Packaging Corp of America (PKG) 2012 Q3 法說會逐字稿

Thank you for joining Packaging Corporation of America's third-quarter 2012 earnings conference call. Your host today will be Mark Kowlzan, Chief Executive Officer, PCA. Upon conclusion of his narrative, there will be a Q&A session. I will now turn the conference over to Mr. Kowlzan, and please proceed when you are ready.

Good morning, and welcome to Packaging Corporation of America's third-quarter earnings release conference call. I am 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 Chief Financial Officer. Thanks for participating in this call this morning, and after the presentation, we will be glad to take any questions.

Yesterday, we reported third-quarter net income of $40 million, or $0.41 per share, which included after-tax debt refinancing charges of $13 million, or $0.14 per share. Excluding these charges, earnings were $53 million, or $0.55 per share, compared to third-quarter 2011 earnings of $43 million, or $0.43 per share. Net sales were a record $723 million, up 8% compared to third-quarter 2011 net sales of $671 million. The $0.12 per-share earnings increase, excluding special items, was driven by higher containerboard and corrugated products volume of $0.07, and lower cost for energy, $0.05, recycled fiber, $0.04, and chemicals, $0.02. These items were partially offset by higher costs for labor and benefits, $0.03, interest, $0.02, and depreciation, $0.02.

Excluding special items, net income for the first nine months of 2012 was a record $142 million, or $1.45 per share, compared to $122 million, or $1.21 per share in 2011. This earnings increase of $0.24 per share was driven by higher containerboard and corrugated cost volume of $0.23, lower cost for energy, $0.14; recycled fiber, $0.08; and chemicals, $0.05, and the lower share count from share repurchases of $0.04. These items were partially offset by higher costs for labor and benefits of $0.09; depreciation, $0.07; interest, $0.06; transportation, $0.04 and lower export pricing, $0.05. Year-to-date net sales were a record $2.1 billion, up 7% over 2011.

In summary, we had a very strong quarter in all aspects of our operations. Our mills ran extremely well, setting an all-time production record. Containerboard and corrugated products demand remained strong. Costs improved significantly, and sales prices began to improve.

Moving to more details of the quarter, higher mill production and corrugated products volume improved our earnings by $0.07 per share compared to last year's third-quarter. Our corrugated shipments were up 5.7% on a per-workday basis compared to last year's third-quarter, including 3.1% from box-plant acquisitions, and up 4% in total with one less shipping day this quarter. Our shipments per workday were each month of the quarter compared to last year, and in September, we set an all-time record for shipments per workday, both including and excluding acquisitions. Our domestic and export containerboard demand remains strong, and we were able to sell more tons to the export market with our mill annual maintenance outages completed in the second quarter. Our export shipments of containerboard were up about 9,000 tons compared to last year's third quarter, and up about 21,000 tons compared to the second quarter of this year.

Domestic containerboard sales were essentially flat with both the third quarter of last year and the second quarter of this year. Our mills produced 670,000 tons of containerboard, an all-time record, up 20,000 tons, or 3%, over the third quarter of 2011. This performance was driven by production increases, primarily from the energy project out our Counce, Tennessee and Valdosta, Georgia linerboard mills and no energy-project-related downtime this year. We ended the quarter with our containerboard inventories down 9,000 tons compared to the end of the second quarter. Our inventory situation here is rather tight, considering October has 23 corrugated product shipping dates, compared to only 19 days in September. So, it is essential that our mills continue to run well in October, which they have through the first 15 days of the month. Looking at pricing, we implemented a $50-per-ton domestic containerboard price increase during the third quarter and are now in the process of implementing a corresponding price increase for corrugated products, which we expect to essentially complete in the fourth quarter. We did announce export price increases to most markets in September, but for the third quarter, export prices were down from last year.

Moving to costs, energy costs were down $0.05 per share compared to last year's third quarter, driven mostly by the energy project and to a lesser extent by lower natural-gas costs in our box plants. Chemical costs were down $0.02 per share, with lower usage driven by the energy project. Lower recycled fiber costs improved earnings by $0.04 per share, as industry published prices for old corrugated containers, or OCC, excluding the delivery costs, were down about $70 a ton in the third quarter of 2012 compared to the third quarter of last year. Finally, depreciation expense was up $0.02 per share compared to last year's third quarter, driven by the energy project, corrugated products strategic capital expenditures, and newly acquired box plants. Interest expense was up $0.02 per share driven by non-capitalization of interest.

I am now going to turn it over to Rick West, our CFO, who will give you an update on our generation and uses of cash and taxes.

Thank you, Mark. In the third quarter, PCA generated cash from operations of $102 million. Capital expenditures were $25 million. We paid our quarterly common stock dividend of approximately $24.5 million and repurchased 253,000 shares of our common stock for about $32.50 per share, or $8 million. As of September 30, 2012, our diluted shares outstanding were 97.3 million shares. Cash tax payments of $2 million were made, and fuel credits of $22 million were used to offset federal taxes. We have estimated remaining fuel tax credits of up to $79 million.

