Packaging Corp of America (PKG) 2007 Q4 法說會逐字稿

Thank you for joining Packaging Corporation of America fourth quarter and full year 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.

I will now turn the conference call over to Mr. Stecko. Please go ahead when you're ready.

Thank you and good morning and welcome to Packaging Corporation of America's fourth quarter call.

I'm Paul Stecko, Chairman and CEO of PCA and on the call with me today is Bill Sweeney, who runs our corrugated products business. Mark Kowlzan, who runs our mill operations and Rick West, our Chief Financial Officer. And thanks for participating as the operator just said, when we complete the presentation, we'll be more than happy to take any of your questions. And with that, let me begin with the summary of our results and then I'll provide more detail.

Yesterday, we reported record fourth quarter earnings of $44 million, or $0.42 a share. This compares to fourth quarter 2006 earnings of $38, million or $0.37 a share. And that number has been reduced for 2006 by $1.7 million, or a penny a share to reflect the new [accounting] guidance for major planned maintenance activities. As I said, this is a record fourth quarter for earnings per share, excluding any special items, since we became a stand-alone company in April of 1999.

The only fourth quarter with higher reported earnings was the fourth quarter of 2000, when we sold our woodland to Southern Timber Venture. In that quarter, we reported $0.58 per share net income, but when you exclude the woodland sale, we had 35% earnings in that quarter. Making this quarter a record earnings when you exclude woodland sales.

Our fourth quarter results do include a non-cash after tax charge of $4 million or $0.04 a share to value the company's inventory on a LIFO basis. And this compares to a similar charge of about $2 million or $0.02 a share in the fourth of 2006. This LIFO charge was about $0.03 a share more than expected, primarily as a result of higher cost items going into inventory of certain items in the fourth quarter and this was particularly in the area of wood fiber, starch, and finished corrugated products. But I should also note, we could have done a better job in forecasting this item, but I think as some of you know, it's pretty tricky to forecast and it's particularly sensitive to short-term changes in cost, such as occurred in the fourth quarter. And that's basically the reason for the miss in that regard.

The improvement in earnings compared to the fourth quarter of 2006 was a result of better pricing and volume. And when you take them together, they improved earnings by $0.17 a share. And these earnings improved and items were partially offset by higher fiber cost of $0.04 a share, higher labor and benefit costs of $0.03 a share, the inventory charge that I mentioned of $0.02 a share over last year, and higher costs and loss production from the previously-reported unplanned outage at Counce which net of insurance recovery lowered earnings by about $0.03 a share.

Full year net income for 2007 was an all-time record also, of $170 million, or $1.61 per share, compared to $125 million, or $1.20 per share in 2006. And the higher earnings for the full year compared to 2006 were impacted for the most part by the same items as in the fourth quarter, except for the Counce unplanned outage and the higher LIFO charge which impacted only fourth quarter 2007 results.

Net sales for the fourth quarter were also an all-time record of $580 million, compared to $553 million in the fourth quarter of 2006.

Full year sales for 2007 and 2006 were $2.32 billion and $2.19 billion respectively.

During the fourth quarter, capital expenditures were $45 million. We also repurchased 788,000 shares of our common stock for $23 million at an average price of $28.85. We ended the year with $228 million of cash on hand. That's an increase of $34 million, compared to the end of the third quarter.

Turning next to operations, our mills produced a fourth quarter record of 615,000 tons. That's up 0.30% over last year and that's a real accomplishment, considering we lost about 11,000 tons because of the unplanned outage at Counce in October. The total earnings impact of the Counce outage from lost production and increased cost was $4.7 million after tax, or about $0.045 a share. We did receive insurance proceeds in December of about $1.5 million after tax, or about $0.015 a share. So the net impact to earnings when you get all done with it was about $0.03 a share.

Mill production in 2007 was also a record at 2,446,000 tons, that's up 1.8% over 2006. Both domestic and export containerboard demand remained strong during the quarter. But, because of our low inventory levels after the October Counce outage, we did reduce some of our outside shipments. Our domestic containerboard shipments were down about 3,000 tons, or 4% below last year's strong fourth quarter shipments and our export shipments were down about 4,000 tons, or about 7% compared to last year. For the year, however, our domestic containerboard shipments were up about 5% and our export shipments were up 25%, which is a record for export shipments.

