Packaging Corp of America (PKG) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Packaging Corporation of America 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. (OPERATOR INSTRUCTIONS). As a reminder, ladies and gentlemen, this program is being recorded.

I would now like to introduce your host for today's program, Mr. Paul Stecko, Chairman and CEO of Packaging Corporation of America. Please go ahead, sir.

Thank you. Good morning and welcome to Packaging Corporation of America's third-quarter earnings release conference call. With me on the call today as usual is Rick West, our CFO; Bill Sweeney, who runs the corrugated products business; and Mark Kowlzan, who runs our containerboard mill system. I want to thank you for participating in the call. And as the moderator just said, when we get done, we'll as always be glad to take any of your questions.

So let me get right to it. Today, we are reporting third-quarter earnings of $11 million or $0.10 a share, and this compares to a third-quarter 2004 earnings of 25 million or $0.23 a share. Third-quarter 2005 results does include an after-tax charge of $1 million or $0.01 a share for the closure of one of our corrugated products plants and other severance cost. Net sales for the third quarter were 512 million, and that compares to last year's third quarter of 499 million[e1].

Net income for the first 9 months of 2005 was $51 million or $0.47 a share, and that compares to 2004 net income of 30 million or $0.28 a share. I should remind you that net income for the first 9 months of this year does include income of $0.06 a share from a Southern Timber venture dividend, which we received in the second quarter. Net sales for the first 9 months of 2005 were $1.5 billion, and that compares to $1.4 billion in 2004.

The $0.13-per-share reduction in earnings compared to last year's third quarter was primarily the result of higher transportation costs, which reduced earnings by $0.04 a share; lower pricing, which also reduced earnings by $0.04 a share; higher energy cost, higher wood cost, and higher wages and benefits, which each reduced earnings by $0.02 a share; and the corrugated products plant closure, which reduced earnings by $0.01 a share. These earning reduction items were partially offset by higher containerboard and corrugated products volume, which together improved earnings by $0.02 a share.

Looking now at each segment of our operations, our corrugated product shipments remain strong, up a solid 5.4% over last year's third quarter, and this includes 1.8% growth from our April 2005 acquisition of Midland Container Corporation. Year to date, shipments are up 4.6% and 3.5% excluding Midland Container. And as a comparison, the FBA reported yesterday that industry demand was up 0.8% of a percent in September, and year-to-date industry demand is down 1.4%.

Noteworthy is the fact that industry inventories dropped by 164,000 tons in September, which is the largest September inventory decline ever. Over the last 25 years, the average industry inventory decline in September was about 33,000 tons. Industry inventories now stand at 2.369 million tons, which is the lowest September inventory level since 1994. I should also note that our growth in corrugated products has been strong and consistent this entire year, with every month in volume up over the previous year and with 6 of the 9 months above 5% in growth. So we've had a good year growth-wise.

Our paper mill productivity was outstanding in the third quarter. We were able to produce 601,000 tons; that's up 1% compared to last year's third quarter. And this is especially noteworthy considering that we ran at reduced speeds at times to minimize natural gas consumption in our mills as well as to deal with the transportation difficulties that were associated with the aftermath of the hurricanes.

With our strong box volume, we had to reduce our domestic and export sales of containerboard compared to last year's third quarter by 12,000 tons. And in spite of that, our containerboard inventories dropped 3,000 tons compared to the end of the second quarter. This strong corrugated products growth has put pressure on our containerboard inventories.

In the fourth quarter with colder weather and the spike-up in natural gas prices, we will be especially challenged. And it doesn't make economic sense for us to sustain warmer weather mill production rates if natural gas as fuel is required to do so.

Moving to cost, like most companies, we were impacted by higher fuel costs. And for us, the biggest impact was in transportation cost, which I said earlier lowered earnings by $0.04 a share. And to give you some numbers, each quarter on average, we ship about 600,000 tons of containerboard from our mills and roughly 450,000 tons of corrugated boxes from our box plants. Our mill shipments are about two-thirds rail, one-third truck, while our box plants ship essentially 100% by truck. Our transportation cost on average for our mills and box plants combined is up 16% or $7 million since the third quarter of last year and up 27% or $11 million over the 2003 average cost per ton shipped, and that is a lot of money.

