Packaging Corp of America (PKG) 2004 Q2 法說會逐字稿

Welcome to the Packaging Corporation of America second-quarter earnings call. At this time all participants are a 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 welcome to PCA's second-quarter earnings release conference call. On the call with me today is Rick West, our CFO, and Bill Sweeney who runs our corrugated products business. I'd like to thank you for participating and, as usual, after we complete the presentation we'll be more than glad to take any questions. So let me get right to it.

Today we're reporting second-quarter earnings of 14 million or 13 cents per share. This compares to second-quarter 2003 earnings of 11 million or 10 cents a share and a first-quarter 2004 net loss of 7 million or 6 cents per share. Net sales were 467 million compared to last year's second-quarter of 436 million and 431 million in the first quarter of 2004. Net income for the first 6 months of 2004 was 7 million or 6 cents per share and that compares to 18 million or 17 cents per share for the first 6 months of last year. Net sales for the first 6 months of 2004 were 899 million compared to 860 million in the first 6 months of 2003. So that's the numbers.

I would now like to start by saying that we had a very good quarter operationally and, from our perspective, the economy continues to strengthen. Our corrugated products volume remained very strong setting a new record for the second consecutive quarter. With this increased demand our paper mills ran extremely well, setting an all-time production record even with our Tomahawk and Filer City mills having their annual maintenance outages during the second quarter. We were finally able to make some progress in replenishing our containerboard inventories as a result of this record mill productivity. But our mills will have to continue to run well in the third quarter in order to build more inventory for the seasonally stronger fall shipping period.

Now let me get into some more specific details of the second quarter starting with our corrugated products volume. For both PCA and the industry the economy continues to be strong resulting in increased corrugated products demand. For PCA our corrugated products volume was up 9.6 percent compared to last year's second quarter, and up 5.6 percent compared to our record-setting first-quarter volume. Year-to-date our corrugated products volume is up 8.1 percent. I should point out that our reported volume for 2004 does include Acorn Packaging which we acquired in mid-February. Acorn shipments improved second-quarter volume by 1.7 percent. But even without Acorn, the second-quarter 2004 volume is still an all-time record volume for us.

As reported by the Fiber Box Association last Friday, the industry also had a strong second quarter, up 4.2 percent, and that's the best year-over-year quarter for the industry in 7 years. In addition, operating rates reached 97.7 percent while containerboard inventories fell another 31,000 tons and now stand at 2,256,000 tons, which is a very low inventory level especially as we approach the fall shipping season. Our containerboard mills produced 578,000 tons, and that's about 6,350 tons per day which is an all-time production record for us. As I mentioned earlier, our Tomahawk and Filer City corrugating mills were down for their annual maintenance outages during the quarter, and this reduced production by about 12,000 tons.

Looking at pricing. For both containerboard and corrugated products, pricing did improve compared to the first quarter as a result of both containerboard and corrugated product price increases. However, our average pricing, including transportation expense, remained below 2003 second-quarter average pricing which negatively impacted earnings by about 10 cents a share compared to last year. Pricing should continue to improve in the third quarter as we see a full quarter's benefit of the second-quarter price increases and also begin the realization of our unannounced July 1st corrugated products price increase.

Pulp & Paper Week, an industry publication, only partially recognized a recent $50 per ton increase for liner board and medium, taking liner board up $35 and corrugated medium up $45 in June. Yesterday, however, Pulp & Paper Week increased both liner board and medium prices an additional $15 a ton. This now takes liner board up a total $50 and medium up $60 a ton on this last price increase.

If you now turn to cost, recycled fiber for us was about $25 a ton higher than the second-quarter of last year which negatively impacted earnings by about 1 cent per share compared to last year. This relatively low impact on higher recycled fiber cost was a result of PCA being a net consumer of only about 80,000 tons of recycled fiber during the quarter. And as I think you realize, as our corrugated product volume increases we generate more recycled fiber from our box plants, lowering our net consumption of purchased recycled fiber.

