Packaging Corp of America (PKG) 2004 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Packaging Corporation of America's third-quarter earnings release conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. If anyone should require assistance during the conference, press star then zero on your touch-tone telephone. I would now like to introduce your host for today's conference, Mr. Stecko. Sir, you may begin.

Thank you, and good morning and welcome to the Packaging Corporation of America's third-quarter earnings release conference call. With me today on the call as usual is Rick West, our Chief Financial Officer; Bill Sweeney, who runs our corrugated products business; and Mark Kowlzan, who runs the containerboard mill system. And as the operator said, at the end of this call, as usual, we will be glad to take your questions.

Let me get right into it. Today we're reporting third-quarter earnings of $26 million or 24 cents a share. This compares to a third-quarter 2003 loss of 32 million or 31 cents a share, which included a $47 million or 45 cents a share after-tax charge resulting from our debt refinancing. Excluding this refinancing charge adjusted net income in the third quarter of 2003 was 14 million or 14 cents a share. Net sales for the third quarter of this year were $499 million. That's up 12.2% compared to last year's third quarter of 445 million. And net income for the first nine months of 2004 was 32 million or 30 cents a share compared to 2003, adjusted net income as detailed in our press release of 32 million or 30 cents a share, which excludes the refinancing charge. Net sales for the first five months of 2004 were $1.4 billion, compared to $1.3 billion in 2003.

Now I'd like to take a look at operations starting with volume. Our corrugated products volume remains strong and our mills ran extremely well in the third quarter, setting an all-time quarterly mill production record. On the price front, we were able to complete the vast majority of our July 1 box increase, price increase, by the end of the third quarter. Higher pricing along with higher sales volume for both containerboard and corrugated products improved our earnings by about 17 cents a share compared to last year's third quarter. Costs were up in some areas, including fiber, transportation, labor and benefits, and we were impacted by weather-driven business disruptions, namely the hurricanes, which increased our costs and reduced our sales volume at several locations.

All of these items taken together reduced our earnings by about 7 cents per share during the third quarter compared last year. With that overview let me now get into some more specific details. PCA's corrugated products volume remained strong and was up 5.3% compared to last year's third quarter, and year-to -date our corrugated products volume is up 7.2%. I should point out that our reported volume for 2004 does include Acorn Packaging which we acquired in mid-February of this year. Acorn's shipments improved third-quarter volume by 1.7%. As reported by the fiber box association last Friday, the industry also had a good third quarter, up 3.2% compared to last year, and up 3.6 year to date.

Industry operating grades remained high at 98.3% in September, and the industry containerboard level stood at only 2.516 million tons at the end of September. And that's the second lowest September inventory in the past 10 years. In the third quarter, PCA's containerboard mills produced 595,000 tons or about 6,467 tons per day. And that's an all-time production record for us, both in terms of total tons produced and tons per day. This level of production was very critical for us. And it allowed us to meet strong demand and replenish to some extent our very low inventories. During the quarter, we were able to increase our inventories by about 7,000 tons. While this is a little less than we had hoped for, it's a good start and will help eliminate some of the inefficiencies associated with running at lower than optimum containerboard inventories. Looking at pricing, our corrugated pricing products improve the significantly in the third quarter, with the vast majority of our July 1 box price increase implemented during the quarter.

As I indicated on last quarter's conference call, it's been our experience that the first increase and usually the last price increase in a series of increases are the most difficult. And the ones in between are easier. And that proves to be the case again with our July 1 price increase.

On the cost side, some of our manufacturing costs were higher than last year's third quarter, namely higher prices for fiber, energy, and transportation. Recycled fiber prices rose almost 30% compared to the third quarter of last year and wood fiber prices were up about 3%. With that big of an increase in recycled fiber cost, we are much more fortunate than many of our competitors in that we have a relatively low reliance on recycled fiber. We utilized only about 100,000 tons of purchased recycled fiber in the 595,000 tons of containerboard that we produced in the quarter. This is about 17%. But even with this relatively low usage, higher recycled fiber costs did reduce our earnings by almost two cents a share compared to last year. PCA's energy prices, particularly natural gas, were also higher, up about 10%, compared to the third quarter of 2003; and our fuel oil costs were up, as well, about 5%. Since about 75% of the purchased fuel usage in our mill is bark and coal, our energy costs for the quarter were only up about one cent a share compared to last year. I should add that our mill and corrugated products transportation costs were also up an average of about 10%, which is a large increase, reflecting higher fuel surcharges by our carriers. Hurricane-driven adverse weather conditions during the quarter shut down or disrupted shipping at several of our corrugated products plants. Fortunately, however, neither of our Valdosta or Counce mills were impacted operationally by the hurricanes; although we could not get all of the rail cars we needed at our mills because of weather-related disruptions in the rail system.