Turning next to corrugated products, shipments were up in total, about 0.40%, compared to last year's very strong fourth quarter, and essentially equaled our all-time record fourth quarter shipments set in the fourth quarter of 2005. After accounting for one additional shipment day this year, our shipments on a per workday basis were down 1.2%. Our shipment pattern's also interesting. Box shipments were strong. I'm talking about December now, which is always a tough month to forecast. But in December, our box shipments were strong through the 21st of December, up 1.6% over a strong 2006 December, as I think many of you recall. Then, from the 22nd of December through the 31st, when there were only three shipping days this year, our volume fell drastically for those three days, down 13% compared to last year.

We think that this was due simply to the way the holiday vacation days fell this year and not the general state of business. We say that because in January, through the 17th of the month, and that represents 22 -- excuse me, that represents 12 of the 22 workdays in January, our shipments are up a little over 6% over last January. So we think the weakness in the three -- in the holiday week is just the way the holidays fell and we've seen a very strong rebound through half of January.

For the year, total corrugated product shipments were down 0.30% and down 1.1% on a per workday basis compared to last year. I should also note that after the Counce outage in October, our containerboard inventory dropped to its lowest level since 2004. And it was critical that our mills run very well the rest of the quarter, and they did. And, by reducing our domestic and export shipments, we were able to replenish some inventory by year-end. As a result, we were able to end the quarter with our containerboard inventories essentially flat, with year-end 2006 levels. And this was very important because we do take our Counce and Valdosta mills down for their annual maintenance outages in the first quarter, and that further reduces our production level and our inventory.

Now, the FBA does not report December ending inventories until February the first, I would note that November industry inventory levels were 2.21 million tons and that was the second lowest level since November 1994, with November 2005 being the only lower year after the, as you recall, hurricane related mill outages. So, we're going to have to wait until February 1st to be able to update those numbers.

As I look next to pricing, we essentially completed the pass-through of our August containerboard price increases in October and except for a very few contractual price increases that roll over into January 2008, we are done with this price increase. Excluding the Counce unplanned outage, our mill cash costs were up about $13 a ton, compared to the fourth quarter of 2006. Recycled fiber costs were up $13 a ton and virgin fiber costs were up $2 a ton. So that means that all other costs taken together were actually down $2 a ton. So other than fiber, we performed quite well cost-wise.

On average, OCC prices increased about 75% or $55 a ton, which lowered earnings by about $0.03 a share, compared to the fourth quarter. And that's a big number, but I would say I think the saving grace is, compared to many competitors, we use among the least amount of OCC in the industry and so the negative industry guard is minimized to some extent by the fact that we don't use a lot of OCC, but when something goes up 75%, even using a little costs you. We also began to see higher purchased wood chip and pulpwood cost during the fourth quarter, due to limited availability of purchase chips, because of downtime and shutdowns at wood product plants, as well as by higher fuel costs and surcharges to ship wood to our mills.

At our Counce and Valdosta mills, overall pine costs were up about 6%, compared to the fourth quarter of 2006, and up about 7% compared to the third quarter of 2007. And until there's a rebound in the housing market with a corresponding increase in the ability -- availability of residual wood chips from sawmills, we see wood cost pressures continuing, especially if winter weather conditions become very unfavorable for logging. With our fiber flexibility, higher wood costs only lowered fourth quarter earnings by about a penny per share over last year, but I should note that most of the increase occurred later in the quarter and this is expected to carry over to the first quarter when logging conditions are the worst. Reviewing other costs, higher labor and benefit cost reduced fourth quarter earnings by about $0.03 a share, compared to last year's fourth quarter, while energy related cost reduced earnings by only about a penny a share and I think most of you know, we have a very, very favorable purchased fuel mix.

Overall, if I look back at 2007, I think we had a pretty solid year. Our earnings rose about 35% to $1.61 per share from $1.20. We set production records in all of our mills and had strong domestic containerboard sales and corrugated product shipments and record export shipments.

