Packaging Corp of America (PKG) 2010 Q3 法說會逐字稿

Thank you for joining Packaging Corp. of America's third quarter 2010 earnings conference call. Your host today will be Mark Kowlzan, Chief Executive Officer of PCA. Upon the conclusion of the narrative, there will be a question-and-answer session. I will now turn the conference over to Mr. Kowlzan. Please go ahead when you are ready.

Good morning and welcome to Packaging Corp. of America's third quarters earnings release conference call. I'm Mark Kowlzan, CEO of PCA, and with me today on the call is Paul Stecko, Exectuive Chairman of PCA; Tom Hassfurther, Executive Vice President of Corrugated Products; and Rick West, PCA's Chief Financial Officer. Thanks for participating in this morning's call, and after the presentation, we will be glad to take any questions.

Yesterday, we reported our best quarter ever in terms of sales, production and earnings. Third quarter 2010 net income was $93 million, or $0.91 per share, which included a $33 million, or $0.33 per share, addition to income from cellulosic bio-fuel credits generated in 2009 and an after-tax charge totaling $2 million, or $0.02 per share, from asset disposals related to the Counce and Valdosta mill's major energy projects and costs related to the closure of a corrugated products facility. Reported results for the third quarter of 2009 were $73 million, or $0.71 per share, which included income of $47 million, or $0.46 per share, from alternative fuel mixture tax credits.

Net sales in the third quarter were all-time record, $643 million, up 16% compared to third quarter 2009 net sales of $554 million. Excluding income from tax credits, disposals and closure charges, net income was an all-time record, $62 million, or $0.60 per share, versus the third quarter of 2009 net income of $25 million or $0.25 per share. This $0.35 per share increase in third quarter of 2010 was driven by higher container board and corrugated products price and mix of $0.37 per share and higher volume of $0.07 per share. These increases were partially offset by higher costs per recycled fiber of $0.03 per share, transportation costs of $0.02 per share, wood costs of $0.02 per share and other costs totaling about $0.02 per share. Excluding the income from tax credits, disposals and closure charges, earnings for the first nine months of 2010 were $113 million, or $1.10 per share, compared to $80 million or $0.78 per share, in 2009. Year-to-date net sales were $1.8 billion, compared to $1.6 billion in 2009.

Looking at operations, our corrugated products demand remains strong, up 4.3% over last year's third quarter. Shipments per workday improved each month during the quarter from 119 million feet in July to 121 million feet in August and 125 million feet in September, making it our strongest month of the quarter. Our outside sales of container board were also strong, up 12% over last year's third quarter. With record container board production this quarter, we were finally able to release more tons to some of our traditional export customers. The increased sales volume benefitted our earnings by about $0.07 per share compared to last year's third quarter.

Our mills had an outstanding quarter, running at over 100% of capacity and setting an all-time quarterly production record of 646,000 tons of container board. That's up 58,000 tons, or 9.8%, over the third quarter of 2009. The record mill production enabled us to start -- take care of the improved demand and also to begin replenishing our container board inventory from the very second quarter of low levels. Going forward, we will need to continue to run well and build additional container board inventory to get us through our first and second quarter 2011 mill annual maintenance outage shutdowns, plus the rebuild of two of the Counce Tennessee Recovery [Board] will work as currently scheduled to begin in mid-year 2011 as part of the large energy optimization project.

As reported be the FBA last Friday, September industry container board inventories were essentially flat with last year, remaining at a 30-year low on a tonnage basis. On weeks-of-supply basis, which factors in current demand, inventories fell from 3.9 weeks of supply last year to 3.7 weeks of supply, which is one of the lowest levels on record. The FBA also reported that industry corrugated products demand was up 2.6% for the third quarter, with September being the strongest month, up 4.6% compared to last September. Looking at pricing container board and corrugated products prices improved significantly year-over-year, reflecting higher container board prices, both domestic and export, plus a full pass through to boxes of our container board price increases.

