Packaging Corp of America (PKG) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Packaging Corporation of America fourth quarter earnings release conference call. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (OPERATOR INSTRUCTIONS) As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Paul Stecko.

Good morning and no we didn't change the name of the company. This is Packaging Corporation of America's fourth-quarter earnings and full-year earnings release conference call. I am Paul Stecko, Chairman and CEO of PCA, and with me as usual on the call today is Rick West our CFO, Bill Sweeney who runs our corrugated business and Mark Kowlzan who runs our mill operations. I want to thank you again for participating. And as usual when we complete the presentation, any of us will be glad to take any questions you might have. And so let me begin.

Today we reported breakeven fourth-quarter earnings after taking a onetime after-tax charge of 10 million or 9 cents a share to settle several benefit-cost related matters between Pactiv Corporation and PCA dating back to April, 1999, when PCA separated from then Tenneco and became a stand-alone company. We were first made aware of these potential benefit cost matters during the fourth quarter when Pactiv brought it to our attention. I should say we know of no other such past or current liabilities, which were related to the agreement and the separation process of PCA from Tenneco, which is now become Pactiv. And that was all back in 1999.

Excluding this onetime charge, adjusted net income in the fourth quarter was $10 million or 9 cents a share. This compares to fourth-quarter 2002 earnings of 12 million or 12 cents a share. The 3 cents per share decline in earnings was the result of lower pricing, which reduced earnings by 14 cents per share, and only slightly higher costs reducing earnings by only 1 cent a share. So it is essentially all price. These earnings reduction items were offset by improved volume, increasing earnings by 6 cents a share and lower interest expense which increased earnings by 5 cents a share.

For the full year 2003, as detailed in our press release, adjusted net income was 42 million or 40 cents a share compared to 48 million or 45 cents a share in 2002. These results exclude our third-quarter debt refinancing charge and the benefit cost settlement charge that I just spoke about in the fourth quarter. Including these charges, PCA's net income for 2003 was a loss of 14 million or 14 cents a share. The five 5 cent per share decline in adjusted net income for the year was the result of lower pricing which reduced earnings by 8 cents a year, higher cost, including energy which reduced earnings by 5 cents a share, wood cost which reduced earnings by 3 cents a share and higher depreciation expense, which reduced earnings by 4 cents a share. And finally, pension and medical costs which reduced earnings by 3 cents a share.

These earnings reduction items were partially offset by lower interest expense, which improves earnings by 11 cents a share, and increased volume which improved earnings by 8 cents a share. So that's a fairly detailed list of items that both improved and hurt our earnings. Net sales for the fourth quarter were $431 million, and that compares to $218 million -- excuse me Rick just corrected me, net sales for the fourth quarter were 431 million compared to 418 million in the fourth quarter of 2002. Full year net sales were $1.7 billion for both 2003 and 2002.

Cash generated from operating activities remained strong in 2003 with 245 million in cash generated. Of this amount, 113 million was used for capital expenditures. We ended the year with 172 million of cash on hand and long-term debt of 698 million. After I discuss operations for the quarter, I will go into more details of cash used for the year, as well as PCA's financial position.

For the quarter, we saw continued very strong corrugated products volume, up 7.5 percent compared to last year's fourth quarter. And last year's fourth quarter was actually pretty good, up 3.2 percent over 2001. So obviously this is very, very strong volume performance. Also noteworthy, shipments per workday were strong each and every month in the fourth quarter, up 8.1 percent in October, up 7.7 percent in November, and up 7 percent in December. This growth was far better than we expected, and I think this is a good indication that the economy has really begun to pick up.

We are especially pleased with the strength we saw in December, which is usually not a very good month. We expected December -- and I am going to refer to total shipments, to be up maybe 3, 3.5 percent over last year, and they were actually up 12 percent on a total shipment basis and up 7 percent on a per workday basis as there were more workdays. And to put this into a little perspective, December '99 with all the free Y2K buying had been our best December ever, as you might expect. This year's December volume actually beat the Y2K December by 4 percent, so very, very strong volume in December. It does indicate to us the economy is starting to roll.

