Packaging Corp of America (PKG) 2012 Q1 法說會逐字稿

Thank you for joining Packaging Corporation of America's first quarter 2012 earnings conference call. Your host today will be Mark Kowzlan, Chief Executive Officer of PCA. Upon conclusion of his narrative, there will be a Q&A session. I will now turn the conference call over to Mr. Kowzlan. And please proceed when you are ready.

Good morning and welcome to Packaging Corporation of America's first quarter earnings release conference call. I'm Mark Kowzlan, CEO of PCA, and with me on the call today is Paul Stecko, Executive Chairman of PCA; Tom Hassfurther, who runs our Corrugated business; and Rick West, PCA's Chief Financial Officer. Thanks for participating on this morning's call, and after the presentation, we'll be glad to take any questions.

Yesterday, we reported first-quarter net income of $18 million or $0.18 per share, which included a non-cash after-tax charge totaling $23 million or $0.24 per share from an amendment of our 2009 federal income tax return to reallocate gallons between alternative fuel mixture credits and cellulosic biofuel producer credits. This charge is a reversal of income that was previously reported as a special item and not included in our recurring results and is further detailed in the notes to our consolidated earnings results included as part of the press release. Excluding this charge, adjusted net income was a first-quarter record, $41 million or $0.42 per share, compared to the first quarter of 2011 adjusted net income of $39 million or $0.39 per share, which excludes a $2 million or $0.02 per share asset disposal charge.

The increase in adjusted net income was driven by higher containerboard and corrugated products volume of $0.09 per share, lower costs for energy of $0.04 per share, and lower recycled fiber costs of $0.02 per share. These increases were partially offset by lower export containerboard prices of $0.03 per share and increased costs for depreciation of $0.03 per share; transportation, $0.02 per share; labor costs, $0.02 per share; and also higher interest expense of $0.02 per share. Net sales were a first-quarter record $671 million, up 7% compared to the first quarter of 2011 net sales of $630 million. Operationally, our business remained strong throughout the quarter, with record corrugated product shipments and record mill production, despite having two of our mills down for annual maintenance outages. The new recovery boiler and turbine at our Valdosta mill and our two rebuilt recovery boilers and new turbine at our Counce mill were instrumental in lowering our energy, chemical, and repair costs and also increasing our productivity.

Looking at the specific details of operations, higher mill production and corrugated products volume improved our earnings by $0.09 per share compared to last year's first quarter. Our corrugated shipments were up 8.3%, both on a total and a per work day basis compared to last year's first quarter. Excluding our three box plant acquisitions in 2011, corrugated product shipments were up 5.4%. Outside sales of containerboard, both domestic and export, remained strong, essentially equaling last year's first quarter, and just slightly below fourth-quarter shipments. All of our mills ran exceptionally well, producing 640,000 tons of containerboard, up 38,000 tons over the first quarter of 2011. This performance was driven by improved productivity, lower annual outage downtime, and an extra mill production day in February with leap year.

Annual mill outages reduced linerboard production by about 18,000 tons during the quarter. Our mill in Valdosta, Georgia, was down for eight days, and the Number 2 machine at Counce, Tennessee, was down for four days. We ended the quarter with our inventories as planned, about 11,000 tons above year-end levels. This level of inventory is required, considering our anticipated demand and to offset lower production due to the three-mill maintenance outage scheduled in the second quarter. The Number 1 machine at Counce will be down for five days. The Tomahawk, Wisconsin, medium mill will be down five days. And our Filer City, Michigan, medium mill will be down for six days.

In addition to normal planned annual outage work at these mills, the Counce outage in April includes a lengthy and extensive overhaul of our 50-megawatt Number 1 turbine generator. This type of inspection and overhaul is performed every six years and will take about 16 days to complete. During the turbine generator outage, the mill will purchase additional electricity to support mill operations. We will also have our large C2 power boiler down at Counce for the 16 days to make planned repairs to replace boiler wall panels. We generally make major repairs of this type every 15 years or so. After the Number 1 machine starts up, the mill will run at reduced capacity for about 11 days until the boiler work is completed. Compared to the first quarter, the planned annual outage work will result in lower mill production, increased mill shutdown and startup costs, as well as higher amortization of outage repair costs. All in all, we expect lost production due to maintenance outages to be about 25,000 tons in the second quarter, compared to 18,000 tons in the first quarter. This will complete all of our annual maintenance outages for the year.

