Packaging Corp of America (PKG) 2011 Q3 法說會逐字稿

Thank you for joining Packaging Corporation of America's third quarter 2011 earnings conference call. Your host for 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 call over to Mr. Kowlzan.

Good morning, and welcome to Packaging Corporation of America's third 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, and after the presentation, we'll be glad to take any questions.

Yesterday, we reported third quarter 2011 net income of $42 million, or $0.42 per share, which included after-tax charges of $1 million, or $0.01 per share from asset disposals related to major energy projects. Results excluding these charges were net income of $43 million, or $0.43 per share, compared to the third quarter of 2010 net income of $62 million, or $0.60 per share, which excludes income from cellulosic biofuel credits and asset disposal charges. Higher volume improved earnings by $0.04 per share, compared to last year's third quarter, but was more than offset by inflationary-driven cost increases totaling $0.18 per share, sales mix of about $0.02 per share, and price changes of $0.01 per share. The cost increases were in transportation $0.04 per share; recycled fiber $0.04 per share; labor and benefits $0.04 per share; energy $0.02 per share; chemicals $0.02 per share; and other items $0.02 per share.

Excluding special items, net income for the first 9 months of 2011 was $122 million, or $1.21 per share, compared to $113 million, or $1.10 per share in 2010, an $0.11 per share increase. The earnings increase was driven by price and mix of $0.41 per share, increased volume of $0.15 per share, lower interest expense of $0.03 per share, and lower energy usage of $0.03 per share. These items were partially offset by inflation and other cost increases of $0.51 per share for essentially the same areas noted in the third quarter. Net sales in the third quarter were $671 million, up 4.4% compared to the third quarter of 2010, and year-to-date net sales were a record $2 billion, up 8.7% over 2010.

Overall we had a very good quarter operationally with record corrugated shipments and mill production. And we continue to make significant progress on our major energy projects at our Counce, Tennessee and Valdosta, Georgia linerboard mills. Higher input costs, however, continue to be an issue, significantly reducing earnings. Looking at the specific details of operations, our corrugated demand was very strong throughout the quarter, up 6.6% over last year. Acquisitions added 1.4% of the 6.6% volume improvement, but even after adjusting for these acquisitions, we still had record shipments. Our outside sales of containerboard also remained strong equal to last year's third quarter, and up 3,000 tons over the second quarter of this year. Increased volumes in both containerboard and corrugated products improved earnings by about $0.04 per share, compared to last year's third quarter.

Our Mills produced 650,000 tons, setting a quarterly production record up 4,000 tons from the third quarter of 2010. Each of our 4 mills ran extremely well, taking advantage of the normal efficiencies following an annual outage. We ended the quarter with our containerboard inventory down about 22,000 tons below the 2010 year-end levels. So you can see, we're in good shape here.

Moving to price and mix, our prices were down slightly compared to last year, due mainly to changes in our sales mix. The change in mix reduced our earnings by $0.02 per share, and other price changes reduced our earnings by about $0.01per share. As stated earlier, higher input costs and other inflationary cost pressures reduced our earnings by about $0.18 per share compared to last year's third quarter. Looking at these cost increases, higher outbound transportation costs reduced our earnings by about $0.04 per share compared to last year's third quarter. The increase in cost was driven by higher diesel prices and fuel surcharges, as well as increased demand on a nationwide truck lease and rail systems.

Published prices for recycled fiber or old corrugated containers, excluding delivery costs, were up about $55 per ton compared to the third quarter of 2010. The higher recycled fiber costs reduced our earnings by about $0.04 per share. Last year's third quarter was the low point in recycled fiber prices in 2010, and since that time, prices have increased about 50%. Recycled fiber prices in the third quarter were also up about $15 per ton over the second quarter of this year. Prices for recycled fiber fell in October, and are now about $5 per ton below the third quarter average. We do expect recycled prices to fall further in November.