The final amount of the available fuel tax credits and the final cash tax rate and taxes paid in 2012 is contingent upon the conclusion of the IRS audit currently underway. On July 26, we completed the redemption of our 5.75% notes due in 2013 with a redemption premium payment of $21 million, which resulted in third-quarter after-tax charges of $13 million, or $0.14 per share. We ended the third quarter with $141 million in cash, up $23 million from our second-quarter ending cash if you exclude the cash proceeds we had on hand at the end of the second quarter from our debt offering. Our debt at the end of the third quarter was $797 million. With that, I will turn it back over to Mark.

Thank you, Rick. We completed our major energy project in last year's fourth quarter and now have almost a full year of operations behind us. I'm very pleased to report that the project is delivering more benefits than we were originally forecasted, and we now estimate the project will improve 2012 earnings by about $0.37 per share, compared to our original estimate of $0.26 per share at the beginning of the year. The better-than-expected results came mainly from better-than-anticipated chemical and energy-recovery efficiencies associated with the new Valdosta recovery boiler and two rebuilt boilers at Counce. The increased process efficiency and [with] consistent pulp quality has in turn allowed us to also increase both our pulp and containerboard production more than we expected.

The operating flexibility we now have with our recovery boilers has also allowed us to avoid some machine downtime this year when our power boilers were down for maintenance and allowed us to eliminate electricity purchases at Valdosta this summer during peak electricity demand periods when electricity prices were at their highest. So overall, I am very pleased with the energy project. The project is generating an after tax return of about 25% on total capital and almost 30% on net capital after deducting avoided maintenance capital, despite much lower fuel and electricity prices today compared to the prices we built into the project savings. We expect the return will improve even further as energy prices increase over time and we capture those-cost avoidance benefits.

Looking ahead to the fourth quarter, we expect higher earnings from our announced price increases, but full quarter's earnings benefit from these price increases will not be fully realized until the first quarter of 2013. The earnings improvement from higher prices in the fourth quarter is expected to be partially offset by seasonally higher costs, due in part to colder weather. Considering these items, we expect fourth-quarter earnings of about $0.61 per share.

With that, we'd be happy to entertain any questions, but I must remind you 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 involved inherent risks and uncertainties, including the direction of the economy and those identified as risk factors in the annual report on Form 10-K on file with the SEC. Actual results could differ materially from those expressed in these forward-looking statements. With that, operator, I would like to open up the call for questions. Thank you.

Thank you.

(Operator Instructions)

Mark Weintraub, Buckingham Research.

Thank you. Good morning. First of all, on the box price increase, to the extent you could give us a little bit more color on how that is progressing relative to other historic initiatives or prior initiatives? And in particular, when you talk about a corresponding increase, should we interpret that meaning that you are shooting for a full pass through $50, $55 per ton? Or is it conceivable that it could vary from that to the upside, or any other color you can give on that?

Mark, for both legal and competitive reasons, we can't get into a lot of detail on forward pricing expectations. Again, as we said during the call, we did build a partial-quarter realization into the fourth-quarter outlook, and we do expect the full realization into the first quarter of 2013. Reminding you that historically, we've put box price increases through faster than the competition, and partly because of our local customer mix. We will provide more detail during the first-quarter earnings call in January. Also keeping in mind that with our 9,000 customers, we do go out and talk to all of these customers. In general, historically, we've been successfully completing these pass-throughs ahead of the competition. Tom, would you like to add anything to that?

Not much more than what you said, Mark. I would say that this is -- we are handling this as a routine price increase. As Mark mentioned, we've got 9,000 customers we've got to go out and inform on a one-on-one basis. Because of our value proposition, we can't just send out a letter notifying them of a price increase. So right now, this is an all-consuming job, and as Mark mentioned, we expect full realization in the first quarter next year.

Yes, and Mark, to the last part of your question -- this is Paul Stecko. The word corresponding, the only intent of that word is it is related to the fact that when -- box prices normally follow containerboard increase, so those two are related. And that containerboard price is up, and now box prices have been announced by us. So don't read anything more into that word. In terms of what our realization is, we don't disclose that. That is a matter between us and our customers. And, that -- what we charge in boxes varies widely because the nature of our customer and product mix varies widely. It's not one number. It's an average number, and the average numbers are sometimes misleading. But that's not something we normally disclose until we have completely completed, if you will, our box price increase.

Okay. And then question if I could on the dividend and your thoughts about potential changes going forward? You do look like you are going to be reporting record earnings in 2012 and presumably with the box price increase going in 2013 hopefully can be even better. Not that long ago, you were paying $1.20 dividend, and it is lower than that right now. When might you be reconsidering what an appropriate level for the dividend is? And what are the key criteria that would lead you to conclude what you might conclude?

Mark, as we've historically said, dividend matters are Board matters. And so with that, and with Paul here, I am going to let Paul talk about that, seeing as he's Chairman of the Board.