Looking at pricing, our domestic pricing for containerboard and corrugated products remained essentially flat compared to both the first quarter and fourth quarter of last year. Export containerboard prices declined during the fourth quarter of 2011 but stabilized in January of 2012 and then were essentially flat the remainder of the first quarter. The lower export pricing reduced earnings by about $0.03 per share. With regards to cost, energy costs were down $0.04 per share compared to last year's fourth -- first quarter, driven by major energy product at Counce and Valdosta. In fact, our energy cost per ton at Valdosta is now a negative number considering all energy items, including purchased fuels, electricity, and sales of energy-related byproducts, such as [Powell] oil. Lower recycled fiber costs improved earnings by $0.02 per share, as industry published prices for old corrugated containers or OCC, excluding delivery costs, were down about $25 per ton in the first quarter of 2012 compared to the first quarter of last year. Although the average price for the first quarter was lower than last year, OCC prices did increase in each of the three months of the first quarter, and April published prices are about $10 per ton above the first quarter average.

We have seen more moderate inflationary cost pressures than we did last year, with the exception of outbound transportation costs, which were up about $0.02 per share compared to last year's first quarter, driven by diesel prices, which increased about 10% on average. Diesel prices also trended higher during the first quarter, and exiting March, were up an additional 5%. We currently expect diesel costs to remain at their elevated levels and possibly even go higher as we move into the summer months, which could result in increased transportation costs. Labor and benefit costs were up $0.02 per share over last year as a result of increase in pension cost and normal annual wage increases. Depreciation expense was up $0.03 per share compared to last year's first quarter, driven by the completion of our energy project, corrugated project strategic capital expenditures, and newly acquired box plants. Interest expense was up $0.02 per share, driven by non-capitalization of interest, with our energy project completion and higher debt. I'm now going to turn it over to Rick West, our CFO, who will give an update on our cash position and biofuel tax credits.

Thank you, Mark. In the first quarter, PCA generated cash from operations before working capital changes of $98 million. Working capital increased by $63 million, driven by about $45 million in beginning of the year payments, including incentive bonuses and our semiannual interest payments on our notes, increased inventory levels, and other normal seasonal changes in working capital. Capital expenditures were $35 million during the quarter. We paid our quarterly common stock dividend of approximately $20 million and repurchased 781,000 shares of our common stock for about $29.75 per share or $23 million. As of March 31, 2012, our diluted shares outstanding were 97.4 million shares.

On March 16, 2012, we acquired Packaging Specialists, a corrugated products manufacturer, located near Pittsburgh, Pennsylvania, with sales of about $50 million in 2011. At quarter end, we had $84 million cash on hand, and our total long-term debt, excluding capital leases, is $805 million. During the first quarter, no federal cash tax payments were made and no alternative fuel mixture credits or cellulosic biofuel producer credits were used, as our first federal tax payment is not due until April 15. With the amendment of our 2009 tax return, we have estimated remaining fuel tax credits totaling $42 million to $144 million. This amendment should also allow us to reduce our 2012 federal cash taxes well below our original estimate of about 20%. The final amount of the available fuel tax credits and the final cash tax rate is contingent upon the conclusion of the IRS audit currently underway.

Finally, we are very pleased to report that our application for an energy investment grant from the US Department of the Treasury for our Valdosta, Georgia, energy project was approved. And on April 11, we received $57 million in proceeds. With that, I will turn it back over to Mark.

Thank you, Rick. Looking ahead, our cost for annual maintenance outages will be greater in the second quarter than in the first quarter, with less tons produced and higher amortization of repair costs. This will reduce earnings by about $0.03 per share compared to the first quarter. We also expect slightly higher costs for transportation and recycled fiber. Higher corrugated product shipments and a richer mix are expected as we move into a seasonally stronger period. Energy usage should be lower with warmer weather, and natural gas costs, particularly in our box plants, will be lower. Considering these items, we expect second-quarter earnings of about $0.45 per share.

With that, we'd be happy to entertain any questions, but I must remind you that some of the statements we've made on this call constituted forward-looking statements. These statements were based on current estimates, expectations, and projections of the Company and involve inherent risks and uncertainties including the direction of the economy and those identified as risk factors in our annual report on Form 10-K on file with the SEC. Actual results could differ materially from those expressed in these forward-looking statements. With that, operator, we'd be glad to take any questions.

