Packaging Corp of America (PKG) 2007 Q3 法說會逐字稿

Thank you for joining Packaging America's -- I'm sorry -- Packaging Corporation of America's third quarter 2007 earnings conference call. Your host today will be Paul Stecko, Chairman and CEO. Upon conclusion of the narrative, there will be a Q&A session.

Good morning, and welcome to our third quarter earnings release call. I'm Paul Stecko, Chairman and CEO, and with me on the call today, as usual, is Bill Sweeney, who runs our corrugated products business, Mark Kowlzan who runs our mill operations, and Rick West, PCA's Chief Financial Officer. Thanks for participating, and as the operator said, after the presentation, as always, we'll be glad to take questions. Let me start with a quick summary and then give you some more detail about the results. aesterday we reported record third quarter earnings of $49 million or $0.46 a share, and that's compared to third quarter 2006 earnings of $44 million or $0.42 a share, and second quarter 2007 earnings of $46 million or $0.44 a share. This was another quarter of strong earnings and solid operations. The $0.04 per share increase in our quarterly earnings compared to last year's third quarter was the result of better pricing and volume, and that totaled about $0.08 a share. This was partially offset by increased recycled fiber and labor and benefits cost, which, taken together, lowered earnings by about $0.04 a share. Net sales for the third quarter increased 2.8% to $591 million, and that compares to $575 million in the third quarter of 2006. And for the first nine months, net income was $126 million or $1.20 a share, compared to $87 million or $0.83 a share in 2006. Net sales for the first nine months of 2007 were $1.74 billion, compared to $1.63 billion in 2006, and that's up about 6.2%.

We also announced yesterday an increase in the quarterly dividend on our common stock from an annual payout of $1 a share to $1.20 a share, and we authorized -- we were authorized to repurchase up to $150 million of our common stock over the next 18 months. Shareholders of record as of December 14, 2007 will receive their first quarterly dividend of $0.30 a share on January 15, 2008. These actions, we think, reflect both our commitment to return value to our shareholders and the overall operating and financial strength of PCA. Turning to operations, our mills produced 632,000 tons of container board. That's a new quarterly production record, up 11,000 tons or 1.8%, compared to the third quarter of 2006. Both our domestic and export sales of container board remained very strong, with export shipments up about 8,000 tons or 16%, and outside domestic sales up 4,000 tons or 5% over last year's third quarter. Our corrugated product shipments were up in total 1.3%, which is equivalent to about 7,000 tons, compared to the third quarter of 2006, with demands steady through the entire quarter. And after accounting for one additional shipment day, our corrugated product shipments on a per-workday basis were actually down 0.3%, compared to a very, very strong third quarter last year. We ended the quarter with our container board inventories almost 3,500 tons below 2006 year-end level. And our inventories are a little lower than I would like going into October because October is a 23-day-workday month in the box plants, and we also had our Filer City medium mill down early in October for its annual maintenance outage. And as reported by the FBA on Tuesday, industry container board inventories are also quite low at 2,372,000 tons or 3.5 weeks of supply, which is the lowest September ending inventory on a weeks-of-supply basis ever.

Looking next at cost, we had another quarter of solid mill operations, which continued to demonstrate the cost advantages we have from our operational efficiencies and the flexibility we have in terms of our relatively low recycled fiber usage and our low natural gas and fuel oil consumption. Compared to the third quarter of 2006, our mill cash costs were up about $10 a ton, but $9 of the $10 increase was due to higher recycled fiber cost. $9 out of $10. On average, recycled fiber prices increased about 30% or $37 a ton, which lowered earnings by about $0.02 a share compared to last year's third quarter. Compared to the second quarter of 2007, mill cash costs increased $4 a ton with almost $3.50 of that due to higher recycled fiber prices. Fortunately for us, our net purchased recycled fiber was only about 16% of our total fiber needs, which is much lower than for most of our competitors, so we have a pretty good advantage in this part of the business. Our wood fiber prices were up only about 1.5% over last year's third quarter, or about $0.05 a share. And really, that's pretty remarkable considering the limited availability of residual wood chips from wood products plants, and was only possible because of our ability to produce more own-make chips in our mills rather than by purchasing either higher- priced residual chips or use more OCC. Looking at other costs, higher labor and benefit costs reduced third quarter earnings by about $0.02 a share, compared to last year's third quarter. And energy costs were also higher at our mills and box plants, which lowered earnings by about $0.01 a share, compared to last year's third quarter. Net interest expense, however, was lower by $0.01 a share which helped earnings.