Labor and benefit-related costs were also up over last year's third quarter, as a result of normal year-over-year increases and higher workman's compensation costs and higher medical costs. Turning next to the balance sheet and cash utilization. Our September-ending debt was $695 million of which about 80% is fixed at an average interest rate of 4.9%. The interest rate on all of our debt averaged 4.3% for the quarter. Cash generated from operations through the quarter was strong at $57 million and capital expenditures were $21 million. Leaving cash available for dividends and other uses of $36 million. Our ending cash balance was $119 million, up 22 million from the end of the second quarter. That concludes the review of operations. And now next I'd like to take a look ahead to the fourth quarter.

Our business has remained strong as we've moved into October. We do, however, expect normal seasonal decreases in volume compared to the third quarter with December being the seasonably slowest month of the year, as I think most of you know. I should also point out that there are three less shipping days in the fourth quarter compared to the third; but more importantly, both Christmas and New Year's Day fall on a Saturday this year. This means that customers could have a tendency to stop taking shipments a little earlier each week, ahead of the holiday, making actual shipping days effectively even a little lower. So there's some unpredictability here. The volume here, however, doesn't go away, but simply gets pushed into January if this should occur.

In corrugated products for the fourth quarter, we should see a little more pricing improvement. And we will also realize a full quarter's benefit of the third-quarter price increases that were implemented. Conversely, our product mix is not as rich in the fourth quarter as in the third as the high-end graphics display business tails off in the second half of the fourth quarter and does not really rebound until after the first of the year.

Our costs are also normally higher in the fourth quarter, with colder weather and higher energy usage. Wood prices also tend to pick up a bit as weather worsens and logging conditions become a little more difficult. Considering all of these items, we would expect our fourth-quarter earnings to be about 21 cents per share.

With that, we're now happy to entertain any questions; but I must remind you, as always, that some of the statement we have made on this call constitute forward-looking statements. These statements were based on current expectations of the company and involve inherent risk and uncertainties including those identified as risk factors in our annual report on Form 10-K on file with the S.E.C. Actual results could differ materially from those expressed in these forward-looking statements.

With that operator, I would ask you to open the lines and we will take some calls.

Thank you, sir. Ladies and gentlemen, if you have a question at this time, please press the one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key.

Our first question comes from George Staphos from Bank of America.

Thank you. Hi, Paul. Good morning.

Good morning, George.

Couple quick questions. First of all, as we went into the third quarter and as you gave the guidance for last quarter, you stated that most of the sequential increase in earnings per share that we would see would come from pricing, much less so from volume. Knowing that you're not necessarily going to get into the details of what you got on pricing, did you hit your objectives in both in terms of volume and pricing for the quarter? Or were you ahead of plan or below plan?

I would say that we were a touch ahead of plan on pricing, and on plan on volume.

All right. So then when we look at your earnings which basically came down right on your guidance, it's the incremental costs in the quarter that prevented you from doing frankly better than what you had guided to. Is that --

Yeah. I'd say exactly what you said, but I would give you a little more specifics. Volume was about where we thought it would be. And we're pleased with that. As I said, our experience has always been that when the second and third, etc., price increases are easier than the first and the last in a series; and actually this went in even a little easier than we anticipated. So we did a little better on pricing than we originally thought. The negative on the cost side that we missed was the hurricanes. And you know, that's very difficult to estimate exactly what it is because there's direct costs. You know, we had a planned flood and all of the sheet stock was destroyed. That you can quantify what it costs you. We had our Winterhaven plant in Florida had no electricity for three or four days, it was down. We can quantify that. But there are other things that are more difficult to quantify. And the best we can do, and I -- I'm going to make -- this is only an estimate, it costs us somewhere between a penny and a penny and a half a share is what we think the hurricane did to our business. And some of that is an estimate, not an actual, hard number.

So you know, we probably did maybe 2 cents better on the price, and the hurricane cost us. And the other thing that we underestimated a little bit was the transportation expense. You know, we did not think we were going to see $50 oil. We didn't think the fuel cost would go up as high as they are. So the things we missed, as we did a little better on price in a hurricane and higher fuel cost, transportation surcharges if you will, kind of balanced that and we got it to 24-cent number.

