Rock-Tenn Company's CEO Discusses F1Q13 Results - Earnings Call Transcript

Jan.23.13 | About: WestRock Company (WRK)

Rock-Tenn Company (RKT) F1Q13 Earnings Call January 23, 2013 9:00 AM ET

Executives

Steve Voorhees – EVP, CFO and Chief Administrative Officer

Jim Rubright – Chairman and CEO

Analysts

Mark Weintraub – Buckingham Research

Phil Gresh – JP Morgan

George Staphos – Merrill Lynch

Mark Wilde – Deutsche Bank

Anthony Pettinari – Citigroup

Mark Connelly – Credit Agricole

Alex Ovshey – Goldman Sachs

Phil Ng – Jefferies

Chip Dillon – Vertical Research

Steve Chercover – DA Davidson

Scott Gaffner – Barclays

Operator

Good morning. My name is Julie. I will be your conference operator for today. At this time, I would like to welcome everyone to the Rock-Tenn First Quarter Fiscal 2013 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker remarks, there will be a question-and-answer session. (Operator Instructions)

As a reminder, slides are being presented today as part of the conference call. These slides can be accessed at www.rocktenn.com under the Investors page. Ladies and gentlemen, this call is being recorded today, January 23, 2013. (Operator Instructions).

Your speakers for today’s call are Mr. James Rubright, Chairman and Chief Executive Officer; and Mr. Steve Voorhees, Chief Financial Officer. Mr. Voorhees, you may begin your conference.

Steve Voorhees

Thanks, Julie. Good morning. Welcome to Rock-Tenn’s First Quarter of 2013 Earnings Conference Call. I’m Steve Voorhees, Chief Financial Officer; and I’m joined this morning by Rock-Tenn’s CEO, Jim Rubright.

During the course of this call, Jim and I will make forward-looking statements involving our plans, expectations, estimates and beliefs related to future events. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from those that we discussed. We describe this risks and uncertainties in our filings with the SEC, including our most recent Form 10-K.

During the call, we will refer to non-GAAP financial measures. We provide reconciliations of these non-GAAP measures to the most directly comparable GAAP measures in the Appendix to the slide presentation, which is available on our website. Jim will begin with commentary on the performance of our businesses during the quarter, then I will discuss the status of the integration and various financial items. Jim?

Jim Rubright

Thanks, Steve. Our first quarter adjusted earnings per share of $1.35 are the result of strongly improving operating performance in our Corrugated and Recycling businesses and solid progress in recovering the fall containerboard and box price increases. Given the $0.04 per share non-cash deferred tax charge we took in the quarter that’s attributable to a change in California corporate income tax laws and the apportionment factors we apply to our business, the implied $1.39 per share well exceeds our EPS guidance for the quarter from our last call where we forecast adjusted earnings to be down significantly from the $1.39 of last quarter and last quarter included that $0.18 per share gain from a favorable contract dispute settlement.

Also, in light of a largely seasonal weakness in our Consumer business, which produced results well below last year and somewhat below our expectations and the fact that we incurred major maintenance outages at two mills in the quarter and build 74,000 tons of containerboard inventory in anticipation of the late winter and spring maintenance outages, the $28 million Corrugated segment income increase over the prior year and $25 million increase sequentially suggests how much our Corrugated segment performance is improving. Our EBITDA margin for the entire company for the quarter was 14.4% and 15.4% for our Corrugated segment.

We generated a lot of cash in the quarter. Our net debt repayment was $155 million. We paid dividends of $32 million as we doubled up the dividend as a result of the change in the tax law and our pension contributions in excess of pension expense of $13 million, a total of $200 million for the quarter or $2.75 per share.

As shown on the next slide, for the last 12 months, we generated $578 million in free cash flow available, and used for these purposes were $7.99 per share.

During the quarter, our Corrugated business showed improving performance in essentially all respects. Domestic box demand held up better than we expected, with seasonally adjusted strong demand, particularly through late December and so far in January. Our domestic box volumes were up 3.2% over the prior year quarter. Containerboard demand for external sales was also strong.

Although we reduced export shipments to certain markets to meet domestic demand, export demand continued strong and pricing has been moving up nicely, as I’ll detail. We didn’t take any brown containerboard economic downtime in the quarter, but we did take 4,000 tons of bleach footboard downtime in our Canadian mill. We took major maintenance downtime totaling 27,000 tons in the quarter, as we took action this year to adjust our maintenance outage schedule to better match seasonal demand.

Also, as I mentioned, we made substantial progress recovering the fall containerboard and box price increases. By the end of the month of December, we had recovered approximately $40 per ton in domestic box prices, although the average for the quarter was about $29 per ton over the September quarter average. With the year-end contractual adjustments I referred to on our last quarter’s call taking hold this month, we believe we’ll have recovered about $51 per ton by the end of January. That recovery will represent the vast majority of our expected total recovery from this price increase, although over the next few quarters, we expect to realize some further contractual increases as well take advantage of opportunities either to further improve the pricing of our base of business or the margin mix of our domestic box business.