Moving to costs, industry published prices for old corrugated containers, or OCC, excluding delivery costs increased about $40 per ton in the third quarter of 2010, compared to the third quarter of last year, reducing our earnings by about $0.03 per share. OCC prices have moved up another $15 per ton in October and are now $20 per ton above the third quarter average. Wood fiber costs were up about $0.02 per share compared to last year's third quarter, but were down about $0.015 per share compared to the second quarter. Wood cost continues to trend down gradually during the quarter but are expected to be higher in the fourth quarter as typical seasonal weather patterns take over. Transportation costs were up about $0.02 per share compared to last year's third quarter, with higher diesel prices and increased demand on nationwide truck fleets and rail systems. Costs in several other areas were up in total about $0.02 per share.

Looking at cash in the third quarter, PCA generated cash from operations before changes in working capital of about $113 million or $1.10 per share. Our uses of cash included an increase in working capital of $10 million, normal capital expenditures of $30 million, $46 in capital expendatures in accounts in Valdosta energy optimazation projects and the repurchase of 1.1 million shares of common stock for about $22.94 per share or $25 million. We also paid our regular common stock dividend, which amounted to approximately $15 million. We ended the quarter with $173 million of cash on hand, down about $9 million from the end of the second quarter. And now I am going to turn it over to Rick West, our CFO, who will give you an update on the fuel tax credits.

Thank you, Mark. We became a registered producer of cellulostic biofuel in September 2010, and as you know, previously we were also registered for alternative fuel mixture credits. For the 372 million gallons of alternative fuels PCA produced in 2009, we had the ability to claim either alternative fuel mixture credits at $0.50 per gallon, our cellulosic biofuel producer credits of $1.01 per gallon or $0.62 per gallon after tax or split the gallons between the two credits.

Claiming all of the 2009 gallons of alternative fuels produced as cellulosic biofuel producer credit on our 2009 tax return filed September 15 would have resulted in an immediate cash tax payment of $69 million. Instead, to avoid any up-front cash tax payments, we claimed about two-thirds of the gallons as cellulosic biofuel producer credits and claimed one-third of the gallons as alternative fuel mixture tax credits, which was used to offset the taxes owed. This action contributed $33 million, or $0.33 per share, to third quarter 2010 earnings. So for both 2008 and 2009 we generated a total of about $220 million in after-tax cellulosic biofuel producer credits and alternative fuel mixture credits, of which $106 million have been used, giving us total remaining credits at the end of the third quarter of $114 million.

Thank you, Rick. Before I discuss the fourth quarter outlook, I want to give you a brief update on our Counce and Valdosta energy optimization project. Total capital expenditures for the project are still estimated at $295 million, of which about half was spent by the end of the third quarter. With $220 million in fuel credits, about 75% of the total project capital will be funded by these fuel tax credits. The project is going extremely well, both mills with completion still scheduled for the end of 2011.

Now looking ahead to the fourth quarter, we expect seasonally lower volumes related in part to three less corrugated products shipping days; wood costs and energy costs are expected to be higher with colder weather; and recycle costs have begun to trend up and are expected to be higher in the fourth quarter. Considering these items, we currently estimate our fourth quarter earnings at $0.53 per share.

With that, we would be happy to entertain any questions. But I must remind you that some of the statements we have made on the call constitute forward looking statements. These statements were based on current estimates, expectations and projections of the Company and involve inherent risks and uncertainties, including the direction of the economy and those identified as risk factors in our annual report on Form 10-K on file with the SEC. The actual results could differ materially from those expressed in these forward-looking statements. With that, Mary, I would like to open it up for calls.

Thank you. (Operator Instructions). Our first question from Richard Skidmore from Goldman Sachs.

Good morning. Maybe we can just start off with the September box volumes being the best in the quarter, can you just elaborate a little bit more on what was driving that? Where are you seeing the pockets of growth and how have the trends continued into October?

I think, again, across the board we saw good business throughout North America. Tom is sitting here. Tom, do you want to add a little color to that?