The transportation and fuel, what was that, another maybe couple of pennies?

You're in the ballpark, yeah. A little over a penny.

All right. You know, I guess as we look out into the fourth quarter, yes, seasonably you do see a reduction in your mix. Is there any deeper drop in mix this year's -- in terms of this year's sequential change versus prior years; or was it normal seasonality that you see at this juncture?

Actually, there is a little deeper drop this year than the other years. But not that much. We acquired Acorn Packaging in February. Their product mix is virtually 100% high-end graphics. And so we simply just have more high-end graphics as a result of that acquisition. I should add we're very pleased with that acquisition. It's done everything we thought it would, but it is a seasonal business, and its business drops off in the fourth quarter and then picks up the first of the year. So to answer your question, yeah, little bit more. But not dramatically different.

Okay. I'll turn it over to the other guys. Thanks, Paul.

Thank you.

Our next question comes from Chip Dillon from Solomon, Smith, Barney.

Yes. Good morning, Paul.

Thanks, Chip.

When does -- as you look out at your order book and everything and as we saw even in this quarter, it looks like your comparisons are getting harder. Is there sort of a wall that you see hitting, you know, sometime I guess in the next three to six months in terms of the year-over-year comparisons, or on the other hand does it just feel like you're going to be able to continue to show pretty solid, you know, 3%-ish-type gains year over year as far out as you can see?

That's a very good question, Chip. I think the answer is I don't know if it's a wall, but it's at least a hill that we've got to climb. Let me just give you some numbers on that regard. The economy really took off as far as we're concerned starting in October of last year. And just to give you some number, our last year's October was up 8.1% over the previous year. Surprising. November was up 7.7%, that was terrific. And December was up an unbelievable 7%. And December's a month that, you know, usually is not very good. So for the fourth quarter, we've got pretty tough comparables. I will tell you starting in October -- and I only have data for nine days -- we are a little bit ahead of October of last year. and I'm pretty pleased with that because, you know, October of last year was the all-time record for us. We've got to see if we can sustain that improvement in November and December. But absolutely, for us the comparables get more difficult because of last fall was just a terrific time, and we have tough comparables. So we do have a little hill to climb there. Can we beat last year? A lot will depend on how the economy goes. And obviously I don't have the answer to that. So far through the first nine days of October, we're little ahead of last year.

Okay. And now, when you look at the view toward the fourth quarter, it looks like if you start with the first quarter and say, okay, if it weren't for the hurricanes, I think you mentioned that was about a penny, you would have had maybe 25 cents. So you obviously are going to get a few more pennies to the positive from pricing as you mentioned that would continue to help you. Then you're going to lose -- I mean, let's just pick a guess, you know, seven or eight cents due to seasonality and the cost pressures. How would you break down whatever that number is, 6-, 7-, 8-cent swing to the negative in the fourth quarter to the third? How does that break down between seasonality and volumes on one hand, and costs that are going up on the other?

Yeah. I'll give you probably three buckets. The other thing -- we'll get more price in the fourth quarter. You know, we passed the vast majority through, so we'll get a little more price in October. And then we have a few very few contracts that are annually priced. We don't have very many of them because we're not really big in -- in those big national [inaudible] pieces of business. So we will get a little price also January 1. But where we're going to get the most price is the fact that the average price will be higher in the fourth quarter than the third simply because we were moving up each month in the third quarter and the -- you know, the average price will be based on the highest price of the third quarter. So the average pricing actually gets us more than any future pass-on.

So we would, in very rough numbers, we would expect pricing to be worth -- rough number -- a nickel to us. Price should be a nickel better in the fourth quarter. Kind of a rough number. Volume and mix together will be minus a nickel. And you know, I don't know if it's 3 1/2 price, 1 1/2 mix, but it's in that ballpark. And then typically, our costs are up three cents, two to three cent in the fourth quarter. And that's what we think they'll be this time. So that nets to about down 3 and that get you to 21. So basically the price we're going to get is a little higher than you estimated. It's going to be about a nickel. But we're going to give that back in volume and mix. And we're going to probably pick up three cents in higher cost is probably a pretty good summary.

Now, as you look at the first quarter, and look at normal seasonal trends, if we assume, you know, that there's no change in price and no change in costs, what would typically happen to your volume and mix in the first quarter?