(Operator Instructions). I am showing our first question comes from Chip Dillon from Vertical Research. Your line is open.

Yes, and good morning.

Good morning, Chip.

I was wondering if you could tell us a little bit about the thoughts behind switching -- reversing, if you will, looks like roughly almost half of the cellulosic biofuels category of credits back into the alternative fuels mixture credit. I know that there's about a 30% higher recovery with the cellulosic, at least if you have the confidence that you'll be able to get it, and I'm supposing I guess either maybe your depreciation analysis going forward or maybe even some political uncertainty could have been part of it. But I'd love to hear why you made that switch.

Rick, why don't you go ahead and get into the details?

Yes. Chip, from the two credits, you referenced the 30%. Of course, the benefit from the cellulosic biofuel producer credit after tax is $0.62. And the alternative fuel mixture is $0.50 per share, so it's not a total difference of that amount. But basically, it was a very complex issue. There were a number of factors that we considered, both from a tax and a benefits utilization strategy. It's really not something we'd like to get into in the call, and we discuss normally our tax strategy.

As I said earlier in the call, we do have the benefit of now being able to take the credits in a more rapid basis and that our cash tax rate could go down significantly from 20% much lower as we go through the year. But we need to see what's happening with the IRS audit underway before I can give you a definitive on a number of things, including the range that we gave, as well as what's the cash tax rate would be.

Another way to look at it, Chip -- this is Paul -- to basically reduce the range from 60 to 160 to, say, 40 to 140, so the number may not even change when we get done with the whole thing. It's just the range that's changed, and that thing's still a moving target. And as Rick said, until we get the audit completed, we're not really going to offer any more information on that subject.

Totally understand. And then just a quick follow-up. When you look at the -- this is becoming a routine, where you guys seem to be doing much better on the volume front. And I know you're adding to conversion and you just mentioned the acquisition. But could you talk a little bit about what you see as the reason you guys are growing so much faster than the market? And also, any thoughts as to why the market looks like it's actually slowed down a little bit versus GDP compared to, say, what we were seeing a year or so ago?

Yes, Chip, again, when you look at our strategy over the last two years to enhance five of our box plants and help take care of their capabilities and service customers, that was $80 million over 2010, 2011 at five of the plants. But also, Tom was very successful in executing three acquisitions last year, and then the one that we just announced. So, when you think about the capabilities from a revenue side of the equation that the box plants now offer, it's quite a different footprint. So, Tom, if you want to add and elaborate to that --

Yes, Chip. Let me just add a little clarity to this thing and go back in time a little bit and refresh our memories about what our strategy was and continues to be, starting with the fact we want to become 90% integrated. And we wanted to do that in three different ways. One was organic growth. The other one was strategic capital and divestment, and that was specifically in plants where we were at or near capacity. And the third way was through acquisition. And of course, we've talked about the acquisition, and we have made four acquisitions in the past 15 months, and that's resulted in approximately 3% additional growth for us.

We also completed much of the strategic capital investment, currently north of about $40 million, and that of course relates to capacity needs, driven almost exclusively by customer demand. And then the remaining is the organic growth, which we've talked about for a long time. It's a long-term strategy, requires a very long sales cycle. It involves hundreds, maybe thousands of accounts that have allowed us opportunities to grow. They're either growing or we've got opportunities with them to add value or earn a larger share of the market. And so that's -- we continue to do that, and of course, I'd be remiss if I didn't give our people a lot of credit for executing very aggressive plan, and they're doing an incredibly good job. So, that's where we stand with that.

Relative to is the market slowing down, and why is it not tracking GDP exactly? Well, if you follow any of the trends that have gone on and certainly FDA statistics and that sort of thing, you know that we have kind of separated from GDP as an industry quite a while ago, and track probably more closely non-durables today than we do anything else. But I think we are still fairly bullish on what's going on with the economy. There will be some ups and downs, and I still say that customers watch their inventories very, very closely. So, we're seeing a few more swings one way or the other that maybe we wouldn't see in a more traditional economy.

Chip, this is Paul. Let me add one thing to what Tom said. I think he's put everything in pretty good perspective, but when it comes to organic growth, we have outgrown the industry over the last decade, continually. And we think the reason is that our basic sales proposition is we sell value, not price.

And if you can provide a customer more value than anybody else, we think that's what makes you successful. And you can provide value in a lot of ways, and we can spend two hours on talking about how you provide value. But that, more than anything else, in my opinion is what's driven our success with regard to organic growth.

