Packaging Corp of America (PKG) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to your Packaging Corporation of America conference call. At this time, all participants are in a listen-only mode. Later, we will be conducting a question and answer session, and instructions will follow at that time. If you need operator assistance, please press star, then zero on your touch-tone telephone. As a reminder, this conference is being recorded. I would now like to introduce your host for today, Mr. Paul Stecko, Chairman and CEO. Mr. Stecko, you may begin.

Thank you. Good morning, and welcome to PCA's first quarter earnings release conference call. With me on our call today is Rick West, our CFO, and Mark Kowlzan, who runs our containerboard mill system. I would like to thank you for participating. As usual, when we complete the presentation, we'll be glad to take any and all questions.

Let me get right into it. Today, we're reporting a first quarter loss of $7 million, or 6 cents a share. This compares to the first quarter 2003 earnings of 7 million, or 7 cents a share. Net sales were $431 million for the quarter, and that compares to last year's first quarter of sales of 423 million.

If I could put this quarter in a little perspective, we experienced higher wood fiber, higher recycled fiber, and higher energy costs, than we originally anticipated as we entered the quarter. Our containerboard inventories also dropped to very low levels, especially in March. This caused some inefficiencies in our box plants, which as a result, increased our corrugated conversion costs. With low inventory levels, we also had to take in about 5,000 more container board tons from our trade partners than we shipped to them. And this reduced earnings during the quarter also. Now, we'll be able to rebalance these trade partner shipments and recapture these earnings on the trade tons over the remainder of the year.

On the plus side, our corrugated products demand continued to be very strong, up 6.1% compared to last year's first quarter. And we successfully completed our annual maintenance outages at our Counce and Valdosta linerboard mills. A lot of good work was done during these shut downs, which will pay us dividends the rest of the year.

Probably the most significant improvement is we can now run light weight grades much more efficiently on the number one machine at Counce and at Valdosta. This is very important because with our containerboard inventory levels as low as they are, we currently see our mills running full the remainder of the year, except for our annual outage currently under way at Tomahawk, which will end Friday and then the Filer City maintenance outage in May.

Let me dig in a little further into the details. The reduction in earnings compared to last year's first quarter was driven by lower pricing primarily, which reduced earnings by 17 cents a share, and higher energy and fiber costs, which taken together, reduced earnings by about 3 cents a share. These reductions in earnings were partially offset by increased containerboard and corrugated products volume and lower interest expense, compared to last year's first quarter.

If I look at our first quarter compared to our fourth quarter 2003 results, earnings were down as a result of lower pricing, which reduced earnings by 7 cents a share, and lower mill production and the cost inefficiencies related to our annual mill outages, which reduced earnings by 4 cents a share. Then higher fiber and energy costs, together, also reduced earnings by about 4 cents a share. Conversion costs inefficiencies in our box plants caused by low containerboard inventories, also cost us just over a penny a share in the quarter.

Recycled fiber costs were about $25 a ton higher than the first quarter of last year, and we're up about $15 a ton compared to our fourth quarter 2003 average. Current prices are $20 a ton higher than the first quarter average, and PCA was a net consumer of about 100,000 tons of recycled fiber during the first quarter.

Our energy prices, particularly natural gas and oil, were also higher. Prices for natural gas were up 16%, or 92 cents per million BTU's, and oil was up 8%, or 30 cents per million BTU's compared to the first quarter of 2003. Fortunately for us, because of our relatively low reliance on natural gas and oil as a fuel source, our earnings were only impacted by just under 1 cent per share compared to last year's first quarter because of these higher energy costs.

As I said earlier, our corrugated products volume in the first quarter was up 6.1% per workday compared to the first quarter a year ago. In other words, the same number of workdays in both years, so total volume and per workday volume is the same in the first quarter for comparison purposes.

Our volume was strong each month, setting new records for each month of the quarter. In fact, March on a total volume basis, with two extra workdays this year, was actually up 15 1/2% over last year, and that's one of the reasons our inventories are so low. Again, on workdays, they were the same for the quarter, but as I think you may remember, January had two fewer workdays this year and March had two extra workdays this year. But for the quarter, they balance. But we were up 15 1/2% over last year in total volume in March, and that is a, that is a strong month.