Well, the biggest problem we have is, you know, our two best quarters are the second and third. And that's driven by the fact that in the first quarter is the quarter that we take our annual shutdowns. And that affects the first quarter. And of course the fourth quarter is not as seasonably as strong as the third, primarily because of December. October and November are good months. So that's probably the best way that I can answer that, you know, that the first quarter and the fourth are the weakest and the second and the third are the strongest. And I think if you just simply go back and look at our record the last four and five years, you will see that pattern is pretty evident. And I think you can figure out what you're trying to figure out from that.

Got you. Thank you very much, Paul.

Our next question comes from Mark Weintraub from Buckingham Research.

Thank you. Paul, you mentioned you had $36 million of excess cash for dividends and other uses. Any update on your thoughts of what you will be doing, assuming that markets stay strong as they are and you continue to be generating this type of excess cash going forward?

Yeah. That's something, of course, that we watch; and what I said on the last call, we wanted to get a couple of quarters of good performance, have a pretty good idea what our cash flow was going to be, where the economy was going. You know, we're up to 120 million of cash on a balance sheet. That's roughly equivalent to two years' worth of current dividend on the balance sheet. The fourth quarter also looks for a lot of reasons like it's going to be a good cash quarter for us. And we should end the year at a position that we can then begin to plan what we want to do with the dividend. We'll have a better handle on what cash we have, a better handle on where the economy is going. And as I said, the difficult part in picking a dividend in this industry is sustainability. And we want to be pretty sure that the number we pick is meaningful and sustainable. And, you know, we tend to be conservative. And when we announced the first dividend, we had a fair amount of cash on the balance sheet. So no matter what happened, we predicted that -- we protected that dividend going forward. And not had a change. And we're in the middle that process now. And, you know, we've had one, what I call big quarter; that was this quarter, we made 24 cents. We'll be in the 20's next quarter if our projection holds, which I hope it will. And that will put us in, I think, in a better position to make the decision that you'd like to hear about today that I'm not prepared to make today.

Okay. And if you could just remind us, is there a certain level of cash you like to have reflective of what the dividend is? You mentioned that you are about two times where dividend is -- two years' worth. Do you want to have two years' worth of what the prospective dividend would be or is it not that tightly linked? How should one think of about that part of the equation?

There's a lot of ways you can think about that. And a lot of it depends on the economy. Obviously if you think the economy is going to be good and strong, you don't need as much protection as if you think it's going to be average or declining. And so there's no simple answer to that. And so the things that we're going to watch is how the economy progresses in the fourth quarter. Hey, we have an election, that could have an effect on a lot of things. And we'll have a little more cash. And so when you put that all together, sometimes you need more, sometimes you need less. And it depends on what your outlook for the business is. So that's probably as definitive as I can get on that question.

Sure. And in terms of your comment that it should be a good cash quarter, I assume that is above and beyond what you do from an earnings perspective. Is that working capital related --

Yes, working capital will be a pretty good contributor next quarter to that number.

Is there a seasonal average of what you generally will --

Yeah, I'm not going to get into that because it's early in the quarter. We have some estimates. We just think it's going to be a good cash quarter and one of the adders this quarter will be working capital.

Okay. Great. Thank you.

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

Hi, it's actually Sam McGovern on Mark's behalf. In response to one of the questions that George had asked you, you mentioned that you had seen volumes so far up a little bit in October.

Over last year.

Yeah, right. Over last year.

Not up a little, up a lot. But just a little over last year.

Right. Is that taking into account the acquisition of Acorn or --

Yes. Yes. Even with Acorn, we're up a touch.

Great. So therefore, this volume mix that you're saying down five cents, the vast majority of that is obviously going to be mixed as opposed to volumes --

No, no. What I -- that volume is compared to the third quarter, not compared to last year.

Right. But I believe volumes were up in the fourth quarter versus third quarter last year?

They were pretty close.

Okay.

They were pretty close. You know, roughly 6926 versus 7082. So pretty close.

Okay. And then the other question -- in terms of end markets, I was wondering if you were seeing any signs of a slowdown in any of your end markets so far?

Yeah. One end market we expect to see a little slowdown in, as a matter of fact, that slowdown could continue into next year. And again, that's hurricane-related in Florida. And I think it might be a good time to let me take -- my voice get a rest. I'm going to let Bill Sweeney, who runs our corrugated products business, tell you a little bit about Florida and some of the effects of the hurricanes as we look forward. Bill?