PCA energy prices, particularly natural gas, were also higher. Prices for natural gas were up 13 cents -- excuse me, 13 percent or 84 cents per million BTUs compared to the second quarter of 2003. In addition, fuel oil costs were also up about 5 percent. Fortunately for PCA, because natural gas and oil represent only about 25 percent of all of our purchased fuels, higher energy costs impacted our earnings by only about a half a cent per share compared to last year's second-quarter. We did experience some operating inefficiencies in our box plants, primarily in April and May as a result of low containerboard inventories which hurt earnings by about 1 cent per share. This situation began to improve in June as we started to make some progress in building inventories. And then finally, we sold a very small portion of our ownership in Southern Timber venture which contributed 1 cent per share to our earnings.

If I could sum up the quarter operationally, our mills performed exceptionally well and our box plants really did a terrific job in meeting record demand while operating at very low containerboard inventory levels. Our costs were also good because of our low reliance on natural gas and fuel oil as fuel sources and recycled fibers as a fiber source. Finally, demand continued to improve and, quite frankly, was up even more than we anticipated.

Turning to the balance sheet and cash utilization. Our June ending debt was 695 million with an overall average interest rate of 4.2 percent. This resulted in quarterly interest expense of 7.5 million compared to second-quarter 2003 interest expense of $15.7 million, which was prior to our refinancing. With the possibility of increasing interest rates, we are fortunate having only about 150 million of variable interest rate debt, which means a 100 point increase in interest rates only impacts PCA interest expense by about $1.5 million annually. Our capital expenditures were on target at 26 million for the quarter and our ending cash balance was $91 million.

Now I'd like to take a quick look at our third-quarter outlook. We should see some seasonal pickup in corrugated products volume along with higher mill production. Our July corrugated products volume remains strong and we're up 6 percent in the first 9 of 21 shipping days in July compared to last year. This is kind of a difficult number to handicap because July 3rd is a holiday this year for some people, wasn't a holiday for others, other people took the 5th off. And as a result, if you exclude the 3rd of January as a shipping day -- excuse me, the 3rd of July as a shipping day, we were up 9 percent. So when you really look and try to put some logic on this thing, I would say that our volume in the first 9 of 21 shipping days is up somewhere between 6 and 9 percent depending on how you treat that July 3rd. Now the FBA counts July 3rd as a shipping day, so officially we're up 6 percent in those first 9 days -- shipping days.

Product pricing should also be higher, improving earnings as we see both a full quarter's benefit of the second-quarter price increases and a realization -- a partial realization of our July 1st box price increases which we are now passing through. The biggest variable in earnings will be the pace at which we move the June 1st containerboard increase through to boxes. We expect this to happen faster than the first box price increase, but the situation was a little bit complicated when pulp and paper broke the $50 linerboard increase into 2 parts, 35 in June and 15 in July. This will hurt, or maybe said better, this will probably push some of our box price realization to early in the fourth-quarter.

If you consider all these items, we would expect our third-quarter earnings to be about 23 to 24 cents per share. With that we would be happy to entertain any questions, but I must first remind you that some of the statements we've made on this call constitute forward-looking statements. These statements were based on 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 on file with the SEC. Actual results could differ materially from those expressed in these forward-looking statements. With that, I would ask the operator to open the phone lines up and we would be happy to take your questions.

(OPERATOR INSTRUCTIONS) Rick Skidmore, Goldman Sachs.

Paul, just a question. What's the box price increase for July that you've announced? And then what is it that gives you greater comfort that this box price increase will go in faster than the first one?

We've announced a 10 percent box price increase and I've got Bill Sweeney here and so I'll let you get it straight from the so called horses mouth. He's closer to it than I am and so, Bill, why don't you answer that question in terms of why do we expect to pay for this one to be faster than the first one?

