Packaging Corp of America (PKG) 2012 Q2 法說會逐字稿

Thank you for joining Packaging Corporation of America's second-quarter 2012 earnings conference call. Your host today was Mr. Mark Kowlzan, Chief Executive Officer of PCA. Upon conclusion of his narrative, there will be Q&A session. I will now turn the conference call over to Mr. Kowlzan, and please proceed when you are 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, our Executive Chairman; Tom Hassfurther, who runs our corrugated business; and Rick West, PCA's Chief Financial Officer. Thanks for participating in the call this morning, and after the presentation, we'll be glad to take any questions.

Yesterday we reported second-quarter net income of $45 million, or $0.46 per share, which included after-tax debt refinancing charges of $2.5 million, or $0.025 per share. Excluding the refinancing charges, earnings were $48 million, or $0.49 per share, which is a second-quarter record compared to the second quarter of 2011 net income of $40 million, or $0.39 per share. Net sales were a record $712 million, up 7% compared to the second quarter of 2011 net sales of $665 million. The $0.10 per share increase in net income, excluding refinancing charges, was driven by higher containerboard and corrugated products volume of $0.07; and lower cost for energy, $0.05; recycled fiber, $0.02; chemicals, $0.02; and maintenance, $0.02. These items were partially offset by higher costs for transportation of $0.02; medical, $0.02; depreciation $0.02; and interest expense, $0.02. Excluding special items, net income for the first six months of 2012 was a record $88 million, or $0.91 per share, compared to the net income for the first six months of 2011 of $79 million, or $0.78 per share, excluding special items. Year-to-date net sales were a record $1.4 billion compared to the $1.3 billion in 2011.

Overall, we had another strong quarter setting several records and generating earnings excluding special items $0.04 per share better than the earnings guidance we provided April 17. The higher earnings came from better-than-forecasted mill costs and better-than-expected export prices and better-than-expected mix improvement in the corrugated business. We also achieved all-time record corrugated product shipments and record second-quarter mill production, despite having three of our mills down for their annual maintenance outages during the quarter. In addition to strong operations, we completed important strategic action during the quarter. The refinancing of $400 million in notes due in 2013. Considering the risks and uncertainties in the debt market, we're very pleased to have this refinancing behind us, and Rick West will provide more details of the refinancing later in the call.

Moving to operations, higher mill production and corrugated products volume improved our earnings by $0.07 per share compared to last year's second quarter. Our corrugated shipments were strong, up 6.6% both on a total and a per-day workday basis compared to last year's second quarter. This increase in shipments included 3.6% from our box plant acquisitions in 2011 and our first-quarter 2012 acquisition. Even excluding our recent acquisitions, total shipments were a new all-time record for any quarter. Our corrugated shipments volume also improved compared to the first quarter of this year, with total shipments up 2.7% and per workday shipments up 4.3%, with one less work day in the second quarter.

Domestic and export containerboard demand remains steady compared to the first quarter. With the higher containerboard consumption of PCA box plants from increased demand and considering that three of our mills will be down during the quarter for their annual maintenance outages, we made a decision to sell fewer containerboard tons into the export market. As a result, our export shipments of containerboard were down about 13,000 tons compared to last year's second quarter.

Our mills produced 638,000 tons of containerboard, a second-quarter record, up 32,000 tons, or 5.3% over the second quarter of 2011. The increase in production was driven by strong productivity and no energy project-related down time this year. In total, annual mill maintenance outages, including an overhaul for 23 days of our 50-megawatt turbine generator at Counce and major wall panel replacements to the large [T2] boiler at Counce resulted in lost production of about 23,000 tons during the quarter. Pricing for corrugated products in domestic containerboard remained steady. Export prices for containerboard were higher and our corrugated products mix improved compared to the first quarter. Compared to the second quarter of 2011, corrugated and domestic containerboard pricing was essentially flat and export containerboard prices were lower. The lower export prices reduced our earnings by about $0.01 a share compared to last year's second quarter.

