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Boise Inc. (BZ)

Q3 2008 Earnings Call

November 4, 2008 12:00 pm ET

Executives

Jason Bowman - Director of IR

Alexander Toeldte - President and CEO

Rob McNutt - SVP and CFO

Analysts

Alex - Goldman Sachs

Mickey Schleien - Ladenburg

Claudette Houston - JP Morgan

Dan Roller - Impala Asset Management

Fritz Van Karpe - Sage Asset Management

Dmitri Genald - JP Morgan

Operator

(Operator Instructions) It is now my pleasure to introduce you to Jason Bowman - Director of Investor Relations, Boise Inc. Mr. Bowman, you may begin your conference sir.

Jason Bowman - Director of IR

Thank you Kim. Good morning to Boise Inc. third quarter earnings conference call. Joining me today are Alexander Toeldte - President and CEO and Rob McNutt - Senior Vice President and CFO. Please note that some statements made in this call constitute forward-looking statements, within the meaning of the federal securities laws, including statements regarding management’s future expectations of earnings of company performance. Management believes these forward-looking statements are reasonable. However, the company cannot guarantee that its actual result will be consistent with the forward looking statements and you should not place undue reliance on them. These statements are based on current expectations and speak only as of the date that they were made. The company undertakes no obligation to publicly update or revise any forward looking statement, whether as a result of future events, new information, or otherwise. Important risk factors regarding the company that may cause results to differ from expectations are included in the company’s filings with the FEC, including our quarterly report on Form 10Q for the quarter ended September 30, 2008. This morning’s call is posted on our website at BoiseInc.com under webcast and presentations. An archived webcast and a replay of our conference call will be posted shortly after the call. I will now turn the call over to Alexander Toeldte.

Alexander Toeldte - President and CEO

Thank you Jason. Welcome to the call and thank you all for listening in. We had a good profitable, third quarter with a performance that increased our earnings as we captured price increases and continued to improve operating performance. We improved margins, generated positive cash flow and made progress in reducing our leverage by paying down nine million dollars of our secured debt. We achieved these results in the face of two hurricanes and continued cost pressures. This progress is very encouraging.

But the global financial crisis brought significant challenges to the economy and with that, uncertainty about future demands. We are keeping a close eye on the situation and on our customer’s businesses and taking proactive steps to improve all cost performance in the 4th quarter.

There are three aspects of the third quarter that I want to highlight. First, our proactive price management. Second, continued improvement in product mix and third, the cost development and actions we’ve taken. As you all well know, we’ve taken a very proactive stance on pricing to counteract the rapid and unprecedented cost inflation this year. Price increases that we announce in the second quarter that were implemented in the third quarter were for unquoted preceeds $60 per time, for line abroad $55 per time, that also was passed through the domestic box business. And then finally we had a significant cost price increase also phased in for newsprint during the third quarter. We are expecting another price increase for Q4 in newsprint.

Abitibe Bowater , who sells all of our newsprint volumes and announced further capacity reduction and another $60 dollars per ton price increase to be phased in during the 4th quarter. The second aspect that I would like to highlight is that in addition to the price increases, we continue to grow and label and release packaging and premium office paper grades which continues to improve our product mix. We grew our label and release packaging and premium office sales by 25% over the third quarter of last year. These targeted grades represent now nearly a quarter of our total paper sales volumes and grew from 19% of our mix in the third quarter of 2007. The gross in most targeted grade offsets the decline in commodity communication paper grades. That allowed us to maintain flat paper sales volumes when compared to the 3rd quarter of last year and all of that was achieved in an industry context

These targeted grades represent nearly a quarter of our total paper sales volumes and grew from 19% of our mixing in the third quarter. The most targeted grade offsets the decline in commodity communication paper grades. That allowed us to maintain flat paper sales volumes when compared to the 3rd quarter of last year and all of that was achieved in an industry context

Free-sheet quoted year to date are down 6.2% from 2007 according to the AF and PA.

A key part of managing our product mix and our profitability is balancing our production with demand. We are carefully managing our production volumes relative to demand and we selectively curtail production of our International Falls Mill in the third quarter in response to market conditions. In October, we curtailed production at our St. Helen’s mill as we’ve experienced a softer demand for some of the products there, and we will continue to make those adjustments to production to match demand. The third aspect that I wanted to highlight cost developments and the actions we’ve taken. Overall, the cost inflation began to stabilize during the third quarter, but it remained at high levels relative to historical levels. In particular, cost at our Pacific Northwest mills remain high and we continue to monitor the cost situation very closely. We’ve seen reductions in our fiber and cash energy cost in compare to the second quarter, but we continue to see rapid increases in chemical costs which were up 13% during the quarter compared to Q2.

