Rock-Tenn Co. F4Q08 (Qtr End 09/30/08) Earnings Call Transcript

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 |  About: WestRock Company (WRK)
by: SA Transcripts

Rock-Tenn Co. (RKT) F4Q08 (Qtr End 09/30/08) Earnings Call November 4, 2008 9:30 AM ET

Operator

At this time, I would like to welcome everyone to the Rock-Tenn fourth quarter 2008 Earnings Call.

(Operator Instructions)

Your speaker for today's call, are Mr. John Spiegel, Vice President, Treasurer, Mr. Steve Voorhees, Chief Financial Officer, and Mr. James Rubright, Chairman and Chief Executive Officer.

Mr. Spiegel, you may begin your conference.

John Spiegel

Thank you, Trey. Welcome to Rock-Tenn's fiscal fourth quarter 2008 conference call. I am John Spiegel, Vice President and Treasurer of Rock-Tenn. Also joining me on the call are Jim Rubright, CEO and Steve Voorhees, CFO.

During the course of the conference call we may make statements that are not historical in nature and may involve forward looking statements, within the meaning of Federal Securities law. For example, statements regarding our plans, expectations, estimates and beliefs related to future events are forward-looking statements, which involve a number of risks and uncertainties. Many of which are beyond our control and that could cause actual results to differ materially from those discussed.

Additional information regarding these risks and uncertainties is contained in the documents that we filed with the Securities and Exchange Commission. These documents include the company's Form 10-K filed for the year ended September 30, 2007, and our subsequent Form 10-Q since that date.

During the call, we will be referring to non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are contained in the fourth quarter press release, which is available on Rock-Tenn's website at rocktenn.com. Also during the call we will be referring to credit agreement EBITDA for 2007. Reconciliation to this measure can be found in our August 2008, Investor Presentation located at rocktenn.com

I will now turn the call over to Steve Voorhees, who will review our financial results. Steve.

Steve Voorhees

Thanks John. Rock-Tenn reported another quarter of record revenue, of $786 million, up 30% over the last year and 2% over the last quarter.

Strong sales growth in consumer packaging and corrugated packaging and pricing improvements in our businesses enabled us to outrun very high input costs during the quarter, and our newly acquired corrugated packaging operations continued to exceed our expectation.

Rock-Tenn reported fourth quarter net income of $28 million or $0.74 per share. On an adjusted basis, Rock-Tenn earned $0.90 per share, 58% more than the $0.57 per share reported in the fourth quarter of last year.

Rock-Tenn reported $8.1 million of restructuring cost, consisting primarily of acquisition integration cost of $1.8 million, the cost of corrugated plant consolidations of $2.3 million, and the amortization of acquisition related deferred, compensation expenses of $2.1 million. We refer to this $2.1 million as ESU expenses during our conference calls earlier this year.

We also incurred $2.1 million of restructuring costs from the closing of our folding carton plant in Baltimore.

During the September quarter, we adjusted the value assigned to the inventory at the time of Southern Container acquisition. This increased the purchasing accounting step up in the value of the acquired inventory by $1.3 million. This was expensed during the quarter and adjusted out, as we did in the second and third quarters.

The integration of Southern Container and Rock-Tenn has continued to proceed very successfully. During the quarter we consolidated our Greenville and Spartanburg, South Carolina sheet plants. We have now fully integrated our legacy corrugated operations into the Southern Container box plant system. We expect to achieve $15 million in annual rate run synergies by June of next year.

Rock-Tenn's results this quarter reflect our new segment reporting structure. Before, reporting segments included consumer packaging, which consist of the folding carton business, and six coated paperboard mills, corrugated packaging, which includes Solvay and St. Paul containerboard mills, and our corrugated converting operation, our Merchandising Displays business, and four Specialty Paperboard Products, which include five Specialty Paperboard mills, 16 converting locations, and our recycled fiber procurement and trading activities.

Turning back to the consolidated results for the quarter; non-allocated expenses increased by $2 million to $8.9 million in the quarter. The increase was primarily due to higher accounting audit and systems cost, driven by the size of the company after the Southern Container acquisition. Perspectively we expect these costs to run at a rate of about $8 million per quarter.

Capital expenditures for the quarter were $24.5 million, below depreciation and amortization of $38.7 million. For the full year, capital expenditures of $84 or $51 million are below depreciation, amortization of $135 million, and below our prior guidance of $90 million.

So fiscal year 2009, we expect to invest $90 million of capital in our business, below the full year depreciation amortization expense of approximately $155 million.

