Packaging Corp of America PKG
Q2 2013 Earnings Call Transcript
Transcript Call Date 07/17/2013

Operator: Thank you for joining Packaging Corporation of America's Second Quarter 2013 Results Earnings Conference Call. Your host today will be Mark Kowlzan, Chief Executive Officer of 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.

Mark W. Kowlzan - CEO: Good morning, and welcome to Packaging Corporation of America's second 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's Chief Financial Officer. Thanks for participating in this morning's call. After the presentation, we'll be glad to take any questions.

Yesterday, we reported second quarter net income of $64 million or $0.66 per share which included one-time after-tax non-cash charge of $5 million, or $0.05 per share, for pension plan changes. Excluding this charge, earnings were record $69 million, or $0.71 per share. This compares second quarter 2012 net income, excluding special items of $48 million or $0.49 per share.

Net sales were a record $800 million, up 12% from the second quarter of 2012 net sales of $712 million. The $0.22 per share increase in net income, excluding special items were driven by higher containerboard and corrugated products prices and mix of $0.27, higher corrugated product sales volume $0.05. These items were partially offset by higher cost for energy of $0.04, labor and fringe benefits $0.03 and the timing of annual mill maintenance outages $0.03.

Excluding special items, net income for the first six months of 2013 was $130 million or $1.33 per share compared to net income for the first six months of 2012 of $88 million or $0.91 per share. Year-to-date net sales were $1.56 billion, up 12% or $1.38 billion in the first half of 2012.

We had an outstanding quarter in all aspects of our operations with record earnings driven by higher prices for containerboard and corrugated products and higher corrugated product volume. The annual outages at three of our mills went extremely well with very efficient start-ups and the mill set a new quarter record for tons produced for operating day. Earnings were higher than our second quarter guidance driven by better than forecasted containerboard and corrugated products volume and price and lower than forecasted costs.

Moving to the details of the operations, corrugated product shipments per workday were up 5.2% and total shipments were up 6.8% with one more work day in this year's second quarter. With our last box plant acquisition made in the first quarter of 2012 this is the first quarter where there was no volume contribution from new acquisitions.

Demand for both domestic and export containerboard demand remained strong however. With higher containerboard consumption of our box plants and with three mills being down during the quarter for their annual maintenance outages, we reduced our outside containerboard shipments by 9,000 tons compared to last year's second quarter.

This allowed us to end the quarter with our containerboard inventories at a more manageable level, about 12,000 tons below the end of this year's first quarter when we built some inventory for our second quarter planned outages.

Our mills will need to continue to run well in the third quarter however considering our inventory level and expected demand.

Moving to mill production and performance, our mills ran extremely well producing 629,000 tons of containerboard, despite reduced production of about 30,000 tons per mill annual maintenance outages at our three largest mills. This is 7,000 tons more annual maintenance down time than last year's second quarter. In April, we had the No. 1 paper machine down in our Counce, Tennessee linerboard mill for seven days reducing production by 11,000 tons.

In April, we also had the larger No. 4 machine down in our Tomahawk, Wisconsin medium mill down from five days and also the No. 2 paper machine of that mill was down 4 days with total production losses of 7,000 tons. In May, our Valdosta, Georgia linerboard mill was down for eight days reducing production by 12,000 tons.

Each of the mills started up and ran very well after their outages. As I said earlier the mill set a new quarter -- second quarter productivity record for total tons produced for operating day.

For the quarter based on days available to operate after taking out the scheduled downtime days, the mills ran at just over 100% of their capacity.

The timing of taking more annual maintenance downtime in the second quarter this year reduced our earnings by about $0.03 per share compared to last year's second quarter. We have no more annual average schedule down in the third quarter, so our mills will have an opportunity to produce more tons. Our remaining 2013 annual mill maintenance outage is in October at our Filer City, Michigan medium mill which would be a five day outage.

Looking at prices and mix, prices were higher for both container board and corrugated products improving earnings by $0.27 per share compared to last year's second quarter. Our corrugated products price increases went in as planned and as of today have been essentially completed. Export prices have also increased compared to both last year's second quarter and the first quarter this year as prices have moved up appreciably in all of our markets.

With regards to cost, energy costs were up $0.04 per share compared to last year's second quarter driven by increased prices paid for purchased fuels. Natural gas prices increased to $1.35 (m2) btu and coal prices were up about $0.55 (m2) btu compared to prices paid last year during the second quarter.

