International Paper Co (IP) 2005 Q1 法說會逐字稿

[CEO's comments inaudible at times; transcript is best product.]

Good day, ladies and gentlemen. Welcome to the Quarter 1 2005 Temple-Inland, Inc. Earnings conference call. My name is John and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference.

[OPERATOR INSTRUCTIONS]

I would now like to turn the presentation over to your host for today’s call, Mr. Chris Nines, Director of Investor Relations. Please proceed, sir.

Morning. My name is Chris Nines, Director of Investor Relations for Temple-Inland and I would like to welcome each of you who have joined us by conference call or webcast this morning to discuss the results of our first quarter 2005. Joining me this morning are Kenny Jastrow, Chairman and CEO of Temple-Inland, Richard Warner, President, and Doyle Simons, Executive Vice President.

Please read the warning statements in our press release and our slides concerning forward-looking statements. We will make forward-looking statements during this presentation.

The format this format is with Kenny Jastrow to give a presentation on the results for the first quarter. After the completion of his presentation, we will be happy to take your questions. Thanks again for your interest in Temple-Inland and I would now like to turn the call over to Kenny Jastrow. Kenny?

Chris, thank you very much. And let me add my welcome this morning. After a review of the first quarter, I’d be happy to take your questions.

Income in the first quarter of 2005 was $45 million compared to 12 million, first quarter ’04, and 53 million, fourth quarter 2004. Earnings per share $0.39 compared to $0.11 first quarter 2004, $0.46 fourth quarter 2004.

First quarter 2005 special charges totaled $0.13 per share. They related to three items-- the Antioch, California box closure at $0.06 per share; antitrust litigation reserves of $0.04 per share; and costs related to the recently completed proxy contest, which were $0.03 per share. I would like to note that the results-- first share results of this presentation for all periods reflect the effect of two-for-one common stock split contributed on April 1, 2005.

Now let’s look at earnings per share excluding special items. For the first quarter 2005, EPS excluding special items was $0.52 per share. This compares to EPS on a-- excluding the special items in 2004 first quarter of $0.21 per share and fourth quarter $0.42 per share. Once again, everything is adjusted to reflect the common stock split upon April 1, 2005.

A comment about the number of shares. In the first quarter 2005, diluted average shares outstanding was 115.7 million. Once again, this is post-split. The board has authorized a 12 million or roughly 10% share repurchase February-- effective at the February 4, 2005 board meeting. In terms of repurchasing, 2.8 million shares were repurchased in the first quarter 2005. Year-to-date, 4 million shares have been repurchased leaving us 8 million shares remaining on the share repurchase authorization.

Diluted average shares outstanding are expected to be relatively flat in the second quarter 2005, compared with the first quarter 2005, including the issuance of approximately 10 million shares of common stock associated with the upper deck.

Now let’s look at segment results. Corrugated packaging in the first quarter 2005, earned $50 million compared to $8 million in the first quarter of 2004 and $24 million in the fourth quarter 2004. Forest products earned $54 million-- I might add that is a record first quarter for forest products -- compared to $32 million in the first quarter 2004 and $50 million in fourth quarter 2004.

Financial services earned $47 million first quarter 2005, compared to $53 million first quarter 2004 and $58 million fourth quarter 2004. Total segment earning then were $151 million first quarter 2005, compared to 93 million in the first quarter ’04 and 132 million fourth quarter.

Corrugated packaging. I said operating income in the first quarter was 50 million. Looking at price issues, first quarter 2005 average box price was up $63 a ton versus the first quarter 2004 average price. First quarter 2005 average box price was flat versus fourth quarter 2004 average price.

Volume. On a volume per work day basis, talking now about box volume, In-shipments(ph) were up 5% from the first quarter 2005 with five less box plants compared with the first quarter 2004 and up 1% compared to with the fourth quarter 2004. Industry shipments on a comparable basis were up 1% on a volume per work day basis in the first quarter 2005 compared with first quarter 2004 and down 3% compared with the fourth quarter 2004.

