Packaging Corp of America (PKG) 2009 Q1 法說會逐字稿

Thank you for joining Packaging Corporation of America's first quarter 2009 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, sir.

Thank you, and good morning. Welcome to our earnings release call. With me on the call today is Rick West, our CFO, and Mark Kowlzan, who runs our mill operations. And the operator just said, once I complete the prepared remarks, I'll be more than happy to entertain your questions.

Yesterday we reported first quarter earnings of $26 million or $0.25 a share, compared to first quarter 2008 earnings of $32 million or $0.31 a share. Net sales for the first quarter were $512 million, compared to $577 million for the first quarter of 2008. Although our first quarter earnings were driven by a severe downturn in the economy, which significantly lowered our containerboard and corrugated product volume and increased downtime, which reduced earnings by about $0.20 per share. In addition, higher costs for labor and benefits reduced earnings by about $0.03 a share, and higher chemical cost reduced earnings by about $0.02 a share. These items were partially offset by higher pricing for containerboard and corrugated products, which increased earnings by about $0.13 a share. And lower costs for recycled fiber and transportation, which also increased earnings by $0.05 a share, and $0.02 a share respectively.

Our earnings were $0.05 a share higher than the guidance we gave at the beginning of the quarter. This was a direct result of our mills and box plants doing an exceptional job in managing and controlling cost. While adapting to and running at significantly lower than normal operating rates. Our costs turned out to be between $0.01 and $0.02 per share lower than originally forecasted in seven different areas; namely, transportation, chemicals, energy, wood, labor, repairs, and fixed costs. Published prices for containerboard fell more than we anticipated during the quarter, but this decline had a much smaller effect on first quarter earnings than it will have, unfortunately, on the second quarter. What was disheartening for us is that our containerboard prices held quite steady until trade publications lowered their published prices each month, which we then had to react to either contractually or otherwise. Our domestic containerboard shipments were down 18,000 tons, and export shipments were down 19,000 tons compared to the first quarter of 2008. Our corrugated product shipments were down about 50,000 tons or 12.6%, and with one less workday this quarter, down 11.2% on a per-workday basis compared to last year's first quarter.

Monthly volume comparisons are difficult to make this quarter, because there are two less workdays in January this year, one less workday in February, and then two more workdays in March. On a per-workday basis, February was a little worse than January, but March picked up and was a little better than February, and March was also our best month on a total shipments basis. More importantly, April has started out much stronger for us with corrugated products bookings for the first 10 days up almost 15% over March, and about equal with April 2008. Shipments for the first 10 days are up about 6.5% over March, and are down less than 6% compared to last April. And usually, billings will catch up with bookings over the course of the month, so starting out with billings up, excuse me, bookings up 15% is very, very positive for us. And this is really the first big pickup in demand that we have seen since September, and hopefully it will continue.

To keep our supply and demand balanced, our mills ran at about 85% of capacity, reducing production by about 90,000 tons to 515,000 tons for the quarter. This was our lowest quarterly production since the first quarter of 2001. Our containerboard inventories increased as planned by about 9,000 tons during the quarter to help compensate for the loss of almost 40,000 tons of containerboard production that we will incur in April when we have our two largest mills, Counce and Tomahawk down for their annual maintenance outages. Looking at costs, our recycled fiber prices were down almost 60% compared to the first quarter of 2008, improving our earnings by about $0.05 a share, and down about 30% compared to the fourth quarter of 2008. Recycled fiber prices did go up during the quarter, with March market prices up about $15 per ton over January. Wood fiber costs were flat with last year's first quarter, but down 7% compared to the fourth quarter, and by March, were down 10%, compared to the fourth quarter. With all of the downtime that's being taken, the overall demand for wood is down, so we are cutting out a large portion of our highest cost wood, and running with significantly lower wood inventories.