Turning to our defined benefit retirement plans were $256 million at the end of September. This compares to $326 million projected benefit obligation at the end of September.

For fiscal year 2009, we expect our book expense related to these plans to be approximately $17 million, as compared to $7 million in fiscal year 2008. We expect to contribute $25 million to our defined benefit retirement plans in fiscal year 2009.

Rock-Tenn reduced net debt during the quarter by $62 million, making for a total reduction of $150 million for the six months since the March quarter, when we acquired Southern Container.

With the increase in credit agreement EBITDA to $458 million, we reduced our debt-to-EBITDA leverage ratio from 4.2 times at the time we closed of Southern Container acquisition to March, to 3.6 times at September 30, 2008.

Clearly, many things are working well at Rock-Tenn at the same time. The Southern Container acquisition added $0.29 per share to earnings for the quarter.

Yesterday, we used our senior credit facility to redeem $129 million of debt at Solvay Paperboard. This frees up approximately $73 million of cash at Solvay that was required to be held under the terms of the Solvay bonds.

We will return $44 million of this cash to the sellers of Southern Container as required by the acquisition agreement. We will use the remaining $29 million to reduce debt at Rock-Tenn.

There was a 2% or $2.4 million redemption premium paid to the holders of Solvay bonds. This premium was funded by the sellers of Southern Container. This premium, even though funded by the sellers, will be expensed on Rock-Tenn's financial statements in the December quarter and shown as debt extinguishment cost and will be adjusted out of earnings for the quarter.

We will make an additional payment of approximately $70 million to the sellers of Southern Container this month to reimburse them for taxes that they will pay as a consequence of the section 338(h) (10) election made as part of the acquisition.

The $70 million payment and the $44 million in cash returned to the sellers as part of the Solvay bond redemptions are shown as debt on our balance sheet as of September 30. Total debt and net debt will not change as a result of these payments.

After these payments are made, we anticipate that Rock-Tenn will have over $200 million in availability under our senior credit facility. This provides more than adequate liquidity for our business.

Going forward we expect annual interest expense to be in the range of $105 million to $110 million per year. Approximately 35% or $575 million of our debt will be at floating interest rates.

We continue to expect to reduce our debt-to-EBITDA ratio to three times by September 2010. Given our progress over the last six months, it appears likely that we will obtain our goal prior to September, 2010.

Jim will now discuss our operating results and outlook. Jim?

James Rubright

Thank you, Steve, and good morning. Well this quarter, the numbers pretty well speak for themselves. Strong sales, high operating rates, operating excellence within our business units and strong accretion from the Southern Container acquisition all combined the results in a record earnings that we reported and record adjusted earnings, which were up 58% from the fourth quarter of 2007, and up 29% from the June quarter.

Segment income was higher than last year in each of our operating segments, except for Consumer Packaging segment, where higher pricing for coated paperboard could not completely offset, very high input costs during the quarter. Especially for fiber and energy, both of which started out high and then with the exception of virgin fiber declined across the quarter.

Bleached and recycled ton shipped, were up during the quarter over last year. Folding carton volumes were flat, in an industry that was slightly down. Display sales were up again, up over the prior year quarter and the September, 2007 quarter.

You step back and look at the changes at Rock-Tenn overtime, I think a very good measure of the improvement of our business profile and our performance is the increase in our EBITDA margin.

Many of you will recall that in our Southern Container acquisition investor presentation, we showed credit agreement EBITDA margins pre-acquisition of 12.4% and 14% pro forma for the acquisition. During the September quarter just completed, our actual adjusted EBITDA margin had increased to 15.4%.

As good as those results in the quarter were, actually each month in the quarter got better. Demand for our products continued to be good throughout the quarter. Thus is July's peak natural gas and high recycled fiber cost backed off across the quarter and the July $55 container board increased and the related box price increases went into effect in August and September, our monthly results improved.

Our outlook for next year should be for continued strong earnings and cash flow as recycled fiber and energy costs are much lower today than last quarter's average as are detailed, and the sales resiliency in times of economic stress, of the large proportion of our sales that are for food and beverage, paper products, health and beauty products, and other consumer non-durables should support our sales volumes, compared to many other businesses.

I would like to return to recycled fiber. We saw sharp OCC declines for both October and November. About half of our OCC price is off of Buffalo and North Eastern OBM, and the balance price is primarily off of Chicago and Southeast and Southwest.

Today, Chicago and Buffalo OBM are each $45 per ton, and that compares to an average for the quarter of $87 per ton for Chicago, and $110 per ton for Buffalo. If you compare that to the last year's September quarter, they were both at $115 a ton.

