidder and we applied it in parallel at Wallula, the same technology that went into the number three machine conversion at DeRidder is being applied at the Wallula number three machine, and that's what's giving us the confidence to do this in a much quicker fashion and then shorten up the conversion time to just two phases all done this year.

I want to throw something out, too. I mean from a performance point of view I wasn't totally pleased. The machine only ran at 99% uptime efficiency during the month of March. So, we've got some room to improve..

Okay..

(27:58) Wallula, if we execute as well as we should and we've done our job in ensuring the quality of the equipment that we're buying and then on the installation side of it that we do a precision installation, the machine should be as successful as DeRidder. And so, we'll give you the details in July..

All right. Thanks for that, Mark. My follow-on kind of a two-part and I'll turn it over.

Can you comment at all, Tom, about what kind of volumes and bookings you're seeing early in the quarter? And then to, Bob, a question that comes up periodically, I think Mark was touching on it earlier, given current status of trends, right, who knows what can happen to demand and pricing next year, next month, so on.

But given what we're seeing right now the company is going to be generating fairly significant cash flow certainly relative to where you were a few years ago and you keep deleveraging.

I know you don't want to share too much of your cards here, if any at all, but are we more likely to see you deploy that to projects or value return in the current environment or would you be more apt to use that capital and powder in a downturn when machines might be less expensive, when your stock might be less expensive, when other opportunities might be less expensive.

How would you have us think about that? Thanks for listening and good luck in the quarter..

George, I'll take the first part of that question and that is our bookings through 14 days were up 5%. So we're off to a very good start for the quarter, and we feel very good about the continuing strong volume demand. I'll turn it back over to Bob, Mark..

Yeah. Obviously, George, the – really, things don't change for us. We look at things, the way we've done things historically is how we'll go forward. And I can read that if things play out as we would suspect that there will be some – especially with tax reform some nice cash generated this year.

But we'll still have a balanced approach towards looking at our dividends and share buyback opportunities. Mark has talked about high return capital projects that we always have on the shelf and ready to go if they make sense.

And as we've said before, box plant acquisitions when they come up and they're the right fit for us, we want to be able to have the dry powder, as you said, available for that. And we'll maintain – we are somewhat conservative on our balance sheet.

And to your point about things depending on who you're listening to, it's how the economy goes up, ways up here, we'll be in good shape. We'll be prepared for that as well, so we sort of like what we've been operating and we'll continue to do it that way..

Probably a better part of two decades now of -- just shy of two decades, we've been recognized as being conservative when it comes to our balance sheet and not taking inordinate amount of risks. It's paid off well for us. We don't plan on changing that, again, but we have tremendous opportunities.

We've been criticized in the past of being too conservative. But again, I'd rather take that criticism than the alternatives. And so, we're very mindful of the enterprise and not putting the enterprise in inordinate amount of risk and yet, we still have tremendous opportunity to continue to bring tremendous value to the shareholders.

So, I think that's not going to change..

Okay. Thank you for the time..

Thank you. Next question, please..

Your next question comes from Adam Josephson with KeyBanc. Your line is open..

Good morning..

Good morning..

Tom, just one on OCC. I know you talked a little bit about it earlier and pointed out that prices have been much higher in the recent past than historically than they are now.

Do you have reason to think they'll move up considerably from where they are now, just given what the restrictions that China has imposed on imports? And what level of OCC prices do you prefer longer term?.

Well, I'm not going to state a preference that I have one way or the other, but I would just say that on the OCC side, it's got to settle out at a point where it's profitable to collect and sell. So, when price points get too low, people tend to get out of the business, and more of it goes to landfill, and that certainly isn't anything anybody wants.

And I can't tell you at all what China is going to do other than the fact that I've made the case numerous times, they have to have virgin fiber in order to run their paper system.

So they're going to get virgin fiber one way or the other, and it's either going to be OCC and if it's OCC, it's going to be they're either going to relax their restrictions or they're going to have to pay more to the collectors to be able to put the capital in, to be able to sort it like China wants.

The other option is to buy more linerboard which their linerboard sales are up or sales, too, and their imports are up of linerboard. That's another way they can get virgin fiber.

They've also got their own collection system going but the prices as I understand it right now in China, their own collection of OCC is about four times the price that it cost to import from the U.S. So, there's – I think there's just a whole dynamic going on there that it doesn't indicate to me that they're going to be out of the OCC business.

I think it's bound to go back up but impossible for me to predict. I just think that it will find its level and it will level out at a certain point that makes sense for all the parties that are involved..

Sure. Thanks, Tom.

And just one, you talked earlier about off-shoring and e-commerce and all that and obviously last year demand for the industry was up – significantly up about 2.5% actual which was much higher than it's been over the last 5 years, 10 years, 15 years, you name it, right? What do you think is a normalized level of growth for the industry? Do you think last year was indicative of what's to come or do you think it will settle out at a somewhat lower level than that for any particular reason? Thank you..

