Thank you for joining Packaging Corporation of America's Second Quarter 2008 Earnings Conference Call. Your host for today will be Paul Stecko, Chairman and CEO. Upon conclusion of the narratives, there will be a Q&A session. Mr. Stecko, you may begin.

Thank you, and good morning and welcome to PCA's second quarter earnings call. With me on the call as usual is Bill Sweeney who runs our Corrugated Products business; Mark Kowlzan who runs all of our mill operations; and our CFO, Rick West. And as the operator indicated, once we conclude the brief presentation upfront, as always we are happy to take your call. So let me get right into it with our results and then try to provide you some specific details. Yesterday, we reported second quarter earnings of $35 million or $0.34 a share, and that is compared to $46 million or $0.44 a share in last year's second quarter and it also compares to $32 million or $0.31 a share in the first quarter of 2008. Net sales for the second quarter were $616 million. That is up 5.2% compared to $586 million in last year's second quarter. Our second quarter 2008 results included three special items totaling $3 million or $0.03 a share. These items included, first, tornado damage at our Windsor, Colorado corrugated products plant and also some limited damage at our Filer City mill from another tornado; second, we had start-up costs for two major projects, which I mentioned on the last earnings call, the Filer City project and the new wood yard at Valdosta; and finally, we had costs related to our recent debt financing. Each of these three items represented about $0.01 a share, so $0.01 apiece totaling $0.03. The remaining $0.07 per share reduction in reported earnings compared to last year's second quarter was primarily the result of higher transportation cost of $0.06 per share, purchase fuel and electricity cost of $0.05, chemical cost of $0.03, annual outage cost of $0.03, labor cost of $0.02 and all other costs of $0.02.…

Yes. [Operator Instructions]. Our first question comes from Mark Wilde of Deutsche Bank. You may begin.

Good morning, Paul.

Good morning, Mark.

Is it possible when we look at these costs to get some sense of how much of this is mill costs versus how much costs you're really seeing over in Bill Sweeney's box business?

That's a good question, and the answer… it would... the answer in the past would have been it’s the vast majority in the mill system and that's now moved there is a majority in the mill system, but not a vast majority. In other words, the price to operate in box plants has also increased appreciably, driven by energy primarily because box plants burn basically natural gas or oil, they cannot burn fuel, they don't have the luxury of burning black liquor, etcetera. Secondly, some of the other materials like starches have gone up appreciably. Wax is off the charts in terms of price increases. So it might have moved and I don't have the numbers in front of me. It might have been 90, 10 at one point, it's probably 60%, 40% now, in that type of range when you look at the price increases across those two.

Okay. So would you anticipate that with this price increase you can actually get some box margin back to recover some of those box plant costs?

We would hope certainly to improve our margins as a result of this price increase and… because as you aptly put, not only do we [inaudible] inflation in the mills, the box plants are now a major contributor also to inflation. And so, that is why from our perspective this box price increase is so important. We've got the make-up ground in two places.

Okay, just one other question. The bio-refinery up at Filer City, is that applicable to other mills in your system? And if it is, would the economics be as compelling as they seem to be on this one?

Well, let me just say that due to the proprietary nature of our technology and the obligation that we have to protect both the intellectual property that we've developed as well as the process know-how involved, I am fairly limited in discussing specific technological details or implications of this project going forward at this time. But down the road, I think that's something I could address. Today, I simply want to report that this refinery concept that we've developed at Filer City has been up a couple of months. It’s now up to 75% of capacity. It is doing everything we thought it would do. It has validated what our savings assumptions would be to date, and we're pretty happy with the results. But into the specifics of how it works or what we are going to with it, it's premature to talk about that.

Okay. But it wouldn't be just applicable at a medium mill, you could use this at a linerboard mill as well?

I didn't say that. I didn't say anything. What I said is... I've told you all that I am going to tell you about this project on the call.

All right, fair enough. Thank you. I'll pass it on.

Our next question comes from Mark Connelly with Credit Suisse. Your line is open.