Turning to exports, as I mentioned, export demand for containerboard continued to hold up across the quarter, and pricing has been recovering nicely. Our containerboard exports were 203,000 tons. They were down 18% for the preceding quarter, but pricing was up. On average, for containerboard only, about $40 a ton over the September quarter, although pulp pricing was up less.

For shipments in the March quarter, we expect pricing to continue to increase in all of our markets. And while pricing to the Middle East has also improved from its 2012 bottom, we’ve curtailed shipments to that region to meet our internal system demand and demand in other higher-value domestic and export markets.

Pulp pricing began to improve in the last few months as well and we expected overall, including our SPSK pulp, our pulp pricing should be approximately $18 per ton higher in the March quarter than in the December quarter.

In addition to the improving market conditions and pricing I have discussed, the new leadership team we put in place last summer in our Corrugated businesses is really having a major impact on improving our operating performance. We’ve made good progress at Hodge, with operating income up $12 million over the prior quarter. We took outages on both machines in December and January to correct some of the engineering design efficiencies discussed in our last call. We’ve seen particular improvement on the number 4 machine but we will implement other corrections in the spring, major maintenance outages, and those will have the greatest effect on the larger number 5 machine.

These steps will enable substantial further earnings improvement over the course of this year, and the new Corrugated leaders are also making solid progress improving our sales performance, volume as I’ve mentioned, and with respect to absolute pricing of new business and selling business that best suits our operations.

And with regard to Hopewell, as I mentioned, we made the decision last year to reduce the complexity of that project by splitting the work over two years, and the first part will be completed in this spring’s outage, with remainder during the 2014 outage.

Turning to our Consumer segment, demand was relatively weaker than we expected during the second half of the quarter, after a strong first half of the quarter. Segment sales of $611 million were down 1.5% from the prior-year quarter, and segment earnings were down $14 million over the prior-year quarter. Continued weakness in global demand for bleach paperboard is the largest issue in the current business climate.

Full-year industry operating rates for domestic SPS production were reported to be 92.9%, which was down slightly from 93.3% in 2011. Although coated recycled paperboard mill operating rates remain healthy, they were reported at 94.6% for the full year. Folding carton pricing continues to be under pressure.

Seasonal demand for folding cartons typically recovers more quickly after the New Year than demand for corrugated packaging, so we’re seeing better sales results month to-date in January, and we expect to see better sales results in the March quarter throughout the segment. Although segment income will be reduced by the major maintenance outage, we’ll take it to the Demopolis Bleached Board Mill during the month of March, which I’ll say more about.

Turning to our Recycling segment, major changes we made last summer in the leadership and organizational structure of this segment are also having an important impact. We had a $7 million improvement in Recycling segment operating income over the preceding quarter, which is primarily a result of cost structure and margin improvements in the segment. The new team is also building a more profitable market presence based on the Rock-Tenn trading model that I believe will show continued earnings improvement as the actions of this team have more time to take hold.

Looking forward to the March quarter and the balance of the year, the business environment overall is encouraging. Domestic boxing containerboard demand is good for this, our weaker sales quarter. Export demand is solid, and export pricing continues to improve. And recycled fiber and natural gas costs, while higher than the December quarter, are still relatively favor in the context of a broader time horizon. OCC for January was flat to December to $100 per ton for our blended average of the regional indices and the 12-month natural gas trip of $3.77 per MMBtu is really quite favorable for us given our large recycle position in both containerboard and paperboard.

Last quarter, we forecast full-year 2013 free cash flow available for debt repayment, dividends and pension contributions in excess of expense in the range of $650 to $675 million or $9 per share.

Today, based on our improving performance and our outlook for the remainder of the year, we believe that free cash flow for such purposes will be higher or in the range of $700 million in aggregate.

Now, as you know, we manage our business to generate long-term free cash flow, but we recognize the reality that most analysts who covers published quarterly EPS reasons, for that reason, the last quarter, we stressed that adjusted earnings per share in the March quarter would be much lower than the September and December quarters due to a number of factors, including the fact that we’ve moved our outage schedule to better match our seasonal demand and it will take the largest amount of outage downtime in the March quarter. 131,000 tons in total is our current estimate for the March quarter.

We believe that these actions we’ve taken have increased the seasonality of our March quarterly earnings to an extent that’s not fully captured in the published consensus or necessarily comparable to our public peers. While Steve will detail a number of specific cost items in his comments, there are four operating factors you should be aware of that will affect March quarter earnings.

First, we pay the employer payroll tax that gets collected mostly in the March quarter. Those payroll taxes will reduce March quarter earnings from December quarter earnings by about $0.15 per share and about $0.05 per share in the June quarter.

Second, the Demopolis bleached board mill outage, which we will take in March, is actually a long and expensive outage much more so than the normal because we’re doing a significant amount of recovery boiler work and that outage will reduce production in the quarter beyond our normal biannual pattern and reduce earnings by about $0.08 to $0.10 per share.