For the year shipments per workday were up 1.7 percent compared to 2002. And to give you a little better picture, I think a breakdown for quarter might be in order. We were up 2.6 percent the first quarter, down 1 percent in the second quarter, down 1.8 in the third quarter and then up 7.5 percent in the fourth quarter. This strong demand in the fourth quarter our mills to run full producing 578,000 tons and that's up 19,000 tons from last year's fourth quarter. Even with this higher production, we lowered our containerboard inventories by about 5500 tons compared to our September ending inventory, and we ended the year with our containerboard inventories in very good shape, 7000 tons below 2002 year end levels.

We produced 2,233,000 tons of containerboard in our mills in 2003. That's up 1.3 percent from 2002, which is pretty compatible with our box volume, which increased 1.7 percent. So pretty good balance. As I said earlier, lower pricing reduced our earnings by 14 cents a share compared to last year's fourth quarter which benefited from a full quarter impact of the August 2002 price increase, which you may or may not recall. Looking at the fourth quarter versus the third quarter this year, lower pricing reduced earnings in the fourth quarter by 4 cents a share compared to the third quarter of 2003 when we reported adjusted net income of 14 cents a share excluding our refinancing charges.

From a cost standpoint, we also had a very good quarter, considering that we normally see seasonally higher costs related to colder weather and more difficult logging conditions. Our costs were only up about one cent a share, and if you look at the major components of cost, higher woodfiber costs were up about one cent. Recycled fiber pricing was up about $6.00 a ton compared to the fourth quarter of 2002. But that only reduced earnings by about half a cent a share. As our net recycled fiber purchases are only about 15 percent, that's 15 percent of our total fiber consumption.

Total purchased fuel costs for both our mills and our box plants were up about 25 cents one million BTUs and this only impacted earnings again by about one cent a share. These and other cost increases were partially offset by lower fixed expenses in productivity. For the quarter cash generated from operating activities was $96 million, and for the full year 2003 was $245 million. Capital expenditures for the quarter were 35 million, and that makes our total capital expenditures for 2003 $113 million, pretty close to our initial target of 110.

During the quarter we paid down $11 million in long-term debt, ending the year with 698 million in long-term debt. The average interest rate on our debt for the quarter was 4.4 percent, and I should note that 80 percent of this debt carries a fixed interest rate. We made no common stock purchases during the quarter, and there is about 11 million or so remaining on our initial share buyback program.

We ended the year with 172 million cash on hand, and that is up 41 million from December 31, 2002. And if I were to sum up 2003, I would have to say operationally it was a difficult year for PCA with lower pricing and a weak economy for at least two-thirds of the year. Excluding our onetime charges, earnings are down about 5 cents a share. But on a positive side, we continued to generate strong cash flow from operations, and we completed a major strategic objective of refinancing our debt. And as a result cutting our interest expense in half. So obviously we are pleased about that.

Looking ahead at 2004, I would like to start by saying that from both a cost and a volume standpoint, our first quarter is normally the most difficult one for us. In fact, if you look at the past three years our average drop in earnings between the fourth quarter and the first quarter has averaged about 8 cents a share. Both woodfiber and energy costs are generally higher in the first quarter because of higher pricing and increased energy usage with the much colder weather.

Second, we normally take our two big linerboard mills Counce and Valdosta down for their annual maintenance outages in the first quarter. And this lowers production. It also increases operating costs with the shutdown and startup of a mill, which is a continuous process. We take our mills down in the first quarter because we do like to match supply and demand as much as possible as the first quarter has always been the lightest for us in demand. Our current plans call for about 38,000 tons less production in the first quarter compared to the fourth quarter of 2003. As a result of our two mill outages and one less mill operating day compared to last year. Compared to the fourth-quarter -- excuse me.

First-quarter results will also be hurt by the December containerboard price decrease, the published December containerboard price decrease of $10 a ton. And we expect box prices on average to be lower in the first quarter as box pricing did deteriorate somewhat during the fourth quarter. Also we reached an agreement with Pactiv Corporation on a new five-year containerboard and corrugated supply agreement. As you might recall, PCA and Pactiv entered into a five-year supply agreement in April of 1999 when PCA was sold by Tenneco Packaging. This is a very large piece of business. It is our second-largest piece of business, and Pactiv solicited competitive bids for this business in the fourth quarter. We were able to retain essentially 100 percent of this business but at lower prices.

