International Paper Co (IP) 2009 Q4 法說會逐字稿

Good morning, my name is Sandrelle and I will be your conference operator today. At this time I would like to welcome everyone to the Temple-Inland fourth quarter 2009 earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer session. (Operator Instructions) Thank you.

I would now like to turn the call over to Chris Mathis, Vice President Investor Relations and Treasury. Please go ahead.

Good morning. My name is Chris Mathis, Vice President of Investor Relations and Treasury for Temple-Inland and I'd like to welcome each of you who have join us by conference call or webcast this morning to discuss results for fourth quarter and full year 2009. Joining me this morning are Doyle Simons, Chairman and Chief Executive Officer of Temple-Inland; Pat Maley, President and COO; and Randy Levy, Chief Financial Officer.

Please read the warning statements in our press release and our slides concerning forward-looking statements, as we will make forward-looking statements during this presentation. In addition, this presentation includes non-GAAP financial measures. The required reconciliation to GAAP financial measures can be found on our Web site at www.temple-Inland.com.

This morning we will give a presentation on the results for fourth quarter and full year 2009. After the completion of the presentation, we will be happy to take your questions.

Thank you for your interest in Temple-Inland and now I would now like to turn the call over to Doyle Simons.

Thank you, Chris. Good morning everyone and welcome. We had an outstanding year in 2009 as our employees delivered solid operating results, return on investment and cash flow despite difficult economic conditions. Excluding special items, net income was $0.70 per share in 2009. This compares with net income excluding special items of $0.11 per share in 2008. Special items after tax for 2009 were $128 million or $1.19 per diluted share, including income of $134 million or $1.24 per share for alternative fuel mixture tax credits, a charge of $11 million or $0.10 per share related to the substitution of letters of credit in connection with the 2000(Sic-see press release) sell of timberland, income of $9 million or $0.09 per share related to the purchase and retirement of long-term debt, and a charge of $3 million or $0.03 per share related to facility closure and headcount reduction. We generated $640 million of cash from operations and reduced our debt by $482 million in 2009. As shown on slide four, our long-term debt at year end 2008 was $1.192 billion and we ended 2009 with long-term debt of $710 million, down $482 million for the year. $307 million of the decrease was from operations and $175 million was from the alternative fuel mixture tax credit.

Let me now turn to our segments beginning with Corrugated Packaging. In Corrugated Packaging we posted record annual operating income of $347 million. Our ROI for the year was an industry leading 16.5% and 2009 was the fourth consecutive year we have earned above cost of capital returns in this business. Corrugated Packaging earnings were up by $122 million in 2009 compared with 2008. While approximately one-third of the improvement year over year was attributable to market related items, $138 million of lower input costs offset by $99 million in lower prices, almost two-thirds of the improvement was a result of strategic initiatives to improve earning power to box plant transformation, benefits from the acquisition of PBL and lower mill costs. In 2009, the benefit from our box plant transformation focused on lowering costs through higher asset utilization was $42 million. We also successfully integrated the PBL mill into our system in 2009 and began producing white top liner board at this mill. The combined benefit of synergies and production of white top added another $35 million to earnings in 2009 compared with 2008. We are very pleased with the bottom line contribution of box plant transformation of PBL in 2009, and as we will talk about here in just a few minutes there is much more to come.

Building Products. Building Products lost $27 million in 2009 compared with a loss of $40 million in 2008, an improvement of $13 million despite the fact that housing starts declined by 39% in 2009 compared with 2008. The key driver to this improvement was lower cost. Despite very difficult markets, we are one of the few companies in this business that has continued to generate positive EBITDA. For 2009, we generated positive EBITDA of $17 million, a $9 million improvement over 2008, again, despite the fact that housing starts declined by 39% in the year.

Turning to the fourth quarter, net income per share in fourth quarter 2009 was $0.34 compared with a loss of $0.06 per share in fourth quarter 2008, and income of $0.61 per share in third quarter 2009. Excluding special items, we had a net loss of $0.07 per share in fourth quarter 2009, compared with net income of $0.11 per share in fourth quarter 2008, and $0.24 per share in third quarter 2009. Special items after tax for fourth quarter 2009 were income of $45 million, or $0.41 per share for alternative fuel mixture tax credits. We generated $200 million of cash from operations and reduced our long-term debt by $169 million in the quarter. Our share-based compensation expense in the quarter increased by $37 million compared to fourth quarter 2008, and $6 million compared with third quarter 2009 due to an increase in our stock price.

