Packaging Corporation of America (PKG) Mark Kowlzan on Q4 2015 Results - Earnings Call Transcript

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Packaging Corporation of America (NYSE:PKG)

Q4 2015 Results Earnings Conference Call

January 26, 2016, 09:45 AM ET

Executives

Mark Kowlzan - Chairman and Chief Executive Officer

Thomas Hassfurther - Executive Vice President, Corrugated Products

Robert Mundy - Senior Vice President and Chief Financial Officer

Analysts

Mark Weintraub - Buckingham Research Group

Chip Dillon - Vertical Research Partners.

Scott Gaffner - Barclays

Mark Wilde - BMO Capital Markets

Mark Connelly - CLSA

George Staphos - Bank of America Merrill Lynch

Debbie Jones - Deutsche Bank

Anthony Pettinari - Citigroup

Philip Ng - Jefferies

Christopher Manuel - Wells Fargo

Steve Chercover - D.A. Davidson.

Andrew Feinman - Iridian Asset Management

Operator

Thank you for joining Packaging Corporation of America's Fourth Quarter and Full Year 2015 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.

Mark Kowlzan

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

During our prepared comments, we will be referring to slides that are posted on our website. I'll begin the call with a review of the fourth quarter and full year results and then I am going to turn the call over to Tom and Bob who'll provide more details. I'll wrap things up, and then we'll be glad to take questions.

Yesterday, we reported fourth quarter net income of $104 million or $1.07 per share. Fourth quarter net income included net nonrecurring charges primarily from the Boise integration of about $400,000. Excluding these special items, fourth quarter 2015 net income was $105 million or $1.08 per share compared to the fourth quarter of 2014 net income of $114 million or $1.16 per share. Fourth quarter net sales were $1.4 billion in both 2015 and 2014.

We also recorded full year earnings excluding earning special items of $443 million or $4.53 per share compared to 2014 earnings excluding special items of $459 million or $4.66 per share.

Net sales in 2015 were $5.74 billion compared to the $5.85 billion in 2014. Excluding special items total company EBITDA in 2015 was $1.106 billion compared to $1.144 billion in 2014. Details of the special items for both fourth quarter and full year 2015 were included in the schedule that accompanies the earnings press release.

Turning to slide 3, fourth quarter 2015 earnings per share excluding special items were $0.08 per share below the fourth quarter of 2014 driven primarily by lower white paper prices and mix of $0.10, higher annual mill outage costs $0.03, lower corrugated volume $0.02, lower containerboard production $0.02, lower export containerboard prices $0.02 and higher depreciation expense $0.02. These items were partially offset by lower costs for energy of $0.05, mill repair costs $0.03 and freight $0.02) as well as our lower income taxes of $0.04) per share. Our earnings were $0.05 per share better than our fourth quarter guidance.

Operational performance contributed about $0.06 per share in total which included about $0.02 for energy, $0.02 for mill repair costs, $0.01 for wood and $0.01 for chemicals. Also as we continue to optimize logistics our freight was $0.02 better than forecast and our tax rate was also $0.02 better. These items were more than offset however by lower than forecast containerboard production and box volumes of about $0.04 per share.

Looking at our packaging business, EBITDA margins excluding special items were up over last year's levels with EBITDA of $252 million and sales of $1.09 billion were 23.1% margins compared to the fourth quarter of 2014 packaging EBITDA excluding special items of $250 million on sales of $1.1 billion or a 22.3% margin.

For the full year excluding special items packaging EBITDA was $1.009 billion with sales of $4.48 billion or 22.5% margin compared to full year 2014 EBITDA of $1.015 billion with sales of $4.54 billion or 22.4% margin.

During the quarter our containerboard mills operated in a very cost effective manner. Containerboard production was 903,000 tons which was a 24,000 tons decrease compared to last year's fourth quarter as we ramped the demand and unlike last year's fourth quarter we did not need to pre-build any inventory for our first quarter 2016 maintenance outage.

As a result we reduced containerboard inventory about 2,500 from the end of September and year-end inventory was flat with 2014 year-end levels.

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

Thomas Hassfurther

Thank you, Mark. As Mark indicated, our corrugated products demand was lower than expected during the quarter down 1% in total and per work day compared to last year's record fourth quarter and up 1% for the full year. Pricing for corrugated products during the quarter remained stable compared to the third quarter of 2015 and the fourth quarter of 2014. As expected, mix was seasonably weaker in the fourth quarter compared to the third quarter.

Our outside sales in containerboard were flat with the third quarter and up about 7000 tons compared to last year's fourth quarter. For the full year outside containerboard sales were up 52,000 tons over 2014. Export prices were about 2% lower than the third quarter and about 6% lower than last year's fourth quarter levels. Domestic prices for linerboard were flat with the third quarter and last year's fourth quarter. Domestic prices were medium or flat for the third quarter and lower than last year's fourth quarter due to published medium price changes.

I will now turn it back to Mark.

Mark Kowlzan

Thanks Thomas. Looking at our Paper segment, EBITDA and sales were lower compared to the fourth quarter of last year with EBITDA of $28 million and sales of $273 million or 10.3% margins compared to the fourth quarter of 2014 with EBITDA excluding special items of $45 million and sales of $284 million or $15.8% margins.