Moving to energy, we worked very hard to lower the impact of higher energy costs by lowering our natural gas usage in the third quarter to only 5% of our total mill purchased fuels -- and kept fuel oil at about 14% of our total purchased fuels. Much lower-cost coal and purchased bark made up the remaining 81% of our mill purchased fuels during the quarter. As a result, our energy cost in the mills rose only the equivalent of $0.01 a share; a remarkable number since our mills consume 90% of our purchased fuels.

In our corrugated products plants however, we do use 100% natural gas and fuel oil, as virtually all box plants do. Fortunately, our box plants consume only about 10% as much energy as our mills. And as a result of higher natural gas and oil prices, our box plant energy cost also rose an amount equivalent to $0.01 per share.

Finally, with regard to cost, wage and benefit cost increases[e2], reduced earnings by about $0.02 a share compared to last year's third quarter, reflecting primarily normal year-over-year increases and some increased headcount to handle the additional volume as we continue to grow.

On the revenue side of the equation, we did experience lower containerboard and corrugated products pricing compared to last year's third quarter as a result of the July and August reductions in containerboard prices reported in the trade publications. This cost us about $0.04 a share. Finally, increased volume contributed about $0.02 a share in earnings improvement.

During the quarter, we did notify employees and customers at one of our corrugated products plants that the plant would be closed in October once we transitioned our customers to other PCA plants in the area. After-tax charges related to the closure and other severance charges in the third quarter totaled about $1 million or $0.01 a share. Fourth-quarter charges related to the plant closure are expected to be about 0.5% per share.

We ended the quarter with $184 million in cash; that's up 19 million from the end of the second quarter. Our debt remained at $695 million with no borrowings under our $100 million revolving credit facility. Capital expenditures for the quarter were $30 million and 99 million for the first 9 months of 2005.

To sum up the quarter, we consider it to be a very good quarter operationally both in our box plants and our mills. Lower prices related to the trade publication changes and higher fuel related costs were the obvious negatives. Higher purchased fuel cost will be more than impact (ph) in the fourth quarter, as the price of natural gas has almost doubled since the hurricanes. Our biggest challenge will be to continue to look for ways to minimize the use of higher-priced natural gas, especially during the winter months, while at the same time producing enough containerboard to support our demand.

Looking ahead to the fourth quarter, higher costs for natural gas, fuel oil and transportation fuel surcharges will lower fourth-quarter earnings compared to the third quarter. And with colder weather, fuel consumption also increases. All in all, we expect that energy and energy-related costs, and I include transportation in this number, could reduce earnings by as much as $0.07 to $0.08 per share compared to the third quarter, and that's the biggest area of cost increase.

Also, corrugated products volume and mill production are expected to be seasonally lower in the fourth quarter compared to the third, related primarily to the normal business slowdown over the Christmas holiday period, plus the fact that there are three less corrugated products shipping days in this year's fourth quarter. We do expect lower prices compared to the third quarter as a result of containerboard price decreases that were reported by the trade publications both in July and in August. However, we expect pricing to begin to improve as the result of our October 1 containerboard price increase. However, most of this increase will not be fully realized until the first quarter of 2006 when the pass-through to boxes is completed.

When you consider all these items, we currently expect that earnings in the fourth quarter should be about a loss of $0.02 per share, driven by a large part in energy-related items.

With that, we'd be happy to entertain any questions. But as usual, I have to remind you that some statements we've made on this call constitute forward-looking statements. These statements are based on current expectations of the Company and involve inherent risk, 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 business statements.

With that, I would ask the operator to open up the call. And we would be glad to try to answer any of your questions. Thank you very much.

(OPERATOR INSTRUCTIONS). Mark Weintraub, Buckingham Research.

Paul, I wanted to first just delve a little more into the impact of these natural gas price increases. I know you don't you use a tremendous amount. But it sounds like even in your system, you're seeing the way it can impact the cost curve, steepening it quite dramatically. Is there any way you can give us a sense of what it is doing to cash costs at facilities, which are being powered by natural gas?

Yes, some strange things happen when the cost of a material doubles. And the best way -- the best example that I can give you is at our Filer City Mill. And again, as you said, we don't use much gas. Our first line of defense against high gas costs is not to use gas if possible. And we got our consumption down to 5% only in the third quarter, which is pretty low.

