Packaging Corp of America (PKG) 2012 Q4 法說會逐字稿

Thank you for joining Packaging Corporation of America's fourth-quarter and full-year 2012 results earnings conference call. Your host today will be Mark Kowlzan, 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. Kowlzan, and please proceed when you are ready.

Good morning. Welcome to Packaging Corporation of America's fourth-quarter earnings release conference call. I'm Mark Kowlzan, CEO of PCA. With me on the call today is Paul Stecko, Executive Chairman of PCA; Tom Hassfurther, Executive Vice President who runs our Corrugated Business; and Rick West, PCA's Chief Financial Officer. Thanks for participating in this morning's call, and after the presentation we will be glad to take any questions.

This morning we reported fourth-quarter 2012 net income of $61 million or $0.63 per share. The reported results included net income of $3 million or $0.03 per share from state income tax adjustments related to cellulosic biofuel tax credits and after-tax charges of $1 million or $0.01 per share from plant closures. Excluding these items, net income was $59 million or $0.61 per share compared to the fourth quarter of 2011 net income of $39 million or $0.40 per share. The $0.21 per share increase in earnings, excluding these special items, were driven by higher container board and corrugated products' price and mix of $0.12, higher volume $0.09, and lower cost for recycled fiber $0.04, and energy $0.02. These items were partially offset by higher costs for labor and benefits of $0.05, including incentive compensation related to record earnings.

Full-year earnings, excluding special times, were $201 million or $2.06 per share compared to 2011 earnings of $162 million or $1.61 per share. The $0.45 per share increase in earnings was driven by higher volume of $0.33, and price and mix of $0.06, lower cost for energy $0.17, recycled fiber $0.12, and chemicals $0.05, and a lower share count $0.05. These items were partially offset by higher cost for labor and benefits of $0.14, depreciation $0.08, interest expense $0.06, and transportation $0.05.

Net sales in fourth quarter were $737 million, up 13% compared to the fourth quarter of 2011. Full-year net sales were a record $2.844 billion, up 9% over 2011.

Overall, we had another strong quarter, setting all-time quarterly records for sales, earnings and shipments, despite about 10 box plants in the East and Midwest being impacted more than usual by severe weather conditions. Our corrugated products' demand was strong throughout the quarter, and our corrugated products' price increases went through as planned.

Moving to more details of the quarter, our corrugated shipments were up 5.8% on a per-workday basis, compared to last year's fourth quarter, including 2.1% from box plant acquisitions, and up 7.6% in total with one more shipping day this quarter. Our shipments per workday were up each month of the quarter compared to last year. And, in November, we set an all-time record for any month in shipments per workday, both including and excluding acquisitions.

For the year, our corrugated shipments were up 6.6%, both in total and per workday, with the same number of workdays as in 2011. Of the 6.6% increase, 3% was from box plant acquisitions. Our domestic and export container board sales demand remained strong. However, with our increasing integration level, and to maintain container board inventories at targeted levels, we did sell fewer tons into the export market compared to both last year's fourth quarter and the third quarter of this year. Our export shipments of container board were about 8,000 tons lower than last year's fourth quarter, and about 17,000 tons lower than the third quarter of this year. Domestic container board sales were down about 2,000 tons compared to both the fourth quarter of last year and the third quarter of this year.

Our mills produced 652,500 tons of container board, up 12,000 tons over the fourth quarter of 2011. The higher production was driven primarily by capacity increases resulting from the energy projects at our Counce, Tennessee and Valdosta, Georgia linerboard mills. But it's worth noting that all four of our mills set all-time production records for the year, producing 2.6 million tons, and ran at essentially 100% of capacity. We ended the year with container board inventories up 6,000 tons compared to the end of 2011, as we needed to begin to build some additional inventory in advance of the 2013 annual maintenance outages.

We've adjusted our mill annual maintenance outage schedule in 2013 to better optimize inventory levels, and also to accommodate the scheduled delivery of critical items needed for the outages. The only maintenance outage in the first quarter will be the number two paper machine at Counce, Tennessee linerboard mill, which will be down for five days in March, reducing production by 7,000 tons, and also increasing operating costs. The majority of our maintenance downtime will occur in the second quarter when we complete our Counce outage, and also have our Valdosta, Georgia linerboard mill and our Tomahawk, Wisconsin corrugating medium mill down for their annual maintenance outages.

There are also two less calendar days in the first quarter, which will lower mill production by about 15,000 tons compared to the fourth quarter. There is one less day compared to last year because 2012 was a leap year. We will need to build some additional container board inventory in the first quarter to cover our second-quarter maintenance outages. This will impact first-quarter earnings, but earnings from these tons will be recognized in the second quarter when they are sold. On the box side of the business, there are two less workdays than the first quarter of last year.