As we mentioned on our third quarter earnings call, our Jackson, Alabama mill was down for an extended period for a planned rebuild of the recovery boiler which reduced production by 20,000 tons and increased operating costs.

The drop in revenues versus last year's fourth quarter was driven by lower prices and mix as total shipments were 5000 and above last year's levels. Office paper shipments which represent about 70% of our total paper volume were up 4% versus last year. Prices held up very well and as we indicated on our last earnings call, volumes were seasonally lower versus the third quarter. Overall, the white paper mills had good cost control during the quarter and the rebuild of the Jackson Mill recovery boiler was successful.

For the year white paper 2015 EBITDA excluding special items was $161 million and sales were $1.14 billion or 14.1% margins compared to full year 2014 EBITDA of $186 million with sales of $1.2 billion or 15.5% margin.

Office paper shipments improved 1.1% versus full year 2014 and although sales prices and mix negatively impacted our EBITDA by 31% we were able to cut that impact by over half through our cost reduction, efficiency and mix improvement efforts.

And now I'll turn it over to Bob Mundy.

Robert Mundy

Thanks Mark. If you turn to slide 4, will be our cash provided by operations in the fourth quarter was $221 million after deducting $75 million in cash tax payments for federal and state income taxes. Other uses of cash included capital expenditures of $97 million, common stock dividends of $54 million, share repurchases of $57 million, and debt repayments of $17 million. We ended the quarter with $184 million cash on hand.

Our fourth quarter 2015 effective tax rate of 32% was about 2% below last year's fourth quarter related primarily to state rate reductions that we were able to achieve compared to our estimates filed in the fourth quarter of 2014 and it was 3% below the third quarter of 2015 primarily due to the passage of the tax extenders act just prior to the end of the year.

For the full year cash from operations was a record $763 million and free cash flow was also a record $448 million. Our key uses of cash for the year included capital expenditures of $315 million, common stock dividends of $201 million, we repurchased 2.3 million shares for a total of about $155 million and we had debt repayments for the year totaling $48 million.

As we normally do at the beginning of each year PCA derives estimates of certain items for the upcoming year. Capital expenditures we expect to be between $250 million to $265 million, DD&A is expected to be about $352 million or about $5 million higher than 2015 recurring DD&A, pension expense estimated to be $27 million, $5 million below 2015 primarily due to our adopting of the spot rate approach or 16 [ph] versus the single discount rate approach for calculating expense.

We expect to make cash pension payments of $37 million in our by [ph] federal and state effective tax rate for 2016 is expected to be about 35%. Based on our current long term debt with current LIBOR rates interest expense in 2016 would be about $91 million and cash interest payments would be about $84 million.

Regarding the current planned annual maintenance outages at our mills, the total earnings impact of these outages which includes lost production, direct costs and amortized repair costs is expected to be $0.49 per share the current estimated impact by quarter in 2016 is $0.07 in the first quarter, $0.16 in the second, $0.10 in the third quarter and $0.16 per share in the fourth quarter.

Now I'll turn it back over to Mark.

Mark Kowlzan

Thanks Bob. In summary, 2015 was a very successful year for PCA as we completed the integration of Boise and achieved full design capacity of our converted DeRidder Louisiana number 3 paper machine. The significant part of the integration effort was related to the rationalization and optimization of the Boise legacy broad [indiscernible] system as well as optimizing the product mix, freight and warehousing logistics of our containerboard system.

Regarding synergies, we achieved on run rate basis a $200 million target and finally we achieved record cash from operations and record free cash flow in 2015.

Looking ahead for the first quarter we have scheduled maintenance outages at our Valdosta mill, one of our machines in [indiscernible] mill and one machine at the DeRidder mill. Labor benefit costs will be higher with annual wage increases and other timing related expenses and seasonally colder weather will increase wood and energy costs. Our tax rate will also be higher in the first quarter. These items will be partially offset by slightly higher containerboard production and corrugated product shipments and lower scheduled outage costs.

Finally over the weekend Pulp and Paper Week, a trade publication, lowered its published price for domestic linerboard and medium by $15 and $20 per ton, respectively, which will adversely affect earnings. Everything considered, we currently expect first quarter earnings of $1.00 per share.

With that, we'd be happy then to entertain any questions, but I must remind you that some of the statements we've made on the call constitute as 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 operator, I would like to open the call to questions.

Question-and-Answer Session

Operator

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

Mark Kowlzan

Good morning, Mark

Mark Weintraub

Thank you, good morning Mark. First, two questions if I could first one being just quickly, could you give us a sense as to what was happening to demand and volumes as the quarter progression? You noted that fourth quarter is a little weaker than you had anticipated, was that towards the end of the year or was that towards the beginning of the quarter?

And then second, if perhaps we could just get a little bit more detail on the bridge from 4Q to 1Q, I imagine that the adverse price maybe is $0.02 or something like that, but what are the other bigger elements if you could sort of size them first a little bit that would be really helpful? Thanks.

