Packaging Corp of America (PKG) 2010 Q1 法說會逐字稿

(Operator Instructions) presentation Thank you for joining Packaging Corporation of America's first quarter 2010 earnings conference call. Your host today will be Paul Stecko, Chairman and CEO. Upon conclusion of the narrative there will be a q and a session.

I will now turn the conference call over to Mr. Stecko. Please go ahead when you are ready.

Thank you and good morning and thanks for joining PCA's first quarter's earnings release call. On the call with me today as usual is Tom Hassfurther, who runs our box business, Mark Kowlzan who runs our paper mills and Rick West our CFO and they'll assist me on the call and again thanks for participating and when I finish the prepared remarks, we'll take your questions. Yesterday we reported first quarter earnings of $19 million or $0.19 a share. The reported results including $9 million or $0.09 per share in addition to income from alternative fuel mixture tax credits, which were generated in 2009. And an after tax charge of $2.5 million or $0.02 per share from asset disposals related to our accounts and Valdosta major energy project as well as the announced closure of the Ackerman, Mississippi saw mill.

The increase in earnings from alternative fuel tax credits was a result of removing a reserve that had been established to cover potential ambiguity that was subsequently resolved concerning the methodology of calculating the fuel credits.

Our net sales for the first quarter were $551 million, compared to $512 million in the first quarter of 2009. Excluding the additional income from alternative fuel mixture credits, and the asset disposals. Net income was $12 million or $0.12 a share versus first quarter 2009 earnings of $26 million or $0.25 a share. The decrease in earnings per share compared to last year was driven by lower containerboard and corrugated products price and mix of $0.26 a share. Higher recycled fiber costs of $0.06 a share, and higher pulp wood costs of $0.03 a share. These items were partially offset by higher volume of $0.16 a share, lower energy costs of $0.04 a share, and lower chemical costs of $0.02 a share.

Looking at some of the details of operations, both are containerboard and corrugated products demand continued to strengthen at a faster pace than we had expected, and was up significantly over last year. Our corrugated products shipments per workday were up 12.4% over last year's first quarter, and with one more workday this year, we're up 14.2% in total.

Shipments were consistently strong throughout the quarter. Up 10% in January and 15% in February. Both on a per day and total shipment basis. And in March, shipments were up 12.5% per workday and with one more workday this year, we're up 17.5% in total.

Remember, however, that last year's first quarter was very weak, and these numbers while very good, did benefit from a fairly easy comparison. Our outside sales of containerboard were also very strong. Up 40,000 tons, or 48% over last year's first quarter. Outside sales could have been even stronger, but we had to limit some sales in this market due to our low containerboard inventory level, and the pending annual maintenance outages in the second quarter.

Our mills produced 569,000 tons of containerboard, operating at 94% of capacity. That's up 54,000 tons from last year's first quarter. We had about 35,000 tons of mill downtime during the first quarter, which included 7,000 tons from wood fiber shortages at our Counce mill, 20,000 tons from our Counce annual maintenance outage and 8,000 tons at our Valdosta mill from downtime related to energy project tie in work. The earnings impact from the down time including higher operating cost was about $0.07 per share during the first quarter. Overall, our mills ran exceptionally well considering the maintenance and energy project related outages and the extreme fiber shortages.

Our containerboard inventory at the end of the first quarter was about 12,000 tons below 2009-year-end levels. This is a pretty low level considering that we have annual maintenance outages scheduled at three of our four mills in the second quarter. And as reported by the FBA last Friday, industry inventory also remained at historic lows. With March ending inventory at only 2.083 million tons or 3.8 weeks of supply. This is the lowest March ending inventory in terms of tons since 1981, and is the lowest ever in terms of weeks of supply dating back to 1974, which is the last year for which we have records.

Moving onto pricing. Containerboard and box prices were down compared to last year's first quarter, as a result of price decreases that occurred throughout 2009. These price decreases along with some mix differences reduced earnings by about $0.26 a share, compared to last year's first quarter. Published industry containerboard prices increased $50 per ton in January, and our corresponding first quarter box price increase went as planned and was essentially completed by April 1st. From an average price standpoint, we realized about 1/4 of the earnings benefit of the box price increase in the first quarter, and we'll realize the full benefit of this price increase in the second quarter.

