Packaging Corp of America (PKG) 2006 Q1 法說會逐字稿

Good day ladies and gentlemen, and thank you for joining Packaging Corporation of America's first-quarter 2006 earnings conference call. (OPERATOR INSTRUCTIONS) Your host for today will be Paul Stecko, Chairman and CEO. Upon the conclusion of the narrative, there will be a Q&A session. Mr. Stecko, you may begin.

Thank you and good morning and welcome to Packaging Corporation of America's first-quarter earnings release conference call. With me on the call today as usual is Bill Sweeney, who runs our corrugated products business; Mark Kowlzan, who runs our mill system; and Rick West, who I know a lot of you know who is our Chief Financial Officer. As usual I would like to thank you for participating and we will have plenty of time at the end of the presentation to take all your questions.

So let me just get right to it. Today we're reporting first-quarter net income of $9 million or $0.09 a share compared to first quarter 2005 net income of $13 million or $0.12 a share. Net sales for the quarter were $508 million and that is up 4% compared to $489 million in last year's first quarter. Lower earnings compared to last year's first-quarter were driven primarily by higher costs for energy of $0.05 a share; transportation of $0.03 a share; labor and benefits which include the change in accounting treatment for stock option expense of $0.03 a share; and overhead and interest expense of $0.02 a share. These costs were partially offset by higher pricing in sales volume for both containerboard and corrugated products which together improved earnings by about $0.10 per share. And lower recycled fiber costs which improved earnings by $0.02 a share.

In addition, last year's first-quarter results did include a dividend from Southern Timber Venture which amounted to about $0.015 per share and there was no such dividend this year.

Looking at our operations, in the first quarter our corrugated product shipments were up 4.9% in total and up 1.6% on a per workday basis after accounting for two more work days in this year's first quarter. The Fibre Box Association reported yesterday that industry shipments were up 3.3% in total for the quarter and 0.1% for workday on a per workday basis. The FBA also reported that industry inventories at the mills and box plants combined ended the first quarter at 2.446 million tons which represents the second lowest March ending inventory since 1987 which as you know was almost 20 years ago.

With regard to pricing, by the first of April we essentially were able to fully complete the passthrough of our January $40 per ton containerboard price increase to boxes which represents for us a pretty fast passthrough by historical measures.

Switching gears a little bit to operations, we successfully completed the annual maintenance outage at our Counce Tennessee mill which included a lengthy turbine generator inspection which must be done every six years so you do it once every six years. This was the year. Parts of the mill were down a total of about nine days as we took our number two machine down for four days, then we took our number one machine down for about five days. During this time we had of course lower production and higher operating cost.

For the quarter, our mill production was 579,000 tons and that is about 14,000 tons or 2.4% higher than last year's first quarter. The higher production compared to last year was helped by good operations but it was really due mainly to our decision to delay our normal February annual maintenance outage at our Valdosta Georgia linerboard mill to April. And this was done to help keep our inventories at levels necessary to support our box plants and domestic containerboard customers.

As a result of good corrugated products demand and our maintenance outage in March, our containerboard inventories did fall about 15,000 tons from year-end levels and were about 8,000 tons below last year's first-quarter level.

On the cost side, natural gas prices did fall during the quarter but still remained higher than the first nine months of 2005. We continued to keep our mill usage of natural gas at a minimum averaging only about 5% of total mill purchase fuels. Our gas usage was a little higher than we expected and hoped for because of some tube failures that we experienced on one of our coal-fired boilers at our Filer City medium mill. Both of our coal-fired boilers at Filer City are scheduled for a complete retubing in May and June of this year.

Across the Company higher energy costs for both fuels and purchase electricity lowered earnings by about $0.05 a share compared to the first quarter of last year. Compared to the fourth quarter of last year, however, energy costs were up only about $0.01 a share which is pretty good since weather is colder in the first quarter than compared to the fourth quarter. And as I think most of you know, PCA is much less affected by higher natural gas and oil prices than virtually anyone else in our industry since 80% of our purchased energy comes from much lower-priced bark and coal.