Paul, just a couple of things. On the mix issue, can you give us a sense of whether the weather affected your mix this quarter and whether we should expect much from that based on your read right now? And the second question on inventories, you said you are going to have to run full to be ready for Christmas, how constrained do you feel on inventories and just how critical an issue is that right now?

On the mix, what we've just seen is that primarily in high-end displays point-of-sale items, we have a little... the mix was stronger in the second quarter than the first, but that's normal. It really was not related to the weather... some of the... as much as, say, ag. business might be in the State of Iowa or things of that nature. So the mix was just a seasonal pick-up. And in terms of... we're not worried about as much getting ready for Christmas as we are the third quarter in the strong fall season, I think that's what you meant by Christmas.

Yes.

Our inventories are... we are not out of gas, but we are close to empty which is no problem as long as we run well in the third quarter. And the third quarter is usually a good operating month, mills tend to run better in warmer weather than colder weather, and this is the warmest quarter weather wise of the year. So, as long as we can run as we expect we think we are going to be okay. We had no shutdowns in the third quarter either, which is a plus. So... but we are not starting out with any slack, we’ve got to perform as well, especially if there is a pickup in demand at all and then the pressure is really on Mark Kowlzan and the whole mill team and quite frankly that's what I'm rooting for.

Well, do you see the industry ever moving away from yellow sheet pricing?

Let me just say this, I wish we had a more perfect pricing mechanism in place, and so I guess I'm saying, yes, I would like eventually to see the move away from everything and have something that was more efficient, more accurate, more timely, and also comply with every law in the land in terms of how pricing is reported, et cetera. So that is a long-winded yes to your question.

I appreciate it. Thanks, Paul.

Our next question comes from George Staphos from Banc of America Securities. Your line is open.

Hi, Paul.

Good morning, George.

How are you? A couple of follow-ons. I just want to try one more thing relative to the bio-refinery, realizing that obviously most of the work would have been done at Filer, did you… or where you able to try the process at any of the other mills in what would have likely been some trialing that you did over the last several months or years or whatever?

Filer City was the primary trial site, virtually all of the trials were done there.

Okay. But there was therefore by definition and a little bit done elsewhere?

Well, you can measure a little bit in a lot of ways.

I understand.

Anything we might have done somewhere else might have just supported the Filer effort, it might not have been related to that mill.

Okay, fair enough. A separate question...

And let me just amplify it a little further. What we said in our press release is that we have some proprietary both pulping and papermaking technology. So when you say trialing there are two things involved, pulping and papermaking, and again we use the resources of our entire system in that regard.

Understood. If we switch gears to pricing and piggybacking on a couple of things, you’re saying one related to freight and the escalation there and then in your prior answer to Mark’s question relative to pricing, what's your philosophy, if not right now but in the future at some indeterminate time, about the use of surcharges and whether they’re applicable to the box, containerboard business?

Mark… I mean George, that's a pricing question and it’s a forward-looking pricing question and that's just something on Advisory Council, we don't discuss on these calls because that could be an indication this is what I'm going to do and I don't want to get into that. So I'm going to have to pass on that question to that Advisory Council.

Okay. If you're ever going to be able to be in a position to discuss that, would that mean you would have first discussed it with your customer base?

High probability that that is indeed the case.

Okay. When... two last ones and I will turn it over. When we bridge to the third quarter from the second quarter, you said price was the primary driver that makes sense, we’ll have $0.03 of specials going away that will help the bridge or the increase in earnings sequentially. Should we assume that the lower purchased fuel costs presumably, given lower consumption, is at least offset by the increase in chemical and other costs that you cited or how would that shake out do you think?

George, I am not sure I understand your question.

Well, just trying to get more precision on the bridge, so in other words I've got energy consumption going lower, is that offset by higher prices in terms of your third quarter outlook?

Yes, the answer is yes. We're going to use less energy, but it's going to cost us more because the going-out price for energy is higher than the average price.

Okay.

For us, and so the answer is yes, price will offset.