Okay, thanks, Mark. Appreciate that. It's a complicated question, because there is a lot of things that go into it. Just to keep it short, they're have been some positive developments with us finally coming to a conclusion on this matter. And that is the price increase is obviously positive. It will obviously produce a lot of cash, which we have to figure out what to do with. The other thing that has happened, since mid-June, our shares have gone from about $25 to a little over $35, and that is the good news. The bad news is it has lowered our yield. The one way you fix that obviously is increase the dividend. I think there are the two positives in terms of getting closer to doing something. The one negative is, I think everybody knows, the tax situation with regard to the treatment of dividends, which we won't know until the end of the year. But all in all, this is a matter that the Board will discuss. And from my perspective as Chairman of that Board, we are getting pretty close to determining what and how much we want to do here. And that's about all I can say of that at this point.

Right. Appreciate it. Thank you.

Chip Dillon, Vertical Research Partners.

Yes, good morning. You mentioned the higher earnings you expect from the energy projects, which I think gets us to about $0.51. If you could clarify that or verify that? And also, where do you see your capacity now in light of the expansions? At least, when I look at the last K, you had about 1.043 million tons at Counce and 556,000 at Valdosta. Can you give us an idea of how much increase you think you will be able to get production-wise as a result of the projects being better than expected?

I'm going to answer part of that, and then I'm going to let Rick walk you through the reconciliation of the returns. But if you think about our capacity, at the beginning of the year, we've got announced capacity of 2.575 tons. It looks like we are on a run rate of about 2.6 million tons. With that, obviously we did see some benefits. Starting in 2010, when we made some of the paper-machine modifications at Valdosta as part of the capital project for drying efficiency improvements, we've added about 120,000 tons of capacity, or about 5% over the three-year period. Now, we are not going to sustain that type of rate. We will be back into the normal type of creep, 1% or so. With that, Rick, why don't you walk through the reconciliation of the returns?

Yes, Chip, the number you've referenced, of course, that was more in line with what the original project was. And we've had some things that happened. Lower, as Mark mentioned, lower fuel and electricity prices than what we built into the project, which has been offset by some better productivity than we expected. But just to put everything in perspective, as you recall, at the beginning of the year, we said in 2012 we expected $0.21 in direct benefits from the project. That included all savings, incremental profit, less the added depreciation for this year.

Also, we expected $0.10 per share in avoided downtime. That was partially offset by $0.05 per share in higher interest expense from the non-capitalization of interest. That gave us a total earnings improvement from the energy project in 2012 of $0.26 per share. If you look at our reported numbers, we have avoided the downtime, and we're getting the $0.10 per share and avoided the downtime. It's just what we were looking at the beginning of the year. As you saw from our results, our interest expense is up, attributable to the capitalized interest. So the capitalized interest of $0.05 is essentially the same.

However, the direct benefits from the project have increased from $0.21 per share to $0.32 per share, which increases the total earnings benefit in 2012 to $0.37 per share. The additional improvement in earnings of $0.11 per share is really coming from three areas. One, an additional $0.01 per share from energy cost savings. Energy prices have not gone up this year. Over time, that number will improve, as Mark said in his comments. This year, we are also getting an additional $0.05 per share from chemical costs savings. And finally, we're getting an additional $0.05 per share for more productivity and production increases than we expected at the beginning of the year.

When I go back and look at the energy project from where we started in 2000 -- really 2009 when we came up with the estimate, and where we are looking at today and toward the future, overall, the three biggest benefits of the energy project are energy-cost reduction, incremental production, and chemical savings, in the order. Now, I'll turn it over to Mark, and he may have more comments on how we were able to achieve the higher-than-expected benefits this year.

Again, when you think about a recovery board, you're trying to achieve two different things here. You're trying to achieve steam generation with the organic composition and also trying to recover cooking chemicals, so you got a very complex reaction taking place at the bottom of the boiler in the reduction zone. We knew we were going to essentially double the amount of steam generation on these boilers, but we were pleasantly surprised with the efficiency gains in the chemical reduction efficiencies in the units, both at Valdosta and Counce, which now have allowed us to produce essentially more cooking liquor, more uniform pulp, and more pulp in general. That has lent itself to more paper-machine productivity. Again, what an added benefit from the project.

Okay. That's very helpful color. And one other question. I was looking back, and if you study calendars, which I do find better things to do, but on my cursory look, we average about 20.4 shipping days in September normally. And so given a 100,000-day shipment rate, it looked like the inventory situation this month that was reported this morning would normally have about 140,000, if you will, ton headwind. That seems like that didn't impact inventories at all. We still have the normal increase. And I thought -- I didn't know if you had any comment about why you thought that was the case? Is it more that -- the production seem to be high. I can only conclude that they're just weren't the tons available to get out into the marketplace. But maybe you have better color than I have?

Yes, with only 19 box plant workdays in September, which is the minimum number, I would've expected a bigger inventory increase. On the other hand, we had hoped to build about 10,000 tons of specifically for PCA of inventory to get ready for October. October has 23 cutoff days. However, we were unable to build any inventory in September because our demand remained so strong. So maybe we should not be surprised.

Let me just amplify. September was a strange month. What we've discovered, it is like discovering Haley's Comet. Maybe we should've known it, but it's been since like 1984 was the last time there was a two-day difference in shipping days year over year. Usually, it is only one day. So we would've thought with that few shipping days, inventories would've risen more. But they didn't. And I don't know if people took downtime in the industry.