Looking at pricing, our corrugated products and container board sales prices were up over the third quarter of 2006 due to some additional price realization from the last box price increase we had in 2006, the realization of the August container board price increase, and finally, by some realization of our announced September box price increase. Most of the September box price increase will be realized in the fourth quarter as you'd expect, and I'd say that at this point, we're very well along with implementing this price increase. Turning to cash utilization, our capital expenditures were $27 million in the third quarter. We made a scheduled $10 million principal payment on our term loans, reducing our long-term debt to $679 million. We also made a number of large timing-related payments during the quarter, including our semiannual interest payment on our notes of $15 million, federal taxes of $42 million, and a discretionary increase in pension funding of $11 million. Finally, we repurchased 300,000 shares of PCA common stock in July for $7.8 million at an average price of $25.96. We ended the quarter with cash on hand of $194 million, and that's a $14 million decrease from the end of June because of a lot of the things that occurred in the -- in the third quarter. And for us, because of the way several of these larger cash payments are staggered during the year, the second and fourth quarters are normally our big net cash generators. Overall, we're pleased with our third quarter results, as well as with container board industry business conditions. For PCA, this is our fifth consecutive quarter of record earnings, excluding special items, due in part to the competitive advantages we have with our low cost -- with our low use of recycled fiber, natural gas and fuel oil, as well as an excellent book of business in our box plants. Our mills continue to run extremely well, setting new records for production and efficiency, and our total box plant shipments were 1.3% higher than last year's strong third quarter.

We continue to see the benefits of a weaker dollar with strong export markets and a steady domestic demand. And the pace of implementing our box price increase, we feel, has been pretty quick. Looking forward to the fourth quarter, we expect earnings to improve with increasing box prices. We completed our scheduled annual maintenance outage at our Filler City mill earlier this month which resulted in lower production and higher cost at that mill. Both our wood fiber and recycle cost on average are expected to be higher in the fourth quarter, and we expect higher energy costs with colder weather. With Christmas, there are two less corrugated product shipment days than in the third quarter. And as a result, we expect our corrugated products volume to be a little lower than the third quarter. Considering all of these items, we currently expect fourth quarter earnings of about $0.49 to $0.50 a share.

With that, as always, we would be happy to entertain any questions, but ,as always, I must remind you that some of the statements we've made on this call constitute forward-looking statements. These statements were based on current expectations of the company and involve inherent risks and uncertainties, including those identified as risk factors in our annual report on Form 10-K on file with the SEC . Actual results could differ materially from those expressed in these forward-looking statements. And with that, I would ask the operator to open the line up for questions with -- with the one note, in order to make sure that we got adequate time for everybody to ask questions, I'd like, on this call, to limit it to one question and one follow-up. And if we got to make a couple of rounds to get all your questions answered, we will. But let's just try it this way this time and see how it works. Operator, could you open up the

Certainly. [OPERATOR INSTRUCTIONS] Our first question comes from Mark Connelly of Credit Suisse.

Paul, can you talk -- you have talked in past calls about seasonality shifting around a little bit. I wonder if you can talk about that issue in the context of prebuy in September versus October, and whether you think that's any sort of a factor here at all?

