Thank you for joining Packaging Corporation of America's Fourth Quarter and Full Year 2007 Earnings Conference Call. Your host today will be Paul Stecko, Chairman and CEO. Upon the conclusion of the narrative, there will be a Q&A session. I will now turn the conference call over to Mr. Stecko. Please go ahead, when you are ready.

Thank you and good morning and welcome to Packaging Corporation of America's fourth quarter call. I am Paul Stecko, Chairman and CEO of PCA, and on the call with me today is Bill Sweeney, who runs our Corrugated Product business; Mark Kowlzan, who runs our Mill Operations and Rick West, our Chief Financial Officer. And thanks for participating as the operator just said, when we complete the presentation, I will be more than happy to take any of your questions. And with that, let me begin with the summary of our results and then I'll provide more detail. Yesterday, we reported record fourth quarter earnings of $44 million or $0.42 a share. This compares to fourth quarter 2006 earnings of $38 million or $0.37 a share. And that number has been reduced for 2006 by $1.7 million or a penny a share to reflect the new accounting guidance for a major plant maintenance activity. As I said, this is a record fourth quarter for earnings per share, excluding any special items, since we became a standalone company in April of 1999. The only fourth quarter was higher reported earnings, was the fourth quarter of 2000, when we sold our woodlands to Southern Timber Venture. In that quarter, we reported $0.58 per share net income, but when you exclude the woodlands sale, we had 35% earnings in that quarter, making this quarter a record earnings, when you exclude woodlands sale. Our fourth quarter results do include a non-cash after tax charge of $4 million or $0.04 a share to value the company's inventory on a LIFO basis. And this compares to a similar charge of about $2 million or $0.02 a share in the fourth quarter of 2006. This LIFO charge was about $0.03 a share more than we expected, primarily…

Thank you. [Operator Instructions]. Our first question comes from Chip Dillon with Citigroup.

Good morning Paul.

Good morning Chip.

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

Well, hey, no one said it would be easier, there is a tough market out there, and we tried to do our part. And if we keep producing record... we can keep producing record earnings in time the market will recognize that, I hope.

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

That is correct.

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

On a total basis, it's up.

Up 0.3 and down 1.1 on a per workday?

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

Got you, okay. And then when you look at the situation right now in the market, coming into the holiday season there were I guess two things that were kind of unusual. One and we heard about this at our conferences just how the box makers in Europe are somehow being encouraged to pay less money to save better quality board and they are slow to do that. But I guess I'm just asking, how do you see that the pricing in the export markets and I know it varies where you're looking at and is that still a way to pull us up if we slow down a lot on the demand front. And then I guess second thing is are you seeing difficulty in exporting board? You and others because of either freight rates, which I understand are coming down or the lack of boats to take the board overseas?

Let me take these one at a time Chip. First of all, we pulled back on export shipments in the fourth quarter simply because we didn't have the tons. That's one of the benefits of having long-term relationships with customers. We talk to them, said hey look, we're going to continue to supply it, but we need some help. We'll delay some shipments into the first quarter next year and I got to appreciate our customers. They work with us and so.... we expect our export shipments to pickup because we did delay some people. Everybody is having trouble at the ports. I would say, we have less than a lot of people because we didn't ship as much in the fourth quarter. So we were able to manage it. And we're expecting export markets to remain good. We have not seen any pricing changing in the fourth quarter to speak of. The freight situation is difficult, the freight rates are going up and that is affecting customers, but with the weak dollar, our exports were still very, very competitive and hopefully this freight situation will abate. But we're just going to have to play that by year, higher freight is making our product more expensive abroad, obviously. But the sunny side of that is people we're trying here is... there is a lot more boats coming to U.S. than leaving the U.S. vis-à-vis balance the trade. And so that problem goes both ways and it's actually freight rates leaving the U.S. are cheaper than coming to the U.S. because of that. So, all in all, I would not say a major change other than its making business a little more difficult to export because of the freight situation. So, that's kind of a long lettered answer to a complicated question, Chip.