Thank you very much for that color.

Next question, please.

Your next question comes from Phil Gresh from JPMorgan. Your line is open.

Good morning, guys.

Good morning, Phil.

Just on the maintenance costs for the quarter, obviously, it's up $0.03 from the first quarter. As we just think about the rest of the year, I know sometimes there's the amortization costs that continues throughout the year, so I was just trying to calibrate how much we would add back, given that there's no more downtime for the rest of the year. Is it -- would it be the full $0.03 plus the first quarter amounts, or is there amortization we need to factor in as well?

Rick, why don't you go ahead and get into the details.

Yes. You really had the right point with the amortization of the repair costs. That is the one thing that you will continue to have. And so, when you look at the second quarter to the third quarter, you will continue to have the amortization of repair costs, and it will go up from the second quarter. So net-net, between the second quarter and the third quarter, I can't give a number. But you will have higher repair costs compared to the second.

Okay. That's helpful. And then just on the energy projects, I think, Mark, you had mentioned last call that it was possible you might see the saves exceed the $0.26 that you talked about. So, I just want to get a sense of how that's progressing at this stage.

Everything we talked about as far as -- I think we summarized and said all in, net about $0.26 benefit. We said $0.21 from the direct energy pieces themselves, and then with the increased volume that we added back, net of the capitalized interest that was netted against that, we still feel comfortable that that 26% -- $0.26 per share number for the year is still good. Everything we saw in the first quarter coming out of Valdosta and Counce indicated that the boilers and turbines are doing exactly what we expected and have enhanced not only the energy picture but our capabilities to just run the mills more effectively and efficiently. So, we still feel good with the numbers we've talked about.

Okay. And then it --

We're comfortable with the number as we run this equipment. I guess our feeling is there may be a little more upside than downside for that number. But only time will tell.

Okay, and just on the -- Sorry, go ahead.

No, go ahead.

I was just going to say on the export markets, you had talked about stabilizing pricing early in the first quarter, but you didn't really talk about anything about it picking up here at all in the second quarter. So, I just wanted to know what you're seeing out there from the export markets in general? And obviously, there was a mill closure in Europe as well, so wondering how that might factor in to your thinking about the opportunities on the export market?

From a volume point of view, again, we said we're pretty well flat on volume, but Tom, do you have anything to elaborate on what you're seeing?

Yes. I think -- all I can tell you is, Phil, we have advised our customers that prices will be going up in the second quarter. That's all I can tell you on that side of the business. And I think it's driven by a lot of different normal factors.

Next question.

I'm showing our next question comes from Anthony Pettinari from Citi. Your line is open.

Good morning.

Good morning, Anthony.

Just a follow-up on Chip's question on volumes. You referenced the 90% integration level goal. Are you at about -- is it safe to say you're at about 80% now? And in terms of the 90% goal, when can you -- when do you think you can get there? Is that a two-year goal or a three-year goal?

Currently, we're at that 81% level with the -- again, as the mills have continued to perform well, that's been the factor there. But the goal would be still to go out to the end of 2014, two or three years and with the acquisition activity that we have and growing the organic side of the Business, to continue to achieve that 90% target. So yes, that's still the plan.

And in terms of a budget or a range that you would set aside for box plant acquisitions, is there any kind of color that you can give, given the three that you picked up recently?

On a range per year of spending, or --

Yes. Yes. Over the next couple years.

Well, just to go back, last year' s three acquisitions, we spent $57 million. And so around $50 million a year would probably be a good number on average.

That's been our historic average if you go back a decade, about $50 million in box plant acquisitions. That can vary from zero to 100, depending on the year. You can have a year where you really can't find anything that really fits your model. But the next year, you find a lot. But I think it would average $50 million a year going forward, and that's not cast in concrete, but that's kind of our calibration.

Great. That's helpful. I'll get back in the queue.

Next question, please.

Our next question comes from Mark Weintraub from Buckingham Research. Your line is open.

Thank you. Just one clarification. When you're talking about the downtime, costs, maintenance, etcetera, third quarter versus second quarter, I think, Rick, you focused on the repair expense. That would go up a little bit. But presumably, you don't have the 25,000 tons of lost production, and so you have that as a positive 3Q v 2Q. And so if you net those two, I would assume that your maintenance/downtime costs would be lower in the third quarter than in the second quarter. Is that a fair assumption?