I know we couldn't build inventory because our demand was strong. September was a record for us volume day on a [per-workday] basis. So, I really don't have a good explanation for that. One other point on that, I saw the FPA members this morning, and it showed that roughly on a per-workday basis, demand was up about 2.5%. And on a total volume, it was down about 7% or so. I don't have the exact numbers in front of me, but that is close.

What we normally do is average the two numbers, but you really shouldn't do that this time, because it's such a rare event that there is two days' difference. You simply can't make up two full days during the month. Kind of the way -- if somebody asked me how would you put your spin on the numbers, I would deduct one of those days, and that would make the total volume down about 2.5% and a per workday up 2.5%. It kind of feels like a flat month to us for -- I would say the industry, it feels like a flat month for them year over year, whereas we're up 5% and down 2.5%. We are up 2%. It's kind of tracking the way it's been tracking all year comparing PCA to the industry. On organic growth, we've been 2% to 3% better, and then if you throw our acquisitions in, then we are about 6% better. But it's a strange month. This hasn't happened since 1984, where we've had a two-day difference in shipping days, and that does skew numbers somewhat.

Okay. Thank you.

Mark Wilde, Deutsche Bank.

Good morning, Mark, Paul, Rick. A question on export pricing. I noticed that you noted that in the first nine months, lower export prices were about $0.05 drag year-to-date. I wondered if you could give us some sense of whether there is still a drag as you see them here in October?

Again, as most of you probably know, we are not a big export player, but we did raise export prices in September to a majority of the markets we serve. And if you think about it, we do business in approximately 35 countries, and of those 35 countries, we probably have five larger countries that we ship probably 55% or so of our volume. But we don't make a practice of commenting on specific prices in specific markets for competitive reasons. With that, we're getting better, but not as good as domestic pricing.

Okay. And can you, Mark, can you give us a little more color generally on what you are seeing in exports? Because I am hearing about some very long backlogs on export sales right now, maybe some people even out into 2013. Can you provide any color?

Mark, this is Tom. Again, as Mark mentioned earlier, we are a smaller player in the export market, but I can tell you that demand is steady to up depending on the market. And certainly the backlogs are getting out there. There's no question about that.

Okay. Then I just had a couple of other questions. Mark, any thoughts on other capital projects that may be looming over the next two or three years for PCA?

We don't have any big projects like these energy projects right now. We have the typical smaller-capital-requirement projects that allow us to continue to build on efficiencies and enhance the efficiencies in a smaller way. But with that, we always have a portfolio of opportunities in both the box plants and the mills, but nothing of the magnitude that we saw with the big energy project.

Okay. Then just my final question. Can you give us an update on what you are seeing in wood fiber costs around your different fiber baskets?

Prices are pretty flat both north and south. So as we get ready -- we're completing our winter [wood build] right now, but prices are flat.

Okay, very good. Good luck in the fourth quarter.

Anthony Pettinari, Citi.

Can you talk about how shipments have trended over the first couple weeks of the month? And then maybe more broadly, you outperformed the industry again on volumes this quarter. I was wondering if -- what you think a sustainable organic growth rate for you is? Can you sustain the 2% to 3% growth that we've seen this year, maybe going into next year?

Yes, if you look at the first nine days of October, our bookings are up about 6% through this period of time compared to a very strong October last year. Billings are essentially flat. Again, cutoff is very strong, and billings always catch up with bookings over the course of the month. Tom, do you want to elaborate on that?

Anthony, I would just say that we have always -- we've said we will continue to look for every opportunity we can, certainly in terms of acquisitions. So we make -- we will continue to look for those. Organically, we've had a pretty normalized rate here for quite some time, and we would continue to see that rate going forward. That would be our expectation.

Okay, that's very helpful. And when you think about box shipment growth in the US, or industry-wide, it's basically been flat this year, as you mentioned. When you look into 2013, is there anything that you are seeing in any particular category like food or beverage or other products that would make you think that 2013 should be maybe a better volume year for the industry, or maybe the same? How are you kind of thinking about those volumes?

At this point in time, I don't think anybody sees anything out there on the horizon that is going to be a dramatic shift. However, I would like to think that it can't get a hell of a lot worse than where we have been, and we're bound to get a little bit better. Certainly, one of the concerns we have is any uptick, given the inventory rates we have right now, is going to make things even tighter than they are at the moment. So, we will just -- we continue to do what we do and let the economy take care of itself, but hopefully there will be some uptick going forward.

Anthony, both presidential candidates are talking about jobs. Both have said jobs is very important. If we can get unemployment to continue to drop, that will be very positive for our industry. Of course, I think we are all familiar with a lot of the anecdotal information reported in the papers about people moving manufacturing back to the US. I think it's started a little bit, but obviously, we need more of that. That is probably the best thing that the country could do to get out of the deficit situation, and that is to grow our way out. Long term, we feel fairly positive about where the US economy is going to go, because it has to go there. Picking when that starting point is, however, is not so easy.

Great. That's very helpful. I'll turn it over.

George Staphos, Merrill Lynch.