Well, I would just say that there is no specific trend. I mean, it is across the board. Demand was very good.

Okay. And then maybe just one of the things that the industry has obviously wrestled with is the August price increase, and historically Paul had mentioned if the paper markets are tight, prices go up. It seemed like this time, prices didn't go up because maybe there was a bit of a focus on the producers not raising box prices. Can you just talk about, in your view, what happened in August with regards to the price increase?

Yes, Rick, Paul has some comments on it.

Excuse me. I have a little bit of a cough. I don't know why they did what they did. You'll have to ask them that. But I can only repeat what they said in their publication, because I think it is interesting to say the least. In their August 20 issue, page 8, when they talk about the increase, and it is under supply-driven increase, they say this and I quote, "mills still appear to have the upper hand in August and there were almost no reports of mills, even smaller recycled mills, backing off the $60 per ton increase." Now, despite that statement, they raised prices by only $40, not $60, in their August report.

Then in their September 17 issue, as you know they rescinded the $40 price increase that they had previously reported in August. They made the change retroactive to August 1 when they had said, as I quoted previously, "there were no reports of mills, even smaller recycled mills, backing off the $60 per ton increase." So, in essence, they revised history that they had previously reported in August. And my only comment on the matter is, I think by doing this, after making such a clear statement about what they said happened in August and then saying it didn't happen in August, in that sense, they raised questions about their credibility. And really, I think if you have any specifics, you are a lot better off talking to them than me.

Okay. And then maybe one last question, I may have missed it, but what did your inventories do quarter-over-quarter?

We don't normally report quarter-over-quarter inventories, we did report we are up 3000 tons. Part of our plan -- and Mark, you might want to -- we might want to address this with regard to the energy projects in our inventory situation.

If you recall, we came out of the second quarter with near record low inventory levels and we had to make some tons to help the box plants get to a manageable level. But going forward now through the fourth quarter into 2011, we have to consider the fact that the Counce recovery boiler will start their rebuilds in June of 2011. Estimated downtime per boiler is in the 30 to 40 day range, so that will impact production. So, it behooves us to have the capability to start building some incremental tons to get through our -- not just the recovery boiler outages next summer, but also the normal annual outages that will take place at the end of the first quarter, and beginning of the second quarter. So we have a ways to go before we're where we will feel comfortable.

Great. Thank you.

Next call.

Our next question comes from Chip Dillon from Credit Suisse First Boston.

Yes, hi. Good morning. First question is for Rick actually. Just on the -- you mentioned you had this $114 million sort of un-utilized or unused credits. I would guess those are mostly tied to the cellulosic biofuels. Does that mean you have to earn that money or I guess three times that amount roughly, or 2.5 times that amount before you can use that? Is that sort of how we should think about that?

Yes, and the cellulosic biofuels producer credit is also subject to alternative minimum tax, so you have to factor that in also, Chip.

Okay, so in other words, there's a minimum --

The producer credits can be used through 2015. So we have a number of years to use them.

Got you. So maybe that means is, is that in a rough sense you might be paying something like a 15% cash tax rate, because I think that's the alternative minimum, plus or minus what state is until you use that up?

That is correct.

Okay. And then I have noticed that OCC prices have started ticking up again even though we have seen Chinese -- at least imports, way down this year. I imagine they are drawing down their inventories. I'm just wondering if you're you are seeing anything though on the quality side in terms of are they, as people build capacity particularly in China but other places, are they needing to increase the amount of OCC they buy per ton of output?

That's an interesting question. Throughout the years, we have continued to see the general quality of OCC deteriorate, and it is based on the principle that fibers can only be recycled so many times. If you go back 20 years ago in the industry, the average number of recycled times was considered seven times that fiber could be recycled. That's based on Southern Pine kraft fiber as a fiber length that averages 3 mm to 5 mm in length. That fiber can only be recycled so many times before the fiber length is diminished to a point it no longer provides the properties necessary to build a box.