Looking at pricing, we completed our corrugated products' price increase as planned. In total we achieved a full pass through of the container board price increase to boxes. From an average price standpoint, we realized about two-thirds of the total earnings benefit of the box price increases in the fourth quarter, and will realize essentially all of the remaining benefit of the price increases in the first quarter.

Moving to costs, lower recycled fiber costs improved earnings by $0.04 per share, as the industry-published prices for old corrugated containers, or OCC, excluding delivery costs were down about $35 a ton in the fourth quarter of 2012 compared to the fourth quarter of last year. Our wood costs for both the fourth quarter and the full year were essentially flat with 2011, and we were also able to complete our annual winter wood inventory build in the fourth quarter. Since early January, a pattern of extremely wet weather in the Mid-South has begun to put pressure on wood costs and availability. Our wood inventories are declining, and the extent of the earnings impact from the wet weather in the first quarter will depend on how long the weather pattern persists.

Energy costs were down $0.02 per share compared to last year's fourth quarter, driven mostly by the energy project and lower natural gas costs in our box plants. Finally, labor and benefits were up $0.05 per share compared to last year's fourth quarter, including the cost for higher incentive payouts associated with the record earnings.

I'm now going to turn it over to Rick West, our CFO, who will give an update on our generation and uses of cash, and taxes.

Thank you, Mark. In the fourth quarter, PCA generated cash from operations of $153 million, including a positive working capital change of $25 million. Capital expenditures were $34 million for the quarter, and for the full year were $129 million. We also spent, during 2012, $35 million for box plant acquisitions. We paid both our October quarterly common stock dividend of approximately $24.5 million, and also paid our normal January dividend in December for $24.5 million. We repurchased 103,000 shares of our common stock during the fourth quarter for about $35.35 per share or $4 million. For the year we repurchased 1.5 million shares for $45 million at an average price of $29.95 per share. As of December 31, 2012, our diluted shares outstanding were 97.4 million shares.

Cash tax payments of $200,000 were made during the quarter for state income taxes, and fuel credits of $3 million were used to offset federal taxes. We have estimated remaining fuel tax credits of up to $76 million.

We ended the fourth quarter with $207 million in cash, up $66 million from our third-quarter ending cash. Our debt at the end of the fourth quarter was $794 million.

Before I turn it back over to Mark, I have a few estimates for certain 2013 items. We expect capital expenditures in 2013 to be about $120 million. We also may consider spending up to an additional $50 million for either box plant acquisitions, or strategic investments in our existing box plants. Preliminary 2013 pension funding and expense estimates, including other post-retirement benefits, are about $31 million and $40 million, respectively.

In terms of cash taxes, after the remaining tax credits are used, our cash tax rate will go back to about 35%. The final amount of the available fuel tax credits and the final cash tax rate in taxes paid in both 2012 and 2013 is contingent upon the conclusion of the IRS audit currently underway. Our effective tax rate for income statement purposes is expected to be about 36% in 2013 based on current federal and state tax laws.

Our debt pay down, under our $135 million term loan outstanding, will be $15 million in 2013. We currently have no plans to pay down any additional debt in 2013. Based on current interest rates, our cash interest payments in 2013 are expected to be $32 million, and interest expense will be $38 million with the $6 million difference between payment and expense due to the amortization of debt refinancing charges.

With that, I will turn it back over to Mark.

Thank you, Rick. Before I move to the first-quarter outlook, to sum up 2012, we set several records for both operations and financial results, driven by better-than-expected earnings benefits from our major energy project at our Counce, Tennessee and Valdosta, Georgia linerboard mills, and record corrugated product shipments driven by our ability to provide value to our customers, and strategic investments we've made in our existing box plants, as well as our acquisitions. Based on our strong financial position and results in 2012, PCA announced on January 14, 2013 an increase in the quarterly cash dividend on our stock from an annual payout of $1 per share to $1.25 per share, a 25% increase.

Looking ahead to the first quarter, as I mentioned earlier, we expect lower container board production and higher operating costs compared to the fourth quarter, with two less mill production days and annual maintenance downtime. We also expect higher energy costs with colder weather, and a pattern of extremely wet weather in the South is putting pressure on wood costs and availability. Corrugated products' volume will be seasonally lower, and we expect higher costs for recycled fiber, and labor and benefits. These items will be partially offset by higher average corrugated products' prices with a full quarter of realization of our fourth-quarter price increases. Considering all of these items, we currently estimate our first-quarter earnings at about $0.56 per share.