Recycled fiber. Prices were up $9 a ton versus 2004 and up $1 a ton versus fourth quarter 2004. Energy costs were up 6 million versus-- excuse me, 4 million versus the first quarter 2004 and up 1 million versus the fourth quarter 2004.

In terms of costs, total costs for our corrugated packaging group were up only 0.5% in the first quarter 2005 compared with the first quarter 2004, despite cost pressure from energy, fiber and other raw materials and transportation. Also, we experienced volume growth. In addition, we, in the first quarter, achieved $14 million of our targeted goal $57 million of business improvement for this year. We are well on our way to achieving the $57 million target. I’d like to note that the $57 million is on top of, as shown in the carp(ph) year slide, is on top of the $143 million business improvement we experienced in 2004, making the total over a two-year period $200 million in business improvement. Once again, this excludes price market issues.

In terms of box plant consolidation, we announced a June 2005 closure of the Antioch, California converting facility. This is our eight closure since the third quarter 2003 box plant. Let me make a comment about this box plant consolidation effort because it is right on target with our concept of asset utilization where from an asset utilization perspective we mean higher volume through less box plants. And in addition to that, we are drilling down into each box plant and looking at every piece of equipment. Each piece has a rated capacity. Some operate at capacity, others below capacity. Our goal is to increase utilization and improve efficiency, all of which will lower cost and improve profitability.

Now from a financial impact for the second quarter, we have two mill outages that will have a $10 million penalty. First, our ergen(ph) mill at Orange, Texas that’s scheduled for an outage in the second quarter, which is its annual outage. In addition to that, we are doing a rebuild of the number two paper machine to give us flexibility for the production of medium and lightweight. In addition, we are doing improvements to the bark boiler to reduce natural gas consumption.

In addition to that, the recycle mill, our recycle mill in Ontario, California is also scheduled for an annual outage, all of which taken together, as I said, have an impact of approximately $10 million. The total funds in terms of these outages is 35,000 tons.

Now let me turn to forest products. Operating income in the first quarter 2005 was $54 million-- once again, a record first quarter for this group. This compares to $32 million in the first quarter of 2004 and $50 million in the fourth quarter 2004. Lumber averaged on a price basis up $30 first quarter 2004 and up $15 versus the fourth quarter 2004. Volume was flat versus first quarter 2004 and up 7% versus fourth quarter 2004.

Current prices are up approximately $15 versus the first quarter 2005 average price. Particleboard. Average price was up $38 versus first quarter 2004 and down $9 versus fourth quarter 2004. Volume was up 8% versus the first quarter 2004 and up 26% versus the fourth quarter ’04. MDF pricing was up $39 versus the first quarter 2004 and down $17 versus the fourth quarter 2004. Volume for MDF was up 18% versus the first quarter of ‘04 and up 26% versus the fourth quarter ’04. Gypsum. Average price was up $15 versus first quarter ‘04 and up $2 versus fourth quarter ‘04. Volume was up 21% versus first quarter ‘04 and up 6% versus the fourth quarter ’04. Also, there is a inter-market(ph) price-- a price increase of approximately 10% currently making its way through.

High-value lands. $4 million dollars was realized in high-value land sales in the first quarter 2005 versus 3 million in the first quarter 2004 and 7 million in the fourth quarter 2004. Average selling price in the first quarter 2005 was approximately $9,100 per acre.

In our financial services business, operating income in the first quarter 2005 was $47 million versus 53 million first quarter 2004 and 58 million in the fourth quarter 2004. First quarter 2005 earnings were down compared with the first quarter 2004 and fourth quarter principally because of earning assets being lower related to mortgage-backed securities and a loan loss provisions higher reflecting more normalized credit conditions. For the second quarter of 2005, we expect earnings to be in line with the first quarter 2005.