What happens the first time is you have to bring credibility about the market conditions within your own organization to say nothing of your customers. So always when you're trying to turn from a downturn to an upturn it's the most difficult, so the first increase is always difficult. What's happened in the second increase is we gained credibility internally 100 percent, and outside I'd say the majority of our customers now are better informed about the market conditions worldwide and are willing to accept the increase. So our result so far in the second increase, which is a 10 percent increase July 1, are much stronger than they were in the first increase.

Okay, great, thank you. And Paul, can you just comment about the inventory levels? Is their potential to bring volume out of the export markets and increase utilization rates in the box plants, increase box shipments?

Well, Rick, I bet we're up 9.6 percent so I don't know how high up is 'high'. We basically did pull some tons out of the export markets when inventories got really critical. We're over that stage. Now we're over that stage because we've had just a phenomenal quarter productivity wise in our mills and our strategy is we're going to keep the export business that we have. We think our mills can sustain this level of productivity and so we're not really pulling out of any more export business. We think we're over the hump. We've got our annual shutdowns behind us so we're in a much better position going forward to maintain adequate inventories in our box plant. The key for us will be continued standing performance in our mill system.

Okay, thank you.

Chip Dillon, Salomon Smith Barney.

Good morning. First, a housecleaning issue -- just to make sure I understand this. There are 22 weekdays in July (multiple speakers) or work days, whatever, or just weekdays. And you mentioned there's 21 shipping days, so there's clearly 1 weekday they are not including. Is that the 2nd or the 5th? The 2nd is a Friday and the 5th is a Monday. Do you know which one of those they're excluding?

I said the 3rd, I spoke incorrectly. I meant the second on my talk. So that was an error on my part.

So the 5th will probably be counted as a holiday by them.

Right, that was my point. The 5th is being counted as a holiday but not the 2nd, and I'm sorry for getting the days mixed up. And that's why I said if you count the 2nd -- we did work a bunch of box plants on the 2nd, but our volume was very low on the 2nd because a lot of people were off and we didn't -- it was a very low-volume day. If you count that day, which I did, we're up 6 percent through the first 9 days. If you don't count that day we're up 9 percent. And my only point was that's kind of a strange day and this early in the month that moves the average a lot. And that's why I said our volume really is up somewhere between 6 and 9 percent depending how you count that day. But the FBA is counting July 2nd.

Okay, I just want to be clear about that.

I'm glad you brought that up, and I'm sorry I got the 2nd and 3rd mixed up.

No problem. The second question I had is just trying to understand when you look at Pulp & Paper Week, basically the independent box guys are paying I guess $95 more for liner board today than they were in February on a contract basis, and so to stand still they've got to recover that -- box prices. How much, I guess on average of -- I mean, it seems that maybe -- or maybe I'm asking this the wrong way -- that one could argue -- you can only tell -- you haven't really told us this -- that the box price realizations in the second quarter may have almost been zero compared to the first because, if I'm not mistaken, the box prices were actually going down from January to February and maybe even into March in some cases. So Obviously that's sort of part of the "V" (ph) and then maybe it was heading up in April and May. But at about $100 a ton, how much on average in the second quarter if any did you see in the second quarter?

Chip, we're in the middle of a price increase and we're continuing. So that's not a piece of information we share because it's immediately then available to our competitors and people can put different slants on different things if you were a salesperson. But I will say this; we definitely increased our box prices during the quarter. We did realize a good percentage of the first price increase, and it's about what we thought. And as Bill Sweeney pointed out, the first one is always the most difficult, it doesn't move as fast and you don't normally get as much of that one as you do of subsequent ones. But we did get a good percentage and we're basically satisfied with that. But there's no doubt that the second one is expected to move faster and get a higher realization. And that's about all I can say on that.

But just so there's no confusion. When you say you've got a good percentage, that clearly was not for the second quarter, that was toward the end of the second quarter, right?