In total, OCC represents about 75% of our total recycled fiber requirements, and those total recycled fiber requirements are about 2.1 million-tons per year. Although, I will not detail them in the call, I would also point out that most other recycled grades have shown similar, very significant downward cost moves.

Energy is also a major cost input for Rock-Tenn. Natural gas closed at $7.47 per Mcf for October, and $6.47 for November 2008, which will be reflected in our December quarter earnings. December is currently trading at $6.84. Those prices compare to an average for the September quarter that we just reported, of $10.24 per Mcf and $6.16 for the December 2007 quarter.

We did not buy natural gas forward this year when prices were high, so our costs for the current quarter will fully reflect the price declines from the September quarter that I have just outlined.

Other important costs for us, such as chemicals, starch and transportation have not yet seen comparable declines from the averages of the September quarter, but the downward movement in oil and natural gas prices should prove helpful there as well as, as it will be with transportation costs.

In contrast to the declines in prices that I have just outlined, virgin fiber costs were much higher than last year, with wood costs for our Bleach Board mill up 27% in the September quarter over the September '08, '07 quarter, so the year-over-year comparison is up 27%. Unlike costs of recycled fiber, our costs for virgin fiber remain high today, and we believe due in large part to the housing slowdown.

I would like talk about the current pricing environment. Published index, paperboard and container board pricing improved significantly since the ends of the June quarter, and we have been passing those price increases through, to our paperboard and packaging customers.

Overall, average pricing for the quarter for paperboard and container board increased $19 per ton over the prior quarter average. Just pointing out what many of you all know, since June of 2008, containerboard had $55 per ton price increase, published in July, which we began to recover in August and September on our 954,000-tons of annual capacity.

In bleach paperboard, $40 per ton was published in October 2008, and we will begin to recover that price increase in November and December on our 335,000 tons of annual capacity.

We saw a $35 per ton increase published in August of 2008 on Coated Recycled Board, which we began to recover on our 620,000 tons of CRB capacity. Uncoated Recycled Board saw a $45 per ton price increase published also in August of 2008, and we will begin recovering that in our uncoated mills, which is known as smaller of our segments, and we have a number of contracts there that affect pricing and with respect to the portion of that product that goes into industrial markets. I think we will see head winds that will not necessarily be the case particular with other grades.

On the other hand, pulp pricing has declined, for us the decline is approximately $30 per ton on our approximately 100,000 tons of annual capacity. Given the production we anticipate of SPS, I think our market tons of pulp this year will be below that 100,000 ton number, perhaps by 10% to 15%.

Regarding containerboard pricing for this quarter, while it is true that recycled fiber and natural gas cost have declined, virgin costs, certainly as we see them, have increased. As I mentioned earlier, and they remain high as we speak. So, that should translate into a relative competitive advantage for recycle producers such as Rock-Tenn.

Looking to the current December quarter, this is typically our weakest quarter seasonally in paperboard and consumer packaging, as we typically experience a falloff in demand for folding cartons and recycled paperboard, especially, as we approach the Thanksgiving holiday and then through the end of the year.

This December quarter, we have taken an abbreviated maintenance outage at our Demopolis bleach board mill. We will not take a major outage, as we have in each of the last three years. We have made a number of operational improvements that would allow us to move to an 18 month major outage schedule.

Thus, we expect to take a major outage in the third quarter of this fiscal year, but then we will not take one in fiscal 2010. The October outage will reduce this quarter's earnings by several cents per share, but the net effect of these changes over the full cycle will be lower maintenance costs in total.

Looking at the current demand environment; demand for our products is going to vary by product category. As a whole, we see our demand as better than general economic data than I have seen, as we would expect.

Backlogs for bleached paperboard are good. Backlogs for recycled board have not changed materially from the averages of last quarter. While the industry data shows decline in containerboard and box demand, our containerboard mills continue to run full as we speak, and our box plan inventories in bookings, which were weak in early October actually strengthened late in the month.

The integration of Southern Container in our legacy corrugated plants is proceeding very well, as are the steps we have taken so far to integrate corporate services. The Southern Container acquisition continues to achieve results ahead of our acquisition operating cases, in all three areas of their business: containerboard, with higher pricing and the increase of 50,000 tons per year in annual production capacity; and the box plants; and the graphic plants.

Our targeted sales plans and operational improvements have led to continued sales and earnings growth. The fact is that notwithstanding weak industry volumes. We grew our corrugated box plant volumes in the September quarter, when we grew them compared both to the June '08 quarter and the September '07 quarter.