Overall, when you look at cost compared to the second quarter, the fiber costs were down, the energy cash costs were down, the chemical costs were up, driven by increased prices for commodity chemicals. In the face of those developments we are taking aggressive action to reduce costs which includes among others the increasing use of local sourcing, reduction in numbers of suppliers to gain economies of scale, reduction of MRO maintenance repair and operating supplies inventory, and wherever possible utilizing lower cost substitute chemicals. And, we are prudently slowing our capital spending. Beyond that, our efforts to reduce fossil fuel use continues to be successful. We reduced our natural gas consumption by 8% per ton compared to the third quarter of last year. That is an additional 2% run rate over the 6% year over year improvement in the second quarter. With that, let me turn to the outlook. This is our first profitable quarter as the new company and we achieve that with good underlining operating performance despite the act of two hurricanes and high input cost relative to historical forms.

The extent of the financial crisis impact on our business remains uncertain. We expect some cost relief but we expect input costs to remain high when compared to historical date and we are continuing to see cost pressure especially chemicals as I said and also when in purchased electrical power. The deterioration of the business environment is clearly challenging for the customers that we serve and while the ultimate impact on demand is uncertain at this time, we have seen a demand that has gotten more lumpy, and somewhat softer, and we are watching it very closely.

We are proactively taking steps to deal with these situations. We will continue to serve our customers very well, and with great care. If we see further slowing of demand, we will adjust production capacity to match demand and have no intention to tie up working capital in inventory. And as I mentioned before, we are prudently slowing capital expenditures. Our efforts to improve performance are paying off and we continue to look for ways to aggressively reduce operating costs and improved performance. All of these actions led to the good results we saw on the third quarter and give us a sound starting point for Q4. And with that, I’ll turn it over to Rob, to take us through the numbers.

Rob McNutt - SVP and CFO

Thanks Alexander. Looking first to EBITDA, EBITDA with $61 million dollars for third quarter 2008. That’s an increase in 52% over the second quarter of 2008. After special items, third quarter 2008 style was $78 million dollars, compared with $40 million dollars in second quarter 2008 and $74 million dollars in third quarter of 2007.

Third quarter 2008 results were impacted by a non-cash mark to marketing expense of natural gas heading of approximately $11 million dollars and by about $6 million dollars for loss of production in shut-down and start-up costs at our Dewird, Louisiana mill due to hurricanes Gustav and Ike. We shut down the Dewird mill in anticipation of both hurricanes and are pleased to report that all mill employees came through safely and there was only minimal damage to the mill. We had no significant plan maintenance outages during the third quarter. Turning to net income, BoiseInc. reported net income for the quarter of $4 million dollars, or 6 cents per share, compared to a net loss of $18 million dollars or a loss of 23 cents per share in second quarter 2008. Predecessor net income was $50 million dollars for third quarter 2007.

Please keep in mind that the results for the predecessor period does not include interest expense and has reduced appreciation through paper and packaging assets were classified as held for sale for part of that period. Turning sales prices and volumes during the third quarter of 2008, total sales increased by $49 million dollars, or 8% to $633 million dollars. That’s up from $584 million dollars during the 3rd quarter of 2007. Paper segment sales increased $29 million dollars, or 7%, to $431 million dollars in third quarter 2008 and $402 million dollars reported for third quarter 2007.

Average net selling prices of uncoated Free sheet increased 9% in third quarter 2008 compared to third quarter 2007 and increased 3% over second quarter of 2008. As Alexander mentioned, premium in specialty volumes increased 15% in third quarter 2008 over third quarter 2007 and 6% over 2nd quarter 2008. This growth was led by a 25% increase in sales in premium office papers, Label&Release and flexible packaging grades over the third quarter of 2007 as we continue to execute our strategy to shipped capacity to packaging driven medium office grades.

This growth was offset by sales volumes declining in commodity USF grades. Turning to packaging, packaging sales increased $20 million or 10% to $213 million dollars for the third quarter of 2008 from $193 million dollars in the third quarter of 2007.