Labor cost were $0.02 per share above last year's third quarter, driven by annual wage increases, and fringe benefit costs were $0.02 per share higher, primarily in medical and worker's compensation costs. Energy cost increases reduced earnings by about $0.02 per share, compared to last year's third quarter, as cost for coal and purchased bark increased and electricity rates were also higher. Chemical cost increases reduced our earnings by about $0.02 per share compared to last year's third quarter. Cost (inaudible)prices experienced the largest increase and were up about $70 per ton, or 20%, compared to the third quarter of last year. I'm now going to turn it over to Rick West, our CFO, who will give you an update on certain financial matters.

Thank you, Mark. Capital expenditures were $70 million during the quarter, which included $31 million for normal capital expenditures, $31 million for the Counce and Valdosta energy optimization projects, and $8 million for strategic projects at our box plants. On September 10, we also acquired with cash, Packaging Materials Company, a corrugated products manufacturer in the Huntsville, Alabama area, with sales of $20 million in 2010. During the quarter, we repurchased 2 million shares of our common stock for about $24 per share, or $48 million, and paid our regular common stock dividend that amounted to approximately $20 million. Our diluted shares outstanding at the end of the quarter were 98.7 million, down from 105.2 at the beginning of 2008.

As we reported on October 12, we made some significant changes to our credit agreements. We increased the line of credit under our existing asset securitization, our receivables revolver from $150 million to $200 million, of which only $109 million is drawn. We entered into a new 5-year bank credit facility, which increased lines of credit under our undrawn bank revolver from $150 million to $250 million. And we also borrowed $150 million in a 5-year term loan at a current interest rate of less than 2%. We elected to replenish our available cash now with a very low-cost term loan, and also increased our available liquidity, giving us significant financial flexibility. As of October 17, cash on hand, including the proceeds from the term loan, was $160 million and our total debt was $808 million.

During the quarter, we utilized $4 million of our available biofuel tax credit, and at quarter-end, we have estimated tax credits remaining from between $73 million to $175 million, with a final amount to be determined based upon the current IRS review of our amended 2009 tax return, which was filed in December 2010. With that, I'll turn it back over to Mark.

Thank you, Rick. Before moving to the fourth-quarter outlook, I want to update you on the status of the energy project at our Valdosta, Georgia, and Counce, Tennessee lineboard mills. We completed the rebuild of the Counce number 1 recovery boiler as planned with no major issues. The rebuild the number 2 recovery boiler at Counce began on September 27 and is expected to be completed in mid-November. Work is proceeding on the recovery boiler and turbine at Valdosta, and if everything goes well, as we expect, the energy project at both Counce and Valdosta will be completed and operating as intended no later than December 1. We expect final project capital expenditures to be at our original approved amount of $295 million.

Looking ahead to the fourth quarter, we expect lower corrugated product shipments and mill production compared to the third quarter, as a result of normal seasonal changes in demand, plus 4 less corrugated product shipping days. The last time there was a 4-day difference in shipping days between the third and fourth quarter was in the fourth quarter of 2005. The lower corrugated shipments and mill production will increase production costs and it will be the normal seasonal increase in cost with colder weather. Our interest expense will also be almost $0.02 per share higher with our recent refinancing and reduced capitalized interest with the start of the energy projects. Recycled fiber costs should be lower, and we should receive additional benefits from the energy project, assuming that we start off without incident, which we expect will be the case.

Considering these items, we currently expect our fourth-quarter earnings to be about $0.37 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 this 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, those identified as risk factors in our annual report on form 10-K on file with the SEC. Actual results could differ materially from those expressed in these forward-looking statements. Operator, you can open up the call for questions, please.

Thank you. (Operator Instructions). Our fresh first question comes from Phil Gresh from JPMorgan.

Good morning. What was the downtime in the quarter? And are you still expecting -- I believe you said a similar amount would be in the fourth quarter, so just wanted a quick update on that.

Phil, as we talked about all year long, we anticipated about 10,000 tons in the quarter, which was pretty much right where we were. Right at the 10,000 ton market was the slow back with the recovery boiler rebuild activities and the fourth quarter we expect the same amount.