In Corrugated Packaging, operating income was $57 million. This compares with $68 million in fourth quarter 2008, and $94 million in third quarter 2009. Operating results declined in fourth quarter 2009 compared with third quarter 2009 due to higher input costs, higher downtime costs, lower prices and lower box volume. As we told you on our last conference call, we had the unique situation of having five less shipping days in fourth quarter 2009 compared to third quarter 2009 due to the way the holidays fell on our fiscal calendar. Accordingly, our absolute box shipments were down over 30,000 tons compared to the third quarter. ROI in the fourth quarter was 10.8%, highest in our peer group.

In terms of absolute input costs, comparing fourth quarter 2009 to fourth quarter 2008, input costs were mostly down with energy down $16 million, freight down $6 million, chemicals down $5 million and OCC up $7 million. Compared with third quarter 2009, input costs were higher with energy up $6 million, and virgin fiber up $4 million, primarily due to wet weather. While OCC prices were flat in the fourth quarter compared with the third quarter of 2009, going into the first quarter OCC prices are up significantly as they started increasing in December, and that trend has continued. January prices were up $38 compared with the fourth quarter average, and February prices will be up another $20 to $25 from January levels.

Box prices were down $4 in the quarter as previous adjustments to liner board moved through to boxes. Published liner board prices moved up $50 in the East and $70 in the West in January 2010. Most of our box prices were either directly or indirectly influenced by adjustments in published liner board prices. A majority of the earnings benefit from the price increase will not be realized until the second quarter 2010. On an average week basis, our box shipments were up 8% in fourth quarter 2009 versus fourth quarter 2008. On an average week basis industry box shipments were down 1%. On an absolute basis, our box volumes in the fourth quarter were down 4% compared with third quarter 2009, and down slightly compared with fourth quarter 2008. We continue to see steady improvement in box demand. On an absolute basis, our January box volumes were the strongest they have been since our acquisition of Gaylord in 2002.

We took 23,000 tons of maintenance related downtime in the quarter, and lost 16,000 tons of production due to curtailment and slow back at our Rome, Georgia and Bogalusa, Louisiana mills as extremely wet weather impacted fiber availability and elevated wood cost. We continue to match our production to our demand and our year end inventories were in line with our three-year low 2008 year end inventory levels. In first quarter 2010 we will be taking our Bogalusa mill down for its annual outage and expect 27,000 tons of downtime as a result.

Turning to Building Products. Building Products lost $18 million in fourth quarter 2009 compared with a loss of $14 million in fourth quarter 2008 and a loss of $4 million in third quarter 2009. Results for fourth quarter 2009 include $4 million of non-cash inventory evaluation adjustment and asset write offs. Building product markets were very weak in the quarter as seasonally adjusted housing starts declined 16% in fourth quarter 2009, compared with fourth quarter 2008, and actual housing starts declined 24% in fourth quarter 2009, compared with third quarter 2009. As a result, demand in pricing were down for all our products in the quarter. In addition, energy costs were higher and fiber costs were up in the quarter due to the extremely wet weather.

Lumber prices were down $7 in fourth quarter 2009 compared with third quarter 2009 and down $19 compared with fourth quarter 2008. Our current lumber prices are tracking randomly and are currently in the $300 range. Lumber volumes were down 11% compared with third quarter 2009, and 7% compared with fourth quarter 2008. Gypsum prices were down $3 in fourth quarter 2009 compared with third quarter 2009, and down $26 compared with fourth quarter 2008. Current gypsum prices are down slightly compared with fourth quarter 2009 average. Gypsum volumes were down 11% compared with third quarter 2009, but up compared with year ago levels.

Particleboard prices were down $13 compared with third quarter 2009 and down $46 compared with fourth quarter 2008. Current particleboard prices are essentially flat compared with fourth quarter 2009 levels. Particleboard volumes are down 17% with third quarter 2009, and down 15% compared with fourth quarter 2008.

Now let me turn it over to Randy to discuss financial highlights for full year 2009 and the fourth quarter.

Thanks, Doyle, and good morning to everyone. Doyle covered the income statement and now I'll highlight cash flow, debt and liquidity, and then make a few brief comments on a couple of expense related items. Let's start with cash flow. For the fourth quarter, total cash provided by operations was $200 million. The operations portion which can be thought of as funds from operations, was $125 million, but that includes cash tax adjusted alternative fuel mixture tax credits of $54 million. Adjusting for these credits, the number is $71 million. The working capital portion in the quarter was an additional $75 million source of cash. I would note that included in working capital was a federal income tax refund of $58 million. For the year, total cash provided by operations was $640 million. The operations portion, or FFO, adjusted for the items noted in our release was $404 million, and compares to $302 million a year ago.