Lighter-board pricing in 2008 increased by 2% over third quarter 2007 due to increased market prices and declined 1% from second quarter 2008 due to changes in product and customer mix. Corrugated products pricing increased by 9% over third quarter 2007 and 4% over second quarter 2008.

Lighter board sales volumes increased 5%, compared with the same quarter in the prior year, while corrugated contained and sheets sales volume was 4% lower in third quarter 2008 compared with third quarter 2007.

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This is due primarily to lower volumes in our sheet plant in Texas as a result of reduced industrial demand in those markets and disruption caused by hurricane Ike which basically shut down the Houston market for a couple of weeks.

Lighter-board operating rates remain high during third quarter 2008. The $55 dollars ton per offer July price initiative was implemented and passed through our converting operations during the quarter.

Newsprint prices increased 27% in third quarter 2008 versus third quarter 2007 and 9% over the second quarter of 2008. Newsprint sales volumes were flat compared to the prior year quarter and down 8% compared to the second quarter larger as a result of downtime tied to the hurricanes. Abbitite Bowater, who sells all our output, announced another $60 per ton price increase in August to be phased in during the 4th quarter of 2008.

Now let’s turn to input costs. Combined fiber energy and chemical costs were $300 and $4 million per third quarter 2008. That compares to $255 million for third quarter 2007. This represents a cost increase of $49 million in third quarter ’08 compared to third quarter ’07. Non cash mark to market expenses associated with gas hedging were about $11 million in the quarter. Compared to second quarter of ’08, combined input cost excluding the non cash expenses declined about $2 million from $294 million.

During Q2 and Q3 we hedged our natural gas exposure using caps with a strike price of about $10.50 as our primary hedging tool. Using caps enables us to benefit from the declines we’ve experienced in natural gas prices, which we’ve really seen since early Q3. Looking forward we’ve hedged over 62% of out estimated fourth quarter gas consumption, and over half of our estimated consumption through the first quarter of ’09.

Turning to debt, at September 30, 2008, our net debt used for covenant calculations, which excludes the $64 million pick note payable, was $1.018 billion. That’s a $9 million decline from the end of second quarter of ’08. Working capital increased $18 million during the quarter, driven by higher receivables, higher log and market pulp inventories, along with a reduction in payables from a annual outages in second quarter.

We expect some working capital benefit in the fourth quarter as we seasonally unwind these inventories. As of September 30, 2008, we’re in compliance with all of our debt covenants, and had total liquidity of around $185 million. Required principle payments for the balance of 2008 are $3 million, and $16 million for 2009. Capital expenditures for the quarter totaled $23 million, making our expenditures for the combined first nine months of the year $69 million.

We expect total capital expenditures for the year to be between $90 million and $100 million. In October, we completed our annual maintenance outage in our Jackson, Alabama mill, and have no other outages planned for the fourth quarter in terms of the annual maintenance outages. Now let me turn the call back to Alexander for his concluding remarks.

Alexander Toeldte - President and CEO:

Thank you, Rob. In summary, our third quarter was a good quarter in spite of the adversity we faced. We were profitable, improved EBDA, and generated cash which we used to pay down debt. We achieved this in spite of continuous cost pressures and two hurricanes. We continue to benefit from the amazing engagement of our employees and we continue to focus on serving our customers well and with great care. The weakening economy has created uncertain and lumpy demands, which we are watching very closely. We are proactively taking steps to deal with those situations, and we continue to build with great urgency on the cost reductions and operating improvements, that we’ve made so far. We will adjust production capacity to match demand, and have no intention to tie up working capital. And as I mentioned before, we are prudently slowing capital expenditures. All of those actions have put us into the situation where we create a strong result in Q3, and that leaves us with a strong and sound starting point for Q4. That concludes our remarks, and we’re happy to take your questions now.

Question-and-Answer Session

Operator

At this time I’d like to remind everyone if you’d like to ask a question, please press star and the number one on your telephone keypad. I’ll pause for just a moment to file the Q and A roster. Again, that is star then one if you have a question. And your first question comes from Pete Rushmire from Barclay’s. Your line is open, sir. Pete Rushmire, your line is open.

Pete Rushmire - Barclay’s:

Thank you, can you hear me? OK, good afternoon. A couple of questions: Rob, I was hoping you could clarify - you mentioned Jackson was outage in October. Can you quantify the cost of that outage?