Tom, why don't you....

I think what we'll see is I think you'll see the business track GDP a lot closer than what it ever has. I mean, they got away from that for a while but I think we'll get back to basically tracking more like a GDP number..

Thanks a lot, Tom..

Yeah..

Next question, please..

Your next question comes from Anthony Pettinari with Citi. Your line is open..

Hi. Good morning..

Good morning, Anthony..

I just want to follow up on containerboard inventories. Last quarter, you talked about inventories being the lowest in four years. I think quarter-over-quarter, they were down another 23,000 tons.

Can you just talk about your comfort level with inventories, especially as we go into kind of spring, summer season and freight being a little bit tighter and then to the extent that you're buying from the outside what that might look like on an annualized basis?.

Yeah. As we've stated many, many times during this portion of the year as we go through our heavy shutdown periods and in light of the heavy demand, the mills have to run extremely well to supply our demand. As you would expect with the type of cut-up we've been experiencing, the inventories have declined.

That's why it was imperative last fall or the fourth quarter to pre-build some inventory. And then again, we had to run hard. Fortunately, the pre-build paid off and also the mills performed in an outstanding manner. DeRidder came on and exceeded our expectations.

But nevertheless, we still have to run hard to get ourselves in a little bit more comfort zone with inventories going forward. We're into that second quarter into the third quarter, which is the heaviest quarters of the year for box demand. So, it behooves us to execute well, but again, that's a high-class problem..

Okay. Okay. And in terms of outage schedule for the rest of the year, obviously 1Q was your highest quarter. But as we think about 2Q, 3Q, 4Q, I think previously, you talked about $0.11 to $0.15, $0.16.

Any update or changes to kind of the cadence of outages for the remaining three quarters of the year?.

Bob, go ahead..

No. Anthony it's the same. It's what I gave you last call it's – that's what we're looking at for the balance of the year.

So, you just have to keep in mind I was moving from sequentially within the same year now with the tax – the tax rate base will be the same as opposed to when you're looking at something year-over-year when we had the big change in our tax rate. But everything, the cadence is still the same..

Got it. Got it. Okay. That's helpful. I'll turn it over..

Next question, please..

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

Hi. Good morning..

Good morning, Debbie..

You highlighted again earlier the attractiveness of bolt-on converting acquisitions which you've done pretty successfully.

I wanted to get a sense of what's the next step here in terms of – is it the viability of the pipeline that is more or less attractive because we know that there aren't a lot of independents left, are there steps that you need to take such as increasing your containerboard capacity or regional exposure before you proceed?.

We've spoken about this in the last few earnings calls. We continue to have opportunities and we have numerous opportunities from internal projects to acquisitions of convertible assets, a number of opportunities.

During this period of time, 2018, we've got our focus on just finishing up the work at Wallula and making sure that all the rest of the projects we have going on at the legacy mills continue to deliver results. And this is part of the question that was asked before you.

We called out on January that we would continue to buy outside tons the rate we're buying last year which was about 250,000 tons of outside purchases. And so we have a number of means of supplying our box plant requirements. And so, I would just leave it at that. We never disclose a plan until, obviously, we're ready to announce something.

Well, we have flexibility for the next number of years to do what we have to do to continue growing the business..

All right. Thanks. And as my follow-up, you changed some of the language in your K around the attracting labor into the industry. I don't think there's anything new around that.

But could you just walk through what you're doing to kind of an increased participation or make working in your industry more attractive for the labor force?.

Well, I think, again, it's a matter of there's more competition for general labor. And so part of that is it's a competition based on willingness to pay several wages, and then the environment in terms of are you in a metropolitan region? Are you in a rural region? And so I think we have a good story to tell.

But nevertheless, we are dealing in a highly competitive labor market currently which is not all bad..

I would add, Debbie, that as an industry certainly on the corrugated box side of the business, as an industry, we've been working on attracting more to our industry for the better part of a couple of decades. And we put now equipment in schools around the country.

We're working with voc techs, we're working with universities, two-year degree universities to introduce people into the industry. And this is above the design, the design cycle, which has been around for a long, long time. But this is really – is on the manufacturing side.

So, I think that's been – that's worked very well for us, and has been attractive for us, and we're bringing in an even more qualified people even at the hourly level who are very promotable and had the desire to move up in the industry. So, those have been very helpful to our industry.

But that said, there's no question that labor is a key element that we're looking at since knowing full well that the costs are going up and that the quantity is going to be somewhat limited, so at least for the short-term..

Okay. Thanks. I'll turn it over..

Thank you. Next question, please..

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

Thank you. Good morning..

Good morning, Mark..

I was hoping to get a sense historically on the box prices.