Okay. And then I know your volume has typically outperformed the industry, but looking at the organic volume out performance, it's really accelerated these past 2 quarters. So I was wondering if you could talk about -- give any color about what's driving that?

Yes. Tom is with us. I'm going to let him go ahead and shed some light on that.

Phil, let's go through the math first I think, just to make it a little easier. We were up 6.6% for the quarter. Acquisitions, as Mark mentioned, added 1.4% to our quarterly results. The remaining 5.2% of growth came from our existing plants. Now as I mentioned in previous calls, we've been out of capacity at numerous plants where we have additional business available. We've made the investments in those plants as part of our integration strategy, and we now are able to handle that business and we're seeing the results from those investments. In addition to growing with our long-term customers, we have added some new customers as well.

Okay. And can you give any color around maybe specific end markets that you're targeting for these businesses?

No.

Okay.

By that I mean it's pretty broad-based.

Okay. And on the price mix issue in the quarter, what was the driver of that? Was some of that seasonal, or was there anything in particular there?

Phil, there are a number of items which impact our mix. Changes in customers and product mix, export versus domestic, linerboard sales, basis wage, as well as percent of value as products, and when you have grown the business as fast as Tom has been growing if from both the acquisitions and organic growth, the $0.02 change in mix is not really large and represents only about 0.005% of the total sales.

And on the price side, our prices were down slightly primarily in the export market, plus we did have some timing impact quarter over quarter in the domestic containerboard prices as a result of pulp and paper rescinding last year's August price increase in September. Other than that, prices have remained very stable.

This is Paul. On the price, the biggest price change is very small, $0.01, but pulp and paper did raise the price. We announced price increase as we got price increase this last August. Pulp and paper came out with only 40 instead of 60, and then at the end of September, they rescinded the 40. But we had that bubble in there in August and September where we got higher prices and back to October it went back to the original price. So you see that in this year over year comparison. That's the biggest difference. That's the biggest contributor to that $0.01difference, but again, $0.01 is a pretty small number.

Sure. Okay. I'll turn it over. Thanks.

Next question, please.

Thank you. Our next question comes from the George Staphos from Banc of America.

Good morning, George.

Good morning, everybody. Hi, Mark. First question I had is as we think about the remaining work you have to do on the projects and the downtime that you need to take, do you have a peg, or an estimate thus far on where inventory might be for the fourth quarter, either up or down? It looks like from my math, third-quarter you're up a few thousand tons versus 2Q sequentially. Would you agree with that as well?

We're up to 3,000 tons, but we are right where we want it to be, and we're down 22,000 tons from the beginning of the year. And we expect the inventories to remain at this level. So ending up the year flat, where we are right now.

Yes, the other thing I would add, George, were up about 3,000 tons, I wish we were up 5,000 tons because we're going into October, first half of November, which in a 6-week period is the busiest 6-week period of the year. And so, we're really pretty close to where we want to be on inventories, especially for these next 6 weeks. (multiple speakers) 3 to go.

All right. Thanks for that. The next question I had, Paul or Mark, as you look at the projects, I know you've been asked this question before, but do you have any further update on what return you expect from Counce and Valdosta? Do you still think you're trending at 20% after tax. And related point, as I look out to next year, it looks like input cost could be a tailwind for a change for you. Would you agree or disagree with that past fourth quarter?

Well, we think the original project returns in the same category, in the same area of 20% to 25%. And in terms of tailwinds and costs, who knows? I don't think we can speculate at this point. The economy seems to want to change on a dime, either up or down. We're always going to have to wait for that. But I think Mark is prepared to give you an update on the project, so why don't we let him do that?

Yes. If you assume the normal growth in volume in the current energy prices, we expect total benefits from the project to be about the $0.35 per share impact. And the number is lower than the original estimate from when we talked about the project at $0.40 per share because energy costs has not risen as much as we originally estimated. However, we do expect energy prices to increase as we go forward.