Our mills ran very efficiently all year at record productivity levels with mill cash costs per ton up only $12 per ton over 2006. And after excluding recycled fiber and virgin fiber cost increase, our costs were actually flat with last year, offsetting all other increases through productivity. We ended the year with our containerboard inventories close to where we wanted them. And at the year-end 2006 level.

For the year, we generated $300 million in cash from operations. CapEx was about $113 million and we paid down $10 million in debt. We returned $136 million to shareholders during the year, including $105 million in common stock dividends and $31 million in share repurchases. We ended the year with $228 million cash on hand, and that's a $66 million increase for the year. With our continued strong earnings and cash flow, in October, we did announce a 20% increase in our dividend to an annual payout of $1.20 a share and also announced a new $150 million share repurchase program. So, a lot of good things happened during the year.

Looking next ahead to the first quarter, we expect our total corrugated product shipments to be higher than the fourth quarter, and as I said earlier, we're off to a pretty good start in January. Both our Counce and Valdosta mills will be done as normal for their annual maintenance outages and that's going to hold production by about 26,000 tons. And negatively impact earnings by about $0.06 a share. But this is what we do every year because we think it's the most advantageous time to take our shutdowns.

Certain timing related benefit costs are also the highest in the first quarter and we expect higher energy cost with colder weather. And again, fiber costs could also move higher if logging conditions get very difficult. Considering all of these items, we currently expect first quarter earnings of about $0.36 a share.

With that, as always, we'd be happy to entertain any questions. But I must remind you that some of the statements we made on this call do 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 at 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 ask the operator to open the phone lines up. Be happy to take your questions.

Thank you.

(OPERATOR INSTRUCTIONS).

Our first question comes from Chip Dillon with CitiGroup.

Good morning, Paul.

Good morning, Chip.

It would be great if the market gave as much credit to all the good things you do as it gave you a penalty for that $0.04. At one point you were getting 100 times that. Fortunately, the stock is coming back. But you live and learn.

Well, no one said it would be easy. It's a tough market out there. We try to do our part and if we keep producing record earnings, in time, the market will recognize that. I hope.

Yeah. Just two quick things I just wanted to ask you. One, just to make sure I had the right numbers. You said that for the full year, your domestic open market board shipments were up 5%, but exports were up 25%. Is that right?

That is correct.

Okay. And then on the box shipments for the year, your actual, I think you said it was down 0.3 or was it up 0.3?

On a total basis, it's up.

Up 0.3 and down 1.1 on a per workday.

No, I'm sorry. I misspoke. It's down 0.3 and down 1.1.

Got you. Okay. And then when you look at the situation right now, the market, coming into the holiday season, there were, I guess two things that were kind of unusual.

One, we heard about this in our conference. This is just how the box makers in Europe were somehow being encouraged to pay less money to [take] better quality board and they're slow to do that.

I guess I'm just asking. How do you see the pricing in the export markets, and I know it varies where you're looking at and is that still a way to pull us up if we slow down a lot on a demand front? And then I guess, a second thing is, are you seeing difficulty in exporting board, you and others, because of either freight rates, which I understand are coming down, or the lack of boats to take the board overseas?

Well, let me take these one at a time, Chip.

First of all, we pulled back on export shipments in the fourth quarter simply because we didn't have the tons. That's one of the benefits of having long-term relationships with customers. We talk to them and said, "Hey, look. We're going to continue to supply but we need some help. We'll delay some shipments into the first quarter next year." And I've got to appreciate our customers. They worked with us and so our -- we expect our export shipments to pick up because we did delay some people.

Everybody's having trouble at the ports. I'd say we have less than a lot of people because we didn't ship as much in the fourth quarter. So we were able to manage it. And we're expecting the export markets to remain good. We have not seen any pricing changing in the fourth quarter to speak of.

The freight situation is difficult. The freight rates are going up. And that is affecting customers, but with the weak dollar, our exports are still very, very competitive and hopefully, this freight situation will abate. But we're just going to have to play that by ear.

Higher freight is making our product more expensive abroad, obviously. But the sunny side of that is people, they're trying, there's a lot more boats coming to the US than leaving the U.S vis-a-vis balance of trade and so, that problem goes both ways and it's actually freight rates leaving the U.S. are cheaper than coming to the U.S. because of that.

