Thank you for joining Packaging Corporation of America’s First Quarter 2020 Earnings Results Conference Call. Your host today will be Mark Kowlzan, Chairman and 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. Please proceed when you are ready..

Thank you, Shelby. Good morning, everyone, and thank you for participating in Packaging Corporation of America’s first quarter 2020 earnings release conference call. Again, I’m Mark Kowlzan, Chairman and CEO of PCA.

And with me on the call today is Tom Hassfurther, Executive Vice President, who runs the Packaging business; and Bob Mundy, our Chief Financial Officer.Before we begin our prepared remarks relative to the first quarter performance, I want to take a few make a few comments about the pandemic crisis in PCA.

Without a doubt, these may be the most unpredictable and unprecedented times that hopefully we will ever encounter.There is no reference manual for managing through a public health crisis with severe economic ramifications, such as what has occurred with the COVID-19 pandemic.

Our routines, habits, personal preferences, work and social activity and many other aspects of our lives are sure to change forever as a result of this.PCA’s operations qualify as an essential or critical element under the various state and local shelter-in-place orders.

Our leadership team is in constant communication discussing safety, the state of our operations, business continuity and other critical management topics.It is our responsibility at PCA to ensure that, first and foremost, we help provide for the well-being of our more than 15,000 employees and their families.

We must do everything in our power to assist our customers and suppliers as well.We have implemented various procedures and safeguards at all our manufacturing, converting and office locations across the country to help keep our employees safe and healthy as we provide the goods and services considered essential for assisting with our country’s response to the pandemic.We have also put measures in place to assist them with the economic ramifications that have resulted from these response measures.

To date, we have not experienced any significant interruptions at our operations or in our supply chain due to the virus.Our network of mills, converting facilities and distribution operations strategically located throughout the United States gives PCA asset flexibility to manufacture and ship products to multiple locations.We will continue to closely monitor developments, take proactive measures to protect our employees, and provide our customers with the products and services they require.I could not be more proud of the effort, responsiveness and sacrifices displayed by all PCA employees, as well as our customers and suppliers.

It has truly been an inspiring observation.I’ll now begin with an overview of the first quarter results, and then I’m going to turn the call over to Tom and Bob, who’ll provide more details. I’ll then wrap things up, and we’ll be glad to take some questions.Yesterday, we reported first quarter net income of $142 million or $1.49 per share.

First quarter net income included special items expenses of $0.01 per share, related primarily to costs and expenses associated with the COVID-19 pandemic.Excluding special items, first quarter 2020 net income was $143 million or $1.50 per share compared to the first quarter of 2019 net income of $187 million or $1.98 per share.First quarter net sales were $1.7 billion in both 2020 and 2019.

Total company EBITDA for the first quarter, excluding special items, was $311 million in 2020 and $371 million in 2019.

Details of the special items for both the first quarter of 2020 and 2019 were included in the schedules that accompanied the earnings press release.Excluding special items, the $0.48 per share decrease in first quarter 2020 earnings compared to the first quarter of 2019 was driven primarily by lower prices and mix in our Packaging segment of $0.64 and Paper segment of $0.05, lower volumes in our Paper segment of $0.03, higher annual outage expenses, $0.04, higher depreciation expense, $0.04, other expenses, $0.01, and higher tax rate, $0.01.The items were partially offset by higher volumes in our Packaging segment of $0.14, lower operating costs of $0.09, lower converting costs, $0.04, lower freight and logistics costs, $0.01, and lower interest expense, $0.04, and non-operating pension expense, $0.02.The results were $0.30 above the first quarter guidance of $1.20 per share, primarily due to higher volumes in our Packaging segment of $0.03 and our Paper segment of $0.01, higher prices and mix in the Packaging segment of $0.02 and lower operating costs of $0.15, resulting from the excellent fiber and energy usage and lower input prices in our mills.Freight and logistics costs were lower than expected by $0.03, as were converting costs, annual outage costs and other expenses, each lower than expectations by $0.02 per share.Looking at our Packaging business.

EBITDA, excluding special items in the first quarter of 2020 of $290 million with sales of $1.5 billion resulted in a margin of 20% versus last year’s EBITDA of $334 million and sales of $1.5 billion or a 23% margin.Our containerboard mills established a new first quarter volume record, even while performing scheduled annual maintenance outage work at four of the mills.