Mark Kowlzan

Yes Mark, let me start off with the volume discussions. Your question regarding how did the quarter go, we indicated our first 10 days were flat with the third quarter, what we saw happening by the latter half of October we saw some decline that we had not expected that continued into the early part of November and then through that mid-November Thanksgiving holiday we saw the volume picked back up and it was a rather nice recovery and so again there was again a sustained recovery through the latter half of the quarter. And also I think Tom can add a little color to that, the quarter itself and obviously the volume was what we expected, but again there was a lot of moving parts taking place as I mentioned on the script with the rationalization and optimization effort. Tom?

Thomas Hassfurther

Yes Mark, I will just add to that. We did take out some pretty significant volume and facilities quite frankly regarding the Boise legacy business, specifically the Tharco business which quite frankly just did not fit our model from a margin standpoint or from a long term strategy standpoint. So we went through a lot of that in the fourth quarter, got that behind us. As Mark indicated, the volumes tailed off in the second half of October and in early November that picked up quite significantly all the way through the end of December going into January. So that kind of gives you an idea where the trouble was.

Mark Kowlzan

And then regarding the bridge Bob we'll ask you that bridge question.

Robert Mundy

Yes Mark, you had indicated what you either thought that I guess the price impact of your small number I think we'd agree is it is something that we don’t see that being very large for the first quarter. The other items, seasonal items like dependent [ph] with weather and those types of things, energy and wood I think you would normally expect is what are some of the timing items which those timing items a lot around late labor type things, wages type things like [indiscernible] we said at the beginning of the year that stared up staying with us throughout the year but they are heavy in that first quarter.

And then just we'll have some timing things just from a [indiscernible] perspective, the freeze in the mills, repairs and materials things that you usually starting into the year we getting on to new initiatives and what not. So those are some of timing thing to that sort of fits that at the beginning of the year. So those would be some of the bigger items both in the fourth quarter and the first quarter.

Mark Kowlzan

Next question please?

Operator

Your next question comes from the line of Chip Dillon with Vertical Research Partners.

Chip Dillon

Sorry, good morning. I guess one quick sort of clean up question is, did you – do you have a good idea Bob of what the deferred tax will be or I'll say it differently, how the cash tax rate might defer from the book tax rate in 2016?

Robert Mundy

It is about 1% difference. There were about - there was about 1% difference between the two. It is I think the tax, the tax rate is 35.29 just over 36.

Chip Dillon

Got you and did you say what the year-end 2015 debt was again?

Robert Mundy

Year-end 2015 debt was or net debt was about $2.1 billion in regards with cash at 184.

Chip Dillon

Okay got you, so the debt was 2284 [ph] then?

Robert Mundy

The debt was 2309 less the cash of 184 so the net is 21.25.

Got you, okay and then you mentioned the Pulp and Paper Weak adjustment over the weekend, I guess two questions, how does that flow into your box prices? In other words is there more of an impact we should expect in the second quarter which I guess it would be a lag? And maybe talk a little bit about how much of your business is affected by it? And then lastly, would you at least on the kraft linerboard side was there any surprise to you in that move?

Mark Kowlzan

Let me start off with that and I am going to hand it over to Tom. Obviously it took us all by surprise and we're not going to quantify the impact, but still trying to analyze the total impact, it is in our guidance, but again there are very strategic points that take place for pricing and where we have upwards of 15,000 customers everybody is different in terms of how the sales [ph] take place. But Tom why don’t you add a little color to this?

Thomas Hassfurther

Okay, yes Chip, I hope you could understand that I mean basically when it comes to discussing the lags or how much the impact is with our customers and things like that, I mean those are contracts we've been having with our customers, that's the only people we really discuss that with. So it is hard to add any real color to that. And as Mark indicated we're still sorting through it to some extent. But nonetheless, I mean just top paper mill of course came out to be a great surprise I think, yes big one.

And keep in mind as the first line of work increase that we've seen since 2005 [ph] now just hearing some of my takes on it and what I think is perhaps going on, but one is the large decline in the sites of the open market has made it much harder I think for trade publications to assess what's really happening. I think that, you know, you basically then cited a move in the traction of the market associated with a small reach and then broad rest that across the entire country and translate that into linerboard pricing, kraft linerboard pricing specifically. So, I can speak for PCA, we’ve not seen any changes in kraft linerboard and so we are very different than most of our favorite supporters.

Now they did give some specific pricing associated with recycle linerboard and apparently use that as further rationale to take down kraft linerboard prices and of course that’s bothersome because they know that there is a big difference between recycled and kraft and are essentially two different products when it comes to linerboard.

So, it seems that they are heavily influenced by this pricing of recycle linerboard and try to translate that into lowering kraft linerboard across the board. So that’s pretty much the extent my comments at this point I can assure you will continue to assess and monitor things going forward.

Chip Dillon

Thank you, that’s very helpful and I guess the last quick one is and I know it's very early days, but you mentioned a great point in time about the very limited open market that’s out there and so obviously that makes it a big challenge to - for anyone to sort of gauge where that is, it's really about boxes and in that vein were they being taught maybe changing at least to help PCA might index their pricing of boxes to something else that's more broad that is very easy to observe like fiber costs or maybe even the – like the PPI?