Absolutely. In other words -- and I'm comparing, when I say our box prices are up, they're up on average and they're up, if you really compare the going out price which is in March and the going out price in June, our box prices are definitely up.

Got you. But if you look at the weighted average in the second quarter versus the first quarter, that pace of increase is substantially less than the end of March versus the end of June comparison.

That is correct; the weight of the average is less.

Great. And last question is, I'm looking at your net debt and, of course, it went up a lot in the first quarter, I guess working capital was a big part of that. And then in the second quarter it didn't really change a lot. And I noticed you mentioned you sold a small amount of this timber partnership that you have. If you could tell us how much that brought in, number one? And number two, would we now start to expect to see the working capital maybe going the other way a little bit and seeing more debt repayment assuming you do nothing else other than pay your dividend and keep CapEx where you've guided us to?

Yeah, I'm going to let Rick -- you're right about working capital. I'm going to let Rick take the second part of that question. With regard to Southern Timber Venture, that contributed 2 million in cash and about a penny a share -- to our second-quarter results. I'm going to turn the rest of that question over to Rick.

Chip, during the second-quarter we did generate cash from operations of about 42 million. But what was included in there was a $20 million increase in working capital. And the reason for that 20 million increase in working capital was of course higher prices and higher demand resulted in higher accounts receivable. But you should see that coming back into the Company with higher cash from operations in the third quarter and then it would even be higher as prices come through in the fourth.

Okay. Thank you very much.

Mark Weintraub, Buckingham Research.

Paul, your EBIT was up $34 million second quarter versus the first quarter. I understand you don't want to give specifics on pricing, etc., but basically I can't imagine that played a huge role in the 34 million swing which calls into question then how much of it really came just from volume and how much of it was perhaps just other cost performance related issues? And understanding they're all interlinked, but could you help us out kind of thinking this through and then thinking through for the third quarter?

You're right, the two big drivers in the first quarter -- second quarter over the first quarter were volume and price, and of the two volume was a bigger driver. The other things that helped, one, we did get a penny from Southern Timber Venture and our energy costs were 2 cents better compared to the first quarter. And our solid wood -- we have very, very small solid wood business, but that was a penny better. But we had a swing of 19 cents. So that leaves 15 cents in volume and price. And volume was the bigger piece of that 15 cents. And that's about all I'm going to say on that.

Also you've had very strong organic growth in your box plant systems. Does that color at all your thought process on additional box plant acquisitions? Does it reduce your desire perhaps to do that or not?

No. Our strategy has been pretty steady in that we think that the best place to be on an integration level is in the low 90s and we're gaining there. We're gaining every year and we've been fairly disciplined and conscious and we've been happy with our acquisitions. We're very pleased with our latest acquisition in Acorn which adds about 2 percent to that integration level. But no, we think the low 90s are the place to be in terms of maximizing profitability and providing the most flexibility over a variety of business conditions. It depends on business conditions -- you get a different number for where you want to be integration wise, but our combinations says the low 90s is where we want to be and we will continue to look for the right acquisitions to move us in that direction.

And can you just update us, where with Acorn and with the developments within your own system would say you are now?

We'll get you that number where we are. We were at 85; we may be a little higher, maybe 86. We haven't run that number yet, but I'm guessing 85-86 percent with Acorn.

Okay, thank you.

Edings Thibault, Morgan Stanley.

Good morning, gentlemen. Just a quick question -- I want to continue to follow up on the notion of sequential improvement in profitability. You mentioned volumes being a key driver here, but when you actually look at your total costs, they went up very little particularly if you were to back out -- well, even including depreciation according to our model. So I'm just wondering as we spend time sequentially, and maybe this is something to do with the seasonality of the business, it seems that if your shipments were off 2nd Q over 1Q and yet costs were effectively flat, would that be an accurate characterization or would you say shipments were --?