So indeed, as less virgin is put into the market and more demand is placed on OCC, you do see the deterioration. And we have seen that. There are some recycled mills that we will not do trades with because of quality, the strength issues. And so to that point, there has been a continuing decline in the overall quality.

And I would assume these mills you would trade with would be in the US, and is this something that is more recent or has this been a long time that you have felt you shouldn't trade with them?

Well, again, it goes back to the fact that we have choices and it is in our best interest not to utilize that particular product in our boxes. But again, if you think about the fiber length, again, over a 20-year period of time when logs were coming out of the woods and going into pulp mills that were say 20 to 30 years of age, the fiber length was dramatically longer. If pulp mills are using 16-year thinning, 14-year thinning,s the average fiver length, even though it is a Southern Pine, is still dramatically lower. It could average 2 mm to 2.5 mm, 2.7 mm. Even some of the virgin kraft that's being placed on the market is not the quality it was 20 years ago. So again, overall, we are continuing to see the diminishing capability of the strength.

Chip, this is Paul. I think what Mark said is very significant, because what we are saying is that because younger and younger wood is being used to make virgin pulp and the fact that the saw mills that use 30-year and 35-year logs, their volume is way down. A lot of saw mills are shut down. The overall fiber length of virgin has decreased. That puts additional pressure of the quality of OCC down the line because you are already starting with a lot shorter fiber.

So these things are feeding off of one another. We don't know the number today, but I wouldn't be surprised that the seven times Mark referred to could be as low as four times, maybe five times. That is pretty significant.

The only other thing I'd add is that in terms of OCC, I think we're getting reports for the first time in a long time that the Chinese are into Mexico looking for OCC. One of the reasons being with the weak dollar, the pesos track the dollar fairly uniformly, and that's become an important source of OCC from them, and now the Mexicans are looking for more OCC in the US. So, we expect, especially with a weak dollar, the US and Mexico to be a more attractive locations for the Chinese to source than Europe. And I think that portends higher OCC costs.

That's very helpful, and real quickly, if you could just update us on what you think the book tax rate will be fourth quarter in the year, and maybe what CapEx will end up being this year and of course next year as you finish the energy projects?

Well from the standpoint of our fourth quarter effective tax rate, I would see it about 36%, 36.5% versus the 35.2% excluding special items in third quarter, down from the statutory because of domestic manufacturers deduction. We haven't really looked at our 2011 effective tax rate. And of course, the fourth quarter there are some year end adjustments that could impact that number on 36%, 36.5%.

As far as capital this year, we are looking at a total of about $310 million to $320 million in total capital. That would include both the project as well as normal capital in 2010. As far as 2011 capital, we will be giving that at our fourth quarter earnings release call once we have all of our budgets put together.

Thank you.

Our next question comes from Mark Weintraub with Buckingham Research.

Thank you. First just wanted to understand, you bought back $25 million in stock this quarter, where did your stock count end at the end of-- where was it at the end of the quarter?

At the end of the quarter our stock count was down to 102.2, Mark.

Okay, so you probably made the purchases towards the latter part of the quarter? Is that -- ?

Yes, it was more so the latter part of the quarter. You also have the impact of some restricted stock vesting. So, net net we were at 102.2 at the end of the quarter.

Okay. And what is, now, the status of any share repurchase authorizations that you might have in place?

We have remaining about $40 million in our existing share repurchase authorization.

Okay, I guess what is striking is that your balance sheet is stronger than it has ever been, you are making more money than you have ever made. Yet for a long time you were paying $1.20 dividend and now you are paying $0.60 dividend. Now, clearly this quarter, you have made up for that difference and a little bit more through share repurchase. Is that what we should continue to expect? That with all the cash coming in that share repurchase will be the priority?

I think for the time being, until we understand what the tax treatments are going to be going forward, we will probably apply that approach. If the stock price allows us, we will buy back shares and continue the dividend. But again, as we have always said, dividends -- any type of increase would have to be sustainable and meaningful. So, until we have a better understanding of what is going to happen with taxes, I think the approach that we've taken will continue.