Thomas Hassfurther

Chip, you know, we've had the discussion before, they're back already last number of years, obviously they have said something we don’t want to get into on the call. It is complex and it is not straightforward as some people might think it is. So obviously there are different ways, but again this is something that right, wrong or different. The market has changed so that's all I want to comment on.

Chip Dillon

Okay, that’s all very helpful. Thank you.

Mark Kowlzan

Next question please?

Operator

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

Scott Gaffner

Thanks, good morning.

Mark Kowlzan

Good morning, Scott.

Scott Gaffner

I just was wondering, could you talk a little bit, Tom I think you mentioned you walked away from some of that Tharco business, it sounded like that was in the fourth quarter. If so, it was just margin issue with the Tharco business and so should be feeling the effects of that throughout 2016?

Thomas Hassfurther

Well Scott, I mean I’m not going to get into great details about that business, but obviously, you know that’s primarily a distribution business and as I said it dented our market models, nor did it did our long terms strategies. It is - some of it is significantly different than the way we go to market and so we are therefore some of that business was not a fit. I'm not saying all of it, I'm just saying some of it you much take into case.

But I mean in addition I mean if you look at our volume, I mean one of the other reasons that the volume was awesome what it is that, I don’t think we've got the economic tailwinds that we had started in the fourth quarter. GDP numbers suggested the economy grew only about half a percent and the last two months of the ISM data [ph] indicates the manufacturing activity may have contracted for the first times since 2011 during our fourth quarter.

So, I think that’s and I think some of that’s clearly due to the strong dollar that’s impacting exports and we’re getting some of that from our customers as well. So, I think that we’ve got this Boise legacy business that we have adjusted somewhat behind us now and will allow us to focus on the things that we do best at PCA and get back to growing our business like we expected.

Robert Mundy

I think that's simple metrics Scott, if you look at the year-over-year margin contribution from Tom's side of the business it speaks for itself in terms of what this rationalization effort has contributed and so again, as Tom just lastly mentioned we needed a little more economic tailwind to boost that.

Scott Gaffner

Understood and then just following up on the commentary before, you mentioned during the quarter you saw some acceleration in demand, I think you said late in the quarter. Has that carried forward so far in the 1Q or is that are we back to more November like numbers?

Mark Kowlzan

Tom has got the data for the first 13 days of the month.

Thomas Hassfurther

Yes, the first 13 days of bookings billings are flat with last year’s January which was a very robust year, pretty robust month I should say up 4.1%. So I would say that the demand pick up that we had in December has carried over to January.

Scott Gaffner

Okay.

Thomas Hassfurther

We were very pleased that right through the holiday weeks the volume was very good.

Scott Gaffner

All right and then just lastly on the outside sales I think you said you had an increase in outside sales during the quarter, was that to the export market or something domestic?

Thomas Hassfurther

Both went up a little bit.

Scott Gaffner

Okay. Thanks for the color.

Mark Kowlzan

Okay. Next question?

Operator

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

Mark Wilde

Good morning.

Mark Kowlzan

Good morning, Mark.

Mark Wilde

Couple of questions, Tom with output and two finer points on this, would it be fair to say that if we backed out the Tharco – shutting of the Tharco volume that your corrugated volume would have been at or above the industry numbers?

Thomas Hassfurther

I’m not going to get into that detail Mark, you could just you know, but you can do the math I think that, you're not overall [ph] telling [ph].

Mark Wilde

Yes, okay. And then the other question I had Mark Kowlzan, if you could give us any color on the duties on uncoated freesheet imports and whether that has changed anything and kind of where you see the market moving in the first half of the year?

Mark Kowlzan

You know the post data shows a significant reduction in imports starting in the third quarter which is after the preliminary rulings were issued. The imports were down around 200,000 tons in 2015 and most of the decline was in fact in the second half of the year as we previously mentioned and we do have some customers that are buying imported paper. We know that many of them bought additional inventory earlier in the year before the rulings came out.

So typical market dynamics were in play and it’s a little bit too early to tell, but it is very obvious that the trade case has significantly slowed the imports and which is really just creating a level playing field. But I think you see that in our volumes, again one indicator, I think our total paper volume for January were up 3% and so we had finished the year strong in paper volumes and going through the first three weeks of January. So again, I think the trade case is having a positive impact.

Mark Wilde

Okay. And then finally if I could Bob Mundy, can you just give us an update on sort of what is still sitting up there on share repurchase authorization and how you’re thinking about sort of use of cash this year particularly in light of the big drop we’ve seen in the stocks in recent weeks?

Robert Mundy

Yes, yes, Mark it is about 93 million remaining of the authorization. So anyhow then our use of cash as we talked maybe a little bit of color as to where we see some of that for 2016 and I think it’s Mark will sort of comment on share repurchases, I think our strategy of continuing to be opportunistic will continue. Of course CapEx as I indicated was and Mark had said in the last quarter’s call that we expected it to be down versus 2015 because of lot of the heavy lifting behind us and so that’s – that obviously is high as it was in 2015.