In summary, let me reconfirm the comment that we made at our March 4th meeting in New York. We at Temple-Inland are focused on growing returns. We look to invest in our businesses and grow our businesses but we are disciplined by ROI. We believe in returning cash to shareholders-- dividends and share repurchase. In fact, in the first quarter of 2005, the dividend was increased 25% from $0.72 to $0.90 on a post-split basis. In addition, we announced the 12 million share repurchase authorization and a two-for-one stock split. We also believe there is significant opportunity on our high-value land. In fact, first quarter sales price average $9,100 per acre.

In summary, we at Temple-Inland are creating superior and sustainable shareholder value. I want to thank you for joining us and I’m happy now to take questions from the audience.

[OPERATOR INSTRUCTIONS] And your first question comes from the line of George Staphos of Banc of America Securities. Please proceed.

Thanks. Hi guys, good morning. Kenny, I was wondering first, I have a couple of questions on the box side. With the effort to improve productivity within the box network and certainly your setting facility as well, what investments might you have to do downstream to be able to take what might be a little bit more production, if in fact you are getting productive-- more productive at the converting side? Or is this a net zero if you become more productive for a facility but overall output doesn’t change? And as I said, I have a couple of follow ups.

Well, George, as you know, we have developed this process of driving up asset utilization. And by doing that it gives us the opportunity to close down facilities. In doing that, we basically lower fixed cost for the facilities that become closed and we improve the productivity and cost structure of the plants that remain open. Now, by drilling down and looking at each piece of equipment, it gives us opportunity to further this program going forward.

Will you need to make any investments, say, in warehousing or anything down at the backend, say, within any of the remaining facilities? Or net-net, not really?

In order to embark on this type of program, you really need three things. First of all, you need a big system and we have a system that stretches across the U.S. and, indeed, Mexico.

Right.

In addition to that, you need technology that makes this seamless to customers and consist throughout your organization. And finally, you need consistent quality. So we have those ingredients in place. There is not large capital requirements to embark on this program because the capital is essentially in place, what was invested in the past. All we’re doing is really maximizing that investment. And the reason we gave this presentation about drilling down this morning, is to give a sense there is more to do on this strategy and we are very confident that it will improve results going forward. That’s part of what makes this $57 million target possible for us this year.

Fair enough. Last couple questions. Kenny, you said that box prices were flat sequentially. When we do some rough calculations-- and I’ll do this offline ultimately -- we’re getting a slight decline. So were prices flat to down in the quarter versus fourth quarter or were they truly flat? And then the second question is, what expectations do you have just on timing in terms of when you expect to have some of these container board increases implemented and then ultimately on box prices. Thanks.

The answer to your first question is the prices were flat. Now, the first quarter was affected somewhat by agricultural markets which are typically particularly on the WAC(ph) side higher price boxes. As you know, there were weather issues in California. So because of mixed issues, prices were flat. Now, in terms of timing going forward, I’m not going to make any forward-looking statements regarding price.

Okay. Thanks, Kenny. Good luck in the quarter.

Thank you.

Richard Schneider, UBS

Kenny, I was-- I know you said you’re not going to make any statements forward about price -- but could you talk about what the conditions are currently in the box market?

Yes. We, you know in the first quarter we had growth in box volume of some 5% compared to a 1% growth in the industry. Our sense is that markets have begun to experience a normal seasonal pickup. We’ve commented in the past that markets are generally in good shape. Having said that, as you look forward, I think a key for this year-- and indeed always -- is the shape of the U.S. economy. I think the economy has weathered the oil issue well. Clearly, what the Fed does and the impact on interest rates will have implications for the economy. But in terms of the economy, that’ll be a key issue going forward.

Could you also talk about, you did a great job of offsetting what everybody else has suffered, a raw materials squeeze. And you mentioned that your energy costs, I think, were up $4 million year-over-year in the first quarter. Could you talk about other input costs that may have impacted you on year-over-year and I’m assuming from the numbers that you were able to offset that with the productivity gains that you were able to achieve? But could you give us an idea of what some of those other raw material costs like wood and others that you may have experienced in the quarter?