Our box plant volumes in the acquired plants increased 6% over the June quarter and 22% over the September '07 quarter, while the mill tons sold were up 11% over the June quarter and 16% over the September '07 quarter. As Steve said, we estimate that the acquisition added $0.29 per share to adjusted earnings for the quarter.

I think, based on our current demand for containerboard and corrugated packaging, the earnings and cash flow accretion showed from the acquisition should continue strong into fiscal 2009, if only as I noted before because recycled fiber costs today are significantly lower than last quarter.

Overall, the strategic moves that we have made over the last few years to now operate the lowest cost coated recycled paperboard system in North America, the lowest cost folding bleach board mills and one of the newest and lowest cost containerboard mills. As well as the increasing profitability of our folding carton business, primarily through the Gulf States acquisition and through aggressive pursuit of operational and administrative excellence, have made Rock-Tenn an exceptional for the rule of our industry and positioned us we believe for exceptional performance in the years ahead.

I want to thank you for your continued interest in our company, and Steve and I are now prepared to answer questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). First question does come from Claudia Hueston of JPMorgan. You may ask your question.

Claudia Hueston - JPMorgan

I was hoping you could provide just a little more detail on what you're seeing in the corrugated box business. Obviously, it sounds like your trends have been a little different than the industry and then you commented that things have picked over the course of October. Just wondering are there specific markets or areas where you're seeing trends, any color there would be helpful.

James Rubright

Yes, if you compare Southern Container's business profile and Rock-Tenn's, we have a higher percentage of our end markets in food, beverage, paper products of various categories, which could be personal care, for example. So our business is going to be a little more resilient, we think than an industrial packaging business.

Now to be clear, October was weak, and we saw our backlogs decline, probably 10% to 15% in the first couple of weeks of October. But then they came back up not to where they would have been at the offset of the quarter, but they increased in the last week of the quarter.

So, while we see weakness in the markets, it may just be our positioning that causes us to be somewhat stronger than other participants. The other thing is that the data has been flowing in, which causes me to say that it has not perfect predictive value. But simply on a Mcf shift basis we feel that our volumes were relatively consistent with our expectations for the quarter. In fact I'm not ignoring the fact that there is a weak economy, I'm simply reporting what we're seeing from volume data in our plants.

Claudia Hueston - JPMorgan

It's helpful. Good to hear. And then I guess, just looking at the display business I was curious just how that turned in through the quarter and drew into October. Has there been any slowing in that business at all?

James Rubright

I don't have a lot of visibility for what the December quarter would be, but there is also a lot of ebb and flow. So given the strength of the October quarter, and the fact that we're heading into the holiday season, I would expect that business to weaken. And we've seen a shift, so that I'm not sure where the revenues are going to come out or sheets produced in the manufacturing plants are down. But we've got in a high level of product manipulation activity in the assembly plant. So it's a little hard to say where that's going, but I question whether the business continued to be as strong as it has been?

Claudia Hueston - JPMorgan

Okay, and then just finally. Any thoughts on where OCC is going to end up here? And have you noticed any changes just in competitive behavior with the decline in OCC?

James Rubright

I won't comment on the latter, but with respect to OCC, we have had the conversation before. We have looked at those $115-$125 prices, and said, well, the mean reverting price is $75, and Steve and I were just going over the 10-year trend, and the mean reverting price is now $72.15 or something like that. So you may ask me what's OCC going to be, I'm going to tell you it is $72, but really, the markets are so weak right now. And that's the way it is.

Claudia Hueston - JPMorgan

Okay. Thanks a lot, guys.

Operator

Christopher Chun of Deutsche Bank, you may ask your question.

Christopher Chun - Deutsche Bank

First of all I just wanted to ask a little bit more about the new maintenance outage schedule. I am wondering, compared to last year, what different impact might be this year?

James Rubright

I think that the outage itself is going to cost us somewhere between $0.02 and $0.05, which is a fraction of what a major outage costs, which basically pretty well wipes out profitability for a month and a half or something like that, depending upon the experience you have in your outage.

Christopher Chun - Deutsche Bank

Right. And how does that compare to last year's quarter?

James Rubright

Well, I think if you, what I would rather do is compare it to the immediately preceding quarter, I am going to lose $0.02 and $0.05 as a result of that outage.

Christopher Chun - Deutsche Bank

Right. Do you recall last year though, how many cents you lost relative to the previous quarter last year?

