Packaging Corp of America (PKG) 2006 Q4 法說會逐字稿

Thank you for joining Packaging Corporation of America's fourth-quarter 2006 earnings conference call. Your host today will be Paul Stecko, Chairman and CEO. Upon conclusion of the narrative there will be Q&A. Mr. Stecko, you may begin.

Thank you. Good morning and welcome to our fourth-quarter and full-year earnings release call. With me on the call today is Mark Kowlzan, who runs our mill operations, and Rick West, our CFO. Thanks for participating. As usual, when we complete the presentation we will be glad to take any and all of your questions. So with that summary, let me get started with today's call.

Yesterday, we reported fourth-quarter earnings of $40 million or $0.38 a share; and that is compared to fourth-quarter 2005 earnings of $2 million or $0.02 a share. This is a record fourth quarter for earnings per share, excluding special items, since we became a stand-alone Company in April '99. The only fourth quarter with higher reported earnings was the fourth quarter of 2000, when we sold our woodlands to Southern Timber Venture. In that quarter we reported $0.58 a share in net income including the woodlands sales; but without the woodlands sale our income was $0.35 a share that quarter.

The increase in our quarterly earnings this year was a result of better pricing and mix, which taken together improved earnings by $0.43 a share. This earnings improvement was partially offset by higher labor and benefit costs of $0.03 a share, incentive compensation of $0.02 a share, and transportation cost of about $0.02 a share.

Full-year net income for 2006 was $125 million or $1.20 per share compared to $53 million or $0.49 a share in 2005. Full-year net income for 2005 did include income of $0.06 a share from an STV dividend received in the second quarter of 2005. Higher earnings for the full year compared to 2005 were impacted for the most part by the same items which impacted our quarterly results.

Net sales for the fourth quarter were $553 million compared to $473 million in the fourth quarter of 2005. Full-year net sales for 2006 and 2005 were $2.2 billion and $2.0 billion, respectively.

Cash generated from operating activities during 2006 was $247 million. We started the year with $113 million of cash on hand and incurred no additional debt. We paid out $105 million in dividends; paid down $9 million in debt; spent $88 million on CapEx, plus about $4 million on acquisitions; and ended the year with a $162 million of cash on hand, which is a $49 million increase.

In our October third-quarter earnings call, we gave fourth-quarter earning guidance of $0.35 a share. With our close of business at the end of November, we were tracking pretty much in line with that guidance. December, however, turned out to be a much stronger month than we expected, which resulted in about $0.03 per share of additional earnings.

Our December results were driven by several things. First, even though we expected a pretty good volume for December, our corrugated products shipments per workday were even much better than we had forecasted, up 1.5% over last year. And last year was by far our strongest December ever.

Second, our mills ran phenomenally well and very efficiently, resulting in record production at very low cost, especially for a winter month. Thus, we achieved better than anticipated results.

I should also point out that we were able to end the year at what we think was the right inventory level to support our two big annual maintenance outages that are planned every year for the first quarter.

For the quarter, our corrugated product shipments per workday came within 0.5% of last year's all-time fourth-quarter volume, which was, by the way, up 4.8% over 2004. For the year, shipments per workday were up 8/10 of 1% over 2005. Considering that going back to October of 2005 we put through three price increases and shed several of our lowest margin accounts this past year, I am pleased with the results.

Corrugated and containerboard sales prices were stable in the fourth quarter and, of course, significantly higher than the fourth quarter of 2005, with the full realization of three price increases.

Looking on the cost side of the equation, as I said earlier, higher labor and benefit cost reduced fourth-quarter earnings by about a nickel a share compared to last year's fourth quarter. But about $0.02 per share of this increase was driven by higher incentive compensation cost, which we accrue at an annual targeted level but then prorate each quarter based on our actual earnings. We had only $0.02 per share of earnings in last year's fourth quarter and $0.38 this year, so obviously there was a much higher incentive accrual.