Yes, and the only thing I will add is we were a little opportunistic last quarter when stocks were trading not in relation to their specific performance but overall worldwide macro trends, everybody got painted with the same color brush. We thought it was an opportunity to buy stock and we got it at under $23 dollars average for the quarter and we obviously thought that was a good buy at the time. And so, although historically we have been steady buyers of stock, in terms of a stock buyback, in these volatile times, if there is opportunity we are in a position to capitalize on that opportunity.

Great, and I guess what I'm trying to understand, too, is conceptually you were at one point comfortable essentially returning $120 million to shareholders, a little bit more than that. And now it looks like you are in financially better shape and you are making more money. Are you -- has there been any change in the way you are thinking about your business or is there no reason why conceptually you wouldn't be comfortable targeting that amount of cash or more to be returned to shareholders on an annual business?

We're thinking about our business the same way. I think one of the things about PCA, we've been a very consistent company in the way we approach the market, the way we approach shareholders and our philosophy for the past decade. So our thinking has not changed very much with regard to returning cash to shareholders. You are right. We have just set a record -- quarterly record for earnings and I'm not sure if we make our number for the fourth quarter, that may be a record also.

I think you also know that we are pretty deliberate. We don't make knee-jerk reactions. When the time is appropriate and we know more about how dividends are going to be taxed, I think we will be able to say more on that subject.

Appreciate it. Thank you.

Our next question comes from George Staphos from Bank of America Securities.

Thanks, hi, guys. Good morning. First question, Mark you had mentioned -- or maybe it was Tom had mentioned, I think, answering Rick's question that October business trends were good. Could someone provide some detail in terms of what the early October trends look have looked like, either in terms of bookings or billing? If you had mentioned them, I had missed them earlier.

I think if you look at the first nine days of business, we were up approximately 3% on the activity in the box plants from third quarter of last year in terms of the October period, nine days. So we are feeling pretty good about that. Again it was a tough comparable compared to last year. The 6%.

We were up 6% last October. So tough comp, as Mark said. Our volume is up about 3% this year. So, we're fairly happy with that.

Okay. And in terms of production and needing to make sure you have enough paper to mail your conversion and box commitments and third-party sale commitments for that matter next year. Should we anticipate that the Company needs to build 5,000 tons to 10,000 tons of inventory from here on out through June if I think about how many days Counce is going to be down?

Again, we have to determine the extent of the outage. We haven't put the final details together on the downtime that is going to be required to rebuild both boilers. But again, we are going to have to determine what do we need to do and how do we supply our own box plants. And again, that has been the challenge, and so we are continuing to look at that. As we go through the rest of the fourth quarter into the first quarter we will have a better understanding of where we need to be come summertime. Suffice it to say, we're not where we need to be at this point. We're still short of tons.

Okay, and it would suggest, Mark, also given the normal seasonality in inventories, that -- where traditionally they decline in the first half of the year. You have got to do a fair amount of building I guess between now and early 2011.

That's the opportunity. We have to get through the normal annual shutdowns that take place starting in March and go through April into May. Then at the beginning of the July-- June, July period, we start the recovery boiler rebuild of Counce and that goes for approximately a three to a four month period until those recovery boilers are back online. So we've got a challenge ahead on how to take care of our box plants.

Alright last question, and I'll turn it over. The external sales were obviously quite strong. I guess you'd mentioned up 12%. Can you comment at all on what impact the export markets had on your business and how you are meeting demand and what kind of margins, what kind of mill nets are you getting in export right now? How would you paint that picture for us? Thanks, guys. Good luck in the quarter.

Yes, let me just comment on that real quick. We had a tremendous amount of catch up to do, for one, in terms of our exports and outside sales. As you know, when inventories got so lean, we were working very hard just to keep our box plants running at incredibly difficult inventory levels. So we had a lot of catch up, and also it has been very encouraging with what is going on with pricing in the export market. I mean, it has gone up dramatically and is reaching levels, in a lot of cases, above domestic markets. So, all in all, that is why we were up like we were. And as Paul mentioned earlier, with the dollar and some of the other things going on in the marketplace, I expect demand to remain quite good.