James Rubright

I do not. And I know that's an important for purpose of your modeling. We'll get back to you on it, but, the reason I'm not myself focused on last year's, you have to take a four-year look at the cost of an outage, because of the various a) execution and b) the scope of the outages, which you take, so it can vary significantly, but we'll get back to you with respect to the specific year-over-year comparison.

Christopher Chun - Deutsche Bank

Okay, fair enough. Recently the US dollar been quite volatile, I am wondering how you see the impact of that on the company's business?

James Rubright

It certainly is a factor, but if you go back to the acquisition of Gulf States in 2005, we sat down and said there were several driving factors that led us to that acquisition. One of them would have been a weak dollar. Essentially, you had a continuation of what we thought then was a relatively weak dollar, and then in 2008, you had a round trip, right? The dollar got really weak and then turned around and came back. So people are saying what do think the strengthening of the dollar means?

Well, I think that it means something relative to 2008, but with respect to 2005, you still have a relatively weak dollar, relative to global currency flows. So, I don't think it has that significant effect, because I don't know that in 2008 you could have fully reflected the quick up and quick down of the dollar, just as the quick up and quick down of the oil price, which on the chart looks like the same pattern, I don't know how that flowed through the economy.

Christopher Chun - Deutsche Bank

All right, do you do much export business either in containerboard or bleached?

James Rubright

We do not.

Christopher Chun - Deutsche Bank

Okay. Then in terms of your balance sheet and your debt, I am wondering if you have any significant maturities coming up?

James Rubright

We do not. Our credit agreement was a five-year credit agreement that we used to refinance the bank debt and do the primary financing for Southern Container. And then we did a seven-year note issue that we closed in March. We do have a '11 maturity $250 million in notes and then '013 maturity of another $100 million in public notes.

Christopher Chun - Deutsche Bank

Okay. And then in terms of your CapEx, I think you mentioned $90 million for next year. Do you see that as sort of a normal run-rate number?

Steven Voorhees

No, I think 80 to 85 is really a normal run rate number for us. We had indicated that there was some CapEx that we had intended to spend that was acquisition related and the 90 is a little lower than the 95. The 90 to 95 range we have been at just as the 83 that we spent was really probably a little bit lower than the range we expected for this year. So, and I guess we were conservative in our guidance when we originally gave it.

Christopher Chun - Deutsche Bank

Okay. And congratulations on a solid performance in a very difficult environment, guys, I'll turn it over.

James Rubright

Thank you very much.

Operator

Cameron Newton of Wachovia, you may ask your question.

Cameron Newton - Wachovia

Maybe this is more of the big predicted question. You're going to reach your leverage target ahead of schedule here. It looks like at least from that model. Historically, you had some very successful acquisitions in the Gulf States and now Southern Container. As you look across the landscape here, you're going to have a lot of assets on the market it looks like. I'm just wondering if there is any in anyone of these businesses right now, is it containerboard or anything that you might look to expand in here if the right opportunity comes up?

James Rubright

Well, if you go back and look at what we said. Before we acquired Southern Container, we said we were looking to expand in the containerboard business for a number of fundamental economic reasons that are playing out as we speak. Southern Container happened to be the transaction that we saw as being the most desirable that we could transact. So would we continue to look in the containerboard space, yes we will.

Our acquisition strategy is to acquire superior assets, which typically means low cost assets in the space. There are some attractive assets out there. But it takes two people to do a transaction. The most attractive assets typically are also attractive to people who currently own them.

So I'm of the view that our business is to generate cash, pay down debt, and if we get our debt targets into an efficient rise and we give it back to our shareholders. All of us in this room being shareholders, and if we have an opportunity to do a really nice transaction such as the ones we've done, fine. If we don't, we'll just continue to execute as we would have.

Cameron Newton - Wachovia

Okay. And maybe on the recycled boxboard side of the equation, you had a quite a bit of capacity come out of the system here over the last few months. Maybe you can just speak to pricing, market balance, and CRB, URB. I think you made a comment about the industrial business in URB maybe presenting a challenge to get fuller coverage, the price increase. I'm just wondering what you're seeing in terms of price pressure, if any, there as well?

James Rubright

Well, if you look at the industry statistics, CRB data would suggest continuing very high operating rates. In the marketplace, we think there is one of the three major producers who are significantly weaker than the others. But the data would suggest that operating rates are very high. And in our CRB system we took minimal downtime in the third quarter.

URB operating rates are higher this year than they were last year, and you have seen significant closures. So the industry there, probably from an operating rate standpoint for the continuing operators may in fact be in better shape going into what appears to be a pretty steep downturn in industrial markets than we would have been a year ago. But my comment on the marketplace just indicated.