I wanted to maybe pick up on that line of questioning that Anthony had started. If we look at this year, certainly it's not been a great year in terms of volume through the retail chain for a lot of the food and beverage products because of food inflation. As I recall, you're not huge into agriculture, but it's not been the world's greatest ag season as well. Are your food-processing and food-related customers talking at all with any kind of data that would suggest that next year could be a better year than what's been probably a pretty challenging year this year in 2012?

George, this is Tom. I will comment on this real quick. Most of our customers, obviously they're -- they tend to be fairly optimistic about their business, and they hope that there is improvement going forward. I can tell you they are trying to do everything they possibly can from a marketing point of view to move their products. I think at the end of the day, just like any other year, there'll be some winners and there'll be some losers. It's in our best interest, obviously, to try to align with the winners. I think one of our advantages is with the 9,000 customer base we have, we're spread out very well so that we have the ability to and grow with a lot of different customers, and we don't have tremendous exposure to just one or two.

Okay. Thanks for that, Tom. Next question I had was on inventory position. Your inventory trend in the quarter surprised me. I would've expected flat maybe up some, like that is where you were trending. Explain to us if there is any operational issues you are having now by being so tight on inventory and what your goals would be for inventory in the fourth quarter coming up?

George, we continue to run full out. For the third quarter, we were running at a run rate over 100% capacity. First 15 days of the month, we continue on that trend. We did take advantage of supplying some of our legacy customers that requested some extra tons on the export side of the business during the third quarter. So we weren't able to build inventory. But right now, I think again, the mills just have to continue running at the pace they are running and supply Tom's needs and our export and domestic customer needs.

Mark, I don't know if you can comment to this, but was there a greater-than-normal trend in this past quarter for other producers asking you for tons that would normally be the case in the third quarter?

We generally don't comment on those matters.

Okay.

George, this is Paul. I think Mark -- a very good point in terms of inventory. We hope to build some inventory. We were running so well we decided to take risk, if you will, to ship more to some export customers who we cut back

Right.

And we tried to help them out a little bit. And that bet was we can continue to run well. There's always a trade-off. If we don't, we probably wish we would've kept those tons, but if we do, we will be happy we sold them. So we are betting that we can continue to run this well. One of the reasons we are fairly confident about the bet, we still are only four or five months beyond the annual shutdowns. Our mills are still in tip-top shape. Where you really start to worry when you get into the first quarter when it is the coldest quarter, and you've got now nine, ten months on your equipment, that is when the productivity risks are greatest. Right now, we've got the wind at our back productivity-wise, so we are going to ride that horse as hard as we can.

Got you. Last quick one, and I will turn it over. Is it possible to discuss at all, either in an index terms or percentage terms, what the overall cash-cost performance at the mills has been this year? Clearly, it has gotten better. The energy products have been a success. But obviously, the way the company reports, which is consistent with the way the other companies report on integrated basis, plus changes in mixes at the box-plant level over time, impairs comparability. So could you help us understand how you've improved in cash-cost position at the mills this year? Thanks, guys, and good luck in the quarter.

[Stewart], regarding that, obviously, we're not going to get into specifics, with the exception of just saying that the energy projects have delivered great results. And we've seen the benefits of the improvements at both Valdosta and Counce. Every year, we're always working on continuing to improve these efficiencies. That's all I really want to say about that. Paul, do you have anything you want to add?

No, other than you said it. Our actual data, actual costs, are company confidential information, and for competitive reasons, we choose not to disclose that.

Okay. Thanks, guys.

Phil Gresh, JPMorgan.

First question, with the containerboard production up 3% year over year in the third quarter, how do you expect that to continue to progress as we think ahead to say, next year? Do you think you can continue at this 3% rate? Or perhaps was some of that from the energy projects, so we should expect a lower rate moving forward?

Yes, going forward, we should be at the normal creep rate, 1%-type normal creep. We took advantage, obviously, of the energy projects through the 2010 and '11 activity at Valdosta and Counce and saw that nice 3% bump. That was a one-time event for us, and as I explained on one of the earlier questions, we have no plans as far as capital right now to go after any aggressive creep. Going forward, it is going to be typical, flat, 1%-type activity.

Okay. Thank you. One follow-up question on the pricing. When you said you expect to be essentially complete in the fourth quarter, should I read to means that the full run rate will be in there exiting December? Or is there still some carryover that we should be thinking about from a timing perspective?

No, our forecast at this point in time, Phil, is that we will have the full run rate going in, into the first quarter of next year. We obviously have some contracts that extend out a little bit further than that, which may add just a little bit, but for the most part right now, we're forecasting the full run rate.

Got it. Okay. With the energy projects and that increased savings that are coming from those, is there any carryover benefit into 2013, perhaps from the productivity or the chemicals or anything else you highlighted there, Rick?

You know, there might be a little bit. We've improved as we've seen things we could do. As Mark said, with the cooking and chemical recovery process, we've got a little bit more during the year. On average, from 2012 to 2013, productivity may come up a little bit, but that's built into the 1% that Mark talked about with creep.