Thirdly, the new team we put in place is intently focused on improving the reliability of our virgin containerboard mills, and as part of that effort, we anticipate incurring maintenance expenses in the March and June quarters that will subtract about $0.05 per share from the earnings each quarter from the earnings you would otherwise have expected.

Then lastly, as I think we’ve detailed in another call, the March quarter has two less production days than the December quarter this year which for us equates to about 40,000 tons of production or about $0.05 per share compared to the December quarter. And as you know, given the sensitivity of our quarterly earnings to cost input and monthly sales volumes, we’re very reluctant to forecast quarterly earnings per share, but given the mentioned – factors I mentioned above, I think it’s worth noting that we expect March quarter’s earnings to be in the range of $1 share. However, this doesn’t detract from our very positive view with respect to the balance of the year as we expect third and fourth quarter earnings to trend up sharply thereafter. And as I’ve stated, we’ve increased our full-year cash flow view to approximately $9.50 to $9.75 per share.

Finally, I’d like to comment on the change that most of you have likely seen where the EPA published its final Boiler MACT rule. There are a number of changes in the final rule that will reduce our expected compliance costs significantly. While we’re at an early stage of the engineering work that will refine our compliance solutions, we believe that the changes in the final rule will reduce our expected capital expenditures to about $100 million or roughly half of the $200 million that we estimated in our last few 10-Ks. In addition, the final rule established the new three-year compliance period, so we expect that we’ll spend most of this capital in fiscal 2015 and 2016.

Now, I’d like to turn it over to Steve to go over some financial specifics. Steve?

Steve Voorhees

Thanks, Jim. At the end of December, Rock-Tenn’s net debt was $3.2 billion. Credit agreement EBITDA was $1.2 billion, and our leverage ratio was 2.77 times as compared to our covenant of 3.75 times. Liquidity was up $1.1 million at the end of the quarter.

In December, we refinanced our accounts receivable facility, extending the maturity of the facility to December 2015. We’ve reduced drawn pricing from a margin of 110 basis points to 75 basis points over short-term rates. This has created 35 basis points in interest rate savings. Due to the good credit quality in our accounts receivable portfolio, we improved the borrowing base definitions, which provided approximately $150 million in incremental borrowing availability. We use this additional liquidity to prepay the next eight scheduled bank term loan amortization payments though December 2014 at a savings of approximately 100 basis points. All totaled, the refinancing will reduce our interest cost by approximately $3 million per year.

Our next scheduled term loan amortization payment is in March 2015. Rock-Tenn’s only significant debt due over the next 12 months is the $80 million, and that’s maturing in March of this year. We expect to repay these notes using our existing borrowing sources. Our balance sheet and liquidity continue to be in excellent shape.

We continue to make good progress on our integration during the December quarter. We’re heavily engaged in converting the acquired box plants to a standard operating system, and we expect to complete the installation across our box plant system during fiscal year 2014. We continue to focus on box plant operating improvements. We’ve closed 15 box plants and realized cost savings and customer retention rates that are meeting our goals. We’re also in the process of closing seven recycling facilities as we implement the Rock-Tenn business model, which is focused on serving our mills and customers within a cost structure that producers above cost to capital returns.

The natural gas lines that will reduce fuel consumption at four containerboard mills have all been completed. These projects reduced our cost by $6 million in the December quarter. Our savings will increase through this summer, as we complete various maintenance outage and capital projects that by the end of this fiscal year, will enable us to achieve a full annual run rate of cost savings through a reduced fuel oil consumption of $45 million.

As of December 31, our run rate of achieved synergies and performance improvements was in excess of $300 million. Approximately 54% of this is in administrative areas, procurement, and energy. Approximately 25% is in the mills, and 21% is in the box plants and other operational areas.

We continue to believe that we will achieve in fiscal 2014 the $550 million run rate in synergies and performance improvements that we forecast shortly following the acquisition. We’ve refined and modified our plants. In particular, we’ve shelved one major containerboard mill expansion project that would’ve created 145,000 tons of additional capacity. And we’ve moved the Hopewell expansion into the 2014 outage.

We’ve identified other lower cost or lower-risk opportunities of at least equal aggregate value. Cash restructuring costs for plant closures, acquisition and integration expenses were $13 million during the first quarter and $92 million over the past 18 months since the acquisition date. Over the same 18 months, we received $44 million in cash proceeds from the sale of real estate and equivalent. The net cash cost of $48 million are much better than our initial expectations, and consequently have had a positive impact on our cash flow over the past 18 months.

Turning to our key cost inputs, wood fiber cost increased sequentially by $9 million and energy costs increased by $4 million. These cost increases were offset by a $14 million decline in the cost of recovered fiber. Market prices for recovered fiber reached a low point in the September quarter and increased in December as we expected.

Our recycled fiber composite index averaged $92 per ton during the quarter, basically the same as the September quarter. Prices during the month of December were $100 per ton and were flat in January, and we expect some upward trend from here.