That is fair. We would not have the north in the second quarter. We have the lost production, plus you have the increased costs while you were down, as well as starting up and shutting down the equipment. So in the third quarter, you would not have the first two items, but you would have a higher amortization of annual outage repair costs in the third quarter compared to the second quarter.

And, Mark, to put it another way, the highest headwinds with regard to maintenance is in the second quarter this year. Those headwinds subside in the third and fourth quarter, because we've got no downtime related, as you have said. The only point was it all doesn't go away, because we amortize shutdowns over the rest of the year after they occur. So, you can't take everything out, but you can take out the piece that you just said. So, from an earnings point of view -- and we don't give guidance more than one quarter in advance -- the situation gets better third quarter over second.

Okay. And maybe I'm jumping ahead too far here, but so order of magnitude about a $0.04, $0.05, $0.04 type of improvement, 3Q versus Q2?

We only give guidance --

Fair enough.

And we have tried to be pretty disciplined about only going out one quarter at a time.

Sure. And just one quick other one. You continue, obviously, to generate lots of free cash flow, particularly if your cash tax rate's going to be even lower. You have the box plant acquisitions. Is much of the remainder going to be focused on share repurchase? Or could you potentially even contemplate revisiting the dividend again sooner rather than later?

I think as we've said in the past, we continue dynamically to look at where our cash needs to be deployed, whether it's a balance of dividends, share buyback, and reinvestment in the assets and acquisitions. So, we'll continue that process to evaluate as we go quarter-to-quarter, and we've got our cash accumulation and cash position. So, again, that just remains a dynamic discussion amongst ourselves.

Yes, so many places to put it. We think $50 million is a good number for acquisitions. I mean, we're very diligent in the way we pursue acquisitions, because in our business, they are very high return but very high risk, dependent on a lot of factors, so we take our time. But I just released dividends and share buyback, and share buyback is the most obvious vehicle, because dividends involve a longer period of time. You have to be sure that you can sustain that dividend. So, both are always in our mind, but obviously, we have -- we had $150 million share buyback authorization. We're proceeding to spend that at an appropriate rate.

Thank you.

Next question.

Our next question comes from Mark Connelly from CLFA. Your line is open.

Thanks. Mark, two things. You mentioned higher OCC costs this quarter, but are you seeing anything picking up in virgin fiber costs? We're starting to see wood product costs rise. In some regions that helps, sometimes it hurts. I'm just curious whether you're seeing any movement on your costs on the virgin side?

No. As a matter of fact, the virgin fiber side, especially in the South, remained really flat. And so, we haven't had any weather extremes in the South this past -- on the fourth quarter going into the first quarter. So virgin, I guess we've talked about that before. We would say it's trending pretty flat.

Do you have a view that if lumber does start to pick up in the South, whether that's going to actually help you or hurt you?

Because the residual shift volumes that would become available in the market, that would help. And we've seen some of that activity actually in Michigan at our Filer City mill, with some sawmills producing more through the fall into the winter, and so there were more chips available on the market. So, we've seen some of that activity starting to take place.

Okay.

Mark, in the lumber market, they cut big trees as opposed to smaller pulpwood trees, and they're going to make residuals as they cut those trees. And that waste wood has go to find a home, and if that -- and we're hoping that the wood products business does pick up, because at one time, for example, at our Counce mill, we got one-third of our wood supply from sawmill residuals. We're down now to maybe 10%, 12%. And so when and if it picks up, we think it's a plus.

Okay. That's helpful. Just one last question. You mentioned the rising transportation costs. Is that making you think differently about the inventories you want to carry?

No. Right now, the diesel's always a factor in the transportation costs, but also with the four acquisitions we have behind us and also the new Reading plant, the question of inventories and how we manage inventories is again dynamically changed in how we service the bigger fleet of box plants. So I think going forward, our inventory model will remain somewhat the same. But do need to consider how we service the additional plants we have.

Super. Thanks very much.

Next question.

Thank you. Our next question comes from George Staphos from Bank of America. Your line is open.

Thanks. Hi, everyone. Good morning.

Good morning, George.