I think prebuy is always a little bit when there is a price increase. People tend to buy a little extra, but when you are buying boxes, storage is a problem. You know, you can't load up on three months' supply because you simply can't hold them anywhere. So I think there's a little, but, you know, we have seen no demand shift -- no change -- October so far as been every bit as good, probably a little better than September, and -- but I'm sure there is a little -- there was a little prebuy. With regard to seasonality, you know, the business has gotten a lot less seasonal. The last two Decembers have been pretty good, and we would expect this December to behave the same way, and I think a lot of that has been driven by Internet commerce. There is a lot of new applications for boxes that never existed before because of all the stuff that people order on the Internet, and that's been a change. And so, you know, December used to be a horrible month for the industry and PCA, and the last two years have been pretty good months. So, I expect less seasonality, except for the fact that when you compare it to the third quarter, you got to realize there's two less days. And that does matter. And that's really not seasonality as much as less working days.

Paul, on that prebuy issue, though, if you were to think about your business in terms of the specific customers that are buying ahead of Christmas, then it's really not a multiple month. It's really just August through October, and then Christmas is over. Is -- you know, do you have enough business in that piece of it to get a sense of how much prebuy might be going on for that customer base?

I would just say that when we look at our order patterns, it's not a large number. It doesn't drive by and say, wow, somebody is prebuying. But you know, there's a little there. And I think the operative word is "a little." I don't think there's much prebuying.

Great. Thank you, Paul.

Our next question comes from Rick Skidmore of Goldman Sachs.

Good morning, Paul. Just to talk about the box price increase for a minute, can you just relate how this one is going in relative to the last box price increase you experienced in '06?

Well, the one in '06, I thought, for us went pretty quick. we got the thing done, you know, between two and three months. This one was quicker. And this is up -- I think -- and Bill Sweeney is sitting here. I'll let him answer that question. He's been around -- he's older than me, but he has been around longer than me in this industry. Here's the quickest one I've experienced. He's been around longer. You want to respond to that one, Bill?

Most of the people that report to me say that this was the easiest increase so far.

Okay. And just to follow that, would you expect that you would see some of your box customers start paying in the first quarter, or do you see all of them paying in the fourth quarter?

The overwhelming majority will pay in the fourth quarter. You always have a few that carry over, but the operative word there is "a few."

Okay. So maybe a little bit of residual carries over into the first?

We had a little bit of residual carrying over into the first. That's true. There is a few accounts that will do that effective January 1st.

Okay. Great. Thanks, Paul.

Our next question comes from George Staphos of Banc of America.

Thanks. Hi, everyone. Good morning. Paul, first question on export. Obviously we can look at export [container board as one cater], but do you have any evidence, you know, whether it's hard data or anecdotal commentary that supports the view that perhaps U.S. manufacturers are starting to be able to ship a bit more overseas because of the dollar, and then hopefully that's having a positive effect on the box business?

You know, we see some of our customers' businesses that are up, and some of those are exporting, and so we're seeing some of that, yes. But it's kind of been a steady, gradual increase. It's not been precipitous. You know, it's it's -- it's almost like turning an aircraft carrier. It's slow, but you can see it turning. The other anecdotal evidence I have seen, and I've seen things I'm sure you've seen - the Wall Street Journal's there - were some of these freight companies are pulling a lot of things, and they are saying it's for export. And we weren't exporting these things a few years ago.

Right.

So you are seeing some evidence of that also. And -- but, you know, there's other things that have popped out that are bigger than that. For example, you know, with the price of corn way up, the meat packing business is -- is really taking off, because corn prices are high. You slaughter more cattle, pigs, et cetera. So that's a bigger event than just the general gradual trend and things moving in export. But it's definitely happening, but I wouldn't say it's explosive. It's more steady and consistent.

Okay. That's a positive way, and well. Paul, switching gears, you know, on -- are the decisions that you make on dividend and share repurchase and ultimately returning value to the shareholders integrated with how you think about your other uses for cash, whether, you know, to invest or, you know, opportunities that you have to acquire, or given your balance sheet position and everything else, are they really more separate in how you evaluate the various uses for the cash? Thanks.