Moving to transportation which it's not as good a situation. Diesel fuel, the key driver of transportation cost increases, was up 20% compared to last year's first quarter resulting in a higher transportation cost for us of about 12% compared to last year. And this lowered our earnings by about $0.03 a share compared to the first quarter of 2005.

Some other cost items, labor for example which includes wages and certain benefit costs such as medical and pension expenses and which also now includes the new accounting treatment for expensing stock options were up $0.03 a share over last year's first quarter. With regard to these new rules for expensing stock options, we recorded a pretax charge of about $1 million for the quarter. Certain overhead costs and interest expense were also up totaling about $0.02 a share but since only about 20% of our debt is variable, interest rate hikes only impacted us by less than $0.01 a share.

One plus on the cost side was that compared to the first quarter of 2005, recycled fiber costs were down for us about $33 a ton which increased earnings by about $0.02 a share. Wood fiber costs were flat compared to last year as supply and demand remained in pretty good balance. I should also note that our first-quarter 2005 results did include a dividend from Southern Timber Venture of $2.5 million pretax and as I mentioned earlier, we had no such dividend in this year's first quarter.

Turning to cash utilization, our capital expenditures in the first quarter were $17 million; working capital did increase $54 million over year-end levels. This increase was driven primarily by what I would refer to as timing issues such as the normal beginning of the year cash payments including the 2005 year bonuses which are not paid until January 2006; the semiannual interest payments on our notes of $15 million; vacation payments that occur at the beginning of every year at some of our location; as well as a $20 million increase in accounts receivable due to higher pricing and entire volume over December 2005 levels.

With these higher timing related payments and increased levels of accounts receivable, we ended the quarter with cash on hand of $68 million. And as I think many of you know the first quarter is normally our highest cash utilization quarter by far and we normally build cash over the remaining months of the year. Our long-term debt remained at $695 million and our cash interest rate on all of our debt for the quarter averaged 5.3% with about 80% of the debt fixed at an average cash rate of 5.4%.

In summary, we think we had a solid quarter operationally. We completed the pass through of our January containerboard price increases to boxes pretty quickly. Our volume remains strong; very importantly, we completed the annual outage at our largest mill on schedule and this helped us keep our inventory levels from declining too much. And finally our earnings are up as expected over the fourth quarter of 2005.

If I look ahead to the second quarter we will have our Valdosta mill outage in April for a planned nine days. And our Tomahawk mill down for five days in May for its annual outage. As I mentioned earlier we must also retube both of our coal-fired boilers at Filer City which will require some downtime on the boilers obviously and increase our natural gas usage. These outages will result in lower containerboard production and higher operating costs.

Our biggest challenge will continue to be to get through the shutdowns at Valdosta and Tomahawk on schedule and then continue to run well in order to maintain adequate inventories at our box plants as these two outages will reduce production in the second quarter by almost 20,000 tons. We expect higher prices as a result of our April $50 per ton containerboard price increase but the majority of this increase will not be fully realized until the third quarter when the passthrough to boxes is completed. We do expect to see the normal seasonal improvement in corrugated products volume and our product mix will as normal become richer as the year progresses.

Finally, as we enter warmer months, energy costs should drop with lower consumption unless gas and oil prices go crazy again, which it looks like oil prices already have. And unfortunately it's unlikely that much improvement will be seen in transportation costs as oil prices have moved up and the summer driving season typically increases gasoline and diesel prices. But if you consider all these items we expect earnings to be about $0.22 a share in the second quarter.

With that, we would be happy to entertain any questions. But as always, I must remind you that some of the statements we have made on this call constituted forward-looking statements. These statements were based on current expectations of the Company and do 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 material from those expected in these forward-looking statements.

So with that, I would ask the operator to open up the phone lines and we would be happy to take your questions.