I should also note that we have not included Acorn Packaging volume in these numbers because we wanted to give a more meaningful year over year comparison. Acorn, which we acquired in February, would add a little over a half of a percent to our volume number. So you can add that in yourself if you choose

Industry inventory levels dropped to 2,354,000 tons in March, which is an extremely low level, in fact, you have to go back to 1981 to find a month of March with an inventory level that low. And you got to go to December of '94 to find inventories that low in any month.

PCA's higher corrugated product shipments and outside sales of containerboard allowed us to increase our containerboard production for the quarter to 547,000 tons, which is up 16,000 tons from last year's first quarter. Even with the higher production, PCA's container board inventories dropped 15,000 tons during the quarter, and were 23,000 tons below first quarter 2003 levels.

Entering the second quarter, our containerboard inventory was at an all time record low for us, both in terms of tons and weeks of supply. As I mentioned earlier, when inventories get this low, you start to generate some operating deficiencies in your box plants and conversion costs go up. I should also not fail to mention that freight costs also go up since you're forced to ship more containerboard by truck instead of less expensive rail to get paper to the box plants on time.

So our challenge is not only to run full, we've got to run well to meet demand and at the same time replenish inventories. The improvements we made at Valdosta and Counce on these latest shutdowns will help in that regard, but as a precaution, we are also pulling some tons out of the export market just to be on the safe side.

As you might be aware, industry publications in March raised prices for linerboard and corrugated medium $20 per ton, which was less than one half of the announced price increase. Yesterday, Pulp and Paper Week recognized the remainder of the announced price increase for both linerboard and medium, moving linerboard up an additional $25 per ton and medium up an additional $30 per ton.

However, the result of the industry publications not fully recognizing the announced price increase until these April publications also delayed the process of passing through the containerboard price increase on to boxes. As a result, we saw virtually no earnings improvement from the price increase in boxes in the first quarter, and our anticipated second quarter price realizations have been extended somewhat.

Turning next to cash utilization, during the quarter we acquired Acorn Packaging, as I mentioned, a premier producer of high-end corrugated products packaging and display materials for $38 million. And we had normal capital expenditures of 29 million in the first quarter. We also made several normal beginning of the year type cash payments and we ended the quarter with cash on hand of $88 million. I should also note that we paid down $4 million in debt during the first quarter, lowering our long-term debt to $695 million.

Now, I would like to take a brief look at the second quarter outlook. We should see some seasonal pickup in corrugated products volume, with PCA mill production increasing by about 15,000 tons or so, compared to the first quarter. In this regard, however, April has gotten off to an extremely strong start. Our first quarter per workday volume, as I mentioned, was up 6.1%, but for the first nine of 21 workdays in April, our orders are up 14 1/2% and our shipments are up 13% compared to last year, which is unusually strong, even for us.

And of course, the question is, can this rate be sustained? But the one thing that does tell me is the economy is starting to hum. I have no other explanation other than that.

Unless energy prices continue to increase, energy costs should be lower in the second quarter due to less consumption as we enter warmer months. Higher recycled fiber prices entering the second quarter will also reduce earnings and could have an even more bigger impact, negative impact, than we forecasted if they continue to rise during the quarter. Now, again, although we're not as effected as many others by rising OCC prices, nevertheless, we're effected. And we would be effected as they continue to rise and we have some experts, although I don't know if there are any experts in this area, predicting fairly high prices going forward for OCC.

Looking at containerboard and box prices, as a result of the delay, in the publications picking up before, of the March price increase, until April, containerboard and box price increases will only be partially realized in the second quarter, with the remainer coming in the third quarter, primarily in July. We estimate that these price increases will contribute about 5 cents per share to our second quarter earnings, again, with the bulk being realized early in the third quarter.

Considering all of these items, we expect our earnings to be about 7 cents per share in the second quarter. That's based on our current volume forecast, and, as I said, volume could be a little better than we think, but with only nine shipping days, that's a big extrapolation, which obviously I'm not willing to make at this point.

Finally, I would like to mention that we did announce a new $50 a ton price increase on both linerboard and medium effective June 1st. Again, essentially all of any earnings impact from this second price increase would not be realized until the second half of the year. In our case, this increase is motivated by extremely low inventories and very strong demand, as well as higher costs.

