Packaging Corp of America (PKG) 2011 Q2 法說會逐字稿

Thank you for joining Packaging Corporation of America's second-quarter 2011 earnings conference call. Your host today will be Mark Kowlzan, Chief Executive Officer of PCA. Upon conclusion of the narrative, there will be a Q&A session. I will now turn the conference over to Mr. Kowlzan. Please go ahead when you're ready.

Good morning and welcome to Packaging Corporation of America's second-quarter earnings release conference call. I'm Mark Kowlzan, CEO of PCA, and with me on the call today is Paul Stecko, Executive Chairman of PCA, Tom Hassfurther, who runs our Corrugated business, and Rick West, PCA's Chief Financial Officer. Thanks for participating in this morning's call. After the presentation, we'll be glad to take any questions.

Yesterday, we reported second-quarter net income of $39 million, or $0.39 per share, which included after-tax income of $1 million, or $0.01 per share from an adjustment to reserves related to medical benefits, and a $1 million, or $0.01 per share charge from asset disposals related to major energy projects. Reported results for the second quarter of 2010 were $38 million, or $0.37 per share, which included an after-tax charge of $1 million, or $0.01 per share from energy project asset disposal charges.

Net sales were a record $665 million, up 8%, compared to the second quarter of 2010 net sales of $615 million. Year-to-date sales were $1.29 billion, compared to $1.17 billion in 2010. Excluding the reserve adjustment and asset disposal charges, second-quarter 2011 earnings were $40 million, or $0.39 per share. Second-quarter 2010 earnings, excluding asset disposal charges were $39 million or $0.38 per share.

Earnings improved compared to last year from higher containerboard and corrugated products mix and price of $0.09 per share and higher volume of $0.06 per share. These improvements were essentially offset by increased cost for chemicals of $0.04 per share, transportation of $0.03 per share, labor of $0.03 per share, energy of $0.02 per share, recycled fiber of $0.01 per share, and legal costs of $0.01 per share. Operationally, this was probably as difficult and a successful quarter that we've ever had considering the planned outages at all four of our mills and continuing energy project work at Counce and Valdosta. These outages went remarkably well and the mills started up and ran very efficiently after the outages.

As a result, our productivity and our costs were better than forecasted, which, coupled with higher than anticipated box volume and containerboard sales, produced earnings of $0.04 per share above our previous guidance. Looking at the specific details of operations, our corrugated demand was strong throughout the quarter, setting an all-time record for both total corrugated shipments and shipments per workday, up 3.2% over last year's second quarter. This was a tough comparable considering total shipments in the second quarter of last year were up 8%. The quarter also ended very strong with June totals and per workday shipments of 5.9% over last June.

Our outside sales of containerboard were also very strong, up 22,000 tons compared to last year's second quarter. With the mills running so well, we're finally able to release more tons to the export market. I should also point out that last year our second-quarter containerboard sales were unusually low because of our precarious inventory situation. Increased volumes in both containerboard and corrugated products improved earnings by about $0.06 per share, compared to last year's second quarter. Our mills produced 606,000 tons setting a new second quarter daily production record based on actual days operated. In total, we had about 40,000 tons of maintenance and project downtime during the quarter.

We ended the quarter with our containerboard inventory down 18,000 tons below the end of the first quarter and about 25,000 tons below 2010 year-end levels. As you recall, we built about 25,000 tons of additional inventory at the end of 2010 to get us to through planned outages this year and energy project slowbacks throughout the rest of 2011. Most of the planned downtime is now behind us with only slowbacks related to the rebuild of the two recovery boilers at the Counce mill remaining. Our inventory levels at the end of June were right on plan, which was no small accomplishment considering the higher than planned volume. Our energy projects remain on or slightly ahead of schedule, but the time to complete or rebuild an old recovery boiler is difficult to predict.

I'll also note that our second-quarter results included about $0.03 per share in earnings benefits from the project from increased productivity at Valdosta, lower purchased electricity from the partial capacity utilization of the new Counce turbine, and lower electricity prices from TVA green energy and center payments. Industry-wide corrugated product shipments for June as reported by the FBA yesterday were essentially flat with last year, and industry containerboard inventory decreased 39,000 tons to 2,155,000 tons, which, except for last year, is the lowest level in 32 years.