Moving to the balance sheet, our long-term debt was $710 million at year end, which was, as Doyle mentioned earlier, down $169 million in the fourth quarter and down $482 million from year end 2008. At year end 2009, our total term debt was $555 million. That's down $286 million from year end 2008. As you can see, we have no debt maturities until 2012.

Looking at our liquidity at year end, our committed credit facilities total $1.075 billion, and our unused borrowing capacity was $890 million with no limitations. Our financial covenants are customary for these types of facilities and we have significant head room versus these covenants. As you can see, at year end our debt to total capital ratio was 43% versus a 70% maximum. And our interest coverage which is the best four out of five trailing quarters, was 10.2 times versus a 3 times minimum.

Then to wrap up, just a couple of comments on some expense related items. First, interest expense was $13 million in the quarter, which was down $10 million, or 43% as compared to a year ago. This reduction reflects not only our debt levels being down $482 million but also the retirement of $286 million of our fixed term debt at an average coupon in excess of 7%. And finally, general and administrative expenses were $17 million in the quarter and for the year, these expenses were $70 million, which was down 8% versus a year ago. I think it's worth noting that the 8% reduction in these expenses during 2009 follows a 24% reduction in 2008.

Now I'll turn it back over.

Thank you, Randy. I would now like to switch gears and discuss a project that our Board approved last Friday to further reduce our box plant system cost. Let me start with some context. In our Corrugated Packaging operation, we have four key strategic initiatives -- maintaining a high integration level, driving for low cost, improving our mix in margins, and profitably growing our business. This project is focused on the middle two -- driving for low cost and improving our mix in margins.

As we have previously discussed, over the past few years we've been focused on changing the culture in our box plant system to run box making machines near design capacity thereby lowering cost through improved asset utilization. This effort has resulted in fewer machines, fewer people and significantly lower cost. We've also been focused on improving our mix in margin and getting paid for the value we create for our customers. This effort, which we refer to as Box Plant Transformation One, has resulted in four fewer plants, 88 fewer machines, and 1,157 fewer people, and by year end 2010 we will have lowered costs by $80 million per year, including an anticipated $10 million in 2010. The capital investment to achieve these cost savings has been approximately $174 million, resulting in a return on investment of 46%.

The success of Box Plant Transformation One, however, did not come just from purchasing new equipment and technology. It came from successfully configuring, implementing and executing with it and changing the culture of our box plant system. The benefit from Box Plant Transformation One have shown up in our bottom line and have been a key driver to our improving ROI. While this action has clearly lowered our cost, it has also enabled us to target a richer mix of products. However, the returns outlined here only include hard dollar cost savings from lowering our costs.

Based on our high level of success in Box Plant Transformation One, we are confident that we can further significantly drive down the cost structure of our box plant system through additional steps to improve our asset utilization. Last week, our Board approved box Plant Transformation Two which will result in 12 fewer plants, 66 fewer machines, and 917 fewer people. Costs will be reduced by about $100 million with approximately 10% of the cost reduction in 2010 and the balance spread roughly evenly between 2011, 2012, and 2013. The capital investment for Box Plant Transformation Two will be approximately $250 million, spread fairly evenly across 2010, 2011, and 2012. The return on investment for Box Plant Transformation Two is anticipated to be about 40%. Again, these numbers only include hard dollar cost savings from lowering our cost structure and do not include benefits from improving our mix.

While we have provided some guidance on timing and are absolutely confident that the benefits will reach the bottom line, the results will undoubtedly be lumpy, just as they were in Box Plant Transformation One. We will incur approximately $125 million of one time charges for this project. We will provide you with an update of the benefits annually.

Before I give some closing comments, let me turn it back over to Randy to provide you with some guidance on some 2010 numbers.

Doyle just took you through our Box Plant Transformation Two project that we will be launching this year. Investment to support this important project will take capital expenditures in total to approximately $200 million to $210 million this year for the Company. This will represent roughly 100% of depreciation in 2010. And depreciation in 2010 is expected to be $198 million, in line with 2009.

On pension, as many of you know, in the fourth quarter of 2007 we made significant changes to the asset allocation of our qualified defined benefit plan. At that time, we repositioned 80% of our plan assets to match the duration of our plan liabilities and also match the overall credit quality of our plan assets to the implied credit quality of the yield curve used to discount our liabilities. This action was designed to mitigate a substantial amount of the volatility in changes to our funding requirements and our pension expense that may have otherwise occurred due to the volatility in the equity markets. As a result from a cash funding perspective, our funded ratio as of January 1, 2010 is expected to be about 90% under the Pension Protection Act methodology.