In addition, labor improved benefit costs increased $0.03 per share. Transportation costs increased $0.01 per share and we did see some (rail) – and we did see some rail car shortages and we also had a heavier mix of longer haul destinations.

Recycled fiber cost were lower than last year's second quarter improving earnings by about $0.01 per share at industry published prices for recycled fiber. Excluding the delivery cost, we're down about $15 per ton in the second quarter compared to the second quarter of last year. This benefit was offset by slightly higher wood cost, which reduced earnings by $0.01 per share. Our effective tax rate was lower than last year's second quarter from the settlement of certain tax matters, which improved our earnings by about $0.01 per share.

I'm now going to turn it over to Rick West our CFO, who will give you an update on our financial position.

Richard B. West - SVP and CFO: Thank you, Mark. In the second quarter, PCA generated cash from operation of $187 million. Capital expenditures during the quarter were $54 million. We paid our quarterly common stock dividend of approximately $31 million. Cash tax payments of $6 million were made and fuel credits of $66 million were used to offset federal tax.

We currently have estimated remaining fuel tax credits of $4 million, which will be used to partially offset tax payment in the third quarter. However, the final amount of the available fuel tax credits and the final cash tax rate is contingent upon the conclusion of the IRS audit currently underway.

We ended the quarter with $370 million of cash on hand, up $102 million from the end of the first quarter. Our total long-term debt outstanding at the end of the quarter excluding capital leases was $786 million. As of June 30, 2013, our diluted shares outstanding were 97.7 million shares.

As Mark mentioned earlier, during the second quarter PCA recorded a one-time non-cash charge of $5 million, which was related to a change in our hourly pension plan. We recently negotiated an agreement involving 25 of PCA's corrugated plants who will transition from a defined benefit pension plan to a defined contribution 401(k) plan.

The pension charge is based on accounting guidance, which requires us to accelerate the recognition of prior service pension cost for employees affected by this change.

With that I will turn it back over to Mark.

Mark W. Kowlzan - CEO: Thank you, Rick. Before discussing the third quarter I want to mention that based on our strong cash flow and cash position, we are accelerating about $25 million of high return capital projects from 2014 into the second half of 2013. These projects are all in our corrugated products plants where additional capacity is needed to support anticipated growth.

Now moving ahead into the third quarter; we expect higher corrugated products prices, higher sales volume, and with no planned annual outages increased mill production and lower mill operating cost. We also expect higher purchased electricity cost with summer pricing, higher amortization of annual outage repair cost, and a higher tax rate. Considering these items, we expect third quarter earnings to be about $0.88 a share.

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

With that, operator, I'd like to open the call for questions. Thank you.

Transcript Call Date 07/17/2013

Operator: George Staphos, Bank of America Securities.

George Staphos - Bank of America Securities: My first question would be can you comment at all on how early third quarter bookings and billings have been. And can you comment at all on the June box containerboard data which came out whether the data was more or less in line with your expectations or if there was any variance. Then I have a couple of company-specific questions?

Mark W. Kowlzan - CEO: Regarding the bookings and billings, for the first seven days our bookings are up about 18%, billings are up about 11%. Again, we are off to a good start, but also take into account the fact that the way 4th of July fell this year on Thursday; Friday and some box plants was an operating day, so even though it was not included as an official day there was some cut-off days. So the numbers are skewed somewhat, but we are off to a strong start but we do expect those numbers to temper down over the rest of the month. And then regarding the FBA numbers this morning; the one comment I do want to make if you look at PCA we came out of our second quarter and -- at the annual shutdown of the three of the mills we needed to run, we needed to build some inventory. But we are actually, for the month of June, we build some inventory so our PCA number we are up 5,000 tons. But we are still too low after the outages and so for the quarter we were still down 12,000 tons. So, on an industry basis if you think about the month of June and what the FBA numbers we're reporting, you're talking about a 30 day mill month as opposed with 20 day box plant month and again that's a 10 day differential. Normally, you'll see a 9 day differential, so you're talking about 100,000 ton mill contribution from this particular June that typically you wouldn't see. So, with that, I really don't have a lot to add to the FBA numbers, except again volume has been strong in our case and the inventories is trended at the historically low levels.