Looking at pricing, both our containerboard and corrugated products pricing were up over last year's second quarter, improving earnings by about $0.09 per share. Pricing remains steady compared to the first quarter, and mix was seasonally richer as expected. On the cost side, inflationary cost pressures continued, however, and remain a concern with higher cost reducing our earnings by about $0.15 per share, compared to last year's second quarter.

Chemical cost increases reduced our earnings by about $0.04 per share, compared to last year's second quarter. Caustic soda prices experienced the largest increase and were up about $130 a ton, or 45%, compared to the second quarter of last year. Outbound transportation costs were up about $0.03 per share compared to last year's second quarter, driven by higher diesel prices and fuel surcharges as well as increased demand on the nationwide truck fleets and rail systems. On average for the quarter, diesel costs were up about 35% higher than last year's second-quarter, but exiting June, they were down about 5% from the peak levels in May.

Labor-related costs were $0.03 per share above last year's second quarter driven by annual wages increases and higher fringe benefits cost. Energy cost increases reduced earnings by $0.20 per share, compared to last year's second quarter, as cost for coal and purchased bark increased and electricity rates were also higher. I should note that the energy project at Valdosta will essentially eliminate the need for purchased bark at the mill as higher efficiencies will allow us to run our boilers with only wood waste from our own wood yard. Recycled fiber prices continued their upper trend with industry published prices for old corrugated containers, or OCC, excluding delivery costs up about $30 a ton in the second quarter of 2011, compared to the second quarter of last year.

The higher recycled fiber costs reduced our earnings by a very modest $0.01 per share with our relatively low usage of OCC. July published OCC prices rose another $10 per ton and are now $15 a ton above the second-quarter average price. In fact, the current July price of OCC is almost 50% higher than last year's third-quarter average of $115 per ton. While we are not immune from this large increase, it will affect most others in the industry much more than PCA.

I'm now going to turn it over to Rick West, our CFO, who will give you an update on our cash position and biofuel tax credits.

Looking at cash, PCA generated cash from operations of $101 million. Capital expenditures were $80 million during the quarter, which included $35 million for normal capital expenditures, $38 million for the Counce and Valdosta energy optimization products, and $7 million for strategic projects at our box plants.

During the quarter, we repurchased 935,000 shares of our common stock for about $28 per share, or $26 million, and paid our regular common stock dividend that amounted to approximately $20 million. We ended the quarter with $119 million cash on hand. Our total long-term debt at quarter-end, excluding capital leases, was $658 million.

We utilized biofuel tax credits totaling $27 million to offset federal cash tax payments. At quarter-end, we have estimated tax credits remaining from between $77 million to $179 million, with the final amount to be determined based upon the current IRS review of our amended 2009 tax return, which was filed in December 2010.

During the quarter, we filed an insurance claim for the total damages related to the April fire and electrical outage at our Valdosta mill. The claim included amounts for production and sales volume losses of about 11,000 tons, repair and demolition expenses to affected buildings and equipment, and the capital expenditures to replace the turbine building roof and affected electrical cables. We settled the claim during the quarter and recorded to income the insurance proceeds, subject to our $3 million deductible, for the tons lost and repair and demolition expenses as well as capital expenditures during the quarter.

We expect to receive additional insurance proceeds for capital expenditures as work is completed. Also, I should point out that our earnings of $0.39 per share included income from insurance proceeds for the capital expenditures, which was offset by the charge for the insurance deductible. So from a recurring earnings standpoint, no add back is required for the deductible. With that, I'll turn it back over to Mark.

Thank you, Rick. Looking ahead to the third quarter, we expect higher sales volumes and increased mill production with less downtime than the second quarter. Accounts will be slowed back as a result of the recovery boiler rebuilds. Cost for recycled fiber, fuels, and electricity are expected to be higher. Considering these items, we expect third-quarter earnings to be about $0.43 per share.

With that, we'd be happy to entertain any questions, but I must remind you that some of the statements we've made on the call constituted 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. Actual results could differ materially from those expressed in the forward-looking statements. With that, we'd open up the floor to questions. Go ahead, please.