Due to credit balances we've accumulated from our voluntary discretionary contributions in prior years, we have no current year funding requirement. While not required, it has been our practice for each of the last five years to contribute $30 million to our plan, an amount approximately equal to the benefits earned annually by our active plan participants. We anticipate contributing $30 million to our plan again in 2010. From a non-cash accounting perspective, we expect our 2010 pension expense to be $59 million.

Moving to general and administrative expenses, as I mentioned earlier, G&A expenses not included in the segments was $70 million in 2009. For 2010, these expenses are expected to be in the $71 million to $73 million range, or about $18 million a quarter. This modest increase is due entirely to our higher pension expense. On share-based and long-term incentive compensation, a significant portion of our share-based awards are cash settled awards. As a result, changes in our share price have a direct impact on our share-based compensation expense. In 2009, our share-based and long-term incentive compensation was $58 million as our share price increased by over $16 a share from year end 2008 to year end 2009. In 2010 this expense is expected to be approximately $32 million based on our year end 2009 share price. In 2010 for a $1 change in our share price, the impact to share-based compensation expense should be about $2.3 million, similar to 2009.

Interest expense. Interest expense on our debt was $63 million for the full year 2009. With our debt reduction of $482 million during the year and the retirement of a significant amount of high coupon fixed term debt, our fourth quarter 2009 interest expense of $13 million is a good proxy for our run rate expense in 2010. In 2010 interest expense is expected to be in the $50 million to $52 million range, or about $13 million a quarter. And, finally, for tax rates in 2010, the guidance I would give you at this time would be to use 39% for an effective tax rate on a book basis and on a cash basis, due to our significant level of alternative minimum tax credits, we will remain a 20% cash taxpayer in 2010. That concludes my comments.

Thank you, Randy. In terms of our financial priorities, we understand the importance of a dividend to shareholder value and are one of the few companies in our industry that did not cut our dividend during this downturn.

Ladies and gentlemen, this is the Operator. We are experiencing technical difficulties and the call will resume momentarily. (Operator Instructions)

Understanding that the call was dropped for technical reasons just as I was beginning a discussion of financial priorities so I will pick up at that point. In terms of our financial priorities, we understand the importance of a dividend to shareholder value and are one of the few companies in our industry that did not cut our dividend during this downturn. Last Friday, we raised our annual dividends by 10% to $0.44 per share, which reflects confidence in our ability to continue to generate cash flow and our commitment to return cash to shareholders.

Another financial priority is to reduce debt. We reduced debt by over $480 million in 2009. We believe we can create value for shareholders by continuing to pay down debt. Our targeted debt to capital ratio is in the 35% to 40% range.

We will also continue to invest in our business. We have invested very wisely in our business over the past number of years and those investments have clearly contributed to our current returns. Box Plant Transformation Two is a compelling opportunity to invest capital to further transform our box plant system and drive up ROI for shareholders.

Finally, we will look for opportunities to profitably grow our Company but as always we will be very disciplined based on ROI. We are constantly looking for acquisitions that are consistent with our strategy and meet our ROI goals.

In summary, 2009 was an outstanding year for Temple-Inland. We demonstrated our ability to execute through the recession as we improved segment operating income by $135 million, reported record earnings in Corrugated Packaging, generated $640 million of cash from operations, and reduced our debt by $482 million. Looking forward, economic conditions appear to have stabilized and seem to be on a slow path to recovery. In Corrugated Packaging we have demonstrated that execution of our strategy focused on integration, driving for low cost, improving mix in margin, and profitably growing our business through our superior relative returns even in tough economic conditions. As the economy improves, we are focused on continuing to improve our relative returns and are confident that Box Plant Transformation Two will further lower costs, improve our mix in margins, and drive up our returns. In Building Products, fourth quarter 2009 was a very difficult quarter as demand in pricing fell for all our products. The market tone so far in the first quarter is improving, especially in lumber. However, log availability and costs continue to be an issue due to the extremely cold and wet weather. As housing rebounds we are well-positioned to capitalize on the recovery.

Thank you. And, Operator, we will now take questions.

(Operator Instructions) Your first question comes from the line of Chip Dillon with Credit Suisse.

Yes, good morning. I was going to ask you, Doyle, you mentioned that you were going to see $10 million, I believe, in 2010 from both box transformation programs, is that correct? So you're going to get a total $20 million, the last $10 million from One and the first $10 million from Two?

That is correct, Chip.

Okay. Then just another clarification from Randy. In terms of the black liquor credits you mentioned you got a big refund in the fourth quarter, and I know a lot of other companies are talking about getting refunds when they file their tax returns during the course of 2010. Does that mean that you are using a different methodology like the excise tax method and therefore the liquor credits you think will be taxable?