George Staphos - Bank of America Securities: One question maybe more specifically to PCA and you alluded to this in your comment. You're accelerating some projects to add some high return or accelerate some high return project in the box plants over the next 12 months into this year. If we had a stack rank what investors see as the most likely sources of return improvement in PCA from here over the next couple of years, would it be coming from the market development as you're seeing in the economy, would it be coming from the capital deployment as you just mentioned for operations or would it come from value return to shareholders, how would you stack rank the most likely sources of improvement on return to the shareholder from here from those three sources?

Mark W. Kowlzan - CEO: Again, if you think about what our strategy has been for the last few years, we have goal of getting our integration level up to the 91% level and continuing to deploy capital especially in the box plants to help in that direction, which we've been very successful at. With that in mind if you think about where we are, year-to-date we're sitting at about 87% integration, but from a return point of view, again I think the capital that we are spending in the box plant continues to give us extremely higher return opportunities, and as you are seeing that in the volume. Tom, do you want to add anything else (indiscernible). We don't really talk about it a lot, but your side of the business has been pulling a lot of good small pieces of return – big volume growth.

Thomas A. Hassfurther - EVP, Corrugated Products: Mark, I would just add that we're really a customer driven company, a revenue driven company. So we will deploy that cash where that driver can accelerate our earnings. That said I think we also taken all of the above approach and we've developed a lot of flexibility and we're pretty opportunistic about where we want to deploy that cash. But right now we have some opportunities in the box plant as Mark alluded to that have some good returns and we're accelerating those solely based on the facts that we have some very good customer opportunities and they are coming to us, and we're taking advantage of those opportunities.

Richard B. West - SVP and CFO: Just to summarize, (indiscernible) good question. If I ranked the first one that you had to pick one and I think Mark said it, increasing our integration level will be our greatest source of value creation for shareholders. So, if you don't mind we'll circle back to you later for other questions. We have 15 analysts now that cover us and we want to give everybody an opportunity. So, we are going to have to cut you off George, no malice intended.

Operator: Anthony Pettinari, Citigroup.

Anthony Pettinari - Citigroup: Mark, you referenced improvements and some capacity addition opportunities on the box plant side. And given that you are growing faster than the industry and your mills are running full out or near full out. I am wondering would you consider capacity expansion on the mill side or over the next one, two years how should we think about your mill footprint in terms of capacity as you continue to grow kind of faster than the industry.

Mark W. Kowlzan - CEO: The number one priority continues to be the integration level. We've spoken over the last year though we continue to have the tons available that come out of the outside sales both to the export and the domestic sales side of the equation. So, with the creep capacity that we currently have in the mills and the efficiency with which we are running and then with the opportunity to move tons and rationalize tons longer term out of those export domestic markets the mill acquisition, mill incremental capacity is a lesser concern at this point as opposed to the integration, if so.

Anthony Pettinari - Citigroup: And then maybe just a very quick follow-up. You referenced rail car shortages and maybe some higher transportation costs and that's some things that other producers have talked about. Is this a problem that's getting worst as you go into the third quarter or is it isolated to a specific region or is there any kind of color you can give us about what the pressure is in terms of transportation cost?

Mark W. Kowlzan - CEO: It was a combination of we went through the outages in the spring, we obviously had opportunities and issues combined with how to take care of the box plants during that period of timing and get the tons move to the right places from the remaining mills that we are running. Again, we had some spring issues again just with the normal seasonality with regards to rails and trucking. And then, again just the nature of where we are with the trucking industry and so, that being said again the fact that we compressed our annual shutdowns into the April-May period probably created the most – the biggest factor in that transportation.

Operator: Mark Weintraub, Buckingham Research.

Mark Weintraub - Buckingham Research: With more and more cash flow that you are generating, you have the enviable problem of finding a home for it and I know you’ve increased your dividend a lot in the recent past. I don't think you are too active on the share repurchase during the quarter, if you could confirm that. And maybe just help us understand I realize there is the 25 minute incremental that you are pulling for but you still seem to have a lot of additional cash beyond homes that have been identified for it. Can you help us on what you are thinking about it at this stage?