Natural gas prices continue to be very attractive. 12-month prices are approximately $3.57 per MMBtu. As Jim said, the12-month strip of approximately $3.77 per MMBtu is attractive and – but does compare to the average price of $3.40 in the December quarter.

Turning to our guidance for certain financial statistics, we estimate that our depreciation and amortization for the year will be $565 million. We expect corporate cost of $25 million through the second quarter and between $95 million and $100 million for the fiscal year. We estimate interest expense of $110 million for the year and $28 million for the March quarter.

Rock-Tenn’s book tax rate for the December quarter was 38.7%. This was higher than we expected due to a re-measurement of deferred taxes required as a result of tax legislation enacted in California during the first quarter. We expect our book tax rate for fiscal year 2013 to trend between 37% and 38% as the impact of the Federal tax legislation enacted in early January are recognized. Of course, we do not expect to pay any cash Federal taxes due to our tax position, which I’ll detail and the re-enactment of bonus depreciation for 2013.

At December 31, recorded unused tax items that will provide a total cash benefit of approximately $355 million and reduced future Federal cash taxes. $129 million of this benefit will be from the use of Federal net operating losses during fiscal years 2013 and 2014. The remaining $226 million benefit will be from the use of cellulosic biofuel, alternative minimum tax, and other Federal tax credits over the next two to three years, the actual timing depending on our taxable income.

These tax items exclude the unrecorded asset related to additional Federal net operating losses, that will be available at the Smurfit-Stone Black Liquor tax credits, claimed as an excise tax credit, proved to be nontaxable. In such a case, the cash benefit of our unused tax items will increase by $227 million to a total of $582 million.

We’re currently estimating total required cash pension plan contributions of $186 million in fiscal year 2013. We expect to contribute $38 million to our pension plans in the March quarter. In 2013, we expect pension expense for qualified plans of about $30 million for the full year and pension funding in excess of expense will be $156 million.

We estimate that the expenses related to deferred outage cost for the containerboard and bleached paperboard mills will be $93 million in FY 2013, as outlined on the table on page 16.

That concludes our prepared remarks. Jim and I are now available to respond to your questions.

Question-and-Answer Session

Operator

Are you ready to take questions at this time?

Steve Voorhees

Yes, we are.

Operator

(Operator Instructions) Please standby for the first question. The first question is from Mark Weintraub.

Mark Weintraub – Buckingham Research

Thank you. Good morning.

Jim Rubright

Hi, Mark.

Mark Weintraub – Buckingham Research

The increase in the free cash flow for the full year, is that a function of you getting the pricing in through better than you had anticipated, better operations, lower costs or something else?

Jim Rubright

I think it’s a little all of the above, Mark. But I think where – my view is primarily based on strength in demand and strength in pricing, as well as somewhat more favorable view with respect to the full-year OCC costs. So I’d say it’s the demand environment, cost environment looking particularly at OCC, which hasn’t increased at the rate that we had internally forecast, and then I think our operations are showing improvements, particularly on the reliability side.

Mark Weintraub – Buckingham Research

Okay, great. And then lastly, on the CapEx, I saw you took the low end of the range down some. Is that you’re spending more effectively? Did you reduce some projects or is that the Boiler MACT rules?

Jim Rubright

It is not Boiler MACT. It was just a refinement of the timing of the execution of projects as we move through the year.

Mark Weintraub – Buckingham Research

Okay. And you remain confident that you can get the synergy and the profit improvement goals that you’ve outlined with the amount of spend that you previously talked about over the next couple of years, is that a fair statement?

Jim Rubright

Yes.

Mark Weintraub – Buckingham Research

Okay. Terrific. Thank you.

Operator

The next question is from Phil Gresh.

Phil Gresh – JP Morgan

Hey, good morning.

Jim Rubright

Hey, Phil.

Phil Gresh – JP Morgan

Just on the March quarter, thank you for the color on the moving pieces there. If you add them up, it’s basically the $0.35 going from the $1.35 to the $1. I guess I would have thought maybe there would be a few positive offsets like the fact that the Corrugated pricing is still flowing through, you still have synergy run rate improving. So I just wanted to understand how the rest of the pieces, shouldn’t they be somewhat positive? Do you feel like you’re being conservative on the numbers or am I missing something?

Jim Rubright

Well, what I didn’t detail was the seasonal effects of fiber cost. We had a very wet winter in the south and then you’re in the winter season. So you’re going to see several signs of adverse comparison to the December quarter on virgin fiber, which is a seasonal effect. And then recycled fiber, just the January price is up $8 a ton over the December quarter average and we expect that to go up a little bit more. So you’ve got $0.10 plus or minus on recycled fiber if we’re right. If there’s upside in our forecast, I think one place could possibly be recycled fiber, but we are making an assumption that it will increase in February and March, so that those are the principal areas, I think.