Our containerboard production allowed us to maintain our industry-leading integration rate of approximately 95% by supplying the necessary containerboard to our box plants, who achieved an all-time record for total box shipments, as well as a new first quarter shipments per day record.We were able to meet this greater-than-anticipated demand through proactive management, changing the sequencing of our scheduled maintenance outages, as well as outstanding execution of the work performed during these outages.Our enhanced capabilities to optimize the mix, freight and logistics costs, inventory levels and internal and external customer needs of the customer - of the containerboard system provided to us by our machine conversion at Wallula Mill were a key component as well.We ended the quarter with containerboard inventories at their lowest levels since the acquisition of Boise’s packaging business in 2013.I’ll now turn it over to Tom, who’ll provide more details on containerboard sales and the corrugating business..

Thank you, Mark. Corrugated products and containerboard demand were very strong during the quarter.

As Mark indicated, our corrugated products plants achieved a new all-time record for total box shipments, which were up 5.6% over last year as well as a new first quarter record in shipments per day, which were up 3.9% compared to last year’s first quarter.Outside sales volume of containerboard was 13% above last year’s first quarter, primarily attributable to increased domestic demand with export demand slightly higher as well.Domestic containerboard and corrugated products prices and mix together were $0.54 per share below the first quarter of 2019 and down $0.06 per share compared to the fourth quarter of 2019.

Export containerboard prices were down about $0.10 per share versus last year’s first quarter and flat compared to the fourth quarter of 2019.I’ll now turn it back to Mark..

Thank you, Tom. Looking at our Paper segment.

EBITDA, excluding special items in the first quarter of $42 million with sales of $217 million or 19% margin compared to the first quarter of 2019 EBITDA of $55 million and sales of $240 million or 23% margin.First quarter paper prices and mix were below last year as expected, however, they were flat compared to the fourth quarter of 2019.

Our Paper volume was also lower as expected, primarily due to the scheduled maintenance outage at our Jackson, Alabama mill, however, it was about 3% higher than we had assumed.Although we ended the quarter with our inventory slightly lower than planned, on April 1, we announced downtime at our Jackson, Alabama mill for the months of May and June to ensure we manage the supply according to our demand outlook for the second quarter.Throughout the quarter, the mills did an outstanding job, managing fiber and chemical usage and maintained tight control over indirect and fixed expenses.I’ll now turn it over to Bob..

Thanks, Mark. We had record first quarter cash generation with cash provided by operations of $237 million and record first quarter free cash flow of $166 million.

The primary uses of cash during the quarter included capital expenditures of $71 million and common stock dividends of $75 million.We ended the quarter with $764 million of cash on hand or $913 million, including the cash we recently moved to marketable securities. Our liquidity at March 31 of over $1.2 billion is the highest ever for our company.

And with the refinancing we completed in the fourth quarter of 2019, we have no debt maturities for the next 3.5 years.Regarding our announcement of taking our paper mill in Jackson, Alabama down for the months of May and June, our estimated second quarter financial impact of this decision is approximately $30 million or $0.24 per share.I want to update you on our full year guidance for certain items that we provided on last quarter’s call.

As Mark alluded to earlier, we managed through a very strong first quarter demand in our Packaging business, partly by altering the sequencing of the scheduled maintenance outages at our containerboard mills, as well as the containerboard machines impacted versus what we discussed during last quarter’s call.

There are no changes to the scheduled outages at our white paper mills.The actual impact in the first quarter was $0.22 per share, and the estimated impact by quarter for the remainder of the year is now $0.09 per share in the second quarter, $0.16 in the third and $0.34 per share in the fourth quarter.

The full year estimate remains at $0.81 per share, as we mentioned previously.Also, our full year interest expense is now expected to be $88 million versus $81 million.

And our net cash interest is now estimated to be $92 million versus $84 million, primarily due to lower expected interest income.Our cash tax rate estimate is now slightly lower than our earlier estimate of 19%, partially due to the downtime we announced at our Jackson mill, and our effective tax rate remains at approximately 25%.After a thorough review of our capital spending plans, we are not changing the range of spending we provided previously, which was between $400 million to $425 million, nor are we changing our full year outlook for pension contributions or depreciation.I’ll now turn it back over to Mark..

Thank you, Bob. I want to reiterate the comments I made in yesterday’s earnings release. As I mentioned earlier, these may be the most unpredictable and unprecedented times that hopefully we will ever encounter.

Not a day passes that we realize something new being impacted in a way we had never thought of or imagined of before.Our consistent approach towards prudent capital allocation and sound financial governance has served us well for many, many years and is certainly helpful in times like this.PCA entered this uncertain period of time brought on by the COVID-19 crisis from a position of financial and balance sheet strength.