Okay.

And in total, our energy costs are going to be up about, we project $0.04 a share in the third quarter over the second.

Okay, thanks Paul. Last one…

No, three questions, that’s the limit. So I'm going to ask you to [inaudible] get back in the queue.

Thanks.

Our next question comes from Chip Dillon with Citigroup. Your line is open.

Hi. Good morning, Paul.

Good morning, Chip.

I was just curious, not to overly nail you down, but kind of interesting as this call has gone on, natural gas has crossed below 10 bucks for the first time in over three months and oil is down another $4 or 20 bucks in the last two weeks. Are your assumptions for the third quarter based on where energy was, say, a week or two ago?

They were based on where they were a week or two ago, but you’ve got to remember that we don't use a lot of gas and oil, and so it doesn't affect the mill operations as much as it does the box plant. Plus we've hedged some fuel and so we are hedged and we may not get as much benefit. If it keeps going down, it's not going to benefit us that much. But that said, the biggest single cost item we have related to fuel is transportation, and we haven't seen gasoline prices or diesel prices drop yet. And that's going to be the biggest single killer for us going forward.

Got you. And then just to refresh the memories, of the 78% that's not oil and gas that you purchased, what is that broken down by?

Well, it's… primarily it's gas and oil. The 78…

You said 22% of your purchased fuel was purchased energy was oil and gas.

Right, the other 78% is bark and coal.

Bark and Coal, okay. And then the last question is you mentioned the pay off of the bonds in August. If, let’s say, you had another opportunity as the stock got weak again or maybe still is, would you borrow against your revolver? It looks like you won’t… wouldn’t need to, but if it came down to that what would your flexibility be? I assume you have an un-tapped revolver?

Yes, we have a revolver, 150 million revolver untapped. Yes, we’ve never tapped it. So, we see no… we’ve never had a need. We've seen no need to tap it. So, I'm not sure… tap it to do what?

To buy back stock. And how many shares do you have authorized still to buyback?

We have $88 million remaining under our $150 million plan as of the end of the quarter.

In dollars?

In dollars.

Okay, so obviously you have plenty of cash for that?

Yes, what we did, Chip, we also when we announced the share buyback, we had a couple of $100 million, $150 million, $200 million worth of cash on our balance sheet that... [inaudible] funded the use a loose term and so we don't have a problem driving our cash on hand on, but hopefully with this price increase that's not going to be the case.

Got you. Thank you.

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

Thank you. Paul, I understand the reasons you are providing the limited information on the bio-refinery. Is this something that you're going to be able to update us on in the reasonably near future or is this something that we're probably not going to hear a lot about for a year or so, or is that all uncertain at this point?

Well, I would say it's uncertain at this point, but a year is a long time. So, let me just leave it at that.

Okay. And then second, you mentioned in the press release that the full benefit of the price increase won't be seen until the fourth quarter. Is it a fair question, can you tell us roughly what percentage of the price increase you had incorporated into your third quarter guidance?

No. We don't normally do that, Mark, but what I've said in the past is for us on average it takes about three months to put in a price increase. Now, for the last two, we've actually put them in, in two months, if you look at the two previous price increases. This one will probably go into the third month because some contracts in the industry have quarterly pricing, and so you can only raise prices once a quarter at the beginning of the quarter. So we do have more… some that will drag off to October 1. And so that means you'll get some obviously August, September and October, but when most of them go on say October 1 for the October ones, but that pushes that to the fourth quarter. So you can do a math, you got zero the first month, which is July the quarter, and assume you got a third in the next three months, you can do the math and probably come up with an estimate. I'm not saying a third, a third, a third model is correct, but at least it would be some order of magnitude estimate for you.

Okay, that's helpful. And... okay, that does it. Thanks.

Our next question comes from Richard Skidmore with Goldman Sachs. Your line is open.

Thank you, Paul. A question with regards to a recent article in one of the trade prices about containerboard prices being up about 50% over the last couple of years, but box pricing in the FDA index being up only about mid-teens, can you just elaborate on maybe what's going on there and what might be different as we go forward that would allow the industry to get the full box price increase?