But at Filer City, we make roughly 1,100 tons a day there. And in the third quarter, we virtually made it essentially with burning coal. And rough number, our energy cost at Filer City -- and we consider Filer City a first-quartile mill cost-wise -- a little under $30 a ton would be the energy cost; that is on running coal.

Now what is going to happen to us at Filer City and at our other mills is winter weather. You've got to heat the buildings. And a rough, rough number, it takes 20 tons of water to make a ton of paper, and all that water has to be heated. So you got energy to heat colder water. And as a result, your steam load will probably increase, again at Filer City maybe 50,000 pounds an hour. So you got a choice -- you could sustain production at say 1,100 tons, but you've got to use gas probably on the last 75 tons, natural gas, because our coal boilers max out if we try to make more steam. Or you can make 75 tons less and use coal. When you look at the numbers, it is astounding. On that last 75 tons, our energy cost goes from less than $30 a ton to almost 200 -- almost a seven-fold increase. And why is that? Because gas costs seven times more than coal roughly.

So I guarantee you that with $200 energy costs, we have -- our cash cost is higher than the selling price. On the first 1,150 tons, we are in good shape. So that's a long-winded answer, but I think it illustrates my point. And what gas costs can easily do if you are paying current market price, $13, $14 per million BTUs is, it has the ability to take a first quartile mill to a fourth quartile mill in one fell swoop because of that large increase.

Now there are ways to mitigate that; if you have the ability to switch to other fuels. But on the margin, where you have a choice of fuels, those last tons as they are burned on gas, it's hard for me to believe that they would not be above cash cost in virtually any mill around.

So, Paul, would that be reflective in some of these recycle mills that are 100% nat gas or close to it? Is there any reason why they would have very different set-up than in Filer City on the incremental?

Not unless they have long-term contracts for gas at better prices, etc. But no, if you were paying $4 for gas a few years ago, and you are paying $16 now, your energy costs are going up 4x. There's no way I know of to mitigate that unless you've got long-term contract protection, unless you have hedged, unless you've done other things that mitigate what you are paying. But if that is your gas cost, that is what is going to happen to you.

And just if I could come back to -- you talked about transportation and energy adding $0.07 to $0.08 of cost fourth quarter versus third quarter. Is there any way you can translate for us what freight per ton might be higher in 4Q than 3Q?

When we look at it, I think that when we looked at the $0.07 cost in energy, about $0.05 of that was related to -- well, $0.02 of that was related to the mills in terms of just higher consumption, etc. The other $0.05 was about $0.03 in energy for corrugated because they have to burn gas and coal, and $0.02 was in transportation.

Mark Connelly, Credit Suisse First Boston.

Paul, just a couple of things. In the past year, you have spent some time and money on both energy projects and maybe a little further back, shifting your fiber mix. Are those things that you're spending money on now or planning to in the next 12 months? Is there anything specific that is on the horizon for you?

Yes, we have a few projects. But the good news is -- not that we knew this was going to happen, trust me, we did not know -- but we had funded two projects last year to improve the burning efficiency on our bark boilers at Valdosta. And basically, we spent about 4 or $5 million with new air-feed systems, etc. And we are now getting as a result of that project about 70,000 pounds an hour more steam out of the boiler using the same amount of fuel. And on a $5 million investment, we will probably get a $10 million-a-year return. So our timing on that was pretty darn good or pretty darn lucky probably is the truth because we did not see this spike up in energy cost.

So we have in our mills been funding cost reduction projects for the last few years. We've got a few more -- a few things we can do. Because when you get energy prices this high, almost any project works. And our philosophy will continue to be that we basically only fund cost-reduction projects in the mills. And in the box plants, we shift our focus -- we really don't care that much about cost-reduction projects. We fund projects -- will enable us to grow.

Although I will say at these gas prices, we are looking at some things we can do in our box plants to be able to burn more oil and less natural gas. And we will fund some projects to do so, and that may add a little bit of incremental spending over the next 2, 3 months to get in a position to try to further isolate ourselves from natural gas price volatility.

And on the fiber side, Paul, is there anything going on competitively in the markets where you are sourcing fiber that might cause you to start thinking differently about what you are using or projects there?