How quickly you would tend to realize them, and maybe if we kind of just – I assume, you would have virtually nothing in that first month of March, but if you look back historically, and I don't know what's the kind of easiest way that you could say this so that it certainly is no competitive issue or whatever, but say within that four months, and the next three months, how much of a percentage of what you typically would get, or however you would want to provide any guidance you could, how much of it should we anticipate would show up in that – this three-month period?.

Yeah. Tom, why don't you go ahead – get its – based on history..

Yeah. I'm just going to walk you through a little bit, Mark. I mean, of how we typically have done this. I mean starting out with a very disciplined approach. But keep in mind that we announced to our containerboard customers a $50 per ton increase effective March 1. We did begin billing in March for those containerboard customers.

That was then reflected obviously in (43:31). And at that point, we then go out and we announced box price increase as well, but we don't get into specifics about it other than to say the triggering mechanisms on contracts and some of the other agreements that we have primarily mean that we've rolled this increase in over about a 90-day period.

That's about all we typically would disclose on this just to give you a historical perspective..

Okay.

And would it be possible if you look back historically in that first quarter, did you – because I assume this would be historical information, did you tend to get 20% of what you ended up with, 30%, 60%, just real ballpark type numbers?.

We just got – the number would be very small that we got, and so there's more to – there's obviously more to come..

Okay. Thank you..

Next question, please..

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

Thanks. Good morning..

Good morning, Scott..

Mark, I mean, we've talked a lot about freight and OCC, but not much on virgin fiber inflation.

Are you seeing anything in Pacific Northwest or the Southeast on more competition around virgin fiber with maybe pulp prices going up and some other trends in the marketplace?.

Yes. Just you would expect and what you're seeing in some of the publications, Pacific Northwest is – once again it continues to be amongst the highest in North America. You can understand that.

And then we've had some weather phenomena in some regions of the southern portion, primarily mid-lower Alabama that impacts our Jackson mill with hardwood pricing and availability, and that's impacting the whole region down there.

And then, again, just some localized weather events, but we're moving into warmer weather, but we're also moving into – a month from now, we'll be looking at hurricane season coming, so it's the typical weather event, but that's about it. All in all, fibers have been pretty flat with the exception of a little regional variation..

Okay.

And if you look at the Pacific Northwest and some of the consolidation that's taking place there, are you seeing any disruption in the marketplace as you bring Wallula up around consolidation in the region?.

No, not really. We've been working for the better part of two years on how we line up our fiber supply agreements and where we're getting our fiber. And so, it's pretty – again, pretty flat in that regard to that whole region..

Okay. And just one clarification on Wallula. I think I heard you say you're going to bring that on line beginning in May.

Can you just clarify that? And then, what percentage of the 400,000 ton capacity should we expect it to be running at in the beginning?.

Yeah. What I said we'd be converting the machine during the month of May, and it goes down about second full week of May. And then it's down schedule wise until the first full week of June starting up. And so when it comes up because we are still lacking some key components of that on a delivery basis could not be delivered until the fall.

It will – and it means that you'll be running the machine at little more than half of its production capacity in probably 220,000 ton a year run rate basis. And so, we'll run the summer at a slow back rate. And then when we get the final key elements to install in October, that will give us the capability to run at the full 400,000 ton run rate..

Okay. Just one quick follow-up there then.

On the key components and obviously coming from equipment suppliers, are you seeing anything in relationship to lead times on equipment? I mean, is this sort of hitting at the conversion question whether or not lead times have really lengthened out on equipment suppliers into the industry?.

What we're seeing over the last two years, again, for critical components like headboxes and press sections, more technical complex components, you're out there 18 months, 20 months for delivery once you place orders. So, timing hasn't got any better, so planning is critical..

Okay. Thanks, Mark..

Thank you. Next question..

Your next question comes from Steve Chercover with Davidson. Your line is open..

Thank you. Good morning..

Morning..

So, first, with respect to maintenance, I generally thought that Q2 was traditionally the highest maintenance spend because that's when the weather is conducive.

So, if Q1 the peak this year, so you can focus on the Wallula conversion?.

Go ahead, Bob..

No..

Bring the color to that, because it's....

Yeah, I mean, you are talking about the maintenance outage, so the – we had the work at DeRidder as well as we had (49:13) and the number two machine out of Wallula all down at the same time which what made first quarter a heavier outage quarter than we typically had. That's really what drove that.

It can change every year, but I wouldn't read any more into that..

Just we want to take a – we were ready and we wanted to take advantage of the fact that we could convert DeRidder in particular during that period of time and get it done with.

And also, we needed – just from the human resource deployment and demands, we were able to take care of accounts in the number two machine out of Wallula over that same period of time. So, it was basically just spreading out some of the key activity but allowing us to really bring DeRidder on to see much more benefit of a full-year this year..