You know what? The Euro is back up $1.40, and $1.41. So not only are prices up in offshore markets, currencies went -- has turned and is working in our favor, which makes export markets very attractive. And we have tried to, and we've been able to, free up some tons to give to our traditional customer base; people that we had to scale back a little bit earlier in the year. We are finally able to give them what they need.

But Paul, given the need to build inventory, are you going to have to pull some of those tons back domestic given the amount of averages you're going to have?

We are hoping that with-- the good news is our shutdowns are behind us and we have no downtime-- maintenance downtime the rest of the year. So, we have a little extra capacity. Our capacity is not linear. We have the lowest capacity, in the first quarter, the second lowest capacity in the second quarter and then the highest capacity in the third and fourth quarters. So, we are not linear. The good news is we have two quarters, we just put one behind where we got a record. We have another quarter where our capacity situation is good, and then it gets tougher.

Okay. Thanks, guys. Good luck in the quarter.

Our next question comes from Mark Connelly from Credit Agricole Securities.

Hi. Mark, as we talk about this inventory stuff, I can't help but find that it is not adding up. Last quarter I asked you how concerned you were about meeting customer demand, and you said, "Well, if we run hard, we'll be fine." And you ran hard and you not only met customer demand but you found new customers and you rebuilt your inventories. And nobody else in the inventory except for one big producer expressed any real concern about meeting customer demand either, which suggests that maybe that's the reason we didn't get the price hike rather than somebody's misread of the market.

How do you think about inventories more broadly? Forgetting the fourth quarter. Paul told us a couple of years ago that 2.5 million tons was a healthy inventory level and a lot of the world has changed since then. How do you think broadly about what is a healthier type market at a time when we read in the trade rags that things are tight and yet nobody is concerned about supplying customers?

That is a good question but I don't have a good answer for that.

Oh, come on. You can take a shot.

If you look at our business -- again, we take care of our box plants, we take care of our customers. As far as the industry inventories, it is hard to understand what their demand is.

We can he only talk about ourselves, Mark. You are asking us to tell you about our competitors. You need to talk to them about them, not us.

But how do you know what a tight market is then?

Well I can only tell you that our -- we're tight and we are pretty proud of the fact that it took record production and we were able to accomplish a number of things. Number one, we were able to supply our box plants. Number two, we were able to free up tons for the export market and we reported up 12% in outside sales, and in addition to that we were able to build some inventory in the quarter. But it took an all-time record production level to do it.

So the situation that we have put ourselves into, if we want to continue to supply the export market at these kind of rates and continue to build some inventory to support our shutdowns, is we have to continue to run very, very well. Our problems will evolve if we do not continue to run as well as we have. In essence, we have to bat 400 or we are in trouble, as they say. We are optimistic that we continue to do that well. So, what other people are doing with regard to inventory and what overall inventory levels are, we really don't have any comment on. Tom, you wanted to add something?

I might also add that clearly we have tested inventory levels that we have never seen -- that we haven't seen in a long, long time in box plants, and maybe never before. And created a tremendous amount of inefficiencies in terms of transportation, fiber upgrades and the like. And, it became very clear that there is an optimal level that we need to be at and it is pretty damn close to where we had been in the past, quite frankly, in order to reach all the efficiencies. And don't lose sight, we have recovered a little bit. We are pleased with the progress. But it took an all-time record production in the third quarter to get where we are now, and we're not where we need to be yet.

What was your operating rate for the quarter, the way you measure it?

Somewhere between 102% and 103%. It is hard to measure for a lot of reasons.

Sure.

Somewhere between 102% and 103%.

Very helpful, as always. Thanks.

(Operator Instructions). Our next question from Mark Wilde from Deutsche Banc Alex. Brown.

Good morning. I wondered if you can help us give us a little more color on how this will play next year?

Good morning, Mark.