Our focus has been and will remain on preserving that strength through the actions and decisions we make as a management team.As Bob mentioned, our company’s liquidity position has never been higher nor has our confidence in the future success of PCA.

We are well positioned to manage through whatever lies ahead, while ensuring we take care of the needs and expectations of our employees, customers, suppliers and shareholders.However, the confidence does not translate to the same degree short-term predictability or guidance specifics that we normally provide at this time.

Bob has provided you an update on estimates for certain forward-looking items.However, due to the uncertain scope and duration of the pandemic and the timing of the global recovery and economic normalization, we’re not able to properly quantify our guidance for the second quarter.We’ve already announced the actions being taken in our Paper business, and we believe these actions will position us properly for what we anticipate right now for the second half of 2020.

However, nothing is certain, especially now, and it may require further action to be taken.

We know that we experienced a demand surge in our Packaging business in the first quarter, and the second quarter has also begun quite strong as well.Our containerboard inventory is at the lowest levels, both in total and in weeks of supply since our acquisition of the Packaging business from Boise.

And while recycled fiber prices began moving significantly higher during the first quarter, our position as a primarily virgin fiber producer minimizes its impact compared to other producers.However, it only makes logical sense that demand in certain end markets will return to more normal growth trends at some point, although we’ve been successful at securing new business in end markets with a stronger demand outlook versus markets whose demand may be impacted more negatively.Also, it is impossible to predict what additional health-related measures will be or must be taken or dictated to us by the various state and local governments where we operate.

Such events and actions could adversely impact the operation of not only our facilities, but also the availability of services and products we rely upon from our suppliers.That being said, it is also a fact that the products our company provides are essential to the response efforts, the recovery and the well-being of our country.

The needs for our cost-effective, sustainable and renewable products will continue.While no one knows the severity or longevity of the virus’ impact on global economy, it is my belief that this need will be even more in demand as the world recovers from this crisis.With that, we’d be happy to entertain any questions, but I must remind you that some of the statements we’ve made on the call constituted forward-looking statements.

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

Actual results could differ materially from those expressed in the forward-looking statements.And with that, Shelby, I’d like to go ahead and open up the call for questions, please..

Of course. [Operator Instructions] Your first question comes from George Staphos of Bank of America..

Hi, everyone. Good morning..

Good morning..

Thanks for all you’re doing on COVID and congratulations on the quarter.

I guess if you could give a little bit more color on what was particularly positive on the operating side relative to your guidance going into the quarter.You mentioned - I think you mentioned fiber and fuel, but if you could, to the extent possible, comment a bit further there, that would be great. I had a couple of follow-ons..

Yeah. George, when we started the first quarter in January, we were looking at taking four of the mills down for their annual outages. And obviously, there is a lot of unknowns there. After the work was done, starting up the mills, all the mills started up remarkably well ahead of schedule and are running flawlessly since.

So that was a big positive for us.And also, in doing so, the utilization of energy and other raw materials flows through. We’ve been - you would understand that with energy costs coming down, we were able to take advantage of lower energy pricing.

And then again, just good efficient utilization of fiber and conversion in the mills.But again, just very well executed annual outages and utilization of the assets. And the same thing we’re seeing in the box plant side of the business, in the converting side.

Bob, you want to add something to that?.

Yeah. George, I’ll just add. Part of what Mark was referring to and what we commented on earlier was on fiber end.

Even though OCC prices were rising throughout the quarter, us being primarily virgin and with the woodyard project that we completed last summer at Counce, we saw significant usage and pricing benefit from that project, as well as other parts of the country.

But Counce was a big part of that project we talked about around this -late summer last year..

I mean, to emphasize that, George, we’re running Counce. Counce has essentially 1,000 ton a day recycling capability with OCC and DLK. And for all intents and purposes, we’re not and we have not been using recycled fiber at Counce, it’s all virgin pine..

Understood. Thank you for that additional color. I guess, I had two additional questions and then, for fairness, I’ll turn it over.

One, can you comment on what you are seeing in the first portion of the second quarter? What are your customers saying about the degree to which they think this volume pickup will be sustained into the second quarter? Recognize there are no guarantees with any of this, so we totally appreciate that.And then on the inventory side, are you comfortable with the level of inventories where they’re at, recognizing they’re lowest they’ve been since the Boise acquisition? Or it’s great that they’ve gotten this low, but you’re uncomfortable with it and you need to rebuild inventory, if in fact demand would allow you to do that in the first place? Thanks, guys.

I’ll turn it over..