Mark W. Kowlzan - CEO: Again, as we said in the past, if you think about the uses of cash being dividend, share buyback, CapEx Paul and I speak regularly about this and we are – in past years we have been opportunistic in buying shares back but it was rather hard to justify these past six months buying shares when the market was performing the way it performed. That being said, I am going to have Paul make some comments as we have done the last few quarters because this is typically a board matter and we discuss this at every board meeting, but in regards to uses of cash besides of $25 million, into the third quarter we already have plans to make a $30 million pension plan contribution and also our federal taxes, we're looking at $31 million of taxes in the third quarter. So again, the benefits of the black liquor credits are essentially (running out of) $4 million left on those credits going into the third quarter. So again, we have roughly $61 million of incremental cash besides the capital. But Paul, do you want to make comment regarding…

Paul T. Stecko - Executive Chairman: Mark, you're right. We are going to continue – we're going to have cash. Things keep going the way they are and this is not a forecast, but we should have strong cash flow generation in the second half, which in your terms exacerbates our problem a little bit, what do we do with it. We've had a strategy long-term that we want to buy back shares that's right off – a pie of the things we do. We thought maybe with the Fed talking about tighten up on not easy – tightening up on the bond buying up, buying back as much, the market may correct -- the market is not corrected, so we missed it again. In other words, if we had to do over again, I wish we had bought shares back during the quarter, we didn't. On the other hand, the stock kept going up, so I hate the route for the stock to go down, just because we want to buy shares. So, I'm kind of in a dilemma I win both ways or lose both ways, however you want to look at it. We did increase the dividend. We thought that made a lot of sense and we increased it appreciably to get rid of some cash. We had a strong quarter and we're back into dilemma again, we got more cash than we need, we really have two things that we can look at; share buyback and dividend increases and it is a move in target. We are kind of hoping that something happens that may make the decision easier, but in the end we are eventually going to have to buyback more shares or increase the dividend and we will probably do some of each and when and how much will depend on a lot of things and I am not prepared including board approval. So, I am not prepared to go much further than that other than we know the situation, we know we have a lot of cash, we know we got to do something with it, we hadn't quite forget it out yet. That's not the best answer in the world, but that's the truth.

Operator: C.A. (Chip) Dillon, III, Vertical Research Partners.

C.A. (Chip) Dillon, III - Vertical Research Partners: First question is you guys pointed out $0.27 improvement from price and mix and just looking at the mill production that would suggest $60 a ton and I know a lot of that has to be the mix side of it with your forward integration strategy. But could you give us an idea of how much of the price increase you actually realize in the quarter and how much we would expect to see in the third?

Paul T. Stecko - Executive Chairman: Let me take this one, Chip. We don't give exact numbers in that regard we view that as company confidential information. However, as Mark said on the call as of roughly today we are done with the increase and we have achieved a full pass through. We got obviously none of the increase in the box plant last April because our price increase began May 1. So, we are going to – when you throw it all together, we are going to have realized this is both the mill, containerboard increase about 40% of the total in the second quarter and the other 60% in the third quarter and that's the best way that I can describe it. So, if you can figure out, which I know you are capable of what the total price increase is and how many tons we produced, we got about 40% in the second quarter, we will get the other 60% in the third quarter and that's what I've given into specific dollar amounts of increases?

C.A. (Chip) Dillon, III - Vertical Research Partners: Second question is you mentioned your – the strong beginning to July and one thing we noticed this morning is in the last couple of years, it seems like the box shipments at least when you look at year-over-year and even in absolute terms seem to be tilted more towards the beginning of a quarter and tend to fall-off at the end of the quarter and we certainly saw that in June but we've also seen in March and December and going back to September and June of last year. I didn't know if something had really changed in the last couple of years that would explain that and is that good or not good for the industry?

Mark W. Kowlzan - CEO: Again, if you just talk about PCA, our numbers are basically flat. If you look at beginning of month, beginning of quarter we’ve been seeing the consistent run rates throughout the quarter. What is interesting about this July, July has started out stronger normally the 4th of July week holiday followed by the second week is typically a big vacation, things are slow but we’ve seen a good strong start this year. So, again – but we are strong but again flat historically through the latest quarters.

Paul T. Stecko - Executive Chairman: Yeah, just to amplify on it. If you looked at our monthly box shipments April, May and June, they are all pretty much the same. There wasn't a lot of volatility month to month, so pretty constant. It's usually more volatile than this. Beginning a month to end of the month there has not been a lot of volatility there and what you said – as you said we have seen time to time historically, but not in the past quarter.

C.A. (Chip) Dillon, III - Vertical Research Partners: I know we're time constrained. So, just could you just talk real quickly about what you're accelerating in CapEx wise into this year? How much of the dollars and what should we expect in terms of the box plant improvement?