With that, we'd be happy to entertain any questions, and must remind you that some of the statements we've made on the 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, those identified as risk factors in our annual report on Form 10-K on file with the SEC. The actual results could differ materially from those expressed in these forward-looking statements.

With that, operator, I'd like to take questions, please.

(Operator Instructions)

George Staphos, Banc of America-Merrill Lynch.

Good morning everyone and happy belated New Year. First question I had, can you give us the traditional run down on what your bookings and billings look like early in the first quarter, recognizing it's still early?

George, for the first 11 days, from the bookings point of view, we're up 4.5%, billings 3.5%. As the month goes on bookings and billings equalize. So again, 4.5% and 3.5% for the first 11 days of January.

And, George, I might add that's maybe 1% better than we expected, because that's a per workday number and we have two fewer workdays in the first quarter. So, that will affect the total numbers. It's good, but it's not as good as it sounds because there are less workdays in the first quarter, which will affect the total number. We are a little better than we had expected coming out of the chute

Understood. It's consistent with some of the other things that we've seen in our work. Second question I had is around the box plant network and vertical integration. I was hoping given it's the end of the year that you're reporting that you can give us an update on actually where your vertical integration was for the year? And, can you comment a little bit on the plant closure that I guess you did in the fourth quarter, how they relate to the overall network?

Regarding integration, for the fourth quarter we're 83.5% integrated. Full year, just under 83%, it's 82.5% full year. And then, again, what was your second question? I'm sorry.

No, that was basically it. Oh, the plant closures, since you need the capacity to some degree seeing that you are going to invest, what was behind the actual plant closings here?

We had one plant in the Southeast, that for a period of time, we had, quite frankly, we had had a customer that was no longer part of that mix and so we had an opportunity. It was a very small plant, but we had an opportunity to just ship that volume into another plant in a nearby region. Basically, the total plant closure cost, we did have another plant in the Mid-West that was not a plant closure per se, but we did some modification to the buildings and took some write off regarding building demolition.

Last one, I will turn it over. I know there was some incentive comp in the $0.05 in the fourth quarters in terms of higher labor and benefit costs. But, is that a run rate, let's call it $0.04, or how we should think about it? That we should think about it for the rest of -- well, for 2013 on a quarterly basis? Thanks and good luck in the quarter.

Paul, do you want to get into that?

Yes, since I still look at compensation. That number was between $0.02 and $0.03 in the fourth quarter. We had an all time payout on our incentive compensation plan as we beat our all time record earnings by 27%. What that number will be in the future will depend on what our level of earnings will be. Our incentive compensation plan has a feature that I would define as affordability, when you make a lot of money you can afford to pay higher bonuses and when you don't you can't. Then we have some performance criteria, both external and internal. So, the answer to your question is, it will be a function of our earnings this year and it's not necessarily a run-rate number. It will follow, as I said, our earnings. If they go higher, than there is a high probability we'll pay out more. If our earnings go lower, there is high probability we'll pay out less. It's not a run-rate number.

All right. Thank you, Paul. Thank you, Mark. Turn it over. Next question, please.

Chip Dillon, Vertical Research.

Good morning. First question, can you give us a little bit of direction between the downtime impact? You gave us the first quarter and mentioned the one machine at Counce. How much more in terms of tons will we see in the second quarter versus the 7,000 we'll see from that outage in the first?

Well, again, the first quarter was the Counce machine going down, you're going to see directly, say 7,000 tons come out of the system with the Counce machine down. But also by moving the remainder of Counce into the second quarter, basically the first quarter is about equal to the second quarter when you look at the difference in the number of days with the leap year effect. Again, because with the added day last year, the leap year added say another 7,000 plus tons. So, in essence first quarter, second quarter will be about the same, as far as tons the impact.

Okay. As a related question, could you maybe give us either the final score? I know you were seeing some continued gains from the energy projects and it's been awhile. I guess it was November 11, 2011, when you completed them. But, where that stands in terms how you see the savings either EPS or EBITDA -wise? And then how much more there might still be, if any, in 2013?

As we said on the third quarter call, we expected $0.37 for the year and we achieved that. As far as any incremental benefits going forward, we don't expect to see any. So again, the project achieved more than we had expected. As we talked last year to the second and third quarter calls, we are very comfortable with that $0.37 contribution from the projects.

Okay.

The only change to that, Chip, is if energy prices would spike and go up, we are going to see benefits in terms of cost avoidance, because basically we buy no fossil fuel. At Valdosta everything's self generated. But, that's a cost avoidance. It'll protect earnings from going down. It won't add to earnings. The only other thing -- we usually can creep capacity about 1% a year. This project will probably enable us to be able to do that. We couldn't have done that without this project. We may get another -- but we are talking maybe 1% of capacity in terms of being able to creep. You could theoretically we couldn't have done that without the project. But basically as Mark said, we've got essentially all of our earnings out of this, with the big proviso, it does give us cost avoidance protection.