You know, I can sum it all up, I would say we've got the volume. We need the price, and hopefully these two things will come together in the second half of the year and if they do, this gets to be a pretty nice business. With that, I would be happy to entertain any questions, but as always, I must remind you that some of the statements we have made on this call constituted forward-looking statements. These statements were based on current expectations of the company, and involve inherit risks and uncertainties, including those identified as risk factors on our annual report on form 10-K on file with the SEC. Actual results could differ materially from those expressed in these forward-looking statements. With that, I would like to ask the operator to open up the phones and we would be more than happy to take any of your questions.

Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press the 1 key on your touch-tone telephone. If your question has been answered and you wish to remove yourself from the queue, please press the pound key. Again, if you wish to ask a question, press the 1 key. Our first question comes from Mark Weintraub, of Buckingham Research.

Thank you. Paul, I just wanted to follow up, you had mentioned that pricing, in your view, might add something on the order of 5 cents to the second quarter, and a lot it then will show up in the third and fourth quarter if we think about the June increase as well. Can you give us a sense of how much you might expect on the price increases, which have so far been reflected in Pulp and Paper Week, you would expect to see in the third quarter, and then maybe if we were to assume that $50 per ton increase would be going through how much does that provide for the third and fourth quarters?

Yeah. To make it fairly simple, when Pulp and Paper and other publications did not go up until April, have you some pricing on quarterly pricing and April, unfortunately starts the second quarter. So we missed that one and that's one of the, one of the reasons the pricing is delayed. We did not get much pricing in April. It usually takes about three months to put through a box price increase for us.

That's the normal, because of difference in contracts, and a very rough rule of thumb is you get a third, a third, a third. So to get the full increase, so if you got zero basically in April, you get a third in May, a third in June, and then a third in July. You got zero, one third, and two-thirds in the three months That averages a third.

So very, very rough numbers. 5 cents is about a third of the increase. It is about as simple a way as I can put it.

With regard to the second half, and again, we've announced the price increase, if we get it, it's $50 a ton and you can do the math on roughly, you know, let's call it 2 million tons to do the math simple for a half a year. That would be $50 times 2 million divided by two, that gets roughly to be another 15 cents a share when you tax effect it.

Okay. Great, and you mentioned that you've got some down time at Tomahawk and Filer City in the second quarter. How much higher could your production in the third quarter be than the second quarter?

We do have Tomahawk down for, it will be up Friday, six days in, you'll shut down. The third quarter is always our best quarter production wise. Mark Kowlzan is sitting right here. You know, we looked for production to be up, you know, probably 25,000 tons, and hopefully the improvements we've made at Counce and Valdosta are going to enable us to do that.

One of the things we've done, as you know, Mark, the world is going to lighter and lighter weights, so what we're able to do is not necessarily make that many more tons, but we can run light weights and make an equal number of tons, so 20, 25,000 tons we think we could probably get. Mr Kowlzan is under the gun. He knows we need the tons.

And just to clarify, that's relative to second quarter?

Yes.

Just lastly, you have talked about if cash flows are increasing, you would consider potentially increasing the dividend. In curiosity, would you want to have a couple of quarters in the bag in terms where you have seen that big increase in cash flow, or is this something that you would contemplate acting on when you think you have good visibility on the increase in cash flows?

Well, you know, Mark, I don't want to give any forecast on when we would do anything with the dividend. We have said that we think one of the best uses of free cash is a dividend, that that benefits shareholders the most, as opposed to other uses of the cash in our particular situation, and we have also said that we want, we want to have a dividend at a level that is something that is meaningful. Obviously I think we meet that criteria, sustainable and growable. And what you're getting on is when do you get to a point where you feel your cash flow is good enough that you feel that this is a permanent and sustainable move, and that's where we would have to be and that information, I don't choose to share at this point, but that's the way we look at it.

Okay. Thanks, Paul.

Our next question comes from Chip Dillon of Smith Barney.