Purchased fuel costs were flat with last year's first quarter, but down about 11% compared to the fourth quarter. Electricity costs were actually up about 15% compared to last year's first quarter, but were flat with the fourth quarter. Chemical cost, primarily caustic soda were up about $0.02 per share over last year's first quarter. We had fixed-price contracts last year, which allowed us to purchase caustic well below market. But with the new contracts in 2009, the prices now, unfortunately, at market. Higher labor and benefit costs reduced our first quarter earnings by about $0.03 a share, compared to last year's first quarter with medical costs representing about half of this increase. Transportation costs were down about $0.02 a share, compared to last year's first quarter, and down about $0.025 cents compared to the fourth quarter, driven by lower diesel costs and the availability of trucks being higher. Finally, higher net interest expense reduced earnings by about $0.015 cents a share, primarily from lower interest income on our cash investments.

We completed our Valdosta mill annual outage during the quarter, which included a major upgrade to the paper machine, where we installed a new state-of-the-art secondary head box and made major modifications and improvements to the [fordranear]. These improvements allow us to run at much higher dilution levels, which significantly improves formation and sheet appearance. This, couple with the fact that Valdosta is one of a very few mills that runs on 100% pine, makes its sheet very attractive to customers, especially in some export markets. At Valdosta, we also upgraded our combustion control capabilities on our large bark boiler and can now produce 20% more steam burning the same amount of bark before the upgrade. We were also able to reduce the maintenance cost of Valdosta's annual outage by about $750,000 by using market-related downtime to our advantage and spreading the annual outage out over 17 days, versus a normal outage of about nine days. This eliminated the need for many outside contractors, and greatly reduced costly overtime.

Turning to cash and cash utilization. Capital expenditures were $28 million during the quarter. We ended the quarter with $140 million of cash on hand, and that's down only $9 million from year end even with about $40 million in normal beginning of the year cash payments. The majority of which are annual one-time payments. Our total available liquidity at quarter end was $312 million, including cash on hand, and $172 million in borrowings available under our various credit facilities. We have no long-term debt maturities for the next five years, with our $400 million of 5.75% notes due in 2013, and our $150 million of 6.5% notes due in 2018. Our total long-term debt at quarter end, excluding capital leases, was $657 million net of debt discounts of $2 million. And significantly on April the 15th, we extended our credit agreement for our receivable securitization program, which was scheduled to expire in September of this year, to April 14th, 2010. So from a financing point of view, we're pretty well set.

Looking ahead to the second quarter, earnings are expected to be lower, driven primarily by lower selling prices, resulting from previously published changes in the prices for containerboard. We do expect lower input cost in some areas, particularly purchased fuels and wood fiber, as well as lower fuel usage with warmer weather. We also have three annual mill maintenance outages scheduled in the second quarter, which will complete our mill maintenance outages for the year. We're also spreading our accounts, Tomahawk, Fiber City outages over more days to take advantage of likely market-related downtime, and again eliminate the need for a good portion of outside contractor work and expensive overtime. These maintenance outages will reduce our production by about 50,000 tons, including 40,000 tons in April, with Counce and Tomahawk down, and 10,000 tons in May with Fiber City down.

Although we have seen a significant pickup in corrugated products demand so far in April, some market-related mill downtime is still likely. Considering these items, and with the current economic conditions and the associated level of uncertainty, we estimate our second quarter earnings to be about at $0.15 per share. Finally, on April the 14th, 2009, we received notification from the Internal Revenue Service that our registration as an alternative fuel mixture has been approved. We began producing and consuming alternative fuels at our Counce, Tennessee; and Valdosta, Georgia; mills on December 12th, 2008. No potential benefits from the use of alternative fuels are included in our earnings guidance, and at this point in time, we have no further details to report concerning this item.