Tom, let me start off with the inventory question, and then I’ll let you take the first part. As far as inventories go, obviously, I wish we had some extra cushion, but it is what it is. It’s also a high-class problem when you have to run as efficient and hard as we are doing.

I found over the decades that our mills run better when they are under duress, shall I say, and there’s a challenge.But no, it’s quite impressive that we are running extremely lean in the inventories. But as you could expect, our 95 box plants nationwide have supported one another.

There were times during the last couple of months that we’ve shifted some inventory from one box plant to another to support the needs of their sister box plants.And again, having the full capability of the Wallula mill operating over the last year, that’s given us tremendous flexibility and this whole logistics capability to support the nationwide footprint.So more than ever, having the mill system that we have allows us to run very efficiently even at the new low inventory levels.

So - and Tom, why don’t you go ahead and answer the first part of that question on where we are in the marketplace?.

Yes. Okay. I’d just add, Mark, on the inventory side, one thing that’s really helped us also is the availability of transportation, so that, as this economy really begins to open up and if that becomes under a little more duress, that may impact some of our decisions inventory wise. But as Mark said, it’s amazing.

We’re able to run at this inventory rate.Let me just comment a little bit on your first question, George, relative to the customers and kind of what’s going on. I’m just going to give you a quick synopsis, a little bit of what took place, as we saw it in the first quarter and what we see going into the second quarter.

Obviously, the first quarter was incredibly busy, high demand, driven primarily by e-commerce and, of course, food and beverage on the retail side of the business.We alluded to the fact that we expect in the second quarter to return to more normalized growth rates, which is what we’re seeing right now.

So there has been a more normalization of the pattern, if you will, of demand.However, going into the quarter, as some of the food service sector begins to open up, we expect to see some return of demand in that particular arena.

So I would just comment that going forward, as we alluded to in our comments, we’re much more on track for that normalized growth pattern, which is in that 1.5% to 2% range..

All right. Thank you very much..

Thank you.

Next question please?.

Of course. Your next question is from Mark Wilde of Bank of Montreal..

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

Good morning..

Hey, Mark..

Mark, I wondered - you mentioned this integration rate in containerboard up to 95% now. I’m just curious about what your options are for adding more mill capacity on the existing base? I think you’ve had some - maybe some opportunities at Wallula.

I don’t know where you stand with those, maybe opportunities at other mills?.

Yeah. Mark, as we talked about in the January call, at this essentially full integration we were at that 95% back two years ago to three years ago. We consider that full integration. We’re still selling a little bit out in the open market, a very small amount, going offshore to export.

So we do have the ability to pull some of that in over time if that dictates. We do have some room to continue to stretch Wallula as time goes on with some capital investment.

And so that hasn’t changed.But I think the bigger story will be, as it was back a few years ago, that we’ll now have to look out and in a much, much broader sense of how we prepare the business for the next three to five years in terms of our containerboard supply.Shorter period of time, we can do what we did a few years ago and buy tons on the open market as we prepare for this future.

But we do have some opportunities. We talked about that in the past. And so I’ll just leave it at that. Nothing’s changed. But we feel we’re in a really, really good position right now. And we’re very comfortable with that..

Okay. And just a couple of quick follow-ons for Tom Hassfurther. Tom, I wondered if you can just comment on whether you’ve felt any impact in the quarter from some of the mill outages that have taken place elsewhere in containerboard?And then I wondered if you could also just talk about sort of growth runway for PCA in the converting business.

You’ve always been a little more niche focused. You’re becoming a bigger and bigger part of the industry.

What does the forward runway look like?.

Mark, the mill outage impact, I mean, we managed around it, let’s just put it that way. There were some trades that were in place that were impacted, that we had to take care of either through our mill system or through other trade partners.

So we did incur some additional transportation expenses.But for the most part, again, it kind of goes back to the commentary around inventory, is that’s remarkable how well we did given the circumstances and given the demand that we had in the first quarter and the very short lead times we had to meet.

So overall, I mean, it’s just - it was just a great team performance.The growth runway, we’ve - as you see in our capital investments and what we’ve talked about and whether it’s building a new plant at a Richland or a Marshfield, we’ll continue to be guided by our customer demand in those regions of the country, and we’ll continue to provide those opportunities for growth as we see.I’ve said all along, I say, we’re not a build it and hope they will come.

We secure the business and then go out and invest the capital. So - and we’ll continue to do that. So I see our growth runway as being very positive. And again, it will be dictated by our customers as much as anything else..

Okay, very good. Good luck in the rest of year..

Thank you..

Thanks, Mark.

Next question please?.

Your next question comes from Mark Connelly of Stephens..