First, Chip, the tax refund that we got in the fourth quarter was really due to 2008 and really didn't have anything to do with the alt fuel. As far as the alt fuel credits we don't believe that they are taxable but we believe they might be subject to alt min tax at a cash tax rate of 15%. So what we did was we paid into the IRS 15% or $34 million, and if we are right, then we will get that $34 million back. If we are not right, then we will only owe another $11 million. And what we will do is we will use our alternative minimum tax credits, we have about $280 million of them, to cover the difference.

Got you. So the way to think about it is you really have no more money you pay in and you may receive another $34 million with your tax return in 2010.

That's right.

Then the last question, you mentioned the charge for Transformation One, $125 million, plus you mentioned $2.3 million per point in the stock with the compensation. Were those numbers both pretax numbers or after tax numbers?

Say the question again, chip? You cut out on the first part.

I'm sorry. The charge of $125 million, and the $2.3 million per point in the stock, is that pretax or after tax?

Those were box pretax numbers.

Thank you very much.

Thank you. And your next question comes from the line of George Staphos with Bank of America.

Thanks, hi, guys, good morning, congratulations on the year. Two questions. Doyle or Pat, if you could comment a bit on how Box Plant Transformation Two might differ from One, either in terms of the activities, or for that matter, what the challenges might be now since it looks like you are taking out maybe a larger amount of machines and facilities, how you balance that across the system? And then a similar question, although aimed at Building Products. Last year in the fourth quarter you had obviously an operating loss, you've done a good job on EBITDA,. It struck us back then that the Company really redoubled its efforts to return to profitability at that point in time. Tell us if you can do anything else with your existing Building Products business or with your operating stance so as to close a gap on profitability independent of pricing. Thanks. Good luck in the quarter.

I am going to ask Pat to answer the first question.

Relative to Box Plant Transformation Two, I would characterize it more as an extension of the learnings and our success, if you will, of box Plant Transformation One. We spent a lot of time over the last 12 months planning and replanning and configuring and reconfiguring our ideas around just exactly what the investment would be, in which locations and how we would successfully manage it and drive the cost savings to the bottom line. So as an organization we are pretty excited about it. We are actually pretty confident about the execution of it and, if anything, I think we can beat what we've highlighted here as savings.

And, George, on your second question regarding Building Products, if you take out the one time $4 million charge, we lost $14 million in the fourth quarter of 2009 which was in line with the loss in the fourth quarter of 2008. You're right, we did redouble our efforts in the fourth quarter of 2008 and continue to drive down our costs. However, what you've got to factor in is that housing declined another 16% in fourth quarter of 2009 versus fourth quarter of 2008. As a result, demand and pricing were down for all of our products in that period of time. And, in addition to that, you had higher energy costs and we've had extremely wet weather in the South which has had a significant impact on our log cost, as well.

We made some targeted investments in our Building Products business here in the fourth quarter specifically around kiln and drying efficiencies at our Pineland sawmill and also some work on some boilers and things that are going to decrease our overall energy consumption and allow us to make more products, more lumber at lower cost. So we are pretty excited about that.

George, we are working every day, as we do in both our businesses, to continue to drive down our cost and we will have some more opportunities to do that, as Pat just outlined.

Thank you, I will turn it over.

Your next question comes from the line of Gail Glazerman with UBS.

Hi, I was hoping you could talk a little bit more about the cost environment on the corrugated side, particularly in the mills. Are you having similar wood procurement production outage issues in the first quarter and any signs if the situation is improving, do you expect it to improve?

Gail, Pat. Yes, wood cost in the fourth quarter was the real unexpected and unwelcome surprise. We had a spike in October, it started to correct itself and then a second bout of unusually wet weather caused another run up in December. Wood costs, pulp wood costs are coming down in January. I would say they are a little bit stubborn but they are headed down in January. And we would expect them to get more to a normal condition in the second quarter. They are starting to come down, Gail.

It's not affecting production this quarter.

We haven't lost, knock on wood, any time in the quarter yet for lack of fiber.

Okay. Can you give maybe some more views on how you see OCC playing out throughout the year? Obviously you talked about the rise in January and February but do you think this is something of a sustainable path or maybe something more like a shock?

As we said, Gail, OCC was up $38 per ton in January and we anticipate it to be up another $20 to $25 in February. It's always very difficult to predict what's going to happen with OCC prices but it's our sense that from this level they could stabilize and even moderate some as we move forward. With that said, we've always indicated that we thought OCC over a period of time could and would be a higher priced source of fiber than virgin wood.

Okay. And just last question, you talked about January being back to a phenomenal level in terms of box volumes. Is that something that's continued into February? And just any sense what might be driving that, is it something you view as sustainable?