Rob McNutt - SVP and CFO:

Yeah, Pete, in the Jackson outage we were down for about seven days in that outage, and typically that outage has cost us between $4 million and $6 million historically. They’re still finishing up the numbers on exactly what that is, and I’m not prepared to give you a specific number. But nothing unusual came out of that outage.

Pete Rushmire - Barclay’s:

OK, and not to split hairs, but the $4 million to $6 million is both operating opportunity cost and the expense which you incur for those types of outages, is that correct?

Rob McNutt - SVP and CFO:

That would tend to be more on the maintenance expense side, in Jackson. We built inventory ahead of that shut down, and so we continued to sell and it really didn’t impact our sales during October.

Pete Rushmire - Barclay’s:

OK. Then I had a question on markets, on pricing. I know you’ve had some movement in pricing. I’m curious if you could help us to understand the spot price as we sit here the first week of November - today - relative to your averages for your key grade, line, and board, uncut of free sheet newsprint.

Rob McNutt - SVP and CFO:

As you know, on newsprint, that’s the easy one, we sell that through Abbot Tibby, and got an average price realization there. We still see Everett’s prices moving up from the average of Q3 , so the price realization we’ve seen so far are still slightly up in line and board. They’re up in newsprint, and they’re up in wide paper at this point.

Pete Rushmire - Barclay’s:

OK, and as we look forward to 2009 do you have any preliminary estimates on capital spending, Rob, for the full year? You mentioned $90 million to $100 million for ’08.

Rob McNutt - SVP and CFO:

Yeah, we’re currently expecting - and understand that it’s a planning number - roughly $110 million for ’09. That is something that we still will have to button down and still have the range on it.

Pete Rushmire - Barclay’s:

OK, and just last set of questions I’ll turn over. I was curious about DeRitter, you know, now that you are two or three quarters past the investment you made in the shoe press, Can you comment on how that’s performing for you? Can you measure it in terms of tons or productivity? I guess it’s a basic question.

Alexander Toeldte - President and CEO:

The shoe press itself is performing very well. It has out performed the specs that we expected. So the investment itself is working very well. We have had, as you know, two hurricanes hit the mill, and the hurricanes themselves plus the associated start up and wind down things have hit our operating performance. But the investment itself has been a good success, and we’re very happy with it.

Pete Rushmire - Barclay’s:

And Alexander, how do you think about that increased output in terms of increased internal integration versus increased over market sales, both domestic and export?

Alexander Toeldte - President and CEO:

Well, remember there are a number of reasons why we did this. There were two major reasons: one was the reduction of energy costs per ton that we have experienced, and are benefiting from. Secondly, that we got a widening of our product range that was very important for us. And then thirdly we’ve had the additional volume that is coming off the machine, and that has in part been absolved very effectively by our own domestic box system, but largely has gone into the open market. And it was always considered that additional volume would go into the marginal export markets. So we have had no issues with the commercial performance whatsoever.

Pete Rushmire - Barclay’s:

Very good, thanks very much.

Rob McNutt - SVP and CFO:

Thanks, Pete.

Operator

Your next question comes from Mickey Schleien from Ladenburg.

Unidentified Company Rep

Hi Mickey.

Mickey Schleien - Ladenburg

I apologize, I missed the first few minutes of the call, so maybe some of these questions are redundant, but could you tell me what your latest thinking is regarding the newest print machines, given the precipitous decline in demand for newsprint and the news that some of the publishers are going to go 100% online. I also wanted to ask you about the outlook for the tax rate given that there was a provision for a tax benefit in the quarter, and lastly, any discussion about a reverse split on the shares.

Alexander Toeldte - President and CEO:

Well let me take the first question and had the other then to Rob. We always said that we’re watching the potential conversion opportunity for at least one of these machines very carefully, we are continuing to do so. Newsprint prices at this point are high, despite the precipitous decline, naturally it’s an entirely fair question to ask how long that can last, but other players are continuing to pull out capacity. We are constantly evaluating the trade off between the EBITDA and cash flow generated from the newsprint operations versus the potential economic benefit of a conversion. Naturally, in the context of a more uncertain economy we’re also that much more careful about committing capital, so were watching the situation very carefully right now, and given that were neither in the forecasting business nor very good at it, we’re just being careful and watching it.

Mickey Schleien - Ladenburg

Alexander, is it still in the neighborhood of $23 million per machine?

Alexander Toeldte - President and CEO:

It is still in the neighborhood of the mid 20s for a conversion of the machine. We are also considering at this point smaller steps as actions going forward, but as I said, this is really the question of how the economics of one business versus the other business intersects. We want to be very careful with capital in the current environment.