No, I think the only thing that is going on in the fiber business is the fuel costs are going up. Fiber is up a little bit in cost; wood fiber is up. And that is driven exclusively by rises in fuel costs. As a matter of fact, stumpage, if anything, is down a touch. But that has been more than offset by the rise in diesel oil prices.

So no, we like our strategy on the fiber side of the business. We are flexible. We can use any form of fiber, depending on where the price goes. And at Valdosta today, we run 100% pine because that's the optimum mix, and we have the capabilities to do that.

George Staphos, Banc of America Securities.

Congratulations to you in the quarter in terms of energy performance. Paul, I had a question in terms of -- on the one hand, inventory is already being down at rather tight levels. Presumably as you explained, other producers are also looking at whether to produce that marginal ton or not. Do you think that some customers might have difficulty getting containerboard or getting packaging from you over the next couple of quarters? Or, said differently, do you think you will be able to meet your commitments?

Well, we think we will be able to meet our commitments. We know we do have a bellows, if you will. We can cut back on export shipments, and that's where we would naturally look to go. But as I have told Mark Kowlzan and he agrees with me, we want our cake and we want to eat it too. We want to try to figure out how to run our mills using no natural gas; that is our goal -- no natural gas in the fourth quarter and make the tonnage.

And there's some ways you can do it. I told him, just run all quarter with no breaks on any paper machine; that will work. Now, no one has ever done that, and it is probably impossible. But if you can operate really well, that's the best way to save energy consumption. Because when you have a paper machine break, for example, you are not making paper but you are consuming almost as much energy. And so we are trying to find those sweet spots that protect energy, and that becomes the guiding strategy.

We are going to use as little natural gas as possible. But we still want to make the tons that we need. Let's shift our operational strategy to be able to do that, take risks in areas that protect energy. But you may have risks in other areas that are much less costly to take.

And you know, for Mark, it is an exciting time. This is where you get a chance to show how good you are. And we think our mill system operators are the best in the industry. And they are center stage this quarter. Because as you said, we are going to support our customers. But we do have an out. And the out is I would have to pull some tons out of export. And I don't want to do that either because we've got some good long-term export customers. So we are going to earn our keep this quarter in the mills. And it is going to be interesting.

Paul, rough math, a couple quick questions. Your inventories were down what -- a couple, 3% in the quarter? Would that be fair?

3,000 tons, that's probably 1.5%.

And could you give us, indexing perhaps or however you care to talk about it -- and maybe the answer is you wouldn't -- if you look at your run rate pricing coming out of the quarter relative to your average, could you give us a flavor what it looked like?

Yes, our pricing has started to deteriorate with the publications changes in July and August. Pricing fell a little bit each month. Again, we are affected by it, but we don't have as much big pieces of national account business that are tied to it as probably some others. We expect that pricing to continue -- in boxes, to continue to decrease a little bit in October, as people that are tied to the publications get the price change.

And then with the price increase we announced and at least one of the publications has picked that up that I know of, we expect pricing to start to improve in November and December. But when you take the entire quarter, pricing will be down compared to the third quarter. And then of course, we get it all in the first quarter of next year, as that price increase goes through to boxes.

That is exactly what I wanted. Thanks, Paul, good luck in the quarter.

Chip Dillon, Citigroup.

Listen, question for you. You obviously thought quite a bit about the fourth quarter before you told us what you thought the number would look like. There's been a lot of changes in the last few days with, as you mentioned, the inventory numbers that were good. And I think it surprised a lot of people that Pulp & Paper Week before those numbers came out reflected the price increase.

Do you think -- I can see the $0.07 to $0.08 from energy. But do you think that with pricing probably looking maybe just down a little bit quarter versus quarter that you're still going to lose money? In other words, did you determine that number before we had confirmation from Pulp & Paper Week, or was that afterwards?

Well, quite frankly, we make decisions based on how we see the business. We thought the price would be picked up by the publications based on our experience in the marketplace with our customers. And so, it was not a surprise to us that the price went up. But as you say, you never know.