Chip Dillon from Citigroup.

Good morning, Paul. First question is could you sort of quantify for us what you think the either in absolute terms or relative to the first quarter what downtime will cost you in the second quarter with these three mills down? How much that is going to cost you?

Yes, it will be two mills down, Filer will not be down. We're going to run Filer, we're going to have to use some gas. We will take one boiler at a time down. And so our plan is not to have Filer machines down at this point. So there will be two mills down but we will have higher gas costs at Filer because we can't burn coal in one boiler while we're retubing it. But the answer to your question that is going to affect our earnings by about $0.04 a share. And $0.03 of that would be related to the two mill outages at Valdosta and Tomahawk and we figure -- we're hoping that gas prices stay where they are and that the increased gas cost at Filer because of the outage will be about $0.01 a share. So $0.04 between these outages.

And then if you could tell us what your box shipment orders or shipments have been so far in April? And what the status is of any box price increase since we would inevitably have to see one in order for the April board increase to remain in place?

Sure. We have data, Chip, on eight shipping days in April. Our bookings basically we have two numbers you'll look at earlier in the month -- you get a lot of bookings and then you also get shipments. And over a month usually shipments approach the bookings number because people order in advance. Our bookings are up about 3% through the first eight days. Our shipments are flat with last year. So if you're trying to impute a number, it is somewhere probably closer to the three than the zero, but that will play out over the month. With regard to the second question was on --?

Box price.

Yes, our policy, Chip, is that we first inform our customers of a price increase before we discuss it publicly. What I can say is historically, in this industry as I think you know, box prices have been implemented about one month after the price increase was announced for paper. And we announced a price increase at the end of March. And once we would have completed any action on our box increase, then we would discuss that. But we think it's important that our customers hear what we are doing from us first before they hear it from somebody else. But I think at least I've given you historical measure of when these things normally happen.

And then lastly, when you look at your inventory change you mentioned they were down 15,000 tons during the first quarter from year end. And the industry was up 182,000. I guess in order to keep your inventories from not dropping more you had to take -- you had to keep Valdosta running when you normally would have taken it down. Does that mean that you were just at an unbelievably low level at December? Or does it just mean that rest of the industry saw an unhealthy increase? I'm not quite sure I understand how they would be up and you would be down so much.

Well, two things. One of the things that we did do -- I mean we all live in a vacuum, we knew we had these two shutdowns, we ran as hard as we could in the month of December to try to accumulate some inventory ahead of this shutdown, as the proverbial squirrel putting a few acorns away for winter. The thing that I feel pretty good about right now is that Counce had a big outage and it has come up and it has run very, very well.

Counce constitutes two-thirds of our linerboard capacity. And so the biggest single event in terms of operations for us is that we got that shutdown done on time. And the mill is in tip top shape and you got to hope it comes up and runs well because when you do a lot repairs, if somebody's made a mistake, you forget to connect this, you do that, that hasn't been the case. We ran well so we got our horse up and our horse is off to a good start. And that gives us some catch-up capacity.

Now that said, we also pulled some tons out of export. Our volume growth although we think it was a good could have been better. We have not taken on a lot of new business because of our inventory situation and so we are limited in terms of how much we could grow until we replenish the inventory. We've got the same situation with regard to Valdosta. It's going down and it's got to come up and it's got to run well.

The other thing that we do have going for us is that we moved Valdosta to April for a couple of reasons, one we needed the tons in the first quarter but April is an unusual month. You've got thirty mill days but only 19 box [cutout] days. So you've got two extra -- you usually had 11 box cutout days. So we catch a little slack in April because there's two less box days. So that said, that is why we are where we are. We're not in the best of shape but as long as we continue to perform we're going to be okay. I think, Bill, do you want to add something to that?

Chip, we tend to take downtime a lot earlier than the rest of the industry. So we were building inventory in the fourth quarter. In my opinion, they were building inventory in the first quarter and they're going to be taking lots more downtime in the second quarter. So I think it will all average (multiple speakers).