No, they are integrated. We have a plan. We have a forecast of what our cash flows will be. You know, as I have stated many times, one of our objectives is to continue to grow our box business, increase our integration level from the -- you know, the low 80s to the low 90s, and we do that by adding box plants, you know. So we budget every year that we would like to acquire some box plants without having to borrow, and that's in our cash planning, and that is integrated in o where we think our cash is going, how much cash we would like to keep around. We are a little on the conservative side. And that, then, determines how much cash is left over for dividends and share repurchases, which we think are two good vehicles. So, no, we have an integrated approach --

So the increase in the dividend and the share repurchase basically suggests that some of the external opportunity, or opportunities, to invest within the company right now aren't as attractive as they might have been six months or a year ago?

No. Absolutely not.

Okay.

We are looking at things all the time. I will tell you that, you know, we are deliberate investors. We look at companies that we buy and, you know, make sure that we think there is going to be a good investment, because capital is precious to us. But it's a continuing effort, and, you know, we like to spend on the order, you know, rough number $50 million a year to try to increase the size of the company and the growth rate.

Okay. Thanks, Paul.

Our next question comes from Chip Dillon of Citigroup.

Yes. Good morning, Paul.

Good morning, Chip.

As we look at the fourth quarter, I can't remember -- the only time I see you all ever having performed better sequentially, I think, that I go back to is 1999 in the forth versus the third, because I know you typically have a seasonal downer. And as you look at this year's fourth quarter, and it looks like it is, of course, going to be up, how much of that would you say is just a quick price increase, maybe faster than those in the past that have occurred in the fourth quarter? And how much would you say might be actual seasonal changes because of the holiday season and more Internet ordering, and therefore the use of more boxes?

I don't want to get too specific here, but I would just say historically, historically, the fourth quarter, because of seasonal factors -- cold weather, energy, less volume -- it has been about $0.05 a share down all things held because of the fourth quarter being in cold weather, et cetera, et cetera, cost us about $0.05 a share. The wild card this year a little bit is the fact that we, you know, we do have two less shipping days compared to the third quarter, but that's not that big of a deal, and the real wild card here -- I mean, if you say what is the one thing that is probably the biggest uncertainty factor? And I would say it would be fiber prices, both recycled fiber and -- with the wood product plant situations, with the lack of availability of residual chips also -- although we have done a great job so far, you never say never, and it would be in the fiber area. That's the one variable that I wish I had a better had on, especially the recycled fiber part. You got all that capacity starting up in China. They need recycled fiber. You're talking in terms of millions of tons, not hundreds of thousands of tons for all of those mills. So fiber is the big variable. It's about $0.05 historically, and it's not too far off from that this quarter.

Okay. Secondly, when you look at the fiber situation, at least it seems like recently, we have seem some unusual dislocations open up in OCC pricing. And I'm sure that's much less of a headache for you, fortunately for you, than for others. But do you see, you know, behavior -- first of all, you would think that the gap would close because I don't see why the City of New York or Chicago would care who they sell their OCC to. So do you see the gap closing? And secondly, do you see different behavior with perhaps people from the Far East coming more inland to source OCC?

You know, Chip, I hate to give you this answer, but I really don't know. I think it depends on how much it moves because obviously you have a freight penalty when you come inland. That's why you buy on the coast. The freight is -- With the price of oil hitting -- last time I checked it hit 88. I'm not sure where it is today. But freight costs are going up. The other thing, you know, that situation in Europe with freight rates. They are not shipping much OCC to China. That is supposed to end a month or so. But I think the answer to your question is it depends how bad it gets. If prices go up a lot, then I think people will move inland. If the thing abates a little bit, then they probably won't. But you are probably better off asking, you know, one of our competitors that -- you know, that have a big recycled operation, they -- I'm sure they are closer to this than us. And not to make excuses, but we don't buy that much, so we don't have as much knowledge, probably, in that area as some others in our industry do because it's a much more important part of their business.