Hey, Mark, I wondered if you could help give us a little more color on how this is all going to play at Counce next year? Because I think you said you're going to take the normal maintenance outage in the fist quarter, and then as we move into the summer, you've got both recovery boilers being rebuilt. I assume that those are taking place sequentially and not on top of each other. So, how much production will you lose and do you have any sense of what the cost will be?

You are correct. Starting in June, we'll begin the process. We will take one boiler down, but don't forget, we have three recovery boilers at Counce. The largest of the three will not undergo this rebuild, it is already state of the art. The two smaller boilers will be the ones that are rebuilt.

The downtime, again, right now we are estimating again four months of activity. We believe we can shorten that up, but that's what the engineers are working on right now with the contractors trying to get the plans finalized. Again, we have to go through the normal annual shutdown of Counce in the spring to take care of regular routine repair requirements. And then, based on the delivery timelines, that's what is dictating the June, July, August, September period and we begin the process of upgrading the number one and number two recovery. Again, one boiler will be down at a time.

So, we are trying to understand and finalize what the impact will be on the production and the cost. Right now, as we finalize the plans by the end of the fourth quarter, we will have a better understanding of that. But right now it is too early to understand what the cost impact will be. And again, a lot depends on inventory balances, and where we need to run the tons.

Okay, so it sounds like if the big boiler is not going to be touched and you are doing the two smaller ones, you can probably still run at something in the range of 80% to 85% of capacity?

That's a good estimate.

That's better than your normal guess, Mark, I've got to pat you on the back for that one.

Okay, and then, once you get the work at Valdosta and Counce done, just incrementally, does that give you some more options at both of those mills?

Again, when Paul introduced these projects last year, the big opportunity comes at Valdosta when the new recovery boiler is in place with the new turbine generator. We will have the incremental opportunity to dry heavy weights more efficiently. Which, again, during the wintertime allows us to shift production out of Counce if we choose to. With winter conditions at Counce, energy costs higher, we can balance out our cost structure, but at the same time, we could make some tons if we chose to. So yes, there will be some incremental opportunity, but it will help us on the cost side.

Okay. And then just one more on the mill side. This 646,000 is really an incredible number, because it seems like not that many years ago if you did a 550,000 ton quarter, that was quite impressive. Any thoughts for us on where that pick up is coming from?

Again, all four mills ran exceptionally coming out of their annual shutdowns this year. Don't forget that just a mill like Filer City that we converted in the 2008 with the new pulping and bio process has-- this year's just been tremendous, tremendous success at Filer. Tomahawk, Filer, Valdosta, and Counce have just had an exceptionally great year, running strong. It is a combination of all the work that has been done over the years and continues to get better, but it is all based on up time performance, the efficiencies.

And again, the third quarter we had no maintenance downtime, but going into the fourth quarter, everyone needs to understand, we do begin all the digester work that takes place at Valdosta and Counce. So we are curtailed for the fourth quarter on the ability to cook virgin pulp. So we lose, as an example, rough number at Counce, we're impacted about 75 tons a day of virgin cooking capacity. Same thing at Valdosta, 70 tons a day, 60 tons a day of virgin capacity at Valdosta.

So, fourth quarter is tougher than the third because we do begin some of this annual maintenance work that is primarily around the digesters.

Mark, you may have been on the line when I answered a previous question. Our production is not linear. The other thing in the third quarter, there was absolutely maintenance downtime. So, if you look at our quarters; the first quarter, we have the lowest capacity, the second quarter the second lowest capacity, and then the third quarter is our highest capacity. So, our capacity -- you can't take our 2.45 million tons capacity and divide it by four, because the third quarter is the highest, so -- because of maintenance outages. There were no outages. Now, that's not to say we didn't run really well. We did.

The other thing is mills tend to run much better after an annual outage, because everything is in tip-top shape and that's why you can run 102%, 103% of capacity. And over time, as equipment wears, your ability to do that deteriorates. By the time you get to your next shut down, you may be running only 96% of capacity. It is not a simple divide by four equation.