Moving onto costs. Higher recycled fiber prices, and weather related higher wood fiber costs reduced our earnings compared to both last year's first and fourth quarters. Looking first at recycled fiber. Industry published prices for old corrugated containers excluding delivery costs increased almost $100 per ton in the first quarter of 2010, compared to the first quarter of last year. And were up about $55 per ton compared to the fourth quarter.

Even with our relatively low use of OCC which is only about 17% of our net fiber purchases, this increase in OCC prices reduced our earnings by $0.06 per share compared to last year's first quarter, and by $0.04 a share compared to the fourth quarter. Domestic published OCC prices peaked in March, at $160 a ton before delivery costs or by $185 per ton delivered, which was the highest price since May, 1995. OCC prices have dropped in April by about $30 a ton, and are now at the average price for the first quarter.

Our wood costs were also up. About $0.03 per share compared to last year's first quarter, and up about $0.02 compared to last year's fourth quarter. Driven by extremely wet weather conditions in the south. It's cost increases probably less than you might expect, but remember, only our Counce mill was affected to a large extent by the extreme weather and we were able able to control wood costs somewhat by shipping some chips up from Valdosta.

The wood inventory situation at Counce since last October has been very variable and volatile depending on weather patterns. After building our wood inventory back to reasonable levels by mid January, frequent and significant rainfall along with colder weather caused our wood inventories to drop drastically and we had to bring in chips from Valdosta and other wood, both chips and pulp wood from longer distances with higher freight to supply the Counce mill. This additional wood fiber helped keep the mill running but in the end we still had to take some fiber shortage downtime as I mentioned earlier. The wood cost however at our other three mills have remained fairly stable.

Very good weather in March, and continuing into April has enabled us to rebuild our wood inventories at Counce and we are no longer shipping any chips in from Valdosta. If these more normal weather patterns continue, we expect to see wood fiber costs at our Counce mill continue to trend down during the second and third quarters. Energy and chemical costs were also lower than last year's fourth quarter. First quarter improving earnings by about $0.04 a share. And $0.02 a share respectively.

As the economy improves, these costs may begin to increase a little, but our exposure is limited because we use very little natural gas and fuel oil in our mills. Medical and worker compensation costs taken together were also down about a penny per share, compared to last year's first quarter, which was a pleasant surprise.

Turning to cash, capital expenditures were $63 million during the quarter, which included $40 million for our Counce and Valdosta energy optimization projects. We ended the quarter with $198 million cash on hand. Down $63 million from the end of the year driven by energy project capital expenditures and several beginning of the year payments totaling almost $40 million. We did not utilize any alternative fuel mixture tax credits during the first quarter to offset Federal cash tax payments as no tax payments were due until April 15th. We currently have alternative fuel mixture credits available to the tune of $137 million, which we'll utilize in part or in total in 2010.

Our total available liquidity at the end of the quarter was about $507 million. Including cash on hand, fuel mixed credits and $172 million borrowings available under our credit facilities. Our long-term debt at quarter end, excluding capital leases was $658 million. On April 14th, we extended our credit agreement for our receivables securitization program to March 1, 2011, at a slightly lower rate.

Looking ahead to the second quarter, we expect significantly higher earnings from the full realization of the first quarter containerboard and corrugated price increases. Earnings are also expected to improve further as a result of our April 1st containerboard price increase, and our announced May box price increase. But most of the earnings benefit from these price increases will not be realized until the third quarter when the pass-through to boxes is completed. Lower energy costs with warmer weather, lower wood costs from better weather, and an expected higher box shipments that also improve earnings.

Our outside sales of containerboard are expected to be lower, due to our lower containerboard inventory level. Planned outages in the second quarter will reduce our production by about 35,000 tons, and increase operating costs. Our Filer City media milll was down for five days in April, for it's an you'll maintenance outage and our Tomahawk Mill is scheduled to be down for five days in May for their maintenance outage. Our Valdosta mill went down yesterday, for it's annual outage, plus energy optimization project work. And it planned to restart on May third. And that will be a 15-day, which is a fairly long outage.

In total, these outages will reduce second quarter earnings by about $0.08 a share. Considering all of these items, we estimate our second quarter earnings to be about $0.30 a share. Our biggest challenge in the second quarter will be completing our mill maintenance outages on schedule, and starting up and running well in order to meet our containerboard demand. After the second quarter, however, we should be in much better shape capacity wise with all of our annual maintenance outages and energy project outages completed for 2010.