Outbound transportation costs were lower than the third quarter, but still up 5% over last year's fourth quarter both at our mills and our box plants. This lowered earnings by about $0.02 a share during the quarter.

We did not see any significant benefits from lower natural gas prices, because our consumption of natural gas, as you know, is quite low. If you recall, when natural gas prices skyrocketed in the fourth quarter of 2005, we were able to cut back our use of natural gas last year to only 3% of our total purchased fuels.

A major challenge for us this past quarter was to get through the last of our mill maintenance outages, which happened to be at Filer City, and efficiently produce enough containerboard to satisfy demand, and have our inventories in decent shape as we exited the year so we could support our two big first-quarter shutdowns. And we did that. Our mills produced 613,000 tons, and that is a new record, at a cash cost -- and this is the important part --that was only 1% above this year's third quarter despite the colder weather. We're pretty proud of that.

We were able to do this in the face of a tightening wood supply situation. With the slowdown in the wood products market, less residual chips are available for purchase from sawmills. At the same time, we need to build pulpwood inventories at the mills ahead of the winter and early spring rains, when logging in the South is the most difficult. This has put pressure on our wood supply situation.

Although wood costs have not increased that much, our wood inventories are low. At Counce, for example, our wood inventories at one point got as low as three days. We'd normally like to have at least a week's supply on the ground at this time of year.

Thus far, we have not had to slow back very much or take downtime because of fiber shortages. But that could change for us, as well as others, I would think, if we get a prolonged period of rainy weather in the South.

One big plus for taking first-quarter maintenance outages as we do is that it does help you build wood inventories at a time when you need wood the most. Again that is one of the reasons we try to push for our big shutdowns in the first quarter.

Overall, looking back at 2006, I think we had a very good year. Our earnings almost tripled to $1.20 over 2005's earnings per share of $0.44, which excludes the $0.06 from Southern Timber Venture. Our earnings improved throughout the year with the realization of price increases; and as a point of reference, for the second half of 2006, our earnings were $0.80 a share. Our corrugated products group achieved the full pass-through of three containerboard price increases to boxes and did it this time a little faster than normal. Our box volume through November was a little less than the industry, but we did it shed some business at places where we thought the margins were inadequate.

Our mills ran very efficiently all year at record productivity levels, with mill cash cost per ton up less than 2%over 2005, with no major unplanned outages. We ended the year with our inventories slightly below 2005 levels.

We also managed our cash efficiently. We normally spend about $110 million on CapEx each year, and in 2005, last year, we spent $125 million as we accelerated some high-return projects, mainly energy. So our target was to spend only $90 million in 2006. We met that goal and spent $88 million without having to delay any major projects. Cash on hand increased $49 million by year end to $162 million.

Looking ahead to the first quarter, we expect our total corrugated products volume to be higher than the fourth quarter. As I said earlier, both our Counce and Valdosta linerboard mills will be down as normal for their annual maintenance outages, which will negatively impact earnings for the first quarter by about $0.06 a share. There are certain timing-related benefit costs that are the highest in the first quarter, FICA being one of them. We also expect slightly higher energy and fiber costs.

Finally, any earnings improvement that could result from our previously-announced price increases that are implemented this quarter would not for the most part be realized until the second quarter. Considering all of these items, we currently expect first-quarter earnings of about $0.31 per share.

With that, we will be happy to entertain any questions. But I must first remind you that some of the statements we have made on this call constitute forward-looking statements. These statements were based on our 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 materially from those expressed in these forward-looking statements.

With that, I would like the operator to open the phone lines, and we would be more than happy to take questions.

(OPERATOR INSTRUCTIONS) Richard Skidmore with Goldman Sachs.

Question just for you, as you think strategically about Packaging Corp. going forward in what appears to be a relatively stable containerboard environment from a supply-demand perspective. Can you just talk about your strategy from a growth perspective, what you are thinking about going forward and I guess use of cash going forward?