With regards to costs, energy costs were down $0.05 per share compared to last year's second quarter, driven by major energy projects at Counce and Valdosta and by lower natural gas costs in our box plant system. In addition, chemicals and maintenance costs were each down about $0.02 per share, driven by the completion of the energy project and reduced spending. Lower recycled fiber costs improved earnings by $0.02 per share as industry published prices for old corrugated containers, or OCC, excluding their delivery costs, were down about $25 per ton in the second quarter of 2012 compared to the second quarter of last year. We continued to see more moderate inflationary cost pressures than we did last year. However, some costs did increase compared to last year's second quarter, including outbound transportation costs, up about $0.02 per share and medical costs up about $0.02 per share. In addition, depreciation expense was up $0.02 per share compared to last year's second quarter driven by the completion of our energy project, corrugated product strategic capital expenditures, and newly acquired box plants. Interest expense was up $0.02 per share driven by non capitalization of interest with our energy project completion.

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

Thank you, Mark. In the second quarter, PCA generated cash from operations of $115 million. Capital expenditures were $35 million. We paid our quarterly common stock dividend of approximately $25 million and repurchased 371,000 shares of our common stock for about $27 per share, or $10 million. As of June 30, 2012, our diluted shares outstanding were 97.1 million shares. During the second quarter, cash tax payments of $5 million were made and fuel credits of $44 million were used to offset federal taxes. We have estimated remaining fuel tax credits of up to $100 million. The final amount of the available fuel tax credit and the final cash tax rate in taxes paid in 2012 is contingent upon the conclusion of the IRS audit currently underway.

As Mark Kowlzan spoke about earlier, we completed a public offering of $400 million of 3.9% senior notes due in 2022 on June 26. In connection with the offering, we also made a $65.5 million payment to settle an interest rate protection agreement. The net proceeds -- or the note proceeds, excuse me, of $397 million net of fees will be used to complete the redemption of our 5.75% notes due in 2013 on July 26, with an estimated redemption premium payment of $21 million, plus an additional $11 million for accrued and unpaid interest through the redemption date. We currently estimate third-quarter after-tax charges of $13 million, or $0.14 per share related to the debt refinance. Our June 26, 2012 press release provides more detail of the refinancing. Excluding both the proceeds and the debt from the senior note offering, we ended the second quarter with $118 million in cash and debt of $801 million.

With that, I will turn it back over to Mark.

Thank you, Rick. Looking ahead to the third quarter, we expect seasonally higher sales volumes, increased mill production, and lower mill costs. As an added note on mill costs, we do expect prices for purchased electricity and chemicals to increase and prices for OCC to decrease compared to the first quarter. Considering these items and excluding the estimated debt refinancing charge, we expect third-quarter earnings to be about $0.54 per share.

With that, we would be happy to answer any questions, but I must remind you that some of the statements we've made on this call constitute forward-looking statements. These statements are 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 these forward-looking statements.

Finally, we will not comment or respond to any questions concerning forward pricing on today's call. Thank you. With that, operator, I would like to open the call up for questions.

Thank you. (Operator Instructions) Our first question comes from Chip Dillon of Vertical Research Partners. Your line is open.

First question is it looks like, Rick, you were saying the net debt ended the quarter at about $683 million, which I believe is about $38 million below the first-quarter level. Should we -- I think one element of the numbers that you laid out I don't believe included, unless you said it up-front, I think it was $57 million in credits you got based on, I guess the energy projects you did. Did that also come in, and should we view that as an offset to the hedge?

That is correct, Chip, and you are correct on your numbers. For the second quarter, the net debt was $683 million with the increase in cash. We did pay down $4 million in debt in the second quarter on our term loan.

Got you.

Chip before, we go any further, I just want to correct one of the pieces of data where I commented about OCC prices. Prices for OCC are expected to decrease compared to the second quarter, not the first quarter, so I just wanted to correct that.

Got you. And then when we look at what's left with the Black Liquor credits, if I'm not mistaken, if let's say that Filer City doesn't go your way, I'll put it that way, the way you view it, then basically it's -- you're done on the Black Liquor credits. But if Filer City gets viewed the way you view it, then that would be the $100 million or some percentage of that. In other words, it all hinges on Filer City at this point. Is that fair?

That is a fair statement.

Okay. Got you. And then lastly --

Chip, this is Paul. The other comment I would make, when you said the way you view it versus the way somebody else views it, we expect there's only one way to view this thing, and that is that although the process was different in Filer City, in terms of how Black Liquor, how the liquor is converted, that doesn't mean that there's anything out of the ordinary here.

Got you. And then as we look out at the second half of the year, any major changes, either in CapEx or your view toward buy backs?