Let me reconfirm what I said, Rich. First of all, in our corrugated packaging operation, cost in the first quarter was up 0.5%. Now, that’s despite the pressures from energy, fiber, raw materials, transportation-- I would say to you that transportation was up significantly. In addition to that, we grew our business in the first quarter. Despite all of those issues, costs were only up 0.5%. And the reason is we are making progress on productivity and efficiency issues. This has to do with the box plant closures, the issue of running mills more effectively. So I think that we’ve demonstrated at least an ability to partially offset these cost pressures.

Okay. And just a couple last things. On the HVU value of 9,100, that’s the highest value we’ve seen on a quarterly basis from you. Was there anything that you could comment on? I know it wasn’t a lot of acreage but in terms of is this a trend that prices are going up or was it just the particular land that you sold?

I think when you look at the HVU issue, we have identified this potential for our company. And the more that we become proactive in bringing land to user value, that’s been reflected in price issue. I don’t want to forecast where pricing might be. But clearly, to take land from what was timberland and create infrastructure and therefore, high value, does drive its value.

And then last, you made an accounting change on your inventory valuation method. Went to average cost. Could you discuss why you decided to do that now?

In taking a look at the business, particularly the variability, we thought that it would be better to have more of a consistent approach to that. So we adopted the average cost versus firm metrics(ph).

Okay, thank you.

Thank you, Rich.

Chip Dillon, Smith Barney

Yes. Good morning. My question has to do with the S&L. And if you look at the returns that you have in the bank, generally they are around 1% on assets before taxes and we tend to see that kind of a return in a lot of banks sort of on a after-tax basis. So it seems like there might still be some opportunity to get the returns up there a little bit. Do you think that’s accurate or is it just because of the circumstances of the parenting bank that you would not likely see a material increase on the return on assets and that the growth would just be dependent on the asset growth itself?

Chip, your question is interesting. Over the last ten years, we’ve made 1.6 billion in that business and had averaged about a 19% ROI. In fact, last year we made $207 million in the business and ROI was very strong. On a quarter to quarter basis, there will be variability in earnings because of issues related to asset growth, loan loss provision, etc. But we believe going forward, that the financial services group has a solid platform for continued strong profitability and ROI.

Of course, the ROI is very good. I was looking more at the ROA and just looking at other banks. And I guess it’s, what a 15 or $16 billion bank. And I just didn’t know-- certainly on your investment it’s fabulous. I just didn’t know if there’s a structural reason why you see a lot of regional banks with 1.5% type pre-taxes income to their average assets and Guaranty seems to be a little bit lower. Again, it might just be because of the conditions tied to Guaranty.

There’s two things I’d say on that. First of all, when you look at peer-group comparisons over a long time, our bank is above the middle-- not the top, certainly -- but above the middle and in that range between the middle and the top on a long-term basis. Secondly, for many, many years we have been dedicated to operating this bank on a low-risk profile. Low risk includes asset strength in terms of credit and secondly, we do not bet on interest rate. As a result of that, we try to manage this bank very carefully on a low-risk basis. But I’ll say to you, the returns, as you said, have been good.

And then secondly, on sort of a different track, Kenny, you look at how strong the building products business has gotten and pretty consistently so. And you’ve got a pretty diversified portfolio between lumber, MBF, particleboard, and gypsum. What’s sort of missing from that mix if you were to sort of fill in the blanks, perhaps, would be structural panels. Is that an area that you think would blend in well to that business especially given your timber base?

We have as our primary focus in forest products, the maximization of the value of our timberland which really involves the growth of fiber married up with our ability to convert it. All of which is strategically located near strong market. Now, when we look at fiber growth, we know that growth will accelerate going forward. We have in place today in our converting operations, sawmills and paper mills, the ability to continue, as we like to say, to soak up fiber growth. So from a street strategic perspective, we are well positioned to maximize this value because today we have the converting capacity to use growing fiber.