Yes. Good morning. I had a question about the cash flow. It looks to me from the balance sheet that while your debt did go down a bit, your cash went down a lot more, and that actually the net debt went up about 81 million. I would just-- obviously I know it was a tough quarter and you are committed to a dividend, but we can't see the whole balance sheet. Could you just maybe comment on what might have caused that? Was there a working capital build maybe on the receivable side or something else we should look for?

Well, the big one is that we funded Acorn totally out of cash on a balance sheet. I'll let Rick give you details on the rest of it.

Chip, the main thing was, as Paul said, the 38 million for Acorn. If you look at our Cap Ex, we spent 29 million, a norm for the first quarter. That's a little bit higher, probably about 5 more than the norm. Then in addition to that, we had a number of beginning of the year payments for-- first of all, we had our first dividend. Certain things that happened in the first quarter, where you always pay it up front, you know, the pay out of bonuses in January, pay out of some vacation pay for the entire year, in January, a number of one time payments that you do not make the remainder of the year.

Mm-hmm.

So that is the primary driver of what we had there, just some accruals and it's essentially 30 million of working capital increase.

Okay.

Which I should see that improving. As far as AR, there was some offsets with the AR, and the inventory was not that much. It was essentially just making these payments in the first quarter. Of course we had our first interest payment on our new debt, half of it, since it's a semi-annual, was $15 million. So you put all those together, that's the reason for the first quarter.

Okay, and then the capex, what-- are you still looking for something, I guess in the 105, 110 range?

110. Of course we usually spend a little more in the first quarter because the sooner-- you know, when you got a shut down like we had at Valdosta and Counce, we try to get those things done and we do the things we want to do while the mill is down as opposed to take down time later and so our capital spending is always skewed a little forward in that regard. That's not unusual.

Okay. You know, I wanted to ask you, you know, when you look at March, the, as we know, Pulp and Paper Week always comes out the third weekend. They have to make a decision on Friday night, and yet, you know, it was sort of the March-- you know, edition that reflected the first price increase, if my calendar here, it wasn't like the 15th. It was, if you will, later. It was the 19th, and yet even though it was, you know, a late third Friday as opposed to an early one, you know, the trade publisher didn't have the benefit of knowing the box numbers. You know, you can hardly blame them for wanting to go out on a limb just in case on Monday the 22nd you had had a disastrous number.

I think what I'm getting at is maybe we could have gotten more of the box price increase earlier if the F BA and the AF and PA had gotten their numbers out at least before Friday, you know, before Monday so that the Pulp and Paper Week would have had the ability to, of the numbers and therefore maybe would have had the guts to go out with a higher number than just the 20.

Is there any way you can influence the trade associations to maybe, you know, be a little bit more on the spot? Because there are a couple months coming up here where, you know, it's only the 15th of the month where Pulp and Paper Week has to commit to something and they may not have the, you know, the numbers in time. Therefore, if there another price increase going through there, they are going to drag their feet again.

Well, you know, the only influence I have is I'm a member. And as a member, I can express my opinion. I don't know how much that has to do with it, but it's certainly worth thinking about. I was obviously very disappointed that it didn't move because the market was very tight. I think in retrospect, everybody understands that now, and I guess the other thing that I failed to mention in the call that they probably hurt us as much as anything and that was that $10 decrease in December.

We suffered with that through the entire first quarter and actually you suffer with it forever, and what bothered me about that was that the $10 decrease in December was attributed to some spot tons that were reportedly moving in December, but then it was acknowledged in January that that spot stuff all dried up, but the price never rebounded to the original level.

Right.

And that $10 hurt us the entire quarter and you put $10 on half a million tons and now you're talking some big money. Hopefully, I'm trying to look ahead, not back. The publications did move the price up, to what I think is the actual conditions in the marketplace, and from our perspective, things are very tight out there and our biggest challenge is going to be not only passing through the box prices which we're in the process of doing, but we got to run really well to keep our inventories up a little higher because they are just too low

Last question, when you look at the box situation, on one hand, you know, some of your maybe more aggressive customers that I think some of you don't have as much exposure to are obviously going try to fight it. Doesn't there come a point where, you know, where they fight it at their own peril because, you know, these big companies risk missing volumes that they don't have boxes to ship their products in? Are we-- I mean with these inventories down this far, are they kind of playing games here, or is it getting to be easier to get them to see the reality that they either pay it or they lose it?