With that, we'll be happy to entertain your questions, as first as always I have to remind you that some of the statements we made are forward-looking statements. These statements are based on current estimates, expectations and projections and do involve inherent risk and uncertainties, including the direction of the economy and those identified as risk factors in our annual report on form 10-K. Actual results could differ materially from these expressed in these forward-looking statements. And with that, I would ask the operator to please open up the lines and we would be happy to entertain your questions.

Thank you ladies and gentleman. (Operator Instructions) Our first question comes from Chip Dillon with Credit Suisse.

Good morning.

Good morning.

First question is, could you give us as you often do, the update for how you're orders and shipments look so far in the month of April?

Yes, I can. It's April is started out to be very strong. And compared to last year, we only have nine days worth of data. There's 21 work days, so we're not halfway there. But after nine days basically, our billings are up 10% over last year, and I think what's significant here as I mentioned on the call, we had some very good numbers in the first quarter, but they were fairly easy comparables. We got a tougher comparable in April. We were only down half as much in April last year as we were in the first quarter, so we're up 10% on a tougher comparable, so very strong, and in total volume through the first nine days, through the first nine days in April we were up 10% over March on an absolute basis, March of this year. So I would say an unusually strong first 10 days, first nine days in April.

So again, just so I am clear on this it is also up 10% in the first nine days in April versus the first nine days in March, both this year.

It's up the first yes..

Okay. Gotcha. You were talking about the inventories they looked like they were actually lower than they were in the Just '93, '94 account 95 run up that we saw. And I remember hearing a term allocation. I mean, you're looking down the exports down several months, are you having actually a hard time you know shipping what people are trying to order, are you behind?

No. We're not behind. We're happy to say, although there are lot of reports of a lot of people being behind. We're, we're fairly on schedule. We did make some allocation decisions earlier in the quarter anticipating that this could happen, and trying to build some safety stop for the big Valdosta outage, so the good news is, that we allocate, we pulled tons out of some markets. Primarily exports so we wouldn't get behind.

Uh-huh.

The bad news is, we probably didn't pull enough, because we really haven't built enough safety stock for the Valdosta outage, so we've got a lot of pressure on ourselves to make sure that the outage is completed on time and the mill starts up well after that outage and we will have to continue to allocate tons in the export market and that's where we're taking up the slack. So we made a decision early to allocate early, so we would not get behind on our domestic shipments, and --

Okay.

I think we've done a pretty good job in that regard and Chip, what I'm doing I'm limiting everybody to two calls and then we'll pick you up on the next round.

Great thank you.

Our next question comes from George Staphos, with Banc of America.

Thanks, hi, guys. Good morning.

Good morning George.

Paul, two questions then on cost, you know, as we look at the guidance that you've given for the second quarter, would it be possible to give us a ballpark what wood and energy benefit would be sequentially for the first quarter and this the second question as you think about your overall cost position, would it be fair to characterize 2Q as still, you know, exit the maintenance outages now if you can do that, more elevated than kind of a normal second quarter, but down versus 1Q? Thanks very much.

Well, on the cost, the energy is usually worth a couple of cents. Second quarter over first. Wood's a lot harder to call. We think we're going to pick up some money here because we think wood cost will continue to tread down, but that's a lot harder to predict and I'm not going to give a number in that regard, but we do have our wood costs going down. Your second quarter is, I think, our second quarter earnings, they can't be typical because we've got a price increase mixed into it, so --

Yeah.

-- they're obviously going to be higher and when you say compared to a typical quarter, it's hard to answer that, because there's a typical second quarter in through the price increase or don't include, doesn't include a price increase, so that's kind of a tough, there's no typical here, unless you normalize for price increases.

I guess we can agree with the point [ MULTIPLE SPEAKERS ] We can agree with the point that you would probably be earning even more than what you're guiding to if not for the elevated raw material even put cost right now.

Oh, absolutely.

Okay. I'll turn it over thanks.

Thank you.

Our next question comes from Mark (Wintrout) with Buckingham Research.

Thank you Paul. If I understand correctly you've got a $0.08 maintenance hit in the second quarter and that goes away for the third and fourth quarters is that correct first off?

That's correct.