I have been looking at industry statistics, and what others with more of an industrial focus on their business have been saying. So I'm just assuming that you're going to see some further reduction in operating income, not further, but just some reduction in operating income, in operating rates in the industrial sector, which would be primarily end markets of tubes and cones.

So I'm just assuming that that business doesn't have, for example the pricing environment that SBS does, where the operating rates and backlogs, as far as we can tell, continue to be very strong for us and then with respect to the public statements of the other major participants in that business as they comment on their opinion.

Cameron Newton - Wachovia

Okay. And then, maybe just one house keeping question; the $1.3 million inventory purchase accounting charges, is that flowing through cogs, and if so, where in the segment results, is that flowing through, corrugated?

James Rubright

Yes, exactly.

Cameron Newton - Wachovia

Okay. Great. Thanks guys.

Operator

[Paul Hunt] of Banc of America, you may ask your question.

Unidentified Analyst

Good mornings, guys. You mentioned couple of times that demand for Rock-Tenn's products tend to be little stronger in the current economic conditions, to your exposure to consumers non-durables. I was just hoping if you could just try and quantify what your particular business has seen in terms of demand declines in prior economic downturns, recessions, have gotten a mid-single decline, any kind of help there is appreciated?

James Rubright

I hate to just respond from memory of the 2000, 2001 recession, and then if you go back to an earlier recession, when I wasn't here. So if you really want, we could look at those numbers and if you want the call back we would be glad to do that. That would be better than any of us speculating with respect to specific volume declines that occurred seven or eight years ago. I apologize for doing that, but I don't want to and I can't be accurate enough to go ahead and do it.

Unidentified Analyst

That is fine. I will call you off line. And then, just one other thing, it looked to me that working capitals did not exhibit a seasonal dip during the quarter. I just wanted to know was that unusual for a fiscal fourth quarter and if so what prevented us from seeing a dip?

James Rubright

Steve, would you want to answer that?

Steven Voorhees

I think between June and September, we typically don't see a huge change. We will see some build up in receivables and inventory, but we're able to offset that through the way we've managed our payables.

Unidentified Analyst

Okay. Understood, thanks guys.

Operator

Matthew Clark of Prudential Financial, you may ask your question.

Matthew Clark - Prudential Financial

A couple of questions this morning. Can you talk at all about cash receivable facility and what was coming due in middle of November, here? I thought at one point you were talking about maybe upsizing that and extending it out, can you talk at all about what is going on there?

Steven Voorhees

Well, we have upsized it. And it's up to $175 million. And it would be renewed as of September. So go a year from September.

Matthew Clark - Prudential Financial

So, a 9/30/09 maturity kind of date?

Steven Voorhees

September 1st.

Matthew Clark - Prudential Financial

Okay. And then can you just tell us how much is drawn as of the end of the quarter on that one, end of September?

Steven Voorhees

It's approximately $90 million.

Matthew Clark - Prudential Financial

And then is that $90 million included in the $245 million of near-term maturities on the balance sheet?

Steven Voorhees

Yes.

Matthew Clark - Prudential Financial

Now if I go beyond that, so the remaining $155 million, I'm assuming was entirely related to the Solvay debt, the payment to the prior owners. Is that your incremental $155 million?

Steven Voorhees

It was cash to the sellers.

Matthew Clark - Prudential Financial

And was the Solvay, $120 million of Solvay included in that number or not?

Steven Voorhees

No, it was not long-term.

James Rubright

We didn't have to redeem that, it what was reflected as long-term.

Matthew Clark - Prudential Financial

Okay. So you said something you paid 44 to the sellers, and then you guys pay an incremental 70 to the seller, that's $114 million.

James Rubright

Right, exactly.

Matthew Clark - Prudential Financial

Okay. And then just I would guess that revolver availability at 930 was about $400 million then as you pay all these, as you pay, prepaid Solvay and pay the owners, that availability drops to about $200 million? Is that the right math?

James Rubright

Yes, that's the high level math.

Matthew Clark - Prudential Financial

Okay, thank you.

Operator

Bill Hoffman of UBS, you may ask your question.

Bill Hoffman - UBS

Just a follow up on Frank's question, so at the end of the day, we should end up with about 200 drawn on the revolver, is that where you end up?

James Rubright

Yes.