You know, chip, I guess the best way from my perspective to answer that, you know, when all else fails, you go with the facts, is an expression I've heard somebody say. The facts are fairly clear. It is a buyers' job to try to get the lowest price, best value. Everybody's got their own value criteria, and people resist price increases, but in general, people know what they're doing and when you get an inventory levels that are as low as 1981, people figure it out fairly fast that this is going to be a tight market. If the economy keeps improving.

And so I think the strongest thing that this industry has going for it is that end of inventories are very, very low. In addition, and some more than others, are hurt pretty much by higher fiber and energy costs. So you've got two things that I think make buyers realize that a price increase is in order and that is very low inventory, good demand, and the suppliers are under some cost increase pressure. In the end, people do the right thing and I think the facts are, are fairly clear in this regard.

Okay. Thank you.

Our next question comes from Mark Wilde of Deutsche Bank.

What? Morning, Mark. No, no, let's watch that language. Hello?

One moment, please.

All right. See if you can get Mark back . I think the operator disconnected Mark.

One moment .

Hello?

Hello, mark?

Yeah.

We got you back.

Yeah. I still have that question. Can you talk a little bit about where this strength in the box business is coming from? I mean the quarter's up 14 1/2% is a pretty enormous gain. Can you pin that down at all by particular businesses or particular region or anything?

Everywhere I, I looked at all the regions. We are just very, very strong in April. As a matter of fact, you know, maybe in our case, and I don't know this is the case. I'm trying to speculate because it is stronger than I would have expected, even in, you know-- I can't ever recall a month this strong in terms of volume and shipments. And maybe some of the reason is that because we were low on paper, we could have shipped even more on March and we slowed down and now we're catching up on some of that business, but I have no way of knowing that.

And so I, I don't have a good explanation other than I think it's the economy in general that when things come together, they, they-- it's not linear. It picks up. I have no explanation other than that. And hey, it may tail off a little bit and we've only got nine days out of 21. But I will tell you, we've never had a nine-day run like this.

Yeah.

Maybe it will slow down. I don't know.

Paul--

I just think it's the economy, is what I think.

Okay. If you-- you mentioned that you were going to pull away from some more of your export sales, but could you give us some sense of how pricing is moving in the export markets? Has that picked up as well?

Yeah, pricing has picked up in the exports. You know, we, we don't like to just pull away from customers. What we'll do is we'll continue to raise prices in export and that will obviously drive some of the volume away. People don't want to pay it. But export's up about 30 bucks.

Okay. You mentioned during the quarter that you had to take in about 5,000 tons from your trade partners and that that cost you a bit. If somebody used a number of $150-200 a ton for kind of the incremental cost of doing that rather than producing on your own, is that a pretty reasonable number?

Yeah, it's reasonable.

Okay. All right. And last question, any difference that you can see in terms of how this box hike is rolling through versus other ones you've seen?

Yeah. There has never been one like it. What happened is, what with Pulp and Paper only going up half of the increase, I think different companies have taken different strategies, at least that's what we hear in the marketplace, you know, we originally were out there try to get half and then going to fall off with the other half. I think some people were trying to get the whole thing and maybe delay it and just do it one time instead of two.

And when, when the publications moved it up the second month so now you've got a third scenario, so this is like something that hasn't happened, at least as long as I can remember, and, you know, we're obviously trying to figure out what's the optimum way to pass this through to our customer now that we've got the right number, so it looks like we can move now instead of two distinct ones to merge these two again. It's complex is about as simply as I can put it.

Okay.

And that's why there's been a little bit of a delay.

Okay. Very good. Thanks, Paul.

Our next question comes from Mark Connelly, of Credit Suisse First Boston.

Thanks. Two things, Paul. First, the low inventory issue getting more severe, is that likely to cost you more money in Q2 than in Q1, or do you think you can get that back and, you know, keep it at the same, you know, loss of a penny?

I, you know, quite frankly, it would not surprise me if it cost us a penny this quarter.

Okay.

Okay.

Is there any chance of that--

Mark, Mark Kowlzan has handed a me a sheet that says half a cent, so he's confident it's going to run, but I think it could cost us as much as a penny.

And do you expect to rebuild some inventory this quarter.