Okay. And real quickly, finally, why should prices stop moving up here? Because this is a function of supply and demand, and I think, earlier, it was asked about this huge spread that you see between prices here for virgin and for the recycled stuff that's obviously inferior that's made in places like Europe. Why shouldn't prices not go up further?

Well, I -- as a point of matter, I don't really talk on these calls about forward pricing because on advice of counsel I have been advised not to. But I would say this -- I think business conditions for the industry are very good for a lot of the reasons you pointed out. Supply/demand are in excellent shape. That's coupled with a weak dollar, and a world economy that's doing pretty well, which means that we've got multiple markets for our product, and -- at a time that supply and demand are pretty good. though. Now, there have been a few problems on the economic horizon. You know, subprime, et cetera. But that thing seems to be not precipitating any big changes in the business patterns, at least we're saying. So I think the only thing I can say to you, Chip, is that I think business fundamentals for the industry are pretty good, and I -- And obviously if we didn't think they were pretty good, we would not commit this much cash going forward in return in value to our shareholders, but we do think conditions are pretty good. And I have to limit my answer to that.

Totally understand. Thank you very much.

Our next question comes from Mark Connelly of Credit Suisse.

Thanks, Paul. Just one more question, last quarter you talked about positive mix changes. Can you talk a little bit about mix, and what you might be expecting going forward?

I would expect our mix to continue to improve on a fairly gradual basis. Again, one of the things that is -- is really the foundation on which our box business is built is that we look for what we call the hard- to-do. And things that people understand -- They are getting value, and are willing to pay for it. And, you know, again, there's another trend in the industry that, with restructuring and consolidations, people are trying to improve their operational efficiency, particularly in their box plants. And higher volumes, et cetera, reduce cost. I point out that our philosophy is actually the opposite.

We run our box plants to do whatever we can to maximize revenue. And I mean, cost is important, but it is not the driver. And when you continue to do the hard-to- do, that generates improved mix. Not simply you are making more high-end graphics. You are doing more things for customers that are more difficult. And what may be a simple box combined with very difficult service requirements is really something special. So our philosophy is we want our mix to get better and better every year, but this is not something where we're building another high-end graphics plant, we're going to get a 10% improvement. We're going at this at 2% to 3% a year kind of mix improvement thing. So, again, slow but steady.

One last thing, Paul, are these low inventories that you got going to cost you a penny or two in the next quarter?

It depends. Mills are running well in October. That's the key because we drew them down, and we got a 23-day month. We have some flexibility with export to honor our commitments, but maybe ship it a little later And that -- that is a little bit of a bellows, if you will, for us to flex. And -- but you always, when you running tight inventories, you may have to incur some premium freight if demand is too strong. On the other hand, I don't want to root against strong demand just to help my inventories. So I can't have it both ways. So the answer is yes, it could cost us some money. I don't think it would be as much as $0.01 a share, but it could be, you know, as much as $0.05 a share.

Very good. Thanks, Paul.

Our next question comes from Rick Skidmore from Goldman Sachs.

Hey, Paul, just following up on a previous question about the exports markets. If the economy does slow, and the box demand is slower in '08 than in '07, how easy it is to move that incremental unit of linerboard into the export market? Is it pretty easy to sell, or is it difficult from a distribution supply chain perspective?

Well, for us, you know, our primary sales in the export have been more to existing customers as opposed to just going out and hitting spot markets. You know, we specialize in things like Super Heavyweights, and in the produce business in South America. And what has happened with the dollar especially in Europe being as weak as it is, we're getting more tons from existing customers because it's a good buy. And so we're not in-and-out kind of players in the export market. And we have the ability to take more business. We could have taken more throughout this year, but we have to balance domestic versus our export shipments.