Yes, that is a good point. As you know we are one of the few companies that go early in the winter. You do run some risk when you take a winter downtime because of things freezing out. And I think that is a good point that Bill added. So that is a long-winded answer to a good question.

Okay, thank you.

Mark Connolly of Credit Suisse.

Paul, just a couple of quick things. You talked about this box -- box price pass-through going through quicker than usual. And it does seem to be the case. I'm curious if you can talk about why? We've heard CEOs of other companies in the last six to 12 months talk about increases taking 120 days to get through from board to box. So I'm curious what in your mind is changing? What are the dynamics out there that are starting to make this work a little better?

Yes, I think I've heard that same dynamic. I think if you go back over history and you look at us I've said many times over the last five, six years, it usually takes us about three full months to put through a box price increase. And what you are seeing the rest of the industry, a lot of the rest of the industry as reported it takes them four months. I think the three versus four is related to the fact that we have a lot more small accounts that are not on quarterly pricing, just the nature of our business. We tend to be able to push it through a little quicker.

We really got it done in just about two months this time. And it's just that we took the posture that -- hey, business is tight, paper is tight, we need this increase and we were fairly resolved in our belief that we needed to get this done as quickly as possible because of business conditions. And I think our customers understood that. I mean they don't operate in a vacuum. They understand how tight market conditions are. I'd like to say that our people did a terrific job. They did but they had some help from market conditions.

Paul, the box plant closures that we've been seeing announced sporadically across the industry, have they had any meaningful impact directly on you and your business?

Not really because we don't have any darn inventory. I think as people close box plants, some customers get upset end there is always some fallout you'll lose a little bit of business. We closed one box plant down last year because of the freight situation. But we think we retained maybe 80%, 85% a bed business. But we did lose 15% from shutting that box plant down. But as people have lost some business as shutting down box plants unfortunately for us with the inventory situation the way it is, we're not in a position to take on a lot of new business. So it really hasn't helped us. Down the road it might.

Okay. And final question. I've asked you this just before. Are you seeing anything far removed from normal in terms of mix shifts that are unseasonable or that might be an indication that something else is going on out there?

No, the only thing that we've seen -- our business in terms of the display and point of purchase sale items that business tends to build over the year as you get toward the holiday seasons. So that is normal. I guess the only thing that we have seen with a few customers we had a view customers in the display business that our business with them was down last year and they suffered some volume decreases in the demand for their product. They have picked up their promotions this year because one thing about an end aisle, there's has been a lot of data that says back from my days at what is now Pactiv, an end aisle display moves about six times as much product as off-the-shelves. So for customers whose volume might have been down last year, we're seeing some people pick up that and it is really I think there is a strong correlation there. So that is about the only trend we've seen.

Very helpful. Thank you, Paul.

Mark Weintraub from Buckingham Research.

Thank you. Paul, on the downtime that you mentioned roughly $0.04 for the second quarter. Just remind us, was Counce -- did that actually come out to be roughly $0.03 which I think was your original expectation?

Yes, maybe just a touch under $0.03.

Okay. Second, a little bit of a broader question. In the last couple of years you've done a lot of things to create alpha. You did the timber monetization, massive deleveraging and then you instituted a sizable dividend. Clearly we've got market dynamics that seem to be working in your favor. But what are you focused on from an alpha perspective and Company specific performance?

Well, you're throwing these financial terms at me. But hey, I know what an alpha is. I think you were trying to trick me here. But we don't have a lot of alpha to offer. We really don't have any major reorganizations, major asset sales, restructuring charges. We basically I think have built a pretty good engine to operate. And let's call that beta. So we've got a pretty good beta machine. And I think it is time for beta for us in the industry. By that I mean we have a unique low cost energy position in the industry. And we have an outstanding customer base in terms of a lot of small customers who require a lot of different things hard to do things that we think we get paid for.