Got you. This is the last quick one. You mentioned how stable the wood prices have been, wood costs. As we go into 2013 and beyond, there are different forces at play, whether it be, I would guess, higher chip availability with lumber coming back. But then again, you've got these alternative energy type plants being built, pellet plants. What do you sort of see for your wood costs, percentage increase as we look out this year and maybe even into next year?

Chip, just looking at coming into this 2013, we're pretty comfortable and wood costs were flat through the year. We did our winter wood build at Counce. Again, very comfortable with where we were. However, during the Christmas period we started to see weather pattern shift through the South and a lot of the heavy rains starting to move up from Texas to Louisiana and into the Mid-South. So, we were impacted pretty dramatically for about a three and a half week period. That forced us to start consuming our winter wood build at a much more rapid rate than normal. That's one of the primary reasons we've talked about wood costs going up on the short term.

We've had a reprieve this week, weather's better. The other regions we're not seeing any of the impact as far as anything unusual. As far as sawmill chips, we have seen an uptick in availability of chips, residual chips available at our northern mills and southern mills. Again, as far as anything that's out on the horizon, if the weather behaves itself and gets back into a normal pattern, then there is nothing that should move wood costs either way. So, we're not expecting anything dramatic in that regard.

I guess, Chip, This is Paul. The only thing I'd add, is you said the two variables as wood products improves there's going to be chip availability which is definitely a plus. Then there's the uncertainty of these pellet wood plants that could or could not come on-line and one's more short term oriented and the other's is more long term. I would say if you look at the cut rate versus the growth rate it's pretty good. The question is, can chip plants start to eat into that balance? I mean pellets, not chips.

As most of the pellets are going offshore to Europe and places like that for environmental reasons for subsidized energy, and the question is, will that continue? Will Europe continue to subsidize energy when they've got problems in terms of costs, Greece, Spain, et cetera? And what will happen long term? Will economics prevail or where government subsidy prevails? That's probably the most important variable and that's a tough one to call.

Got you. Very helpful. Thank you.

Mark Connelly, CLSA.

This is Steve Aragon filling in for Mark Connelly. My first question goes back to fiber costs. It sounds like you're expecting a wetter than normal weather in the South, so higher than usual fiber costs, but the EPS projection from fourth to first looks pretty normal. What's offsetting these extra head winds? I know you mentioned price, but there is anything else there?

Again, besides the wet weather we're into it's a colder weather period. We are seeing the colder temperatures up north that we haven't seen for a few years. Energy use in particular is going to be higher. And then, again, we just don't know what this winter weather, as far as the rain's going to do. Rick, do you want to elaborate on any of the other changes?

I think rather than looking at fourth quarter '12 to 1Q '13, I think it's a little simpler to look at 1Q '12 to 1Q '13. If you look on that basis, we made $0.42 per share in the first quarter of 2012. With the production day and corrugated product workday difference, the volume that we'll produce and ship in the first quarter of 2013 versus the first quarter of 2012, is expected to be essentially the same. So, no impact.

Okay.

The second item is cost. You're going to have your normal year-over-year increases in merit and benefits, et cetera, say that's $0.03 negative that would take you down to $0.39. We said in the fourth quarter we recognized about $0.12 per share in price and mix and it was two-thirds of the total benefits. So, you divide that by two-thirds you get $0.18. You add the $0.39 and plus the $0.18 for price, that gets you to $0.57. Then, some of these weather things that are unusual you back off $0.01, that gets you to our guidance of $0.56. That's a very simplistic way to look at the change in earnings and our guidance.

Got you. Thank you, that's helpful.

Phil Gresh, JPMorgan.

Good morning. Just on the capital allocation side of things. For the year you guys bought back $45 million of stock, and, Paul, I asked about this last quarter so I just wanted to follow up again about as to how you're thinking about things as we enter 2013. If things are more stable out there would you guys be looking to buy back more stock this year given the cash flow?

I wish things were more stable out there. We would like to buy stock more continually. We've been opportunistic. We didn't buy a lot in the fourth quarter because of the impending quote-unquote, financial cliff, fairly uncertain time. We faced the same thing, to some extent, in the first quarter with the debt ceiling and what its effects will have on macro-economics and the stock market in general. So, we're waiting for a little more stable time to be more consistent buyers. If there's any volatility that we think unfairly hits our stock, we're well prepared to take advantage of that. And like you, we're hoping for more stable times. It makes buying stock back a little easier. That's the best way I can say it. We don't have a long term strategy here right now. We have a short term strategy that still tries to be a little opportunistic and we'll move to a longer strategy when things get a little more stable.