The other thing, Phil, that we've discovered, as you always doing a project like this is that when you get done, there's a few more things you could tweak that you didn't do in the first project. Now, it's not a lot of money, and it's not a lot of return, but Mark told me about a project the other day, probably going to cost $0.5 million to do, and we will get 100% return on that. And that's because the energy project enabled it. But it's just a small thing, the $0.5 million in improved earnings isn't that much, but we've got a number of those and when you look at everything, if you'd done something just a touch different, you can get a pretty good return. Unfortunately, it's just a little bit of capital, and even though the return's really good, it doesn't make that much more money. But we do have some upside in those areas.

Right. Okay. My last question on the share repurchases. Rick, I think you said it was $8 million in the quarter, so that was a little below the second quarter, and if I look at the year-to-date, you're tracking below last year on that front. So maybe you could comment on the philosophy right now around share repurchases? Is some of this driven by how much cash you want to have on hand right now? Or how do you think about that in light of the fact that CapEx is down quite a bit from last year so you do have more cash flow? I guess I would've thought maybe a bit more on the share repurchase front this year. Maybe you could just give a little color?

This is Paul again. You're right. We didn't do as much last quarter as we normally do. We bought in about $32.50 a share, and the strategy we have been pursuing, which we discussed on last four conference calls, was that we're going to try to be a little more opportunistic than in the past. And that's when there was a very volatile time in Europe, problem in Greece or Spain. The market would get hit over here. Everybody got tarred with the same brush. Our stock would drop $1 or $2, and we would pick it up. We've been very successful in doing that, buying on the downs when something not related to our business happened in some parts of the world.

That really changed. If you look at the third quarter, we basically went up from about, like I said, $27 a share to about $35, $36. The stock was much less volatile, and those opportunities for a big blip down really never happened. We kept waiting and waiting and waiting, and it never happened, and we ended up buying some stock. I think if the world is more stable, we are going to have to return to more of a more steady, more continuous dollar-cost averaging, hopefully on the way up, type of buying strategy. The old strategy served us well for about 18 to 24 months, but unless the world gets more volatile, and those opportunities don't exist, then we are going to have to buy on a more steady basis going forward. So that remains to be seen.

Okay, that's helpful. Thanks a lot. I'll turn it over.

Mark Connelly, CLSA.

Thanks. Just one thing. I think we beat inventory question to death, but can we talk about more broadly about working capital, given the acquisitions and where that's going to settle out over the next couple of quarters?

This is Rick, Mark. From our working capital standpoint, our working capital has increased, as you pointed out, from the acquisitions. If I look at it, I think historically, working capital has been the lowest in the fourth quarter. And I think as we go into the fourth quarter, I do expect working capital to go down. Now the amount of working capital we have on hand will really be determined by a number of things, price of product and the AR. I don't see a lot of change in DSO. And number two is how much inventory you need in finished goods, as well as containerboard. But I think the biggest change in our working capital has been more so the acquisitions and a little bit pickup in finished goods. But I do expect that to go down in the fourth quarter and probably level out a little more over the next year.

Okay. That's all I need. Thank you.

Joshua Zaret, Longbow Research.

Thank you. I have a question on the working of the commencement of this box-price initiative. In general, and I underline in general, should we typically think it starts four weeks after Pulp and Paper Week raised their prices series? Or is it a set date, like October 1? And as long as I am asking this, did you get anything in September on the box side?

We are not going to comment about that, again, for legal reasons. Paul, do you want to add anything to that?

Our policy forever has been when the price increase is over, we comment on it. We do not comment on while it is going on, and that is on advice of counsel for antitrust reasons. And as you know, we are a very litigious society these days, and so we are extra careful to go way beyond what's required for safety reasons. We did say we completed our containerboard price increase in the third quarter, because it was over and we could say that. We are in the process of a box-price increase, so we are going to give no further information than that until we complete it, and then we can talk to you a lot about.

Okay. Was there a publicly announced date or --? It sounds like there isn't.

We are not going to comment on that. We have 9,000 customers. We call on them. We don't simply send out a letter. And so you cannot guarantee that you -- you try to get to them as quickly as possible, et cetera, et cetera. But it's not as simple for us as just sending out a letter, because we don't do that. We make personal calls.

Okay. Fair enough. Thank you.

Alex [Ovshey], Goldman Sachs.

Thanks, good morning. As you look at your M&A pipeline, and as we head toward [what's year-end and] potential tax changes in '13, are you seeing any incremental opportunities come up?

Tom, (multiple speakers) --?

Regarding acquisitions, I would just say that as we've talked previously, we continually look at acquisitions. We've got some opportunities that are out there that we're vetting at the moment, but we have a very high hurdle rate for these acquisitions. It has to meet the litmus test regarding customers, regarding management team, marketplace, et cetera. We're going through some of those, and we continually look at lots and lots and happened to get one here or there that is an absolutely right fit. And we'll continue to do that.

Okay. Thanks, Mark. As I look at your balance sheet, it's in pretty good shape. The leverage ratio is pretty low. Can you talk about what you believe to be the appropriate leverage for the business? And if we are below that level, how do you see the company getting back to that level?