What we saw was December demand for boxes was strong. That trend continued into January. And has been the same way for the first few days in February. I will let Pat address what we think may be driving that.

I think peoples, our customers' inventories are very lean and I think there is a little bit of restocking. I think that our customers are looking out and feeling better about their businesses and demand from their end users. So I think there's a gradual improvement in the overall economy and we are seeing it in our box demand.

Okay, thank you.

Thank you. Your next question comes from the line of Mark Wilde with Deutsche Bank.

Doyle, without getting too specific could you just walk us through in your two main businesses what you think the big puts and takes are going to be here as we look at the first quarter?

Okay. Let's talk first about Corrugated Packaging. I think a couple of the key issues there are OCC which we've already walked through, Mark, clearly is going to have a significant impact on the cost side of the equation. And we will have to see how virgin wood plays out. As Pat indicated, that seems to be improving somewhat but we are not out of the woods yet in terms of the wet and cold weather. In terms of the pricing side of the equation, clearly box prices are moving up but we won't see significant benefit of that until the second quarter of 2010. And then we are going to continue to be very focused on our internal initiatives through getting started on Box Plant Transformation Two. But we won't start to see the benefits of that until later this year. So I think those are the key issues for Corrugated Packaging.

In terms of Building Products, Mark, it's kind of interesting there. As I mentioned in the comments, we've clearly seen a rally in lumber prices. The question is how long and how sustainable is that rally. So far that rally has really been a supply side driven rally as opposed to demand side. So it's still up in the air as to how sustainable that rally is as we move through the quarter. Offsetting they benefit from the lumber pricing is, again, because of the wet weather, lon cost and long availability are an issue on the saw timber side. In terms of gypsum, those markets continue to be challenging and prices, as I indicated, are off slightly versus fourth quarter levels. Particleboard, actually we've seen particleboard in MDF. We've actually seen improvement in demand in volumes and prices in that business are flattish. So that's a quick walk through how we view first quarter versus fourth quarter in our two businesses.

Then, Doyle, coming around to this Box Plant Two initiative, in the past you've suggested that you've been real happy with returns on the mill side of your business but box plant returns have really been sub par. If you take into account both the incremental capital into the business plus the benefits that you are going to get from that, how will your return on investment look in the box business three years out?

The comment we've made historically, Mark, is from an industry perspective this industry has done a decent job of generating returns but a very poor job of generating returns on the box plant side. So that's what Box Plant Transformation One was all about and that's what box Plant Transformation Two will do, is continue to drive up the returns on the box plant side of the system. Our goal is to maximize ROI for our shareholders. First we have our mill system where it needed to be and we now have one of the lowest cost mill systems in the industry. After we complete Box Plant Transformation Two we will have the lowest cost box plant system in the industry. And you will combine those two and that's the way we are going to continue to drive up ROI for shareholders. In terms of quantifying what that will be, like I said, we'll continue to quantify the benefits of Box Plant Transformation Two on an annual basis and at some point, Mark, we will provide you some guidance on the overall ROI from our box plant system.

Then finally, Doyle, your balance sheet seems like you are pretty close to, or pretty much at your debt targets right now. Can you just talk about acquisition strategy on both sides of the business, what you would be looking for and your willingness to pursue things in both Building Products and Containerboard?

Sure, let me make a quick point on our balance sheet. While we are approaching our debt to cap target level, Mark, we've still got a little room to go so we will continue to pay down debt in the near term. In terms of acquisitions, clearly, as we've consistently said, we would like to grow both of our businesses, Corrugated Packaging and Building Products. We will continue to be very disciplined based on ROI, disciplined based on the impact of any acquisition opportunity on our balance sheet. But in terms of Corrugated Packaging, as we've said I think in response to a question you had on our last call, this is a business model that is very scalable. We have proven through Box Plant Transformation One that we can drive down our cost in our box plant system. And while we clearly, as indicated by Box Plant Transformation Two, don't have to grow we have significant opportunity in our box plant system to continue to drive down our cost. It is a model that is scalable and could be applied across a larger system. In terms of growth in Building Products, we are focused on possible growth opportunities there that are consistent with our products win, consistent with our strategy and consistent with our geographic location which is primarily focused on the South and Southeast.

Great, thanks, Doyle.

Thank you. Your next question comes from the line of Mark Weintraub with Buckingham Research.

Good morning, Doyle. I think you said but if you can repeat again, what was the timing expectations on the Box Plant Transformation program for the benefits?