Well, the Florida market represents about 3% of the national total. And according to pulp and paper, the produce crop is off about 20%. And we expect that to be the same somewhat next year. That would mean that the -- the total U.S. market would be reduced by close to 1/2 of 1%. But I think an offset to that would be the rebuilding in that the economy, affected by all of the insurance money that's going to go in there. So I would think that number would be a lot -- that 1/2 of 1% to the nation would be the top number; it would probably be more like .2% or .3%.

Yeah, thank you. So I guess that's the explanation. But, you know, the short answer to that is yeah, we think the produce market is going to be reduced because of the Florida crop situation. But as Bill said, there will probably be some rebuilding. That will probably help some things. And that's hard to quantify. That's the only one I really know about.

Okay. And in terms of box prices, how much are they up roughly versus the quarter average?

Yeah. One of the things that we don't do is we only talk box prices to our customers.

Okay.

And so that's just something that we have never gotten into historically.

All right. Well, that's the end of my question.

Thank you.

Our next question comes Eddings Tibalt (ph) from Morgan Stanley.

Good morning, gentlemen.

Good morning, Eddings.

A couple of questions. You said you got the vast majority of the price increase through, you know, it was at 95%. Are you optimistic, is the last percentage of that price increase in the fourth quarter, is that more of a timing issue, or is that a resistance at passing the full price increase through?

It's a timing issue. Some people are on quarterly pricing. And which means that the quarter starts October 1. So the people that had that type of contract had protection until, you know, the 1st of October. Strictly timing. And as I said on an earlier call that we have a few accounts, not many, very few, that actually were on annual pricing. You know, that benefits you when prices are going down; it hurts you when prices are going up. We have a few of those, not many. And so we'll get a little bit of pricing January 1. But we're done, and, you know, the vast majority means that almost all of the price increase; and, you know, everybody -- you can put your own guess on that, but it's primarily timing related to contractual agreements.

Okay. And Paul, you've talked, you know, this quarter about the importance of actually building up inventories in the system. You know, where do you sit relative to where you want to be in terms of inventories? You know, where, if ideally how many more tons would you have in the system, and would it be possible to quantify the impact that that has had over the last couple quarters?

Yeah. I'll start with the last question first. We think it's probably cost us the last two quarters, a penny, penny and a half a quarter just because of inefficiencies in the system. You know, we've run low on certain grades. We've had to pay premium price to get paper there. Even in some instances we had to go out and buy sheets to fulfill demand because we simply could not get the right grade of paper there. And I will tell you the rail system has exacerbated the situation. So we were trying to pick up somewhere between 10- and 15,000 tons of inventory going into October. And that would have put us right where I think we would have eliminated all inefficiencies. We got about 7,000 tons in October. I think we're going to be okay. October is a big month. And it's going to also depend on how strong October remains compared to our forecast. And November and December the same way. So, you know, we didn't get all the way there, but we got a good part of the way there. So I think any cost impact is going to be less than a half a cent a share as opposed to a penny and a half going forward. And again, that's just an estimate.

Okay. And that would be felt more -- would it be fair to say that impact would be larger in the second and third quarters because of the seasonal nature of the business?

Absolutely. Absolutely. We get by November, we'll be all right.

Okay. And does that mean you'll probably be, you know, on a production basis, you'll be running more full than perhaps you were a year ago in an effort to try and rebuild those inventories?

Yeah. We're -- Mr. Kohl's sitting in the meeting here. He's got to run well in October especially. And through the first -- you know, till Thanksgiving in November because we need the paper. We get a little respite from there until the end of the year, you know, unless December is a year like it was the last year. But at least for the next 6, 7 weeks, we've got to run real well to keep up.

When you look historically, just again at your production of containerboard, you know, sequentially down about 20,000 tons on average, is that primarily due to -- I mean, you take your down time in the first quarter from a maintenance perspective, is that primarily due to just the vacation schedule and the holiday schedule?

You mean the fourth quarter being sequentially down from the third?

Yes.

Well, what we do is we -- historically we run to demand. And if our demand is down, we slow the machines down and simply produce less. Now, last year, you know, demand just took off; and we got caught a little bit by that, and that's how we got into the year with very, very low inventories. We want to make sure we exit the year with adequate inventory. So one of the plusses we do have is that we can run pretty hard because we still have to build some inventory.

Got it. Thanks very much. Good luck in the quarter.

Thank you.

We have a follow-up question from George Staphos from Bank of America Securities.