So we had the right pricing information. We think we've got a fair handle on where the price will be in the fourth quarter. I think the bigger variable, Chip, in the fourth quarter for us is where we struggled to -- when you do an estimate, you always struggle with something; it is volume. Because December is always a crapshoot. You don't know how strong or weak it will be. Last December, we were up almost 10% so that is astounding. So we have got a tough comparable. And so you have got to guess on volume. And our forecast early in the quarter is that volume will be less than the third quarter. The million dollar question is, how much?

And I have to tell you that the first 8 days of October have been very, very good -- our bookings are 8% better than last year, and our billings are 6% better. But 8 days a season does not make. And so it is still going to come down to December. We put our best pencil on December, and we came up where we came up. And maybe there's a little upside to that, but it's far too early to say that.

And then when you look at the marketplace, you mentioned the strength in early October. What is happening down in the Gulf Coast region in terms of your customers and the demand levels there? I would imagine that a lot of it was completely shut off. And is any of that coming back? And do you think that's going to depress the box shipment numbers nationally in October?

No, I think it's probably going to help them, and I will tell you why I say that. First of all, we do not have a lot on the Gulf Coast. Are you getting an echo, Chip? Can you hear me all right?

Yes, you are coming through fine.

Okay, I was picking up an echo here. We've got a plant; we have got a Midland Container plant in Jackson, Mississippi; that is the closest thing we've got to the Gulf Coast. We've got a plant in Donna, Texas, which is on the Texas Gulf Coast, but that is a sheet plant.

So we are not big players down there. But a couple things have happened. The cut-up this quarter in Louisiana is up 5%. So the hurricane -- they've had a strong -- I mean the month, excuse me, the month was up 5% in Louisiana. So probably box volume will start to bounce back there after the hurricane, and I don't think that would be negative. I think that will probably -- as people rebuild in that area and do things, box demand will probably improve. So I don't see that being a negative, and I think the September numbers indicate that.

Rich Schneider, UBS.

Paul, I was wondering, in terms of the numbers that were released yesterday, there was a big jump in the West; it was up 9.2% -- haven't seen a number like that in quite a while. Could you shed some light on this?

I asked Bill Sweeney the same question yesterday because I had the same reaction to you. Numbers haven't been that good since Hector was a pup. But Bill, why don't you tell him what you told me yesterday?

Well, we are really a player in Southern California, and our volume was incredibly high there. But I would attribute it mainly to produce being stronger than it was last year. It's really nothing else that you can explain that kind of a jump.

Yes, and the fact that the comparable last year was pretty bad. So you're comparing it again to a bad year, last year, is the other thing that helps that number.

Are some of your customers starting to feel tightness either getting board or even getting boxes, particularly with the inventories down this low? And have order files stretched out whatever way you want to look at it?

With us, I will tell you we have gotten more inquiries than normal from people that don't regularly buy paper from us. And our first -- our philosophy is that if you are a buyer from PCA, we will do our best to supply you and protect you.

And so I would say spot activity has definitely picked up; people looking for paper. And we really don't have that to offer. And that brings up an interesting point also. One of the trade publications did increase the price $30. It is going to be interesting to see what happens with regard to spot pricing. Will that be reflected in the trade publications? When pricing deteriorated, the reason that was given is that there's some low-priced spot tons out there, and that depressed the average price for the market.

Today, caustic soda is a good example; we needed an extra truckload or two. We do not use a lot of caustic, but we use some. And the spot price for caustic is at least $100 higher than the contract price.

We will see what the trade publications do going forward. If spot prices took price down, will higher spot prices take it up in the future? And that is something that has always confounded me, how spot prices could only take prices down in a bad market and a soft market and never take it up in a tight market.

So that bears watching over the next couple months.

And then in terms of the export market, that trade publication that lifted prices talked about prices going up in the export market, and I was wondering what your experience is. On the flipside, when they took prices down, they were talking about the weakness in the export market.

Well, I think was the available -– if the avail -- we have fairly low inventories. And if paper remains tight, obviously I've just said on this call that the only place I have to go to get more tons for our own box plants and our own domestic customers is to pull back on export. And the law of supply and demand works in export too. If there is less paper available for the export market, you would expect the price to go up if the laws of supply and demand continued to operate, as they have done in the past. So that would be my expectation.

Edings Thibault, Morgan Stanley.

Paul, a question if you will, as we look ahead to next year and I know you're probably loath to do that until you survive the fourth quarter, but what kind of cost price increases should we be expecting in terms of some of these alternative fuels, particularly on the coal side?