So in our case, we think we've put ourselves in a position to earn money the old-fashioned way, and that is for making a very good margin off of selling boxes. And that is what we are all about over the next few years, and I think that is healthy. But you did mentioned dividends as a vehicle to create -- and I'll use your term -- alpha. We do have the largest dividend in the industry, and going forward if things materialize as we hope, we look to dividend increases as a major way to continue -- and again to use your term, not mine -- increase alpha in this company.

And that is about it. So I really don't have anything too glamorous to report, other than we're going to try to make some money the old-fashioned way.

Maybe one quick follow-on. You've also historically grown your volumes a little bit better than the industry. Is that something that you think you can continue to do, and are you going to do that organically or continue bolt-on acquisitions?

That is absolutely what we plan to do, but that is part of the old-fashioned way. I'm going to call that beta. Growing volume is nuts and bolts for the business. That remains one of the things we want to do. We want to get our integration level into the low to mid 90s, and we will do that by both internal growth and bolt-on acquisitions as box plants, and that hasn't changed.

Thanks.

George Staphos from Banc of America Securities.

Hi, guys, good morning. Paul, a few questions first if you could help us parse the $0.10 pricing and volume the first quarter. Was it roughly 50-50? And then as we bridge into the second quarter, you've told us what the downtime is going to be. But how do you get to the $0.22 in remaining areas? Is price and volume kind of $0.15, $0.20 with most of that pricing? If you could help us out with that, thanks.

Well, we always report price and volume together, and that number was $0.10, so we don't split them apart. With regard to the second quarter, we see some positives. Price and volume will probably be around $0.12, rough number. Energy we think will save us a couple of cents, because you've got a lot warmer weather. And labor will be about $0.01 better because we make -- you know you max out on your FICA payments in the first quarter, you don't have to make them once you max out. So they total about $0.15.

We had a couple of negatives, freight, we think freight is going to go up. And recycled fiber has gone up little bit and we think recycled fiber and freight probably at least $0.01 apiece. And that will bring you to the number. But then nested in these numbers are the fact that the shutdowns are going to cost us about $0.04 and they are distributed in a lot of other areas.

And the other thing that will probably happen, in our box plants things like yield, operating efficiencies, running with low inventories, cost you some money and it's hard to nail that -- is it transportation, is it yield? I wouldn't be surprised if that cost us $0.01 too.

Sure, Paul back to the first quarter would it be safe to say that if you can't give us at least a rough approximation that both were pretty significant contributors to the quarter --?

I would say no -- I would say it this way and you pushed me as far as I'm going. It's $0.10, it's mostly price.

Okay, fair enough. Now in terms of the rest of the year we would expect -- should we expect that third and fourth quarter assuming existing market conditions stay as they are, right, that you'll be able to open it up a little bit? We should see the shift in numbers start to pick up and presumably be a bit more contribution therefore from that growth?

Yes, just to build on what Bill Sweeney said, when he helped me out with that earlier question, we take our shutdowns very early because energy costs are highest, the weather is the coldest in the first quarter. But when we get through our shutdowns, I mean were ready to hum for the last seven months of the year where others are taking downtime because there is a lot more dispersion in shutdown timing. And we certainly do expect to be able to take on new business and grow the rest of the year. But we've got to put a few more acorns away in inventory before we go on that pickup in business.

Got you. Paul, I guess the last question and I will turn it over. If you take maybe a different angle on cost and margins over time and if you go back four or five years, the cash flows that the Company has been generating per ton of production has been dropping somewhat and you've done better than most in the industry but nonetheless you are down, I don't know, roughly about one-third. Price over -- let's say the last five years is flat to down so that is part of the answer. Obviously costs are up. How much do you think you can claw back over the next two or three years of the cost hit you've had to take in operations? And how much do you really have to wait on the market either for transportation or energy? Thanks.