Okay, and I wondered, just wanted to turn to Tom Hassfurther for a minute. Tom, I wondered if you could you talk about the Windsor closure, which was just announced? And at the same time talk about where you are at in terms of potentially adding some converting capacity, either through acquisitions or incremental improvement at existing plants?

Okay, Mark. Let me first talk about the Windsor closure. That was a sheet plant we had in Colorado. A number of years ago the major customer that that plant had went overseas. We have been struggling during that period of time to try to replace that business. And of course, we have got a corrugator plant and a sheet plant in the Denver area, as well. So, the lease came up on that building and we opted to move that business into our Denver market and supply out of that market. As you know, that part of the world is pretty limited with regard to box customer potential. So, that's what we did and it is just under the normal course of business. If those things occur, those are the things we have to do.

Regarding our capital investments and the like, I think in the past, we have mentioned, that those are primarily all customer-driven. We will continue to invest in those areas where we're out of capacity, where customer demands are such that we need to add capacity or certain products or whatever to meet those needs. And we will continue to do that wherever those opportunities present themselves.

Okay, very good. Thanks a lot .

If there's no more questions, Operator -- ?

We do have a question from Brett Deiver from Columbus Hill.

Morning.

Good morning, thank you for taking my call, or my questions A few quick questions. First, on the export market, what percent of your capacity and percent of your revenue can you sell to the export market once your inventories are at more normalized levels?

12%.

12%?

I'm sorry, 8% going offshore.

So, I'm sorry, what was the 12%?

8%.

8% is the right answer. And that's as a capacity or percentage of revenue or basically the same?

Capacity.

Okay. Second, you mentioned in the release that your September shipments per workday were the highest in the quarter. I'm just trying to get a sense, did that sequentially continue throughout the month of September? Did each week get gradually better and did that trend continue into October?

Yes.

And then finally, if you could just give some comments on the demand side you are seeing in the business. I obviously can follow what's put on an industry basis. But just trying to get commentary from you guys just on your business, not the industry, dow the demand feels to you.

Well again, the first nine days of October were up about 3%. But again, that is over a tough comparable compared to a year ago when we were up 6% from the prior year. S we are feeling pretty good about the 3% and we are seeing that across the board throughout our market.

Okay, and is anything specifically driving that?

No.

Is it one part of the customer mix?

No, see, again, across the board throughout the North American market that we have.

Okay. Then, finally, just two quick numbers that I didn't see provided in the release. A DNA number and a total debt number, if you have that?

Sure. Total debt didn't change, about $658 million in total debt and that's of course before cash, not net debt, and we are still running about $40 million a quarter in DDNA.

Okay, great. Thank you very much.

(Operator Instructions). We do have a follow-up from Mark Wilde from Deutsche Banc Alex Brown.

Yes, just a follow-up on these box volume numbers, Mark, that you gave us for July, August, and September. Is some of that just the normal seasonal pattern that you would expect to see as we kind of move through the third quarter and your volume builds into the fall?

Exactly. That's always the way the third quarter traditionally builds itself.

Except for the mega-recession year of 2008 and the world fell apart starting in September. That was the obviously the big divergence of that pattern. But it's good to see the old pattern return.

And then on this -- the exports, the strength in exports. Would you care to talk about how much of that you think is a result of just good demand offshore and how much is help we are getting from the currency at this point?

Well, I would say-- Mark, I would say it is a combination of both. But if you look at the numbers, for instance, in Western Europe, their recovery has been a lot faster and a lot better than anticipated.

And their prices are a heck of a lot higher, too.

And the prices are a heck of a lot higher as a result. So, those are all positive trends when you look at the export market. As we mentioned earlier, some of it was just simply we had some catching up to do on orders that were pending.

Okay, fair enough. Listen, have a great fourth quarter, guys.

Thank you.

If there are no further questions, we would like to thank you for participating in today's program. You may now disconnect and have a wonderful day.

Thank you.