Thanks. Mark, your inventory performance last quarter was pretty stunning, and now they’re down again.

How much of that is sustainable? And how much is just sort of dealing with the surge you had to deal with?.

Well, again, if you look at our plans for the first quarter, we knew we were going to be pushing the envelope on that lower end of the inventory because of the annual outages. We go through that every year to one degree or another.

But obviously, with demand strong through the fourth quarter and then demand stronger than we anticipated in the first quarter, we really had to execute well through that period of shutdown time.Now the shutdowns are behind us. The mills are all running well. So we’re able to continue to place tons into our system where we need to.

Obviously, we don’t have a lot of extra capacity. And I’ll use the term, we don’t have a lot of margin for error, the mills have to continue to run well now.We have our next planned outage in September at the Tomahawk mill, and then Filer City has no outage this year. We’ll have the No.

one machine down in Counce later in the fall, but that will be it.So we have the remainder of May through the summer months into the September period to run well and build up some extra tons where we need to place them within the system..

Okay. And then just one more question. When I look at your revenue per ton performance, I didn’t see any of the negative impact that I was or much of the negative impact that I was expecting from the January price cut.

Is that consistent with your view? Or did you - do you feel like you sell what you’re supposed to see? Or are we going to see a catch-up in Q2?.

Yes. Mark, it’s Bob. I’d say we saw what we were expecting, certainly some mix component to some of that, but it was about what we were expecting..

Okay. So its sound, looking at next. Very good. Thank you..

Okay, thank you.

Next question please?.

Your next question is from Brian Maguire of Goldman Sachs..

Hey. Good morning, everyone. So just a question on - I think in the release, you talked about sources of upside to the $1.20 guidance. One was better mix and price. Just wondering if you could kind of comment a little bit on that.

I think Tom was just alluding to it, but wondering about mix and then just within that sort of the volume trends by end market.

I think you talked about e-commerce and supermarkets being a little bit better, but wonder if there’s any other end markets that you started to see some weakness as the quarter dragged on, so just kind of mix in general for both pricing and volume there?.

Tom, why don’t you go ahead and handle it..

Yeah. Let’s talk about the volume trends first, and then we’ll get back to the mix side of it.

But on the volume trends, as I said, the e-commerce and the food and beverage on the retail side in the first quarter, obviously, with some of the panic buying and some of the other things and, of course, consumers quickly changing from going to restaurants regularly to now being at home and to not being travelling or any of those other sorts of things, so that side of the business, I mean, really, really was very, very robust.The food service side of the business, on the other hand, which would be restaurants, hotels, airlines, conventions, all the other - stadiums, all those other areas of food service, that was down dramatically and has and stayed down throughout the quarter.

I think they’re seeing some signs of and hope of rebound, obviously, going into the second quarter as the economy begins to open up some.On the ag side of the business, of course, it’s a mixed bag also. You had those ag industries that support the retail side, did very well, those ag industries that support food service.

In some cases, we’re applying produce under the fields.The auto sector has been – has obviously been under some duress. I’m talking about aftermarket, primarily. And then, of course, at the towards the end of the quarter, we had some we began to see some weakness on the protein side, meat and pork specifically. That’s COVID related.

Lot of things going on in the plants, 2-week shutdowns, things like that, that have gone on in some of those processing plants. So and we expect that to begin to come back.In terms of better mix and price, I mean, on the mix side, yes, the brown volume has been very good, again, driven by that e-com and that food and beverage side.

But on the other hand, the display side of the business, the point of purchase display has been relatively weak, and we expect that to remain somewhat weak throughout the remainder of the year..

Okay. That makes sense. Thanks for that color. And then just to switch to the paper side of the business. Demand there seems like it’s maybe rebounded a little bit in March for whatever reason, but we’re all expecting a pretty big drop in April with all the offices and schools shut.

I don’t know if you can comment on trends you’re seeing there.And I think in the release you said that the Jackson outage, you think, will be enough to take care of what you’re expecting for volumes, but things do continue to come in weaker.

Does that just extend the duration of that outage into 3Q, if needed?.

I think everything we’re seeing is what the - what has been reported in the public. The percentage of falloff of demand is pretty close to what the indexes have been indicating. If you would imagine that starting in March, all the school systems throughout North America started to shut down at from the university level down to the kindergarten level.

Businesses were sending everybody home to work from home, shelter in place. So there was that big immediate fall off in demand for paper.What we saw a little bit happening through March into somewhat into the early part of April was that there were some channels and some outlets that were still stocking.