Well you know, our philosophy -- let me just give a little speech ahead of that question. Our philosophy is that we don't think we are smart enough to predict where a lot of commodity prices are going -- coal, gas, etc. So we try to design flexibility in our processes so whatever happens, we've positioned ourselves competitively.

But I think with regard to gas, if you read what's going to happen in terms of winter demand for gas and the fact that the Gulf is -- in terms of a distribution system -- in somewhat disarray, we certainly feel that natural gas prices could increase through the winter. And this could be a 6-month catch-up on getting inventories in natural gas back at more reasonable levels.

I think coal prices will continue to increase at a much, much slower rate however. Most of our coal contracts are 3 years, and we roll them over 1 year at a time. As one rolls off, one rolls in. We continue to negotiate with our coal suppliers to make sure that we're pleased at the way this thing progresses in the future. But I think coal will go up a little bit.

But again, I think the challenge -- and oil is anybody's guess. But I think the situation that is still most volatile is with regard to natural gas because of the situation on the Gulf Coast.

And just one other question -- you talked about the impact of energy in that fourth quarter. Can you talk about how much of that $0.07 to $0.08 would be seasonal, and how much of it is due to this natural gas situation?

I would say of the $0.07 to $0.08, $0.02 of it would be seasonal. No matter what the price of fuel would be, you're just going to use that much more energy. (multiple speakers) would be price related.

And you also have some seasonal mix shifts that go on in the fourth quarter as well.

Yes, our mix is not as rich in the end of the fourth quarter as it is the rest of the year. We are fairly big players in the high-end graphics, point-of-purchase, point-of-sale display segment of the business that revolves a lot about -- along the Christmas season. And you're usually done making that stuff by the third week in November. So from then to the middle of January, our mix is not as rich as it is the rest of the year, and that does affect us too.

And then one final I guess modeling question. Any other shifts that we should expect as we bridge the Company into the first quarter of the year?

No, I think we've got enough already, don't you?

Well hopefully, some of these things will start to ease by then.

You and I are hoping for the same thing.

You're right; exactly. Thanks very much and great quarter, guys.

Mark Wilde, Deutsche Bank.

Paul, I wondered if you could talk a little bit about just fiber costs kind of region by region. I think that the Southern pulpwood costs have come down for you over the last few years, probably helped mills like Valdosta. But I'm also hearing -- some of the guys up in the Great Lakes are talking about significant increases in pulpwood costs in some parts of that area. You don't seem to have seen that yet. Can you talk about that?

Mark, I mentioned earlier in the call that for us, stumpages actually came down a little bit, and the fuel surcharge on transportation is what has driven our wood cost up. And wood costs for us this quarter were up almost $0.02. And region by region, at Valdosta, we enjoyed pretty good wood costs because that's a part of the world that a lot of mills closed down in. And you've seen the maps; that's where the older mills were. And as the industry has consolidated and rationalized capacity, there's been a lot of closure in that area.

Hardwood prices rose, so we shift to Valdosta 100% pine. So our stumpage cost, if anything, they're down a touch. But they are paying the same thing for gasoline there as we are in Tomahawk. So the fuel portion has gone up.

And actually in our Northern mills, Filer City is a good example, we had the mill about 120 miles south of us close down, the Menasha mill. So there's more wood available in that wood drain, and that has helped. But again, it is independent of fuel cost. And the same thing in Tomahawk. It is fuel-driven, not stumpage-driven.

And then finally, if that Muskegon Mill that Sappi has downsized, will that affect fiber costs around Filer City?

Absolutely.

(OPERATOR INSTRUCTIONS). Richard Skidmore, Goldman Sachs.

Paul, just a quick question for you. As you think about cash flow, your dividend and your propensity for growth buying box plants, can you talk about how you are thinking about those going forward?

Well, I'm thinking about them really the way we have. And that is, when we look at excess cash flow, where do we want it to go? And we want it to obviously go first to the dividend, secondly to support growth. And anything beyond that, our probably the third-best use for it would be share buyback.

