Thank you for joining Packaging Corporation of America's third quarter 2009 earnings conference call. Your host today will be Paul Stecko, Chairman and CEO. Upon conclusion of the narrative there will be a question-and-answer session. I will now turn the conference over to Mr. Stecko. Please go ahead when you're ready.

Thank you and good morning and welcome to PCA’s third quarter earnings conference call. With me on the call today Mark Kowlzan, who runs our mills; Tom Hassfurther, who runs our Corrugated Products system; and Rick West, our CFO. And I want to thank you for participating. As the operator just mentioned, at the conclusion of the presentation, we will be glad to take calls. Yesterday, we reported third-quarter earnings of $73 million, or $0.71 a share. Third-quarter earnings included income of $48 million, or $0.46 a share from alternative fuel mixture tax credits for the period July 1 through September 30, 2009. Net sales for the third quarter were $554 million and that compares to $621 million in the third quarter of 2008. Excluding the income from the alternative fuel mixture tax credits, net income was $25 million, or $0.25 a share and that compares to third-quarter earnings of last year of $38 million, or $0.37 a share. This $0.12 per share decrease in earnings compared to last year was driven by the downturn in the economy, which lowered containerboard and corrugated products price and mix by $0.19 a share and volume by $0.06 a share. These items were partially offset by lower costs for transportation of $0.05, energy of $0.05, recycled fiber of $0.02 and chemicals of $0.02 per share. Net income for the first nine months of 2009 was $207 million, or $2.03 per share. And excluding alternative fuel mixture tax credits, earnings were $80 million, or $0.78 a share compared to $105 million or $1.01 in 2008. Year-to-date, net sales were $1.62 billion compared to $1.81 billion in 2008. The pickup in business conditions that we saw in the second quarter, when our corrugated products volume was up 10%, or 40,000 tons over the first quarter,…

Thank you, and good morning, Paul.

Good morning Chip.

First question is on the CapEx. You are telling us it's roughly $145 million or so per year for the two big projects, and you are talking about avoided maintenance. What should we think about in terms of what overall CapEx would be those years? Because again, I guess that would mean the only other spending would be maintenance on the box plants and the two other mills.

Yes, we will have a little more, you had a few maintenance, you got to maintain Counce and Valdosta also, Chip. So those [debt] capital, that maintenance money doesn't go away. But the way to think about this is we are going to avoid about $20 million a year in boiler maintenance at Counce and Valdosta. So our normal capital, which is $110 million, will drop to about $90 million. And with all the activity going on at Counce and Valdosta, it may even drop to about $80 million. So I would use $80 million to $90 million for what I'd call normal CapEx. That would be normal maintenance, normal projects, profit enhancement in both the mills and the box plants. And then our capital for the project will be about $145 million on top of that for both years. Maybe a little less because we are spending about $20 million this year, so make it $135 million a year for those two years. So we will have committed about $20 million in these projects this year by the end of the year. Okay and FX will be excluding the project, in the $80 million to $90 million range for the next two years.

Okay. And then for this year, you were actually, it's interesting you are spending $20 million, and the year-to-date rate is quite below, I think, some of the numbers you were, some of us might have in the, I don't know, 110, 120 range. What do you think this year will end up being?

We are going to come in about $100 million this year for the normal CapEx. It might be 5 lower, it might be 5 higher, but call it $100 million. And then we will spend $20 million on the project this year, between now and the end of the year.

And then as I look at your balance sheet, on the black liquor, it looks like if you run roughly like you did in the third quarter and it doesn't go away until year-end, that $106 million that you haven't used would obviously be up around $190 million. And assuming that the next couple of years are equal or better than this year, how long do you think it would take to use up that roughly $190 million?