Hey, Paul. Just getting at costs sequentially per ton fourth quarter versus us third quarter. I understand, you know, the discussion on fiber and energy sequentially, but when we do just some rough calculations with, you know, the numbers that we can get from your press releases, and just look at, you know, the difference between revenue and EBITDA and divided by your tonnage, sequentially, when you look at third quarter, the fourth quarter, you tend to see a drop in that number. So is that driven by the reduction in some of the variable costs also associated with the display business that you see drop off in 4Q, or what else goes on behind that?

Now, I'm not sure I understand your question, George. I apologize. Can you tell me what you're getting at again?

Well, trying to take a rough swath at cash costs, given the material that you will provide in your press releases. And if I look at the difference between revenue and cash profit, giving me a rough [profit per] cash costs and then look at your tonnage. There seems to be -- if I've done my numbers right -- you know, a drop-off in 4Q versus 3Q. So is that related also to the additional expense you peal off as display business drops seasonally, or some other costs that drop off?

One of the things you got is some of the weather costs offset and mix would be two of the things you got to take into account.

Okay. Well, we've got the mix on the revenue side. I'll ask that question offline. Thanks again.

Okay. And I'll help you as much as I can.

Very good.

Our next question comes from Mark Wilde from Deutsche Bank.

Good morning, Paul.

Good morning, Mark.

I wondered if you can just help us understand the -- some of the other expenses in the quarter. They were up pretty significantly. So that had an effect, just sequentially. If I look at SG&A, corporate overhead in that other expense line line.

What I would say in that regard is that compared last year, you know, our pricing and volume was up 17 cents, and then we had other costs up about 7 as an offset. So that made up 10. You follow me? Price and volume compared to last year up 17; other costs that you are referring to, I mean -- price -- let me say it again. Price and volume contributed 17 cents to earnings, more than last year. And other costs reduced earnings by 7 cents. So we netted up 10. If you look at those 7 cents, the hurricane, as I said, hurricanes somewhere between a penny and a penny and a half; transportation, little over a penny. And then we had the area of what I call salary benefits and all of those things. Workman's comp was up this year. One of the things we have been doing is trying to work aggressively to close out some cases. That increases in some costs; hopefully down the road, that will pay off. We had normal salary and benefit increases compared to last year. In addition, our recycled fiber cost was up a couple of cents from last year.

Yeah, I guess what I was getting at, Paul, is if you just look at like SG&A, corporate overhead and other expenses, just on a quarter-to-quarter basis, so second quarter to third quarter, the net swing there was $7.7 million, just going from the second quarter to the third quarter; and I just was looking for a little clarification on what was in there.

Yeah, sure. In that area, we had really two big items. Is workman's comp in that? Yeah, workman's comp is in that, and that's a little over a penny. In addition, the way we track -- the way we accrue for bonuses is a function of what we made in the previous quarter. For example, in the first quarter our earnings were negative; we had no bonus accrual. In the second quarter, we had earnings of 13 cents. And in the fourth -- in the third quarter, we had earnings at 24 cents. So about a penny and a half, 2 cents of that was increased bonus accrual based on the performance in that quarter. In addition in that number is, we had an ST -- Southern Timber Venture dividend in the second quarter of a penny, and we had no STV dividend in the third quarter. And they would be the three biggest items.

Okay. And then another question since Mark Kowlzan is there. I'm just curious. It seems like it was a great quarter from a mill-operating standpoint. And you're almost at 2.4 million tons a year now on a run rate at the third-quarter level. I wonder how much more there is. I wonder if you could talk about any plans to do any tweaking or restarting; and then maybe you can also just give us a sense of, you know, if the contribution from an incremental ton of mill volume right now, would that be sort of a 2-, $250 million-a-ton number?

Well, let me comment. We don't really have any plans to add incremental volume except, as I said on an earlier call, at Counce and at Valdosta. We're running more lightweights. And we have made some changes to our equipment to be able to run more efficiently on lightweights. And that process continues. At our Counce mill, we run basically the No. 2 machine now, 100% on 35 pound. That's it. We don't even make 42 pound on that machine. And we use a lot of 35 pound; that's become a more popular grade than 42 pound. We can't run 35 pound effectively on No. 2 machine there. We get down to 42 -- excuse me, we can't effectively run 35 pound on No. 1 machine. We get down to 42 pound, and that's all we can do. We will be doing some things to the machine either in December or probably most likely in our annual shutdown in March to be able to run 35 pound effectively on the No. 1 machine at Counce. So other than that, we don't have any plans to add incremental capacity. And that's probably the best way I can answer that question.