Mark Kowlzan

Anything else Mark?

Mark Wilde

I think that’s it. I will turn it over.

Mark Kowlzan

Okay, thank you. Next question?

Operator

Next question comes from the line of Mark Connelly with CLSA.

Mark Kowlzan

Good morning.

Mark Connelly

Mark, your stock got selected yesterday pretty much in line with everybody else, but your business model in the past has tended to outperform somewhat. Do you think your business model is less able to outperform at this point or are the internal opportunities less attractive?

Mark Kowlzan

You have heard us talk about rationalization. Our priority in 2015 was completing the two-year integration of Boise and executing well on that. And so, a big piece of that as we’ve indicated was this rationalization and the readjustment of the entire Boise legacy box system and so in doing so we concentrated on that. As you think about it, we haven’t made any acquisitions of box plants. The last one was in April of 2014.

And so, we’re right now through this last era we've purely been on organic growth mode. We’ve been avoiding over extending ourselves and so recapping right now where we are we’re poised for growth. If you go back to the 2012, 2013 period we are open market buyers. We had integrated up into the low 90s and we had – we've gone through roughly five acquisitions of box plants. We built a new plant in Redding, but a new plant in the [indiscernible] and so we have a lot of the acquisition and organic capability.

And so, we have reset the stage for that. We’ve got the containerboard ton for Tom, we’ve got the acquisition integrations done. All the work that Tom did on the legacy Boise Tharco system is behind us. So I think again, the model remains very strong and relevant and so that’s what we’re going to plan to execute on. Again we have got the balance sheet and we’ve got the tons to move into the market as we seek that.

Mark Connelly

So would it be fair to say that we should expect you to be more aggressive on upping your integration levels now?

Mark Kowlzan

Well that's – we talked about that on some calls last year that the goal will be to move back up into the low 90s and we’ll do that with a combination of designed box plant acquisitions and organic growth and so be mindful on the acquisition side looking at the quality and the multiple paying, but again we are looking at that, we are ready and capable of executing on that.

Mark Connelly

Super, thank you.

Mark Kowlzan

Next question?

Operator

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

George Staphos

Hi everyone, good morning. Thanks for taking my questions. Most of them have already asked and answered. I guess maybe Mark a question for you or maybe it is probably more for an economist. I mean you mentioned that ISM [ph] got progressively more negative in the back portion of the quarter. You saw volumes for your business pick up as we approached quarter end.

How do you reconcile that and should we be worried if at all that what we saw in the last two months in terms of macro data doesn’t translate to your business in the first quarter? And then the related question I had, the rationalization effect of primarily the Tharco business, how long will that be a headwind for you, will it be more or less if maybe not line item in details visible in terms of your overall growth rate through the third quarter of this year, does it continue all the way into the fourth quarter, do you feel you have most of it behind you where and lot of it had been done already in the first quarter of 2015?

Mark Kowlzan

On the first question regarding the economy in the ISM [ph] obviously the last reported ISM data showed a contraction. What we think was happening or what we have to believe happened as the Holiday period came on Internet commerce have reported in the various segments was very strong and so I think we were a player in the Internet commerce, but that also plays into the fact that we said that mix was not enriched as we expected. And so, I think that is a large portion of what you see.

Regarding any overhang and impacts of the integration and rationalization of the Tharco business, I think again we need the economy to give us some tailwind. With that being said, Tom and the group of fully prepared and focused now on rolling that business instead of just how they go about rationalizing. Tom, do you want to add some color to that?

Thomas Hassfurther

Yes, I would just add George. The ISM [ph] numbers tend to be somewhat of a trailing number also. So the way we go to market is fast as you know people - boxes and trends we see are kind of leading edge as opposed to maybe the ISM the import trailing edge. I would say the ISM data probably ended up showing what we saw in October, but probably hasn’t come out really to represent what happened at the end of November or December or through December I should say.

So and the rationalization effect of Tharco of course whenever you – whenever you eliminate something or sort of resize something and you’re going to be dealing with that certainly going forward, but that’s said, I mean it’s totally behind us now, were not in terms of comparing numbers, month-over-month or quarter-over-quarter, but we’re very poised now to move forward and have gotten all those efforts behind us which were important to us, we'll be back to operating like PCA.

George Staphos

Okay and thanks for that Tom. A related question perhaps and my sense is what you think you saw in the fourth quarter was more inventory contraction and then hopefully more of a back to normal approach from your customers, but I don’t want to put words, is that what you think you saw and then related question.

Have you seen your bad debts move up at all is there anything in your data right now that is suggesting whatever we've been going through both within the sector and broad economy is the fun edge of a recession or do you think it is more inventory contraction. We're back to normal at this juncture.

Thomas Hassfurther

Let me, yes, on the bad debt piece of that, we have actually see bad debt losses on the bad debt piece of that, we’ve actually seen our bad debt losses actually declined and so that’s been very favorable for us.