I'll take that, Alex. You know, we really don't look at it at a leverage ratio. Of course we watch it, but we think we're at the right debt level. It gives us a lot of financial flexibility. We've got low interest rates, low debt, and it really gives us the ability to take advantage of whatever opportunity is out there with the leverage we have. I think you can look at it in the way of what you want to do opportunistically, and we'd rather have that financial flexibility of what would essentially be considered a low leverage to take advantage of those things with our financial flexibility when they might appear. We don't really have any plans to pay down debt. We only have a small term loan, and then in addition to that, we've got very low interest on our other notes. So, we're pretty happy with where we're at from a leverage standpoint. We would not be -- we have the flexibility, if we wanted to borrow, to borrow also.

Okay. Thanks, Rick. And I will ask just one more question. Can you think about the normalized CapEx level for the business? If you look at years 2010 and '11, clearly it was elevated because of energy projects. Probably '12 was a little bit lower because you were benefiting from the investments you were making in '10 and '11. So what's the right way to think about normalized CapEx and is that a good proxy for 2013?

Typically, we've seen -- we've run about 75% of depreciation, which is that $110 million, $120 million level. If you look at depreciation going forward with the acquisitions and where we are on a percentage depreciation, we're going to be in that $120 million range. And then we've also talked to the point that Tom is going to have $50 million, $60 million available for continued acquisition opportunities or box-plant strategic activity. Again, we are going to normalize, and it's going to be right in that range, $120 million area, plus the opportunities for Tom's side of the business.

And when we talk about the box plants, I'd also add we've said for a long time, we run at about $110 million. And we like to spend about $50 million a year on box-plant acquisitions. That's kind of been our mantra for the last five years. And that $110 million has probably creeped up to $120 million, because as we make this acquisitions, they need capital to be supported, too. So as we get bigger, we've basically gone from about a $2.1 billion company. We are close to $3 billion now. So, obviously it requires a little more CapEx.

The only other change that I think we've talked about a little bit is that Tom is out looking for acquisitions, but those acquisitions also compete against his internal projects. And so that $50 million is for either acquisitions, or if he's got a better internal project, for there. That internal project would go into the CapEx number, but it really comes out of the acquisition pot. Wherever we have the best investment for that $50 million, and usually it's an acquisition, because it's got a lot of synergy benefits, but occasionally, it's for an internal acquisition like the plant we built in Redding 1.5 years ago. I throw that caveat. The competition for these acquisition dollars is keen, and it's both internal and external.

Okay. That's very helpful color. Thank you.

Al Kabili, Credit Suisse.

All right. Thanks. I just wanted to circle up a little on the acquisition front, and with the M&A you have done on the box-plant side, you were still able to increase year over year your sales of containerboard to the outside. And I was wondering if you could comment on that? I would have through your integration rates would be going up with the box-plant acquisitions. Is this just a function of the higher capacity on the mill side from the energy projects, or just help us through that?

Again, the energy projects allowed us to grow the containerboard production about 120,000 tons. At the same time, we've been talking about our plans on the box-plant side to grow the integration level from the 80% up to the low 90%s, and currently we're selling somewhere roughly 83% integrated. We've been able to produce the tons necessary to continue supplying the market and also at the same time, as we've made this acquisitions, supply those acquisitions. With that, again, things are going to level out, thought.

I think the level out is an important comment. It's been a tough job to get the integration level up when you are also increasing your mill capacity, but we're up about 3% over the last couple years despite the additional capacity on our mills. But as Mark said earlier on the call, we're down to maybe 1% creep growth. So Tom Hassfurther is going to have a little easier time building that integration level up, because the mill production is not going to be going up as fast as it had been.

Okay. All right. That's helpful. And also, if you could help us a little. On the fourth quarter, you lapped some of the box-plant acquisitions. Can you help us with what acquisitions help on shipments in the fourth quarter? Is it still that 3% kind of rate in the fourth quarter? Or does that go down a little bit because you lapped some of the M&A?

I think we had one acquisition we made last year in the fourth quarter. So, it won't be three. It'll probably be more like to two.

Okay.

We [caught out that one] we made of the fourth quarter last year.

Okay, great. That's helpful. The final question is on mix. You talked last quarter how mix was a little better than you had expected, and I was wondering if you could talk about what you saw on product mix this quarter? A follow-up to that mix question is with price hikes coming, are you seeing from customers increased interest in further light-weighting, or any response on mix from that as well? Thanks.

This is Tom, Al. I would say that from a mix point of view, it's been pretty steady, not a dramatic change. Regarding the light-weighting, I think every customer out there is looking for an opportunity to reduce cost, but at the same time, they're not going to sacrifice quality in any way. I think there's a constant pursuit in the marketplace for reduced costs, and we work with all of our customers to try to do what is right and to try to meet their objectives, but at the same time make sure that we maintain the quality and service that they demand.

Okay. Great. Thanks again.

Steve Chercover, D.A. Davidson.

Good morning. Thanks for taking my question. I too had a question on mix. Are you seeing any benefit from the return of manufacturing to the US that you alluded to? And also, are you seeing incremental volumes to the white good products? I am thinking appliances for housing recovery.

This is Paul. I would say we are seeing some benefit in that I used to hear once a week from the box side of the business that this customer or that customer was shifting business to Mexico or China. I don't hear that anymore. And we are also hearing information that -- and we know of some of our customers that have moved some business back from Mexico or China. The amounts to this point are small, but we expect that trend to continue. So we really can't quantify it any more than that.