We did realize $0.03 per share in benefits from the project last year in 2010, and we expect to realize an additional $0.11 this year in 2011 as we talked about during the year. The remaining benefit is $0.21 per share expected next year as the year unfolds with the project at fully running capacity.

In addition, project downtime we incurred this year would be eliminated, which would contribute an additional $0.10 per share to the earnings in 2012. And that would be partially offset by the $0.05 per share non-cash increase to interest expense. And then in accordance with accounting guidelines, a portion of that 2011 interest cost were capitalized in relationship to the energy project. And finally, if the energy project qualifies for an energy reinvestment brand, we would receive about $60 million in 2012 after-tax, which would reduce the cost of the project from $295 million to about $235 million.

Last question I had and I will turn it over after this, if we look back over time, Packaging Corp. has had a great track record both in terms of absolute and relative in terms of capital returns and relative performance versus your peers in the market. Although the last few years, that relative gap has not really widened much. It's been relatively flat. Maybe the answer is the return to aggregate that you expect to get from the Counce and Valdosta projects. But Mark, what do you and the team think from your strategy and operations is going to lead to a reemergence, if that is the way you would put it, in terms of your relative returns versus other paper and forest stocks and cyclicals more broadly? Thanks, guys, and good luck in the quarter.

Yes, I think the answer to that question is we've always invested for long-term. There will be ups and downs. We widen our lead at times, it shrinks at times. We had a very strong quarter volume-wise this term because of investments. And those investments are just starting to pay off in the box plants, so there's not a knee-jerk answer to that question. It's just our focus has always been long-term. We think over the long-term, we have a superior strategy, and the results will speak for themselves. Kind of like the stock market. It always gets it right in the long-term, but it's wrong a lot of times in the short-term.

All right. Thank you, Paul.

Thank you. Our next question comes from Anthony Pettinari from Citigroup.

Good morning. Following up on your box plant performance and the investments you've made there, I think you spent about $40 million in 2010 and plan to spend about $40 million in 2011 on plant improvements and bolt-on technologies. As you look forward to 2012, are there comparable opportunities for box plant improvements and would they require a comparable level of capital spend, or how should we think about that?

Yes, Anthony. This is Tom. I'll answer that question for you. Things are -- we take advantage of the opportunities when they present themselves. And last couple of years, we've had those kind of opportunities. Now, 2012, I expect it to go down a little bit in terms of our capital expenditures. The opportunities aren't there, and plus we really have a job to do with the investments we've made and taking advantage of the opportunities that that's presented. So if things change, then we'll change accordingly. But for right now, I think it's going to go down a little bit.

I think Tom has put it quite well. We don't let the money burn a hole in our pocket, CapEx wise. If we have an opportunity, we spend it. But we don't feel compelled to spend capital in the hopes of growth. When we see an opportunity, we jump on it. And I think the illustration of that is our CapEx next year is going down from $260 million this year back to $110 million, which is our normal CapEx.

And so, the other thing we've done long-term has been to be pretty disciplined about our capital spending, because that's something that in this industry, if you're not careful, you really don't create shareholder value. So capital discipline is still important to us, and that's why we'll only be at $110 million next year.

Okay. And then just following up on the capital allocation, for M&A, clearly your focus has been on box plants. But given the shape of your balance sheet, are there circumstances under which you would consider looking at mill assets in the future, or is that not really on the table?

That answer has not changed in 10 years. We always are open to any deal that would produce a lot of shareholder value. And where we have been finding deals that produce the most has been on the box plant side. If things changed, then we would obviously would be willing to look on the mill side.

Great. That's very helpful. Thank you.

Next question, please.

Thank you. Our next question comes from Mark Weintraub from Buckingham Research.

Thank you. You noted that you're cap spend is going down $110 million this year. And obviously, benefits from the energy projects are going to start kicking in. So, presumably, you're going to be generating, hopefully a lot of cash in the coming year. At the same time if I caught you right, I think you said you now have $160 million of cash on the balance sheet with the new financing that you've put in place and a lot of additional liquidity too. And I guess the question is, first, are you intending to run with a lot more cash on the balance sheet? Or are you likely to be targeting that cash for either M&A, and/or share repurchase or some other use. If you could help us understand the thinking there please?