Yes. You know, our strategy has been to continue to grow and increase our vertical integration level. You know, we were about 82% last year. We would like to get that vertical integration level into the low 90s. We think that is the optimum for us. We do that both for internal growth and acquisition of box plants.

We did not grow that much in 2006, by design. In a rising price environment, the leverage is clearly on price, not volume. We took the opportunity to prune our mix and optimize the volume that we did have. You need to go through that process every so often. We completed it and we still grew a little bit.

So growth is something we are interested in, but it's the kind of growth that we have had the past five, six years. Pretty steady growth. We will do that both through internal growth in our box plants, and we are continuing to look for good box plants to acquire.

I would also say that in terms of cash uses, our CapEx returns to a normal use this year, somewhere around $110 million or so. Any excess cash that remains, we look at two areas to put that. That would either be dividends or share buyback.

Just following up on the growth, Paul. How many box plants would it take to get to the integration level that you're talking about?

Depends how big they are. A lot of real little ones, or not too many real big ones. So really there is no straight answer to that. But it could be in the range, five, six type box plants could probably get you to that level if they were of average size.

Okay, great. Thanks, Paul.

Mark Connelly.

This is [Hamza Mazari] from Credit Suisse filling in for Mark. Just a quick question for you. Packaging Corp., it is not highly exposed to agriculture; but are you feeling some impact indirectly as canning and other Midwest food-related businesses feel the impact from below-freezing temperatures in California?

No, we have not felt too much of the effect of California. We are big in agriculture in Florida, in the South. We are not big in agriculture on the West Coast. So we have a big plant in L.A., but it is manufacturing oriented.

But in terms of the freeze that happened out there, we have not seen -- if there is going to be a ripple, we have not seen it.

Okay, thank you. That's very helpful.

George Staphos from Banc of America Securities.

Paul, where do you think you are in terms of reviewing your mix of customers? Are you pretty much through the process of optimizing price mix and, as you were saying before, shedding some business?

Yes, we completed that in the first half of last year.

Okay.

So when we were, say, almost oversold -- you never say oversold, but pretty close to oversold, our inventories were low, we were pulling tons out of export. We took a look to align ourself with the optimum mix. By the middle of the year, we felt that we were where we need to be. We grew the second half of the year more than the first half of the year.

Okay. Paul, when we look at production in the fourth quarter, did any of that get into -- incrementally was there growth in external sales, export sales? Or was the overwhelming majority of the production used just to rebuild inventory to where you needed it for the first quarter?

Yes, it was pretty -- there was no one place that it went. The only thing that I would say is that we are not in the business of selling tons. We're in the business of making money. Quite frankly, with the freight situation the way it is, you can have some $100 freights versus export tons that only have a $15 freight. So when you look at the price differential for some of the export business, it is pretty attractive in some situations. So we try to put the tons where we can make the most money.

But in terms of outside sales, we were balanced third -- between the third and the fourth quarter. They were about the same. We just moved some of them in different places where we could optimize our margins. And freight plays a big part in that decision today, much more so than it did in the past.

Sure. So would that suggest that fourth quarter year-on-year maybe you were up 5% on external, Paul?

Yes, you're probably in the ballpark.

Okay. Now looking at December and the fourth-quarter volumes, can you give us a flavor for how big e-tail and e-commerce was both in terms of scope of your business and year-on-year change?

Well, you know, this e-commerce thing, it is back to kind of the previous call, on -- have you felt the effect of something? There is a ripple effect. So we may not be dealing directly with somebody that is in e-commerce business, but we are involved in the whole process of making goods and boxes for goods.

So what we think, and I am starting to see some data out, people predicting how much e-commerce is going to affect the box business. [Ritzy] just had a report -- I will give him a little plug on the call -- on that. But we think this whole phenomenon of e-commerce has really strengthened the box business in December, which used to be a terrible month for the industry. That is the only explanation we have.