With that, I would be happy to entertain any questions, but as always, I must remind you that some of the statements we have made constitute forward-looking statements. These statements were based on current estimates, expectations and projections, and involve inherent risks and uncertainties including the direction of the economy, and those identified as risk factors on our annual Form 10-K on file with the SEC. Actual results could differ materially from those expressed in these forward-looking statements. And with this, I would ask the operator open the phone lines and we would be happy to entertain any of your questions.

Certainly. (Operator Instructions) Our first question comes from Mark Weintraub of Buckingham Research.

Thank you. Paul, I wanted to spend a little bit of time on the significant improvement in demand you have seen in the first part of April. Just a clarification, on the bookings and the billings, how many days would you have of each of those, where you said they were up 15%?

Yes, we have 10 days in April, which is basically half of the month, and I would amplify just a little bit, when this thing picked up -- it just picked up very quickly, and it actually started -- it started the first week in April, and actually that also included-- the first week in April is on a Wednesday, that Monday and Tuesday were also very strong, so that whole week was the pickup, so this pickup that has been really, 12 days -- 12 box plant days in duration. The first -- last two days in March, and then the next 12 days in April. So 10 days in April. But 10 days in April is the short answer to your question.

Okay. And trying to answer understand, I think you said that bookings were up 15%, and billings were -- it was a number less than that. Does the billings usually become equal to the bookings?

Yes, a very high correlation, by the end of the month, the billings usually catch up with bookings. Basically how it works, you book an order, you may ship it that day, you may ship it within two or three days, or it may be as long as 10 days, and what the average is probably, 5 or 6 day lag from the time you book an order until you ship it, and usually there is a flop over. The last few days in March carry over in to April billings, and the last few days in April carry into May billings, but the lag is a couple of days by the end of the month.

And is this improvement you are seeing, it is broad-based or are you seeing some specific areas in particularly strong?

No, it's like somebody turned the light switch on, Mark. When things -- we have been booking in let's say the mid-'90s. 90 million feet a day, 95 million feet a day, we would have some 80s on a bad day, maybe 105 million on a good day. We have had some days in to the 120 million foot range. So it has been a big, big change. There is nothing we can see except that it is pretty broad-based.

I know you're not an economist, Paul, but do you have a sense as to the sustainability of this? Or what are you hearing from customers? Is it kind of just a little restocking going on, or do you think that it is a real inflection point?

You said it best when you said I'm not an economist. We really don't know, except that the only other visibility that I have is that I do get data on cut-up. In other words I don't have the actual sales beyond the first 10 days, but I do have data on how much roll stock has been cut up in the box plants, so I have probably three, four, five more days data on that. That has remained strong, so at least for the next five days, that's going to translate into good shipments. And so -- but in terms of feedback from customers, no, that's way too early. Now this thing is going in to its third week in terms of a pickup, and I really don't have -- I wish I could amplify on why it is sustainable. We're just going to have to wait and hope this is the beginning of the pickup. But only time will tell.

Okay. Great. Thank you just one last one real quick. When you gave your earnings guidance, have you made any assumptions as to how sustainable this amount of pickup is?

Yes, we have baked a little bit in there in -- obviously you have to take a guess, but you are a little cautious with only three weeks worth of data is the best way I can put it.

Okay. Thank you.

Thank you. Our next question comes from [George Staphos] of Banc of America Securities.

Thanks. Hi Paul, good morning.

Good morning, George.

I just want to segue then off of Mark's question. If we think about the $0.15 guidance for Q2, up to Q1, could you roughly bridge or apportion the variance across some of the major categories, whether it be pricing or volume as you see it right now? Realizing it is not a guarantee.

Yes, I would say there are two big negatives on the earnings that are going to take away from earnings. One is -- pulp and paper -- the trade publications have brought the price down $60 on liner and $70 on medium, and you can do the math to figure out --that is very, very significant. The other significant item is that due to the accounting changes with three shutdowns down, we're going to take a $0.03 hit more than normal on these maintenance outages, and the reason for that is you used to accrue the cost of them over the entire year.

Right.