Chip, we've stated, as far as the capital for the year, that $110 million was the target. We're still on target for the $110 million, but we've also commented that we were setting aside approximately $60 million for the acquisition side on the box plants for Tom to work with. And year-to-date with the box plant acquisition that was completed in February in the Pittsburgh area, we've spent roughly $30 million of that $60 million, so we do have some room left on the acquisition side. Tom, do you want to comment at all about where you stand this year on some of the opportunities?

Well, I would just say on the acquisition front, Chip, we constantly look at opportunities. We turn down a much higher percentage, obviously, than we pursue going forward, and we continue to review opportunities as they exist right now. We have, however, taken some of that money out of the acquisition area and plowed it into some strategic capital investments within the box plants, which have some returns that are essentially equal to what an acquisition would give us, and that's primarily based on customer demand.

Got you. Any update on where you stand on the buyback, how much is left?

There is $117 million left on the buyback.

Thank you. Our next question comes from Phil Gresh of JPMorgan. Your line is open.

Just on the OCC comment, I was just wondering are you basically run rating what we're seeing here in July, and saying it's going to be lower? Or do you actually think from here, it actually might take another step down?

Run rating, what you're seeing published and what the data is telling us.

Got it. And then on the export pricing, is there any more color you can give us on where you saw the outperformance there versus what you're expecting? Is it a specific region or what were you seeing there?

This is Paul. I will take that. The answer is, no, except for the fact that when you pull 13,000 tons out of export like you do, you obviously pull out your worst business. So that in itself is going to help your pricing.

Okay. On the export markets in general, are you seeing any impact on your business right now from the temporary mill shut over in Europe?

We really don't comment about any specific relationship with customers, and that would fall in that category. We're going to have to pass on that question.

Last question. Rick, just in terms of the buybacks, is there any reason to think that you guys wouldn't buy back as much this year as you did last year? Is there anything specific going on this year that would limit that, or is it more just how you're feeling about the share price?

There's no reason. We're still going to look at both buy back and other alternatives for cash that we've talked about earlier. So we'll just continue to address the buybacks each quarter.

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

Can you talk about how demand trended through the three months of the quarter and maybe how you're seeing it play out in July? Then given the box numbers that came up this morning, can you just talk generally about the current state of demand you're seeing, whether the summer has been stronger than expected, weaker than expected, or whatever color you can give?

For the second quarter, our box numbers were flat. Obviously, we had good numbers, but we saw constant steady numbers. And if you look at where we are for the first eight days of the third quarter through July, we're looking at probably 7.2% up for that period of time. Also, one of the differences this year, with the Fourth of July being in the middle of the week, it's a tough comparable. So, again, the other thing to think about, too, is that the acquisitions and the -- with the organic piece, they're both contributing about equal, 3%, 3.5%, on average.

Okay, that's helpful. And then maybe just a couple of questions for Rick. With the net debt about $680 million, do you think that you are at an optimal leverage at this point, or would you potentially consider raising the leverage to pursue some opportunities within acquisitions or strategic capital spending? And just how are you generally thinking about that?

Well, we look at more the financial flexibility that we have. We think we've got a reasonable debt level, but the positive for us in having the debt level that we do have is it does give us the opportunity, if we see something that we want to borrow for, as we did in the third quarter of last year. We borrowed some to -- when we wanted to pick up some additional shares. So what we do with our cash as well as our debt level is going to depend upon the opportunity, utilizing the flexibility we have.

Phil, this is Paul again. Just one other comment on your first question. As Mark said, our business has been steady all year, and up roughly 7% a quarter, and that does include acquisitions. And through the first seven days of January, we're up about -- excuse me, July, we're up about the same. And that is on organic growth, which is really the major year over year improvement, we're up about 3.6%, 3.7%, and then we're up another 3.5%, 3.6% from acquisitions, and that gets back to that 7.2% number. So it's evenly split between organic growth and acquisitions.

Okay. That's very helpful. And maybe just one last question for Rick. Regarding the IRS audit that determines your final cash tax rate, do you have any sense of a time frame or how we should think about the resolution of that?

It's taking what we consider the normal with the IRS. I really can't say anything other than it could be at the end of the year, beginning of next year is what we're hoping to have a final conclusion.

Our next question comes from Mark Weintraub of Buckingham Research. Your line is open.

Thank you. I was hoping to get some sense as to how you see the tenor of the market right now, because we've got some, it seems, contrary type of indicators. If you read the headlines, they all look so negative, yet obviously, your business has been doing well on the demand side. And looking industry statistics, operating rates and inventory seem to be pretty good for the industry overall. How is this all coming together as you sense the tenor of the market?