I wanted to piggyback actually off of Mark's question there. As you look at the acquisitions that you have made and now the most recent one, should we assume that at least initially, you have a somewhat more challenging logistical situation to make sure that you keep the customers that you acquired through these acquisitions? And as we think -- take a step back, think more broadly about the acquisitions that you've made, is it possible to perhaps peg what kind of accretion, either to earnings or cash flow returns, they can have when we look at, say, a year or so?

On the first part, from the logistics and how we service the customer base, no. That's not an issue. As a matter of fact, in many cases, our capabilities are enhanced with the bigger footprint. On the second question, Rick, do you want to talk about any of the accretion?

No. That's not something we would get into, Mark -- I mean, George -- trying to isolate profitability by an individual unit.

Would it be fair, though, Rick, that you would have made these acquisitions with the assumption that it's enhancing to whatever relative level of return or free cash flow generation you had previously? Would that be fair?

Well, I think you can look at the volume. We said with the volume we were up 8.3%. And without acquisitions, we would have been up 5.4%. So you're getting the throughput of the mills plus the box plant shipments of about 3%. So intuitively, those acquisitions are generating additional earnings for us. We just don't want to get into the specific numbers.

And George, as I said earlier, we view this endeavor as a high return, high risk endeavor.

Sure.

High risk for the reasons you elaborated on, but high return for a lot of reasons, if you can make sure that you're not going to be encumbered by some of the potential downfall of making these acquisitions. And that's why we are very deliberate in the way we approach this. And so, we've been extremely pleased with the returns we've gotten on these. That's not to say over the last 15 years we haven't been burnt a few times, for the reasons you elaborated on. But overall, we've been pretty successful in this regard. And Tom, I think he wants to add something.

George, this is Tom. I'd like to also add that in order to mitigate those risks, as I have mentioned, one of our key criteria in the acquisition process is a great management team and very talented people. And to make sure that they stay on board, that really helps mitigate that risk of losing customers or anything like that.

Okay. Appreciate the color there. If we can switch topics to maintenance and the products that you've had underway, one of the things that you mentioned as part of the second quarter program is maintenance of the boiler walls. And I remember from one of the last calls, perhaps incorrectly so, but I think this was true, that you were accelerating to some degree the maintenance on boiler walls. If that's true, can you elaborate a bit on that? And if it's true, should we expect perhaps a bit more than historically normal maintenance expense during the first half of the year on a going-forward basis?

The work that's underway right now at Counce again, we're taking advantage of the very fact that we had the annual shutdown. And some of that work could have been done over the next few years, but again, we had the ability to execute that work now and get that behind us. So in that regard, it's an isolated opportunity to upgrade and update the water wall on the boiler.

Just to amplify on that, every six years as Mark said, we have a major turbine overhaul. And we decided since the turbine was going to be down 16 days, widespread, the boiler work over a couple of years, hide the boiler work behind that turbine downtime. And that, in the long-term eliminates mill down time, and they save a bunch of money, although you do the repair all at once. And so we took advantage of that fact, and this only comes up once every six years, and we took advantage of it.

Got it. My last question and I'll turn it over, can you comment at all about early second quarter volume trends? If you had mentioned it before, I had missed it. Thanks, guys. Good luck in the quarter.

On the first eight days of cut up for the month, we're seeing bookings up 10% and shipments up 6%. So all in all, the trend continues of what we saw in the first quarter. So, we're still feeling pretty good about where our Business is.

Thank you.

Next question, please.

Your next question comes from Al Kabili from Credit Suisse. Your line is open.

Hi. Good morning. Thanks.

Good morning, Al.

I guess, Mark, maybe you could talk about -- you mentioned a richer mix that you see in the upcoming quarter. Is that just seasonality? Or is there something else driving that? I wonder if you could just elaborate a little more on that.

That's pure seasonality taking place, so again, we see this up every year.

Okay. And then the second question I had, along the export markets, you mentioned -- you're telling your customers price increases. Is that across all the major geographies? Or is that primarily Europe? Or is that spread across Latin America, Asia as well?

Again, in general, we've told our customers in the export market that the prices will be increasing in the second quarter. And that's really all we want to comment regarding pricing.

It does vary by market, by geography. And we're really not going to get more specific than that. We give that information to our customers, and that's always been our plan, to share that with customers and go no further.

Okay. Fair enough. And then, also relative to the growth rates you're seeing, is there any particular end market that stands out directionally one way or the other that you're seeing? Or is it pretty broad-based in terms of the end markets, in terms of your shipment growth?

