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Executives

Paul T. Stecko - Chairman and CEO

Richard B. West - Sr. VP and CFO

Analysts

Mark Wilde - Deutsche Bank

Mark Connelly - Credit Suisse

George Staphos - Banc of America Securities

Chip Dillon - Citigroup

Mark Weintraub - Buckingham Research

Richard Skidmore - Goldman Sachs

Richard Skidmore - Goldman Sachs

Joshua Zaret - Longbow Research

Claudia Shank Hueston - JPMorgan

Packaging Corporation of America (PKG) Q2 FY08 Earnings Call July 22, 2008 10:00 AM ET

Operator

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.

Paul T. Stecko - Chairman and Chief Executive Officer

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. These higher costs were partially offset by higher sales prices, which improved earnings by $0.15 per share.

Our second quarter earnings were up $0.03 compared to the first quarter 2008 as a result of higher prices and volume totaling $0.06, reduced annual outage cost of $0.03 and lower energy consumption with warmer weather of $0.04. These earnings improvement items were partially offset by higher purchase fuel and electricity prices of $0.03, transportation cost of about $0.025, chemical cost of $0.01 and the special items I just mentioned earlier of $0.03. Except for much higher than expected energy and energy-related cost and the unforeseen tornado damage, the quarter was pretty much in line with our expectations.

Net income for the first six months of 2008 was $67 million or $0.65 a share compared to $77 million or $0.74 a share in 2007. And year-to-date our net sales are $1.19 billion compared to $1.14 billion in 2007.

Let me now get into some specific details of our operations. First, our mills produced 614,000 tons of containerboard, that's down 0.3% compared to last year's record second quarter production, and this occurred despite having both of our medium mills down in the second quarter for their annual outage, while only Tomahawk was down last year. This year our Tomahawk medium mill was down for about 4.5 days reducing production by 6500 tons, and our Filer City mill was down about 4.5 days reducing production by about 5500 tons. The earnings impact from these two outages from over-production and increased operating and repair cost was about $0.03 a share.

During the quarter, the production efficiency at our mills was outstanding setting a second quarter record for tons produced per operating day. Also, our Valdosta mill set an all-time quarterly production record. Even with these records, we ended the quarter with our containerboard inventory down 3000 tons from the end of the first quarter and down 8000 tons from year-end 2007 level. Our domestic sales of containerboard remained very strong, up about 10% over last year and up 18% over the first quarter of this year. With strong domestic shipments and our low inventory levels, we shipped about 3000 tons less into the strong export market than we did last year in the second quarter and about a 1000 tons less than in the first quarter of this year.

Turning to the box business, our total corrugated products shipments almost equaled last year’s strong second quarter, down only 0.4% and were up 4.3% over our of first quarter shipments. On a per workday basis, there was one more work one day this quarter, shipments were down 2% compared to last year’s second quarter and were up 2.7% over the first quarter of 2008.

Year-to-date our total shipments and shipments per workday are down a modest 0.7% over a strong 2007. As reported by the Fibre Box Association this past Wednesday, industry containerboard and inventories remained at historically low levels with June inventories dropping 73,000 tons to 2.277 million tons or 3.6 weeks of supply. And on a weeks-of-supply basis, this would represent the lowest June ending inventory on record.

Looking at pricing, our corrugated products and containerboard sales prices were higher than the second quarter of 2007 as would be expected as a result of price increases, which occurred in the second half of 2007 and also up over the first quarter 2008, due primarily to a richer product mix. Unprecedented escalation in energy and energy-related product prices significantly impacted transportation, chemicals, purchased fuel and electricity cost for us. Fortunately however, only 22% of the purchased fuel in our mills come from natural gas and oil. So we are not impacted as much by rising fuel costs as others in the industry. However, even with this relatively low dependence on gas and oil, higher fuel prices and higher electricity prices still reduced our second quarter earnings by $0.05 a share compared to the second quarter of last year and $0.03 a share compared to the first quarter of this year.

Yesterday, in a separate press release and related to higher energy cost, we announced the successful start-up of a biogas refinery at our Filer City semi-chemical medium mill. As we outlined in the release, the bio-refinery takes the byproducts liquor of the pulp cooking process at Filer City and utilizes bacteria as the vehicle to convert the pulping liquor directly to methane gas. The methane is then burned in an existing power boiler at Filer City, and essentially it eliminates natural gas usage at Filer city and also replaces about 30% of Filer City's primary fuel, which is coal.

The investment in this biogas project was a little less than $20 million, and we expect a return of about $10 million annually. And that would equate to a cost reduction about $25 a ton to produce semi-chemical medium at Filer City, and that's a significant number. This return is particularly good considering that we are replacing primarily coal, which is a relatively low cost fuel. with methane. The return will be obviously much higher in a situation where biogas was replacing all natural gas or fuel instead of coal. We think the biogas refinery at Filer represents a major milestone for PCA on the energy frontier and also for the overall development of low-cost green energy.