Mickey Schleien - Ladenburg

That’s conversion to be able to produce exactly which products?

Alexander Toeldte - President and CEO:

It’s a range of products, we’re in commercial discussion with a number of potential customers, so I don’t want to say too much about that.

Mickey Schleien - Ladenburg

Okay, thank you.

Rob McNutt - SVP and CFO:

On our tax question, I’ll take that one. I thin our book tax rate for the quarter was about 16%, still over the long term we look at a book tax rate blended of about 39%. In terms of cash taxes for 2008, those will be nominal, really, for the year. The last question around reverse split, frankly don’t think it’s appropriate for me to comment on that kind of an issue at this point.

Mickey Schleien - Ladenburg

Okay, thanks Rob.

Operator

Your next question comes from Fritz Van Karpe from Sage Asset Management, your line is open sir.

Fritz Van Karpe - Sage Asset Management

Good afternoon guys. When you look at your UFS mills, what percent opf the production is integrated on site with pulp production, and how much of it is cost disadvantaged by having to truck the pulp in?

Rob McNutt - SVP and CFO:

In terms of our pre-sheeted mills, all of them have onsite pulping capacity to some degree. In our western operations, in St. Helens, we’re modestly pulp long. In our eastern operations at International Falls and Jackson we’re modestly pulp short. Structurally, running the pulp mill and in the paper machines we’re pretty close to pulp balance. In International Falls, that mill actually sits on the Canadian border, and the avid to be milled directly across the river actually pipes slurry pulp across the river to the I Falls mill, so we don’t have to incur the costs of drying the pulp and transporting the pulp there. In Jackson, Alabama we do buy market pulp and then in all of our mills, to the degree that there are an specific grades of pulp that we don’t produce on site. For example, I falls has a high recycled content, pulps post consumer and recycled pulps. Those would certainly be trucked in.

Alexander Toeldte - President and CEO:

If you think about the Jackson Mill, it is in the immediate neighborhood of the Alabama River Complex, and that’s where we get [ph montrough] over market pulp, and that makes both mills preferred customers and preferred suppliers to each other. So we actually are not totally open in terms of supply security in those issues.

Fritz Van Karpe - Sage Asset Management

TO what extent are those mills, is Jackson the only one having a substantial cost differential due to the pulp situation or is it more on a continuum, how do I think about that?

Rob McNutt - SVP and CFO:

I think about it more on a continuum. I think Jackson is pretty unique in office paper mills, in that we’ve got that very large scale J3 paper machine there, and a sister machine that, the smaller J1 machine which produces the premium and specialty papers, office papers, colors, and the high recycle content, Jackson’s very unique in having on site de-inking facility. On that side we’ve got a real cost advantage in terms of those premium and specialty papers, the high recycle content papers. It’s a bit f a blend of exercising it, it depends a little bit on what market pulp prices are, and frankly as we continue to grow those recycled grades, the advantage of having the on site de-inking just continues to grow for us.

Alexander Toeldte - President and CEO:

The pulp capacity matches very nicely, the larger one of the two machines there, so in terms of having the core part of one of our EBITDA engines nicely integrated we’re actually in a very good position in Jackson.

Fritz Van Karpe - Sage Asset Management

Are there any of your mills that stand out in the UFN system on a cost basis? I’m trying to get a feel of what your cost curve looks like?

Alexander Toeldte - President and CEO:

I think if you look at the I1 and the J3 paper machine, those are two of the larger commodity uncoated free sheet machines in the system, and then you tie that in with our relationship with OfficeMax and I think that’s a pretty attractive delivered cost to the customer. You look at Walula, which is fundamentally transitioning into that label and release, and we think that’s a darn competitive label and release machine on a global basis, because it’s larger scale and it is integrated, and you have to look at it grade by grade, mill by mill. St. Helen’s is probably, at its grade mix, more challenged, does a good job on flexible packaging, and some other grades, less competitive on some other grades.

Fritz Van Karpe - Sage Asset Management

Thank you.

Operator

Your next question comes from Jeffery [ph Harlid 03:15] of Barclays Capital, your line is open sir.

Jeffery Harlid - Barclays Capital

Hi guys.

Rob McNutt - SVP and CFO:

Hi Jeff.

Jeffery Harlid - Barclays Capital

Can you just talk about what you’ve seen in demand since quarter end in your major grades, has there been a meaningful falloff in any grades, just with the economy?