People’s buying habits changed, people that went home, businesses that were now operating in a different manner were sourcing their cut size, reprographic paper is an example, from different supplies. But we’ve definitely seen the falloff. Now, here is the end of April.

And again, I would just refer you to what the publications are saying with demand.Now that being said, with talk about reopening various sectors of the economy in the United States, you could imagine if school systems come back up and run into the fall, schools will be reordering.

Businesses that come back up will be continuing to reorder paper as time goes on.So we think where we are, we put ourselves in a good position to manage the inventory. We can manage that up and down. We have that flexibility. And so I’m very comfortable with how and what we’re doing in the paper side of the business in managing to the demand..

Okay.

The plan at the moment, though, is to restart Jackson, correct?.

Correct..

Okay. Thanks very much. I’ll turn it over..

Okay, thank you.

Next question?.

Your next question is from Anthony Pettinari of Citi..

Good morning, guys. This is actually Randy Toth sitting in for Anthony..

Good morning..

Over the – good morning.

Over the past couple of quarters, you’ve built a sizable war chest in anticipation of potential economic uncertainty and with nearly $1 billion of cash on hand and the uncertainty now here, how are you thinking about capital allocation? And has the tone of conversations within your M&A pipeline changed at all? If any color there, would be helpful..

I remember a year ago, in January, I was asked the question when I - I think we probably had $300 and some odd million of cash, and there were some individuals that thought that was a high number. And then we went into the second, third quarter of the year when cash is building up.

And I remember the July call last year, when we were somewhere in that $500 million level, and someone asked me, didn’t I think that was too high. And I said, no, I’d let them know when I thought it was too high.

Here we are, approaching $1 billion, and I’ll still use that and say, you never have enough cash, especially how I referred to it last year as we live in very uncertain times, well, this is about as uncertain as it gets.So I’m very comfortable with the cash we have. We also are generating healthy cash as we go through this.

The capital plans that we have in place are very business growth driven and efficiency driven, and so we feel very comfortable with continuing on with the capital allocation in that manner.And also, as we go forward, with this fortress quality balance sheet, it does give us an incredible opportunity to look at acquisition opportunities that come along and they could be highly accretive in the future.

So we can do just about anything that makes sense in the future and go forward in a very comfortable manner..

Understood. Understood.

And then could you just briefly talk about what you’re seeing in April demand for both containerboard and paper, maybe versus March?.

Tom, you want to talk about containerboard, I’ll talk about paper?.

Yeah. The demand is still as I alluded to earlier, I mean we’re returning to more of a normalized growth trend. So demand right now is running 1.5% to 2% in that category, both on paper and on boxes. So that’s about - I’m talking about linerboard medium here, not the paper side of the business.But - so that’s about where we’re running right now.

I’d say it’s a much more normalized growth pattern, as we talked about. But I do see some positives as we open up this economy. There’s some opportunities, I think, to improve that as the quarter goes on..

And then with regard to paper, primarily cut size, again, I’m just going to refer you to what the publications are referring to and what they’re anticipating for the second quarter right now. It seems to be holding up with their predictions of a downturn in demand..

Okay, understood. I’ll hand it over..

Next question please?.

Your next question is from Mark Weintraub of Seaport Global..

Thank you.

First, just clarifying, that 1.5% to 2% that’s year-over-year, right, for containerboard and box demand as opposed to April v March? I’m sure that’s what you meant?.

Yes, yes..

The other just kind of following up a little bit on some of the comments about securing new business in well positioned end markets, et cetera.

Maybe if you could provide a little bit more color, and is that additive business, are you trading up? And maybe more generally, if you could provide some thoughts as to the mix of your business, how it positions you in this environment overall?And with one question being, historically, you’ve had more local account exposure than some of the other larger players, which are more nationally driven.

How does that play out, do you think? Or are you seeing it play out in this type of environment?.

Mark, this is Tom. I’ll just answer that real quick. We haven’t changed our stripes at all in terms of the type of business we go after or the mix of business that we currently have. It served us very, very well. And I think served us incredibly well during the first quarter.I’ll give you an example of the way we operate.

We – at various times, I mean, you’re going to win some business, you’re going to lose some business, you’re going to do some other things. And we happen to, coming into this year, lost a very sizable national account.That’s been replaced with about, I don’t know, 50 to 100 accounts, so which is our niche and more about how we do it.

And that’s an example of the hard to do. And of course, that positions us for a lot less risk going forward when that business is spread over a much larger customer base. It also allowed us growth opportunities within all those accounts that we just picked up.