I would say, in general it is the magic of arithmetic. If you just take a rough number that boxes cost twice as much as the paper, if they both went up the same, you would expect as a percentage paper go up, say, 20% and the boxes only 10% because they are twice as expensive. So that's math. That gets you pretty close to what your answer is, 10% of a big number is in a lot of... is equal to 20% of some half that size. So you should always have a higher percentage increase in paper over boxes. That said, I think a contributor to that is that… especially maybe on the earlier price increases some people were not able to pass it all through, and I don't know that's the case. But by far the math… reason for the difference in the percentage [inaudible] rough number, twice as much as another one, and that's the reason the percentages are so different.

Okay. Just shifting to a different topic, with regards to the export market, are you seeing a deterioration in the profitability in the export market relative to the North American market, excluding this current price increase?

With the current price increase, the domestic market will be more profitable than the export market.

Thank you.

That’s for two reasons, one is freight and the other is absolute pricing, but there have been some price increases in the export market also. So the export market I think has the capability catching up and that remains to be seen. But again, I would also tell you, we're very small players in the export market compared to other people. So I think our knowledge is limited, especially when you go into markets like China where we are not very big players at all.

How much of your export volume is sort of under a contract that you have to ship it there and how much is just the volume you can move around?

Our volume we can move around totally.

Okay, thank you.

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

Two questions. The first, in terms of downtime just going throughout the year, in the second quarter you sounded like you had 12,000 tons or $0.03, it sounds like in the third quarter you had zero. What would the fourth quarter be? And then to the second question, your volumes were very good, and I was just wondering how much of a factor the unscheduled outages at Weyerhaeuser and IP played into that?

To answer your first question is really the zero downtime for maintenance in the fourth quarter. We've taken all of our maintenance downtime in the first and second quarters.

And is that any different from last year?

Yes. Last year we did Filer City. We normally do Filer City in the third quarter. This year we pulled it up to the second quarter so we could start up the bio-refinery and take advantage of the downtime of an annual outage and not have two outages, one to start up the bio-refinery and then another outage later in the year. So, we killed two birds with one stone, as they say. With regard to your second question, we… our volume increase was not increase, our volume was down, but we weren't down as much as the industry. And I would say that the single biggest element of our growth, and I think Bill Sweeney actually addressed this at the last meeting, is that most of our growth is coming from growing with existing customer in terms of... you may share an account with another supplier or two and over time if you can continually convince that customer that you're doing a better job, you will tend to get more and more of his business, and that is probably the primary place we’re growing. We get more business from existing customers.

So IP, Weyerhaeuser, not factor?

I didn't say that. I just said that we're growing from existing customers. Now, they may be a competitor in some of those existing customers. We’ve got lot of competitors. We’ve got more competitors than we know what to do with, but we're growing with existing customers, that's probably our... that's our primary area of growth.

Okay. Thank you.

Thank you.

Our next question comes from Claudia Shank Hueston with JPMorgan. Your line is open.

Thanks very much. Good morning.

Good morning, Claudia.

I was hoping you could talk to us a little bit about what you're seeing in terms of box volumes thus far this summer, are there any pockets of notable strength or weakness, just in terms of the demand and maybe how it compares to what you saw last quarter?

Well, the only thing that I would say in terms of [inaudible] demand there, there have been some places where there have been extremely bad weather where plants are down and so we are not shipping as much to there, but there is no pattern. You can guess where the bad weather has been, where there has been flooding, etcetera. And so there is no trend or anything of that nature. I can tell you that July has started off to be a pretty good month. We've got 10 shipment days where have data out of 22, and this is kind of a strange July because of where the 4th of July fell, which was on a Friday, some people worked on that Thursday, some people didn't work. I'm talking of our customers. And so the 3rd of July was a bad shipping day and them the Monday after the fourth some people took that off, but that said... and it's kind of hard year to compare, through the first 10 days our bookings, in other words our orders, are up 2.4% and our shipments, our billings are down 1.4%, but usually over time, by the end of the month billings and bookings get pretty close. So we feel pretty good about this start. Our billings are up 2.4 [ph] and… especially with a couple of bad shipment days. So from our perspective, June and the July have been pretty transparent in terms of the strength of the economy.