All in all, I would not say a major change other than it's making business little more difficult to export because of the freight situation. So, that's kind of a long-winded answer to a complicated question, Chip.

And then just real quick --

I'm going to have to make this the last question and I'll let you come back later if you don't mind. I'd like to make sure everybody gets a chance.

Understand. Thank you.

Our next question comes from Mark Weintraub with Buckingham Research.

Paul, if possible, could you give us some sense as to the extent to which seasonality perhaps is impacting the first quarter number? And what I mean by that is, can you give a sense as to what type of annualized earnings run rate one could guesstimate that the company might be at, obviously the world will change and prices go up and down and things like that. But in terms of the kind of annualized earnings power, is that a number you feel comfortable giving to us, given that I do think the first quarter is a seasonally impacted number and is kind of misleading, you can't just times it by four.

Yes. You can look at history. We don't give full year forecasts. We give quarter at a time because we're normally pretty comfortable. We can predict earnings a quarter ahead. But if you look at us historically, our earnings drop about $0.10 a share, rough number, between the fourth quarter and the first quarter. And we're not out of line with that this year.

If you look at our fourth quarter numbers and you adjust for the fact that we had two unusual events, which is the LIFO charge of $0.03 and the Counce outage of another $0.03, instead of making 42, if those things hadn't occurred, all other things equal, we would have made $0.48. And then when you start working backwards from 48 as a base, basically $0.06 is the outages. It get you back to 42. And then the other $0.06 is the seasonal factor and it's really three things: One is energy. It's colder in the first quarter and paper mills are very energy intensive. So energy is one of the items; The other item are labor and benefits. You've got your annual increases in wages, et cetera, et cetera. And some of those costs are front-end loaded. You incur more in the first quarter than other quarters; And then the third area would be wood fiber. And again, that's a function of winter logging conditions and the fact that we've seen an increase and I don't want to minimize, but I do think a continuing concern with virgin fiber will be when these sawmills finally get back in running, because that is, roughly 30% of the source of -- in the south, at least, historically, 30% of the fiber came from purchased sawmilll residuals, 25 to 30. And that's probably about half of that is gone with the shutdowns and that's putting a little pressure on fiber. So you take those three items. They're all about a $0.02 item, maybe one's a little higher than the others, but that'll get you back to $0.36 and all of those items are typical in the past. We always get higher labor and benefits in the first quarter.

Wood costs usually go up and energy always goes up in the first quarter because you simply use a lot more. So, and that's kind of a quick shorthand way of looking at this thing.

But in terms of predicting year-over-year, I think if you go back, look at the last five, six years, you can see the pattern. We got the strongest earnings in the second and third quarters and the lowest in the fourth and the first and we expect that pattern to remain the same.

Okay. Thank you.

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

Hey, good morning.

Good morning, George.

How are you? Two quick questions. One, in the third quarter, you had a little bit of restructuring, I think box closing activity. Was there any of that in the fourth quarter that might have affected cost? I know it wouldn't have been big but nonetheless, I wanted to ask the question.

No. I don't recall closing any box plants in the third quarter. Hey, Sween. Did you close some you didn't tell me about?

I beg they were under me.

Oh, he said no. he said he didn't close and no. I don't think we closed any box plants. We had a small operation in Buffalo that I think we closed in the second quarter, but that's a tenth of a cent item. We're not talking any money at all.

Okay. So, in the fourth where there is none of that at all?

No.

Okay. And then as you look at the environment, and obviously, who knows whether the economy slips into a deeper slowdown or not, but does the environment look more attractive to you in terms of being able to find acquisition candidates or does the current macro environment, at least the concerns out there, make you a little bit more reluctant and raise, if you will, your threshold return or risk premium in looking at potential acquisitions? You know, your typical types of acquisitions [inaudible] bank.

With regard to the economy, I kind of feel like the captain of the Titanic. That iceberg [doubled] look too big ahead. You never know. We're off to a very strong January. I mean, our January doesn't watch with everything you read in the newspapers. We still got half of January to go but at least through the half of it, volume is strong. If you read -- you know, the Feds not doing all these things just for the heck of it, so who knows. But will tell you at least our business for the first half of January, I feel better when I look at our bookings compared to when I read the newspapers. But hey, that could change.