As a competitive environment as you might expect is pretty intense for such a large piece of business. This lower pricing will reduce our annual earnings at current prices compared to last year by about 10 cents a share, of which 3 cents per share will be in the first quarter. I should also note we have announced to our customers that PCA will raise prices on linerboard and medium by $50 a ton effective March 1st. For the most part, however, the vast majority of any increase in earnings resulting from this price increase will be realized in the second quarter as the increase then flows through the box (indiscernible) prices and remember we are just over 80 percent integrated. Considering all of these items, we currently expect our first-quarter earnings to be a loss of about 2 cents a share.

Finally, I'd like to point out that our inventories, as I mentioned earlier, are quite low as we enter 2004. Especially with two major mill maintenance outages ahead of us in the first quarter. These low inventories coupled hopefully with continued improvement in economic activity should allow us to sustain high operating rates throughout 2004.

With that, we will now be happy to entertain any questions. But I must remind you, as always, some of the statements we have made on this call constitute as forward-looking statements. These statements were based on our current expectations of the Company and involve inherent risks and uncertainties, including those identified as risk factors in our annual report on form 10-K and our forms S for registration statements filed with the SEC on October 3, 2003. Actual results could differ materially from those expressed in these forward-looking statements. With that, operator, would you please open up the lines, and we would be happy to take any calls.

(OPERATOR INSTRUCTIONS) Richard Skidmore of Goldman Sachs.

Just a couple of questions on the cash flow. Can you talk about where the $96 million came from? Is that primarily working capital changes, and would you expect that you would build some working capital in the first and second quarters? Or maybe help me understand that a little better?

I do not have a complete breakdown. Some of it is working capital because our inventories are very low. And of course that helps working capital. There won't be much build in working capital in the first quarter. We are going to have to run very well -- Mr. Kowlzan sitting across from me is on the hook, our inventories are low, we got two shutdowns, so we got to run very, very well just to keep up. And then in the second and third and fourth quarter, especially second and third, we need to replenish our inventories to get ready for the Fall season. So normally we can build most of those inventories back up in the May, June, July timeframe.

We did have one unusual item in the increase in the cash is that we had a $10 million tax refund that covered our previous three years. But that is the only unusual item and a little bit of working capital -- the rest is strictly and the Accounts Payable went up a touch, too, but basically its just from operations.

Okay, and then if you could just touch on the maintenance costs or at least the maintenance downtime that you take or the maintenance closures that you are taking for in the first quarter. How many days is that in each of those facilities?

We usually don't get into a lot of detail on the days we have planned; I will say we've given you the number of tons, but normally you take a mill down for about a week is kind of a rough rule of thumb to get an annual maintenance outage done. I will say the one in Valdosta this year is a little longer than that. Valdosta a little longer than normal. We are making some process improvements, and they been planned for a couple of years. And so that will be a little bit longer this year, but a week is usually the normal time.

Okay, and then just one follow-up on your other two facilities, are those maintenance closures taken in the third quarter or the second quarter?

We will take those in the second quarter, but remember those mills are about roughly half the size as the two big linerboard mills. So it's not as big an impact on our volume.

Okay, thank you.

And they are both medium mills.

Mark Connelly of Credit Suisse First Boston.

Paul, could you talk about energy just a little bit? You have a much different energy composition than some other companies do. Did you do anything different than you usually due on hedging? I know there's no real clear or formal policy on it, but could you give us a sense of what you are doing and.

We hedged earlier in the year; and so basically we went into the quarter fully hedged, but we don't have a formal policy. We take a look at it, we manage it every day and sometimes we hedge, sometimes we decide not to. This year we did hedge.

How does that bring you into the next quarter? Are you hedged into the next quarter?

Yes, we've got 65 percent hedged going into the next quarter.

Okay.

Rick does the hedging. He's behind me here.

Any shifts in your consumption from what we are used to seeing? I've got you using something like.

None at all. We are -- we try to use as much bark and coal as we can, and it's a trade-off. We got to -- when you do this swap between oil and gas, oil gives you some better efficiencies in some operations, so we try to maximize oil also. But no, I would say that any change is not by design, it's just by the operations may do it a little different but no, pretty much essentially the same as it was a year ago.

Paul, in past quarters you talked about not wanting to take your inventories down much lower, and this is somewhat meaningful number to go down further. Should we take this as an indication that you don't think demand is going to be robust --?