Okay. Fair enough. Then on the inventory front, just where you guys are exiting the year, I know you are talking about building some in the first quarter just from a maintenance standpoint, but do you feel comfortable just on a longer term basis worth where your inventory levels are right now?

We finished up the year, quite frankly, we had hoped to be able to build some inventory with the Christmas storms that took place we actually ended up with a few thousand tons more than we had planned on. But quite frankly, with the fact that the dynamics are different now during the latter part of the fourth quarter for the last few years. You know, we don't see that December slump like we used to. So demand is fairly constant, which, again, from going back historically we're used to see an inventory bulge that you'd want to work off during that early part of the first part of the year. You don't see that any more.

It creates the necessity to build an inventory that can sustain us through the shut down period. It's important that we build an inventory. We're pretty much where we want to be right now. We've spaced out these shut downs. That's one of the factors that we've looked at as where we take these shut downs now and space it a little bit longer through the first and second quarter to better accommodate the cut-off needs and the mill capabilities during the first part of the year. So regarding that again, I think where we are right now in January our inventories are pretty close to where we'd want them.

Okay. Then my last question, your major investments are now basically done at the existing mills. You've got the savings locked in. I'm wondering from a footprint standpoint, how you're thinking about things moving forward? Is the idea of adding more mills to the system something that you would be considering at this point? Or just how you think about that strategically?

Just to go back and review, we've talked for the last couple of years about our integration plans moving from the low 80%s up to the low 90%s, 90% to 92%, 93%. That remains our focus. So, Tom's been able to create some good opportunities with box plant acquisitions and the organic opportunities with the capital spending in six of our plants. Nevertheless, again we remain focused on that integration plan. We currently, you've heard Paul say this. I've said it, if an opportunity came along at the right price, we'd consider mill acquisitions. That's always something you'd have to consider. Right now, that's -- again, our priority is the integration plan.

And I'd add, we're not looking for diversion here. Our goal is get to 90% plus integration. That is our main focus.

Okay. Thanks a lot. I'll turn it over.

Next question, please.

Mark Weintraub, Buckingham Research.

Good morning. Rick, I appreciated the bridge you did from 1Q '13 versus 1Q '12 and understanding that. If we did look though at 4Q to 1Q, it seemed that you had implicitly suggested there'd be $0.06 positive on pricing mix. Since the number's going down $0.05, you add the $0.06 to the $0.05, it looks like there's about $0.11 seasonal flash cost variance for Q2, 1Q. Could you help us understand a little bit better what the components are? Because, it seems to be more than the normal seasonal. Whatever you can do to help us out there that would be great?

Well, you know, I couldn't say if it's more than normal. Just to walk you through the items, let's just say colder weather, energy, wet weather, $0.04. We do have statutory benefits that start back up in the first quarter, which is more of a timing item. That's about $0.025 to $0.03. Then you have your normal year-over-year increase in wages and some fringes increase, which is about $0.025 to $0.03. Then you're looking at recycled fiber on average being up about $0.01 a share. Then you've got some offsets with different things -- inventory, a little less maintenance expense without as many outages in the first quarter, and then some seasonal volume related. As we said, corrugated's products volume will be down the first quarter versus the fourth quarter, but essentially the same in total year-over-year. So, that'd be about $0.03. That gets you down to our guidance of $0.56.

Okay.

I think the real difference this year is the more seasonality of the corrugated products volume with less workdays than last year.

And we had a leap year last year. We don't have one this year. Leap years are good.

I'm sorry, what's the statutory benefits you were talking about versus the other benefits.

The statutory benefits, your FICA, your SUI, your FUI, people pay those out as they go through the year. So, you have a lot of those paid out by the fourth quarter that you're not getting the expense. Then when you start up in the first quarter you begin that expense again.

And then does that go back down again in the second quarter or that's just at a higher level versus the --?

It goes back down throughout the year as people pay out their benefit requirement for the statutory branches.

Okay. Presumably a typical normal year you would see much of the energy costs, weather related stuff come back in the second quarter? You would see the statutory benefits and the other benefits also come back? Is that fair?

I would say that's a fair assessment. But not necessarily -- it will dependent on your rate of pay. The social security's capped at $100,000 some. Once you get there, some people will get there in the second quarter, third quarter, fourth quarter. That thing decays over the year in terms of payment and until you reach the minimums. In the first quarter you take a full hit.

Okay. Then obviously your seasonal volumes typically get better.

That's correct.