Mark W. Kowlzan - CEO: Tom, why don't you comment about some of the projects you're looking at there in terms of just the opportunities?

Thomas A. Hassfurther - EVP, Corrugated Products: We're going to accelerate about $25 million into 2013. Now, $5 million of it really doesn't have any real return in terms of income, but $5 million on infrastructure, which we just need to do and we might get that done now, $20 million is spread out in a lot of different projects and a lot of different plants. Again, it relates to the previous discussion that we had regarding our customers and their demand and the opportunities they present. So, that's where those geared towards and it's a handful of projects really spread out across the country.

Operator: Mark Connelly, CLSA.

Mark Connelly - CLSA: Just two things. You generated a lot more cash than we expected you to this quarter. I wonder if you could tell us if there is something different going on in working capital or somewhere nearby. Secondly, do you have a view on fiber cost in the second half and whether they are going to be affected much by the volatility of seeing lumber prices?

Mark W. Kowlzan - CEO: Rick, why don't you talk about cash first, then I will talk about fiber?

Richard B. West - SVP and CFO: I have really (indiscernible) normal in the cash flow or the cash we expected. We were bargaining a level of cash generation at the level. We said our working capital did not change significantly from the first or the second quarter, so, Mark, there was really nothing unusual there. We did have some larger cash payments in the third quarter, as Mark mentioned earlier. So, it is really nothing unusual.

Mark W. Kowlzan - CEO: Regarding fiber, we are seeing basically flat trends currently on virgin fiber (indiscernible) hardwood across the country. We have few periods with wet whether that caused some momentary increases in the Southern states, but again as we go into the middle of summer right now our earnings flat with wood-based fibers little bit of increase on recycle we are seeing around the country but nothing dramatic.

Operator: Phil Gresh, JPMorgan.

Phil Gresh - JPMorgan: Just on the box plant side you mentioned that this is the first quarter we didn't have any acquisition impact on the box volume. So, I am just kind of curious how you are thinking about the pipeline for any additional box plant opportunities or whether the acceleration on the CapEx side of things, I mean, is it going to be more internally focused in the second half?

Mark W. Kowlzan - CEO: Again if you think about it, I know Tom is constantly evaluating opportunities. Tom, why don't you add a little color to that?

Thomas A. Hassfurther - EVP, Corrugated Products: Phil, I would say that as we've said before, we are always looking at potential acquisition opportunity. We do have a high threshold for what they have to meet in order to make the acquisition. Of course the quality, great quality and sustainable customer base, a quality management team and accretion to earning. So, there are lot of factors that have to be met and it's got to be its size that makes sense to us as well quite frankly. But we're still looking at them, we're exploring them, we have some opportunities that we're certainly looking at right now and that's certainly an area that we will continue to deploy our capital.

Paul T. Stecko - Executive Chairman: I guess the only thing I would add to that, all things being equal, an internal investment will produce a better return than an acquisition because if you just put a piece of box of equipment in the box plant all of the overheads already been absorbed in that box plant. The one thing you're adding is a little bit of variable labor, a little bit of energy. So, the margin on some of the things that we're doing and some of the things we've done in our internal investment program produce very, very good returns and we've had a good list of projects to look at. Tom and Mark have gone through them, they picked the best of the best and said hey we need to accelerate these returns are that good. That doesn't mean you don't keep looking for acquisitions, but an internal project if it's a good one because of the overhead absorption benefit will beat an acquisition.

Phil Gresh - JPMorgan: Then just to the extent that mix is then a help, as you look at the numbers year-over-year, how much of that is just kind of driven by using more of that board internally and these initiatives that you've had versus some other kind of mix related factor that you've been going after.

Richard B. West - SVP and CFO: Yeah, some of the mix improvement is a result of that Bill as you mentioned, there is no question about that. We're going to deploy our paper where we have the best returns, there is no question about that. But in addition I think its representative of the quality of the account base we have, they put a very high demand on us, they add value, and as a result of that we expect to get paid for that. So, I think it's a combination of all of the above, I think in addition the improvement in the pricing also as a result of the containerboard increase on mill side, which did go into effect starting in April, so we got some benefit from that as well.

Phil Gresh - JPMorgan: Then, Rick, you had said last quarter that the maintenance tailwind from 2Q to 3Q I believe would be $0.06 a share and obviously you guys had really strong performance this quarter. So, is that delta still the same or does that change the delta?