If you look at the cash, Mark, that we generate, fourth quarter is a very good quarter from cash generation. And when we looked at the refinancing at the end of the quarter, we were down to $40 million and then we had a dividend payment of $20 million the first week. So we had to look at it at that point. But, we do expect our capital expenditures in 2012 with our energy project behind us to go back, as Paul said, to $110 million, which is $150 million decrease. But until we complete the energy project in the fourth quarter and also make our normal beginning of the year payments in the first quarter of 2012, when we have the most cash drain, our significant cash generation will not start until the second quarter of 2012.

And we did take the opportunity to buy back the stock, as I said, which brought our cash down to $30 --at the $40 million at the end of September. But we felt it was more important to keep more cash on hand right now to give us more immediate financial flexibility, and that's why we took out the term loan. Also, the term loan facilitated getting a higher bank revolver. You really, in this market, it's hard to get an increase in your bank revolver unless you take out a term loan at a reasonable rate, and so we did that also. When you combine the liquidity on the balance sheet from the revolvers as well as the cash, we think we're in very good shape with long-term financial flexibility, whatever opportunity avails itself.

Mark, to say it even simpler, you can buy a lot of financial flexibility for very little money these days. That term loan after-tax is about 1% interest. We bought back 2 million shares during the quarter at right at $24. So we're getting the 3% savings there on the dividend. That's our dividend pay down, and it's only costing us 1% for the interest expense.

So, the world is a tricky place, things are difficult to predict, and we've always believed in flexibility. And what we've been able to do with this refinancing is put ourself in a position if we want to accelerate a share buyback, if we want to make some acquisitions, we can. But with the increase in the revolver, we also protect our financial well-being going forward. So this is a very unusual period where you can borrow money this inexpensively and increase your financial flexibility and give you the ability to take advantage of certain things if they happen.

That makes a lot of sense, and the follow up, given that you now do have that liquidity in place and you pointed out that your -- the cost of debt has come so low relative to the cost of equity, has that caused you to rethink the amount of financial leverage that you think is optimal to have, all else equal? And would that direct you to potentially be more aggressive on share repurchase?

I wouldn't read that into it. We just thought that this was a good value at this time. As things evolve, we may move more conservative, less conservative, but what's happening in the world will determine that more than anything else.

Okay. Thank you. And one last real quick follow on. Mark, when you were running through the effects from the energy project, if I did my math right, it was $0.21 and then another $0.10 with less downtime. And then you said an offset of $0.05 from interest expense where the net effect was $0.26, is that right?

That's correct.

Okay. Thanks so much.

Thank you.

Next question.

Thank you. Our next question comes from Chip Dillon from Vertical Research.

Yes, good morning, gentlemen. My first question is on the EBITDA from the project. I know that obviously there's going to be some step up in depreciation. And I think on the last call, Paul, you mentioned it was about $90 million all in. And with the guidance that it's going to be $0.35 versus $0.40. Does that mean the EBITDA --is -- first of all, is that a new number? Should we take our EBITDA down $7 million or $8 million for that?

What we said on the last call, the $90 million was the original, and I think I did mention energy costs had not moved up as much. And so as things evolve, where we stand right now is that that EBITDA is probably going to drop-down. If you do the math somewhere around, off the top of my head, $75 million from $90 million.

Got you.

That could vary a little bit if we get the energy grant, because it's less capital. That means less depreciation. But, you're talking maybe $2 million, $3 million, $4 million, $5 million there. We'll have to wait and see.

That will come through on the per share number, of course with EBITDA it doesn't impact with less depreciation, but it would give you a little bit more on EPS from the project, if that grant comes through.

Got you. And I think, Rick you mentioned something about $60 million. Did you say that was the amount of tax credit you expect to get realized next year? Or did I miss that?