So for us it's not just going out abd trying to take business from somebody. It's more grow with somebody. And this business comes to us naturally because of the currency. And so, we have the ability to take more. I mean, we got -- we can sell more if we had the tons. And obviously if our domestic demand slows down, then that's one of the things we would obviously do. But just as a point of reference, through the first 10 days of October, our volume is up 2% over last year on a per-workday basis. And there's one extra workday this month. Now I'm not saying we can, and I don't know if we can, but if we sustain this rate for the rest of the month, we're up 2% on a workday basis, plus another 4.5% for an extra day. We'd be up 6.5%. So the last thing we would be looking for is more export this month. And, you know, if things lighten up as the quarter moves on, that is -- would be the point we would look to put more in the export.

Okay. I'm just shifting -- I'll go with the second question for a second. You have talked about over the last few quarters running the mills extremely hard. You have taken your normal maintenance downtime. Is there any concern that the mills need to have a little bit of extra maintenance, given how hard you have been running them recently?

No. We're in pretty good shape. What happened to us last year, we did have that problem. In December at Valdosta, we had to take some extra maintenance in our woodyard, and we lost a little production. But once we got the Valdosta woodyard and adequately maintained, and then we did some more work there in its annual shutdown this year, we're okay. And I don't see -- you know, there are -- I had some known problems at this time last year, where I had maintenance concerns, but I'm optimistic. Mark is sitting here, and he's shaking his head yes. We think we can make it to our next shutdown okay. At all of our mills.

Okay. Great. Thank you.

Our next question comes from Mark Weintraub of Buckingham Research.

Thank you. Paul, I really (inaudible) a big exporter, and as you said, you got a lot of specialty stuff that you're working with, but do you have a sense as to where mill nets are to some of the European markets relative to shipping it domestically?

Well, I can't speak for everybody. I can speak for us. We have situations where the mill nets to Europe are better than the same thing in the U.S, and some are worse. And the variable is how far you have to ship domestically. Because the freight differential is you can get down as low as $15, $20 freight in the U.S. ll the way up to $100 freight if you are shipping, say, to the West Coast. And, of course, that freight is bared by the - on domestic shipments - by the supplier, and we ship SAS just to the port going to Europe. And it's, you know, you are talking a much lower freight because, Valdosta for example, is a two-hour truck ride to port of Jacksonville. So the answer is, export pricing is -- in a lot of areas -- you know, I would say on average it's close. Maybe not quite as good, but it's close, but there are instances where it's better.

And if you contextualize historically what has been, is that fairly unusual, or is that not that unusual?

It's more unusual than it used to be because, you know, if you go back five years ago, you know, our average freight cost, you know, rough numbers, were $25 a ton domestically. Today it's averaged $50, $55 a ton. So our freight over probably five or six years for container board domestically has doubled. And so that's helped the export business. That's made the export business more competitive because of domestic freight shipment costs.

And then just a last one. A quick one. Cap spending for '08, do you have a initial figure?

Yes, we're -- our number for the year is about $110 million. And what have we got year-to-date, Pete? We're at $70 million. So we're about right on track.

Okay. Actually the question was for '08.

Oh, I'm sorry. '08, yes, we're talking about that. We are probably going to be, you know -- Our target number is $110 million, but we have got a couple of opportunities in the box business to make a few very small investments, CapEx- wise, with very good returns. And although I haven't made a final decision on this, I'm leaning hard towards probably giving Mr. Sweenny another $10 to $15 million because I like the projects. They are the do-the-hard-to-do-things. And I like the returns on these projects. They're hard to walk away from. We have tried to stay very disciplined on $110 million, and we have. And occasionally I'll go $10 or $15 million above it. Last year I went to only $90 million. So you got to be a little flexible. So I'm going to say we're going to be between $110 and $125 million is what I would say right now.

Okay. Great. Thank you.

Probably closer to $125 million because I like whatwe can do, and we got a lot of cash.

Our next question comes from George Staphos of Banc of America.

Thanks. Hey, Paul, maybe just continuing on that theme. You know, on productivity investments within the mill system, do you have any projects where you can measurably further reduce either energy consumption, or give yourself a little bit more fiber flexibility, or have you really pretty much tapped out on bigger projects there, and it's more 1%, 2%, 3% types of productivity gains? Thanks.