No, no. December I thought I would have to wait another thousand years for Y3K, and it happened in December and I have no rational explanation how December could be so strong. And that's what's happened to us, and quite frankly -- and I said in all candor Mark Kowlzan has his work cut out for him in the first quarter. We need to run real well to try to hold our inventories and maybe pick them up a touch.

You are lighter than where you planned to be?

Yes, yes, yes.

In terms of --.

And because of December. December is usually a slow month.

Sure.

So everybody showed up in December this year.

We won't complain that you had a hefty month. Can you give us any sense of how much box prices are down?

We really don't get into box price details, but on the order of -- I'm really going to pass on that.

Fair enough. Thanks, Paul.

George Staphos of Bank of America.

Good morning. Paul, I was hoping you could help us bridge a little more 4Q to 1Q in terms of earnings per share. Obviously Pactiv is a big chunk, but last year's first quarter was tough from an operating standpoint, as well.

There is a lot of ways you can slice it, and let me just approached in one or two different ways. If you look at our results the last three years, fourth quarter to first, we were down 9 cents in 2000, 9 cents in 2001 and 5 cents in 2002. And it's related to all the same factors. Maintenance downtime, which is a big part of it. Coal -- all the things I talked about. So if you average those three years, 9, 9 and 5, it comes out 8 cents has been our average drop the last three years. You take that 8 and you add the Pactiv event at 3 cents, that gets you to 11 cents. And that's probably the simplest way to look at it.

And then--.

I will give you another way that you really can get to the same number, and that is to look at the components and price fourth quarter versus first quarter. We look -- with the $10 that fell in pulp and published pulp and paper to be down about 9 cents. Volume down 2 cents, and don't forget we had a huge fourth quarter. That number is usually not that big in the first quarter volume being down, but it is compared against that very big fourth quarter. That gets you to 11 cents, and you got a couple other things that offset each other.

Got you.

(indiscernible) Two quick ways to look at it and try to arrive at where we come up to on a forecast.

That's very helpful. In terms of cash flow for the year, do you have a target yet for comprehensive (multiple speakers)

No, we don't. And it is our practice that in all candor we think, although we missed our forecast pretty badly in the fourth quarter, we were up more than we thought, but again that was driven to the very, very high volume. We only feel comfortable going out a quarter and doing a forecast so much can change in this business, that our practice is to try to do the best job we can giving a forecast one quarter in advance.

Any free cash flow that you generate this year where do you expect it to go?

Free cash flow can go to a couple of places. And I think the prime use of our free cash has shifted from debt paydown because we are down to fairly low interest expense, our interest expense now is only about $7.5 million a quarter. So and at pretty low rates. And from a long-term perspective as we generate cash flow and as and if the economy improves, we first look to put ourselves in a position at some time to increase the dividend would be probably our prime use of any increased cash flow. Obviously, share buyback would also be a consideration for use of that cash flow because we like the tax treatment on both of those vehicles.

And those would go ahead of debt?

At this point they would definitely go ahead of debt. What I have said we would do is pay down a little bit of debt, tens of millions as opposed to hundreds of millions, simply because we think it's a good discipline to pay down some debt. I like that number to come down, but it's going to come down a lot slower than it did in the past.

Okay.

But yes, ahead of debt.

Chip Dillon of Smith Barney.

Good morning, Paul. One clarification I wanted to first I wanted to also get a little bit into the Pactiv situation, but before that you mentioned your production I believe for the year was 2230. Is that right?

3 3, I think it was. Let me double check. 2233.

Okay and then you mentioned you had 19,000 ton increase in the 4Q production versus 4Q of '02, and what was the total fourth quarter production again?

578,000, Chip.

578,000, great. Now when you look at those volume levels, when you look at the pulp and paper (indiscernible) pricing, it looks like in the first quarter we are going to be down around 20 bucks, maybe 22 bucks from where we were in the first quarter of '03. And across your mix that would -- if you just rotely did that about $13 million. When you say the Pactiv contract is going to hurt you by 3 cents in the first quarter I am assuming that is year-over-year, not necessarily that is not a sequential impact is that?

No, that is year-over-year comparison. So in other words 10 cents, divided by four quarters would be 2.5 cents a quarter. The reason it is 3 Pactiv volume is a little stronger in the first quarter than some other quarters. So it doesn't come out 2.5, 2.5, 2.5. It's three in the first quarter.