Bill Hoffman - UBS

Second question is, as we look into the December quarter, I was a bit interested to hear your taking an abbreviated downtime at Demopolis as we look into the December quarter, but also we would like to get a sense on what you think may be occurring from the demand side of the equation, whether you're starting to see some softness. I know you mentioned that October started off soft and got a little bit firmer towards the end of the month. But are you hearing anything from customers about their yearend plans for reducing their own inventories through the chain?

James Rubright

What we have seen so far is a somewhat softer market for us, and then if you go back to October of '07. But it is not a dramatic change in what you've seen. And if you look at it across more than just October and September, because our comparison is October '08 versus October '07, October '07 was a very strong month. And September '08 was a very strong month. So if you look at September '07 and October '07 compared to this year, folding cartons were about flat for the two months. And as I have indicated at least the production in corrugated was significantly stronger.

So we see weakness. But again we're heading into a period of time that is seasonally weak. So, it's the demand that you see seasonal weakness, is it the economy? I don't know. Frankly I think we're going weakness because rest of the world is in a deep recession. But as we have indicated if consumer spending is off 3% and restaurant spending is off 4%, does that mean Rock-Tenn sales are down or up. I don't know, because as we've gone through other times, when go into the grocery store and you get a chicken in a white box, that's probably sales of paperboard, somebody printed it somewhere. Dry food and frozen food that's what we package.

So we're not necessarily going to correlate with even a category such as consumer's non-durables, because we are correlated but the fits not perfect. We have also talked about the fact that there is ebb and flow in the supply chain and the inventory chain is very difficult for us to take a look at the three week period of time, and then tell you what that means for volumes going forward.

So our view is much more, we live in the same world as everybody else. So we're going to see some of that effect, even though it's muted in the numbers that we're getting reported of out the physical production in our facilities.

Bill Hoffman - UBS

Thanks, I appreciate the color. A final question, just looking into 2009, I think, you originally, your the capital expenditure target was in the 95 to 100 range. Any changes, any thoughts on that?

James Rubright

Well, the 90 reflects our current view. We have a dynamic capital budgeting process. We revise it on an ongoing basis. We're not locked in a particular, one year plan and so forth, although we're always looking a year ahead. So, just today I would say that what we anticipate spending is a little bit less than we would have anticipated when we originally set that guidance.

But it's essentially for purposes of looking at the company on a post acquisition basis, when we were looking at our maintenance capital, our projects and then our anticipated synergy or acquisition rated CapEx, where we would have said 90 to 95 this year in 2008 then and 90 to 95, 2009.

Today looking at those same numbers with the projects that we expect to execute, we think that the 83 that spent this year was just what we spend. We really think it will be 90 next year. But depending upon opportunities that we see, as well as what's happening in the marketplace that 90 will change, could go up and could go down.

Bill Hoffman - UBS

Right. Okay. Thank you.

Operator

Our last question does come from Mark Wilde of Deutsche Bank. You may ask your question.

Mark Wilde - Deutsche Bank

Good morning, Jim. Good morning, Steve.

James Rubright

Good morning, Mark.

Mark Wilde - Deutsche Bank

I want to start off by just pointing out that you have a much larger competitor reported earnings last week, and their consumer packaging business, which has about three or four times the SBS volumes that you guys have, had $6 million in EBITDA in the quarter, which I think is pretty remarkable. So congratulations on that.

I wondered if you can talk a little bit about the state of the folding carton market. I'm particularly curious as to whether some of the consolidation and rationalization moves, we've seen over the last 12 to 24 months, whether you think that's having any effect now on the market? And also just thoughts on whether you want to grow in that converting business any further over time?

James Rubright

Number one, with respect to the market, we are seeing opportunities as result of that consolidation that we would not have seen, we think, in our judgment, absent the degree of consolidation that's occurred over the last, I would say 18 months. Those opportunities may be very large consumer products companies, who have now a very consolidated supply base, who would like to expand that supply base, and therefore they're willing to consider opportunities that they felt no need to consider a year ago. So we're seeing that in the marketplace.

Secondly, there are number of customers of ultimately, let's say CRB customers, who now are looking at their source of supply somewhat differently, maybe providing opportunities for us that we would not have seen. So the principal change that we've seen is an opportunity set that we wouldn't have seen.

I won't comment necessarily on pricing or competitive behavior, you understand that, but any way, there has been some change in the marketplace, although, it's yet to be a sea change. And then please, if you don't mind, the second half of your question was?

Mark Wilde - Deutsche Bank

I was just curious about your thoughts on expanding any further in the converting business; in the carton business?