Well, the grant is about anywhere from $55 million to $60 million is what we're looking at. And you don't pay any taxes on the grant. In fact, you don't reduce your taxable depreciation by the full amount of the grant. So you get a little bit of more benefit on the tax side, even above the amount of the dollar grant that you receive. So it nets out to about $60 million of benefits to the bottom line in cash.

And you should get that next year?

Well, we applied for the grant, and if it's approved. We expect to apply for the grant in the fourth quarter when the project is completed. And of course, it will depend upon the Department of Treasury approving the grant, but from everything we can see, we think we fall within the guidelines for approval. And we'll know that hopefully by the end of the first quarter.

Okay. And then two more quick ones. I know, Paul, you did a good job of explaining to us how the biggest bang from the energy project could be if energy at some point really takes off. And as we think about the future, how should we think of the relationship there?

Let's say for example oil hit $120 or $150, and maybe you have a number in mind when you did the project. And I guess gas goes up through $7, $8, $9. Is there a relationship where we see how much you feel you will benefit versus the competitors, and that you wouldn't expect prices to go up to reflect the pain that competitors would feel that you would not feel?

Well, Chip, as I said on earlier calls, we thought going forward that the biggest inflation liability and energy lie in electricity. Because there's not many coal-fired power plants being permitted, although it looks like the EPA is loosening up there a little bit. And the grid is going to be stressed over time, and so purchased electricity is the thing that we think will escalate the most over the next 5 years to 10 years. And of course, we went from basically 50% self generation to 100%. So that's the number 1 driver. We don't burn much oil, so we're not that affected by that. And the second thing in line would be natural gas. Again, we don't burn that and that leads you to the third energy source, purchased wood waste bark, and we eliminate -- we don't buy any purchased bark. We basically eliminated all of that at Valdosta. So when you really get down to it, electricity is by far the most important variable in our energy savings.

Got you. Okay. That's very helpful. And the last thing for Rick is, Rick, could you just remind us how much is left on the repurchase authorization? I'd I see it's 2 million shares. That's a big chunk for 1 quarter, that's good.

And also if you could just give us some guidance on interest expense next year in terms of the swing and capitalized interest? I would imagine there's -- I don't know if it's $2 million a quarter now, and that obviously goes away, but if you could verify those numbers?

Okay. As far as the first thing, we have about $33 million left on the existing share repurchase authorization. And our total interest expense next year will be about, if you take into consider -- no capitalized interest plus the refinancing, about $38 million.

Got you. Thank you, very much.

Thank you. Next question.

Thank you. Our next question comes from Mark Connelly from CLSA.

Thanks. Just two questions. Curious what you think you're seeing in virgin fiber costs for the rest of this year. Obviously it has a lot to do with the weather at this part of the year, but with housing not coming back, I'm wondering if you're seeing any structural changes in your chip supply or if you're thinking about sourcing fiber differently for 2012?

Mark, right now we're seeing virgin fiber in the southern sector flat through the summer into the fall. Barring any unforeseen weather phenomena, as far as winter weather, we're seeing everything pretty stable.

So no changes that you'd expect in where you're getting your chips from?

No. Again, the supply is still down considerably, so we really don't spend on the outside market for very big volume of our chips, a couple percent at the end of the day.

Okay. And Mark, just one more question. When you look across your box plants, I'm trying to get a sense of whether customers are pulling back. And Paul used to say, you don't get paid for easy. So are clients asking to make you to make easy or hard stuff these days?

Mark, as we said before, we've talked many times about our strategy around our customers and our willingness to do the hard to do. I would say at this stage of the game, the hard to do is what customers are demanding of us virtually every day. And, we're fortunate to be positioned with customers who are also willing to do the hard to do on their side, and I think they benefit from that as well.

Sounds good. Thank you.

Thank you. Next question.

Thank you. Our next question comes from Mark Wilde from Deutsche Bank.

Good morning. I wondered, Mark, is it possible to get from either you or Tom, just get a sense of how box volumes seem to be moving here in October? And also, with boxes, are you benefiting at all from a little of this consolidation that's taking place among the bigger guys?