Only thing that goes up is your maintenance expense for outages does increase because we amortize them over the remainder of the year after they occur.

Well, and on that, you had mentioned that you're going to be building some inventory in the first quarter, but that the sales wouldn't get booked until the second quarter. If you were to sell that production in the first quarter, is that a meaningful difference to what the earnings would be?

You know, rough number a penny or so.

Okay. How much does maintenance go up second quarter versus first quarter, order of magnitude, earnings-wise?

Really at this point, Mark, we haven't finalized those numbers as we're completing the total cost of our annual shut down. So I'd be reluctant to give you that number at this time.

And, Mark, our current practice is we give guidance a quarter at a time. We're not going to start giving estimates for the second, third and fourth quarter on things. They're just too difficult to make.

Sure.

We'll do one quarter at a time.

Thank you.

Mark Wilde, Deutsche Bank.

Just a couple of follow-up questions. First, can you talk a little bit about the net impact from the hurricane? Because it sounded like you had some box plants that might have lost a little volume, but at the same time you said that as a record shipping month in November for you?

Mark, I'm going to let Tom expand on that one, because we had a few different storm events taking place.

Mark, the net impact from Sandy, that impacted a number of our plants, and then additionally we had the two snowstorms that came through the Mid-West. All in all that was about $0.01 a share. The difficulty there is estimating, okay, if you lose a little bit of business because a shut down does any of that come back? Typically, if you've got our plants down and our customers' plants down, you're going to lose some sales as a result of that. That won't show up in the following year.

Okay, but just to be clear, Tom, you did say November was an all-time record month for you guys. Is that right?

Right. And, I'd add, Mark, if -- I know you're not a weather man, but Sandy was in October and the bad storms were in December. We had good weather in November, which allowed that.

Okay. Then the other question I had, just can you recap for us again that maintenance that's going to be going on in the second quarter? If you can't give us a cost or anything that's fine. But to recap for us, what is actually going to be out in the second quarter?

Yes. Again, what we'll do is we're going to complete the Counce outage in April. During that same period of time we're going to have the Tomahawk mill down in April this year. And then in May we'll take Valdosta down and complete its annual shut down in May. Those are the three shut downs. So everyone understands again, the Filer City mill will not go down until October of this year. We moved it up to October. We've got that flexibility now with the energy infrastructure systems at Filer.

Okay. And, Mark, if we just went back and looked at what normally happens in terms of these maintenance outages that the three mills you mentioned, is that going to be a pretty good indicator of what we should see this year?

You know, Mark, this year, again, they are just normal outages, mainly inspections. We're not into a lot of big capital upgrades. This year it's just routine work, take the mills down, inspect, repair, get them buttoned back up and running again.

Mark, we only give downtime forecast one quarter in advance for various reasons. We can tell you what's down in the next quarter, when we have the same call, we'll tell you how many tons for the quarter. We don't do it more than a quarter in advance.

We all understand that. I was just trying to make sure that we were doing as well as we could in terms of calibrating that bridge going into the second quarter.

Right.

Thanks very much.

Anthony Pettinari, Citigroup.

Good morning. Your CapEx, $129 million this year. I think it's a tad higher than what you are shooting for next year. Can you just remind us, was there any carry over expenses from the energy project or was there anything that caused that number to be a little bit higher this year?

We said that we'd spend $120 million of normal CapEx between the mills and box plants. And then we said that on the strategic side, primarily the box plants, we'd set aside perhaps $50 million or $60 million for Tom to look at potential acquisitions, strategic opportunities. So that $9 million, the $129 million, from $120 million to $129 million, is basically strategic opportunity spending that took place. Although, we had the one acquisition for the year. We looked at some of the opportunities and one of the opportunities also was Valdosta with some strategic capability upgrades. That $9 million differential was strategic opportunity spending.

And, Anthony, Paul -- just on that point Mark's making that's, I think it's an interesting antidote. The way we approach capital spending, minimum effective design. We try not to make sure things are gold plated. When we did the energy project at Valdosta, there was about five or six things we could have also done. We assessed the probability of needing them and the probability on most of these items was 20% and 30%, so we didn't do any of them. When we got done with the project, they always find some things that don't go exactly like you like. This was a positive one. We were able -- the boiler did better than we thought. We were able to get out more electricity and that created a problem. We didn't have enough steam. We looked at it and said, hey, the biggest steam user in the mill is the fan pump drive. It's a stream driven pump and we decided it would be the biggest motor in the bill, so we decided to spend $1 million this year to put in an electric drive instead of a steam drive. That's $1 million dollar motor, but the payback is $1 million. So, one year payback. But, the whole point in the discussion is that we really do minimum effective design. If you miss something, then you only fix the things that you miss. You didn't put in five other things you didn't need. We'll get a very high return on that. That's in a number that could have been part of the project but it wasn't.