We have one energy product -- one engive project that's fairly significant, and I'll probably -- once we get it going, and I can quantify that the results are as good as I think they are going to be, I'll probably talk about that sometime next year. We're spending about $20 million in the energy arena on one project, fairly heavy return because of energy.

Yes.

In terms of fiber, we are -- we have funded some projects to increase our ability to do some things like use more OCC at Tomahawk as opposed to DLK, which is a little more expensive. And you need to use recycled fiber when you use semi-chem medium because that's the strength component of the mix. The ideal semi-chem is about -- rough number 60%, 65% wood pulp, 35% or so OCC or recycled fiber. And so that will save us some money there. And then we have a variety of projects that are smaller to improve wood yield, as wood is your single biggest cost in making paper.

We're doing some things with what we call chip fractionation, where you divide the chips by thickness, and you cook. Cooking pulp is like cooking spaghetti. Ideally, you like every strand to be the same thickness because if it varies in thickness, you'll overcook or undercook the chips. If you can separate them into all the same thicknesses, cook them in separate digestures, you can improve your wood yield. We have got some projects in that area. And, of course, the best way to lower your fiber cost is improve your yield. So we're doing some things there. So we got enough going on that I'm happy about it.

Take the energy project and the other thing that you mentioned on fiber, you know, could be -- in just thinking about, you know, required rates of return -- could these be adding, say ,in a couple of years, $10 to $15 million?

I'm not prepared at this point to talk about that because I don't like to give rough estimates. We are doing some things that are significant that we have got to prove will be as successful as we think. But until they are approved, I'm going to just pass on that one.

Okay. Thanks, Paul. Good luck in the quarter.

Thank you.

Our next question comes from Mark Wilde of Deutsche Bank.

Good morning. I wonder if we can just get some thoughts on why this box hike seems to have gone in so quickly, and whether you think you will actually get past the $40 container board price, and what you realize?

Well, you know, there's a lot of reasons. I'll let Bill jump in here also. You know, I think, you know, the primary reason is supply and demand. Paper is very tight, and people understand it. And that historically is what has driven box prices, because paper is, you know, anywhere from, you know, probably 60% to 80% of the cost of a box, and so that's a big driver. I think people understand that, and, you know, at least from the people that I talk to, customers, there has been a mood shift in terms of worrying as much about a stable, dependable source of supply, especially in light of the transportation difficulties. And they understand that having paper is equally important to paying a little more more it.

And I think when you look also, customers have a realization everything has gone up in price. And really, again, a corrugated container is still a very darn good value to them for what it does. And I think there's also a good feeling that this balance of trade is going to get better, and people are feeling better in general about their ability to compete in world markets. And that's helped the psychology in terms of, hey, let's get on with it. And Bill, you want to add anything to that from -- you know, you are closer to it out in the field than I am.

Mark, the customers understood the situation. In terms of -- so they were expecting an increase, and that's why it was -- and they -- they -- they are in touch with what is happening. And the relative value of fiber versus resin has also helped. So there's no substitute for boxes at this point that's economically viable. The other situation is that when you are talking about a bigger pie the percent increases help you get more than fiber. So we have -- As our company , as you know, traditionally, not only passed through the cost of the fiber, but we've covered inflation. And it's easier now with a bigger pie with the same percent

Yes, that's a good point. In order to (inaudible), we transfer paper to our box plants at market. And you know -- I'm going to pick a number. Our yield is a little better than this, but I'll do the math. If you have got a 10% yield loss, then if you have a $40 price increase, the breakeven at the box plants on it, you got to get $44 because you have a yield loss. And then as Bill said, you got to do a little better than that even because you got to cover inflation, labor, energy, et cetera. So our philosophy is that we want the box plants to be paid for the value and the products they supply to the customers, and that would dictate that you need more than $40. How much more we think we need or we're going to get, that's not something that I discuss on a call like this.