If you’re looking for upside, if consumer demand strengthens particularly. I think the upside over the balance of the year, a little bit in the quarter from demand would also come in the Consumer segment, but seasonal cost factors are going to mute the effect of the price increase which we’ve indicated what we recover in the March quarter and then, once you get into the June and September quarters, as you move through the outage season and into an environment in which you’ve got more favorable cost factors that are seasonal, your earnings then just snap back up.

Phil Gresh – JP Morgan

Okay thanks. And then, Jim, just on inventories, obviously you built some inventory here in the quarter that are planned for the maintenance. But maybe you could just talk a little bit about how you’re thinking about the inventory levels across your system longer term and you’ve talked about operating at a very tight level. So how are you thinking about that longer term?

Jim Rubright

The inventory build that we’ve built will peak at about 95,000 tons in the month of January. As I mentioned, these 131,000 total tons include 14,000 tons of Demopolis. So I think the total system outages for containerboards are 117,000 tons in the March quarter, but given the fact that we’ll have 70,000 tons of downtime in the June quarter, you’ll see us run that inventory down in the June quarter, not the March quarter.

So then you get into the September quarter and basically at the end of the September quarter, you sort of reset your inventory levels. And we’ve talked about the fact that we would like to operate our system with somewhat more inventory than we’ve been able to manage to over the last two years. I think that’s totally – in total about 40,000 tons.

So if we’re successful in achieving the performance and reliability improvements that we’ve described, we’ll end this September with about 40,000 tons of containerboard in our system in excess of what we had last September. We balance the public perception of inventory levels versus the cost of operating our system and we come out at that being about the right increase for us. Our full year cash flow numbers, therefore, are reflecting the fact that we’re building in an inventory cost that’s associated with an incremental 40,000 tons of inventory over the course of the fiscal year.

Phil Gresh – JP Morgan

Got it. Okay. That’s helpful. And then just a last question is just how you’re thinking about the improvements at Hodge moving forward. I think you expected a pause this quarter, as you work through the downtime, and then some improvement in the back half. So maybe just talk about where you feel you were this quarter relative to what you thought, and then how you see that progressing over the next couple of quarters?

Jim Rubright

I didn’t expect to see much improvement over the course of the December quarter until we completed the outages that we did middle of December on 4 and early January on 5. But in fact, they increased their average production in the month of December by over 200 tons per day from the average of October and November. So actually they made significant progress. And I looked at the daily report for yesterday and they had the highest production that they’ve had since the outage. So the team is doing a very good job.

But there are some structural issues associated with five, I won’t go into the specific detail but it really won’t be corrected until the outage, which will be early in our third fiscal quarter. So, while I think you’ll see some incremental improvement and some reliability improvements, I think the major next change from the levels we’ve achieved at the end of December will be in the second – in our third fiscal quarter, which is when we complete that outage.

But nonetheless, the team has done a very good job and Hodge is moving along, and again, another potential upside would be some increased earnings from Hodge before what we’re estimating in the March quarter. But I want to go back to one other factor because when you look at the seasonality of the March quarter earnings, it is surprising why it is so much. And in fact, the timing of our outage is not only increase the tons, but our two most profitable mills go down for outages in the March quarter. They’re very large, very profitable mills. And so the loss contribution relative to the total loss contribution over the course of the outage season is maximized in the quarter in which those two go down. And again, I mean, if I was trying to manage earnings, I wouldn’t have done that, but I’m trying to manage cash flow and it’s the right thing to do for the company.

Phil Gresh – JP Morgan

Understood. Thanks, I’ll turn it over.

Operator

The next question is from George Staphos.

George Staphos – Merrill Lynch

Thanks, everyone. Good morning. I had a couple of questions on cash flow realizing that there are not going to be any Federal taxes paid, Steve, do you have a view on what we should be penciling in for other taxes in terms of how you ultimately get to your $700 million free cash flow available for debt, pension and dividend? And similarly, Jim, you’re mentioning the working capital that you’re building in directionally for the forecast. If you’re in our seats, how much would you be building in for working capital as a cash usage this year?

Jim Rubright

Hi, George, the taxes other than Federal would be somewhere around...

George Staphos – Merrill Lynch

Yeah.

Jim Rubright

$10 million.

George Staphos – Merrill Lynch

Okay.

Jim Rubright

For the working capital, we – if you look at AR, inventory loss AP, we hover between 45 and 50 days, just think for the forecast there, if you can do that they’ll be some like inventory went up on a day’s basis, this past quarter AR went down a little bit, but that’s pretty much what we experience as far as changes in working capital. I think that’s responsive to your question. Did I miss something?

George Staphos – Merrill Lynch

No, I guess that’s it. We’ll back into what that means from a working capital cash usage offline. Are there any other large cash flow items we should be mindful of as we’re developing our own forecast relative to your guidance? You’ve already given us CapEx and pension, we have that, but anything else that we should be mindful that you haven’t called out specifically?

Jim Rubright

I don’t think so.