Richard B. West - SVP and CFO: I think the delta is essentially the same. It's going to be somewhere between 2Q to 3Q after you net out the increase in repair job amortization of an improvement from $0.06 to $0.08 per share.

Operator: Mark Wilde, Deutsche Bank.

Mark Wilde - Deutsche Bank: I have just two questions. One, Paul could you just talk about the topic of a potential special dividend as opposed to just an ordinary dividend? Then, Tom Hassfurther, are you benefitting at all in the box business from just a consolidation that's taken place among the bigger players and maybe customers wanting to add suppliers or additional suppliers?

Paul T. Stecko - Executive Chairman: On the dividend, we have never done the special dividend and I really can't comment on that (indiscernible) people will read speculation into that and I don't want speculation to occur when I really don't have anything to say on the subject. So, we have never done one before and I am going to leave it at that. And Tom, you want to take the second part of that?

Thomas A. Hassfurther - EVP, Corrugated Products: Yeah, Mark, I would say that – I'd say we gained for many reasons not primarily at all because of consolidation. I think more so because of our existing customer base the fact that we've been able to align with some customers who have been able to grow through this period where the box business has been relatively flat. I think we have proven to our customers that we provide the best value and that's benefitted us great.

Operator: Alex Ovshey, Goldman Sachs.

Alex Ovshey - Goldman Sachs: If you look at the consensus forecast for the U.S. economy there is hope that we see a pick-up in the second half of this year and then into '14. As you look at your book of business and talk to your customers, do you see a potential pick-up in your business in the back half of this year versus the first half?

Mark W. Kowlzan - CEO: I don't really have an answer to that, that's speculative. We are not seeing anything in the market that says one thing or the other. Our business has been (stuck and erupt) pretty constant. The good news is it is a high earnings, so we are not complaining about it. As I said early, we've been pretty consistent. We have not seen any change. We've heard as you've heard and report up, so if the Fed changes its policy it may have an effect on economy etcetera, etcetera. So, we're kind of like you we're waiting to see what happens, but we don't know what's going to happen. But if it stays where it is we'll be pretty happy, if it gets better we'll be happier. So, that's about all we could add on that, we really don't know where the economy is going.

Thomas A. Hassfurther - EVP, Corrugated Products: I would just add in addition Paul, that our customers like ourselves we're hopeful and optimistic.

Operator: Scott Gaffner, Barclays.

Scott Gaffner - Barclays: First question is really just a clarification around capital spending. I think on the fourth quarter you had mentioned $120 million CapEx and then $50 million for either from box plant acquisitions or some strategic investment. Should we think about the acceleration of the $25 million from 2014 as additive to that number, meaning $195 million in total now versus the $170 million or how should we think about that?

Richard B. West - SVP and CFO: If you look it regularly we had $180 million of plants normal capital spending for the mills and box plants. We also had an additional $10 million that we had planned on this year for the Boiler MACT spending, so total of a $190 million. But again for the $180 million plus the $25 million that will be the total CapEx between the mills and box plants, and so again about 205 of normal plus the 10 of the Boiler MACT.

Scott Gaffner - Barclays: And then just around the capabilities that you are actually adding to the box plants are these customer specific capabilities meaning are you coming up with ways to hold customers accountable for the investments that you are making or are these more broad investments that you can utilize to serve broad customer base?

Thomas A. Hassfurther - EVP, Corrugated Products: Scott, this is Tom. They are driven primarily by what in essence is customer demand so that we don't have the capacity for it. So, we obviously will be able to fill the capacity of the customer demands that we have existing and obviously have some potential to handle some additional demand.

Operator: Philip Ng, Jefferies & Company, Inc.

Philip Ng - Jefferies & Company, Inc.: Quick question, I mean from a growth standpoint your box inventory has obviously outpaced the market pretty nicely it is (indiscernible) mid-single digit rate for last few years. Is the 75 million type of investment the new run rate going forward to sustain that growth rate going forward?

Mark W. Kowlzan - CEO: You can't say that. We will take advantage of opportunities. I think Tom said something that's very important. We see demand opportunities and growth opportunities based on our customer activity we will continue to deploy capital to support that growth need. So, on a dynamic manner we will be very flexible in how we deploy capital into the box plants. Again it is a very dynamic process. CapEx will slow down as we get towards the 90%, mid 90% to 93%, 94% integration level. As we approach that, obviously, our need for additional box plant capacity will diminish unless we add more mill capacity or unless we expand our mills and then you are in the game the same cycle because our strategy revolves very strongly around high integration level. So, it is dynamic, you would expect it to slow down and then it could pick up again depending what we do on the mill side of the business.