Thank you. (Operator Instructions) Anthony Pettinari, Citigroup.

Good morning.

Good morning, Anthony.

Can you give us your latest take on how we'll see the costs and benefits of the energy projects kind of flow through into the third and fourth, and maybe even the first quarter? And can we assume you are still on track for the boiler rebuilds, the impact volumes? I think by 14,000 tons in the third quarter, and then another 14 in the fourth quarter?

Starting with the last part of your question, we're expecting for the third quarter the impact of the boiler rebuild at Counce, roughly 10,000 tons for the third quarter, and 10,000 tons into the fourth quarter, as far as boiler impact accounts. Regarding how the mega-project energy project will flow into the earnings, we talked over the last two quarters that we were anticipating somewhere $0.10, $0.11 this year. So for the second quarter, roughly $0.03 of benefits flow into the earnings, and again, that's what we are typically going to see through the rest of the year to third quarter, fourth quarter to get us that $0.10, $0.11 benefit for 2011.

Okay. And on the previous call you had talked about the boiler rebuild being completed kind of end of July and then running full out in August. Can you just give us an update in terms of your kind of ability to run above your rated capacity and what August is going to look like from a production standpoint?

It appears right now that the first recovery boiler is going to be completed by the end of this month, and we should theoretically be burning liquor in that boiler in the first week of August, which would allow us then to run full-out during the month of August. And then the second recovery boiler is scheduled to go down now towards the latter part of September, which again allows us to have almost 3 full weeks of September of full running accounts. And then we take it down the last week of September and it'll be down to the entire month of October into November. So that's why we're still looking at the 10,000 tons of impact the third quarter and then 10,000 tons into the fourth quarter. But the project is on schedule and the boiler work that's been completed on the first boiler has gone very well. We're very pleased and anticipating a good start-up.

Anthony, this is Paul. I'd add one thing to that. One of the things that Mark did say that we came out of this quarter with our inventories exactly where we wanted them to be, because of the great productivity in the second quarter. So, the pressure is off a little bit. We just have to run in August, have another normal good month. We don't really have to run above capacity, which is a relief, because that's a difficult thing to do. But what will happen, as the recovery boiler reduces as we're working on a recovery, the capacity reduces at Counce, we'll start to eat a little bit into our inventory. And then the month of August has got to make that up, and then sustain us through the second recovery boiler outage, which starts in September and goes for about 40 or 50 days. So we think the good news for us is that we are back to being able to run the mills normally and not have to push to extreme levels of production, which I'm sure as you know you can't sustain for any length of time.

Great. Thank you.

Next question.

Mark Weintraub, Buckingham Research.

Thank you. Two quick ones if I could. One is, if you could help us in bridging the third-quarter forecast that you have for this year at $0.43 with the $0.60 of that you made last year, what was the big drivers of that delta are as you see it? And then second, if you could just -- you mentioned you've been exporting a little bit more. Where are your mill nets in the export market versus domestic?

On the first part of your question, Mark, if you look at 3Q 2010 through 3Q 2011 and what we're expecting, we've got approximately $0.19 of it inflationary impact year-over-year. I'll give you an example of year-over-year just on recycled fiber. You're looking at about a $0.05 impact, transportation $0.04, chemical costs $0.03, electricity $0.02. So all of these type of cost inputs rolled in make up that differential between the $0.60 earnings last year to where we're expecting to be this year. And then course netting out the benefits from the improved volume that we expect to see. And then regarding the --

Net on export versus -- I think your question Mark was export versus domestic net?

Yes.

Same as last time. It varies by market. There's some export nets that are better, and some that are worse depending if you're in South America, China, Europe, et cetera, and of course the dollar is certainly helping the thing. So that's about all we can say on that.

Would it be fair to say relative to historical norms that the mill nets in the export markets are stacking up better relative to domestic again, relative to historic norms?

Without question.

Okay. Thank you.

Next question.

Chip Dillon, Vertical Research.

Yes, good morning.

Good morning, Chip.