Got you. Thank you.

Mark Weintraub, Buckingham Research

Thank you. First, just wanted to get a sense, Kenny, if you had not changed your method of inventory accounting, what would have been the profits in the corrugated?

It’s not that significant, Mark.

Okay. And second, in looking-- obviously, it’s very good performance in the packaging business. And you noted that box prices were flat. I had thought with given your national account base that there could have been some repricing at the beginning of the year that actually would have led to some improvement. You did mention that there are mixed issues related with agricultural markets, etc. As we think about the second quarter, do some of these mixed issues come into play so that the average price goes up or it’s not-- any particular reason why we didn’t see some of that catch up pricing in the first quarter?

Let me say that first of all, first quarter pricing relative to those national accounts that changed in the first quarter did change. What impacted, however, was somewhat of a mixed issue relative to the agricultural market. The agricultural markets are typically a fourth and first quarter with some second quarter carryover but not as dramatic as first quarter. We’ll just have to see how the quarter goes on a relative basis going forward.

Okay, and then lastly, on Richard’s question on the land sold, you were talking about the importance of whether or not there’s infrastructure developed, etc. On the land that you sold this quarter that had the 9,100 average price, did those have some infrastructure in place?

Yes, we’re beginning to have more and more activity relative to bringing infrastructure and value to land. And, as I said, over time, that’s what our objective is. So that as we look at this process, we don’t want to sell, or develop, or joint venture, or whatever this land until we get it to a level that to us becomes high value. So when it does become high value, whether it be infrastructure or phone(ph) growth or whatever, then is the time we’ll look at selling this property or monetizing.

Maybe asking the question a different way. How if at all was the land that you sold this quarter different from the lands that you had sold in the prior quarters where the average price had been not nearly as high?

Well, land pricing, Mark, is very dependent upon location, and its mix of use, etc. So it’s not something that’s sequentially happens. For instance, Main and Main in New York is certainly higher value than farmland. So a lot of this has to do with what type of use are planned for the land, and where it is, and when it will ultimately be absorbed.

Okay, thank you.

Edings Thibault, Morgan Stanley

Thanks and good morning. My question is regarding the box lines that you guys generated. Kenny, I was wondering if you could perhaps shed some light on why you think you guys are outperforming the business, the overall industry. Are you taking share at incremental accounts? Are there new accounts? Are there particular pockets of strength for Temple-Inland customer base that, perhaps, are not reflected in either the overall economy or the overall box numbers?

This is the seventh quarter in a row that we have outperformed the industry relative to volume. I will remind you that is despite the closure of seven box plants over that time period. What we have in place is a system that is geographically dispersed. We have consistent quality. We have very intense customer focus. And quite honestly, we just get out and hustle. And we’re good at the box business and we capitalize on that.

Okay, thank you.

Mark Wilde; Deutsche Bank

Good morning, Kenny.

Good morning, Mark.

I wondered-- you had very nice performance in the paper business-- I wondered when you talk about the productivity you’re picking up, whether you can kind of help us break it apart a little bit more between sort of what you’re getting on the mill side and what you’re getting on the converting side. Maybe on the mill side if you can just give us a sense of how much volume you’ve been able to squeeze out of the mills either over those last seven quarters or maybe just on a year-over-year basis?

As we’ve said since we’ve embarked on this program, Mark, clearly when we became integrated we developed the ability to run mills more full, they run more efficiently, and they run better at lower costs. I would say to you, the key, though, is on this box side of really taking advantage of capacity and through consolidation upping productivity significantly by doing more through less box plants. On top of that with this drill down as we look at each piece of equipment, what really happens is you begin to understand there’s even more capacity which gives you an even greater ability to keep consolidating and keep growing. All of which is the high productivity and lower cost area.