I'm going to let Rick answer that, but I think we are picking up about $17 million a month in black liquor. So three times 17 gets you to 51 more from where we are. So I don't get to your $190 million number. But I'm going to turn that…

We are looking at additional black liquor credits in the fourth quarter of about $48 million. Estimating our cash tax payment in the fourth quarter would be about $21 million. So the remaining black liquor credits available at the end of the year would be about $134 million, Chip. And we can offset that with our taxes owed through the remainder of 2010, or we can take a refund in 2010 for the remainder that is owed.

Okay. And when would you actually get that refund? What is the earliest you could claim that?

You have two options. You could either get the refund when you file your normal tax return in September, or you can do an early filing, I think as early as February, and receive payment.

And actually, when you get the refund, you're in essence applying that against; you're carrying back those credits to prior years or prior-period income tax, right?

You can get a refund of your taxes for that amount. I don't know that it is a carryforward. I would have to check on that, or a carryback. But it is just the cash amount would come out.

So basically you will get the rest of this $134 million sometime in 2010?

Yes, we're looking at sometimes in 2010, but we want to make sure that we do it in the most tax efficient manner because of some of the rulings we've had on the taxability of the black liquor credits.

Okay. And last question is…

No, no last question. I'm going to limit everybody to two questions. And if you wouldn't mind holding, we will get you on our next pass, Chip.

Got you. Thanks.

Thank you. Next caller.

Next caller is George Staphos of Banc of America Securities.

Thanks. Hi, everyone. Good morning.

Hi George.

Just segueing on the capital project question, Paul, you mentioned that $20 million or so will be related to the end of the year spending on these new projects. How should we think about the spending and how it will peak over the next couple of years until its conclusion in 2011? And can you bracket the sources of the return in your 25% plus comment across whatever savings or efficiencies you generate?

Sure. As I said, you may have heard it on a previous call. We are going to spend about roughly $130 million, $135 million each of it in the next two years, 2010 and '11. So there is no lumpiness to it. It is fairly well spread out.

Okay. Got it.

In terms of the savings, about 70% of the savings that we are going to get is going to come from reduction in fuel prices, elimination of purchased fuel. And basically, I think the most fascinating thing about this project is that we currently, because these are very old boilers we are replacing, and that is why there is a fair amount of maintenance scheduled on them over the next four years or so that we will eliminate. But basically, for one pound of black liquor, we can produce 2.2 pounds of steam. With the new boilers, we will go for every pound of black liquor four pounds of steam. So we almost double the energy production with the same amount of black liquor. That allows us to produce a little over 50 megawatts of electricity with no fuel costs. And so electricity is a big saving and the elimination of purchased fuel is a big saving. And even at Valdosta, we won't have to buy any purchased bark at all. All the bark we use at Valdosta will be from what we consume in making wood. So that is the bulk of it. We will also have lower cost of production for fiber, because we will be able to ship more heavyweights to Counce and to Valdosta and make them more efficiently, because we will have better drying capacity on the paper machine. We’ll also be able to shift production between Valdosta and Counce in the winter months, where the steam load at Counce goes up about 200,000 pounds an hour because of colder weather; much more warmer in Valdosta, a lot less maintenance expense. Not only capital maintenance, but these old boilers require a lot of maintenance expense. We also had headcount reduction. We are going to run only one boiler at Valdosta as opposed to three. And there is a variety of other savings. The only other thing that I should mention is that on some of these tax credits, we are looking at, you have a choice to either get credit, one is for electricity that you generate that is green, or you can actually get an investment tax credit up front, which would reduce the capital cost. Now it would give you less savings, but you’d also spend a lot less capital. And that will need to be looked at when and if legislation it’s in Congress right now emerges. So we will just have to wait on that. But it's complicated. But no matter what way you look at it, either taking more savings or spending less capital, you still get the same return. That's a long-winded that's a long answer to your question, but it's not a simple answer.

No, but we appreciate the details on the parameters. But it would appear that you get the 25% no matter what, and depending on how this credit legislation goes and whether maybe even over time you get more credits on the entirety of your energy production, not just related to what’s new here, it's all upside.