On the downtime, not the downtime, but the slow back accounts, you mentioned the 10,000 tons. And not really knowing how much strain that's putting on normal operations, I would guess that's about $0.02 or $0.03 hit. Is that the right neighborhood? And then I guess the second question is, it seems like you benefited to the tune of about $0.03 already in the second quarter from the energy projects. And that I believe you mentioned when it's all said and done, you might see $0.10 to $0.11 per quarter starting early to mid-next year? Could you just clarify those?

Yes. On the last question first. We expect to for the full-year to see $0.10 or $0.11 benefit from the projects for 2011. And so for the second quarter, we saw about $0.03 of that benefit roll in for the year. And then as far as the first part of your question, the $0.02 is a good number. $0.02 to $0.03, $0.02, you're right in the ballpark.

That's more than just volume too Chip, because obviously without a recovery boiler, your costs will go up a bit too.

Exactly.

As Mark said, $0.02 is a good number.

And on the '10 to '11, I totally get you for the full year '11, but it seems like that is probably a ballpark run rate from the entire program when it's all said and done and up and running completely. Is that fair?

Yes. It's fair if nothing changes. Chip, by that I mean I think we've talked on a previous call about we may have the potential to and we are in the process of filing for a grant from the Treasury Department that would substantially lower the cost of the project. And when you do that, you give up some ability in other areas in terms of savings, so we may have the opportunity to take the return a little more in savings or in capital reduction vis-a-vis the grant. So that will determine things. But in general, our savings are still estimated at about $90 million, and how that will flow into EPS will be determined again in part by how this grant turns out.

Got you. And that's $90 million pre-tax?

The $90 million still is like, it's in the right ballpark. Might be a touch lower or a touch higher. Electricity cost had moved up and so the savings we thought might be a little lower on that one element of the project, but now they're starting to move up with a vengeance, so by the time the project moves, we may even be higher in that regard. It's going to depend in that one area on electricity prices.

And that's a pre-tax number, right, 90?

And that's EBITDA, not EPS. I mean we're talking $90 million of EBITDA.

Got you. And the last question --

The depreciation goes against the book earnings, but helps your cash flow as you know.

Of course. And just last quick question. As you look into 2012, how much do you see CapEx at this point dropping? I know we expected to drop off quite a bit. What's your latest read on that?

As we've said, the last couple of quarters, we fully expect capital to get back into the norms in terms of $110 million total Company capital spending for mills and box plants, and so we -- that's what we're planning for next year as we speak to the facilities.

Terrific. Thank you.

Next question.

George Staphos, Bank of America.

Hi, everyone. Good morning. Maybe segueing on that question. As you think about capital allocation and going forward, how would you have us think about how you're prioritizing out your allocation of excess capital? In the future, do you anticipate it will be still largely aimed at return based projects? Do you think M&A is ahead of that? Or is it value returned to shareholders whatever form that might be, how would you have us consider that at this juncture, guys?

I think reiterating what we talked about, in terms of capital again. If you look at that, we're planning on the $110 million of capital, which of the $110 million, $70 million would roll into maintenance type capital, $40 million would go into the various high return opportunity-type spending, and then you have to look at dividends and stock buyback, which again, but as far as the capital $110 million, it's historically what we're planning on.

Okay. It would seem that, you know, barring nothing else, it would seem like debt, you don't really need to do much there in value return, barring anything sizable on the investment front would tend to be the priority. Would that be fair, Mark?

Yes.

Okay. Second question, as we think about your running relatively full out in August, trying to get ahead of the last remaining outage in count, how should we think about how those tons as they are produced and ultimately sold into the market may or may not affect your margins, relative to what would be the normal seasonal pattern? Should we discern any change 3Q versus 3Q or 4Q versus 4Q? And then certainly, and maybe you could talk about how's your early July shipments? How are they trending?

Let me answer that last part first. If you look at the first eight days of cutoff, we're having good start. On the similar trend as we were in June, we were up 5%, which we're pretty pleased with, so all in all, the good trend is continuing right through into July for the first eight days.