Sure. Box Plant Transformation Two timing benefits we said we would get $100 million in lower costs, $10 million in 2010 and the balance spread roughly -- and I want to highlight roughly -- between 2011, 2012 and 2013. As we said in our comments, just as it was in Box Plant Transformation One, those numbers will be lumpy, will not be linear, but that's our best guidance in terms of timing. In terms of the capital spent, again there it will be roughly, in this $250 million in capital, it will be roughly a third, a third, a third in 2010, 2011, and 2012.

Okay, great. And then following up on the last question coming at it a little bit differently, I understand that there's still some more debt pay down that you are interested in doing. What's your general thoughts towards share repurchase if you continue to be generating the very sizeable amounts of free cash that you have been?

Sure, Mark. And as indicated by our recent increase in our dividend, we are focused on returning cash to shareholders. However, with that said, and as I mentioned in response to Mark Wilde's question, our near term focus is going to be to continue to pay down debt. We also have had this compelling opportunity to invest capital in our business and we are really excited about Box Plant transformation Two. And we will also look to profitably grow our Company through acquisitions. So all of those are on the list, Mark. But in terms of near term priority, I can tell you that paying down debt is the focus.

Okay. And then just lastly, if you were to characterize putting through the January price increase, what is that telling you about the market today versus prior times when you've essentially put in the first price increases? Is there anything that we should be taking a way from the experience you've been having, do you think?

I am going to ask Pat to answer that question.

I would just comment that the box price increase is moving smartly. That's how I would characterize it. We expect the majority to be realized in the second quarter. And, as you're well aware, there's a January price increase in liner board and a corresponding increase in boxes. Hasn't happened that many times in the history of this industry so I think there is something to be had there in terms of a learning. And that's just how I would leave it.

And maybe, given that costs have obviously eaten into a fair amount of the price increase, what do you see as the biggest obstacles or hurdles of getting a second price increase?

Mark, we are not going to speculate on further price increases. However, I would highlight that industry conditions are very constructive. You have demand improving, as we already talked about. You have operating rates increasing. And you factor in the closures, operating rates are in the 94% to 95% range, and industry inventory levels are at currently the lowest level they've been since 1994.

Thank you.

Your next question comes from the line of Richard Skidmore with Goldman Sachs.

Good morning, Doyle. Just a couple questions coming back to box Plant Transformation Number Two, are there any remaining box plants that aren't impacted by Box Plant Number Two and that were not impacted by Box Plant Number One such that there might be a third iteration of this? Or does this really get you to having addressed all of the issues in your box plant system?

I would say that at the end of Transformation Two, the vast majority of our plants will have been reconstructed, if you will. And, yes, there will be a few plants that will not have been touched by One or Two, but at the end of this we are going to have the premier corrugated converting plants, I think, in the world. I think Doyle mentioned it, but we are not just focused on the cost side. Clearly the returns are solely based on taking out hard cost dollars. But the big part of box Plant Transformation Two is the equipment and the technology that we are putting in place, that are going to allow to us target a richer section of the customer portfolio, if you will, and the very flexible equipment technology that can leverage graphics and short order quantities. That's typically where there's a little bit more margin. So we are pretty excited about the cost side of Transformation Two. And completely additive is the mix in margin improvement that we expect to get but isn't in the stated returns.

Thanks, Pat. Just maybe to follow up on that topic a little bit more, how does this impact the overall capacity and ultimately your integration back to the mill level?

If you recall -- just a little context. When we acquired Gaylord, we had 82 box plants. And we've been able to grow the mill system up about 100,000 tons, 150,000 tons depending on the year, from that level. And we've also been able to grow our box business in lock step with about 20, 19 fewer plants. So we have lots of really good ideas on the mill side such that we can bring both up together. So we like being integrated. We think it provides benefits relative to the export markets. And we see that continuing.

Okay, maybe just one last question, if I might, just on again this transformation. Will you be deploying people that were involved in Box Plant Number One at their respective facilities and moving them to the facilities that you are going to be undertaking Box Plant Number Two with?

Yes, I mentioned that we are pretty confident about two because we've been through it with One. We've learned a great deal. We've learned a great deal of how to do it and keep customers happy and grow our business. We've learned how to do it from an equipment installation and ramp up standpoint and keeping costs down. So we share best practices and best people across our business as the need arises.

Thank you.

Thank you. Your next question comes from the line of Joshua Zaret with Longbow Research.

Thank you. Two questions. First, when you were answering Mark Wilde's questions about the pluses and minuses going into the first quarter for Corrugated Packaging versus the fourth quarter, you didn't say anything about the change in shipping days. What would that be and would that be significant?

Yes, there will be back to more normalized shipping days as we had indicated before, we had five less in the fourth quarter of 2009 and we will be back to more normalized levels. So up four or five versus fourth quarter 2009 -- actually five.