No, and that's an important point. If the legislation, there has been a bill introduced in the House and the Senate that basically will treat paper companies like utilities. Currently, the law says if you make green electricity and you sell it to a third party, you get a credit. What the industry is trying to get approved is that if you make green electricity and you use it yourself, you should get a credit. Because it doesn't make a lot of sense to sell it to the grids and then buy back electricity from the grid; you are just increasing line losses. But if that happens, we also get the savings on the $50 million of electricity, 50 megawatts that we currently produce. That is not in the savings in the project, because obviously we don't have to spend capital to do that. And so this is some important legislation for us.

Okay, Paul. Thanks. I'll turn it over.

Thank you, George.

Thank you. Our next question comes from Mr. Mark Weintraub of Buckingham Research.

You had mentioned a lot is going to depend on the direction of the economy. And I was just wondering if you could provide us with how your comps progressed during the quarter, and if you have any indications on how October is going at this stage.

Sure. Well, as I said earlier, our box business got a little better each month. To reflect on the history of the year, going back to our second-quarter earnings release, January, February, March were slow and then we saw a big step-up in April, and where our volume increased almost 10%. And then we kind of continued to improve, but at a couple percent a month rate. September was particularly good for us, where we went flat from last year, and the industry was down 4.8%. And basically in the first quarter of the year, we trailed the industry; the industry outperformed us. And then we've been outperforming the industry by about 2% per month since then. But then we had a big step-up in September, where our business picked up and we were flat. October is turning out to be an interesting month. And I hate to get too optimistic, but it's early in the month. But through the first 10 days, our bookings are up 7% over last year. And our billings are up 2.5%, and billings always trail bookings early in the month. So we are off to a really good start in October, but a half month does not make the quarter. But so far, so good.

Just to clarify, bookings, would you at this point, though, that 7%, would that normally be reflective of what your billings for the full month would be?

Usually, the short answer to that is yes. And usually over a month, billings catch up with bookings. As the month goes on, your bookings will level out or they could decrease. But eventually billings have to match bookings. And usually over a month they do. Not always, but usually.

Is that my second or do I get a second question?

No, you get a second question.

In terms of your guidance, I realize you are not a meteorologist, but what had you kind of factored in, in terms of whether things were going to get worse or continue to improve, as the five last days would suggest? And also, on the demand side, I think you had said you had assumed fairly normal seasonal drop-off from what we saw in the third quarter. Is that correct?

Yes, but the weather is a tough one to call. We've got this goofy El Nino pattern, and those that follow the weather, weather moves into East Texas, and then it comes up through the Ohio Valley. And it's cutting through the heart of the containerboard industry, in terms of Alabama, Mississippi, Louisiana, Arkansas, and Tennessee is on the boundary of it, and the western half of Georgia is affected. And these storms, it seems like every 72 hours, something else comes through, and the ground just won't dry out. Now, we've had a pretty good run now. We've had five days of sun that is projected, and we are cutting a lot of wood. You said it well when you said I'm a meteorologist, but I don't even think the meteorologists can project this. We've built a couple of cents, $0.02 to $0.03 in. I might be a touch conservative on the weather, but you've got to make a call, and we think the weather situation could cost us let's call it $0.02, $0.03 more than we might have normally thought. And I hope I'm wrong, but it is just hard to project. And I've been in this business 30 years, and last Thursday was the first time I've ever run out of wood in 30 years. So this is a very rare event.

Great. Thanks. Very helpful.

Thank you. Our next question comes from Mark Wilde.

I wondered for my first question if you can just kind of tie together kind of thoughts on all that cash on the balance sheet, and do that in conjunction with maybe thoughts on your dividend.