So my base going into the third quarter is a tenably $0.38 if you're guidance proves out. And then beyond that --

That's correct.

Okay. And then beyond that, any benefit we get from the April price increase that continues to flow through, which presumably can be quite substantial, and so that leads me to the question, which is, you're in all likelihood going to be generating a lot of earnings in cash. Your balance sheet is in very good shape and you've essentially put the cash aside already for the energy project. Can you give us any update on what the, the potential use is of that cash might be and what are the, what need yet to happen until you're ready to make a commitment in that regard?

Well potential uses, Mark, really haven't changed. You look at dividends, you look at share buy back, and you look at, you know, box plant acquisitions, which, you know, we would like to do to get our integration level up from the 80s to the 90% level, and obviously acquisitions are hard to predict. There's no even flow of those, so put that aside, that really gets you down to two things, share buy back and dividend, and you know, once a couple things are sorted out and they're starting to get sorted out and it's exactly when, and if the cash flow improves how much we're going to have, we're obviously as each quarter goes and each price increase goes through, it gives us a little better handle on that. The economy is still a thing that I think I'd like to feel a little more comfortable about, although signs are, I'm feeling better today than I did three months ago and then the fourth one is how the tax situation is going to play out, and I think more and more data is becoming available on that, so about the only thing I can tell you is, we're getting closer, but we're not there yet.

Okay. And is, is there a stronger bias to dividends or share re-purchase at this point or is that steel something that's in flux?

We're not there yet.

Okay.

So that's about all I can say on that. But we're close.

Okay. Thank you.

Our next question comes from Richard Skidmore with Goldman Sachs.

Good morning Paul. Just a quick question on your volumes up significantly year over year versus what the industry's trending at and historically you've done a bit better than the industry, how do you feel about your ability to continue to grow faster than the industry on your box volumes and what's going to be the key driver of that?

Well, couple things that I should point out just in the sake of completeness. You know, last first quarter, we under performed the industry. And then we out performed the industry the last three quarters, so you know, part of the reasons our numbers are so good in the first quarter is we did under perform the industry, and the trend has been for the last three quarters to out perform the industry, and so you know, I can only know what we're doing, and, you know, I can't predict how the industry's going to do, but the trend says the last three quarters we've out performed the industry, and, you know, I, I see no reason why that we shouldn't be able to out perform the industry. And that's, that's about all that I can say, because long-term we've done that, and I think it's, it's, it's the nature of, you know, we do concentrate on what we call the hard to do things, and we've been through some tough times and we've got even harder things to do, so hopefully this trend will continue but that's hard to predict.

Is there, Paul, is there any specific end market that you're seeing specific --

No.

-- recovery in.

What make me feel good about the numbers is this is across the board. This looks like all of our customers, you know, I use that word not every one, but the vast majority of our customers are reporting that their business is improving. Things are getting better. The economy is getting better and that's manifested itself in better box demand. Not only for us, but for the industry, so that's I think the really good news. This is broad base it's not the housing market much it's not food, it's everything.

Okay. Thank you, Paul.

Our next question comes from Mark Wilde, with Deutsche Bank.

Good morning, Paul.

Good morning Mark.

Just curious, it seems like we're continuing to pick up momentum here in terms of just volumes. I wondered in your experience, where are you seeing the real pick ups within the, within your portfolio?

Well, yeah, just, I kind of covered that, Mark on the last question, you probably on the line didn't hear it. It's across the board. There's no one particular area. General feeling is the economy's picking up, and everybody is starting to, to benefit from it, and we're seeing that on a very broad basis. There's nothing that, you know, jumps out as being very strong or very weak. Things are picking up all over and that's translating into better business. I think the other thing that indicates that the economy is getting better, you know, one of the concerns that I had was that, you know, our March volume, was very strong, albeit compared against the weak comparison, but the April numbers that, if there's ever going to be a pre-buy, you know if there's any suspect that the strong March was caused by a pre-buy in because the April 1 price increase, the April numbers are even stronger than March. So that would indicate that there was very little buy in to beat that price increase, so I just think it's the, it's the economy. As a matter of fact, one of the other problems we're having is truck availability, and to ship paper by truck, trucks are harder to find, and to me that's an indicator that the he economy is starting to buzz a little harder. And again, trucks are spread all over the country.