Yes. For the first 8 days, as we always talked on the call, we're up 9% in our box volume. And so again, having a great start for the quarter, so don't see anything changing. We had the same trend develop in the third and again, October is very strong. Tom, do you want to add anything to that as far as --?

No. I would just say, Mark, do we benefit anything from the consolidation that's going on in the business? There may be some, but it's early to tell I think, certainly regarding the IP inland potential merger. But it's one of those things that I think we're well-positioned in the marketplace for the things we do very well. And as we talked about, we've made some investments, especially with current customers, that allowed us to take advantage of the opportunities that they presented us. And that's primarily what's driving our growth.

And the one benefit that you do get, Mark, is that if a particular customer -- usually this is mostly in the bigger customers, if they have supplier A and B as their 2 suppliers, and A and B merge, and the Company still has the purchasing philosophy that you need 2 suppliers, then you have an opportunity to pick up some business that you might not have picked up because they already had 2 suppliers in the past. But there aren't that many of those.

All right. One other question. Mark, I'm just curious with the energy projects, you've given us already the $110 million capital number for next year, but I wondered whether these energy projects have opened up any other options for either cost savings or ultimately moving up volume at either Valdosta or Counce?

Nothing as far as anything new. We're talking about -- mill production, we're on track to have record year, production year this year. If you include the extra down time we took because of the energy projects, but the year has been driven by exceptional performance in the 4 mills. And also we did receive the benefits of the energy project. Part of the project at Valdosta was the dryer efficiency improvements, which was done in 2009. And so we've seen that benefit. But all in all, nothing is changing as far as capacity, so --

Okay. Fair enough. Thank you.

Next question.

Thank you. (Operator Instructions).Our next question comes from Carly Mattson from Goldman Sachs.

My questions have actually been answered, thank you.

Thank you. Our next question comes from Steve Chercover from D.A. Davidson.

Thanks, good morning. First of all, could you please elaborate on the Alabama assets that you purchased? How will they impact your integration levels, and would they be accretive by $0.01 or $0.02 next year?

Is way premature to comment on that. We've owned the assets for a couple weeks now, so we think that we bought the assets at a price that is accretive to earnings, yes. But that's about all we're going to say. We're not going to quantify that at this point.

Okay. If I could push you to look perhaps at a 5-year perspective, where do you see growth coming from? Because obviously, you'll hit your integration target of 90% within the next 2 years or so.

We'll cross that bridge when we come to it. To be honest with you, we're not big believers in looking out 5 years. We're just not that smart to be able to predict the future. So we concentrate on the next 2, and that's a tough target getting to 90% integration level in 2 years. So we get to that, we'll comment beyond that at that time.

Thanks very much.

Thank you. Next.

Thank you. Our next question comes from George Staphos from Banc of America.

Hi, guys. One last follow-on, just a technical question. Thinking about the price rescission in the trade publications from last year, and realizing this is only a small amount, less than $0.01of impact, the fact that the rescission occurred within the quarter, wouldn't you have rebated that amount so it really wouldn't have been in your revenues last year guys? I was just thinking about that out loud during the Q&A. Thanks.

Well, if you were on pulp and paper, you would have gotten rebated, but if you were not and we had raised prices, then those prices stop. But eventually you have to give it back because you want to treat all customers fairly. And that's why it's not the full amount, it's a much smaller number, but that's basically the number that the price is off by.

Okay. Thanks very much, Paul.

Next question.

Thank you. (Operator Instructions).Our next question comes from Andrew Feinman from Iridian. Thanks.

Thanks. Good morning. So just talking about the earnings numbers you mentioned, $0.21 from the project, $0.10 from less downtime, so that's $0.31. And then minus $0.05 for higher interest, so that's a net improvement of $0.26. So if I assume that the price of containerboard doesn't change, then the only other things I have to estimate in here are the increase in all your other costs and the returns that you're getting on all the box plant money that you spent. Maybe I could call those 2 things a wash and just say that you're going to have $0.26 of improvement next year?