Robert Mundy

And then on the, the question about the economy and we said this before, our customer base being two thirds local accounts, they’re very nimble and they are very capable of responding very quickly and I think Tom said I think they were some response from our – lower customer base to as the economy in the news, the daily news that we saw every morning as we watched first business news and people got cautious and probably ran some of their volume inventories lower levels. But that being said they can respond on the partner side just flip these up.

Thomas Hassfurther

I don’t want to try to qualify or quantify.

Mark Kowlzan

George, I'll agree with that and what we’ve seen over the last few years quite frankly, this is something that just recently. We've been seeing that our customer base is very sensitive to inventory levels and our very estimate, quick adjustments and so, its let’s say going into October they were a little less optimistic about the Christmas season or something like that. I mean, they can adjust inventories very quickly, so this is something we see and so it's actually changed the seasonality a little bit of our business as well.

George Staphos

Okay, I appreciate it guys and will turn it over.

Mark Kowlzan

Thanks, next question please?

Operator

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

Debbie Jones

Hi, good morning.

Mark Kowlzan

Good morning.

Debbie Jones

You guys talked you being a player in ecommerce I was just under the impression a lot of this growth is in recycle boxes, maybe that’s not the case and you can correct me, but does this impact your ability to kind of grow with it trend?

Thomas Hassfurther

Debbie this Tom, I’ll handle that. So, I mean, as you can well imagine as the right ecommerce is drawing I mean virtually that, anybody who has got a consumer related process in ecommerce somewhere or other and it is not just all recycled anything. I mean it's still required for performance boxes and it is still required traffic boxes, it requires all sources of things that we currently supply. So no, we don’t feel the least limited in drawing in that region.

Debbie Jones

Okay and then I guess if I move to kind of growth from M&A, how important is this to your strategy, you had mentioned quality in the multiple, but are other things out there that actually fit your criteria?

Thomas Hassfurther

Yes, we continue to explore acquisitions and there are some things that would fit our criteria now it takes two to tango at this side, so we need somebody who is, who wants to sell and at the same time, we're an anxious buyer, so to make this thing work, but nonetheless there are some quality assets out there, fewer than they were before, but I think as Mark indicated earlier we will remain a disciplined acquirer. So we're not changing that part of our strategy.

Debbie Jones

Okay, great. Thanks, I’ll turn it over.

Mark Kowlzan

Thank you. Next question please?

Operator

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

Anthony Pettinari

Good morning, thanks for taking my question.

Mark Kowlzan

Good morning.

Anthony Pettinari

You referenced export prices lower sequentially in 4Q and I’m wondering if you could speak to what you are seeing in the beginning of the year in export markets either in terms of pricing with the strong dollar or what underlying demand looks like? And then can you remind us what percentage of you containerboard last year was exported?

Thomas Hassfurther

Okay, Anthony as far as demand goes, I mean demand is pretty flat right now. I mean, again we are relatively small player in the export pocket, so you got to keep that in mind. But we are in numerous regions and you’ve got some that are down, I mean obviously if you take China and then some of the effect in Asia that’s down and then you've got some others that you’re actually back a little bit and then Latin America, South America is relatively flat, so it is pretty flat on an overall basis.

We don’t talk about forward pricing. I gave you some indication of what happened up to this point in packaged pricing, but anything going forward is really between us and our customers. But I will say that obviously the strong dollar is a headwind for us when it comes to that.

Mark Kowlzan

Anthony regarding the export volumes, we are currently just under 10% of our total containerboard volumes going in export, but again, moving that into about 35 different countries worldwide, that’s up from a few years ago when we were open market buyers of containerboard and needed those tons and we shipped all those tons back into our own need. So with DeRidder and their capability we've been able to service some of our legacy customer requirements around the world, but its again small portion less than 10%.

Anthony Pettinari

Okay, that’s helpful and then switching to white papers, the $0.38 headwind you saw last year from lower price mix, in terms of the mix piece of that, is there anything in 2016 between the mix, between office paper pulp, specialty papers that would be a meaningful tailwind or headwind in 2016 in terms of your mix of white paper?

Mark Kowlzan

Again, just elaborating a little bit on the mix, what we saw happening last year, a lot of the, on cut size in particular you saw a lot of it shipped from the high end super bright, Laser Inkjet type cut size into the more commodity type cut size, the 92 bright cut size paper and so that trend continues and it's just the market that we're living in right now. And so, that being said, we are comfortable there and we get our volumes up, so we’re feeling good about that.

Anthony Pettinari

Okay, that’s helpful. I’ll turn it over.

Mark Kowlzan

Next question please?

Operator

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

Philip Ng

Hey, good morning guys, I understand PPW cut was largely backward looking and generally appreciate the color you provided earlier, but the market and just a reaction to your stock our investors are actually concerned that there could be further price erosion. Can you just provide any color on pricing in terms of outlook, supply/demand and just competitive activity in the broader market that would be helpful?

Mark Kowlzan

Again for trust reasons we're not going to get into a discussion about pricing.

Philip Ng

Okay.

Mark Kowlzan

We just cannot go there.

Philip Ng

Can you just talk about supply/demand and just the competitive active in the marketplace at the start of the year?