Alexander Toeldte - President and CEO:

Jeff, that’s a question that we are constantly looking at and spending a lot of our time watching, he pattern we’re seeing is very lumpy demand. We have days that are completely off and we have days that are absolutely strong in UFS, and so we had for example four days recently with very low demand followed immediately with three blockbuster days. It’s very difficult to lay a trend through that, that’s very clear. Demand is softer than last year, demand is softer than in 2, but it’s not clear that it has truly dramatically lower, as some people have reported.

Jeffery Harlid - Barclays Capital

Okay, and how about in the box business?

Alexander Toeldte - President and CEO:

In the box business we continued to have really good demand in the ag business and food processing sectors, so basically our entire northwest system continues to operate, certainly right now with a good loading. We see softer demand among our industrial clients. We have managed to keep our CDC operation, which basically serves industrial customers or the suppliers to industrial customers in Texas, and there we continue to be running a full three shift operations with profitable product, so far what we’re seeing in declining demand in the industrial sector we’ve been able to compete it away.

Jeffery Harlid - Barclays Capital

On input costs, can you just talk about your remaining in hedges on natural gas, what prices they’re at, and then just, directionally with some of the declines, and in energy freight, and also maybe you can talk about fiber as well, as you look into Q4.

Rob McNutt - SVP and CFO:

Yes Jeff, in terms of the hedges, again, we were using that 10.50 cap as energy ran up. We’re more recently layering in, as energy’s come off so dramatically we’re layering at $9.00 caps there, and so I think when the q’s posted on EDGAR today there’s a lot of detail on the hedging situation there. A little over 60% hedge through the end of the year and we continue to layer in for next year. It’s a layering program, basically buying insurance as the cap and selling away tops and floors to lower the cost of that.

You asked about other energy, fuel, and in particular diesel, if you look at diesel, I think it peaked around 4.70 in July, a gallon, and closed out October about 3.25. for us, on an annualized basis, a dime change in diesel is about a $1.5 million. We don’t have perfect optics into that because some of that’s embedded in delivered cost of materials and so forth, but that’s kind of the order of magnitude for us.

Jeffery Harlid - Barclays Capital

How about on fiber, chemicals, other costs/

Rob McNutt - SVP and CFO:

Inn terms of fiber, it’s region by region, we did see a lot of fuel surcharges in our fiber that we’re starting roll off now. We also see, as others have, as we’ve talked about before, as the saw mills, in the northwest in particular for us, continue to be down, that residual chip market continues to be tight there, and so we’ve increased our whole log chipping capacity, again whole log tends to be more expensive, but we anticipate that as those fuels surcharges as diesel comes off and fuel surcharges come off that should help us there.

In Louisiana, the storms certainly the south part of the farm there that we access for the mill in Derider, they have a lot of water in them, and so those costs in that region have been moving up a bit. The folks who manage that region for us in the Timberlands down there, the fiber buying down there did a very good job anticipating, and frankly we’re in pretty good shape on inventories ahead of the hurricanes, so while you may have seen some others have disruptions in production capacity our folks did a good job in making sure that we had capacity ahead of the hurricane season in the log yards so we continue to run there and modestly cost advantaged in the early part of 4, although we think those costs will be up in Q4 on balance.

Looking at Jackson, those costs again, to some degree, impacted by residuals, and fuel costs, and the same thing in I Falls, more the fuel cost there.

Jeffery Harlid - Barclays Capital

Rob, on covering calculations, can you say where you were first on your LPM EBITDA for covenant purposes, and the interest coverage and leverage rations.

Rob McNutt - SVP and CFO:

We moved up a little bit in terms of our LTM EBITDA recognized the mark to market non-cash mark to market on the hedges, we get to have that back, as well as other non-cash charges like the inventory adjustment and so forth. We continue to be in full compliance, in terms of the details I’ll let you walk through that with Jason after the call.

Jeffery Harlid - Barclays Capital

Thank you.

Rob McNutt - SVP and CFO:

Thank you Jeff.

Operator

Your next question comes from Tim Quinlisk from Mayo Capital, your line is open sir.

Tim Quinlisk - Mayo Capital

Thanks for taking my questions. Most of them have been answered, but I’m just trying to look at the amount of flexibility you have and kept spending as you go into 2009 if this sort of maintains itself at lower levels for a period of time. I know you talked about 110 million, but how low can you go on a maintenance basis and still operate?