Yes, I would say there is three things that have reduced our cash flow, one is price, two is cost and our tax cash rate as I've told people does go up over time and it has gone up over time. So we've got a higher cash tax rate also. But basically when you look at what drives profitability in this industry price is by far the most overwhelming variable although when you got things like energy going up at $15 gas that tends to really put some pressure on things. But for us fortunately our energy position we're not too dependant on gas and oil.

But the real driver of getting back to the kind of EBITDA margins, if you will, that we enjoyed -- and you can go back to 2000, you can go back to '95 -- we've got to have pricing at least approach on an inflation-adjusted basis where we were then. And costs, you know we can't have $20 gas and do it but we've got to have gas prices are up and they are not going down. But price more than anything else will determine the "callback" that we can achieve.

Okay, thanks, Paul. Good luck this quarter.

Thank you.

Thibault Edings from Morgan Stanley.

Good morning, gentlemen. Just a quick question on the Valdosta mill moving around. Normally that is taken down in the first quarter, you are taking it down in the second quarter. Can you talk about sort of what the benefit quarter to quarter is? Was it $0.01 in one. Because you normally take the Tomahawk mill down in the second quarter, is that correct?

Right, right. The only change we made this year is we moved Valdosta from February to April. And the reason we only moved it two months is that's all we could move it because you've got statutory requirements to inspect your boilers every so often and they are reasons why you can't extend it any further then that. You can make a case -- why don't you put it off till December? Well, you can't is the answer. But I think I said on an earlier call the Counce shutdown cost us just under $0.03 a share and we think that the shutdowns in the second quarter are going to cost us for Valdosta and Tomahawk $0.03 a share. But then it's going to cost us and other full penny in natural gas because we've got to retube our boilers at Filer City. They are due for their annual tubing and we're running on borrowed time on those boilers. So that must be done. I don't have an option to delay that.

Sure, sure. And then as you think about -- you referenced dividends earlier in the Q&A session here. Historically you've liked to carry a pretty significant cash position at the Company. When should we, how should we think about what kind of cash position you think is appropriate for Packaging Corporation of America? Is it one year of dividends, is it two which is what it has been historically?

Yes. The answer to that is it's a direct function of what business conditions are like. When we instituted that dividend, business conditions were not the best and I felt that you need some cushion because protecting the dividend is an important thing in our way of thinking. And so we kept what we thought was a healthy cushion two full years worth of the dividend. As business conditions improve and you are feeling a lot better about your cash flows we don't think you need as much cushion.

As a matter of fact, one of the things that we did, as you know in December, we had about $200 million of free cash on the balance sheet and we took about 94 off to buy back shares because we felt pretty good about the future. And felt that hey -- $100 million was probably the right number where we are in terms of business conditions. So there isn't an absolute number, it's a function of business conditions. And we have no absolute rule.

Got it.

When things aren't looking real good, $200 million we thought was the number. When things are looking really terrific I don't know what the number will be.

How are things looking?

I feel pretty good.

Amen to that. And just a question for you on terms of share buybacks. I don't want to put words in your mouth but you didn't mention share buybacks, obviously you bought shares back in the fourth quarter. You said you'd looked at dividend as your primary tool. Are you ruling out share buybacks?

No, absolutely not. Because what I've said is that the one thing -- it's unbelievable but there is not too many things that investors I think are unanimous in. But when I talk to our investor base, they all like dividends. It is something that they make sure they tell me they like the dividend. But you get to a point recognizing this is a cyclic industry and you probably you can't increase the dividend based on one year's performance or two year's performance because there will be ups and downs. So you can't put all of the free cash that you generate into your dividend because you've got to also pass, in our opinion, sustainability requirements. So some of the cash has got to go someplace else.

The advantage of share buyback on a theoretical basis you are getting capital gains treatment on that type of use of cash. And so we can't put all of our excess free cash to a dividend and the beauty of a share buyback is it is not something that you have to do continually. You can do as a rheostat if you will, as a good place to put free cash without having a continuing obligation to do it. And that is why share buyback jumps up in the second place as a use of cash.