As we see mill volumes tweak up as sort of, you know, the contribution from that, if I use the number of $250 at current pricing, is that a pretty good number?

That number depends on the mill; it depends on the price; it depends on a lot of things. Sometimes it's a good number. Sometimes it's not.

Okay. And then, finally, any sense just with other prices or the costs of other packaging materials moving up, things like plastics, whether that changes your view of, you know, what box prices might be able to do over time?

You know, I think it does have an effect because, you know, by far in my opinion the main determinate to box pricing is supply and demand. That has for the past 50 years set the box prices. But there was always a threat and there always is a threat that if prices go too high, you've got to worry about competing materials. And from that point of view, we have certainly seen much, much higher increases in other commodities than containerboard. Our containerboard prices are up about, say, in linerboard about 30% or so this year. I mean, that's nothing compared where steel and some of the plastic resins have gone. So I think what's happened, even though our pricing's up, in relative to other materials, we're more competitive even at higher prices than we were before this price increase series started. Now, how long that will last, who knows? But in the end, I think, you know, you always get the calls about, hey, can, you know, energy prices are going up, can you pass that through? And my answer's always been more than anything else, supply/demand determines what cost you can get for a lot of these products. That's the best I can do on that question, Mark.

All right. Very good. Thanks.

Thank you.

Our next question comes from Joshua Zaret from Oppenheimer.

Thank you. Three quick questions, and I just wanted to confirm what you answered in Chip's question when you were talking about the sequential change and costs being up 2 to 3 cents, used the word "typical." Is the word "typical" the right word?

Yeah, typical is the right word. Typically every fourth quarter, because of energy usage and colder weather, wooding costs, that's what it goes up. The reason I say typical is that, hey, if there was an explosion in the rise of recycled fiber cost, energy, it could be more, or if OCC went the other way it could be less, that type of thing. But for us, it's typically, say, 3 cents higher in the third -- higher in the fourth than in the third. So there's nothing hidden in that word "typical."

Great. Then the second question. Linerboard -- containerboard price is up $95 a ton. Is your target to pass that fully on -- I mean, is your goal to pass that fully on to the box price, or is it going to be something more on the order, your objective is $80, $85, something of that magnitude?

Our objective is to pass it all through. And we think the chances of that are pretty good.

Great. And then this last question -- and this is an industry question. September, corrugated box shipments. Two regions were very unusually weak. The west was down 3%, when it's been up closer to 4%; and the north central was only up 1%, well below what it's been tracking all year. Anything unusual there, anything that you're worried about, being sustainable? Can you sort of give us an idea of what caused that weakness?

You know, that's a very good observation, Josh. When I first saw the box numbers, you know, my gut feel was that -- and it shows that I was not right -- that demands in September would be up, you know, 2, 2.2, 2.3%; it was only up 1.6. When I looked at the numbers I only really saw one weak region. Everything was positive. A couple regions were up 3%, 3.5%. And then the west was down 3%. Just as you pointed out. And when you get into it and look at it, the west is composed of about five regions. The biggest region is L.A. That's 1/3 of the total west. And the second biggest region in the west is San Francisco area. That's 1/3. Okay? So between Frisco and L.A., that's 2/3 of the west. And then you've got Phoenix in there, Arizona; you've got Oregon, Washington. L.A. was down .9%. And the shocker was San Francisco, down 16.5%. And I don't have a good explanation for San Francisco other than last year it was up a lot, and this is a very, very difficult comparison for that region, but that doesn't even explain it. Phoenix was up 19%. So the answer to your question is -- San Francisco -- California would have been, I think, flat if you do -- almost flat -- I mean the west would have been almost flat if San Francisco had been flat. But it wasn't. And I don't have a good explanation for why San Francisco area was so negative other than it's a difficult year-over-year comparison or there's a mistake in the data, which I don't have any reason to believe there's something there. So I don't have a good answer to your question, but I have looked into it.

Thank you very much.

We have a follow-up question from Mark Weintraub from Buckingham Research.

Thank you. Paul, would you be able to contrast the third quarter versus the second quarter using that bucket methodology, price, volume, mix, and costs?