We continue to see a broad-based growth across our footprint in North America. So again, it's nothing in particular. All of our segments are continuing to move in the right direction.

Okay. All right. Well, thank you very much. Good luck.

Next question, please.

Your next question comes from Philip Ng from Jefferies & Co. Your line is open.

Good morning, guys. Your production levels were obviously very strong during the quarter. I would imagine you're obviously benefiting from some of your recent investments. What's a good run rate for production capacity going forward? I know historically 1Q's been a little lighter.

We don't get into forward quarters of production. So again, I think if you know what we've produced in the first quarter and what last year was. So again, I think that's all we want to say about the quarter.

We basically run to demand. And that will determine our production level. The only thing that Mark did say earlier is that at the end of the second quarter, all of our maintenance outages will have been completed for the year. And -- but again, we don't -- we run the demand, and we don't give projections more than one quarter out.

That's fair. But historically speaking, since most of your maintenance is done in the first half, if demand is there, production is usually a little stronger in the back half, right? Is that fair?

That's very fair.

Okay. And then a question for Rick. The CapEx for this year, I think it's in that 110 ballpark. Is that sustainable over the next few years? And do you have any other major products on tap?

We do not comment on CapEx but one year in advance. That's been our historical norm, 110. But we'll have to look at it each year. And that's all I can add on that, Phil.

And then just one final question on the inventory. It seemed a little higher in 1Q than in years past. It sounds like you're taking a little more downtime and you're expecting strong demand. One, is that the biggest reason? And two, is the expectation for inventory to come down over the next few quarters? And just wanted to get your view on the inventory level for the industry.

As usual, we have the shutdowns planned for the first and second quarter. So, it was in our best interest to build inventory and plan to take care of and service our box plants as needed. So, the 11,000-ton increase was actually necessary to take care of our Business. So other than that, we also, as I mentioned earlier, with the new acquisitions and the new Reading plant, five additional plants to service, so nothing's changed there.

Okay. And just wanted to get your thoughts on the inventory level for the industry.

No comment.

We don't comment regarding that.

Okay. Thanks, guys.

Next question, please.

Thank you. Our next question comes from Joshua Zaret from Longbow Research. Your line is open.

Thank you very much. Quick question. With the huge consolidation trend we're seeing, four major players of the past now involved in consolidation, is that benefiting you in terms of customer churn and people coming your way? Are you seeing anything in that direction?

The only thing we would offer on that is that every time anything happens in the industry, there are pluses and minuses. And one plus of it is that if two people got together as a result of a merger and they were the two suppliers to a company that wanted to have two different suppliers, then that company, the buyer would have to seek a another supplier, because the two suppliers they had now became one supplier.

Right. That's what I'm getting at, so is that benefiting you?

That benefits us. That's correct.

Okay. And then to change quickly, can you remind us what percentage of your box shipment end market is agriculture?

Tom, do you want to take a shot? It's a low number.

It's a very low number. We're not very high on ag.

That's what I thought. The final question is, when you are purchasing, you're acquiring box plants, is there a theme in terms of end markets that you're focusing on? Or technologies or anything in that respect?

No. Not really. If you really look at our spread of business, and I think that's what gives us some tremendous strength, you're talking about thousands and thousands of accounts spread over all sorts of different industries. And we try to obviously pick the winners in those industries if we possibly can, because they're going to have the best opportunity to grow.

But with regard to acquisitions, it's more built around relationships, their ability to add value, how well they fit into our model, are they willing to do the hard to do? Have they earned the right to have that long-term reputation with the customers? And of course, are those customers in industries that are going to survive? I mean, that's obviously one of the things we take a look at. For the most part, any of those acquisitions, their customer base is spread very much like ours is.

Okay. Great. Thank you very much.

Next question.

Thank you. Our next question comes from Steve Chercover from D.A. Davidson. Your line is open.

Good morning and thanks. I was surprised it took so long to get to the question as to the implications of the recent consolidation. And I heard your answer. Does the consolidation spur you to expand to any US geographies where you're not currently exposed?

We've said for a long time we are in every major market except the Pacific Northwest. And so we don't feel a need to be in every market, in that we're not in one because we're geographically disadvantaged. It's so far away. So, we look for box plants, as Tom just elaborated on in detail, meet our criteria. And not generally focused on a specific geography where we need to be.

Understood. Okay. Thank you.

Next question, please.

(Operator Instructions). I am showing our next question comes from Scott Gaffner from Barclays. Your line is open.