George Staphos – Merrill Lynch

Okay. Thanks for that. Next question I had, you mentioned that there’s one project now that you’re not going to be going ahead with on the mill side, that I think Jim you said was going to be roughly around 145,000 tons of incremental tonnage. Would that then take the goal, maybe it used to be 600,000 tons to more like 450,000 tons of improved productivity and I’ll stop there and ask a couple of follow-ons?

Jim Rubright

Yes, but let me go back through and detail that because the 550,000 to 600,000 tons was basically the initial target and of that, remember the first 200,000 we’ve achieved through the actual 150,000 that we’ve brought on and the change in the mix at Hodge which reduced that goal by 40,000 to 50,000 tons by substantially increasing lightweight production there versus the original, what I’m going to refer to as the Smurfit footprint plan. So, yes, in the interim, basically in the last 24 months, several things have happened. First one is the economy hasn’t grown and as a result of the fact that I don’t think we’re going to make any change in sort of the political agenda in Washington, it’s hard to expect the economy to grow significantly.

Secondly, our businesses have performed very well in a constrained capacity environment. And then, with respect to the existing mills, we’ve really done a good job and have some things that are in place that are reducing the cost of the capacity that we otherwise would have displaced with incremental capacity addition. So it changes the economics of the project that I’ve mentioned, that we’ve cancelled. And it was also causing us to look very closely at the economics of what’s left on the table because the additional capacity that we’ve always talked about bringing on, always was intended to displace higher cost capacity. So if you reduce the cost of the capacity we’re going to displace, you then affect those economics.

So I think that we’ll be very careful with respect to any net capacity additions relative to our system, and the team we’ve got in place is much more focused on cost reduction opportunities. So therefore, while I think that we’ll meet or exceed the synergy target and performance improvement target that we’ve indicated, I think there’ll be a mix change and a greater focus on cost reduction particularly given my view that the economy is not likely to grow in the next 12 to 24 months in an accelerating rate and our view that we need to be extremely careful with respect to the capacity balance in the containerboard segment, which is obviously driving significant value for us.

George Staphos – Merrill Lynch

It’s a fair point, it’s nice to see the improved progress. I guess the related question I had is there are some new, and in case, larger machines coming on stream that could affect some of your mills in terms of fiber basket and potential demand. Again, if you were in our seat, how would you guys think about how that those machines might impact your markets for your fiber costs over the next 12 months?

Jim Rubright

If you assume that the market has some capacity creep up, it’s hard to say whether that additional capacity will be absorbed or not, it’s also a little hard to predict what the actions of the particular party adding that capacity will be with its existing base of supply. So I can’t predict with certainty how much of an impact it’ll have. We’ve seen an impact on fiber cost in the New York and sort of upper northeastern region already, as they line up for fiber supply. So I don’t think – well, I think it’s been adverse. I don’t think it’ll be much more materially adverse from what we have seen.

George Staphos – Merrill Lynch

Got you. Last quick one, and I’ll turn it over. One slide nine, where would I find the incremental performance improvement of synergy benefit to Corrugated’s EBITDA bridge? I know some of it’s being offset by wage inflation and so on, but where would I find that in those bars? Thanks, guys. Good luck in the quarter.

Jim Rubright

George, it’s Jim. Many of the categories, I think, there’s mostly in the last bar, which the other’s A minus, we’ve call it out $16 million, in the footnote as deferred average cost.

George Staphos – Merrill Lynch

Right.

Jim Rubright

The other negatives contributing to that would be some maintenance and replacement, which is about $4 million. Freight, which should be a broad definition of slate to include warehousing and were negatively impacted by higher rail rates this time, and around about $6 million in other, which is primarily higher SG&A cost, I think the synergies would be kind of netted in there that would be an offset to higher labor cost, I mean, in general cost increases in the areas which are not otherwise identified in the area in the chart.

George Staphos – Merrill Lynch

Okay. All right. Thank you very much. I’ll turn it over

Operator

The next question is from Mark Wilde.

Mark Wilde – Deutsche Bank

Good morning. I wondered Jim, if you could talk a little bit about the weakness that you had highlighted in Consumer Packaging. You mentioned both some weaknesses in board pricing and weaknesses in the carton pricing and I wondered if you could kind of break those two out for us and whether you think there is kind of an ongoing impact for maybe carton contracts resetting at lower levels?

Jim Rubright

Well, the underlying problem as I mentioned is the global supply of SPS and then that backs up throughout the grades and with respect to – and you’ve seeing another $20 ton decrease in SPS, so if I’m correct, we’ve got a total published index decline of $60 a ton in SPS pricing. I think the psychology of contract negotiations are you’re either in the strong board market where converters have an opportunity to increase pricing here and a weak board market which puts the changes of psychology and tends to put pressure on the negotiations. We happen to be in the latter phase right now.

It’s unfortunate because SPS is only one of three grades, and I think supply for certainly CRB is strong, so I think absent the SPS effects where it can create some tightness in that market, particularly domestically. You could reverse the psychology but currently, we’re on the other side of that cycle right now.

Mark Wilde – Deutsche Bank

Okay and then just (inaudible), is that all that’s going on in terms of lower carton prices or has the carton market become a bit more competitive as well?