The one caution I'd throw out and we're happy with the numbers, don't get us wrong. But when you had a Fourth of July weekend starting off the month, that does disrupt things. Of course we had the Fourth of July starting the month last year too, every year. But we've only got eight or nine days worth of data, but it's pretty positive. But I must caution you. The Fourth of July events two days off, some people only take one day off, so I wish I had five more days of data before we answer that question, but at least through eight or nine days, we're up almost 5%.

And as far as the first part of your question, with the volume and how we're running counts, and bringing the tons on again. I think it's just as we've said, that the forecasted guidance of the $0.43 is based on the higher volume we expect to see from the mills running now, but obviously offset by some of the inflation. So the fact that we are getting ready to take the number two recovery down at the end of the month, it plays right in with the expected volume benefits.

Last one, guys. I'll turn it over. Realizing that you are guiding at 10,000 tons worth of outages in the quarter, is there any way given how well you are running right now, that you could approach the tonnage you put up in the third quarter last year, which was the peak of the year? I think it was like 645,000 tons? Thanks, guys. Good luck in the quarter.

Well, we've got to run to demand. If you think about the capabilities, where we ran last year, I recall about 104% of capacity, and second quarter, we had an exceptional run also. And so depending on how the mills run, we just come out of our annuals, the equipment is in tiptop shape. But again, if the demand is there, then we will have an opportunity to run through that demand.

Okay. Thank you, guys.

Thank you. Next question.

Phil Gresh, JPMorgan.

Good morning.

Good morning, Phil.

So as guys think about kind of the current run rate of labor and input cost trends that you're seeing right now and you kind of look ahead, I mean do you think that those costs could potentially offset the majority of the benefits you're seeing in the energy savings?

No. You're talking about the energy project savings?

Yes. If you think about -- if you just kind of run rate right now and think about 2012 and the year-over-year costs that you might have to see next year. I mean, how much of that $90 million might -- $90 million, minus whatever you're getting into 2011 would get offset by higher costs?

We're not going to speculate about next year.

I mean, who knows. Right now, with very tough inflation, we're offsetting it. With increased volume, productivity, et cetera. And where inflation is going to go from here, who knows? You know, the one thing that we would add is that the biggest single source of inflation, at least for most people, has been OCC. And where that's going, will drive a lot of things. And, you know, we expect OCC -- we're hearing reports from the field now that it's going up again in August. That remains to be seen, but we are hearing that, and because of the high mill operating rates, and we're at a low generation time of the year. And a lot is going to depend on how strong this industry is and how far, how strong China performs.

But inflation is obviously is tough to predict. There is a plus side of inflation, however. It says that economic activity is picking up everywhere, and that's a good sign, we think, for volume. So inflation is bad, but it ain't all bad.

Understood. Just on the OCC aside, would you say that you at this point have minimized the amount of OCC you can use in your own system in terms of the flexibility of certain machines, or would it require further investment if you wanted to go more to the diversion side at this point?

Historically, we've been right on the low end, and we use just as much as we need to on the medium side of the business. Obviously we need to have some recycled fiber in each sheet, and again we're using the minimum amount. Counts, again, we're flexing that amount to meet our requirements, but again in that 22% type total usage range for the Company. We are essentially about minimal end of demand.

Yes. What we've said for years, we could run basically between 20% and 33% OCC. And if OCC ever got cheap, which doesn't appear to be the case, we could flex up, but we can't flex down. We are as low as you can go, primarily because when you make semi-chemical medium, you need some source along fiber in that, and people use OCC to satisfy that need. At Valdosta for example, we use no OCC at all. That's 100% pine sheet.

Okay. Thanks, guys.

Thanks. Next question.

Mark Wilde, Deutsche Bank.

Good morning.

Good morning, Mark.

Mark, as we think about the energy benefit next year, is it fair if we just take that $90 million number, pull out the $0.11 on a pre-tax basis that you've talked about for this year, and the remainder would be what we should see next year? Or, there's some other issues that we ought to be thinking about?

I think at this point, Mark, we said the benefits for the project are going to be close even when we tried to get it back to an EPS range, with the depreciation deduction maybe about $0.40 per share, maybe a little bit lower, maybe a little bit higher. And we've said we're going to get about $0.10 this year. So I think at this point, we would prefer to wait to see what happens with different cost inputs and other things before we give guidance or discuss how earnings will flow into 2012. That'll be something that we'll do later as we get into the fourth quarter and first quarter guidance.