James Rubright

We've grown our sales. Our business was a $670 million business, when we started here in 1999. It is $1 billion, close to $1.2 billion today. So we have grown in the business, but we've grown, even though we've consolidated plants, and I guess Gulf States have probably $350 million in converting sales, when we acquired them. So we have grown, but we've grown primarily internally by building larger, very competitively-structured plants from a cost standpoint. The only acquisitions we've done other than Gulf States was our very high-end folding carton business in Canada, and then an unsuccessful foray into the West Coast with a very low-end carton business.

So as we look at the market, we typically said, we are not really a roll up strategy, because it's difficult to find assets as good as ours. Again, I come back to the fact that if we do an acquisition, we're going to buy really good assets, and they're hard to find. So we would like to grow in the business. We're currently earning across the capital in folding carton and converting, but we're not going to force it.

Mark Wilde - Deutsche Bank

What about, Jim, just going a little further up in the market? You are more bread and butter, as you say kind of food and consumer non-durables, and I don't think you have any real presence in things like pharma and healthcare at this point?

James Rubright

Well, it is a small presence. It has not been our primary target market. But we have three plants, two of which are pretty much exclusively devoted to those marketplaces. So we have good visibility. Would we acquire others? Typically we have looked at a number of pharma healthcare type folding carton acquisitions, label insert companies to fill out our marketplace and so forth. But we really haven't seen a company that we could acquire for a price that we felt was realistic in relation to the opportunities that are there in our ability to create value, so it is what's happened.

Mark Wilde - Deutsche Bank

Okay, and then I wanted to switch into the Corrugated business. If it is possible to get just a little bit better sense of what you did to get such big volume increases through the Southern box plants. I mean, those were really enormous numbers in the context of almost any kind of economy?

James Rubright

Yes, they are, and it's just a tribute to the Southern Container management team, their focus and their ability to execute. As you know, we believe we got the best box plant system in North America. We certainly have the best graphics capabilities and very large, very low box plants. So they got and then they have got the pricing of the Solvay mill. So they have got just a competitive advantage. But they're not really attacking the market with the price. They attack the market with service and deliver and customer satisfaction.

I think I can prove that based on the margins that that business generates. You can't generate those margin and really be attacking the markets solely on the basis of price or really on the basis of price. But Mark, their record is to grow like they've grown, and they saw, they opened the Solvay mill in 1994 with a 150,000 tons of capacity. And they needed three partners to do that and it is now 750,000 tons and 70% of that is going through the Southern Container system directly or through swaps.

So they have a management team and a sales team that is incredibly focused on exploiting opportunities in the marketplace. We have worked for nine years on customer satisfaction and we think customer satisfaction that we obtain, which we measure very carefully is a terrific strength. We included them in our process this year and they came out just where we were. They have very high customer satisfaction. The answer is it's a 1,000 things, but it's not something new. It's something they had done pretty consistently at least for the last 10 years is just the way we looked at.

Mark Wilde - Deutsche Bank

Okay, one last question, now you mentioned that the tenure average on OCC is up about $70-$75. With pricing so low right now, would you do anything to kind of go along OCC, if you could go forward and it is the type of prices we're looking at right now?

James Rubright

Sure, I mean, if you could go forward at current market prices based on the philosophy or business viewpoint I have articulated, you would go along. The fact is the market is extremely liquid, and the hedge premiums in the market are also very large. So it's not practical, we do have a trading business and we take positions as you know and we I think we'll turn those profits as we turn around positions. So we got good visibility in what's possible in the market is just not possible to capitalize in a major way in the current price environment.

Mark Wilde - Deutsche Bank

All right, just actually one other thing on that waste paper. Is it, do you have any exposure to export OCC going offshore, I mean I've heard about a lot of offshore mills, particularly Asian mills may be reneging on contracts or trying to renegotiate contracts mid-ocean. It just sounds like all this is going to cause a lot of turmoil in the entire sort of wastepaper chain, and I wondered what you're doing to kind of watch your risk there?

James Rubright

Well, we may just be fortunate because of our business positions, Mark. We have as you know, for us a significant recycle trading business, which is both physical and a brokerage business and as I mentioned we'll trade around our positions. But we're focused on our mill system. Our mill system is located in the middle of the country, basically. We don't have a port-oriented mill. So our recycled trading and the physical delivery is typically in this middle of the country and not for export. So we have -- I'm going to say none and I think the answer is none. But it is certainly a de minimis, if any exposure to the kinds of risks that you're talking about with respect to export OCC.

Mark Wilde - Deutsche Bank

Okay, very good. Thanks, Jim.

Operator

At this time we have no further questions.

James Rubright

All right. Thank you all very much for joining our call.

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