For the quarter, our cash flow did increase. We're up about, what[e3]? 18 million in free cash. We expect our free cash to go up also in the fourth quarter over the third quarter. But until we get back to levels of profitability that we enjoyed the end of last year, I have not really been thinking of any extra uses of cash flow. We want to try to get our profitability back to where we think it needs to be first.

And the CapEx number is still good, about 110 million for '05?

We did fund a few (technical difficulty) funding, as I said earlier on the call, we are looking at doing some things in the box plants to try to get not as totally dependent on natural gas. I'm probably going to fund some projects, a few extra projects between now and the end of the year. So it wouldn't surprise me if that 110 number jumps to 115, 117 kind of number. The returns on these projects are huge because of the price of natural gas. And it gives us flexibility, which is another important criteria. Thanks!

Chip Dillon, Citigroup.

Paul, you mentioned mill closures helping the fiber situation. There is a mill I think in Michigan that Menasha shut down, what? 2 months ago. Do you have any insights as to whether that mill is likely to restart, especially if prices are up?

I have no insights into whether that mill is going to start up or not. I know it is down because we're getting some wood from that area. But in terms of that, that is the extent of my knowledge.

Richard Diamond, Inwood Capital Partners.

Paul, just to follow-up on the dividend, I know you thought long and hard before raising the dividend. There seems to be some concern in the marketplace that given the lack of profitability, you're thinking of reducing it. How should we think about your commitment to the dividend as it stands now? And I have a second question.

Yes, it's the same as when we announced the increase of dividend. And that said that we think we are a fairly conservative company. We were criticized for not raising it quicker. And my answer to that was because we are conservative. We started with about $200 million of free cash on the balance sheet because you never know where the business is going. And we wanted that security in case business conditions weren't as good as we thought. And we have hit a tough patch price-wise in the industry. But as I reported, our free cash flow at the end of the -- excess cash on a balance sheet or free cash on a balance sheet was $186 million, so we've only eaten into 14 million from where we started.

And obviously, if business stayed bad forever, it would be hard to support any dividend. But hopefully with the price increase that we're implementing now and an improvement in business conditions, we can move on and talk about what you do with excess cash as opposed to how secure is the dividend. That's about the only thing that I can tell you. It was our intent to pick a dividend that was sustainable. We built in some safety measure in terms of keeping excess cash around. And what's going to happen over the next 2, 3, 4 years, obviously is going to be a function of how good business is. And that's probably the best answer that I can give you at this point.

And that brings up a second question, which is -- looking at 2006, given tight supply and it seems like fairly good demand, is it fair to say that as a betting man, one would believe that there are going to be more price increases than the $30 that we have just seen? And if there are, when is the next time that prices could be raised?

Well, I'm not a betting man; although, I do bet a little with some of my compadres here on college football, and I'm not doing real well. But we only give a forecast one quarter in advance. And I'm not going to speculate beyond that. I mean the fundamentals I think I have talked about in detail. I think you've expressed them fairly well. But you are in the business of making bets. I'm in the business of trying to deliver results. So if you want to bet me on the next Penn State game, give me a call. But that's about all I am going to say.

How about another way of asking you the same question?

You are going to get the same answer.

Yes, but if market conditions warrant it, when is the soonest that we can see additional price increases?

I am not going to speculate on when the next price increase would be, and let me tell you why. This industry has always been under considerable antitrust scrutiny. Someone could perceive that as signaling. And there is no way, shape or form I would ever do anything like that on this call or in any other venue. So the answer is, I have no answer.

Chris Chun, Deutsche Bank.

Paul, related to the dividend question, I think is your cash flow position. Because it seems to me that in this quarter, you paid out quite a bit more in dividends than you earned in net income. And yet, you were able to hold debt flat and build like $19 million in cash. Can you walk us through the major elements of that?

Well, the major element is -- this is Rick West. We were positive on working capital; we picked up 31 million in working capital in the third quarter, and that's normally what we do. We have positive working capital the latter two quarters of the year; that's our best quarters for working capital. So that was the major reason that we were able to increase the cash.

And that is the pattern every year.

And then was there a big difference in terms of book taxes and cash taxes?

No.

And then obviously, there's going to be a difference between depreciation and CapEx. But other than that, is there anything else that we should be thinking of?

Not as it relates to the third or fourth-quarter results.

(OPERATOR INSTRUCTIONS). Anna Stromberg (ph), NXS (ph) Capital Management.