Well, again, Mark, if you think about our model and what we've been talking about the last couple of years here, with the strategic activity during the past two years, and the work that Tom has done on the acquisition side of things, we really have created a new revenue engine. And if you also think about it, we've got four acquisitions, plus the new Redding plant, so we're operating five additional plants, plus the strategic spending was applied to five plants. So really, we have 10 plants that are now contributing in ways that we never had before. So we would always talk that we had the demand, but we couldn't supply the customer base. We have that now. So we have grown into that and taken advantage of the acquisitions and the strategic spending. So with that, we only know what we're doing and we talked, and our model is definitely a different model compared to the industry.

Yes, Mark, I would answer that just a little different. The market has basically met our expectations. We thought our business would be this strong, and it has been this strong, and we're projecting that that trend is going to continue, and that's how we built our third-quarter earnings model. And it's hard to, for us to comment on the entire market, other than we read the numbers you read. But we're really concentrated on our customer base, and we feel pretty good about it.

Fair enough. Typically, you don't take much down time, if any, in the second half of the year. Would that be your expectation at this juncture?

That's correct. The annual shutdowns are behind us, and now we are on a full run-rate mode.

Okay.

And, Mark, just to amplify on the reason for that, our demand period is the weakest in the winter months, and labor is also a lot more available then to do shutdowns. Energy cost is historically higher. So for the last 15 years, we've basically concentrated all of our down time in the first four months of the year. It's the lowest cost for us to do that it way. And then it also leaves us the most capacity when we need it the most, and that is the period we're about the enter now, which is the seasonally strong period of the year. Now through -- it used to be now through Thanksgiving, but with Internet commerce, December is actually turning out to be a half decent month the last three, four years, which it hadn't been before then.

Our next question comes from George Staphos of Banc of America Securities. Your line is open.

I want to cover a little bit. Can you comment why you think you're able to see some improvement in your mix, what was perhaps behind that either on the board side or the box side, specifically within domestic?

Why improvement in mix? It's at that time of the year, second quarter, seasonally, starts to ramp up some of the graphics side of the business.

Right, but you said it was a little bit ahead of your expectations, so I guess I was trying to get at why it was above what the normal seasonality would be.

Well, I think because our customers are trying to do some creative things to drive their sales in this environment right now, and one of those vehicles happens to be the graphics area. That picked up seasonally a little faster than what we thought, and probably on a volume basis for the year it will be quite a bit higher than what we had anticipated. In addition, you've got ag business, and some of the other things that have gone on that just help our mix typically in the second quarter.

Okay. Tom, I know you don't want to speak for the market, but based on history, when you have seen a pickup in the graphics business, is that usually coincident with an ultimate improvement in the broader economy, or is it really inconclusive whether that actually happens to be the case or not from your vantage point?

I really can't tell you that that's conclusive at all. All I can say is that this is, depending on the customer you're aligned with, and depending on their business and what their strategies are really determine how they're trying to drive their business, and if we get the net result of that, we are better off.

Okay. Two quick questions on vertical integration in the model. Is there a vertical integration level right now that you think is normal for the existing mix of business that you have in production? And if could you share, what do you think that ratio is right now? And then, bigger picture, the model has worked, not just in recent periods, but looking back over time, PCA has continued to probably grow more quickly than the market. Is there a natural limit, do you think, Mark or Paul or Tom, where you finally can't do that anymore, whether it's a bench and depth issue or a customer opportunity issue that would mean that you ultimately see a limit to the way the business model continues to outperform, if you will?

As we stated, the goal still is to get to the 90% integration rate, and that's important because we feel 90% still allows us some flexibility to supply tons into our customer bases as they grow. 100% is not a good number to be at because then your customers then understand that you are going to be limited in that ability to help them grow as they move forward. So we're moving along. We're on track to get to the 90%, and that's going to remain our goal for the remainder of the next couple of years here.

And with regard to your second question, there are limits, but we're nowhere near those limits yet.

Last one, Rick, any benefit from the Highway Bill on pension free, do you think, and if there is a number, what might that be? Thank you, guys. Good luck on the quarter.

No, we're so low, from what we stand, I don't see it being substantive to us. We haven't really gone through all the math, but I don't see is it as sustaining.

Our next question comes from Michael Wilde from Deutsche Bank. Your line is open.