Sure. I won't get into the specifics on the amount of cash. If you want some amplification on that, I would get Rick to give you that. But basically, what we have said is that between the black liquor credit cash we are going to get and maybe a $100 million of that cash from the balance sheet, we like to keep at least $100 million, $125 million of cash around. We've got at least $100 million more than that. So between that $100 million and the black liquor credits, that's going to pay for this project. So this project is already fully funded. Going forward basically, we look at dividends and share buyback to be a function of how well we are producing income and cash from normal operations going forward. So I think the good news is, if you are interested in share buybacks and better dividends, is that this project of ours won't affect our thinking going forward there, because we've got these projects funded. And any decisions on share buyback or dividend changes will be a direct function of how well this business performs going forward. And as you know, for the past 10 years at least, we have felt that returning value to shareholders in both dividends and share buyback is important, and that is why we've done both of those over the last 10 years. And we hope to be able to continue that pattern.

Okay. And for my second question, I wondered if you can just address kind of what's going on into the export market. Because it looks like in your numbers and the industry numbers, we're really getting a pretty big bounce from the big declines we've seen in the first three or four months of the year. I wondered if you can kind of address the separate issues of kind of FX, maybe improvement in some of the offshore markets, and then whether you are seeing any easing in kind of trade financing, trade insurance. I know for some of the brokers, those were issues earlier this year.

Yes, I would say a couple things in general. One, the weak dollar has helped. And we announced earlier the last quarter, that we had basically pulled out of Europe because there was a period when there was a flight to the dollar for safety reasons. The dollar strengthened; it got into the high 120s, low 130s and at the same time, prices in Europe were just abysmal, and it did not make it profitable to ship paper into those markets. Since then, the dollar is close to 150 and the Europeans have announced big price increases. As you know, in September, they announced a EUR60 increase. EUR60 is $85. So a big increase and it looks like that went through. So two things in Europe, prices are better, and the dollar is more favorable. That has helped the situation within Europe. In South America, things have remained pretty good. South America has come back from this economic calamity, I think, a little faster than people thought. And the other thing that surprised me a little bit, things are better in China also. I think the fact that when things hit over there, they took some downtime and they don't make craft linerboard. And so business in China has actually turned out for us to be a lot better this year than the last. And again, we are not major exporters. We only export about 6% to 7% of our production. But I think this is probably reflective of everybody, conditions are just better now than they were six, seven months ago, and we've returned to previous levels. I am really not up to speed on insurance. I haven't heard anything from our people about that in terms of it being a big problem for us. So I can't comment on that.

Okay, fair enough. Thanks.

Thank you, Mark.

(Operator Instructions) Our next question comes from Mark Connelly.

Good morning, Paul. This is Jason Marcus in for Mark.

Okay. Good morning.

Pulp and Paper Week said when they took the linerboard prices down $10 in September that it was a cumulative adjustment rather than a discrete event. Is that gradual reduction consistent with what you are seeing in the market over the last quarter?

No.

So it was a one-time thing, and it wasn't gradual erosion over the past several months?

We haven't seen any erosion over the past several months.

Okay. And then I guess relative to last year, as you look at the Q4 guidance, I guess where is the seasonal pattern different this time? Is there a part of your mix that is substantially different from last year, I guess, besides the weather?

No. I am surprised. If you look at our record over the last 10 years, we usually fall $0.08, $0.09, $0.10 in the fourth quarter, related to usually volume, higher energy consumption, would be the two things, wood costs tend to go up, etcetera. I think the only thing different this time is we are a little more conservative on our volume in wood costs because of this weather situation. You adjust for that $0.02 and $0.03, and we are right back in where we were. And of course, the other big change this year is this $10 a ton price decrease that Pulp and Paper announced last month unfortunately starts the first month of the quarter, which means you get a hit with it the whole quarter. A lot of these price changes with customers, they are implemented once a quarter. So if you time it the way Pulp and Paper timed it, it hits the industry the entire quarter. $10 on a 0.5 million tons is $0.03. We won't get hit with the whole thing, because not everybody is tied to Pulp and Paper, but that's a couple of cent item too that, quite frankly, a month ago, I didn't expect to happen.