I haven't checked the K, are they like more than 10 percent of your volume?

No, probably half that.

Okay, so it's probably fair to say that of the impact year-over-year roughly -- and I am being very rough here -- about a fourth to one-third of it is just the market price coming down and maybe two-thirds of it is just sort of what it took to keep the volume?

No, I don't think that's correct. Our price quarter-over-quarter is down 9 cents.

Right.

And most of that is market.

Right, but I'm sorry I misspoke. When you look at the Pactiv business that if they are less than 10 percent of your business and the hit is 3 cents and price overall is 9 cents, so .9 cents or less you could argue that sort of the cost to keep in the business in the competitive environment, that of the hit you are taking the 3 cents may be a good two-thirds of that was sort of what you had to concede to them above and beyond the market price drops.

I haven't looked at it that way. But there was certainly some of that.

In the negotiation again that is a factor of being a large piece of business; that the larger the piece of business the more intensive pricing competition can be. And we have only two pieces of business that are greater than 2.5 to 3 percent of our sales. We are pretty well dispersed in our account size, but we do have two large pieces of business, and this was one of them. So yes, it is not linear. You're certainly correct there, Chip.

Do you have an early read into the quarter or the month that you are reporting in. Has there been any trend or any change in the trend in the first few days or weeks of January in terms of this robust improvement in your shipments per day?

January has been about as we expected. And again, there is always complications to any questions. Our last year's January was an all-time record for us. It was the best January we ever had. This January through the first I got about ten days, 8, 9 days worth of data, is about at the same pace. Maybe a touch better. So you could say its only flat to last year but you've got to be careful with that for two reasons. One, you're comparing it to an all-time record, and secondly, last year's December just died. And so when people didn't work for a couple weeks, they got back to work, we had unbelievable volume in the first four, five days last January.

And then it decayed. This year with things running full through December we didn't start January as strong as the previous year. It has kind of been steady. So have I seen anything in January that would indicate the economy is not improving? The answer is no, I haven't. But is it as strong as December? No, and not in relative terms. December it was unusually strong for us. To a degree that I don't really have a good explanation for December. So that's a long winded answer to say I've seen nothing in the first half of January that would lead me to believe the economy is not moving along.

And finally we've seen a number including yourselves of producers announced price increases and I've heard anecdotally that there is a pretty tight situation in getting open market tons. Have you experienced a real change in -- that (indiscernible) mill inventories would seem to suggest this, too, but in the tone of the open market liner and media business?

Well, I would say two things. We are not big open market players. Compared to some of the other ones. Our integration level is quite high, so we don't sell many tons in the open market, but we do sell about roughly 18 percent of our tons into the open market either domestic or export. And I can only speak for ourselves. Our inventories are very low, and if you had to ask me what is our number one challenge for the first quarter and our number one challenge is for our mills to continue to perform and produce the way they have in the past because we really don't have any extra tons for sale.

Okay. Thank you very much.

Mark Weintraub of Buckingham Research.

First, can you give us a little sense as we think about second quarter versus first quarter? I assume there will be as much as 20,000 tons less maintenance related downtime, so should we be looking for volumes to be picking up on order or production volumes on order of 20 to 30,000 tons?

Well, we don't give a forecast that far out, but typically the second quarter volume is stronger than the first quarter volume. So yes, we would definitely look for increase in volume. I don't really have a forecast at this point. And that is again, Mark, the reason we try to take our two big shutdowns in the first quarter. And quite frankly, it is the lowest demand period. We get it out of the way. It is also a period where contractors are more available. You can do better job on the cost of a shutdown. It's harder work to do a winter shutdown, but we've gotten fairly good at it. So our philosophy is look, let's get it out of the way when energy costs are the highest and when we can buy contracting labor the cheapest.

And our period of demand is the lowest and then that usually sets us up and historically, if you look again I can give you a history, for the past at least three years we've run totally full in the second and third quarters as we replenish inventories and as demand picks up. So the answer is yes, we expect the demand pick up. I don't have a concrete forecast of how much because I've got to do two things in the second quarter. I've got to be able to handle increased demand. I've got to replenish inventories a little bit to get ready for the bigger pickup in demand that comes later in the year.