To put that in prospective, on a per day basis, on a per workday basis, our December sales, our December shipments on a per workday basis were actually higher than November. That has never happened in the history of the Company. It is something I thought would never happen ever. It happened. And my only explanation is that this e-commerce thing really stirs the pot up at the end of the year.

Got you. Paul, two last quick ones. First, realizing there's a lot of moving parts in free cash flow, and obviously growing the business and CapEx are your key priorities, it would appear. If you had something left in the pot at the end of 2007, would you think that a dividend would be more likely or share buyback, as you think about it? Realizing there are no guarantees.

Then what is kind of the early trend in the first quarter in volumes? Thanks.

Well, in terms of what we do with the cash, you have got to ask yourself how much that you have. That is in the process of what we are looking at. We are trying to make a call on how much free cash we're going to generate going forward. Obviously, price plays a big part in that. Once we get a better handle on where that is going, although we are optimistic, we can make that call. But it is hard to do that until we have that last piece of data.

With regard to how is volume going in the first quarter, I first should point out that last January for us was somewhat of an anomaly, in that it was our third-highest volume month ever. That is unusual for a January; and again I think that some of this Internet carryover. But it was just off the charts.

That makes the comp very, very difficult for this year. So I just say that so you understand that we are comparing against something difficult. But that said, our bookings rate for roughly the first dozen days of the month are about 2.3% below what we shipped last January. So it is a little less than last January, but last January was the mother of all Januaries.

But I should also add that we are about 1% ahead of what we shipped last first quarter. So you calibrate those and you say we are basically running about the same as last year at this time.

Got it.

That is the best way I can answer that. Again, you have just got to be careful with some of these comparisons because it is what you're comparing it against. But anyway, you got the numbers.

Got it. Thanks, Paul.

Claudia Shank from JPMorgan.

Just wondering if you could put a little bit more color on the trends in fiber costs, both on the virgin side and on the recycled side.

Well, it looks like the Chinese are in it the market again, buying on the recycled side. I think there is an expectation that recycled fiber costs are going to go up a little this first quarter. We think that is going to happen; but I think a little is the operative word. I don't think they are going to skyrocket, but they are going to go up a little.

We think virgin costs are going to go up because, again, supply and demand. You got sawmills that are down, people will probably have to go out a little further for their wood in order to get it. A lot is going to depend on the weather conditions. But we also look for virgin cost to rise a little. Again, I think a little is the operative word.

Where is there more risk? I think there is probably a little more risk on the virgin side, because you can't predict the weather very well. If we have a lot of bad weather in the South, that could put some pressure on the wood basket. We look at our wood cost every day, and we will only go so far out for wood. If it is further than that, we are not going to pay for it. We will do what we have to otherwise.

Okay. Then just the tax rate was a little bit lower than I expected in the fourth quarter. Can you just give some guidance on that for 2007?

Yes, well, the biggest piece of that was -- and it's good news and it's continuing good news -- is that the President signed into law again the investment tax credit. Excuse me, the R&D tax credit.

That was probably about $0.01 of our lower tax rate. That was the biggest single item in there. But again, that will be continuing. He signed that into law on December 20. We thought that he would but you never know, but he did. We -- not only do we enjoy that, obviously everybody in industry enjoys that.

Okay, so looking at '07, the rate should be more like it was in the fourth quarter?

Rick?

The '07 rate, the effective tax rate should be about 37%. We had a couple of other items during the year that lowered it. But at this point, we would say the average of 37% for the effective tax rate.

Perfect. Thanks very much, guys.

Mark Weintraub from Buckingham Research.

First, Paul, you indicated you're comfortable where your inventories are. I would just be curious to get your thoughts on where industry levels are; and how you see them -- how you expect them to act in the quarter ahead.

The inventory levels for -- I think we are comfortable, and one of the reasons we are comfortable, our inventories are not that high, I don't want to mislead you. But our two shutdowns this year are easier than they were last year. We had to put a new headbox into Valdosta, and that is always risky because you don't know how it is going to behave. We don't have anything dramatic going in this year. So the downside on having not a good startup is much less. I feel a little better in that. And the shutdowns aren't as long this year.