In terms of acquisitions and risk premiums, if we are headed into a recession, yes, I would say that the risk premium goes up, because times are much more uncertain and your risk premium concerning the acquisitions or anything, at least ours would go up.

Okay. By the way, you had $900,000 of expense in the third quarter of '07 for restructuring. Was the pension contribution $5 million as you expected and should we expect that to change in '08? Thanks.

Oh, let me have that one again? Rick's got it. Go ahead.

Pension expense and contribution for 2008, George, should remain in line with 2007 was about $25 million in contributions and about $22.5 million in expense.

Okay. Thanks, guys. I'll turn it over.

Our next question comes from Richard Skidmore with Goldman Sachs.

Good morning. This is actually Alex of [Goldman Sachs] asking a question on behalf of Rick. With the share price toward is today and the below where the stock has traded over the last several months, would you consider allocating more money towards share repurchase than originally budgeted?

I will -- you don't -- any change in the share repurchase requires a board approval. So we do not have the authority to allocate more than the $150 million that has been approved by the board. And so that would be the answer to the question. We don't have the authority to exceed what the board has approved.

Okay. But would you consider, your word of share price is today? Coming back to the board, how would that process work?

The board and I would discuss it and we would make a decision on anything we did and then and only then would that become public information.

Okay. Thank you.

[OPERATOR INSTRUCTIONS]. Our next question comes from Mark Wilde with Deutsche Bank.

Good morning. Paul, it looks like even adjusting for the Counce outage and the incremental LIFO, that you were a penny or two below what you'd pointed us to back in October. Can you walk us through what changed during the four quarter for it?

Yes. Well, yes. But that would be a long conversation. We missed by a penny, penny and-a-half. I gave $0.49 to $0.50 cents [inaudible].

It's not a big number. I'm just curious.

Well, it's a lot of little items. A tenth of a cent here, a tenth of a cent there, interest expense and that might be a couple tenths of a percent. A lot of little items. Let's see if any of them drop out. Any jump out at me.

Pete, you got any little real numbers? Just a lot of little items. Wood products. We have a small sawmill in [Hardeman], Tennessee. We've had that down more than normal. That's a couple tenths of a cent. But nothing jumps out of mark. It's probably 20 little items. We have some -- do we have any asset write-downs? We had some asset write-downs where we put in a new piece of capital equipment and the piece of equipment that it's replacing has not been fully depreciated. That might be $0.003. But you're getting down into a lot of little items.

Yes, that's fine. And second question -

Hey, Mark. We missed by - Our forecasting, if I could be plus or minus $0.02, that's about as good as we think we can do.

Well, if you do that, Paul, you're probably better than most of the analysts on this call. Second question, your cost of goods sold was up less than 3% for the full year and your mill volumes were up almost 2%, so you seem to have done a great job on unit cost, but the SG&A is up about 7, 7.5%. Can you walk us through that?

Yes. Well, a lot of that is salaries and I'll tell you another -- as another problem, when you have a record year. The people expect you to pay pretty good bonuses and we did that.

Okay. Last question. I think you're 63 this year. Can you just talk to us about any kind of succession planning at PCA?

Not -- no specifics, obviously that's something that's pretty confidential. But I think the thing that if you asked me what I'm proudest about my tenure here at PCA, which I expect to continue, is that very, very strong team run this. It's not me. We are deep and so in terms of potential succession, I've got a pretty good list to choose from.

But there is no mandatory retirement age or anything, is that right?

No, there's not.

Okay. Very good. Thanks a lot.

And while I'm here, I have had handed a note to me that I did speak incorrectly. That Buffalo outage did occur in July and I'm wrong, that wasn't a second quarter event. July is in the third quarter. And I was wrong about that. So sorry for that information. Misinformation, George.

[OPERATOR INSTRUCTIONS]. Our next question comes from Joshua Zaret with Longbow Research.

Paul, you mentioned the strength in demand you're seeing so far in January, Are there any particular end use markets that's driving that? Is it across the board? Can you comment on that?

It's across the board, although I would say the meat packing business is particularly strong.