Okay. And I guess just related question. You referenced the 90% integration goal. When you think big picture over the next two to three years, do you think you get to that 90% mostly through those kinds of strategic spending and strategic initiatives? Or do you get it from the box plant acquisitions or how should we think about those buckets as you move toward 90%.

It's a combination. If you look at the benefits of the strategic spending that was completed in 2011, which was a 2010-2011 spend in the box plants at half a dozen of our plants where we upgraded their capabilities, and then you look at the acquisitions, basically the incremental volume that we saw in 2012, half of it came from the organic capability in the box plant, half of it came from acquisitions. And so we'll continue that trajectory. Tom's always looking at acquisition opportunities and some of that $9 million, that $129 million in capital, some of that $9 million Tom applied at a number of the box plants. It's some strategic pieces of capital that will enable better organic support of the customer base.

Okay. That's helpful. I will turn it over.

Next question, please.

Scott Gaffner, Barclays.

Good morning. I was just curious, you talked about the strong results in November sort of continuing then into the first quarter, little bit better than expected. Can you talk from an end-market demand perspective? Are you seeing any increased demand from housing related industries or anything related to a better industrial production?

Tom, why don't you look at that one.

I think there's some pick up in the economy. I don't think there's any question about that. It's certainly not what I call booming, but I think there is some pick up. It's steady. The housing industry, obviously, the numbers are much better. Of course, that'll drive a lot of residual customers towards increasing their purchases. I think that's one of the tail winds we have going forward.

And longer term you've talked about the return of manufacturing jobs and factories to North America. Are you seeing that currently? Is that starting to impact the results? Or anything you can provide there in the longer term outlook for that?

I wouldn't say it's an immediate impacted results, but it certainly is encouraging, what Wal-Mart has decided to do with setting aside a major amount of purchase in the $100s of billions towards helping assure that there is some reshoring of manufacturing to this country. I'm sure that got the attention of many of our customers, and that will bode well for our Business going forward.

Okay. Lastly, throughout the whole price increase discussion that just occurred and some of the changes in consolidation in the industry over the last two years, have you seen any meaningful shift in share particularly in the fourth quarter?

We are not really in a position to comment about that.

Okay. Thanks. Appreciate it.

Philip Ng, Jefferies.

Your mills obviously ran very well, ran close to 100%. Is that 2.6 million number production number sustainable and should we assume 1% supply creep for 2013?

Yes. The 2.6 million tons is sustainable and with continued discreet investments to support that, 0.5%, 1% is achievable. Again, it depends. We've said this before, it's all about how much capital do you want to spend or do you need to spend. But, we feel good that number is sustainable and we can continue to grow at a very conservative rate.

And just a caveat on that. The way it normally works is after you get done with an annual maintenance outage, everything's in tip-top shape. And you could probably run in our system 102%, 103%, 104% of capacity. Then you'll lose that ability over the next 12 months as things wear and you get down less than 100% of capacity, like 98%. Counce, for example, ran less than full capacity in the fourth quarter because it's at the end of its cycle and so it's not a linear phenomenon. The other thing it's not, we had no major problems in 2012 in our mill system. You have your normal day to day, but no big boiler problems, et cetera. So that has the one caveat, knock on wood, that you don't have a major problem, because that would impair your ability to run at 100%. So in a normal year without any major problems, yes, it's sustainable.

I got you. Are there any other major projects on the horizon that you could actually bottle more incremental capacity than the normal 1%?

No. Currently we're not looking at anything big. It's just the day to day thing that address cost, reliability, maintaining our up time, but right now we don't have any big -- nothing of the magnitude of the big energy projects.

And you can always come up with projects. They will be expensive and just a matter of money and right now we want to spend our money and get to the 90% plus integration level.

I got you. You provided some color on inflation on the wood fiber component? What about the other major pieces like chemical costs and starch?

Looking at the first quarter, we didn't see anything in the chemical related area and it's more so than normal, year-over-year increases and annual wages, et etcetera, and benefits. That's the biggest one from an inflation standpoint. A little bit on recycled fibers I said earlier.

And one last question. I want to get a sense from your perspective of the state of the market. Sounds like you're generally a little more upbeat about demand? This time last year we saw some leakage on pricing exporting, some spot discounting, but sounds like the markets much tighter right now. I just want to get your takeaway?

I think you described it very well, Philip. It's certainly better than it was a year ago. Things are pretty tight. Export market, demand remains very strong. Overall basis, I think that the market itself is in good shape.