So where we are on inventory, I think, if the wood situation doesn't kill us, we're going to be okay. But with regard to industry inventories, it's kind of interesting. There was a correction made by the AF&PA; so if you look at the last number we have, if you correct for that, that 30,000 tons overstatement, there is 2,512,000 tons. That is historically a low number.

Then if you look ahead, there are some things you don't know what is going to happen; but there are some things you know that are going to happen. What you don't know, obviously, is what demand is going to be like. You got to make a prediction on that.

But the one thing you do know is, if you look at the first quarter, there's two less mill operating days compared to the fourth quarter. At 100,000 tons a day, that is 200,000 tons. There are also four more box plant cutup days in the first quarter than the fourth quarter. You know, we have shipped 10% to export; the other stuff is going into the domestic market for cutup.

So let's call that 80,000 or 90,000 tons times four. You got 300,000, 350,000 tons there. Rounded off, rough number, 0.5 million tons that will be a swing because of mill production and box cutup days. Obviously, that is going to have a positive effect moving inventories lower.

Now, you got to throw in operating rates which are unknown, etc. But a 500,000 ton lump is a pretty big lump. So we feel pretty good that inventories are going to behave throughout the first quarter. They are difficult to predict in any given month. But you have got this 500,000-ton swing that somebody has got to deal with.

The other thing you have is that Longview shut a machine down on the West Coast; it was only down one month during the fourth quarter. I guess it's going to be down the entire first quarter. So that is probably another 50,000 tons. Then there was the mill in Canada, up at Redrock that shut down and reported in the trade publications that it was shipping out of inventory. That is going to run out sometime.

So you add those all up, and I feel pretty good about the supply-demand dynamics as we go into the first quarter.

That 2,512,000, that was at the end of November. We don't have December numbers yet. We won't have those till the end of the year. So if I said another month -- it was 2,512,000 at the end of November. That is corrected for the AF&PA mistake that came out last week.

Okay. Just following up on this, the box plant cutup dates, this December, did you have one fewer cutup days than the prior December?

Yes, we operated our system 18 days, which is the same number as the FBA reported.

Okay. How would you describe the status of the first-quarter containerboard price hike? Have you announced anything on boxes?

Well, the only thing that I can say about the first quarter, we have announced a price increase on containerboard effective January 1. Unfortunately, it was not acknowledged by at least one of the major publications, which is obviously very disappointing from the window we are looking out at the world at.

Because, hey, business was darned good for us in December in a lot of fronts. We had people looking for paper, both integrateds, even the Canadians were looking for paper. And we simply didn't have it.

So from the window of the world that we're looking at, we felt pretty good about our price increase. We are obviously disappointed that it wasn't picked up this month. We will see what happens going forward.

With regard to box price increases, as I have said many times, before we make any announcements we notify all our customers what we're doing with regard to box price increases. So, I'm not prepared to discuss that on this call.

Okay. Then lastly, in terms of cash tax expectations for this year, any parameters you can lay out for us?

It should be pretty much in line, Mark, with our effective tax rate.

Okay, thank you.

Mark Wilde with Deutsche Bank.

Paul, I wonder if we could just take maybe one or two steps back from the rock face and look a little longer term. You argued for many years after you went public that you were a consolidatee rather than a consolidator. I just wonder if that view has changed at all as the industry landscape seems to be shifting.

I don't think that view has changed that much. If I had my druthers, I would rather someone acquire me for a premium than I acquire them for a premium. That hasn't changed.

That said, if the mother of all acquisitions came along, you would look at it. When we were mired in debt, even looking at it wasn't a possibility. But our basic philosophy hasn't changed. It only evolves around one principle, creating shareholder value. I think you create more shareholder value quicker if someone pays you a premium than vice versa; although it could be done the other way.