Okay. Can you give us some sense though of how much you think the potential of the mill side of the company might have improved over the last seven or eight quarters since Pat joined?

Mark, we don’t give specific cost issues out on the mills. What I will say to you when you look at the $143 million last year in business improvement and, indeed, part of the 57 million this year, some of that is certainly on the mill side.

Yes, but that no hint in terms of how much volume-- incremental volume you may have gotten?

I’m not going to make comments on cost volume in the mills.

Okay. And can you just come back and clarify those comments you made about the share count second quarter versus first quarter?

All right. Let me just review that. The 2005 first quarter diluted shares outstanding were 115.7 million. Now, for the second quarter 2005, we expect the share count to be relatively flat with the first quarter. That’s despite the fact that we’re going to issue 10 million shares roughly related to the decks. But also, we have authorization of 12 million shares of which we bought 2.8 million in the first quarter. Now, we’ve bought 4 million to date, but for the second quarter, we have roughly 9 to 10 million shares still to buy in.

Yes, okay. All right. That clarifies it, thank you very much.

Thank you.

Peter Ruschmeier, Lehman Brothers

Thanks and good morning. Kenny, wanted to ask you about your box business in Mexico and along the border. If that’s something you’ve seen any changes in and if that’s part of the source of benefit you’re getting on the volume side of the box business?

It has been, Pete. We have a very nice position in Mexico that-- and along the border but principally in Mexico itself -- where not only have we grown the business per box plant but also we have a nice system that over the time period has grown therefore improving productivity and lowering costs. And it’s been a source of good performance for us and we continue to expect it to do well going forward.

Do you see any evidence or have anecdotes of customers that have been migrating back to Mexico from other places in Asia?

Well, one of the things that we tried to accomplish with a Mexico orientation was to certainly be responsive to U.S. customers who had moved manufacturing or added to manufacturing in Mexico versus the U.S. It’s hard to track on a quarter basis flow of manufacturing activity. I do think, clearly, Mexico has benefited some with a rebound in manufacturing and that, in fact, has been helpful to us.

Okay. Wanted to ask, if I could, an update on your self-sufficiency, your harvest volumes. If you could remind us what that self-sufficiency figure was for 2004 and kind of what the trend is if you have a first quarter number or a 2005 expectation as you become more integrated?

Yes, the self-sufficiency number is roughly 54%. Some of that, obviously, has to do with how much lumber we produce. But roughly 54%. Now, self-sufficiency is not going to move very much on a quarter-to-quarter basis because we’re talking about trees growing. But over the time period, we expect self-sufficiency to increase as our lands grow more fiber. In fact, we expect fiber growth to increase 50% over the next 10 years and to roughly double over the next 30 years. I think the basis in our March 4th presentation indicated that by 2014, we felt self-sufficiency would be around 85%, all of which is both growing cash flow and returns.

Okay. Last question, if I could, coming back to HVU land sales. Can you help us to understand the margin on those lands? I mean, I guess it’s related to Mark’s question about how much development actually takes place. I would think if you have $9,000 of income, there might be a couple thousand dollars of resources that you’ve invested over the years in that business. Any way to help us to think about margin on that?

Yes, the-- first of all, the high value, the value chain for high-value land basically runs first timberland. That’s the capital base at book. The next is the designated high-value, there’s no change in capital because it’s just a designation. Once we get to high value, there is some capital but it’s not significant relative to the value creation that happens because the heavy capital is the next stage from high value, I mean, from a user value into final development. So when you look at this quarter, for instance, and the $9,100 an acre. There is some capital that has been invested previously but it’s not significant amounts.

Okay. Very good. Thanks very much, Kenny.

Thank you, Pete.

Marc Pomper, Lehman Brothers

Hi gentlemen, thanks for taking the call. Just a question from the credit perspective on your company as you seek to maximize value for shareholders. Wanted to get a sense as to where you draw the line if at all with regard to ratings or creditors. Would you work hard to maintain investment grade and what the creditors expect in terms of the form of entity(ph) paying back their obligations.