Philip Ng - Jefferies & Company, Inc.: That's actually a great segue. On the mill side, do you guys have a lot of projects that are still available that you can usually add some capacity down the road or would you actually have to step up spending pretty meaningfully to get that incremental capacity?

Mark W. Kowlzan - CEO: We've said this before. It's all related to the amount of capital you want to spend. So, capital per ton of capacity and so, you can add capacity virtually to most mills, it’s just how much is going to cost and how much you are willing to spend, how valuable is that incremental ton.

Richard B. West - SVP and CFO: Yes, said another way, creep capacity 1%, 2% a year for not a lot of capital but if you want a big pop in capacity, that cost – that's a big pop in capital. So, yeah, you just have to determine as you go through this, what's the best way to do it maybe accelerate creeping little bit, maybe do a big mill expansion, maybe make an acquisition and that will depend on the factors and play at the time.

Philip Ng - Jefferies & Company, Inc.: At this juncture it is probably still too early to call that?

Richard B. West - SVP and CFO: Again as we've said until we get that 91% integration level, the low 90s and then understand where our balance is going to be for outside sales of remaining tons we're not making any plans for any large mill expansions.

Richard B. West - SVP and CFO: Just to add to that, as you said our demand is – and our growth has been I think very good the last three years since we embarked on this project, but we're only half way there. This is an ambitious project to get from 80% integration to the mid-90. It's not something you do quickly because every piece of business we expand; we don't want tons for tonnage sake. We want box business that comes from customers who appreciate and pay for the value we provide. So, we're only looking for good business to fill up our system, not business in general and that makes this objective even tougher. But we're on pace, I think we're doing as we expected and we're going to finish this before we move on to something else.

Philip Ng - Jefferies & Company, Inc.: Then just switching gears a little bit, just to broader emerging markets, economies, like Brazil, China, and Middle East you seem to have slowed a little bit. I know you guys don't export too much abroad, but have you seen your export business slow down a little bit on that?

Richard B. West - SVP and CFO: We haven't seen this really slow down, but one of the things again, during the second quarter we intentionally decreased our outside sales and particularly some of the export funds to make sure that we took care of our own internal box plant needs, but some – if you think about last year to this year, we're proud of we are the last guy to answer that question quite frankly, just because of the position we've taken in the export market. We cannot handle the demand we have right now and we (shrunk) our supply base to the export market as it is. So, all I can tell you is what we see right now have no idea what somebody who is really large in the export market and participates in all the markets around the world what they see it. In addition, I would just add that, as Mark mentioned in his comments, the price has risen significantly or certainly appreciably in the export market as well at least the ones we are involved in.

Operator: Albert Kabili, Macquarie.

Albert Kabili - Macquarie: Mark, first just if you could help us on the box plants estimate. Just help us frame what that means for your capacity this year how much that boost your capacity this year or how does that help your integration rate?

Mark W. Kowlzan - CEO: If you look at year-to-date we are sitting at an average of about 87% integration and we believe in what we are forecasting internally as that that integration level will remain about 87% through the remainder of the year, in that area. But for full year average…

Albert Kabili - Macquarie: And is this investment related more to improving throughput or is some of this just increasing your capabilities that's going to help with the mix component of your business?

Mark W. Kowlzan - CEO: Both.

Paul T. Stecko - Executive Chairman: This is Paul Stecko back on the CapEx we had a program where we spent $80 million to $100 million over the last couple of years to increase our integration level. This is only $25 million of capital. So, you are talking about a couple of percent increase in integration level at most here. So, this is not a big, big project, but don’t misunderstand that we simply accelerated about $25 million from last year to this year and it's all equipped, it’s a piece of equipment that we add a capacity on, it’s a piece of equipment that we need because we got a new piece of business specific to a customer that we produce and other prices. As Paul mentioned about $5 million is just for infrastructure improvement. When you are running box plant some of them as hard as we are you got to make sure the infrastructure is still able to support it, be that another truck (top) or improvement in a (indiscernible) so we can get more input through the whole plant et cetera, et cetera. But again, it’s only $20 million for equipment probably in seven or eight plants and it is going to – on the margin increase our integration level a couple of percent but it’s not going to increase 10% because of the amount, we are only spending $20 million in capital, it’s not that much money but the returns are all very good.