And if business were to be pretty good all year, I don't know if you would be willing to give a sense of how much production do you think you'd have for the full year? And making the assumption that business is good, so certainly no market related downtime or anything like that necessary.

If that were the case we would hope to run to capacity, and our capacity is published. And that would be the number.

Okay.

Which is roughly about 2.25 million tons -- 2.3 million tons Rick points that out, that's our capacity and it's really between the two numbers depending on the mix of lightweights and heavyweights. And so it would be somewhere between 2.250 and 2.30 dependent on the mix. And we would have to do a little bit of trading to get to 2.3, but somewhere in that range.

Okay, great. Just to clarify on the Pactiv business this was effective starting January of this year so there was no impact in the fourth quarter from that, is that right?

It was, right, the agreement will be effective the first quarter of this year, and will run for five years.

Lastly I would assume that when you were thinking through pricing impact first quarter versus fourth quarter, because the price increases is mostly for March that you wouldn't really see any effect until April in your box business.

That's historical. Usually box prices, when they move it's about a thirty-day lag. And the fact that we are a little over 80 percent integrated means that the only potential benefit you really have in March is on those, that 18 percent. And of that 18 percent a portion of its export and export prices are also -- we think going to go up -- how much remains to be seen. And so as I said in our press release, the vast majority of this price increase -- assuming obviously it goes through, etc., will be felt in the second quarter and beyond. And of course as you know, this business formula is pretty simple, volume times price. We feel real good about where we are positioned on volume. We need some help now from price, and that turns out to be a wonderful equation. But we still need that price increase to go through.

Lastly, you talked about to the extent that you've got increasing free cash flow raising the dividend or increasing dividend over time is something you would seriously contemplate. Any more color you can provide and how you might think any benchmarks, did you think about where the dividend level can go to over time either as a percentage of free cash flow, however you like to think of it.

Yes, but let me just go back to that question. I do not want to mislead anybody. I'm not indicating that if we have a good quarter we are going to raise the dividend every time we have a good quarter. What I'm saying is when you look at a dividend, we want it to be meaningful, and we think 3 percent right now is a start when we put it out. Was among the highest in the industry. It has got to be sustainable and we obviously felt pretty good about that. And it's got to be growable. So you've got to answer those three questions every time you do anything.

My answer to the previous question is that as cash flow increases, as this business improves where do you put it, and increasing the dividend has moved to the head of the list. And that doesn't mean it will all go there because again, you've got to deal with a sustainability question, and you want to continue to grow it over time. But that's where the money will go to first, and how high, what are the targets, that is obviously going to depend on how strong our cash flow is.

And it also has to recognize the fact that no matter how much we like it or don't like it, this tends to be a cyclical industry, and you never want to have to decrease your dividend. So we would like to take it up. We would like it to be recognized as a big piece of value. In owning PCA stock. But on the other hand we do not want to get ahead of ourselves and if we have a lot of excess cash flow, share buybacks start to make some sense cause it kind of acts as a bellows and if the industry did turn cyclic, you wouldn't have to do that but you could sustain your dividend. So it is a balancing act between those two things. That is our strategic psychology, if you will.

Thank you, Paul.

Edding Sabalt (ph) of Morgan Stanley.

Just a quick question on the capital spending outlook if you are running fairly full in the fourth quarter, fairly bullish outlook hopefully for the full year, do you need to materially list with capital spending to try and make sure your mill system can continue to produce?

No, our capital spending will be about 110 million, and we think that's adequate. We have been spending roughly that. We did have a couple of years where we were in the 125 range, and that was to comply with some environmental clean air act regulations. But when we look at the business, our system is in very good shape. It has been well maintained. We think we need about 110 million, and that is over the next three to five years it should stay at that rate. And I should point if you looked at -- and just pick a rough indicator -- capital spending as a percent of sales, I think for the six producers, the six major producers of containerboard at least, we spend the most as a percent of sales. So we have not been starving this business. We have continued to invest in it, and we only spend at about 75, 80 percent of depreciation but that's adequate for us. And we have no need to do anything other than what we've been doing, and that's our plan.

Great. And I apologize for kicking around a dying horse here, but on terms of the Pactiv contract can you shed some light on the structure of that contract, why is it that prices are lower? Is that simply a lower converting margin if you will, relative to publish linerboard prices, and is that sort of indicative of if so is that indicative of a little bit of a margin squeeze for box converting operations in general?