Today if you look at our debt to capital ratio, it’s in roughly the 40% range. When we acquired Gaylord several years ago, we went in the market and sold market at an upper deck and did some long-term financing. Our intention was to restore our balance sheet to a flexible position and give us a strong credit posture to run the company from. Nothing’s changed since then. We intend to have a strong credit posture so that we can take advantage of opportunities.

I think it’s at the extent(ph) you want to play offense but I-- the extent there-- your strategy, core strategy’s under some pressure. Do you see any change in that going forward-- is investment grade something you hold at a high priority?

I think we just recently demonstrated our focus on having a strong balance sheet.

Thank you.

Chris Taggert, FrontPoint

Hi, how are you. Hello?

Go ahead.

Are you planning any additional steps to defend Temple-Inland against Icon(ph) or others who may recognize value in breaking up the company?

I’m not sure I understand your question.

Well, I’m wondering if you’re planning any steps to make it more difficult for investors who may see value in trying to take over Temple-Inland and breaking up the company from doing so.

Well, what I’d do is call your attention to the slide that’s still is up on the screen that shows what our intentions are and what we are doing. And that is, growing returns, we look to grow our businesses but we are disciplined by ROI, we intend to return cash to shareholders both through dividends and share repurchases, we’ve got this significant opportunity high-value land, and we’re very focused on creating superior and sustainable shareholder value by growing ROI.

And is returning cash to shareholders one of the proposed uses for sales of the high-value land? Is that a priority?

All of the above is part of what we’re going to use cash if you just look at that screen.

Okay. And shifting to bank, in the quarter, did net charge offs match the provisions?

I can’t give you that answer. I don’t know but that’s not a significant issue. Charge offs ultimately reflect the provision because the provisions are provided so the charge offs are taken against the provisions. The way they match up quarter-to-quarter is not significant.

Right, I just-- so you’d mentioned that the provisions had increased and I was wondering if they increased in the quarter--

The provision is one thing, the charge off is another. Provision really affects the P&L because the charge offs is taken against the reserves that have already been put up through the P&L technique through loan loss provision. Loan loss provision in the first quarter was relatively representative of normal credit conditions.

Okay.

I’ll give you a little bit of fact on that. Over many years, the loan loss provision in our company has roughly been between 40 and $50 million annually.

Right. Last year it was a credit.

Last year, we had improvement in credit market. As a result the loan loss provision was below normal. This quarter, as I said, the loan loss provision reflects more normal credit conditions.

Okay. So we should expect kind of a 40 and $50 million run rate for the year is what you’re saying?

I’m not-- I don’t make-- I’m not making a forward-looking statement other than to say that we expect the second quarter to be in line with the first quarter when you take a look at our financial services group.

And then-- thanks for that. And also at the bank, was the net interest margin impacted quarter-to-quarter as well? I know you’ve mentioned there were lower earning assets that have driven down the returns so I was wondering if the net interest margin had also contracted?

The net interest margin is relatively consistent because we try to really match assets and liabilities. In the first quarter, we actually had higher prepayments on secure mortgage-backed securities. And that’s the differential in total asset.

And what is a general run rate for you net interest margin?

Well, if you’ll just check our 10-K and Q filings you’ll see, basically, those statistics.

Okay. Thanks.

Mark Wilde; Deutsche Bank

Yes, Kenny, I just wanted to talk a little more about the packaging business. And you mentioned, I think, that you were-- your price of converted product was up about $63 a ton quarter-- year-over-year. Which looks like it falls about $25 short of what the trade papers were showing and I wonder if you think this going forward that the box business is going to be decoupled from those trade papers or whether there’s something else that’s going on in your number share?