Okay. Just kind of a follow-on to that. You enjoy some of the highest margins in the industry. I wonder whether these margins are just particular to your situation. You've got four good mills and you have got a different business mix than most other folks. Or are there some things that you think you are doing at Packaging Corp. that you could apply across a bigger platform?

Absolutely. We got this bottle of magic juice that we drink every day. And it never leaves my office, we take a swig every morning, and that is it. No, seriously, though, that is close to it.

I have said many times, Mark, people make the difference. If you look at our mills, yes, we have got some structural advantages in the energy area; but basically, our paper machines are the same as everybody else's. We put our pants on the same way everybody else does. We have some very good, dedicated people that we think -- and I think our numbers prove -- are the best in the industry. That is both on the mill side and on the box side.

On the box side, we pride ourself in doing the hard-to-do things. Making things that are difficult, shipping them quickly, a lot of changes. Quite frankly, when you can do the hard-to-do, there is less competition; because not everybody can do what you can do. If it is nothing but two pieces of linerboard glued to a sheet of medium, anybody can do that. It usually comes down to one variable, price.

So it has taken years to build this expertise, and that is the magic sauce I'm talking about. We don't drink it, but there is a magic sauce.

Okay. Then just to kind of close the loop on that, if the mother of all deals came along and there was an opportunity to do something with a larger player, does that mean we shouldn't expect that you could improve their margins significantly if they are doing a lot of straight brown box business?

Mark, that is asking me, like, what is happening on Mars. I have no idea what I could do inside somebody else, because I'm not inside anybody else. So I don't really have an answer to that question.

All right, fair enough.

Richard Schneider from UBS.

The downtime that you're taking in the first quarter at Valdosta and Counce, could you put a number on how many tons you're taking out?

Yes, that will be somewhere between 20,000 and 25,000 depending how quick the shutdown goes. We could be off a half a day, three-quarters of a day either way. But we should be in the range between 20,000 and 25,000 tons. Between the two of them.

Then looking at sort of the rest of the year, the next significant one probably would be --?

Tomahawk. We take Tomahawk down in April.

Okay.

Then we won't take Filer City down till the fourth quarter. That has been our normal pattern every year since I can remember.

Okay. You mentioned your inventories were stable in the fourth quarter. I am assuming, though, that they did build in December when you ran full to build up inventories for these shutdowns.

No. December -- what do we got for December? 2,000 tons? Somebody is putting up a 2. Yes. We picked up a couple of thousand tons in December, but not much because our December volume was so strong. But not a lot. Our inventories, we kind of built them slowly over the quarter.

As you compare yourself to other players in the industry in terms of your makes, where would you talk about any significant difference? Things like display boxes or anything else that could be different for you from a seasonal standpoint than other players in the industry.

I think our mix is skewed more towards a value-added than the average producer in the industry. Again, that is not to say we don't make a heck of a lot of plain brown boxes. But overall, we have a higher percentage of our business in the high-end graphics, the point-of-purchase point-of-sale display end of the business.

We are much more local then national, although we have some good-size national accounts. But again, we focus on accounts long-term, where we can develop expertise that can provide them the best value in terms of all the cost elements at their business, with the box being one of them.

When you can master the hard-to-do things and provide value, you can get better pricing. That is what we have been able to do. Trust me, they don't give us better pricing because they like me. They like what we sell them.

Would that mix of yours be stronger in the December time period than the rest of the industry?

Usually, it's weaker. Because as you know, the display business starts to slow down in the middle of November. You've basically have shipped all the displays that you're going to. So our mix does get a little weaker.

So -- and then it stays weak maybe through January and then starts picking up about mid-February and goes fairly consistent the rest of the year. So our mix is a little weaker December through mid February.

Could you give us any rough comment about what you are hearing about the export market right now?

Well, what we hear is that it is pretty good. South America, they have had a very, very good produce crop this year; and so we are getting more inquiries from there than normal. Europe has been pretty good. Germany's box business grew 3% this year, so our European business is doing okay. That is about the two highlights that I could put out.