We don't give forecast for next year. I think the 2 other factors you have to look at is inflation and demand. But we're not going to comment on next year's earnings.

Right.

The only thing we will comment on for you, Andy, is if you look at the last -- and I don't disagree with anything you said in terms of you've added the numbers up, to get to the $0.26, and that's correct. So if you look at the last 10 years, and it varies, but because the first quarter is a shutdown quarter, it's our biggest shutdown quarter and it's the coldest weather quarter, historically, our earnings fall about 7% going from the fourth quarter to the first quarter. Okay? About $0.07 a share. From fourth to first.

And so in addition to looking at what you think we might be able to make, you have to factor in seasonality, which means that the first quarter is always historically been our lowest, and the third historically our best quarter. That's no prediction for next year, but it's happened the last 10 years in a row is all that I can tell you. So you need to factor that type of thing in also in your thinking. This is a seasonal business, exacerbated by the fact that maintenance downtime is seasonal also.

Great. I appreciate that. Thank you. I have one last -- one other thing. And that's just to say that if you get the $60 million grant, and you get the $175 million of receivables, and my estimate for your free cash flow next year is about $250 million. So if I'm right and you get those other things, then you're going to be getting close to $5 per share of cash coming in. Am I doing that right?

Andy, we don't give yearly estimates. And so I just want to say for the record on this call, we're not validating anything you've said. If anybody is misled, you misled them not us, because we only give quarterly forecasts.

Right. Right. I appreciate that. I understand.

All right. Okay. Next question please.

Thank you. Our next question comes from Chip Dillon from Vertical Research.

Hi, just a quick clarification, I guess, for either Mark or Rick, is you mentioned the CapEx was $8 million in the quarter for the box plants, I believe. What was the amount, I think you said it for the energy projects in the third quarter and for the year-to-date?

From third quarter for the energy projects was $31 million and of course $8 million for strategic in the box plants, and then our normal capital was also $31 million.

Got you. And do you have those numbers for the fourth quarter?

For the fourth quarter, we expect to spend about, on the energy project, about $20 million. And then our normal capital, if I remember correctly, is about in the third quarter, about $30 million to $35 million. Include any additional for the box plant integration also, so we're looking at capital in the fourth-quarter of about $60 million.

Got you. Thank you, guys.

Thank you. Next question.

Thank you. Our next question comes from Phil Gresh from JPMorgan.

Hi. I don't think anybody asked about the export markets. I want to get your thoughts there in terms of what trends you're seeing in light of some of the pricing weakness in Europe and Asia right now. And obviously the trends with the dollar, have you seen any uptick in the fourth quarter given the re-weakening of the US dollar?

Phil, this is Tom. I would just comment that it has weakened a little bit over in Europe, both in demand and price, and that's all we see right now.

Okay. All right. Thanks.

Next question.

Thank you. (Operator Instructions). Our next question comes from Phil Marriott from First Eagle.

Thanks, good morning. Just given your expected reduction in CapEx of $150 million and the other comments about cash, I'm just wondering if you could at least give us some indication of your priorities for the use of cash going forward? Are you comfortable with the debt on your balance sheet? Do you need to prioritize paying that down or would you put more emphasis on either a dividend increase or incremental share repurchase? Thanks.

Well, as we said in the past, really we've got 3 uses for cash, dividends, share buyback, and acquisitions. And they are interrelated. If you have a lot of good acquisition opportunities, that affects how much you have for share buybacks and dividend. This past year, we put, obviously, more money into share buyback than we had to dividend increases. And that's the function of a lot of things, including where your stock is trading. And obviously if you think your stock is undervalued, that seems to be a good investment as opposed to dividend increases. But all 3 of those things are in play. And it changes, but right now we've obviously put more emphasis on share buyback over everything else.

Thank you.

Thank you. Next question?

(Operator Instructions). If there are no other questions, I would like to thank everybody for participating in today's conference, and you may now disconnect. And have a wonderful day.

Thank you.