Rob McNutt - SVP and CFO:

Well, we consider 85 million dollars the minimum required to keep the current facilities in full compliance, safe, environmentally sound, and reliably operating.

Tim Quinlisk - Mayo Capital

Ok great. Thank you.

Operator

The next question comes from Vivian Chen from VKM Capital. The line is open,

Vivian Chen - VKM Capital

Hey guys. Thanks for taking the question. I just have a question about pricing. Given the economic environment post-September 30th, and the economic deterioration within the financial services, have you guys seen any pushback on the pricing increases that you pushed through last quarter, just in terms of people asking for reversals that trend or what you anticipate going forward.

Rob McNutt - SVP and CFO:

No we haven’t. There are individual accounts and customers who have reduced their demand but overall no. As I said, we are seeing a probably, somewhat softer market but we are continuing to move price through at least for now.

Vivian Chen - VKM Capital

Ok.

Rob McNutt - SVP and CFO:

Vivian, just to follow on that, pricing is obviously a matter of supply and as Alexander mentioned earlier, as demand has softened a little bit we’ve taken selective downtime and will continue to match our production with demand and make efforts to maintain that price level.

Vivian Chen - VKM Capital

Ok. That’s my question, thank you.

Operator

Our next question comes from the line of Ken Gibson from HSNL. Your line is open.

Ken Gibson - HSNL

Yes. I just want to talk a little about the debt structure and going forward and do you anticipate any problems staying in compliance with the covenants and also in 2009?

Rob McNutt - SVP and CFO

Sure Ken. This is Rob. In terms of debt structure, as I mentioned earlier, we’re in good shape in terms of liquidity with 185 million dollars at the end of the quarter. I think it’s important to recognize that month-end and frankly quarter-end tend to be the low point in terms of our liquidity and doesn’t necessarily represent out average liquidity throughout the quarter. That’s been the history thus far. In terms of covenant compliance, again, we’re in good shape at the end of Q3. We’ve got very minimal principal payment in the balance of 2008 and into 2009 and in terms of compliance going forward, again, if markets and margins stay where they are, we’ll continue to be in good shape and beyond that I’m not going to forecast.

Ken Gibson - HSNL

Right. Thank you.

Operator

Again, if anyone has any questions, please press * then 1 on your telephone keypad. And Richard Doidge from Ladenburg & Solomon - your next question.

Richard Doidge - Ladenburg &Solomon

Yes, thank you. Since Abitivy is your distributor, and their finances are somewhat weaker than they have been, what is your exposure? Is there any way you can protect yourself in case something unfortunate happens to them later in 2009?

Rob McNutt - SVP and CFO:

Yes, we’ve got a long and positive working relationship with Abitivy in marketing our newsprint and our exposure to Abitivy is something that we disclose and I don’t have that specific number at the top of my head but it is disclosed and if you want you can look at it there in the receivables footnote. In terms of what we can do to manage that exposure, I think as I mentioned earlier, we also partner with them at our International Falls mill and they sell us some pulp and that’s helpful and frankly we’ve worked very closely and constructively with Abitivty to manage and watch that to say that Abititvy has been a good customer and they pay us religiously on-time.

Richard Doidge - Ladenburg &Solomon

Ok. So you do have some offsetting payables to them to offset your receivables. Is that what you’re saying?

Rob McNutt - SVP and CFO:

Yes. Potentially, if that ever became an issue.

We also have a contingency operating plan in place. The details of which we naturally don’t want to disclose but it is clearly one of the eventualities for which we have made plans.

Richard Doidge - Ladenburg &Solomon

Ok. Thank you.

Operator

And I have no further questions, thank you. At this time I would like to turn the call back over to Mr. Alexander Toeldte for any closing remarks.

Alexander Toeldte - President and CEO

Well, thank you very much for attending and for listening in. Again, I want to summarize that we had a good third quarter despite high cost pressures, despite hurricanes. We are, as you know, proactively taking steps to deal with the economic environment that’s facing us. We’re continuing to build on the cost reductions and operating improvements with great urgency that we have created so far. We will adjust production to match demand and won’t tie up capital in inventory. We’re prudently slowing capital expenditures and therefore feel that we have a very good starting base for Q4. So thank you very much for attending and with that we’re closing the call.

Operator

This now concludes Boise Inc. Third Quarter 2008 Earnings Conference Call. You may now disconnect.

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