So would that result in something like -- I'm just taking it off the top of my head -- something like 30,000 tons of shipments, something to that effect?

Correct.

And then the second question, I believe on the fiber supply that about 50% of your pulp wood, or say, wood fiber comes through supply agreements. Has that been any advantage to you in terms of the wet weather, either getting supply or maybe a lag in pricing not coming through? Has it had any effect?

We are very pleased to have a long-term fiber supply agreement. With that said, that is basically at market so there are either maybe some minor timing differences. Ultimately we pay market for the wood we secured through our long-term fiber supply agreements.

Who are you tied to, are you tied to Timber Mart-South? Who are you tied to on that?

On the pulp wood side we are tied to Timber Mart-South.

They seem to have gone up more quarter to quarter in their numbers than other, by what I would call more than a moderate amount. Has that been an issue? Have you noticed that or has that been an issue?

That's why I answered the question the way I did. There are going to be timing differences as these things flow through but we do think Timber Mart-South is a good reflection of what's actually happening in the market.

Okay, great, thank you very much.

Thank you, your next question come from the line of ark Connelly with Sterne Agee.

Just a quick follow up on the box plant thing, sorry to beat a dead horse. But will the implementation of this program, which obviously goes across a couple of years, is that going to limit your ability to participate as volumes come back in the industry for operational reasons rather than capacity issues?

No, we've purposely spent as much time as we have, Mark, and I mentioned we started really getting the pencil out and laying some scenarios and our ideas out very early in 2009. And we've structured it in different markets, different regions and laid it out in a way that now we've got actually year by year by year, we'll be growing our potential box plant capacity as a result of the investment.

Okay. Just one last question, you didn't talk a lot about opportunities to take additional cost out on the wood side although you did say there are some opportunities there. Is that more of a lack of opportunity or lack of an appetite to spend on those businesses?

As we see attractive opportunities, we are going to capitalize on them, be it in building products or the mills or in the box plants. We've got some good ideas on the Building Products side and we've implemented a number of them in 2009 and have some queued up to take advantage of in 2010. We've made one investment I didn't talk about. We've invested in some technology, again, in our lumber business that gives us some ability to improve our value realization, if you will, from each saw log so we can turn each saw log into a higher earning lumber composite, if you will. So that's in there, as well.

Mark, we have lots of opportunities in both Corrugated Packaging and Building Products to invest capital. As we said on our last call, the process we've been going through is prioritizing all those various opportunities. And, clearly, as we outlined today, Box Plant Transformation Two came to the top of the list. Now with that said, we are very bullish on Building Products long-term. And as Pat just outlined, we've got some opportunities to invest some capital there which will generate long-term benefits for shareholders.

Thank you. Your final question comes from the line of Peter Ruschmeier with Barclays Capital.

Thanks, good morning. A question for Pat. I was curious on the transformation, how much converting capacity would you have at the end of this relative to the start? Is it a function of basically doing more with less so that you've got just as much at the end?

Yes, as I mentioned to Mark Connelly, at the end of this we will have more in-ground capacity than we currently have. The other piece I think to mention, and some might be curious, as many people know, we have four of our larger plants that are currently running and have been for a number of years on a 24/7 basis. Number of the investments that we are going to be making over the next three years are based on any one of those additional investments in plants running 24/7. But should we need capacity in individual markets on the box side, we clearly have three or four of those plants that might be configured then to run 24/7.

On the capital front you mentioned spreading that $250 million over three years. So does that imply that you are going to be around this $200 million Capex range more or less for each of the next three years?

That is correct, Pete. As we've said, over the long-term we think Capex for our Company will run 85% of depreciation. We've had a couple of years over the past couple of years, it's run significantly less than that. But as you just indicated, over the next two or three years it will run close to 100% of depreciation and we think that's absolutely the right thing to do based on an opportunity to generate returns at the level that we outlined for Box Plant transformation Two.

Just lastly, Randy, you mentioned cash taxes 20% for the year. What's the remaining balance of your tax credits that presumably will help your cash taxes to be lower in 2011 as well?

Approximately $280 million (inaudible).

I'm sorry?

Approximately $280 million of alt min tax credits still left.

Terrific. Thanks very much.

Thank you. I now would like to turn the call over to Doyle Simons for final comment.

Thank you, Operator. As I understand it we don't have any more questions. I'd like to thank everybody for their interest today. I apologize for the technical difficulties but I look forward to speaking to everybody again next quarter. Thank you very much.

Thank you, ladies and gentlemen. That does conclude today's Temple-Inland fourth quarter 2009 earnings results conference call. You may now disconnect.