Now what you do is you can't accrue anything until you take them, and then you accrue it the rest of the year, so we can only divide by nine instead of 12, as they say, and we have three of them this quarter. So that's a $0.03 hit, and that in price are the two biggest item that contribute to this decline. We got our shipments going up a little, we think our costs will continue to come down, so you can do the math and figure out yourself how big a price decline is going to do to get to the forecast that we have arrived at. Price is the biggest variable, and that's the swing variable.

Okay I mean, at this juncture, the sequential improvement in cost would be a few pennies, would you say?

Yes, you are in the right ballpark.

Fair enough. When we look at the the first quarter, and try to get at the $0.13 a share pick u pin pricing, if I use just the benchmark, I would wind up more around $0.07, not $0.13. Can you give us some rough parameters on how you calculated that $0.13.

George, that's a long discussion, it's really -- I don't want to get that technical on this call, so if you call me back later, we might be able to give you some updates on that, but there are a lot of numbers that go in to that. As you said, spread, mix, things of that nature. So $0.13 is the number, and I can give you some amplification later. Last question. I'm trying to limit it so we can get a many people on as possible.

Got you. Maybe then on the demand question again. If you're not sure whether it's restocking or truly your customer is thinking there is a pickup in consumption, do you think you are doing any differently, from what you can see, which you might not have 100% visibility on, relative to your peers? In other words are you gaining share? Or do you think your customers are gaining share? Or do you know at this juncture?

Our volume was down 1% in the first quarter compared to the industry. So in terms of that. That's a very small loss in share compared to the industry. I personally think -- I don't know what restocking is involved, but I -- it has been five months now, six months since this thing turned down. I think people are still cautious, and I think they are ordering to meet their demand, so I would think it's a pickup in demand, as opposed to some restocking. But I don't know that.

Okay. Thanks, Paul.

Thank you. Our next question comes from Chip Dillon of Credit Suisse.

Hi, good morning, Paul.

Hi, Chip, good to hear from you.

Good to hear from you. Just doing a little math, I just want to confirm, you are short of signalling that your maintenance downtime might be in the ballpark of 50,000 tons this quarter--

I'm not signalling. I don't like that word. I'm stating we are going to have 50,000 tons of maintenance downtime this quarter.

Obviously, this burst of activity, you can't extrapolate, as you mentioned, but is there any chance that you would have to cut back on that if this level of demand continued, say, through May at this rate?

Well, I don't think so. Because our outside shipments will be down this quarter in terms -- both export and domestic, and we have already completed one of the shutdowns, which is the Counce shutdown, that's the big one. And Tomahawk is already down. And so one of the things that we did is we were careful enough to build about 9,000 tons of inventory going in to these shutdowns just in case things pick up a little, and they did pick up. Now they picked up more than we thought, but I think we'll be okay, and what -- if things stay the same or hopefully even get stronger, then the need for any market-related downtime will diminish later in the quarter. We have enough paper to get through this.

Got you. And you mentioned your outside shipments would be down, is that year to year, or versus the first quarter?

Versus the first quarter.

Okay. And then lastly, you mentioned that you thought -- your gut feeling is that most of this pickup is actually underlying demand versus, say, your customers rebuilding inventories. What makes you think that?

Well, they have ordered it at a steady pattern for about six months, and that would indicate that they have reached a steady state. It fell, they lowered their inventories, and demand then demand has just bounced on the bottom now. December, January, February, and March. So to me that signals that they have found steady state. They have synchronized supply and demand in their business, and the only thing that I can think of where they would make a precipitous increase would be the fact that their demand had picked up. The other time you get this is that when people think there is going to be a price increase, they order like crazy.

Yes.

Well, that ain't the case.

Yes.

So that's how I arrive -- that's my theory anyway, Chip. I might be right. I might be wrong. But I think we have been at steady state, and that's how I arrive at what I'm guessing at, if you will.