That's accurate. Our cost, again -- when you have record productivity in your mill that really helps your costs. And as I said on an earlier call, or (indiscernible) to an earlier call, our energy costs were actually down 2 cents, the equivalent of 2 cents per share quarter-over-quarter. Recycled fiber was up just a touch, but the cost efficiencies are really what has driven things, and of course some of that gets into the volume impact also. But our costs were not -- I would say slightly down but that's driven by productivity.

And given the fact that you expect to run full into the third quarter and, in fact, run full without taking the maintenance downtime in the corrugated mediums, it sounds as if you're fairly confident that you can maintain that level of productivity and, in fact, improve it because of the lack of downtime.

Yes, we think the third quarter should be another good quarter for us cost wise driven by very, very high productivity and the fact that we think energy and fiber prices ought to be fairly stable in the second quarter. Again -- than the third quarter, excuse me. And again, we're not affected anyway that much unless there's a real big change in those because most of our energy is in coal and bark and we don't use that much recycled fiber. So I would say, yes, what you say is -- we think we're going to maintain this type of very good cost performance in the third quarter at least.

Well, I certainly hope you're right on the energy and fiber side. Good luck in the quarter, guys.

(OPERATOR INSTRUCTIONS) Mark Wilde, Deutsche Bank.

I had a couple of question. One, can you just talk about the incremental mill volume? I've always thought of you as good mill operators, so to get this much incremental volume is kind of surprising. Can you maintain this?

We hope so. We need the tons. One thing I should point out do you that I did mention on last quarter's earnings release calls, and that was that we did some work at both Counce and Valdosta that would allow us to run faster on lightweights. It doesn't help us very much on heavyweights because we run into drying limitations, but obviously a lightweight sheet is easier to dry than a heavyweight sheet. But, this has helped our productivity, the fact that we can run about 300 feet faster on Valdosta and on Counce number 1 on the lighter weight grades.

And as you know, the industry has continued to move to lighter weight grades and this has helped our efficiency in the mill on lightweight grades. And of course the key to when you're running 300 feet faster you don't want the sheet to break. The dynamics are tougher; it's harder to run at higher speeds. But the work that we did at the mills appears to be pretty successful, very minimum capital and that's also helped our productivity. The other thing it's allowed us to do is optimize the system and we now have more capacity to run 35 pound which means we can put more heavyweights at Valdosta and we can get a few extra tons out that way. And that certainly has contributed to our productivity.

Paul, if you just looked at a market that could remain tight here for a couple of years, what kind of creep do you think you can engineer in the Company on the mill side over the next couple years?

In our case not much. The last few changes gives us some incremental tons, again only on lightweights. But we could get another maybe 50,000 tons over the next 3 years out of our system per year, I'd say that would be a real, real rough guess, without any major project, but we have no major projects planned.

And any likelihood that you'd bring that machine back at Filer City if the market remained (indiscernible)?

Our biggest -- as you know, Mark, the short answer to that is no. The reason for that is we're long and medium, and if you look at our balance we've got a little more medium in relation to liner board. So we've spent our money on productivity improvements on the liner board side, as I mentioned Counce and Valdosta. We're in good shape on medium capacity.

Can I just move to what you're suggesting about the third quarter which seems to me to imply sort of a pre-tax gain of about $17 or $18 million. And just sort of back of the enveloping it, if you have a lot of the benefit of that first price hike, you get any kind of benefit from the second one, and then you've got incremental volume, it seems like you might even be able to do a little bit better than that. Am I missing something?

I don't know if you're missing something, but let me just say it another way. We made 13 cents in the second quarter, a penny of that is from Southern Timber Venture and that comes and goes. That's about our third -- we got some dividends from there, we sold just a small stock (indiscernible). If you take that penny out, you're at 12 and we're saying 23 to 24, so you're looking at an 11 or 12 cents or so improvement. And I will tell you most of that improvement is in price and a little bit in volume. Not much in volume, most in price. Cost saying about the same. And again, Bill Sweeney talked a little bit about the pace, we're more optimistic for the reasons Bill gave, but this is a hard thing to handicap. And anyway that's our best shot at it right now. And obviously there's some uncertainty around that number.