Moving next to transportation, which represents the single largest cost increase item we have, average diesel prices as reported by the U.S. Energy Information Administration were up 57% compared to the second quarter of last year and up 25% compared to the first quarter of this year. These high diesel prices continue to drive up transportation costs for fiber and other inbound raw materials as well as outbound freight for containerboard and corrugated products.

Higher transportation costs reduced our earnings by $0.06 a share compared to last year and about $2.50 a share compared to the first quarter of 2008. Chemical costs are also being impacted by higher fuel prices because many of the chemicals we use are very energy intensive to produce or they’re byproducts of other materials impacted by higher energy prices. Our chemical costs, particularly caustic soda, soda ash, sulfuric acid and wax, were up about $0.03 a share compared to last year's second quarter and up about $0.01 a share compared to the first quarter of 2008. Wood and recycled fiber costs were only up about $0.01 a share over last year’s second quarter if you exclude its transportation cost. When you include transportation, fiber costs are up about $0.04 a share. Looking at other costs, higher labor and benefit costs reduced second quarter earnings by $0.02 a share compared to last year's second quarter.

Let me now turn to cash utilization where our capital expenditures were $31 million in the second quarter. We also repurchased 984,000 shares of our stock at an average price of $21.97. We ended the quarter with $298 million cash on hand and our long-term debt remained at $807 million. As you recall, we will be paying off over [ph] $150 million in notes, which mature on August 1 of this year, which will lower our cash and reduce our debt by the same amount.

Overall to wrap it up, our business remained strong throughout the quarter. Our mills ran extremely well setting production records, and both our corrugated products demand and outside sales of containerboard remained strong. We ended the quarter with our containerboard inventories a little lower than forecasted. So we will need to continue to run well during the third quarter. Finally, the start-up of the bio-refinery to produce low cost methane at Filer City demonstrates our continuing focus on reducing cost and developing competitive advantages.

Looking ahead to the third quarter, we expect to improve earnings primarily as we begin the realization of higher prices from our announced July 1 containerboard and August 1 box price increases. Since it usually takes several months to fully implement a box price increase, a full quarter’s benefit of these price increases does not occur until the fourth quarter. We also expect seasonally lower energy usage, but prices paid for transportation, purchased fuels and electricity and chemicals are expected to be up in the third quarter, maybe as much as $0.06 per share, as again a full quarter's impact of the price increases that occurred over the course of the second quarter for these items are felt. Considering all of these items, we currently expect third quarter earnings of about $0.41 a share.

With that, we would be happy to entertain any questions. But as always, I must remind you that some of the statements we've made on this call constitute forward-looking statements. These statements were based on current expectations of the company and involve inherent risks and uncertainties, including those identified as risk factors in our Annual Report on Form 10-K on file with the SEC. Actual results could differ materially from those expressed in these forward-looking statements.

With that, operator, I would ask you to open up the lines for any questions.

Question and Answer

Operator

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

Mark Wilde - Deutsche Bank

Good morning, Paul.

Paul T. Stecko - Chairman and Chief Executive Officer

Good morning, Mark.

Mark Wilde - Deutsche Bank

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?

Paul T. Stecko - Chairman and Chief Executive Officer

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.

Mark Wilde - Deutsche Bank

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?

Paul T. Stecko - Chairman and Chief Executive Officer

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.

Mark Wilde - Deutsche Bank

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?

Paul T. Stecko - Chairman and Chief Executive Officer

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.

Mark Wilde - Deutsche Bank

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

Paul T. Stecko - Chairman and Chief Executive Officer

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.

Mark Wilde - Deutsche Bank

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

Operator

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

Mark Connelly - Credit Suisse

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?

Paul T. Stecko - Chairman and Chief Executive Officer

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.

Mark Connelly - Credit Suisse

Yes.

Paul T. Stecko - Chairman and Chief Executive Officer

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.

Mark Connelly - Credit Suisse

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

Paul T. Stecko - Chairman and Chief Executive Officer

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.

Mark Connelly - Credit Suisse

I appreciate it. Thanks, Paul.

Operator

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

George Staphos - Banc of America Securities

Hi, Paul.

Paul T. Stecko - Chairman and Chief Executive Officer

Good morning, George.

George Staphos - Banc of America Securities

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?

Paul T. Stecko - Chairman and Chief Executive Officer

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

George Staphos - Banc of America Securities

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

Paul T. Stecko - Chairman and Chief Executive Officer

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

George Staphos - Banc of America Securities

I understand.

Paul T. Stecko - Chairman and Chief Executive Officer

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

George Staphos - Banc of America Securities

Okay, fair enough. A separate question...

Paul T. Stecko - Chairman and Chief Executive Officer

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.

George Staphos - Banc of America Securities

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?

Paul T. Stecko - Chairman and Chief Executive Officer

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.

George Staphos - Banc of America Securities

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?

Paul T. Stecko - Chairman and Chief Executive Officer

High probability that that is indeed the case.

George Staphos - Banc of America Securities

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?