Okay. And then kind of related actually to trucking is a follow-up here. You know, until the last few days, oil prices have been trending up, and could you just, you know, remind us of the different ways in which, you know rising oil prices might flow through to your business as we move through the year?

Well, rising oil prices do bother me. They don't bother me very much about driving up our costs of making paper, although they do effect transportation costs.

Right. That's what I was thinking of.

What my concern is with rising oil is if that translates into higher gasoline prices that takes disposal income out of the economy and people spend money on gasoline, which, we don't pack in corrugated containers and that money does not buy things that are packed in boxes. So if oil prices really cause a spike in gasoline prices, that translates into lower box demand in my opinion, and that's a much bigger cost for concern. The other thing that happens with higher oil prices, obviously chemical prices go up too, but again, my bigger concern are things that hurt corrugated products demand first and then I worry about what it does to our costs because we have a pretty good cost structuring mill. We virtually don't use any oil anymore, except a little in our (inaudible).

Okay fair enough, thanks.

Our next question comes from Claudia Hueston with JP Morgan.

Thanks very much. Just a question on what you're assumptions are for recycled fiber as we head into the second quarter and do you think prices will fall more?

Rick flipped a coin yesterday that came up tails so that is the basis of this prediction. They may go down a little bit but the truth of matter so that's recycled fiber is, you know we don't really know, if we had to take a guess probably down 15 in May. Maybe down another ten in June, and then probably start to pick up if the Chinese buy more. But I think if you ask five people that question, you may get five different answers, so it's a tough thing to predict. I don't want to sound like I know more than we do. But that's what we think.

Okay. That's helpful. Thank you.

Our next question comes from Mark Connelly with CLSA.

Thanks, Paul.

Good morning Mark.

Good Morning. Do I have my notes correct that, that this year's outages in Q2, including the big Valdosta outage are still substantially less than last year, and does that create an opportunity for you to rebuild some of those inventories that you've been struggling too.

Yeah it does, because last year, Mark, we had a lot of market related downtime.

Right.

There's more maintenance downtime this year, because we've got an extra shutdown, by an extra shutdown, we've had to take Valdosta down twice. We took it down once in the first quarter to make some energy project tie ins, it was a short shutdown like six days, five or six days and then we have a longer shutdown in, in right now, due also annual maintenance and some tie ins, but last year's first quarter, we took about 60,000 tons, excuse me, second quarter about 60,000 tons of downtime, we're only going to take 35 this year. But what you said is correct, when we have this quarter completed, basically by the, say, mid May, we'll be done with all of our outages, and we have the ability then to try to replenish inventory, but the other big difference between last year and this year is, demand is a lot stronger this year.

Sure. Sure.

So it's harder to build inventory, but--

How anxious are you to build --

No down time in the second quarter, we think that we will be able to get our inventories back in good shape and that's essential because in the first quarter of next year, we're going to have to do some downtime that counts on the energy optimization program because we're rebuilding, we're not replacing the recovery boilers there, and that will take some of our capacity out..

Right.

So you know, we're not going to be dancing for joy for about another year until we're out of this transition with the energy projects and we're going to have to, we're going to have to run well to keep up with demand.

Okay. And one quick question. Your fiber mix, has all this OCC and vergent stuff meaningfully changed your mix and will we get back to normal in Q2 if it has?

Yes and no. In short period of times when we couldn't get any wood, we couldn't get enough wood at Counce then we maximized OCC to keep running, and that cost us money, that's why our OCC costs were up $0.06 in the second quarter. But now we're back down to our normal running rate. We've got plenty of wood. So other than that upset condition, no we've remained fairly stable.

Good.

We did get hurt, even though it's amazing, even though we only use 17% normally recycled fiber, we did use a lot more in the first quarter, and that drove our wood cost, drove our cost up $0.06 a share, which is a big, which is a big number.

Uh-huh. Thanks very much Paul.

Thank you

(Operator Instructions) Our next question comes from Chip Dillon, with Credit Suisse.

Chip, are you there?

Yes. I'm sorry. Hi, Paul, sorry about that.

No Problem.

You mentioned earlier that I think the energy project and you know the challenges over the next year, given that this is a unique set of projects you're doing at Counce and Valdosta, is there any changes either, therefore there might be, you know, changes as you go along, are we still expecting the project to come in, all in at about $300 million and is it still expected at the end of 0 -- or 2011 or is there any tweaking to that time frame or to the cost?