And then finally if I can. Would Bill expect the sequential gain in the fourth quarter in terms of price just assuming sort of a normal roll through to be about the same as it is in the third quarter?

I'll let Bill answer that for you.

No, Mark, I think the first increase is done. We just have some left that will roll out. The second increase will -- most of it will be in that quarter, some of it will be in the fourth-quarter but not as much as second versus -- third versus second.

Absolutely. We generally can get price increases in 3 quarters, as Bill's saying; a little will drag into that fourth quarter. But the predominance will be in the third quarter. But on average we won't get a full quarter's worth because if you got a third, a third, a third in each month that only averages two-thirds for the quarter. But you will have gotten most of it by the end of that third month.

I guess I'm just trying to think about sort of quarter average prices, third quarter over second and then fourth quarter over third.

I understand.

Thank you very much.

Mark Connelly, Credit Suisse First Boston.

Just a couple of follow-up things. I wonder, Paul, if you or Bill could comment on any particular areas of strength or weakness in your own customer order book over the last quarter or what you're seeing now? And second, leaving aside the inventory issue, we're hearing a lot about transportation costs and transportation backups, are you seeing that easing at this point as well?

On the first question, our strength is across the board. There is some geographic -- the east is, if you look at the FBA numbers it'd give you that idea, and we follow that basic trend. But we've got a lot of customers and I would say it's uniform. Transportation, your second question, is a problem, especially in some parts of the country and if that problem is exacerbated by having low inventories, one of the things that helped us was this 4th of July weekend because we planned around it, we put a lot of paper in box cars and got it through our plants in rail. That not only saves some freight, it dealt with the problem -- trucking gets very difficult over some of these big holidays because people want to get home and if they don't have a back haul --. But the whole transportation system -- things as the economy gets busy it's a problem and it still remains a problem.

Okay. And one last question. This small Southern Timber deal, is there any more of that likely to be coming?

We have no plans for that. When we sold our woodlands we decided that we would take a position in Southern Timber Venture. We owned about a third of it. And from time to time we do plan to monetize that interest down from the third. I don't know if we're going to end up at 20 percent or where we're going to end up. We'd like to hold a piece of that because they are a big supplier to us and we like to participate on the board, but we certainly don't need 33 1/3 percent to do that. So we have no definite plans, occasionally an opportunity comes along to monetize a little piece of that and that's what we did.

Cool.

George Staphos, Banc of America Securities.

If we could relate that 578,000 tons of production, again you're producing more lighter weight, what would that number have looked like if this was two years ago and do you think that your share of the lighter weights is higher proportionally than your share overall within the sector?

No, I don't think our share -- I think our share is fairly typical of the industry. I don't think -- the whole industry has really had a shift and the primary shift has been from 42 pound down to 35. And today we make twice as much 35 pound as we do 42 pound. And so that's been a very, very big shift. We used to consider about 550,000 tons to be our capacity for a quarter with a higher basis weight. And if you take our 578, add 12,000 ton of downtime, we're up about 30,000 tons for the quarter. If you annualize that that would be 120,000 tons. But again, it's hard to annualize that because this is a record quarter, everything went well. Our brakes were down, our efficiency was very high, it's yet to be seen if we can sustain that. But 550 would have been the number.

I want to piggyback on one of Mark's questions back a couple questions ago. Again, the third quarter, most of that you see coming from pricing, just a little bit from volume if I got you right.

If I predict the volume right. I obviously missed the volume last but at least I missed -- I was low, it was higher.

Well, that's kind of the question here. You're carrying in so far early in the quarter at 6 percent or 9 percent volume growth. Is that what is baked into your guidance right now or are you looking at a lower volume number over the course of the quarter?