Couple questions. One for Rick, just maintenance costs as we go from the second to the third quarter, we know all of your maintenance is done. But do you spread those costs out over the year, and how would that change going from the second quarter to the third quarter?

Really, it doesn't change. The run rate on the amortization of maintenance costs is essentially going to be the same in the third quarter to the second quarter. That's why we didn't cite it in our guidance for any change.

Okay. Mark, what's a good number for you guys at this point for just the mill volume on an annual basis, do you think?

Are you talking volume or capacity? We can tell you our capacity. We can't tell you our volume.

Okay. Capacity.

Well we published capacity at the end of last year at 2.575 million tons. We would hope to get some productivity improvements, some creep capacity this year, not much. So rough number, I wouldn't be surprised if we ended the year at about 2.6 million tons of published capacity.

Okay. Last question for Tom Hassfurther. Tom, if demand remains similar to what we've seen in the first half, will you be able to continue that organic growth of about 3% to 3.5%?

Well, we certainly hope to. That's the intent, Mark, and it's interesting, when you look at our organic growth. Most of it comes from our existing customers who have just chosen to do more business with us at various locations, and, of course, that helps drive some of our strategic capital. And we continue -- that's the plan going forward. And so I would plan that we would continue to grow at these rates.

Okay. And, Tom, I'm curious, is there any -- do you have much of a display business buried within the overall business?

We don't typically break out our business, but certainly we do have a graphics business.

Okay.

One way we are different, Mark, is that some companies have specific graphic locations. We integrate our graphic business into our regular box plants, to make -- and that helps us handle the seasonality of the graphic business. It is stronger different parts of the year, and the beauty of that, when we need brown business in those plants, when graphic is down, that happens, and vice versa. So we like our model in that regard.

Our next question comes from Mark Connelly of CLSA.

Mark, just a couple of things, can you give us a sense of what your overall energy mix looks like now and whether you're looking to reduce coal further the way other people are? I'm also interested in how much energy flexibility you have or whether you think that's an old fashioned concept.

Regarding the first part of the question, if you look at -- obviously with natural gas prices falling last fall through the winter, we took advantage of that and shifted more coal into gas. And we continue to do that for the summer months, and also, we're still waiting on the EPA to issue the Boiler MACT rules to see where that's going to take us on any further changes. But flexibility-wise, we've maintained the flexibility with the work that was done on the boilers accounts in Valdosta. We've maintained and built in further flexible capabilities. In that regard, it's still very important to us.

Super. Just one last question. You talked about recycled fiber. I assume that your virgin fiber costs overall have been pretty flat. Are you getting any help from this pickup in lumber?

We started seeing some of this last year in the fall. Again, in particular, as an example, in the Michigan area, we saw some increased shifts available on the market from some hardwood sawmills. So in that regard, we each seen some benefit. Obviously, we're not where we were prior to the housing collapse, but we've seen a little bit of improvement.

Our next question comes from Phillip Ng of Jefferies. Your line is open.

Thanks for the color on your raw materials prices. I think you commented that OCC is going to be down, energy and chemical is going to be up sequentially. So collectively, should we expect input costs to be up sequentially?

What we said is the in fact lower mill costs overall compared to the second quarter and the third quarter, Phillip. But embedded within that number is some increases for electricity a little bit, and also some in chemicals, primarily starch.

Overall still lower.

What you see take place typically in the July-August period in some of the areas with the summer heat temperatures, the utilities end up having to have some abnormally high real-time pricing, and so we just expect that there will be some days and some periods where we see some real-time pricing get out of hand.

I got you. But it doesn't sound like it's going to be a sharp-up tick from where you were.

It's something we typically see, but we just made that point.

Okay. That's helpful. And just want to get a little more color on what you are seeing on the export market right now. I think you did you comment that things were a little better than you expected both from a demand and pricing standpoint. Certainly the headlines out of Europe and Brazil have gotten worse. Just want to get your view on a real-time basis.

Phil, I will just comment on that real quick. Sometimes, we're not the best barometer of the export market, quite frankly, because we send a lot of specialty products to that market in terms of liner. But it's not great over in Europe, but I don't think it's as disastrous as what the press would have you believe.

Okay. And then during the quarter, you guys obviously shifted out of the export market. How much of that was the down time you guys were taking or just better integration on the box side from the acquisitions, or you just taking share? I just want to get a little color on that front, and will that trend reverse itself in Q3?