Okay. Thank you.

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

Paul, just wanted to get your views on, I guess, one of these two government credits that people are talking about. The one that I think could actually be either an opportunity or maybe even a small threat would be the RCAP, which is the one tied to timber. And I didn't know if you have any views on that. Because it could be written a certain way, it could encourage some of your wood suppliers to sell to alternative energy plans as opposed to a paper company.

Yes, this is going to sound like an evasive answer. It is not, Chip. It is just that this thing is hard to figure out because there has never been anything like it. It's not something as simple that a bill was written and it's clear as a bell on how it works. This thing will be administered through the Farm Bureau on a contract-by-contract basis, in which every piece of land is treated separately. The landowner teams up with somebody who is a qualified burner of that fuel, and you can get a credit for up to two years. And I have as many questions as you on this. We are studying it. What we are doing, because of what you referred to, we are in the process of being qualified. We expect to have our mills qualified. I think, we are talking in days, not months. And the other thing that I think there has been a lot of misconception about is the landowner, not the paper mill, gets the credit. Now, there has been a lot of speculation of, hey, can and if and when and how can that credit be shared, etcetera. But there are more questions than answers on this thing. And hopefully by the next earnings call, answers will exceed questions. And I think everybody will be much better to explain, understand and evaluate what this can or can't do. But right now, it's still pretty nebulous. But there are a lot of people working on this, both in our industry, trade association and individual companies, I'm sure. I know we are doing a lot of work to figure how to best position ourselves to take advantage of anything that may be available. And that's a long-winded way to say we've got to wait a month or two to really find out what end is up.

I understand. I even called it the wrong thing. I meant the BCAP. Thank you very much.

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

Good morning, Paul.

Good morning Rick.

I just wanted to follow up on the capital spending project over the next couple of years. Will that have any material impact on your ability to produce volume in those two years? Will there be any extra sizeable downtime over those two years?

There will be a little bit of downtime, but not much. At Valdosta, there will be no downtime because this is a standalone new recovery boiler; it's on a different spot than the other boilers. And we will build it and then make tie-ins, and really very little downtime. The work we've got to do on the paper machine to improve the drying efficiency will be done during an annual outage, and we will actually do that work this spring. At Counce, it's a little different, because we are rebuilding two recovery boilers that are in place and they are operating. And so when we take one down for a rebuild, which will be about three months, we will lose some production. And then when that one starts up, we'll lose less production, we will lose some production, but less, on the second one, because we will be able to make more steam from the same amount of black liquor. But when you really look at it, it may involve over a year, 20,000 tons of production would be a rough guess. Because we will pick up the OCC content, we'll do some things, we will shift a little production to Valdosta. And we are fiber limited at Counce; we are not fiber limited at Valdosta. So we can get some of that back. But a real rough guess is 20,000 tons, and we'll work and see if we get that down a little bit.

Okay. And when you emerge from this capital project, Paul, does that at all increase any of the capacity on the paper machines?

At Valdosta it will, but we are going to do, we have already de-rated Counce by a couple of hundred tons because we simply cannot produce enough wood at Counce to sustain the level that we were able to sustain in 2008. We were running Counce at about 101%, 102% of capacity. So net-net, there won't be any potential capacity increase available to us unless we make a wood yard investment down the road, post 2012, at Counce, or this wood product market comes back and we have a lot more chips available; then we probably could pick up 150, 200 tons down the road.

Okay. And then just tied to all of this, how does this capital spending plan change your view, or does it, with regards to increasing the integration, i.e. looking for opportunities on the box plant side? Does it push it out for a couple years or you are still in that process?