Not off the top of my head. I really haven't looked back, Mark, into the second quarter for this meeting. If you want to get back to me and that's public information, I'll be sure -- I'll be more than happy to share it with you. I just didn't prepare to look back into the second quarter, and I don't have all of those numbers confined to memory.

Okay. Thank you.

Again, ladies and gentlemen, if you have a question at this time, please press the one key on your touch-tone telephone. Our next question comes from Frank Dano (ph) from Atage Capital.

I have just a question on the fourth quarter again. Am I correct in assuming that the guidance assumes that the fourth quarter will be a normal fourth quarter and not like one of those strong fourth quarters you had last year?

The guidance is -- this is what we think our volume will be. I had not given a volume projection.

Okay, okay. I mean, I remember historically your fourth quarter is this big swing number because there's one or two weeks in December you don't know what actually happens. Is that still the case?

The last two weeks in December are the most variable; that is correct.

Okay. And early on the [inaudible] in dividend, you made a comment you wanted dividend to be both meaningful and sustainable, which can be at odds with each other.

Let's put it -- they can be if you're not careful.

Right. I guess, is sustainable more important than meaningful?

Both important. It's like asking do I like my son Todd or Brian better? I like them both equally.

Okay, thanks.

Our next question comes from Jennifer Truinsky (ph) from Barclays Capital.

Hi, it's actually Mark Tibble with Barclays. We're just wondering if you could talk about your goals for debt reduction over the next couple of quarters here.

We have no goals for debt reduction over the next couple of quarters. And the reason for that is our debt is very low cost. We view that debt really as an asset to have on our balance sheet debt that's fixed term and relatively low cost. We think we have better uses for the cash than paying down debt. Increasing the dividend would be a better use. And if our cash flow got real strong, even buying back shares, we think, would be a better use. As well as some acquisitions. So we real don't have any debt reduction goals. Our interest expense is only $7.5 million a quarter. So if I reduced our debt by 1/3, that would only reduce expenses by $2.5 million a quarter, pretax. So we're pretty happy where we are with the debt.

Thank you.

Our next question comes from Andrew Finnman from Aridient.

Thank you. You just touched on buying back stock, and I was wondering if you have bought any stock? And if you had any goals for whether you would this year or not.

No, we have not purchased any stock this year at all. A number of quarters. I don't know if it's 2, 3 or 4. But a number of quarters, Andy. And my comment on buying back stock is related to how strong cash flow can get. You know, if the economy progresses, if another price increase would occur in the industry, our cash flow does get pretty hefty. And again, back to Mr. Dano's question on meaningful and sustainable, I mean, you can't set a dividend based on your max cash flow. You got to, again, balance meaningful with sustainability. And the question is, what do you do with the extra cash if it exists? And I was simply trying to make the point that if it exists -- existed and we didn't want to put it into dividends, we would see share buy-back a better use that cash than reducing the debt. And that's all I was -- only point I was trying to make.

Okay. Thank you.

We have no goals for the fourth quarter in that regard.

Thanks a lot, Paul.

Sure, thank you, Andy.

We have a follow-up question from Jennifer Truinsky from Barclay's Capital.

I just wanted to follow up on the levering up question that Mark Tibble asked. Would you be willing to lever up the balance sheet at all just given that that reduction is no longer a priority?

We have no plans to lever up the balance sheet.

And in addition to that, Moody's currently has you rated below investment grade, just given the 42% stake by Madison Dearborne Partners. I was wondering if you'd had any conversations with the agency lately and whether or not achieving an investment grade rating at Moody's is a priority for you.

No. We have not had any discussions other than the normal discussions we had with rating agencies on a periodic basis. But nothing in particular to that. We don't see that as a priority to get accomplished. If you look at our statistics and you look at our ratios, a debt to EBITDA and the other credit indices, you know, we should be much higher. Moody has their reasons. You enunciated one of them. They historically have a problem when you have a financial partner. As you know, we were acquired by Madison Dearborne and then went public. But we're happy with our debt. We're happy with our credit profiles, Standard & Poor's has us two levels higher than them. And, you know, we don't think there's a lot we can do. We just keep adding cash to the balance sheet. And they may notice it one of these days.

Thank you very much.

Thank you.

Again, ladies and gentlemen, if you have a question at this time, please press the one key on your touch-tone telephone. I'm showing no questions at this time, sir.

Okay. Listen, I'd like to thank everybody for participating, and for the few of you that would like some data, get a hold of me. As long as it's public information I'm more than happy to share it with you. I look forward to talking to you in January. Thank you very much.

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