And then just a little --

I am going to have to make this the last question and I will let you come back later, if you don't mind. I have to make sure everybody gets a chance.

I understand. Thank you.

Our next question comes from Mark Weintraub with Buckingham Research.

Paul, if possible could you give us some sense as to the extent to which seasonality perhaps is impacting the first quarter number and what I mean by that is, can you give a sense as to what type of annualized earnings run rate one could guesstimate that the company might be at? Obviously, the world will change and prices go up and down, and things like that. But in terms of the kind of annualized earnings power, is that a number you feel comfortable giving with us... giving to us, given that I do think that first quarter is a seasonally impacted number and is a kind of misleading, you can just times it by four?

Yes, you can look at history, we don't give full year forecast, we have a quarter at a time because we know, we are normally pretty comfortable, we can predict earnings a quarter ahead. But if you look us historically, our earnings drop about $0.10 a share, rough number between the fourth quarter and the first quarter. And we are not at aligned with that this year. If you look at our fourth quarter numbers and you adjust for the fact that we had two unusual events, which is the LIFO charge of $0.03 and the Counce outage of another $0.03 instead of making $0.42, if those things hadn't occurred, all other things equal, we would have made $0.48. And so, and then when you start working backwards from $0.48 as a base, basically $0.06 is the outages, that gets you back to $0.42 and then the other $0.06 is the seasonal factor. And it's really three things. One is energy, it's colder in the first quarter and paper mills are very energy intensive. So energy is one of the items. The other item or labor and benefits, you've got your annual increases in wages et cetera, et cetera and some of those cost are front end loaded, you incur more in the first quarter than other quarters. And then the third area would be wood fiber. And again, that's a function of winter logging conditions and the fact that we've seen an increase and I don't want to minimize, but I do think a continuing concern with virgin fiber will be when these sawmills finally get back and running, because that is roughly 30% of the source of, in the south at least. Historically 30% of the fiber came from purchased sawmill residuals, 25 to 30 and that's probably about half of that is gone with the shutdowns and that's putting a little pressure on fiber. So you take that history items, they are all about a $0.02 item, may be ones a little a higher than the others. But that gets you back to $0.36 and all of those items are typical in the past, we always get higher labor and benefits in the first quarter. Wood cost usually go up and energy always go up in the first quarter, because you simply use a lot more. So and that's kind of a quick short hand away of looking at this thing. But in terms of predicting year-over-year, I think if you go back over the last five, six years, you can see the pattern. We got the strongest earnings in the second and third quarters, and the lowest in the fourth and first. And we expect that pattern to remain the same.

Okay, thank you.

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

Hey. Good morning.

Good morning, George.

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

No, I don't recall closing any box plants in the third quarter. Hey Sweeney, did you call somebody and tell me about it?

I beg your --

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

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

No.

Okay. Then as you look at the environment and obviously, who knows whether the economy slips into a deeper slowdown or not. But does the environment look more attractive to you in terms of being able to find acquisition candidate or does the current macro environment, at least the concerns out there, make you a little bit more reluctant and raise, if you will your threshold return over risk premium looking at potential acquisition, you know your typical types of acquisition that still --

Well, I think with regard to the economy, I kind of feel like the captain of Titanic, that iceberg don't look too big ahead, you never know. We are off to a very strong January. I mean our January doesn't match with everything you read in newspapers and we still got a half a January to go. But at least through the half of that, volume is strong. If you read the... if you, the Fed is not doing all these things just for the heck of it. So, who knows, but I will tell you, at least our business for the first half of January, I feel better when I look at our bookings compared to when I read the newspapers but, hey that could change. In terms of acquisitions and risk premiums, if we are headed into a recession, yes, I would say that the risk premium goes up because times are much more uncertain and your risk premium concerning acquisitions or anything, at least ours will go up.