We are not big players in the Far East. Our two biggest markets are South America and Europe, and I'm pretty upbeat about both of those markets.

Just the last question, as you look at the conditions today, do you see -- are there any real differences between the conditions today and the conditions you had when you were pushing up pricing three times during 2006?

No, I think for us, the business has felt -- the best word I could say is steady. We got down to lower inventories a little bit in the last year. But we have been able to, through hard work, get them up a little bit.

But in terms of -- again through our window of the world, supply-demand feels like it has felt. I'm not saying that a month or two when inventories really dipped there was a little more panic buying. But from our perspective, the business is pretty tight. Like I said, we have got integrateds looking for paper. We have got Canadians who never would look for paper looking for paper. So from our perspective, business still feels pretty darn good.

Thanks a lot.

(OPERATOR INSTRUCTIONS) Edings Thibault, Morgan Stanley.

A little bit of that magic juice please. Perhaps I will wait for the afternoon. A couple questions. Number one, you sort of touched on the linerboard price increase that was announced for January. I would love to get additional color. You said it wasn't picked up; but there was a pretty broad consensus that it wasn't pushed by the industry as well. Then you sort of talked about we will see what happens coming forward.

Is it fair to say that that price increase sort of remained active in terms of -- as an announcement to your customers?

We made a price increases announcement for January; and that is really all that I am going to say. I cannot give any forward-looking pricing information. Again, as I said on an earlier call, the first people we talk to about pricing is our customers; and then we will talk to other people once it is generally known. So I really can't go any further into that for a variety of reasons, most of which you know.

Right. No, I was just sort of questioning structurally. I mean, the implication is that it was -- and maybe you can't answer this. But you did announce it in early December for January implementation. If you're unsuccessful, do you have to reannounce it?

I don't have a comment on that. I could only tell you that we announced it and we thought we were going to get it.

Got it.

And we were surprised that it wasn't picked up. Again, our business is strong. I can't speak -- obviously can only speak for this Company. But if you look at our numbers, you look at what we have done, I think you could fairly understand why we were pretty optimistic about this increase.

Okay, one of the things that -- you're obviously a student of the industrywide data as well, and we'd love to get your insights. When we looked at the containerboard production data for December, one of the salient comments other than inventory, or one of the salient points there, was really the sharp increase in exports. Would you --? I think you have touched on this, but maybe some more color on why the export market today is better than the last time we saw a spike like this, which was, if I recall, December 2004?

Well, the two things I saw in the December numbers -- one, operating rates fell about 2.3%, which I thought was positive; and second, I think I touched on that on an earlier question. We have put more tons into the export market.

Not that we could not have sold them domestically. It's that when you look at the freight situation, if you got some pieces of business that could have an $80 or $100 freight and you can ship out of Valdosta for $15 or $20 freight to the port for export, that $70, $80, $90 freight differential makes that pretty attractive business.

So as I told an earlier caller, we are not in the business of selling tons. We are in the business of making money. If we can get a better margin with a piece of business, we tend to gravitate in that direction. That is one of the reasons we put more paper into export.

Is that export versus domestic premium that you're referring to here? Is that higher than perhaps was the case in late 2004?

Well, yes, because of the freight has moved up. If you look at the freight rates, freight is up probably $30, $40 since then. Freight has been the driver of that for us. Again, I'm not speaking for the industry, I am speaking for PCA. Freight costs have gone up a lot in the last three years.

Great. Then one final question. One of the things that you referenced, being your most profitable quarter since 2000, but yet your mill profitability or your operating profit remained significantly below 2000 levels. What do you think has to change in order to perhaps recover the profitability that you enjoyed in 2000 and frankly even in 2001?

Price has to go up. That is the biggest single driver. Other things can happen too. But what you have got happening is you got inflation, and you have to grow a lot of volume. Or, as some industries have discovered, that you have got to overcome inflation to get to returns, and price is the single biggest lever you have. Obviously that is one of the reasons we are disappointed that the price increase was not acknowledged.