Got you. Even more to the point, the fact that you are in front of a pulp and paper decline and they are ordering like this?

Yes, right. Or things are tighter out there than pulp and paper would lead you to believe.

Got you. Thank you very much.

Thank you. Our next question comes from Richard Skidmore of Goldman Sachs.

Good morning, Paul, just to clarify on the volume pickup comment that you made, how much normally would you see March to April from a seasonal standpoint, and then secondly, do you have any -- have you won any new business that would be reflected in that volume pickup in April?

The first question, very little pickup normally. I have been back, as a matter of fact, and looked at that a couple of days ago when these number were going crazy, how much did go up. And since 2000, that's as far as I went back, our volume picks up about 2%, to 2.5% between March and April, so not very much compared to the magnitude of the numbers that we're seeing, and in terms of new business, we gained business, we lose business, but I -- not a big change. As matter of fact, for the first quarter, our volume was 1% less than the industry's. So it's not -- I think that it's related more to the market than our performance, and I think when other people report we'll know the answer to that question.

Thanks. Just one separate topic if I might. Just import, exports. Do you think there's a long-term change in the export markets for your business, and separately, are you seeing any inflow of imports coming in from potentially Europe in to the open market?

No, the export markets have been hurt by the worldwide recession also, and the problem with exports is customers overseas need less paper than they did six months ago, and that's affecting export business all over the world. I would say export businesses-- it has stayed the same, which was weak over the last four months, and I think it will pick up when the general world economy picks up.

And imports? Are you seeing much in the way of imports come in?

No, the numbers last month--there were 2,000 tons of imported paper coming in to this country, that's down 50% from February, when only 4,000 tons came in, so basically, despite what people may indicate, I always like to go with the numbers, and the numbers said only 2,000 tons came in last month, that's hard -- that's not very much paper.

Great. Thanks, Paul.

Thank you. Our next question comes from Mark Wilde of Deutsche Bank, Alex Brown.

Good morning, Paul.

Good morning, Mark.

Two questions, first one of your biggest competitors is in Chapter 11 right now. Any thoughts on what impact that has had on the business to this point, if any?

No, I really don't have any thoughts, I really don't want to comment about somebody in bankruptcy, what it could mean or not mean. Our business has been pretty stable, as I say earlier, our volume was off 1% compared to the industry. We're not out beating the bushes for new business in terms of that is where we're going to make our money when demand is way off. We focused on cost, so when your focus is as strong on cost -- we really had not seen anything that would give us cause for alarm in that regard, and I think what we need to -- the two things that give us cause for alarm is when is this economy going to pick up? And when is this price going to stop falling? And those two things are what we have got -- they are going to help us more than anybody being in or out of bankruptcy.

Okay. Second question, and this is just on Packaging Corps. We take a couple of steps back, when you came public about nine years ago, lots of people talked about you being a consolidatee, not a consolidator. And in the time that has passed the industry has consolidated, looks like it's going to continue to consolidate. But you have this high-volume niche strategy, which seems like kind of a tough fit for the bigger players. So if we take consolidation off of the table, what is the strategy that we're likely to see Packaging Corps pursue over the next five years? Are you going to continue to just focus on cash flow off the existing business, Are there some moves that could help the Company accelerate its own growth?

Well, when we were formed in 1999, we really only had one objective, and that was to create shareholder value in whatever manner it was the best, and we concluded that the best way to do that is not by growing, not by doing this or that, by having high profitability, and that's what we focused on, so going forward, we're going to maintain our strategy. High profitability business, and we think that's the best vehicle to create shareholder value. And one of the reasons -- we made some acquisitions primarily on the box plant side, which have contributed nicely to our margins and profitability, and we will continue in that vain, and if something bigger and better came along, it has got to pass just 1/10. Does it add to or take away from our profitability? And we are not consumed with any need to grow or not grow. We're consumed with the need to increase our profitability. And that's as simply put as it can put it.