And that’s I think that’s the best description of the way we continue to operate and what makes us somewhat unique, I think, in terms of the larger players..

Great. So - and are you - I completely understand your long-term strategy, and it’s been incredibly successful for you, and I expect it will be going forward.

I’m just trying to get a sense of, in the current environment, are you seeing a difference? Are the local accounts performing differently at all than the larger national? Are they holding in better? Or they or is it more difficult for them? Or what - if there’s any differentiation you can see, that would be great..

I would say, Mark, that it’s more of a mixed bag. Obviously, if you’re big on the e-comm side, you’re going to have very big and large growth, all right, which we’ve participated in. Some of the smaller players there, they’ve done well.

Some of them haven’t done as well.Some of the business I’m talking about that perhaps was maybe negatively impacted in the first quarter through COVID and things like that, that chose to close will be reopening coming into the second quarter. So I think there’s some opportunity there.

But again, it’s - I think on a macro basis, it’s - there’s a lot of give and take there..

Got it.

And also, order of magnitude, how much of your business would you say is directly or indirectly going into food service, which obviously was hit hard, but maybe is starting to see some recovery now?.

Well, we don’t really break out our actual segments and how much of those sales are. But we do have a sizable amount that does go into food service. And that was very negatively impacted, obviously. And we expect it to come back, but it’s going to come back slowly.

I mean I just don’t think there’s going to be any return to what we used to consider normal in the short run. It’s going to take a little while to get there..

Okay. Thank you..

Thank you.

Next question please?.

Your next question comes from Gabe Hajde of Wells Fargo Securities..

Good morning. Thank you gentlemen, for taking my question. Mark, I was curious, you mentioned it in your prepared remarks as well as in the press release and talking about demand coming back, maybe even a little bit better than it was before the crisis. And I’m curious if you can elaborate on that comment..

Well, again, using that, you have to qualify the time that it takes to get there. And I would expect that for PCA, in particular, we’re an American-based company. We do, again, a small amount of containerboard sales offshore, but we don’t have operations.

We produce and sell into the United States with our corrugated products and our paper, primarily here, again, in the United States, a little bit into Canada.But nevertheless, we do believe that we will come back strong as a country, and it’s still the best place to be in the world.

And so the caveat is it’s just there’s some time it’s going to take to get there, but I still feel very good that we’re in the right place in the world and in the right products. And we’ve got the platform to take advantage of that..

Okay. And then maybe, I guess we’ve tried to come out in a couple of different ways on the end markets that you guys serve in the corrugated business.

But is there a way that you can give us to think about corrugated intensity for the food beverage that goes through retail versus food service? Intuition would tell me that it’s more intensive to go through the retail channel, but something that you guys have observed through time and a way to think about it?.

Tom?.

Gabe, let me see if I can take a crack at this. I’m not sure exactly what you’re after. But on the food and beverage retail side, there’s there are two distinctive markets really per se, okay? There’s the - there’s that retail side and then there’s that food service side.

And what we’ve - what I’ve learned even through this process from some of our end customers is how unique and different they are.It’s almost like tissue. I mean tissue on the there’s tissue on the retail side, and then there’s tissue on the institutional side. And they’re two completely different businesses and really different products.

So you can’t just swing from one to the other. And the same is very true even in the food business and especially related to the ag side of the food business, where you’ve got agricultural accounts that primarily serve the food and beverage retail side.And then you’ve got ag accounts that serve the food service side.

And they don’t swing from one to the other. They’re just - they have completely different product lines and supply lines.

So that’s one of the big distinctions that we’ve seen here, is that we - obviously, in Q1, we had tremendous demand on that retail side just to keep store shelfs stocked.Now as we get into the second quarter, third quarter and go on and the economy begins to open up, we - the food service side will begin to pick back up.

That will and the retail side will come down a little bit. But overall, the net effect of that will be an increase, probably a slight increase in demand, not a decrease in demand..

Okay, thanks..

Thank you.

Next question please?.

Your next question is from Adam Josephson of KeyBanc..

Morning, everyone. I hope you and your families are well..

Morning. Thank you..

Same to you..

Thanks. Tom, just one on back to the box demand trends for a moment.

So if April is back to kind of a normal trend, I guess my question is, why not provide guidance in that case? Is it something you’re thinking may happen in May and June that you haven’t seen yet? Or is it something perhaps in your backlog for May that you’re seeing? I’m just - because, obviously, you normally provide current quarter guidance.

And in this case, you’ve opted not to do so.