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

Let me have that one again? Rick got it, go ahead.

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

Okay. Thanks guys, I will turn it over.

Our next question comes from Richard Skidmore with Goldman Sachs.

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

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

Okay. But would you consider given where the share price is today? Coming back to the Board, how would that process work?

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

Okay, thank you.

[Operator Instructions]. Our next question comes from Mark Wilde with Deutsche Bank.

Good morning. Paul, it looks like even adjusting for the Counce outage and the incremental LIFO that you are still a penny or two below what you had pointed us to back in October. Can you kind of walk us through what changed during the fourth quarter for you?

Yes. Well, yes but that will be a long conversation. We missed by a penny, penny and a half. I gave 49 to 50 --

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

Well it's a lot of little items, a tenth of a cent here, a tenth of a cent there, interest expense and that might be a couple tenths of a percent. A lot of little items say, if any dropout... any jump out at me. Pete, do you have any little real numbers, just a lot of little items, wood products, we have a small sawmill in Ackerman, Tennessee. We've had that down more than normal and that's a couple of tenths of a center, but nothing jumps out Mark. Its probably 20 little items, we had some... do we have any asset write downs? We had some asset write-downs where we put into new piece of capital equipment and the piece of equipment that is replacing is not been fully depreciated, that might be three-tenths of center, but you are getting down into a lot of little item.

Yes, that's fine. And second question --

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

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

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

Okay. My last question, I think you are 63 this year. Can you just talk to us about any kind of succession planning at PCA?

No, no specifics obviously, that's something that's pretty confidential but I think the thing that if you ask me, what I am proudest about my tenure here at PCA which I expect to continue, is that very, very strong team. One is, it's not me. We are deep. So in terms of potential succession, I've got a pretty good list to choose from.

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

No, there is not.

Okay, very good, thanks a lot.

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

[Operator Instructions]. Our next question comes from Joshua Zaret with Longbow Research.

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

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

And what would you... any, can you attribute that to anything or?

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

I see. Thank you.

Our next question comes from Chip Dillon with Citi.

Yes. I just had one --

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

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

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

I know you've seen any kind of impact on pricing especially in Asia, we... you might have some contacts over there that indicate which direction the board price is going as a result of their higher raw material cost?

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

Got you. Thank you.

Our next question comes from Mark Weintraub with Buckingham Research.

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

Well, the answer to that I think is one of these things sometimes the newspapers get it right and sometimes the newspapers get it wrong. The problem is they don't tell you which it is. Last year, just to reflect on that, we gave a very bad earning guidance in the second quarter and we had forecasted $0.35 and we made $0.44, it's a $0.09 miss. That was on a positive side and part of that reason; we had similar stuff in the newspapers about the economy slowing, this, this and that. And I'll tell you when... when we do our forecasting it rolls up to me and then I put my spin on it. And I was... I believe more of what I read in the newspapers last second quarter than I probably should have, and so I think the newspapers had a wrong last second quarter. They made every right this time and the problem is I don't know. And if I knew that, I'd tell you. So you are affected by the Fed psychology the consumers, etcetera, and I eventually they are going... the newspaper is going to get it right. And it may be this time, it may not. So I can't help you very much, but at least I give you an example of a year ago, they didn't have it right.

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

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

Great. I appreciate the color.

Our next question comes from Mark Wilde with Deutsche Bank.

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

No, no, Mark, our margins got that high but you're five years ahead of time. We got to the low 30s, it's the peak in 95.

Okay.

But it never got that high in 99.

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

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

Yes, I think it's --

Third quarter margins were over 20%.

Right. I've got 19% for the year. I am just trying to figure out kind of what you think these could potentially get to?

Yes, but that's... the way we look at it when we compare ourselves with other companies or divisions, you get, you take corporate overhead out of that number and you look at what is the margin as the business as the division standalone. When you do that, you get... you get over 20%. So let's not argue the point, but we are close to 20% right now.