Where we're coming out is basically what we think our volume for this -- it depends. It's a complicated question. The reason it's complicated, you have to look at last year's quarter that you're comparing it with. Our volume in July last year wasn't that good. And so we expect to beat that by more than we beat our August volume last year because we had a very strong August. You just can't look at each month and say that's the number for the quarter. We look at the prior year comparable and that's how we come up with our numbers.

Understood. Last question in terms of, again, utilizing the cash position. If I heard you right you had 90 million on the books?

91, yes.

You've always talked about it being -- next increase in the dividend being meaningful and sustainable. It looks like you've got the pricing, you've got the earnings momentum, you've certainly got the cash position. What else in your mind as you think about it would be important in understanding whether that next dividend increase, whether it comes, would be sustainable?

Well, that's obviously the most difficult part of it. Again, as you said, we think when we have excess cash the best use for it is to increase our dividend and it's got to be sustainable and meaningful. And the sustainable part is the difficult part because of the cyclicality of this business. And that's why on the first dividend we had roughly 150 million on the balance sheet, so no matter what happened we knew that thing was sustainable for at least 2, 2.5 years going forward. And that entered into our thinking. If we can accumulate cash and fill from a fairly conservative bias so that we've got enough cash to declare this dividend including what could happen from a cyclicality point of view. And when we get to that point and we feel that we have this sustainability, that's when we pick a number and that's when we do something. And of course, when you say you've got the price, we haven't put it through yet. Bill Sweeney and his gang are working hard to get it through in the third quarter. So we're confident but we don't want to put the cart before the horse.

Paul, is the burn rate on the cash kind of the way we should think about the next increase, if it comes, going forward we should think about it again being 2 to 3 years worth of cash to do it or is that due (multiple speakers)?

No. Again, you've got to look at business conditions at the time, how do you feel about supply/demand. Quite frankly supply/demand is looking good. If we go back when we did the first dividend, business wasn't that hot at that time as you recall. And we were hoping it would pick up and it did. So I would say we might have been a little more -- we were a little more conservative at that point in the cycle than we might be now as we see this economy evolve. So there's no answer. We look at the business conditions at the time and that really dictates more than anything else how much conservatism you build in.

Thanks. Good luck in the quarter, guys.

Thank you.

(OPERATOR INSTRUCTIONS) Peter Ruschmeier, Lehman Brothers.

I wanted to ask you a question just to clarify your strong volumes and the impact of Tomahawk and Filer City. The 12,000 tons of outage, can you help us to better understand the P&L impact? Is that something that you amortize that expense or is it expensed in the quarter taken?

Both is the answer, but I'm going to let Rick give you the details.

The specific expenditures that are made during the outage for the work that's done is amortized over the course of the year equally each month. The specific operating inefficiencies that occur as a result of the lost tons, they're incurred within the quarter. So that's the two things that happen.

Okay. And any quantification of what that impact of lost tons is in the quarter?

Yes, we can work that out and give you the numbers. It's not to hard to calculate. We don't have it in front of us. Hold on and we'll give it to you in a second. Rick's banging it around. A cent and a half.

And again, just to clarify, your expectation at this point in time with the improved seasonality and lack of downtime would be that you could be hitting numbers close to 590,000 tons in the third quarter?

Well, I'm not going to do that far. If you take our all-time record, it's just like the guy that ran a 10-100, there's no guarantee he's going to run the 10-100 at the next race. He's capable of it, but being capable of it and doing it -- would I be happy if we made 590? I'd be happy if we could equal our all-time best next quarter. But there's no guarantee we're going to do that.

Fair enough. Just another point on the cost side equation, you've addressed energy, fiber, transportation. Can you touch on chemical costs that you've seen so far on your expectations?

Not a lot of variability. It's under the radar screen. My radar screen is about half a cent when something is moving more than half a cent I will look at it. But it didn't get under the radar screen.