The reasons the price is lower than it was is that there was intense competition for the business, and when that happens and you have a lot of bidders, pricing tends to go down. Other than that, I would describe our pricing model as we build them and they pay us, and that is about to be sarcastic as deep as I am going into that subject.

Great. Can you talk about some of the trends on that contract? Have you seen it growing since '99, and is the outlook that you are hearing from Pactiv --.

One big plus with our relationship with Pactiv is that that business has continued to grow. I'm not here to give a press release for Pactiv, but they are one of my valued customers. They've done an outstanding job growing the business, and we hope they keep up the good work.

Great. One final -- I would echo that, by the way. One final question any pockets of strength/weakness as you look over the last three months and you see these strong gains on a shipment per day basis?

I think it has been across the board. I would point out one slight negative. I think in some of the beef business the mad cow is probably slowed things down such, but hopefully that will bounce back, too.

Thanks very much, and good luck in the quarter.

Chip Dillon of Smith Barney.

Just a quickie, I think you may have addressed this, but your CAPEX for this year what is your plan?

110. The question came up while you were holding the similar question Chip, and just for your benefit, we see that range as the right range for us over the next three to five years. And I also told I answered that question, if you did a quick study and look at the top six containerboard producers, CAPEX as a percent of sales, we spend the most. So we have not starved our system, and we don't need to spend any more than we are spending.

So this obviously is therefore somewhat sustainable.

Yes.

Okay, thank you.

Mark Wilde of Deutsche Bank.

Just on that capital spending number, how much of that goes to the mills and how much of that goes to the converting business?

I got Sweeney and Kowlzan here and they'll start arguing right on the spot, but it is roughly divided, about 50-50, but that's a misleading statement, so I will clarify it. We spend a touch more than 100 percent of depreciation in the box business, and we spend about 70 percent in the mill business, and the reason is that as you know, we have been growing our box business, and we have outperformed the industry. And there are a lot of reasons for that we think, but one of them is that we've continued to invest in the box business. It's allowed us to grow that business, and we are fortunate that when this company was acquired from Tenneco the mill system was excellent. So we've not needed to put that much capital into our mill system.

For one thing, we're not trying to grow our mill capacity. We are trying to increase our integration level. On the other hand, I got to give Mark Kowlzan a lot of credit; he gets a lot out of the capital that he gets and the things we've been able to do with that capital, I am very pleased with. But I think a more appropriate way to look at it is although its split about 50-50 we do spend more than 100 percent of depreciation in the box business and probably only 70 or so in the mills.

To follow up on that integration thing, if you go back about two or three years ago, you were talking about requiring more converting capacity and you really have been pretty restraint on that count. Are we likely to see that pickup, do you suppose?

One, that is an important objective of ours, although we have outgrown the industry for the past five years by a fairly wide margin in growth. We want to get to the low 90s on integration level, and in order to get there in the timeframe that we would like to get there, we would like to acquire some box plants, and that remains a centerpiece of our strategy, and I would admit I wish we were a little further along in that than we are. We are just fairly careful acquirers.

And then can we turn to exports because I know you do send some tonnage down into Latin America, I think in the crude box business. I'm just curious about why the export market even into the fourth quarter seems to have been so sloppy particularly with the decline in the dollar? Any thoughts?

I think the export business picked up in the fourth quarter.

But from a price standpoint?

No, but the volume picked up and I think the price is going to start to pick up. And it's been pretty steady on price. One thing, and again this is the export people tend to try to pick up as much as they can if they smell a price increase coming, and that is probably some of the reasons for the pickup in export activity. I know our export activity was up somewhat in the fourth quarter.

Okay, and then can you talk about how you might expect this containerboard hike to roll through the boxes. You talked about 30 days but I think if you look at historic it often takes the industry three to six months to get it fully implemented.

I think six is a little long, but let me just give you historically what normally happens. You increase, you have the way we do it, we increase we announce price on paper, and we begin in our own box plant. Don't forget, we are 80 percent integrated, that a month later the price goes up to the box plants and then they got to pass that increase through to the customers in order to have any net gain. And I would say that it is in our case it is normally about a three-month process. And there is a reason for why it may be a little faster with us. We have a lot of customers, smaller customers, a lot on purchase orders as opposed to big long-term contracts. And one of the reasons that it does take longer we do have people on quarterly pricing. We do have people on monthly pricing, you don't make an adjustment but once a month and depending on the nature of your business, it could be quicker or longer both on a way up and on the way down. So I think on the way up we probably have a few advantages and on the way down we probably have a few disadvantages. So hopefully things are on the way up, and we will have some advantages.