That's encouraging. Even if it's embryonic, it's a start, and --.

That's a good way to put it.

Other quick question. In your fourth-quarter outlook, you mentioned higher costs due to weather. Did you incorporate flat OCC, or do you have any inflation built in there?

The OCC is flat. We've seen the numbers. Obviously, the southeast area, OCC is up about $5. But all in all, we are flat, and that's what we've built into the fourth quarter.

Very good. Thank you.

Philip Ng, Jefferies.

Morning, guys. Had a longer-term question. The industry's obviously benefited quite a bit from the consolidation on the containerboard level. I just want to get a sense, do you think there needs to be more consolidation on the box side to improve returns going forward?

We are not going to comment about that, again, for legal reasons.

Okay. That's fine. Based on what you guys mentioned earlier about CapEx potentially being in that $110 million, $120 million ballpark and $50 million to $60 million on acquisitions, 2013 is shaping up as a record for cash flow year for you. So in terms of the remaining piece in terms of cash-flow deployment, should we think about it as being return to shareholders? Or how should we think about it going forward?

Yes, I think you heard Paul talk earlier to the dividend question, the fact that we spelled out our plans for capital. We have no plans to pay down debt, so that leaves that cash available for share buyback and dividends. So some ratio of the two. Again, that is where we are headed into the new year.

Okay. In terms of OCC, you mentioned you're baking in flat OCC prices for 4Q, but my question is the drop-off that occurred during 3Q, will that cycle through into 4Q? Or the benefit already kicked in 3Q already?

We don't talk about guidance into the forward quarters like that, but again, I think to summarize, it all depends on China.

Okay.

Think about that.

Okay. One last final question on the M&A side. A few of these companies I cover not containerboard have mentioned how multiples have come in a little bit due to the current macro backdrop. But given the fact that the industry is getting price increase, how do you see multiples come -- actually move higher given the current backdrop?

No. Don't have anything to really comment on that.

We are not -- that is what the analysts do. We don't -- we are not smart enough to comment on multiple changes. Our multiple is up this year, obviously, for I think our performance and what people think of the future. But predicting, now I can't even predict where our stock prices are going, let alone multiples. We really -- we can add any value to that.

No I'm just asking you if --

(multiple speakers) value-added answer to that.

In terms of what kind of multiples for stuff that you could buy, I guess in the pipeline, has that changed directionally?

We are not going to comment on that.

Okay. All right. Thanks, guys.

Thank you. We've got time for one more question.

Scott Gaffner, Barclays.

Thank you. Good morning. Just a logistical question on the box-price increase. I mean you did say was an all-consuming going out to these 9,000 customers, but I would assume that a certain percentage of your customers are on some sort of index that makes the conversation a little bit easier. Can you talk about what percentage of customers are on some sort of index as far as the containerboard price increase flowing through and how that will affect the discussion?

No, I am not going to comment on that. I would just say that the discussion is as important with every single customer, regardless of whether they are on or off some sort of index.

Okay.

It's not that we don't want to disclose information to you. We just don't like to disclose that information to competitors. There is no upside to that.

Right. Okay. No, I can appreciate that. Looking at the energy cost, you noted that the energy projects were ahead of schedule this year, obviously more of a benefit than you expected. But the natural gas prices have risen a little bit recently. How do you think about when we move into 2013? If they were to stay at this level, how does that impact your business? A follow-up on that, when you look at the seasonality of your purchased energy versus internally supplied, how does that change as we move through the year?

Natural gas is such a small component of our energy that it's really not a big factor. In that regard, again, we again just use very little natural gas. So that is about all I really want to say.

And it really doesn't change seasonally, except that the fact that in the winter months, you use more energy on the three coldest months of the year, primarily because your water temperature is a lot colder and you've got to heat a lot of water up to make paper. The one thing to point out on our Valdosta mill, we're now to the point now where other than in the lime kiln, where we do burn a little -- where we burn natural gas, we don't use any fossil fuel at all at Valdosta. We run the mill, again, except for the lime kiln, on 100% wood waste and black liquor. Counce is not quite as good, but Counce is pretty good in that regard, too.

Right. Okay. Lastly, on how we should think about directionally maintenance downtime as we move into 2013, I would assume you are in a pretty good position based off of the energy project and some of the work done over the last couple of years. Should we think about -- and you've got some benefit look like in the first half of 2012 from lower downtime, maintenance downtime. Should think about that repeating again in 2013?

We are right in the process of planning next year shutdowns, so we'll be able to add details on the January earnings call. But essentially, the shutdowns are normalized year-to-year with required work. But we'll add the details and January.

I think the only thing I would add to that is we did say when we talked about returns, avoided capital. With Valdosta and Counce, with the new boilers, there would have been about $80 million of capital spent over about a five-year period that won't have to be spent now on maintenance, because these are virtually new boilers. Going down from that regard. Our maintenance expense will be less.

Okay, appreciate it. Thank you.

Okay, with that, we're out of time. I appreciate everybody's time today on the call and look forward to seeing you in January for the full-year and fourth-quarter call. Thank you very much.

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