Again, all of the above. With the down time that was being planned with the mills and the work that Tom had done with the acquisitions and the organic growth, we needed all of those tons to take care of our customer base here in North America.

Okay. That's it. That's helpful. One last question. Your free cash flow is obviously quite strong, should accelerate pretty nicely this year. When we think about maybe 2013, are there any major reinvestment projects on the horizon, or should we expect it to be pretty much in line from 2012? So would the majority of that cash be returned to shareholders in acquisitions?

Again, we will continue to look at box plant acquisition opportunities and strategic opportunities from the organic side as we see customers growing and their needs demanding, we can work with them. So that's something we hope that we'll continue. That's what we're planning on.

But nothing like what we've seen the last few years, is that fair?

No. That's fair, yes.

Our next question comes from Scott Gaffner of Barclays. Your line is open.

So you mentioned the lower energy cost, it was a $0.05 benefit in the quarter. You talked about some of that coming just from lower fuel costs and some was from the energy projects you completed. Can you just break that down so we can get a sense of how much is coming from each of those buckets?

Well, again, the energy projects have been contributing the bulk of that. So we have continued to see good results from both accounts and the Valdosta piece. And so again, that's pretty much all of that savings was contributed through the accounts from Valdosta project.

Probably Valdosta is a little bigger contributer than Counce. Just to put a little technicolor on this, at our Valdosta mill, if you count -- that was a boiler project, and we buy basically no purchased fuel at Valdosta. We run on 100% wood waste from our own wood yard and black liquor. And so no purchased fuel, and we buy very little electricity. We produce roughly 98% of our own electricity, and then we have byproducts that come out of burning black liquor, things like coal oils, soap and turpentine. You throw that all together and our energy cost at Valdosta is actually a negative number, and that's a big source of the savings.

And so are you returning energy to the grid through Valdosta?

On occasion we sell some back to the grid, but most of the time we run at about 98% of what we need. And we buy a little from the grid to maintain the utility tie in case there was ever an emergency and we had to take that -- take the turbine down.

Also in the quarter, your maintenance costs came in at only, you said, $0.02 maintenance costs for the quarter. I think you were saying it was going to be a $0.03 head wind going into the quarter. Were you able to outperform on some of the projects, or where did those lower costs come from?

The change from 1Q to 2Q was the accounting of the annual outage cost. From the standpoint of compared to last year, in the second quarter we were $0.02 per share better, and that's more driven by the fact that we're, especially the energy project, we're not having to repair such older equipment. We've got new equipment, a new boiler at Valdosta and rebuilt boilers at Counce which really helps us. So the majority of the $0.02 per share improvement year over year was related to the energy project.

Rick raises a very good point. When we did this project, we noted that over a five, six-year period, we would reduce maintenance on those five old boilers that we took out of service by about $80 million in terms of cost avoidance. Some of that is capitalized and some of it is expensed, but it was $80 million in additional to the savings that we got that we don't have to spend, as Rick just pointed out. And that's an important point.

Okay. And then just lastly, you mentioned e-commerce is now benefiting the December month, but do you get any benefit from e-commerce in back-to-school sales? Maybe you could just also talk about your overall thoughts on e-commerce and how that could potentially aid the overall industry as we move forward.

I think year-round now, e-commerce is a positive factor. I think, again, seasonally, whether it's a school-related time of the year that has definitely been a positive for the industry.

Yes, and December is especially strong for two reasons. One, that's obviously the biggest buying period for things, and people are shopping more and more on the Internet. And the other beauty of buying things on the Internet as opposed to a store, when you have to send it back to the Internet, you have to pack it in another box to send it back, because most of the time, you throw the first box away. So you get a double bang for your buck over the Christmas holiday.

Do you have any preference of those boxes versus your traditional boxes is that --

I think you've got to look at that. That volume is good for the entire industry. Where it ends up benefits everybody. It doesn't matter who makes it. That's going into -- volume for the industry, and those kind of boxes tend to be lower priced. They're plain brown boxes, don't have a lot of graphics on them, so that's not the sweetest part of our mix, but it benefits the industry in terms of total consumption.

Our next question comes from Al Kabili of Credit Suisse. Your line is open.

First question on inventory, down 1,000 tons sequentially. Could you just comment how you're feeling about your unit inventories right now, how they are versus where you want them ideally?