Just wanted to clarify something, on your corrugated box plants, what was the percentage of oil you said that the plants were using?

Well, our box plants burn only natural gas and oil. In other words, they can't burn coal. They cannot burn bark. They cannot burn other types of byproduct fuels. You know, some people burn used tires, etc. They only burn natural gas. So the answer is 100%.

100% of natural gas --

No and oil. And it is skewed towards -- it is probably 85/15 -- 85% natural gas, 15% oil.

Frank Dunau, Adage Capital.

Why don't you burn your competitors' boxes?

You know, I'll tell you something; that is not as dumb as it sounds. Because right now, the BTU value, the cost per million BTUs if you burned old corrugated containers, it is about $7.50 a million BTUs; gas is at $13. So strange world when you can burn boxes' OCC as fuel value.

That's interesting. Am I imagining it, or it seems to me that when you dropped the price -- or when the publications dropped the price, your prices seem to go down pretty more rapidly to reflect the drop in price than they do when the publication has a rise in price. They seem to go down more quickly than they go up, based upon the published price. Am I just--?

(multiple speakers) I don't think so. What happens is, it all depends on when. Because a lot of prices will index at the beginning of a quarter, so it determines -- when it is done, you could get a little lucky or unlucky, depending on that when the change is made. Because the first of the quarter, most things change on a first quarter as opposed to the second month of the quarter, etc. But I haven't seen anything that is -- at least in our business that is too nonlinear in that regard.

And one last question -- you are talking about maybe getting inquiries from some of your competitors or some other customers you usually don't get inquiries from. Is it possible that some of your competitors -- I mean, if you've got a natural gas problem, they got to have huge problems. Have you heard anything about some of them sending out rumblings that maybe they are going to have just shut the stuff down; they cannot begin to make the stuff?

No, I haven't heard any rumblings. I obviously don't talk to them about that. But what I am simply saying is that we only use -- well, typically, we run it with about 7, 8% natural gas. We got it down to 5 in the third quarter. We're not going to get to 0. But if we could get to 2.5%, that would be terrific. But if you look at some of the published public data that some of these consulting firms put on about -- this is what every mill in the industry burns; this is their guess at cash cost. You do get enlightened when you see how dependent some people are on natural gas. What the ramifications are for them, only they know.

(OPERATOR INSTRUCTIONS). Anna Stromberg, NXS Capital Managed Markets (ph).

One more question that I wanted to ask is, what is the lead-time for the December orders that you get? How many I guess weeks or months in advance do you know what the orders will be?

Orders for paper or boxes?

Boxes.

Typically, boxes are 1 day, 2 days, 3 days kind of time frame. Boxes take up a lot of space. So people don't have in their plants normally a lot of space to store them. So it's a 1, 2, 3-day kind of thing.

And for paper?

Paper is once a month, usually a month, 6 weeks out.

But have you spoken to any of your buyers, and what do they expect this to -- what kind of a year do they expect this year to be for the fourth quarter?

We have 8,000 box customers, so we talk to them every day. And you will get 8,000 different opinions. I think the consensus on the fourth quarter is, nobody knows how bad these energy prices are going to affect the economy. And that's probably what the theme is. Although from my perspective, the September box volume increase was positive. It's the first increase since March. So we were fairly happy about that.

And out of the buyers, is there one large buyer that exceeds more than maybe 5% of your sales?

We have got probably two fairly large customers that approach 5%. But if you take our top 30 customers collectively, they are only about 30% of our volume. So for us, a large buyer averages 1%. We are fairly disbursed in that regard.

Can you name the two that approach 5%?

No, no, no. I can but I don't want to.

(OPERATOR INSTRUCTIONS).

Okay. Well listen, since we have no further calls, I want to thank everybody for participating in the call. As I have said, it is going to be a challenging third quarter but operationally -- the fourth; challenging fourth quarter. But operationally quite frankly, that's what makes this business exciting. We are looking forward to it, and we are looking forward to talking to you next quarter. Thank you very much.

Thank you, ladies and gentlemen, for you your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

[e1] Separate paragraphs for Q3 and 9-month data [e2] Remove comma between subject and verb for clarity. [e3] Needs some kind of punctuation to make sense when read, not heard.