Mark Kowlzan

Again, we've commented our volume is in line with where we were last year, we were flat, but again, I think we’ve indicated that we need a better economy, stronger economy as far as some tailwind and so at the end of the day we have a system that can respond. We have a system that’s ready for growth, but Tom you want to add any more color to that?

Thomas Hassfurther

Yes, I would say that, I mean I think you need to think of it like this reaching for the supply standpoint, kraft linerboard standpoint you are talking about, kraft linerboard it really hasn’t grown significantly in years and so, very much in balance and run rates that are probably on average something closer to 94%, 95% which is very healthy and demand that all we can do is, go up what our trends are which we indicated was moved upwards in December period over into January and were now compared to the 4.1% jump we saw January a year ago so.

Those are the best we can tell you in terms of the trends and I think that the, I think there is a lot of industries that would - are very envious of the fact that we've got a 95% run rate in an industry like this based on kraft linerboard price.

Philip Ng

Okay, that’s helpful and I guess obviously there has been a big focus on pricing coming, flipping a little bit here. But on the offset are you seeing any major cost tailwinds with this pullback in energy costs, chemical prices, it did seem like freight was a larger tailwind. Can you kind of help quantify and what the potential net impact would be on margins in 2016?

Mark Kowlzan

Yes, I will let Bob give you a little more color, but obviously through the year last year we did see the benefit of natural gas pricing and so there is a benefit to the lower petroleum input cost factor, and we did as we indicated on calls last year. We are concentrating heavily on the transportation efficiency and capabilities within our system and how we supplied Tom's side of the business from the middle. So we saw that, so Bob do you want to give a little more color?

Robert Mundy

Yes, I would say obviously Mark said was absolutely correct plus on there being that energy side we’re just, Mark talked on the last call about as an example the turbine project we did an international call that we got partial benefit of this year, that will continue for the whole year.

So we see pretty much on all the inputs, nothing really - those favorable trends should continue. One of the reasons in the fourth quarter we did better is because really at I Falls we overcame actually the electrical rate went up as an example, but because we’re purchasing so much less electricity we turned that into a $2 million plus just year-over-year, just a fat mill [ph] problem. So those are types of things that will certainly help us in 2016.

Philip Ng

Okay, this is one last one from me, I mean you guys mentioned that you guys are ready for growth, M&A. You guys have been kind of absent from that market whether it’s the box market or paper. I know valuation hasn’t been an issue or something that is reason why you have been reluctant be as aggressive. I mean given the pullback in valuation across the board has the pipeline kind of improved or how do you seem to have valuation come in as well in as well in the open market? Thanks.

Mark Kowlzan

I don’t think at the current time I don’t think anybody has a real good feel for what these current valuations are. We just know that again compared to historical valuations on box plant acquisitions the multiples had gone up. And at the time as Tom mentioned the number of plants and books of business that were available that we would be interested in were fewer and so we have plenty to do with the integration and optimization effort with Boise. So we were less compelled to go and chase these last year as an example. But that being said, we are looking, we won’t get into what we believe is a fair multiple, when we do something we will let you know.

Philip Ng

Okay. Thank you.

Mark Kowlzan

Next question please?

Operator

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

Christopher Manuel

Good morning gentlemen. Couple of questions for you, one sort of on a volume and then I want to come back to kind of the price cost element a little bit. As you look forward to 2016, I know you already said when you laid out sort of a guide for 1Q that you are anticipating little bit higher volume.

But even kind of thinking about the industry or yourself specifically, however you wish to address it, as you look forward to 2016, I mean we had a point – point and half of corrugated consumption improvement interesting looking at 2016 with half of it still going to food and bev and ecommerce continued to pick up and extra shipping day this year because of a leap year that is worth half a percent. How do you think on a go forward basis as you assess the economy and what you are seeing and feeling that did you think the industry can enjoy another point, point and a half kind of year?

Mark Kowlzan

Let me start off with that and I will turn it over to Tom. Again if you go back in the last few years for the first time and a long time start to see box demand fall in line in a trend line with GDP growth. That being said, in 2014 the GDP numbers were coming on a lot stronger, economists in general, people in general were pretty bullish as 2014 fourth quarter proceeded. We went into the first quarter of 2015 people were talking about in the 3% GDP range.

Obviously bags [ph] are provided down the GDP numbers themselves fell far below what our earlier expectations. So again that being said, if you believe what we saw happening over the last few years that box demand was much more hopelessly tied to GDP, I think again all things being equal, but from an industry perspective, you got to have an economy that is going to give you that table and Tom you want to…

Thomas Hassfurther

Glad to say, chris we're not economists, don’t spend a lot of time trying to be economist. But we do look what those look their claimed their economist say about us – about the business going forward and I think it’s fair to say that most of them our consensus would be around 1% to 1.5% growth barring any foreseen circumstances. So I think you’re probably in line with what our expectations are.

Christopher Manuel

That’s helpful and then second question I had, I do get that we look in the publications and we see $15 and $20 of price decrease. But I mean, I also kind of help me think this through with the page after that article finishes up and they list key consumable. So effective cost to produce a ton of kraft linerboard and a ton of kraft medium both of those are down. Our these were 3Q over 3Q numbers and we don’t have all 4Q yet, but they’re down $25 to $30 a ton because of lower fiber energy transportation et cetera.