No, it really doesn't change it at all, because we have been somewhat fortunate, not somewhat, we've been very fortunate with the black liquor credits that pay for a very large portion of this project. And we had accumulated enough cash this year to be able to fund that project. And as I said on an earlier call with regard to both dividend and share buyback and I should've included box plant expansion in that number too, we are back to the business as usual, that the three main uses of cash would be share buyback, dividends and addition of box plants, not in any particular order, what provides the best value for the shareholders.

Okay. Thank you, Paul.

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

Paul, one last question, sort of longer-term and hitting on the question of integration. We have seen a lot of volatility in demand in corrugated products this last year, obviously related to the economy. We've seen continued changes in trade flows, not just in containerboard, but obviously in manufactured goods over time. Do you think the integrated model is that much more valuable then, given what we've seen in terms of demand in the US over the last 12 to 24 months? Or do you think perhaps integration, not necessarily for you, but more broadly speaking for others in the industry might be less valid than it might have been, say, two, three years ago? And then as a sidebar, what's your view on the trend in lightweight containerboard, if we are going to see much of that in the next several years? Thanks. Good luck in the quarter.

Yes. With regard to integration, it depends. It depends if you make money in your box plants or not.

Okay.

We make money in both our mills and our box plants. So every ton of paper that I can make into my own box increases my profitability, as opposed to selling that paper to somebody else who makes some money making their box. However, if your box plants are just there to cut up tons, then it's obviously not as valuable to be as vertically integrated as we want to be. With regard to lightweights, there was a trend over a long period of time, but it looks like that trend has bottomed out. There has not been any appreciable of movements in the lightweights, and my opinion is that we may see a little more, but I don't think a lot more.

All right, Paul. Thanks.

Thank you.

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

Follow-ups. First of all, Paul, just to kind of confirm on downtime, you said in the fourth quarter it would be a little bit more than you saw in the third quarter. Is that right?

Yes. We expect more downtime in the fourth quarter for two reasons. One is seasonally slower volumes in the fourth, third quarter is usually our biggest volume quarter. Fourth quarter, because of December, Christmas, three less shipping days, etcetera, you normally get lower volume. And if you get lower volume and you are running into demand, that would imply lower production, and lower production would imply some downtime more than the third quarter.

Okay, and also on downtime, we know what the market downtime was in the second and third quarter. I can't recall, of the 90,000 tons you took in the first quarter, what was the breakout of that maintenance to market?

I can't recall either, Mark, but I am going to take a guess. Somebody has given me the number, though.

It was 60,000 market-related, 30,000 for the annual outage.

Okay. All right, that's good. And then the last question I had, Paul, we've had a little bit change on the call today for the first time in 10 years. I think Tom has replaced Bill Sweeney, who I guess is at the golf course or on the beach. I wondered if you could just give us a little background on Tom.

Well, I'll tell you what, I'll do better than that. I'll let Tom give you a little background on Tom.

Well, I've been in the business a long time; 31 years with PCA. I've had a lot of the varieties of jobs. And I think probably most importantly, spent the last 19 years working for Bill. So I think you will see a lot of consistency take place with the Company going forward. And we just need to continue to implement and do the things we've been doing well, and the rest will take care of itself. So I certainly appreciate the opportunity, glad to be here, and I think we've got a lot of good things to look forward to.

All right. So I guess the main point is after working with Sweeney for 19 years, it's unlikely we see any big changes.

Let me just say this. He said, glad to be here. I was just going to jump in and say, what do you mean glad to be here? You've been here 31 years. So he's been here a long time. He and Bill have worked very closely together. And Bill Sweeney is as good as there is, and I think Tom is certainly in that category. The information flow and the idea flow between these two guys has been very large for the past 15 years as they've worked together, and they've learned a lot from each other. And that is a big compliment from me to both of them.

All right. Very good. Thanks.

(Operator Instructions)

It looks like we are out of questions. I'd like to again thank you for participating in the call, and we look forward to better weather and look forward to talking to you in January about how we did for the year. Thanks again. Bye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Thank you, and have a nice day.