And what would you -- can you attribute that to anything or -- ?

Well, I think that one of the things is, there's been a run-up in grain prices. And when grain prices run up, it gets costly to keep big herds so those herds get slaughtered and that get you an increase in volume in the meat business. And that's what's driving that.

I see. Thank you.

Our next question comes from Chip Dillon with Citi. Yes, I just had one --

Hey, Chip. I'm sorry I cut off. I'd like to get everybody one, get their questions out of the way before I come back and hit you again. But you got -- you're on again.

Oh. Totally understand. Just quick question on the OCC situation. We're reading more about how it's almost like there's increasing competition for what's out there with the export prices that are I guess a record spread to what domestic mills are paying and you would think Wal-Mart or someone selling OCC really doesn't care who they sell to. So, what do you see going on there? Do you think that the U.S. price of -- your costs will continue to move up?

I do. I do think OCC cost will move up. What a differential, differentials between export market and domestic markets, I don't know how they can be sustained. Usually water seeks its own level and there will be some equalization. But there's another couple million tons of capacity coming online in China. That's going to run on 100% OCC and that will continue, in my opinion, to put pressure on OCC prices and I think OCC prices go up and, it does affect us but fortunately for us, we use, as you know, among the lowest OCC percentage in the industry. So we are competitively advantaged and but even when you're done and using 20% or so, it does cost you and you've got to eventually figure out how to recover those costs.

Are you seeing any kind of impact on pricing and especially in Asia? You might have some contacts over there that indicate which direction the board price is going as a result of their higher raw material cost?

You know, I don't have a lot of information on that. We are not big exporters to Asia. When business got real good here and our inventories were tight. We had to make some decisions, what markets to not serve as vigorously and Asia is one we basically pulled out of and we basically concentrate on Europe and South America is our two primary markets. So, eventually as OCC prices keep going up, you would think that would translate into higher domestic prices in China, but China is a different place. So, making forecasts about what the Chinese are going to do, you know, I think maybe predicting OCC prices is even easier than that.

Got you. Thank you.

Our next question comes from Mark Weintraub with Buckingham Research.

Quick follow-up I had was it's interesting, as you talk about your business, it seems that things are chugging along pretty well. Yet as you referenced the newspapers have tremendous amount of doom and gloom. I'm just curious as to whether or not it's typical that you read about it in the newspapers before you see it in your business, when historically there have been slowdowns in the economy and if not, any thoughts on the apparent discrepancy?

Well, the answer to that, I think is one of these things, sometimes the newspapers get it right and sometimes the newspapers get it wrong. The problem is they don't tell you which it is. Last year, just reflect on that, we gave very bad earning guidance in the second quarter and we had forecasted $0.35 and we made 44. It's a $0.09 miss. That was on a positive side. And part of that reason, we had similar stuff in the newspapers about the economy's slow and this, this and that. And I'll tell you when, the way we do our forecasting, it rolls up to me and then I put my spin on it and I was -- I believed more of what I read in the newspapers last second quarter than I probably should have. And so, I think the newspapers had it wrong last second quarter. They may have it right this time. The problem is, I don't know. And if I knew that, I'd tell you. So you know, you're affected by it. It affects psychology to consumer, et cetera. Eventually, the newspaper is going to get it right. It may be this time, it may not. I can't help you very much. But at least I give you an example of a year ago they didn't have it right.

Fair enough. So bottom line, sometimes it does happen without you seeing it in your business early on but obviously as you point out, sometimes you read about it and it doesn't then -- the slowdown doesn't occur.

Obviously, there's a lot more momentum about a recession occurring this year than there was last year so we'll have to wait and see. And the only anecdotal evidence that I have is, you know, I did get a little worried when the volume dropped off the map those last three days in December. I hoped that was the holidays but you never know. And then when it rebounded as strongly as it did the first half of January, I felt pretty comfortable that we just saw a vacation day phenomenon in December and hopefully January will continue as strong as it has been. And so we've not seen in our business, a big change in volume. Quite the contrary. It's stronger than we expected.

Great. Appreciate the color.

Our next question comes from Mark Wilde with Deutsche Bank.