Good morning.

Good morning.

I was just hoping you could dig a little bit deeper into your response to the 2Q positive mix shift. You mentioned seasonality, but does the seasonality drive higher-value products? And if so, what are we talking about here?

The seasonality does drive some of the higher-priced products. That's true. And demand starts to -- typically starts to ramp up a little bit. And that's why if you look at our comparables, last year we were up. This year we're saying we're going to be up again. That's pretty much the trend.

Okay. And then looking at the transportation costs, it's been a headwind all of 2011, obviously starting off again as a headwind this year. I think before you talked about 50% of your shipments are rail versus truck. Is there anything that you can do to sort of manage the outbound transportation costs?

Again, because of the diesel factor, you have your trucking and your rail available, and you optimize that mix. And so in any given week, any given month, it's an optimization question on how you take advantage of that.

You misquoted us just a little bit. I think it's good that we correct that.

That would be great.

50% of our shipments are roughly truck-rail. That's coming out of our mills. Out of our box plants, is virtually 100% truck. So, it's very skewed to trucking when you throw in the box plants. And you can't ship boxes by rail.

Right.

The rail system doesn't operate that way. So, most of our shipments are truck. And that's why diesel is an important variable.

And the one thing on the box plants side, Scott, is that we can -- we obviously focus very much on cubing the trailers. Because we can't wait out trailers in the box business. So, you focus heavily on cubing them.

Great. Thank you.

Next question, please.

Thank you. Our next question comes from Stephen Atkinson from BMO Capital Markets. Your line is open.

It's Joel [Accursiastri]. Thank you, operator. I don't know if you covered this, but when you talk about the Counce turbo generator overhaul, do you expect any benefits like in terms of additional production or lower cost, like incremental to what you're planning?

No. This is just a six-year routine overhaul of the turbine, going through all of its maintenance requirements, just to maintain it.

Just like your car, when you overhaul it, you hope it runs good for another six years.

Okay. So, it's just maintenance, right?

Right.

All right. Thank you.

Next question, please.

Thank you. Our next question comes from John Tumazos from John Tumazos from John Tumazos Very.

Good morning. In the $0.45 guidance for the second quarter, what is your estimate of natural gas prices? And are there any other ingredient price estimates of note?

What we're seeing with natural gas, what we estimate is that natural gas remains flat at that low level we're currently experiencing.

And John, we don't use as much gas in our mills to speak of, but we do get a big savings in our box plants, because most of our box plants' boilers are fired with natural gas. So, the bulk of the savings will be in the box plants, not the mills.

So, does flat mean the same price and volumes used as the first quarter or as a year ago?

Well, again, you're going from a winter season into a spring, summer season, period. So, typically, your usage volume does fall going into the warmer climate -- warmer season.

One other thing, we did have some physical contracts purchased out in advance, but those did expire in the first quarter. So, we will get a little bit of benefit and in fact will be buying at the market price now versus the physical contract price. But it's not a huge number.

Thank you.

Next question, please.

Our next question comes from George Staphos from BofA Merrill Lynch. Your line is open.

Hi, guys. Quick one. We hear a lot about manufacturing perhaps seeing a renaissance here in the United States over the next number of years. Given what's transpired in emerging markets, given the cost position. Are there two or three concrete, tangible evidences from what you see that that's in fact happening? Or from your vantage point, is it a lot of discussion but really without a lot of reality at this juncture, in terms of manufacturing recovering here relative to where it had been in the US? Thanks, and again, good luck in the quarter.

George, let me take that. We had some tangible results, but we're not going to share them with on our competitors on this call. But there's a lot of tangible examples published in the Wall Street Journal in the last two months. So, I think there's a lot of anecdotal evidence, very specific, that indeed has started to happen, and we certainly hope that it continues.

Paul, if that's happening, how long do you think it takes for the supply chain around manufacturing to build out? If manufacturing, say, of washing machine -- or maybe that's not the right example is improving, your fabricators, your tool and die guys, all these guys have to start building back up again. Is that a one-year or a three-year phenomenon, or how would you think about it? Thanks again.

The short answer is, I don't know. I have never manufactured washing machines, but there are better people that you can ask then us. We simply don't know.

Thanks.

Next question, please.

(Operator Instructions)

With no more questions, thank you for joining us today, and we look forward to seeing you at the next call. Have a good day.