Is there much more business out there, kind of high-margin business that would fit with your existing portfolio?

The answer -- the short answer to that is yes, but when you say "out there," the reason that our margins tend to be higher than some others is that we have a strategy that provides value to our customers, and if we can continue to increase the value we provide to them, we sell them more than just a plain brown box, be it features, service requirements, be it capabilities, et cetera.. If you can create value that your customer appreciate and count on, you can get compensated for that value, so it's just not that there's people -- pieces of business out there that are higher value than others. You have an opportunity to create value for your existing customers, and I think as Bill Sweeney said many times on these calls, our biggest growth vehicle is with existing customers, as opposed to new customers. In terms of -- instead of having half of their business, we have it all, because we have demonstrated to them, we can create value for them. So you can make this kind of business, it just takes a lot of time and perseverance to get there, but there is enough room for us to grow.

Very good. Thanks a lot.

Thank you.

Thank you. Our next question comes from Claudia Shank-Hueston of JPMorgan.

Thanks very much.

Good morning, Claudia.

Just building off of Mark's question, can you maybe just comment a little bit on your priorities for cash, how you are thinking about buybacks and acquisitions and cash on hand at this point?

Yeah, well, we think cash is king. I have to admit I feel a little better than I did two or three weeks ago before things looked like they may be picking up. But we did reduce our dividend to $0.60. Our strategy going forward is to maintain the maximum financial and strategic flexibility we can. To be able to take advantage of whatever faces us ahead. So in the short term, until we see a clear direction of where this economy is going, we will continue to accumulate cash. When we think we know where this economy is going, we'll begin to make some decisions as to what is the best use of that cash, be it reinstate or increase the dividend, share buyback, strategic acquisitions that may provide very, very good profitability to us, but as they say, we'll cross that bridge when we come it to.

Okay. Thanks. And then just your CapEx in the quarter was a little bit higher than what I was expecting, but obviously you had that big project that fouled off. Are you still comfortable with sort of $90 million or so for the year?

Yes, we are. And one of the reasons you'll see high CapEx this quarter also is that we front loaded this year all four of our annual outages, and so when you are down, that's the time to do those projects under the cover of annual mill maintenance downtime. So that's one of the reasons that we'll be skewed a little more to the front of the year than to the back. The other reason is you get a return on these projects, so if you do them up front you get more return during the year. This year our first two quarters will be higher than normal just for those reasons.

Okay. Thanks very much.

Thank you. Our next question comes from Mark Connelly of [Stern Aggie].

Hi, Paul.

Hi, Mark.

Thanks for taking the question. Coming back to your customers who talked a lot about your side of the niches, but can you talk about what your customers are experienced out there. In the past you have always reminded us that your customers aren't immune to the economic trends, but your average customer does tend to be smaller. Are they seeing a different trend in your mind than larger customers are in this market? Is the quality of your accounts receivable book any different? And then my question is, you spent the last several years benefiting substantially from all of the investments you made in advance in energy flexibility. And I'm wondering what is on your plate for positioning yourself for the next five years?

Yeah, with regard to the customers, I think in general it depends on the industry they are in. I think in the food and food service packaging, those customers have been hurt the least by the recession. Then if you get into customers that are more in automotive, or building products, that we sell to -- our shipments to them have been down 40, 50%, opposed to maybe 5%, 6% in food service, so it's a function of what industry they are in. I don't think it's near a function of whether they are a big company or a small company. Because we also sell to some very, very big companies, we just don't have a big position with those companies. But even big companies constitute 1% or 1.5% of our sales. So I think it's more industry-specific than size of company specific.