Well, we're basically on plan, but, again, we are going into a busy time of the year for us, so we need every ton we have, and that's important. The mills have to run right now. It's critical. We've gotten out of the heavy shutdown period, which is the second quarter. And we basically held where we wanted to on plan with inventories. But again, we need tons, and we've got the business, and we've got to run.

Okay, great. The other question I had, just around, the tone of the market, I know you are outperforming the industry, but I was wondering maybe if you could just help us with, if you -- if there's any notable changes with what you are seeing now, with what it was like this time last year? Has there been any differences in terms of what you're seeing in the environment? Notable differences say versus this time last year?

From our perspective, there is not much of a change. We've taken advantage of what we've built into the box plant system and mill system. Again, Tom's group has taken advantage of that with the customer base and working with them and the results speak for themselves.

Great. Final question is on mix. You highlighted earlier that you did a little better from a mix perspective this quarter than you initially anticipated. Sequentially, can you help us with how you are thinking about mix sequentially?

Our mix will be pretty similar to what it is in the past going forward. We may see, as I mentioned earlier, we probably will see a slight pickup on the graphic side of the business going forward, just because I think we've got customers that are trying very hard to feature their products in a relatively flat market.

Our next question comes from Joshua Zaret of Longbow Research. Your line is open.

I have one question. I guess the thing that caught my interest was you mentioned you're doing strategic spend on five box plants. Now, I think, and correct me, you have about 70 box plants. So the question is, A, are there -- is this something that is going to be ongoing, and B, what is the focus of this spending? Is there a need for more corrugators at some of these plants, or are you changing markets? If you could answer those questions, I'd be very interested. And how much capital you will be investing over time. You mentioned the amount of you're investing for your acquisitions. Again, I assume this is small, but I would like to know that.

That was in reference to the spending that was done in 2010 and 2011 with the five box plants we identified. We spent $80 million during those two years on the strategic opportunity. The point was made, we will continue, as we go forward, as we're working with our customer base, if we have the opportunity to grow with them, and we see an opportunity, we might make some strategic investments.

So is this about scale basically?

Joshua, this is Tom here. I just want to point out that I think it's very important to understand, we have never, never invested capital on a build it and they will come basis. Our capital is always strategically invested around our customers and around demand that we see in particular market places. That, we will continue to do.

Yes, and to amplify on that, we did that with the $80 million we spent. We're into that. We like the results. They're showing up in our numbers' bottom line. And as we go forward, we now have more competition with internal projects because of that success versus acquisitions. So in order to make an acquisition, this money has got to compete against internal projects. And our success in the last few years on internal projects has been very good and so the competition for that last dollar of capital is even more keen within the Company than it has been in the past. And that's the point we've been trying to make. So we've got good choices. We can't make them all, but it's good to have more good choices than fewer good choices.

Our next question comes from Alex Ovshey Goldman Sachs. Your line is open.

On the export front, can you comment what percentage of your volumes went into the export market during the quarter, and longer term whether you see a strategic rationale to be a player in the export markets?

Typically we've said this, quarter to quarter in terms of the year to year, we might go from 8% to 10%, 11% of our products go offshore.

And our trend is down in that regard, but that's an historical number, 8% to 10%, and we've cut back a fair amount from that number, which we're not going to divulge.

That's helpful. Any color you can give on just the mill net differential right now between selling through Europe and selling domestically? The data seems to imply it's about $100 a ton. Is that a good ballpark figure to be thinking about?

We're not going to comment on that.

Understood. Last question, just on the chemicals side. Can you comment on what you saw in terms of pricing trends for the key chemical costs that you used in the second quarter on a year over year basis and what the outlook is going forward for the balance of the year?

We saw an easing on the inflationary pressure from last year, but going forward on the commentary about chemicals into the third quarter, most things are flat. We are anticipating, as an example, corn obviously is going to be under pressure theoretically with what's happening with the drought. So that's one example.

Just remind us, what are the key chemical inputs? Starch, caustic? Any other big ones we should be thinking about?

Right now on the box plant side, the starch and starch-related products, all the adhesives. But on the mill side, obviously the caustic chemicals, and then wood fiber obviously is a big one, which has been very stable.

(Operator Instructions) Our next question comes from Max Salk of PPM America. Your line is open.

My question was answered. Thank you.

Mr. Kowlzan, I see there are no more questions. Do you have any closing comments?

I'd like to thank everybody for participating today and look forward to seeing everybody on the next call. Have a good day. Thank you.

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect, and have a wonderful day.