Okay. Couple of other questions for Mark Kowlzan. How would you have us think about sort of the annual capacity, mill capacity of the Company at this point? It seems like if you're running really, really well and we're not having to take any maintenance outage, you are doing somewhere around 650,000 tons a quarter, Should we think about sort of 2.5, 2.55 as your sort of annual practical mill capacity?

I think just as we did last year, Mark. I think your number is correct, 650,000 tons with no downtime, no impact is a run rate, but when you take into account shutdowns, monthly outages, and then as the year goes on in the equipment getting worn out and you get further and further away from your annual shutdowns and the cycle is continuing, the efficiencies get less. And so I think the number we've been using, that 2.5 million tons, 2.45 is still a good range, and again coming out of the annuals, we always run better.

Yes. Mark, it's like if you've ever been to an auto race. When they change tires, the cars run faster for a little while, and then they slow down because tire wear. Mills are the same way. When you come out of an annual shutdown, you can hum, because everything's perfect. But as you get wear, you get more increased mechanical breakdowns. Your productivity will decrease over time. And that's one of the reasons that we take our outages in the first quarter and beginning of the second quarter. That's the lowest the demand season. We don't have much capacity in the first quarter or December as we do the rest of the year, so capacity is not a linear thing. It is a function of weather. You don't run as well in cold weather as you do in warm weather, and it's a function of the equipment. And so you can't take a number and multiply it by four, because that's not the way it works in a paper mill.

Okay. Fair enough. On the cost side, I'm just curious, what are your virgin fiber costs doing in the second quarter and kind of year-to-date, because they were pretty high as I recall in the first half of last year?

In 2010, when the industry was still struggling with wood supply because of the fall of 2009 into the wet winter weather of 2010, inventories were lower and the mills were running out of wood. Prices were high, but then prices came down last year, and they've been stable since then. So virgin fiber costs related to wood has remained very, very stable.

Has that been actually a positive at all in the first half?

No, no positive, but again just stable relative to OCC.

Okay. All right and the last question just for Tom. I wondered if you could give us some color on, you know, what field might have added to your converting volumes in the second quarter?

Field added about 1%, Mark.

Okay, very good. Thanks.

Very good. Thank you. Next question.

Joshua Zaret, Longbow Research.

Thanks. Can we look at end-use demand for a little bit? What was your star area? Was it food and ag, and can you just sort of give us a rundown there? And then, as is typical, it looks like your shipments which you said -- your box shipments were up 3.1%, out-paced the industry again. Can you sort of give us what in your profile allows you to do that?

I'm going to let Tom take the question.

Joshua, I would say that we have been fortunate that our existing and new business growth has remained about the same quarter over quarter. So we've done a good job in that area. And I think we've been extremely fortunate that we've had very little attrition within our existing account base. And we've been able to grow with our existing customers. I'd like to think that, that has a lot to do with our skill, but also a little bit of luck is involved in that. We've selected our customers, and we've managed to align ourselves with customers who have fared pretty well in this difficult economy.

I think some of that has to do with the fact that they're very demanding of their suppliers, like ourselves, require the heart to do as we talked about, because they do a lot of that themselves in their marketplace. And we've also been fortunate because some of our customers have had some very healthy export growth. And as I talked about earlier, I said the field acquisition that we did, that added about 1% to our numbers. So all in all, across the board, our customer base has done fairly well in this difficult environment.

So you're seeing a broad-based recovery across all your markets is what you're saying?

Yes. It's a fairly broad-based recovery. Yes.

Now given just finish this up. Given the weather and the droughts we're seeing. We're seeing images of dried up cornfields all over the country. Is that something we need to worry about in terms of third-quarter demand that could affect your guidance, or is it not that important?

No, I don't think so. I mean, I think that -- some of that news, it's always reporting the bad news, not the good news a lot of times. But I think that food prices could be affected by the corn and some other things, obviously our starch prices are affected by corn. But all in all, I think that from what we hear from our customers, they would like it to be more robust, but, it is what it is, and they're continuing to do fairly well.