Okay, that's helpful.

At least as viewed by our box sales.

Now that's helpful. And then just two little housekeeping items, could you just quantify the number of shares you had outstanding at the end of the quarter? And then CapEx for the year, do you still expect a $110 million to $115 million?

I'll let Rick answer the first question, yes, we expect CapEx $115 million is probably still a good number.

On the share count, about 103.5.

Okay, perfect, thanks very much.

We have a follow-up question from George Staphos with Banc of America Securities.

Hi, guys.

Hi, George. Go ahead.

Last quick one on cash flow. Rick, if I take the data that you gave us and we have the P&L items and you gave us cash and CapEx, it seems now that we know what the share repurchase was that there was very little use of cash for working capital. It looks like you have aligned there pretty well. I don't know if you have a dollar amount, certainly that would be consistent with the comments you've made today on the call. Do you have a number on working capital cash flow this quarter?

Working capital was down slightly, the only item I don't think you consider, George, was our cash taxes, we’re about $4 million more than our provision or book taxes. So that drove your remaining difference between the share repurchases, but working capital was essentially flat.

Our next question comes from Jonathan Lewinsohn [ph] with Anchorage Capital. Your line is open.

Hi, guys. Just quick questions related to the export, a question that was asked before, I know you're not that deeply in the market, but it clearly impacts the industry. And how important are inventories, that has been talked about a lot, about this low inventory. But how important are inventories in a world where a decent amount of production goes to low margin business that you would always pretty much give up for additional domestic business? So could it be that low inventory numbers just aren't as important as that they were compared to a period where the export market didn’t really exist the way it does now, the low margin export market?

No. I think inventories are still as important. In our case, our June exports were down and they were down because we had very low inventories. We couldn't ship into markets.

So you would always prefer a domestic customer to an export customer then?

No, we prefer a customer that allows us to maximize our profitability. If I've got to ship paper to the West Coast, lot of cases that's worse than exports when you net off the freight and freight is a very important part of the equation and the freight to the West Coast is very, very undesirable and that's a problem. Fortunately for us, we've only got… we don't have a lot of box plants out there because we don’t have any mills out there. And again, the problem of having the mills out there, they are fairly high cost mills for a lot of reasons. So, when you compare export business with domestic business, freight has become a big equalizer because most of the export business we sell are FAS port. So, we just pay the freight to the port and again a mill like Valdosta are pretty close to Jacksonville and so we work close to ports. So, there is no one answer to that. It depends on the customer and it depends on the freight cost involved.

Thank you.

[Operator Instruction]. We do have a follow-up question from Mark Weintraub from Buckingham Research. Your line is open.

HI, just a quick one. On the $20 million that was spent at Filer City, was that mostly incurred this year or was it split between this year and last one? And then if we think about cap spending levels for next year, should we back that amount off to get a sense of what the likely levels would be or... is there any help you can give is there?

I can give you a little bit of help. We have been... we started construction on this project about last June and so we’ve spent money part of... in the last half of last year and we... so we spread the spending over about a one-year period. We’ve probably spent 65% to 70% of money in 2008, the other 30%, 35% in 2007. And so that's the spending for it. I always give a CapEx forecast for the next year in the January call and that's what I will do this year. We don't give CapEx updates for the next year, I go one year in advance, and the next earnings call in January I will give you a forecast for CapEx for 2009.

Okay. Thank you.

[Operator Instructions]. Sir, I'm showing no further questions at this time.

Well, thank you very much. Thank you for your participation in the call. I'm looking forward to talking to you next quarter.

Ladies and Gentlemen, this concludes today's program. You may all disconnect.