And you’ve expressed the plan for Paper, taken Jackson mill taking the Jackson mill down for two months.So I’m just trying to understand what kind of drove the decision not to provide guidance if, in fact, your box demand trend seems to be holding up pretty well at the moment?.

Adam, there’s zero upside in us providing any guidance because of the uncertainty that we still live with day to day.

Anybody that turns on the TV or watches the news or checks your Internet messaging, what’s coming out of Washington, what’s coming out of the state and local levels is anybody’s guess from day-to-day and hour-to-hour, the Paper business, the demands.So it’s not even worth trying to put a number on that until we finally get some time behind us in terms of normalizing the economy.

And so that’s about as simple as it gets. There’s still tremendous uncertainty day-to-day. And Bob, do you want to....

Yes, just with - and Adam, as well, with suppliers and services and whatnot, we have no control over what may be going on there. So we can’t be as confident in that we feel good where we are now. But the supply chain, things can happen, and it puts a lot of uncertainty out there..

Sure. No, understood. And Mark, just on the free sheet business longer term. Obviously, you’re managing supply now to match demand, and hopefully, things get better on the other side of this with respect to free sheet demand.

But longer term, how are you viewing that business? Do you view it as really a cash cow, and you’ve managed it quite successfully since you got it from Boise, and you’ll continue to dothat? Or is it something that you may actually look to get bigger in if the price and opportunity is right?.

Well, we’ve said for seven years that the business has provided us a really good cash flow. We never had to invest an inordinate amount of capital. It’s turned out to be a very good business in that regard. We’ve made no - it is what it is. It is a declining business over time.The decline had flattened out somewhat.

We would expect that decline to continue over time in a normalized manner. And at such point in time that it called for, we do have numerous opportunities to take advantage of these remaining assets. That’s all I’ll say about that..

Understood. Thanks so much Mark.

Okay.

Next question please?.

[Operator Instructions] George Staphos [Bank of America] has returned to the queue..

Hi, everyone. Thanks for taking the follow-on.

Mark, Tom, given what you’ve seen over the last four to six weeks, maybe longer in terms of COVID and what it changed in terms of consumer demand, ordering patterns and the like, are there any directions, investments in converting, investments generally that you could sort of outline for us that may be now more important, higher priority, again, given what you’ve seen over the last quarter or two? Thanks, guys.

And good luck in the quarter..

Tom, why don’t you go ahead with that?.

Well, Number one is, I’m going to reiterate this over and over again, no matter what call we’re on, and that is that our investments are customer-driven.

So we tend not to talk too much about that when we when the demand gets to a certain point and we need more capacity, we take care of that capacity, whether it’s at a box plant or at a mill.And we - there’s no question, the patterns have changed dramatically as a result of COVID.

I think the patterns will be it’s going to be a long time before the patterns get back to what I’d call the normal that we used to understand, and we’re going to have to adapt accordingly.One of the things that it does cause is it does - we could have - we can have tremendous demand in one region of the country or even a single plant and far less demand in some other plant.

And therefore, we have to utilize our resources in a different way, which we do. And sometimes we incur additional cost as a result of doing that, but we take care of our customers.So we’re just prepared to continue to do that. And we’re prepared to look at the market through a very realistic lens and adapt to whatever change needs to take place.

That’s about the best I can summarize for you there, George..

Understood. Yes, I was getting really more about process than capacity, but I understand that that’s something you don’t want to get too deeply into. I mean, maybe as a follow-on and recognizing and you wouldn’t be offended if I’d say you’re somewhat biased here.

Do you think that the world we’ve been living through in the last quarter or two has, I don’t know, ultimately, long-term assisted, improved the growth outlook for corrugated because we’re all going to be shopping from home to a larger degree, et cetera? Or you think this is more of a one-off and the longer-term secular will be what it was prior to COVID? Again, good luck for the quarter..

Well, it’s George, it’s hard for me to speculate on that, but I would say that most of the trends are positive for corrugated, okay? Now on the other side of the equation, it’s been a negative for OCC collection, obviously.

And we haven’t spent a lot of time talking about OCC, but it certainly has impacted OCC collection.Getting it from the consumer is a lot more difficult, and getting it from the food service sector or the retail sector. And I think that’s going to be a trend that we’re going to be dealing with for quite some time..

Thank you. And Shelby, I do believe there are no more questions..

No, there are no more questions. Do you have any closing remarks, Mr.

Kowlzan?.

Yes. Thank you for joining us today, and everybody stay well, be safe and look forward to talking with you in July for our second quarter call. Thank you. Have a good day..

This concludes today’s conference call. Thank you for your participation, and you may now disconnect.+.