Yeah, we expect to build some inventory this quarter.

Okay.

We have to build some inventory this quarter because we get ready for the third quarter, that's the biggest volume quarter of the year.

Sure.

And, you know, we're off to a good start, in terms of Counce and Valdosta coming back from a shut down, and some of these improvements we've made are paying dividends, but it's probably going to cost us a little bit of money, you know, half a cent to a cent. I'm being a little pessimistic probably at a cent.

Okay.

As a result of low inventories, and, you know, there's a plus to this too. We-- everybody's got a thing called obsolete inventory and maybe every year or so you write it down and use it for broke. Well, we've been able to cut that in half on its own. We figured out that, hey, you got some rolls that aren't the right size. You put them on a corrugator. You slow the corrugator down and you use that paper because that's all you have.

Right.

But we are, we are pretty low inventory levels. Bill Sweeney's not here today, but tell you a funny anecdote. We worked some box plants on Good Friday to keep up with demand. That's not a normal workday, but we worked them. And I asked Sweeney how many box plants did you run? He said every one that had paper was his answer to me, which we kind of chuckled against, and-- but there's a little bit of truth to that. That is an exaggeration. We are at fairly low levels, but I'm confident. We're going to come out of this okay.

So even though you're off to a very strong start on the demand side, you think that at some point in the quarter you'll be able to rebuild the inventory?

Yeah, to be honest with you, I would have thought I would have rebuilt them some by now. I haven't, but that's because of the first nine days of April hasn't let me.

Right. Okay. Just one more question. You are running your mill system pretty hard. If you leave out fiber and energy, which is awfully hard to leave out, but if you did, is your operating efficiency at your mills where it's going to be, or is there any room for efficiency to go up with the increase in tonnage, you know, beyond the rebuilds.

Yes, the answer, the efficiency will go up. One of the reasons is, again, the work we did at Counce on the, on number one machine and on Valdosta, we can now run both of these machines about 300 feet per minute faster than we did before, and we need that speed on light weights.

Right.

To get a maximum efficiency. The other thing that does for us is that we've got the ability now to run much more light weights at Counce and we'll put more heavy weights at Valdosta where we have lower fiber costs, and so you want to maximize the square footage, if you will, out of Counce and maximize the tons out of Valdosta, and we get a fairly good cost savings by doing that.

Right. 300 is a heck of a big move. Okay. Perfect. Thank you.

Thank you.

Our next question comes from George [Staffos] of Banc of America Securities.

Hey, guys, good morning. Paul, I was hoping you could bridge a little bit more 1Q to 2Q, you got about a 13-cent swing. You're getting, you said 5 cents from pricing. Usually you get a 3 cent seasonal pick up 1Q to 2Q. Can you help us fill in where the other EPS--

Yeah, I'm going to throw out some very rough numbers. This is not a forecast, these are kind of order of magnitude numbers. Let's call it a nickel in price, volume probably is worth three maybe four cents and additional volume. Energy is probably worth a penny lower energy, and then you'll pick up about 3 cents because you don't have the maintenance outages. You got the two small ones, not the two big ones.

Right.

So if you add that up, what do you get? I'm shooting from the hip here.

You get 12 cents, so you're getting there.

12 cents, and you said the number is 13?

You're losing a little bit in inefficiencies--

We'll probably pick up a penny in wood costs, too, because you got better logging conditions than you had in the winter. That's kind of-- I got you in the right church, maybe not the right pew exactly, but you're pretty close.

Right. Gotcha. Can you give us a handle on which way conversion costs are going to go for the box plants, 2Q into 3Q, you've already given us a fair amount of color with some of your challenges, but what are the things you can do to improve the conversion cost given the challenges you've got right now?

More paper. Seriously. Our conversion costs, quite frankly, our conversion costs were flat with last year, but the problem is we had forecasted an improvement in conversion costs because of the increased volume. When you are banging out the volume we're banging out of those box plants, your conversion costs ought to come down because you got the volume effect. They didn't come down. They stayed flat and they stayed flat because of low inventories. So once we get, once we get some more inventory, then our conversion costs should get better, not worse.

Okay.

And I, I would have thought that we had no effect on conversion costs, actually a little better conversion costs in the second quarter, but this darn April got off to such a strong start, it's screwing me up.