Great. And then one final question just on your box volumes in the first quarter, how much of that was organic versus acquisition?

Well, we didn't make any acquisitions in the first quarter. But in our numbers we did acquire Midland, I think it was last April. And Midland's numbers are in there. Midland contributed about 1%, actually exactly 1.5% to our volumes and the other thing that happened, we shut down a box plant that is not in our volume this year so that went the other way. We had a box plant in West Virginia. But we kept about 80% of that business. So shutting down that box plant probably cost us only 2/10 or 3/10 of a percent. So net net -- about -- rough number 1.2% of our volume was not organic, if you will.

Great. Well, good luck going forward. Thanks very much.

Thank you.

Mark Wilde from Deutsche Bank.

Good morning. A couple of questions, one short term, one a little longer term. In the short term, I wonder with the prices going up whether you think there is an argument for getting those box prices up by more than just a containerboard price goes up. I mean surely Bill Sweeney is paying more for natural gas and the corrugators and more for freight to ship those boxes.

Mark, one thing that we don't talk about until we complete talking to our customer, and I said this on an earlier call, is prices. Anything we're doing on pricing its our policy to talk to our customers first and let them hear it from us directly as opposed to a third party. So I'm not going to comment on that any further. And that is the reason.

Okay. Well that is fair enough. But could you give us some sense of how much you think cost have moved up in the box business because of what you are paying for freight and what you are paying for energy at the box plant and what you are paying for labor?

Not off the top of my head. But a rough number might be 10%.

Okay, fair enough.

If you look at the energy cost, in terms of our cost at the mill -- well, it could at the cost at the box plants, your labor is probably moving up at 3% a year, energy has moved up 300%. And so maybe it is closer to 5% cost at the box plants. Because labor is a big part of it. And I'm not counting paper because that has moved up a lot also. I'm talking to the variable costs at the box plants, energy has been the biggest mover. And of course transportation is up 20%. And really if you go over the last three years it is probably up from $30 a ton to $50. So that is a big one. So I want to say between 5% and 10%. I don't know the exact number off the top of my head. But it is in that range.

Okay. And then the other question I have is a little longer term. I mean I think since the Company came public about six years ago the scenario for the Company has changed a little bit. I think you've done a great job, the stock has performed well over time. But you're still an independent company, you may be an independent company for quite a while. And I just wonder how this plays into your thinking about both acquisitions and then succession planning?

Well I'm not planning on quitting, if that is what you are asking. I love what I'm doing. So I've got no plans in that regard. And everybody around the table is smiling and I'm taking that as a sign that they are happy in their jobs too. But regard to plans going forward, we want to continue to grow this business and I think I had a similar question earlier and our plans are -- we have gotten to a place where it comes down to being able to do the fundamentals of this business better than anybody else. And we do have a competitive advantage I think over everybody in the industry in terms of 80% of our fuel is bark and coal. So I actually feel pretty good about where we sit. And if you look at market conditions and you compare them say back to the last really good market which is '94, '95, I feel pretty good. So now you're not going to get rid of me in the short-term.

Paul, is there any kind of a mandatory retirement age at the Company?

No.

Okay. Very good, thank you.

Richard Schneider from UBS.

Hi, Paul. Just was curious about with fuel oil going up in price what are your options to deal with that? I know that only represents something like 17% or 18% of your mix. But how do you deal with the trade-off between the price of natural gas and fuel oil which right now fuel oil looks to be a bit cheaper -- I mean more expensive than natural gas?

And that is the case if you are talking about [SICs] oil. One of the things that we have we only burn oil at one mill to speak of and that is at Valdosta. And one of the things that we did do, and I reported last quarter, was we pulled up some capital from this year into last year, that is why our CapEx was a little higher than normal last year, it will be a little lower than normal this year. And we did a complete overhaul and improvement of our air systems in our bark boilers. And we can now get roughly 100,000, 125,000 tons in our more steam out of the same amount of bark because of that. And so that reduces our oil consumption, that is one thing we do.