So seeing - on one hand seeing pricing down a little bit less than what cost of produces would sort of imply that on a per ton basis you’re actually making the same or even more money. Looking at your results and looking at your margins getting a little better might suggest that. Does that seem like an unreasonable way to kind of think about things or I know you said you were surprised to see price come down but considering some of the costs came down as well is that maybe not such a ridiculous thing?

Thomas Hassfurther

I think people are not taking into full appreciation is the labor cost benefits inflation that takes place year-over-year. If you go back the last price increase was 2013, so this would be we’re coming up on three years and yet that would be three full years of a company’s labor cost benefits inflation and that is a significant factor in that cost. So even though we get some tailwind between energy costs, some of the other input costs, you throw medical into that and so that you got a big piece of that people aren’t appreciating.

Christopher Manuel

Okay. That’s helpful. Thank you.

Mark Kowlzan

Thank you. Next question, please?

Operator

Your next question comes from the line of Steve Chercover with D.A. Davidson.

Steve Chercover

Thanks. Good morning everyone.

Mark Kowlzan

Good morning, Steve.

Steve Chercover

Just two quick ones please. One of the rationales over last two years for keeping inventories at high levels has been freight and it sounds like the railroads are now easing, so I’m just wondering if you will revisit the strategy or perhaps the bottleneck in box hasn’t changed it is just on frac sand and other commodities?

Mark Kowlzan

I think we’re seeing some box car availability that we did not see. Obviously, the rates are not as good in some cases that we would like to see. It’s not that the railroads of lower grades necessarily and in some cases some of the full mainline service rail they truly choose not to want to still serve some of locations. So it’s not as easy in a straightforward assumption as you might think.

Our costs are down due to the actions that we took to optimize that the inventory and last year established a higher inventory level. We believe we’re at a level that sustains and balances out and optimizes the transportation piece of the equation. But that being said, that does offer you a little bit of relief in terms of what the rail industry is going through and so a lot has taken place with how we are managing transportation.

But again on the trucking side of the equation there has not been any let up on the regulatory pressures that the trucking industry is facing and so again although more box cars maybe out there available it’s how we utilize them and our work price.

Steve Chercover

The margins have been sufficient to say that you’re being quite rationale. Just last question then, you’re obviously reluctant to discuss price and that’s just fine, is it fair to say you’re sure as heck not talking to issues well?

Mark Kowlzan

No comment on that.

Steve Chercover

All right, thank you very much.

Thomas Hassfurther

Thanks.

Mark Kowlzan

Thank you. Next question, please?

Operator

Okay, your next question comes from the line of Andrew Feinman with Iridian Asset Management.

Andrew Feinman

Good morning. So I would just, first question is CapEx for 2016 I don’t know if you can give a number, but I know you said it would be lower, but how about, can you tell us what it would be in terms of the percent of depreciation and amortization?

Mark Kowlzan

Well, yes let me give you the number and we’re - we commented with, we’re probably going to be targeting that $250 million to $265 million which is down from the $314 million actual, I don’t have the full calculation on part…

Robert Mundy

Yes, I mean that was the number I gave earlier I think indicated that deprecation is going to be about $350 million so..

Mark Kowlzan

Yes, so 75% area, so we’re going back to historical levels and that’s what if you think about last two years 2014 we spent $425 million, last year $314 million, high return opportunities. This year it still be continued discipline to reduce capital. But yet at the $250 million and $265 million level we do reserve the right as Tom comes forward as an example with good acquisition opportunities and/or good cost reduction, high return opportunity that might get identified in a last box planned from the middle. We would update you on future calls.

Andrew Feinman

Right, so when you say you have exerted the right you are saying that if he has an opportunity you could a little higher.

Mark Kowlzan

Absolutely and as far as uses of cash Andy, if you've taken remember your buyback stock, pay dividends, pay down debt or make some high return acquisitions or high return investments that go right to the bottom line. So, the discipline was instilled for that very purpose to really focus everyone’s detention on where we want to go.

Andrew Feinman

Well, okay thank you for that. So, I – your stock is down from 80 to right now it's at 49. It was over 80 and so I just wonder how you would get comment on that in terms of whether it presents an opportunity for you I’ll stop with that.

Mark Kowlzan

Well, let me just comment. We purchased 914,000 shares of stock in the fourth quarter and so we’re going to be opportunistic. That being said 2015 was a very strong year. We are only off 2014 is all time record earnings by couple of percent and so earnings were down just couple of percent and yet the stock is down and doing what it is so I don’t understand that rationale totally. So we’re going to keep doing what we do and again we've got strong balance sheet, poised for growth as I said earlier and we’re going to keep doing what we know how to do and what our model tell us works.

And with that operator, I think we’re out of time. So, I think I’d like to just basically end it there and appreciate everybody joining us today and look forward to talking with you on the April call.

Operator

Again, thank you for your participation. This concludes today’s call. You may now disconnect.

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