Yes, that's fine. It looks like over the last couple of years,that at least some of your competitors weren't able to recoup all of those costs. My follow-on question now, Paul, has to do with this Pensacola startup, [that's your former employer]. And just bringing up the question of whether the U.S. industry over time might move to lighter-weight packaging and lighter- weight container board, and whether you think there will be anything to that.

I think the answer is we already have moved to lighter-weight paper. You know, 42 [pound] used to be the bell weather grade, and now in our own case we probably make five times as much as 35 [pounds] -- now the bell weather grade weights dropped. And now it looks like, at least, for the industry have kicked up a touch in terms of basis weight. And I think that's due to the fact that, you know, a lot of these wrap-around boxes that say they protect things like furniture, those markets have gone offshore. And so, you know, we're still big in some of the things that -- you know, produce, and food that have to support weight. But in terms of, will we go lighter this country? You know, I think there's always the -- there's always constant pressure to reduce cost in every element of your business, and that includes packaging, but as Bill pointed out, there aren't many substitutes that have got the cost position we do.

You know, plastics, resins. You are not going to be helped by some of these oil, and eventually natural gas should -- natural gas and oil should not get too far out of parity, but in Europe it's a little different. And what they do in Europe is because they do not have virgin fiber - You know, there used to be only one craft mill on the continent. I'm not sure if it is still running. So they have either zero or one craft mill on the continent. That's 100% recycled market, and that's weaker fiber, weaker markets. And so what they tend to try to do because the fiber is so expensive is they'll go a multi-wall. They'll go two-ply, and we'll go one in this country and get the same strength. That involves more labor, more starch, more other things, but that's what they do more than we do. And I'm not very familiar with, you know, what -- you said my former employer, I have been going here, 15, 16 years now. But they have said publicly that a lot of that will go to their European operation which makes a lot of sense because they do a lot more lightweight. Will we ever get to that in the U.S.? I think it's probably more a function of fiber prices than anything else, and right now, you know, I would say, you know, it's not in the foreseeable future.

Okay. Very good. Thank you.

Again, if you have a question at this time, please press the "1" key on your touchtone telephone. Our next question comes from Tyler Old of JPMorgan.

Good morning. Just taking a step back and given the current economy that is throwing off mixed signals here. What is your view of where we're headed? And what are your customers' order patterns so far in the fourth quarter signalling to you about, maybe the direction of where the economy is going in fourth quarter and maybe into early '08?

Well, you know, in terms of where the economic is going, you know, I -- I really can't add much other than, you know, everybody speculates. My own personal feeling is I think the economy, despite some problems, has handled them well. It is still moving along. Business is still good. But, you know, I'm really not the best person in the world to talk to about an economic forecast going forward. In terms of our customers, we got over 9,000 customers, and collectively, what they are saying to us is that, hey, we're up 2% over a very strong beginning of October last year. So collectively, I think they are saying they have got confidence in this economy.

All right. And then could you just quantify the Filer City maintenance, and whether or not you are still planning to take downtimes in Valdosta in the first quarter?

Yes, we had Filer City down for four days in -- beginning of October, and that took out about -- oh, 4,042 tons of production roughly. As of right now, things can always change, but we would plan on taking both -- for the last -- except for one year, we take down both of those mills in the first quarter, and we do that because energy costs are the highest in the first quarter, so it makes sense to shut a mill down when you got to pay the most for energy. And it's always also a period where, historically, demand was lower than the other quarters. Although that is starting to even itself out a little more. And you have good labor ability. Not many people go down in the first quarter, so the construction labor you need is fairly plentiful. So for us it makes a lot of sense. And we've got mills in the South where you can do that. Yes, that is still our plan, always subject to plan, but you're planning shutdowns a year in advance, so the chance of changing it is not so great.

Great. Thank you.

I'm not showing any further questions at this time.

Okay. We're about out of time, anyway. Listen, I would like to thank everybody for participating in the call, and, you know, hopefully talk to you again one quarter from now. Good-bye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Thank you, and have a great day.