Okay. And coming back I guess to the productivity issue of shifting from 42 pound to 35 pound, any way to help us better understand the difference between the strong market we're and a weak market, what that swing factor can be in either tons or profit contribution? It seems like it's a material number, I'm just trying to get my hands around what you can do at the extremes in terms of getting more tons out from that component alone.

I don't think the 35 ton relates to the type of market you're in. It's just basically where the design community is going. People are trying to do more with less. That's the nature of business. If you're talking about, hey, your machines can make more tons if you run 42 and 35 and maybe you won't offer as much 35, you'll just offer 30 or 42. We don't do that because we're 85 percent integrated so we give our box plants what they need. So that leaves 15 percent of the 15 percent we are bias toward heavyweights and super heavyweights in the export market. So we don't sell too much 35 to the export market at all. So from our point of view it really doesn't affect us.

Okay. Last question if I could. I think you've been running pretty consistently at 39 percent book tax rate. Can you help us understand, is that still good guidance going forward and what's your outlook for cash tax rate?

Well, 39 to 40 -- probably 39.5 is the best effective tax rate going forward and the cash taxes are going to remain low. I'd say they're going to be below -- 10 percent is what we've always said. And of course that will go up over time.

And it'll go up as our income goes up. But Rick's saying 10 percent roughly this year gets you in the ballpark.

Very good. Thank you very much.

Frank Dunau, Adage Capital.

Just swinging back to George Staphos' question on the dividend. If you continue generating cash and your balance sheet now is pretty good and this (indiscernible) is about where you want; are there any other alternative uses for cash other than raising the dividend?

Well, we need some cash for acquisitions, as we said. But again, that's small compared to making an acquisition on the mill side of the business which we have no plans. But if this thing goes as -- the economy continues to pick up and it goes like a lot of the analysts suspect, than we do start to generate more cash and sustainability enters into it in terms of you just can't raise it based on peak earnings. What is the second most likely use of the cash? Again, we like the tax treatment on dividends, we also like the tax treatment on capital gains. Share buyback would be second in the pecking order.

Just because you get sort of at the end of the year and it -- let me word it differently. You pay 3 quarters now, I think a 15 cent dividend, another quarter is 15 percent in a year and then a lot of companies raise it after a year. Would that be a reasonable timetable?

I'm really not going to comment on that. Reasonable is a broad word.

Okay, thanks.

Andrew Fineman, Iridian.

Can you tell me how much your depreciation and amortization was for the quarter?

39 million.

And you gave the long-term debt 695, was there any in the current liabilities? Any short-term debt or current portion of long-term debt that would be in addition to that?

No, we always include, when we give long-term debt of 695, Andy, we include our asset securitization revolver in that number because we expect to keep it over time even though it shows up as a current maturity at 109 million. So it's included in that number so there is no other.

Thank you for that. And just checking, you didn't buyback any stock during the quarter did you?

No, we did not.

Okay, those were all my questions. Thanks a lot.

Jim Dunn, Banc of America Securities.

Can you update us on where conversations are with the rating agencies right now and specifically with Moody's? What's the expectation in terms of getting you up to investment-grade?

We haven't had any conversations with Moody's; quite honestly it hasn't been on our radar screen to deal with. Generally we talk to the rating agencies once a year. We talked to them last July, of course, with the refinancing. We're going to talk to S&P in August just to give them an annual update and we'll probably speak to Moody's sometime before the end of the year just to give them an update on the Company.

They know our numbers and our numbers are, if you compare them with comparable risk, obviously I think most people conclude -- they don't understand why Moody's is lower than S&P. And those numbers -- they know them and, as Rick says, we do meet with them once a year, but they're going to do what they're going to do.

Just out of curiosity, are there specific targets that, if they lay it out to you, could get you to investment-grade since obviously debt reduction is no longer a priority?

No.

Okay, fair enough.

Gentlemen, I'm showing no further questions at this time.

I would like to thank you for participating in the call and am looking forward to talking to you next quarter. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may now disconnect. Have a great day.