The answer to the question is nothing's changed. We expect it to come in at around 300, Mark doesn't like to hear me say that. Maybe a touch below 300. We're a little bit ahead. We're saving our contingency. You never know if you over turn a problem, 300 or maybe a touch less, and we're on schedule, we feel very good about the schedule.

And the return potential that we should expect again should be 20% to 25% after taxes on that full 300; is that right?

That's correct. There's been no changes in that regard.

Great.

The only thing that I will say is that, we, on this annual outage at Counce, put in the new economizer in our big boiler, and that economizer was designed by the same people that are rebuilding our two smaller boilers, we're very happy with the results of that. We've got a nice energy, we got a nice efficiency improvement. More than we expected, and that makes me feel pretty good about the improvements that we've projected on rebuilding those two boilers, because based on what we've seen on this economizer upgrade, we may be a touch conservative in our estimates. I don't know that yet. But it's a good piece of data to have in our back pockets.

Gotcha. Thank you.

Our next question comes from Joshua Zaret with Longbow Research.

Thank you. Paul, my question is, could you tell us the difference you're seeing in your box customer sentiment, what you're hearing between the January box pricing initiative and the April/May initiative and also how the drop in OCC cost is factoring into this argument, you know, how important that is? Thanks.

You know, as I stated earlier, we basically completed the first box price increase on April the first, and April the first is a magic day because some of our customers are on quarterly pricing, which means that they enjoy the benefit of waiting a little while when prices go up and on the way down they pay earlier, depending when you make the price increase announcement. So it went as planned. We got it done in the normal amount of time.

I would consider it a normal price increase, we would announce box price increases for may. We're just beginning to talk to customers about that, and so we're optimistic with the supply demand situation, and our order bookings etc. that this price increase will go also in the scheduler time frame we have in mind. And I never get into any specific comments from customers. We keep them between us and the customers, so that's about all I can say on that. On that subject.

Well let me follow it with, theoretically with the drop in OCC cost make it a little more difficult, is that your experience or is it really operating rates at the, at the primary mill level really driving this thing through?

I would say this this small drop in OCC, we're only talking $30 and we use 17% OCC in our mix, so it doesn't affect us very much in the big scheme of things, wood has always drive, driven price increases in this industry or one, containerboard inventories. And they're at, you know, on a week's of supply basis all time lows, and then demand, and demand is improving. And you know, basically expectations and the expectations are, I think pretty good for the industry, pretty good for the economy, things are picking you know, and I think those are in order of magnitude more important than a $30 a ton drop in OCC prices.

Great. Thank you very much.

Thank you.

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

Thanks. Hey Paul. Two questions. Shorter term and longer term.

As we think about inventories and where we're at right now. Traditionally we tend to see a seasonal drop in inventories this time of year, it also sound to some agree at least from listening to you or anyway. Maybe industry levels are at practical lows. Would you expect much if any further inventory drop from these levels either for you or for the industry, I have a question on strategy I'll follow-up on.

Yeah I can only speak for ourself. I don't expect our inventories to go any lower. We're, we're, you know, we're sucking fumes as they say. The gas tank is pretty low.

We've got to try to build a little bit of inventory because we have allocated some markets, and we've told those customers that we will, we will try to help them as soon as we can. And we're not going to forget about that obligation. As far as the rest of the industry, you know, I don't know what their situation is on annual outages. And all of that stuff. That's not something that we track, but when you're this low and people are still shipping orders in late, you know, I think it's unlikely that they're going to go much lower.

Okay. I appreciate that, Paul. And then in the longer term question, you obviously you and Mark have a lot on the plate in terms of energy projects. The early signs from what you're seeing is positive. The longer term you want to use some of the cash if you have the right opportunity to perhaps grow the vertical integration. Are there any other elements of the strategy for Packaging Corporation of America that we should be mindful of from a, from a, you know, marketing and operational standpoint over the next three years that you would remind us of now and thanks and good luck in the quarter.

The other half of the equation is obviously the box business. We've worked hard, you know, the mill's only one thing counts and that's cost. Get it as low as possible. In the box plant area, obviously we work on doing a hard things. That involves people, that involves technology and equipment, but the other thing that we're trying to accomplish in our box system over the next three years is to get our integration level up from about 80% today to 90%, and we are spending some extra capital this year, about $35 million in our box plants in markets where we are out of capacity. Not everywhere, but in selected spots in order to grow in those markets and grow with customers that want us to grow so we can better serve them. And that's part of our plan along with selected box plant acquisitions to get our integration level up from say 80% to 90% over the next three or four years. And --

Paul.