Sounds like marching orders for the industry for 2007.

No, it's not marching orders for anybody. You asked me a question of what the lever was; and the biggest lever you have is price. Then you have got cost; and then probably volume, in that order. So it is certainly not a marching order. But it is the thing that we think can move PCA's numbers the best.

Great. Well, good luck in the quarter and in 2007.

Thanks.

Chip Dillon from Citigroup.

I know about a year ago you shut down, I think, a machine at Tomahawk, if I'm not mistaken. I know in your filings you sort of said that, depending on your situation and market conditions, that that capacity, I believe, could come back. Is that true? Is there any -- there is no fiber constraint there like you have with Filer City where I think you have to pick one or the other?

We have kept that machine in condition that it could start up someday. I would say that the chances of that happening are extremely remote. Extremely remote because the thing only trims about 80 inches. It doesn't trim anything that is a problem.

But the only way I could conceive if we would run that machine is if, knock on wood, we had a catastrophe at a mill and we had to do something just to keep up because the other machine was down. It is just too narrow.

I would rather, if I wanted to make those tons, I would spend more money on the number 4 machine at Tomahawk because I could get those tons there much more economically than starting up that small, tiny machine. So other then I am keeping it around in case there was a dire emergency, but that is about it.

Okay. Could you tell us -- we're going to see the capacity survey come out, I guess in a month or so. Would you know if that machine is probably going to be left in that capacity? I think you actually tell them yes or no.

I have got three guys here wondering about that. I don't know the answer to that. It has been down forever. I think of them as -- here is the way I think it works, Chip, and I am going to put a qualifier here. I don't know this is the answer, but this is what I think.

I think after a machine is down three years, it is shown as permanently down. I think that is the rule; and this machine would qualify.

Okay, I thought it was shut down early last year. Or are we talking --?

That's right. We flipflopped machines. It has been two years. That's right. What we did was we shut that machine down and started up the machine we had down at Filer City, which has been down longer because of the freight situation. We had much better freight out of Filer City. The wood situation is better there, too. It was more cost-effective to run -- and the machine is wider, so we started that one up and shut the Tomahawk machine down.

But you're right. It has only been down two years. So it would be the same -- it probably would not be taken out of the numbers yet. Next year it would be.

Okay. Then you mentioned freight, you have done a -- really helped us a lot in the past talking about sort of giving examples of how freight times had increased, especially over the rails, from like what it was five or six years ago. As you look today versus recent years, would you say it has gotten a little bit easier to get roll stock from point A to point B? Or is it still as hard as it ever was?

Yes, I would say it is as hard as it ever was. You win a few battles, you lose a few with the railroads, but it's as hard as it ever was.

One of the problems you have now is you've got to get enough switches. So if you don't really plan your movement of product exactly correct, and you put too many rail parts into a facility, they are there but you can't get them switched and moved into the facility. The railroads like everybody else are trying to reduce costs. But it just makes it more difficult. So you know, it's as hard as it ever was, from my perspective.

Got you. Okay, thanks, Paul.

Fritz Von Carp with Sage Asset Management.

My questions have been asked and answered. Thank you.

Great.

[Andy Thamann] from Iridian.

I was just wondering in regard to the $161.8 million, whether there is something in the next quarter or two that you might want to have that around for? That you might need it. Because that is a lot of cash for you guys. You don't usually -- I don't know if you always carry that much when your debt is at this level.

We don't carry it with us. We have got a big safe we keep it in. No, I'm kidding you. No. Obviously, you can only keep so much cash around. We do get a return on that cash, etc. etc. But we have made no decisions in that regard that I will reveal on this call. But it is something that is on our minds, let's just say that.

Okay, thanks a lot.

Thank you. I am not showing any questions at this time.

Okay, thank you, very much, operator, and thank everybody out there for participating in the call. Looking forward to talking to you next quarter.

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