Just a couple of questions, Paul, about sort of margins in the business. One, if we look at kind of the full year '07 your EBITDA margin was just a little over 19%. Historically, if we go back to the early part of this decade, right about the time you became a public company, your margins were as high as 34%, I think back in 2000. Is there any reason?

No, no, no Mark. Our margins got that high but you're five years ahead of time. We got to the low 30s at the peak in '95 but it never got that high in '99.

Right. Well, let's see. The numbers I've got even for '01 would be about 21, 22%? I'm just trying to get a sense of whether there's any reason you can't take these margins back into the 20s.

Well, we're in the 20s now. I think we're pretty close to 20% for the year.

Yes, I think it's a little -

Third quarter margins were over 20%.

Right. I've got 19 for the [inaudible]. I'm just trying to figure out kind of what you think these could potentially get to.

The way we look at it when we compare ourself with other companies who are divisions, you take corporate overhead out of that number and you look at what is the margin as the business as the divisions stand alone. When you do that, you get over 20%. So let's not argue the point. But we're close to 20% right now.

Okay.

And that's where we've been before, but to get back to the peak, the 30s, you got to go back to '95 to get those kind of numbers.

Do you think that's possible?

I hope so. That obviously we're going to require either much better pricing or lower cost and they're the two things that drive it, because I don't think this obviously isn't an industry that has 10% a year growth. And so, you've got a lot of years of inflation to overcome and you can only overcome that with price or lowering cost and with the energy situation, the fiber situation, it will take higher prices to get back to those kind of margins.

Would you rule out being able to move on price at some point this year? I mean, you do have a lot of cost inflation. We've got operating rates for the industry up in the sort of 97, 98% rate. Inventories are lean and exports are going up.

Yes. For legal reasons that I know you're aware of, Mark, I cannot comment about forward pricing and I won't. But I can say that what you said is correct. Historically, operating rates for the industry are at a level that has historically resulted in increased pricing. Whether that occurs again or not, I can't say because I don't comment on forward going pricing.

Okay. Good enough.

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

Thanks. Hey, Paul. One additional question maybe on the outlook, taking a different fact. Do your customers tell you as they're ordering from you what their point of sale experience is? Obviously, in mean produce, if you ship it, they're going to use it because it's being taken away. But for other types of products and markets, do you get a sense whether the shipments that you're seeing are dove tailing with your customers' point of sale experience right now?

Yes, our customers do not keep a lot of inventory because corrugated containers take a lot of space.

I understand.

There's a fairly close couple. And they are ordering more boxes in January because their business apparently is pretty good and the only thing that we have heard that I think is note-worthy from customers, we got 8,000 customers, roughly, and so you know, you've got a lot of people talking to a lot of customers, some of the information is good, some's not good. But the only trend that I can point out over the last year that I think is significant is we've got a lot more feedback from customers that export out of this country is being a bigger part of their business than it has been in the last decade. And that message has been the most consistent message that we've gotten from customers.

Okay. Fair enough. It's still not sure whether the retail point of sale data would marry up but we'll find out about that do you understand the road. Just on CapEx, what's your outlook for this year, 110, 115?

That is our CapEx, we're looking at a couple of projects that still early in looking at that potentially have high returns, could up that number a little more for 2008, if they continue to look as good as initial indications are. But right now I'd plan on about 110 to 120.

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

Thank you.

Our next question comes from Steven Nathan with Menlo Capital.

Hey, Paul. How are you?

I'm good.

Hi. Congratulations. You're doing a great job. You guys always seem to do very well in a challenging economy. Couple of things. What are you guys doing in terms of operational improvement issues revolving around the [Lee Manufacturing], TPM and Six Sigma? And how are those initiatives benefit your business?

We have a vigorous cost reduction program. We don't rely on one of these named programs like Six Sigma. We've got our on program adapted to the way our business runs. And as I've said many times, this company revolves around the concept of operational excellence. We're only in one grade of paper, containerboard. And we make boxes. And so we're specialists in that and our improvement does not come from a major restructuring, a major headcount reduction program, a major transformation program.