But we see it normally as you should be able to get most of it done over a three-month process. That's why I said you would see meaningful results in the second quarter. I didn't say in the month of April because the quarter is three months long, and that is normally about what it takes for us. And I think it's different for everybody else, and you'd have to ask each supplier on what their pattern looks like.

And finally one more shot at that dead horse. Does the Pactiv contract from the past did it pretty much follow market prices? Did pricing there follow your overall average?

Pricing was tied to containerboard pricing.

Great. Thanks.

Which is a normal practice in the industry for virtually all contracts.

All right. Thank you.

Andrew (indiscernible) of (indiscernible) Management.

You have any short-term debt?

Rick is going to take that one.

Andy, the only short-term debt we have is the 109 million in our asset securitization which we call our long-term debt, but it really turns over every month and we can either pay it off or keep it. (multiple speakers)

But that's included in the 698.

That's why I said it is in the 698 but it is 109 million of that. Other than that we did pay down the 11 million of the 50 million we had in bank debt, and the remainder is our notes.

Just to be clear when I gave 698, we call that long-term debt. And I guess semantically I view that as long-term, but it's our asset securitization. But theoretically I guess you could classify it as short-term. It is in the 698s.

But the 39 million you got left on your revolver you just said you paid down 11, that is also included?

Andy, hold on. I didn't say revolver. I said when we refinanced our debt we had 50 million in term loans in July. In the fourth quarter we paid down 11 million on those term loans, which gives us a remainder of 39 million on those term loans.

Is that in the 698?

That's correct.

There's nothing if not in the.

Just to make sure you understand our revolver is completely undrawn.

Well, this is getting more complicated.

(multiple speakers)

This is getting more complicated than I meant for it to be. I just wanted to know if thee is any short-term debt not included in the 698. That's all.

No, there is none.

Okay, the interest expense in your press release I think includes some of the costs of the refinancing. Can you tell me if you take that out, how much just interest expense is on an apples-to-apples basis with the last year's number was 67.7.

Last year's number was 67.7 million, and if you take this year, this year including the non-cash portion of the interest expense would be about 31 million is what our current interest rates would be.

Okay, so for 2003, and you understand what I'm trying to do.

48 million.

48 million, and how about you also in your press release the number that you put in there for taxes that has all the onetime stuff. Can you tell me what the tax number would be without all the onetime stuff because -- and that's the only other number I'm missing.

Our effective tax rate is going to be about 40 percent, and it's always about 40 percent. Our cash tax rate is lower in 2003 as a result of the charges we took. And we would look for a cash tax rate going forward at 10 percent or somewhat below. It depends upon the level of earnings because we do have some tax loss carryforwards.

Okay, this Pactiv contract when you said it's going to cost 10 cents, I guess that is at today's prices, so if prices go up maybe it'll cost you less than that?

It's a five-year contract. And as I said on an earlier call, most of the big contracts are tied to the price of linerboard, and in order to determine that five-year contract obviously prices going up or down will help us, it will help us going up, hurt us going down.

It doesn't have to be 10 cents if prices go up?

That's right.

Okay, and you had -- you said that you had Pactiv and one other guy that was that big. Is that contract coming up for renewal?

I have no comment on that, Andy. I do not talk about individual pieces of business.

I congratulate you on getting that business renewed and removing the major piece of uncertainty that we don't have to worry about any more going forward. I guess one more question. Depreciation and amortization you mentioned in the press release that it was higher depreciation expense. Can you just give me the number for the full year?

Number for the full year was 157. Number for next year is 160.

Beautiful. Thanks a lot.

Jim Stanley of SAC Capital.

(inaudible)

I think our hour is up. We may take another call or two. He may have signed off.

There appear to be no further questions at this time.

All right, thank you for participating in the call. And looking forward to talking to you next quarter.

Ladies and gentlemen, thank you for participating in today's program. This concludes the call. You may now disconnect.