Well, in a more general answer to it, Mark, we think the box business looks good. We think, first of all, there’s a much better balance between supply and demand in the U.S. In addition to that, we think it is effective this strategy of taking advantage of capacity by increasing asset utilization. So when we look at the business as a business, we think it looks good going forward.

Okay, so is it fair to say like you would advise us as analysts or investors when we think about how you’re good at doing that business to not just look at the trade-paper pricing in order to figure out where your earnings may be going?

Well, it’s interesting because, clearly, some contracts are dependent upon trade-paper pricing. That’s particularly those that are more national account contracts. In the non-national account contracts, there’s all different kinds of pricing mechanisms. What I would say to you is, clearly, markets are competitive and when we go into the market, we compete for business. We compete against other companies in the business.

Okay. And then just one other question on that business. You’ve made so much of really trying to be balanced between the mills and the converting side of the business. Can you just give us an update on what your integration level would be either in the first quarter or for all of ’05 and whether you’re a net buyer or a net seller of container board in the open market?

Yes. Now, integration, Mark, as you know, is defined as boxed shipments against board capacity of board production. We are north of 100%. Now, having said that though, in our shipments, we have issues related to certain grades of paper, particularly white top that we don’t manufacture. So we have to buy that on the open market to satisfy some of our box customer needs. So from a practical standpoint, we do buy and sell both white top and then we buy back liner board or trade for it. In addition to that, we are somewhat short on medium. And in that regard, we do trade or sometimes we have to buy.

Okay. All right. And are you making any more medium in the joint venture?

The joint venture continues at its relatively level of medium. What we are doing, though, in the rebuild of number two paper machine at Orange is giving us some flexibility relative to lightweight and to medium.

Okay. Very good. Thanks.

Thank you, Mark.

George Staphos, Banc of America Securities.

Hey Kenny, just a quick follow on on the packeting(ph) side. I mean, one of the truisms in packeting over the years is on the sub straight, whether it’s film or making paper board, you want to run full, you want to maximize your runs on the big, fixed-cost investment. But in converting, you don’t necessarily need to run as full because its fixed costs aren’t as large and you need to be sensitive to the market conditions. You want to have some slack capacity; you also don’t want to flood the market. If you agree with that, a couple of questions. One, without giving us a single point estimate for what you think you’ll be able to get to in the box business in terms of a utilization or operating rate, directionally do you think you’ll be able to add 5 percentage points over time or 10 or whatever-- however you’d guide us -- to your operating rate in boxes? And two, how are you going to make sure that you still remain sensitive to what’s going on in the market, either to make sure you’ve got enough demand or capacity when you need-- when the demand’s out there and also prevent against, again, flooding the market or stockpiling too much inventory? Thanks.

Right, and I appreciate the question, George. Let me answer it directly because it’s a key issue for our company. First of all, relative to box plants, as companies integrate, more capital is put on the box side. For our company, we have as much capital invested on the box side as we do the middle side. That capital is not free. It has to be earned on so that it’s not just mills need to run to full but you have to make money on the box side, too, because you have capital invested there, particularly the more you integrate. Secondly, a strategy for making more money on the box side is clearly to drive asset utilization up.

I will say to you, as you know, there are no industry statistics on-- published on capacity for box plants. Our sense is it’s significant. It’s significant in our company. So as you increase asset utilization, you clearly drive down costs and increase productivity, all of which helps earn on the capital investment at business. And in terms of opportunity, clearly, clearly, you have to keep some surge capacity within your system to take advantage of growth opportunities. I will say to you after you’ve met the surge capacity out, there is significant opportunity to ramp up asset utilization.

Kenny, do you think it could be a 10 point pickup over some period of time? Or would you prefer not to comment.

Well, let me just say to you, I think after you net out surge capacity, there is significant opportunity to ramp up utilization.

Fair enough, I think I’ve got you. Good luck in the quarter.

Thank you, George. Thank you all for joining us. I believe that was the final question so we are now adjourned.

Ladies and gentlemen, we thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. Have a great day.