Okay. Thanks, guys.

Thank you. Next question.

Alex Ovshey, Goldman Sachs.

As I look at the earnings bridge from '11 to '12, it looks like volume benefited earnings by more than $0.30, if my model is right? I think you said half of that was acquisitions, the other half was organic volume growth? On the organic side it's still a very meaningful contribution to earnings in '12, despite over all industry being flat from a volume point of view. As we look at '13 and you look at your book of business and the conversations you're having with customers, any color you can provide on how we should think about the benefit that volume could provide to earnings in '13?

We really are not in a position to get into that. We talk one quarter at a time. But, the first part of your discussion on the volume, you were correct in your assumption on what that contribution was from volume for the year. Again, moving into anything but this quarter, we're not --

Yes, it's Paul Stecko. The only thing I'd add is, as Mark said, we give volume guidance a quarter -- any guidance a quarter at a time. But if you look at our long track record, ten years, you can see that we've outgrown the industry considerably, and obviously that still remains one of our objectives.

Thanks, Paul. And then on the export side can you talk about the current demand trend you're seeing out there? And whether or not you expect any mix shift between the normal amount of tonnage that you ship with the export versus what you expect to see in 2013?

Yes, as I just mentioned a few minutes ago, the export demand remains very strong. And of course, they're going through a price increase right now, or an announced price increase of EUR60 and that's on recycled. Things are moving up there as well in Europe and Latin America remains strong as well as South America. I think that as we've talked before, we exported over 250,000 tons. Some of that is going to go to our integrations. We're not, as we've talked before, large exporters and we concentrate on a couple of markets. That's all I can really comment on. I think that worldwide demand is still quite good.

Just to amplify on what Tom said. This is Paul Stecko again. 250,000 tons last year, some of those tons will be needed in our own box plants this year. We are not as dependent on export as many of our competitors are, and we'll become less dependent on export over time.

Thank you. Last question. This number of capacity conversions in the wings and container board, I think most of them are from newsprint to lightweight container board. I'm curious if you have thoughts around whether a conversion from newsprint to linerboard would be accepted in the marketplace? Whether you've seen examples where it's been accepted in the marketplace? General thoughts around the conversions that are happening from newsprint to container board?

Paul, why don't you talk to that. You've been studying that one for the last year or so.

We've gotten a lot of questions on it. The problem with answering the question, it's an hour discussion because it's very complicated. So, I'm going to try to keep it simple and short. There's a lot of variables. No two machines are alike. When you try to convert a newsprint machine you're faced with probably running way at the low end of the weight spectrum and some of which grades are only exportable, aren't consumed in the US. The more money you put into a machine the more flexibility you can get with regard to weight range. You just have to change more things. It's all over the map.

The bigger problem with newsprint conversions is that newsprint's primarily uses a lot of hard wood, a lot of ground wood. You need soft wood to make linerboard. You can have a newsprint mill, but there are no trees there to make the pulp from, which is a problem. So then you're faced with using recycled fiber, and again the problem there is most of the newsprint machines would be big and you'd need a lot of recycled fiber. You've got some cost exposure. Then you've got availability exposure, because you've got a newsprint machine where there are a lot of trees but not a lot of boxes. Ideally a recycled mill's got to be someplace like Chicago, New York where there are a lot of boxes. So fiber doesn't match up real well.

That said there will be some conversions. I think over the next decade, with some reshoring and if this economy is going to grow and help with the debt situation, more container board capacity will be needed in the US and certainly some conversions will be viable. But it's a very complicated thing. And the ones that we've looked at, there's a lot more that there's no chance of a conversion than can be converted. There may be a few gems out there, but in our opinion they're few and far between.

Thanks, Paul, helpful color.

(Operator Instructions)

Carly Mattson, Goldman Sachs.

Keeping in mind is -- I'm sorry, this Mike Habich speaking for Carly Mattson. I'm assuming that you [hired] holding $50 million for acquisitions earlier on the call, but could you frame for us how you view the opportunities within the broader container board space for M&A? Specifically, is there room for more broad scale M&A, either from a strategic perspective or maybe from a financial buyer, and what role could Packaging Corp play there?

Let me answer that. We can't answer that question. We would not want to share that information with any of our competitors. What we're doing at M&A we like to keep to ourself for competitive advantages. So that's just a subject that is not appropriate for general discussion.

All right. Thank you.

Sorry about that, but that's the way it is.

Understand.

Next question, please.

Mr. Kowzlan, I see there are no more questions. Do you have closing comments?

Yes. Thanks, everyone, for joining us on the call today. I look forward to talking to you on the April 1 quarter call. Thank you.

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect and have a wonderful day.