Okay.

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

You think that's possible?

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

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

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

Okay, good enough.

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

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

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

I understand.

So, there is a fairly close couple and they are ordering more boxes in January because their business apparently is pretty good. And the only thing that we have heard and I think is noteworthy from customers, now we've got 8000 customers roughly. And so, you got a lot of people talking to a lot of customers, some of that information is good, some is not good, but the only trend that I can point out over the last year that I think is significant is, we've got a lot more feedback from customers that export out of this country is being a bigger part of their business than it has been in the last decade. And that message has been the most consistent message that we've gotten from customers.

Okay, fair enough. It's still... still not sure whether the retail point-of-sale data would marry-up, but we'll find out about that down the road. Separately just on CapEx, what's your outlook for this year 110, 115?

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

Okay. Thanks Paul. Good luck in the quarter.

Thank you.

Our next question comes from Steven Eason with Minlow Capital [ph].

Hey Paul. How are you?

I'm good.

All right. Congratulations, great job, you guys always seem to do very well in a challenging economy. Couple of things; what are you guys doing in terms of operational improvement initiatives revolving around lean manufacturing, TPM, Six Sigma and how are those initiatives benefit your business?

Well, we have a vigorous cost reduction program. We don't rely on one of these named programs like Six Sigma. We've got our own program adapted to the way our business runs, and as I have said many times this company revolves around the concept of operational excellence. We are only in one grade of paper; containerboard. And we make boxes and so we are specialists in that and our improvement does not come from a major restructuring, a major headcount reduction program, a major transformation program. We think we are fairly good at what we do, and we simply got to do 200 or 300 things, a little better each and every year at our box plants, and our mills and at corporate headquarters. And so we've got programs in every facility to do everything a touch better, but it's not the type of company that we are going to say, okay, we are going to do and I will use your term Six Sigma everywhere. And that's going to change this company, we've got a good operational strategy and record and we just want to improve upon what we've got. We don't want to change it.

Now mentioning your box plants around the world, are there certain plants that you're more concerned with than others regarding through-put?

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

And in terms of benchmarks you guys were talking about, how are you measuring those? Are you looking at rolling out or OE? I mean how you guys looking to measure that so you could tell the shareholders and investors out there this is how we are achieving our record growth?

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

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

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

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

Well, as I said earlier, we've got to 200 or 300 things a little better. There is no one goal. Because we like our model, we like the way we do things, we've got to do 200 or 300 things a little better and so I can't... I wish our business was as simple to give you one goal, but it's not.

Okay, thank you very much.

Our next question comes from John Emerich with Iron Works Capital.

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

Yes, what I think what's happened in not only us is the export business has been very strong and even though industry box demand this year is down 1% or so in 2007, the industry has run full. And that's because the export market has been pretty good. And those tons have flowed into the export market. So that's basically what I was talking about.

And that condition still exist?

Yes.

Thank you.

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

All right. Thank you.

Our next question comes from Heather McPherson with T. Rowe Price.

Hi Paul. I was hoping you might help me understand something regarding the cost environment. And what may be the marginal cost might be for the highest cost producers in the industry so that is hypothetically we look out and we say that box demand goes down in '08 and capacity rose, they just starts to go down and then prices starts to slip typically, they would probably slip to where the fourth quartile producers cost might run to. And since we are starting to see a lot of inflation on the cost side, do you have a thought here about what that marginal cost flow or might be for prices given the cost inflation we've seen?

No, not of the top of my head.

Okay.

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

Okay. I appreciate it.

Thank you.

Our next question comes from Tom Cleves with International Paper.

International Paper?

What? You are kidding, right? What they say is International Paper guy asking a question.

Tom Somebody?

No, who is down the line? Hello?

Are you kidding?

Operator?

I'm not. It's been apparently their line is dropped. I am not showing any other questions at this time sir.

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

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