We think we're fairly good at what we do and we simply have got to do two or 300 things a little better each and every year at our box plants and our mills and at corporate headquarters. And so we've got programs in every facility to do everything a touch better, but it's not the type of company that we're going to say okay, we're going to do, I'll use your term, Six Sigma everywhere and that's going to change this company. We've got a good operational strategy and record and we just want to improve upon what we've got. We don't want to change it.

Let me turn to your box plants on the world. Are there certain plants here that you're more concerned with than others regarding through-put.

We don't have box plants around the world. We're 100% domestic. All of our box plants are in the U.S. And yes, we have some box plants better than others. We benchmark all of our box plants, we share best practices, we meet with them several times a year to say who is doing the best and who is doing the worst. And we put plans in place to obviously get the poorer plants to improve and when you've got 67 box plants, there's one that's ranked the best every year and there's one that's ranked the worst every year and then we apply the necessary efforts to do what we think we do across the system. But we have a lot of data and we have a lot of best practice principles that we use.

In terms of benchmarks you guys were talking about, how are you measuring those? Are you looking at ROA or ROE? How are you guys looking to measure that so you can tell the shareholders and investors out there, this is how we're achieving our record growth?

Well, when you see a record well, I think the way the shareholders appreciate it most is the way we've been able to do it this year. Our earnings are up 35%. We don't get into heavy financial calculations in a box plant. You look at the fundamentals in a box plant, guy running a corrugator and a box equipment, he's concerned about yield. That's one thing that can improve his profitability. So we would concentrate on yield. We would concentrate on productivity. Things that people can control at that level. They can't control the cost of borrowing. They can't control other things. So we try to make people accountable and improve the things they can control. And I think we've been fairly successful at it.

Are your yields in your plants where you want them to be or what are you guys doing to keep improving on those?

At some of the plants they're where we want them to be. In some of them, we're working on improving them. We don't share operational details on calls like this because I'd be sharing them with our competitors too. So that's as good as I can do on that question.

Final question, going into as we go into '08 which is going to be a very challenging year for a lot of companies, what is going to be your number one goal as the packaging PCA to actually help improve shareholder value so everybody does well?

Well, as I said earlier, we've got to do 2 or 300 things a little better. There's no one goal. Because we like our model, we like the way we do things. We've got to do 2 or 300 things a little better. So I wish our business was as simple to give you one goal, but it's not.

Okay. Thank you very much.

Our next question comes from John Emerick with Ironworks Capital.

Thanks. Could you clarify a comment I guess from maybe even the last transcript. I missed it if you talked about it on this call, but the company's ability to take excess production, excess relative to say slackening demand in the U.S. and fill export demand, if you will?

Yeah, I think what's happened, and not only us, is the export business has been very strong and even though industry box demand this year is down a percent or so, in 2007, the industry has run full and that's because the export market's been pretty good. And those tons that flowed into the export market. So that's basically what I was talking about.

That condition still exists?

Yes.

Thank you.

I mean, the export -- the condition is -- I don't know where U.S. box shipments are going this year but the export market is still pretty good.

Right. Thank you.

Next question comes from Heather Mcpherson with T. Rowe Price.

Hi, Paul. I was hoping you might help me understand something regarding the cost environment and what maybe the marginal cost might be for the highest cost producers in the industry. So that if hypothetically we look out and we say that box demand goes down in '08 and capacity utilization starts to go down and then prices start to slip, typically they would probably slip to where the fourth core tile producers costs might run to and since we're starting to see a lot of inflation on the cost side, do you have a thought here about what that marginal cost floor might be for prices, given the cost inflation we've seen?

No, not off the top of my head.

Okay.

That's something that would -- would require a longer conversation than -- you've got to be careful giving a flip answer about something that's pretty complex.

Okay. Appreciate it.

Thank you.

Our next question comes from Tom [Slebs] with International Paper.

International Paper? International what?

You're kidding, right?

(LAUGHTER) What they say? This International Paper guy asking a question. Tom somebody?

No. Who's on the line? Hello?

Are you kidding me?

Operator?

I'm not. Apparently their line has dropped. I'm not showing any other questions at this time, sir.

Well, that's a good way to end the call. Listen, looking forward to talking to everybody next quarter and hopefully this economy will prove stronger than a lot of people think but time will tell and thank you for participating in the call. Happy New Year.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference. You may now disconnect.