Jim Rubright

I think as what I said Mark, I think it’s a function of the board market.

Mark Wilde – Deutsche Bank

Okay and then just in terms of, coming back to George’s question, in terms of some of these deferrals or cancellations on mill improvement projects and containerboard, can you just walk us through in addition to Hodge and Hopewell, what else sits out there for you now. I think it, at one point, there was a project down in Florence. I don’t know whether that’s the project that you’ve cancelled, but if you could just walk us through what else is going to go on across your system over the next two or three years in terms of capital?

Jim Rubright

No. Mark, if I was going to try to walk through capital in the mill system for the next three years, we’d be on the phone for a long time.

Mark Wilde – Deutsche Bank

I was just really interested in sort of the major projects that would have added significant capacity.

Jim Rubright

Well, there were three projects that were significant relative to their total capacity, one we’ve done at Hodge, the other is Hopewell, and another one which we’ve unspecified with respect to the mill we’ve indicated we’ve canceled. So those were the three major projects. The remainder of the capacity increase is really a function of a broad variety of smaller capital projects and rationalizations and bottleneck, debottlenecking across the entire mill system, and so none of them would fit the category of a major project.

Mark Wilde – Deutsche Bank

Okay. And then just one other question on fiber cost, you touched on OCC kind of up around the Solvay Mill, I think with that new machine starting up in Niagara Falls. I know that there’s a company that seems to be producing recycled containerboard down in Georgia right now. I wonder if that’s had any effect on kind of southeast OCC. And then finally, if you could just talk about what you’re seeing in pulpwood cost in the southeast, particularly with some more of these pellet plants being announced?

Jim Rubright

Yes. Well, the first one with respect to recycled fiber in the southeast, no, there really hasn’t been an overall change in the market demand. And I – so I don’t see a significant effect there.

Number two, with respect to fiber costs, virgin fiber costs in the south, they’re higher so far this year than we had budgeted, and I think the wetness of the season which had been referred to by others is a driver of those costs. I think that will ultimately come back as we move through the spring and into the summer, assuming we have normal weather patterns. And Mark, was there a third part of your question?

Mark Wilde – Deutsche Bank

No, I think that you’ve got it. Good luck in the coming quarters.

Jim Rubright

Good. Thank you.

Operator

Next question is from Anthony Pettinari.

Anthony Pettinari – Citigroup

Good morning. You talked about the timeline for major projects in the mills and where you are there. And I’m wondering when you look at the box plant side, can you tell us kind of what inning you are in, in terms of realizing the footprint changes that are desirable there? Is your integration rate or export mix going to change? And then, Steve I think referenced the conversion to a new planning and costing system, I believe this is going to complete in 2014. Do you get the benefits of that when the switch is flipped in 2014 or is that something where you’re getting benefits flowing through improve quarter-by-quarter?

Jim Rubright

Right. I’ll take the last question first. There is some sort of incremental benefit as you obtain the visibility of data out of the system as you start moving across the regions as you implement the system, but it’s small relative to the impact of the cost structure changes you can effect when you no longer support six procure-to-pay systems in a box plant system, and you can centralize a number of accounting and other finance functions. So you have – when that project is completed in 2014, you’ll be able to make some a number of organizational and structural and functional changes that will give you the benefit of that project. So it is largely not incremental. So let’s go – that’s the first question. Let’s go back to your other questions, if you don’t mind restating them.

Anthony Pettinari – Citigroup

Sure. Sure. I mean when you look at the box plant side, where are we in terms of realizing sort of the footprint changes?

Jim Rubright

That’s a good question. As you know, we’ve announced 15 box plant closures and I’ll just comment, those were essentially three – moving our box plant system to a system that has larger average capacity. So the average – those were like less than 400 million square foot a year plants on average, and we’re trying to move to a model where we’re 1.3 billion square feet to 1.6 billion square feet on average for the heart of our box plant.

So those were important closures. As we look at our box plant system today, we see much more opportunity for improving the overall cost structure of the system than we would have 12 months ago or 18 months ago. And some of its capital related, but it’s not really a footprint change in the main. It’s really an equipping change to modernize the equipment in the plant, change the plant functionality and footprint or functionality. So some of the capital that I would otherwise have expected to have put into mill expansions, will drive into the box plant system. But it’s not so much footprint as it is simply enabling pretty significant cost reductions in the converting cost system in our – across Rock-Tenn.

Anthony Pettinari – Citigroup

Okay. That’s.....

Jim Rubright

And I’d say we’re very early days there relative to the re-equipping of the basic box plant system.

Anthony Pettinari – Citigroup

Okay. That’s helpful. And I guess just final question, as you look towards maybe the end of 2014, would you anticipate that that footprint change would meaningfully change your integration rates or your mix towards exports versus the domestic market or maybe your balance of exposure between big national accounts and local accounts. Can you give us sort of any color there?