So--

On the other hand, I don't want to complain about the volume either. So, you know, they got me either way.

So it would be fair to say conversion costs in 2Q are probably pretty flat sequentially?

I think conversion costs will probably be flat, but they should go down with the increased volume. We won't be out of this until the third quarter when we have some more inventory.

Okay.

Where conversion costs really start to contribute to earnings as opposed to just be break-even, if you will.

Two last ticky-tack questions. Do you have actual square footage out of the box plants for the quarter and do you have depreciation for the quarter?

Yeah, we have depreciation and you can-- we can get you the actual square footage. We reported last year what we shipped. We can get that number. I don't have it, I don't have it in front of me.

Okay. And depreciation?

You know, roughly, it's roughly 7 billion feet.

Okay.

And depreciation was about 39 million.

Thanks, Rick. Okay, guys.

Our next question comes from [Eading Seebolt] of Morgan Stanley.

Good morning.

Good morning.

Just a quick question on your total conversion rate. The tons that you put into your box plant, you historically have been running around 80%. Sorts of pre-Acorn, it sounds as if that number was higher in 1Q. Is that an accurate assessment, or is it lower--

No, 82 is the number.

82?

Yeah.

And would you expect that to increase as you pull off these export tons?

Yes.

Okay.

Yes, that number will go up as we pull export tons and as our value continues to go up, because the volume's going up in boxes.

Right, and final question, as you look at this announced June price increase and you think about your own goals to build inventory ahead of the third quarter, it sounds as if -- if demand continues to be robust, that you're going to draw a pretty hard line to your containerboard only customers on that price increase because, you know, if they don't take it, you're going to want to build that inventory anyway, is that a fair assessment?

Well, we'll have the same posture as we had for this first price increase, and we had very, very good reception to the first price increase. People understood Again, we're not big-- we're not big open market players, and so it's probably, you know, we don't have to move nearly as many tons, but, you know, the old adage is that the first price increase and the last price increase in the cycle are the two hardest to get. We've got the first one behind us now in containerboard.

Sure. Then a final comment would be on freight costs. I was wondering if you could let us know what the trends are in freight cost. You mentioned need to ship via truck rather than rail. Are you looking at your total delivered cost per ton, is that having a material impact, the increase in freight rates on your ability, not your ability, but your cost to get that tonnage or the boxes themselves to your customers?

Freight's up a little bit driven by higher oil and gasoline prices, but it's not a huge number. What's hurt us on freight is the fact we've had to shuttle some tons to box plants to keep up with demand and rail's a lot cheaper in some of our runs and we've got to get back to that mode and we expect to get back to that mode, you know, by the end of the second quarter.

Great. Thanks very much. Good luck for the quarter.

Thank you.

Our next question is from Jane [Minn] of Scotia Capital.

Hi.

Hi.

I think my question has been answered, but just to be sure, what was your depreciation and amortization figure?

39 million.

39 million. Okay. My other questions are answered. Thank you.

Thank you.

Our next question is from Michael Christolo of Inwood Capital.

Good morning, Paul. question on value enhancement given that the pricing power you're seeing is going to drive cash flow over the next few years. I thought I heard you say at a conference a few months ago with regard to the Madison Dearborn stake that you would not buy back some or all of their stock in a private transaction. I just wanted to inquire would it be fair to state your position more broadly that you wouldn't engage in any transaction or buy back or tender that isn't available to all holders?

Well, I never say never. What I said at a conference when I had that question is that we had no plans to buy, to buy Madison Dearborn's shares and they had no plans at that point, they had never sold any, they had never asked us to buy any and that's not something that would be particularly interested in doing. One of the reasons is liquidity. And that's why we favor use of free cash going into dividends as opposed to buying shares. So, again, as I said earlier, our plans on the use of free cash going forward is into dividends and that is the primary measure.

Thanks for clarifying.

Sure.

Again, if you have a question, please press the one key. I am showing no more questions.

Well, I would like to thank everybody for participating in the call, and look forward to talking to you next quarter. Thank you much.

Ladies and gentlemen, thank you for your participation in today's call. This concludes the program and you may all disconnect. Have a good day.