In regard to energy, we're about done doing what we can do in terms of we have a -- had a portfolio, a very high-return projects, and basically, we're through with the first phase in that -- with this Counce boiler rebuild on the bark boiler this past quarter, we're down to a low of fossil fuel level as is possible in our system. What is next for us is we would like to increase over the next five years our ability to generate more electricity, we generate about half ourselves. We purchase the other half. I would like to maybe get that number up to say, 50% to 75%, and we have some projects that we're looking at. We may over the next five years add another recovery boiler to the system, take out maybe two where we have an opportunity at Valdosta to shut down two boilers and replace it with one. That's something we'll look at over the next five years snatch additional incremental steam would get about a 40% efficiency improvement in steam generation from the same amount of liquor, which would then translate into more electricity production. One thing that I did mention on the call was that although our energy costs were down, our electricity was up 15% year-over-year, and we think with what is going on in the world, you cannot get a coal-fired utility plant permitted these days. They are backed up because of the changes in some of the environmental laws, and the carbon dioxide, and carbon credits, et cetera, and so we think it is a time to be prepared to try to get ahead of the curve on electricity, like we got a little bit ahead of the curve on some of these other things.

The question on the accounts receivable quality, has that deteriorated much ?

Surprisingly not, and I'm knocking on wood, because that is something that you would suspect that could be the next shoe to drop, not only in our business, but across industry, but it has held up better than we thought it would. We had some reserves, we have reserves for those things, but so far so good.

I'm sure Rick deserves all of the credit for that.

More than me. I'll tell you that.

Thanks very much, Paul.

Thank you our next question comes from Joshua Zaret of Longbow Research.

Thank you very much. Paul, you talked about the trade publications bringing down their index prices for containerboard, and that started since December, what -- if we look at this on a monthly basis, what for you is the typical lag time for that to work itself into boxes?

It varies all over. We're only about 30% national account business, and the other 70% is local business, and a lot of that is not on contract. It's on purchase order, and these are negotiable items, so it's months not weeks, let's put it that way. That's probably as detailed of an answer as I will give on that.

All right. I'll leave you alone then. Thank you.

Thank you.

Thank you. Our next question comes from [Steve Shurcover] of D.A. Davidson & Company.

Thank you very much. Two quick questions, first of all can you point to any specific segments of the economy that account for that 15% uptick in April?

Yes. Food and food service packaging, because it's 50% of our business, and if that wasn't enough, then the rest of it couldn't bring it along. Other than that, no, I don't have any more specifics to give.

Okay. My second question I guess is a bit like Josh's. The relationship with pulp and paper week just seems absurd. Presumably you guys don't give them a lot of data. The buyers are certainly happy to gain the system and drive pricing down. When is that linkage going to end? Or is there anything you can do about it?

Well, they do surveys, and when you -- what do you mean by linkage?

The linkage insofar as it doesn't sound like your customers were giving you great pressure to reduce prices, but as soon as it's published and pulp and paper week, the tail is wagging the dog and you have lower prices contractually.

About the only comment I will make in that regard is when you read what they say, most of the data they use comes from the East coast and we have provided them information that we think it would be more accurate if the survey involved more customers as opposed to the same ones that are concentrated in the East Coast, that rely on a lot of recycled paper that may not be typical of what we think are market conditions, and that's about all we can do, is request that they do broader surveys to get more accurate information, and I would like to leave it at that.

Okay. Thank you.

Our next question comes from [Peggy Bone] of [Vespar Enterprises]

Good morning. I -- you had said that your caustic soda pricing last year was below market price, but that unfortunately your contract for this year is at market price. Is that due to not as good of negotiating or what do you have to say about that?

I guess you can call it that. No, they expired. We had contracts that expired that were long term, and when they expired and caustic soda tripled in price, it's a little harder for my purchasing guy to negotiate, but I'll pass your comment on to him, but that's basically it, that we had very, very favorable contracts that unfortunately expired.

Okay. Thanks.

Sir, I'm showing no further questions.

Thank you. Melissa and I thank everybody for participating on the call, and hopefully when we talk in three months, the pickup we have seen so far has sustained itself, but time will tell. Thank you much.

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.