Albert Kabili - Macquarie: And that’s $20 million on top of the $50 million, so $70 million total?

Paul T. Stecko - Executive Chairman: Yeah, we put that in really on top of the 50 because we’ll do that in lieu of making an acquisition and that's the plan for this year. As Tom said, we are still working on the pipeline. That number could change soon if a really good acquisition came up, but we got no comments on that at this point. Next question, please?

Operator: George Staphos, Bank of America Securities.

George Staphos - Bank of America Securities: My third question, the only question here is this. If we look at the level of operating profit relative to revenue and subtract one from the other you get cost both this quarter and the year ago quarter. Cost went up about 50 some odd million dollars. Yet production declined for all the maintenance outage reasons. As you think about maybe the question more for Tom, as I listen to what you (enumerate) kind of the cost factors in the quarter, would much of that increase in cost be a function of mix i.e., as you've picked up business, you've picked up more profitable business, but business that in turn requires you to add more value to the product before you sell it to the customer? What would drive that increase in cost relative to the lower production year-on-year that you saw in the quarter?

Paul T. Stecko - Executive Chairman: It's not related to that. We told you where the cost items that went up. Obviously energy prices are up, coal, gas, labor infringes are up. Our incentive compensation payments will be up. If we continue at this rate we'll make appreciably more earnings than we did last year and our bonus plan is the function of profitability, the more profitable we are, the higher bonuses we can pay. So obviously our labor and benefits are up, but there is nothing related to the mix on that is the short answer to your question.

George Staphos - Bank of America Securities: I'll follow-up offline because the numbers on a per share basis don't add up quite to the overall level of cost increase, but anyway good quarter and good luck in the third quarter.

Paul T. Stecko - Executive Chairman: Let me comment on that. We don't understand the intricacies of every analyst model, so when you throw a model question at us. We don't necessarily agree with what you're saying. Not because we don't believe you, we just don't understand your model. So, it is hard to respond to questions like that unless we do it offline and you tell us what your model means and we can respond to that as long as this publicly available information.

George Staphos - Bank of America Securities: Sure. I was just referring to what you publish in terms of revenue and operating profit.

Operator: C.A. (Chip) Dillon, III, Vertical Research Partners.

C.A. (Chip) Dillon, III - Vertical Research Partners: Just a quick one for Rick. On the black liquor credits, you mentioned there is just a little bit left and could you just give us a range of what the possible outcomes would be based on the Filer City audit. Could there be more or could there be – they would be reversed some of these credits?

Richard B. West - SVP and CFO: Chip, as far as any more, no. We recorded on what we expect that we will get and we have the 4 million remaining. And if you look in our 10-K it does lay out how much we have built in in the event that it does – if this allow which we do not believe that will be the case. And as we said last quarter we believe the worst case would be $120 million payback if no credits were allowed and we don't anticipate (indiscernible).

C.A. (Chip) Dillon, III - Vertical Research Partners: And when do you think this gets resolved. Any update on that?

Richard B. West - SVP and CFO: From our standpoint we are still hopeful that it will be resolved by the end of the year.

Operator: Albert Kabili, Macquarie.

Albert Kabili - Macquarie: Just a quick one for you, Rick, on pension. With the changes to the plan any thoughts on how that influences the pension expense?

Richard B. West - SVP and CFO: It doesn't really influence the pension expense that much, I did mention on a voluntary pension contribution that we're making irrespective of the change in the third quarter, but it does not impact the pension expense.

Albert Kabili - Macquarie: With the black liquor, $4 million left, should we just be assuming your cash tax rate goes close to your 36% book tax rate, is that how we should be thinking about it or there are some depreciation items that could change that?

Richard B. West - SVP and CFO: There are some differences between tax depreciation and book depreciation as well as some credits that are available under the normal course. I would say our cash tax rate reverting back to about 32%, probably about 28% in the third quarter mill and go to 32%.

Operator: Mr. Kowlzan, actually there are no more questions, do you have any closing remarks?

Mark W. Kowlzan - CEO: Thanks, everybody for joining us today and we look forward to seeing you on the next call on October. Have a good day. Thanks.

Operator: Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.