Let me ask one more question. The FBA came out with their weeks of supply containerboard at 3.6 weeks, which, you know, is typically a very -- or a tight number. We do a survey and people out there don't -- it seems like a balanced market when we talk to people, in terms of supply, yet a 3.6 number were to apply otherwise. Do you feel it's as tight as that 3.6 number implies from your vantage point?

From our vantage point, Josh, we've been on a roller coaster. I mean, we have struggled to keep up for the last year. And so it has been extremely tight for us to the extent that unfortunately, we had to pull some tons out of the export market just to keep our domestic customers supplied. And we now again have struggled back to get to an inventory level that we can manage at a reasonable cost, as opposed to shipping things by truck and doing things just to keep up. So from our perspective, it's very, very tight market.

Okay. So I guess what I would ask is are you seeing more phone calls from customers for containerboard supply, which I guess would indicate a tighter market?

Well, people kind of know that we have a set of customers and that we are full. And so yes, we get calls and I would say the number of calls changed dramatically one way or the other.

Okay. Thank you very much, Paul.

Next question.

Mark Connelly, CASA.

Good morning. This is Kurt, filling in for Mark. First question. Can you tell us whether you think you have benefited in terms of the strength of the customer relationships by the whole Sauget/Smurfit; first the bankruptcy, then the change in ownership. And to your higher valued customers and more choice or less choice in suppliers than they did five years ago?

We're not going to comment on that in terms of what we benefit from other activities going in the industry. If we did, we'd keep it quiet anyway, and if we didn't, we wouldn't say anything anyway. So, it's really not something we want to address.

Okay. Secondly, when you look across your box plants, have you seen customers pulling back lately in terms of what they're willing to pay for and has the new round of economic concerns showed up and kinds of orders you are getting?

The answer, you know, let me answer that question a little broader. You know, there was speculation, and I use that word speculation, that at least in one publication that there was a large fall in box prices last quarter. And we will not comment on our own box prices, because we usually don't. That's between us and our customer. But when all else fails as they say, you look at the data. And the FBA does publish to its members the average box price for the entire industry, month by month. And what I can say is that box prices rose April from March. They rose again May over April, and they rose again June over May. So three months in a row, they've continued to move up a little bit. And of course, there is some element of mix in that number, because you can't really separate.

So the data would indicate that box prices are pretty stable and if anything, with increasing mix, pricing has improved over the last three, four months. And as you know, our margins, EBITDA margins, have continually out-paced the rest of the industry, and so that would indicate that obviously that our box prices have moved in the same direction.

All right. Thank you very much.

Next question.

(Operator Instructions) Andrew Feinman, Iridian Asset.

Thanks. I think I heard you say when you answered Wilde's first question that out of the 90 of benefits, D & A was 40. Did you say that? And if not how --

No. Andy, what we said was the EBITDA benefits were about 90, but as we said earlier, when you go through everything and convert that back to an EPS number after depreciation, you're looking at about $0.40 per share on a $0.90 base. And then I said this year, we expect to get about $0.10 of those EPS benefits from the project in 2011. Now, where that ultimately will turn out is the total benefits for the entire project, once it's totally completed, is something we'll look at and give you an update later in the year as we get further along with project completion. And most likely other things will change, which will impact benefits.

Okay. So the D & A -- you haven't given that number yet?

If you take the project, and we're looking about $300 million, it's about 20 years. I think that equates to $15 million to $20 million of the D & A. Good estimate.

Okay. Thank you for that. So you have $102 million on the table with the government. Do you think you'll find out about that this quarter? You know, for the receivable?

Not 102. What we said, Andy, was on the biofuel credits that are in question, we have remaining -- yes, I guess it is 102 the way you did your math, 77 receivable versus the potential of 179. And quite honestly, you can't predict when they'll be finished with their work. We're working -- we have provided them what they need. They're in the process of reviewing it. And the extent to what they need to do additional work, that will be left up to them. Hopefully we'll have this completed by the end of the year, but earlier, hopefully earlier, but who knows at this point?