Yeah, I figured managerial bandwidth was part of it. And then, if I'm not mistaken, the ability to do pressure-sensitive and label at Wallula was an upgrade to that machine about a decade ago.

Is there any equipment there that you might relocate to your other white paper operations, I Falls or Jackson?.

No..

Serious about that?.

That's a short answer..

That's a short answer. Okay. Thank you..

Thank you. Next question, please..

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

Hi. Good morning..

Good morning, Gail..

In terms of the demand front, any perspective on what the West Coast ag demand outlook is this year? I assume maybe you have a better peek into it with Sacramento.

And also, with all the noise on potential trade wars brewing, is that a concern that you're hearing from customers? Any particular concern there in any end-markets and in particular that would be following that, that we should be thinking about?.

Go ahead, Tom, again first part, and I'll answer the second part..

Gail, regarding West Coast ag, it looks like it's going to be a very busy year. The demand is very strong. So, that will – that obviously is a plus for us when you take into account Sacramento acquisition that we just made. Mark, do you want to....

Yeah. And then on trade and what's going on, obviously, until we finally understand what is negotiated and what changes, you never know how it will turn out. Obviously, there's a lot of rhetoric coming out of Washington.

But nevertheless, we deal with about 18,000 customers in the United States, making everything from manufactured goods to food products. And so, it's hard to imagine what that impact would be, so we'll just wait and see what trade negotiations (52:18)..

Okay..

It's not even worth speculating..

Okay. And then, there's obviously been a lot of talk in the investments you've been making on the mill side.

Can you just give us an update and remind us what you have going on in terms of organic investment on the converting side?.

Well, yeah, we've talked about some projects. You get into a few specifics.

Tom, do you want to talk about the new plant we're building?.

Yeah. Gail, we obviously always have a lot of capital going into the box plants. We've recapitalized that consistently over the years. We think as well or better than anybody else in the industry. We've got a couple of big projects going on right now. We're building a new plant in Marshfield, Wisconsin.

We've also got large capital expansions going on in the Pennsylvania, Virginia region. And just a lot of projects going on all over. When you've got virtually 100 plants, there's a lot of things going on at all times. And it all goes back to what we discussed earlier.

This financial flexibility that we have really allows us to do the things that we need to do, driven around what our customers need and what their demands are..

Okay. Thank you..

Thank you. Next question, please..

Your next question comes from Adam Josephson with KeyBanc. Your line is open..

Thanks for taking my follow-ups. Bob, just on the tax side, can you help us with what your expected 2Q tax rate will be compared to the 25% in 1Q? I know you mentioned it would be slightly lower sequentially.

And then can you help me with what your long-term cash tax rate expectation is, just in light of the change you made to your 2018 guidance?.

Yeah. In the second quarter, Adam, it goes down to just under 24% where the effective tax rate is. And that's why it was mentioned in our guidance, while we get a little benefit (54:18). It really has nothing to do with tax reform.

It has to do with this accounting change that was made last year around employee share-based accounting and how it's recorded now in tax expense rather than in equity.

And when you have like we do in the second quarter, the majority of our restricted stock and so forth vest during that quarter, the difference between the grant date and the actual date that at best creates that noise. We have the same thing when we went from the first quarter to the second quarter last year went down for the same reason..

And on the cash tax side, Bob, longer term?.

Yeah. It's the same range that I gave earlier, Adam. As you know, we just gave what it is for the year. And I've mentioned that the cash tax rate went up a bit because of what the states were doing. And again, the range -- our new range for this year is 14% to 16%. But if you take out the overpayment that was made, it's on a normal basis.

It would be swinging at 19% to 21% range..

Got it. Thank you for that clarification. And Mark, just on the paper business, your volume was up in the quarter. Was there any pre-buy just ahead of your announced price increases? And then, in terms of industry demand, it was down about 5% last year. It's been a little better so far this year.

Do you have any particular expectation for what industry demand will look like compared to last year?.

On the first part, you'd have to assume it went a little bit pre-buying. It wasn't – probably wasn't that much, but we have assumed there was some pre-buy.

And then, on the second part of your question, what the volume would look like, I think the key part is that if you went back in the last seven years or eight years and look at what the slope of the curve was supposed to look like, we've flattened out considerably in the demand destruction portion of that curve.

And so, let's say, I think – and it also speaks about the strong economy and use of paper, so. But again, with Wallula going out of the production, we're down to a two-machine paper business. So, it goes back, and we have a nice tidy two mill business, Jackson, and I Falls with the four machines running, supplying both new supplies.

So, I'm not going to worry about what happens around the world, and it's just the business generates a lot of cash. And that generally require a lot of capital as we've said a number of times..

Mark, thank you, and best of luck..

All right. Thank you. Thank you.

Any other questions, please?.

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

Do you have any closing comments?.

Thank you for joining us on the call. We look forward to talking with you in July. Have a nice day..

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