We also, as a lot of people do, we have the capability and we are permitted to burn used motor oil at Valdosta and we burn some of that, and that helps. And then the third part is oil prices are going up and that will cost us some money at Valdosta. But again it is a small part of our energy mix compared to other competitors. And I also would note in the last week gas has moved up about $1.00 a million btu's and that affects everybody also.

And then on the freight side is there any options that you have or are you pretty much at the mercy of what is going on with fuel surcharges and other things on the freight side?

I will tell you the freight side for us is a little more difficult because unfortunately for us we don't have any unique advantages like we do in energy. We're in the boat with everybody else, if you will, except it's not a boat it's a railcar or a truck. And the rail situation is getting interesting, you know there are hearings about what the railroads are doing with fuel surcharges. I'm sure you saw that big article in the Journal yesterday. And so that is something that we will participate in through our industry trade association because rail costs are a big driver of that. And with regard to gasoline prices and diesel prices, I really don't have a good solution to that. Until energy gets in a little better balance and at least in the short term it doesn't look too good with oil hitting $70 a barrel. So we don't have any competitive advantages or disadvantages in that regard. We're going to have to pay higher costs and we forecasted that.

Last week (indiscernible) Pulp and Paper Week going up and reflecting the full $50 April increase, how much would you say of box business in general is still tied to the Pulp and Paper Week index?

I can only speak for us and we have a lot of a business that is not long-term account and we have a lot of little customers buy on purchase orders. So we are less than most people in terms of being tied to it. But the fact of the matter is over time that doesn't matter because we've got to be competitive in the marketplace. And even though you may not be tied to it and other people are that helps set the market price. And it affects you.

Now if you are asking have we changed a lot of contracts to get off pulp and paper? The answer is no we haven't because our contracts that we do have for selling paper tend to be longer-term. And you really can't enter that discussion until one of those contracts expire. And we haven't had many expire.

Okay. Could one maybe estimate or say maybe at least 50% of the business is tied to it?

I'm not going to hazard a guess on that.

Okay. And just last question, you said you were pulling back from the export market. Part of it is because of your limited availability of containerboard right now. Do you see an opportunity in the second half to maybe be a little more aggressive in the export market particularly now that maybe you can talk about it some of the prices in the export market are going up?

Yes. But what I said and it's just a slight deviation from your question. I said we had pulled back. Our desire is not to continue to pull back. Hopefully we're within a month and that a month being Valdosta is up and running well of doing exactly what you said. I would like to put some more tons in the export market. We have had customers that we've dealt with long term and that market. They have been somewhat sympathetic to understand that we've pulled back. But we would like to maintain some long-term relationships. And if we can produce more tons, which I hope we can, we would certainly like to get back some of the tons that we'd had to withdraw from the industry. But that is going to require us to get our inventories stabilized where we think they will be.

And some of those opportunities are as profitable as domestic opportunities?

Well, what the situation is is if you look at the price of export, it is lower than the domestic price but there is a huge freight savings. In other words, if I've got to ship paper to some locations you could be easily be looking at $70 a ton. If your average freight is 50, that probably varies, pick some numbers, it varies from 20 to $100. If something is right next to the mill, it's $20. If you are going very far west coast, it could be $100. When you're shipping to the Port of Jacksonville, which is right down the road from Valdosta, we've got about a 15, $20 freight all in. So you've got a huge freight advantage on export. When you look at those two together export and domestic are about a push these days.

Great. Thanks a lot.

(OPERATOR INSTRUCTIONS)

Well, hearing no more questions, again, I would like to thank you for participating on the call. And I look forward again to speaking with you next quarter. Goodbye.

Ladies and gentlemen, thank you for your participation. This does conclude the conference call. You may all disconnect.