And so when Paul said that you have filed for a grant from Treasury to lower the cost of the project, that's a separate and unrelated to this $102 million, am I correct?

We have not filed for the grant. It is separate and distinct from that. It's a 30% Department of Treasury grant that would be applicable to a portion of the capital related to the project. You cannot file for the grant until the project is completed, which would be in the fourth quarter. However, there's a lot of preliminary work that you have to do to substantiate the project cost to which we are actively involved, not only internally but with others outside in doing the preparation work for the application. So the grant would be filed, once the project is completed, and probably 30 to 60 days to determine if we have been approved for the grant, from everything we say we should be.

Thank you.

Next question.

Chip Dillon, Vertical Research.

Yes. You know we spent a lot of time on energy products, but let's don't shortchange the strategic box plant initiative you all have. You mentioned spending $7 million this quarter. Can you just lay out for us how much more, and I know that maybe kind of open-ended, but roughly say in the next year or so, how much more you see for this, and what kind of benefits, whether on and EBITDA or EPS basis, we could see as we go through '12 and '13?

Yes. Chip, we're pretty well wrapped up on the spending activity. Last year we spent about $40 million in 2010. This year we're going to spend another $40 million, and this is in a handful of the box plants, installing both all new technology to enhance the capabilities to service their customer base. And so we're pretty well wrapping up that business this year.

And what would you say the ultimate EPS benefit would be and how would you stay afloat?

You know, on that spending, the $40 million and $40 million, we're anticipating about a 30% return, the way we look at our projects on a discounted cash flow basis.

Chip, the problem with giving a straight answer to that question. Unlike the energy projects, when they're completed, you turn on a switch and you get the savings. It's instantaneous. With these projects, you'll get these returns over a longer period of time because they're driven by volume, not cost reduction. So in some instances where we're totally out of capacity, then you'll get the savings earlier than in some markets where we've got to get that capacity now. And I think as Tom will bring you up to date. I'll let him do that. We're already getting benefits from the project. That's one of the reasons our volume is outpacing the industry. We have invested to expand our capacity and we're getting early benefits there.

Yes. Chip, I might add, and I want to make this clear. Where we have added capacity, it's driven by customer demand. I mean we're not a build and then they will come investment house here. I mean, we do what we need to do based on customer demand. And we've got a lot of small footprint plants in some markets and things like that where we just need some additional capacity driven by customers. So with those type of projects, they tend to be very accretive to earnings and start to give you return right away. And that's why we expect the 30% return as Mark mentioned.

Got you. And real quickly on the export market. If you look at the last few years, where have you seen the greatest change in demand? Maybe not so much for you but for the industry? And is it fair to say the mill nets our probably a better stay for Europe than they are for Asia, just in a very general sense? Or not?

We're not going to comment on where they're the best. We don't want to give any people any clues where to go fishing. But with the weaker dollar, that's always helped everywhere. And where they are is really a function of two things. What's the current price in that market? And they vary. And how much currency benefits you in that market.

It benefits you more in some markets than others. So that's a question that it's difficult to answer. But overall, it's -- we're at good levels in all markets compared to say where we were five years ago.

Got you. Thank you.

Next question.

George Staphos, Bank of America.

Hi, guys. One last final one, quick one. Just back to the energy projects and the potential bridge if you will to '12 versus '11, if you're getting whatever, $0.10 to $0.11 of benefit this year, I remember from your past comments that the incremental project outage expense, if you will, was also roughly in that range. Is that a fair assessment? So that whatever benefits you get next year, it's really a true incremental benefit to what you netted this year? Thanks. Good luck again in the quarter.

Of course it will depend on demand, George, as to the number of tons that we can produce, but what we said was that we're going to lose about 50,000 tons more, maybe 40, the way we're looking at this point in a normal year. So it maybe a little less than the ten that you talked about that would be offset, but it's close. But it of course will be in depend on demand next year and what we need to run.

Sure. Thanks, Rick.

Next question.

(Operator Instructions)

Moderator, we'll go ahead and end the call as there appear to be no other questions. Thank you.

Ladies and gentlemen, thank you for your participation. That concludes the conference. You may disconnect, and have a wonderful day.