And that's also at the heart of our strategy.

Paul, just a quick one. That investment what's it worth in term of integration does it add three basis points, you know, ten you I assume not, how much does that add to your forward integration ?

We're not going to get into those specifics. What we're doing this year can probably increase our integration level just this year 2% to 3%.

Okay. Thanks very much.

Our next question comes from Mark (Wintrout) with Buckingham Research.

Paul, just do you have a quick update on the Filer city project?

Yes Filer city is humming along. The one disappointment with Filer city is with the collapse of the economy last year, you know, we ran that mill at only about 85% of capacity last year. And so we, we did not need the pulp to ramp, we couldn't make enough pulp to ramp up the bio plants to 100% of capacity, because we were only running the plant at 85% of capacity. And we're looking forward now to being able to ramp up to 100% of capacity and we're pretty confident we can could that. But the thing's humming along it's doing well.

I will tell you there's been a few bumps in the road as we've learned things about the technology, but nothing of a real significance, we have learned a lot about how to run a bio chemical plant to produce methane gas, and there's you know, not many places to look, we're the only ones in the world ( that we know of that are running a plant on feeding the bacteria this type of fuel, and we know a lot more than we did today, and our energy costs have improved a lot. And we're pretty happy with where we are, and we'll be even happier when we run up to, you know, 100% capacity on that, and I would expect probably be able to do that sometime during the third quarter.

And you mentioned you're the only company using this type of process, is this, is this still a process that, that potentially you could leverage in the future or given where gas prices are, it's just, it's less obvious?

The answer is is yes. We could, for example, you know, we've looked at maybe moving this technology to Tomahawk, but right now, our capital is tied up in two large energy projects at Counce and Valdosta, so that's down the road. You know, we do recognize that, you know, $300 million capital spending is a big number this year, and so we're, we're not about to commit anymore capital than that. And as you said, with natural gas at very low prices, that makes the Filer city project although a good one, the returns aren't as high as it would be if gas was at $13 again.

We don't burn that much gas at Tomahawk however, we burn coal there. So, one potential benefit down the road if we did something to Tomahawk, if coal became a bad thing to learn, who knows where the environmental laws are going, that's something that would really up the probability of doing something at Tomahawk.

Okay. Thank you.

(Operator Instructions) Our next question comes from Fritz von Carp, with Sage Asset Management.

Yeah. Fritz von Carp, thanks. I've heard some anecdotes from operating people in the industry or, you know, around, around, you know, customers and so forth of your industry, who are saying that it's, it's beginning to get hard to find boxes, that you know, that enough capacity was taken out during the downturn that, you know, even in this little bit of an upturn that we've had, is that supply started to get, to get tight, could you comment on that? Do you see that more or less or what do you have have to say there.

The only thing I would really say, I can comment myself. We've certain regions of the company where our demand and our capacity don't match, in other words, we need more capacity. Quite frankly there are other parts of the country where we've got plenty of capacity and we don't need anymore, we won't need anymore for a long time. So it's a mixed bag, and you know, I cannot generalize. Box plants run probably on average at pick a number, 70%, 75% of capacity. I would think there's plenty of of capacity in the country. Boxes may be tight, hard to get that's probably because more of the paper is not available than box plant capacity.

Yeah. I'm sorry. I was referring to, yeah, not the folding of the paper into the finished product but the basic containerboard.

Oh, the paper, oh, no, no okay.

I understand that folding the boxes has got more capacity, always.

Okay. Okay. In terms of paper, well you know, inventories are at historic lows. And I think that answers your question that there's not as much paper around as historically there is, and that translates into a tight market, so I think what you're saying is reflected in the inventory numbers and you are correct.

Okay. Great. Thank you.

I'm not showing any other questions in the queue at this time gentlemen.

Okay. Well listen, I would like again to thank everybody for participating, and looking forward to talking to you next quarter. Take care.

Thank you. Ladies and gentlemen thank you for your participation in today's conference. This does conclude the conference. (Operator Instructions). Good day.