Paul T. Stecko - Chairman and Chief Executive Officer

George, I am not sure I understand your question.

George Staphos - Banc of America Securities

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?

Paul T. Stecko - Chairman and Chief Executive Officer

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.

George Staphos - Banc of America Securities

Okay.

Paul T. Stecko - Chairman and Chief Executive Officer

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

George Staphos - Banc of America Securities

Okay.

Paul T. Stecko - Chairman and Chief Executive Officer

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.

George Staphos - Banc of America Securities

Okay, thanks Paul. Last one…

Paul T. Stecko - Chairman and Chief Executive Officer

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

George Staphos - Banc of America Securities

Thanks.

Operator

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

Chip Dillon - Citigroup

Hi. Good morning, Paul.

Paul T. Stecko - Chairman and Chief Executive Officer

Good morning, Chip.

Chip Dillon - Citigroup

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?

Paul T. Stecko - Chairman and Chief Executive Officer

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.

Chip Dillon - Citigroup

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?

Paul T. Stecko - Chairman and Chief Executive Officer

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

Chip Dillon - Citigroup

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

Paul T. Stecko - Chairman and Chief Executive Officer

Right, the other 78% is bark and coal.

Chip Dillon - Citigroup

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?

Paul T. Stecko - Chairman and Chief Executive Officer

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?

Chip Dillon - Citigroup

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

Paul T. Stecko - Chairman and Chief Executive Officer

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

Chip Dillon - Citigroup

In dollars?

Paul T. Stecko - Chairman and Chief Executive Officer

In dollars.

Chip Dillon - Citigroup

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

Paul T. Stecko - Chairman and Chief Executive Officer

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.

Chip Dillon - Citigroup

Got you. Thank you.

Operator

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

Mark Weintraub - Buckingham Research

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?

Paul T. Stecko - Chairman and Chief Executive Officer

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.

Mark Weintraub - Buckingham Research

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?

Paul T. Stecko - Chairman and Chief Executive Officer

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.

Mark Weintraub - Buckingham Research

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

Operator

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

Richard Skidmore - Goldman Sachs

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?

Paul T. Stecko - Chairman and Chief Executive Officer

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.

Richard Skidmore - Goldman Sachs

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?

Paul T. Stecko - Chairman and Chief Executive Officer

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

Richard Skidmore - Goldman Sachs

Thank you.

Paul T. Stecko - Chairman and Chief Executive Officer

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.

Richard Skidmore - Goldman Sachs

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?

Paul T. Stecko - Chairman and Chief Executive Officer

Our volume we can move around totally.

Richard Skidmore - Goldman Sachs

Okay, thank you.

Operator

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

Joshua Zaret - Longbow Research

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?

Paul T. Stecko - Chairman and Chief Executive Officer

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.

Joshua Zaret - Longbow Research

And is that any different from last year?

Paul T. Stecko - Chairman and Chief Executive Officer

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.

Joshua Zaret - Longbow Research

So IP, Weyerhaeuser, not factor?

Paul T. Stecko - Chairman and Chief Executive Officer

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.

Joshua Zaret - Longbow Research

Okay. Thank you.

Paul T. Stecko - Chairman and Chief Executive Officer

Thank you.

Operator

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

Claudia Shank Hueston - JPMorgan

Thanks very much. Good morning.

Paul T. Stecko - Chairman and Chief Executive Officer

Good morning, Claudia.

Claudia Shank Hueston - JPMorgan

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?

Paul T. Stecko - Chairman and Chief Executive Officer

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.

Claudia Shank Hueston - JPMorgan

Okay, that's helpful.

Paul T. Stecko - Chairman and Chief Executive Officer

At least as viewed by our box sales.

Claudia Shank Hueston - JPMorgan

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?

Paul T. Stecko - Chairman and Chief Executive Officer

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

Richard B. West - Senior Vice President and Chief Financial Officer

On the share count, about 103.5.

Claudia Shank Hueston - JPMorgan

Okay, perfect, thanks very much.

Operator

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

George Staphos - Banc of America Securities

Hi, guys.

Paul T. Stecko - Chairman and Chief Executive Officer

Hi, George. Go ahead.

George Staphos - Banc of America Securities

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?

Richard B. West - Senior Vice President and Chief Financial Officer

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.

Operator

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

Unidentified Analyst - Anchorage Capital

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?

Paul T. Stecko - Chairman and Chief Executive Officer

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.

Unidentified Analyst - Anchorage Capital

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

Paul T. Stecko - Chairman and Chief Executive Officer

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.

Unidentified Analyst - Anchorage Capital

Thank you.

Operator

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

Mark Weintraub - Buckingham Research

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?

Paul T. Stecko - Chairman and Chief Executive Officer

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.

Mark Weintraub - Buckingham Research

Okay. Thank you.

Operator

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

Paul T. Stecko - Chairman and Chief Executive Officer

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

Operator

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

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Source: Packaging Corp. of America Q2 2008 Earnings Call Transcript
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