Jim Rubright

Yeah. Certainly, the experience we have in our consumer business, where we dramatically reduced the footprint and cost of our folding carton system really without the intention of providing a basis for growth, but really just to right size the asset base and get the cost structure right, resulted in growth, and I think, you’ve seen that in one of our competitors. So the possibility of growth in converting sales is certainly there, but all other changes are essentially justified on the assumption that they’re cost based and not incremental sales based.

So with respect to our plans, we’re building them on the basis that we maintain the level of integration that we have rather than increase it, with respect to the specific investments I’m talking about.

Anthony Pettinari – Citigroup

Okay. I’ll turn it over.

Operator

The next question is from Mark Connelly.

Mark Connelly – Credit Agricole

Thanks. Just two things, Jim. First, it sounds like from what you’re saying and what we’re hearing elsewhere that most of the improvement in the export market is because of reduced supply. Can you give us a sense of what you’re seeing on the demand side in the export market? And secondarily, just to get this over with, other producers are talking about greater than normal winter seasonality, but I don’t really hear you saying that, am I right in that?

Jim Rubright

Well, with respect to the second question, in our scale, the factors are things that we have done that create the seasonality. Within – if you just look at the weather conditions for example, yes, I would think that you have a wetter winter than normal in the southeast and possibly some more pressure. And as I indicated, I think our fiber costs are ahead of our expectations and is that seasonal?

Mark Connelly – Credit Agricole

Okay.

Jim Rubright

I think likely yes, but relative to scale of the changes we’ve talked about, it’s in terms of just the quarterly impact on earnings, it’s smaller for us possibly than some of the competitors.

Mark Connelly – Credit Agricole

Sure.

Jim Rubright

And that’s basically – that might explain the focus and again Mark, I apologize, ask me your first question again.

Mark Connelly – Credit Agricole

Sure. The question is on the export market. All we’re hearing about is withdrawal of supply, but I’m just curious what you think is really helping the demand?

Jim Rubright

Well, demand was never really the problem. I felt – now you have to dial back over a year, but when you get into November and December when the European disarray of their economy really occurred, we had some companies really tear up pricing in the export market. And so you just had an – a significant decline in export containerboard prices that was not in my mind, a function of export demand. And as we’ve said all through last year, we thought demand was fine. We just – it just takes a while to get pricing up, but if you think of where they are from the bottom, you’ve got more than $70 a ton in Central America, significant increases in Europe and Asia, but the demand environment has always been okay.

And right now, the demand is strong and I think certainly, we cut back on export volumes as a result of internal system demand, so I’m not arguing with the fact that you probably had constraint. And Mark, look at the differential between recycled and virgin containerboard costs in Europe.

Mark Connelly – Credit Agricole

All right.

Jim Rubright

It’s a huge disparity, which says virgin is clearly short in Europe and that’s what we export. So I would say the demand environment likely is strengthening, but I think the bigger impact on pricing is simply a recovery from a very adverse circumstance that developed over a year ago as a result of what was going on Europe.

Mark Connelly – Credit Agricole

Right. Okay. Thank you very much.

Operator

The next question is from Alex Ovshey.

Alex Ovshey – Goldman Sachs

Thanks. Good morning, guys.

Jim Rubright

Good morning.

Alex Ovshey – Goldman Sachs

I think you talked about the improvement in demand on the CRB side driven by number of the food end markets that you have exposure too. And on the containerboard side, it doesn’t seem like we’re getting the same type of pull-through on the demand side. I’m just curious it appears to me that corrugated recycled board and containerboard have similar end markets, so what would be the disconnect between why it appears demand trends are picking up more on the CRB side versus containerboard?

Jim Rubright

Over time, our experience has been that folding carton demand picks up more quickly in January and February than corrugated demand does. Similarly, we have more seasonality with respect to folding cartons in December than you do with containerboard. Now, I cannot explain that. It just is, and it is a pattern and it recurs.

Now, what I said in my comments was we were very surprised by the deep weakness in consumer packaging demand, and you’re equating that to CRB, which is ultimately accurate at CRB and SBS, I don’t know where the demand went, to be honest with you, but it went somewhere in December and it has come back very strongly in January. But these are very, very short-term effects. They’re not really changes in long-term supply and demand dynamics with respect to it. CRB, If you look over longer term, CRB is high.

Nobody imports CRB into the United States, nobody exports it. So, it’s pretty much a closed market, and it’s a very sustainable product for which there’s very stable demand. So that, I think that explains the difference in where CRB is relative to other grades of paperboard. In Corrugated, we’ve seen normal – or containerboard, we’ve seen normal seasonal patterns except that the demand, as we’ve said across the December quarter and into the January quarter, have simply been stronger.

Why? I don’t know, but we’re satisfied with the demand characteristics in the containerboard market, but they’re more stable than – on a seasonal basis than we would have expected.

Alex Ovshey – Goldman Sachs

Thank you, Jim. And then can you tell us what your total production of containerboard was in the December quarter? And then what the change in the inventory was, if you compare the December quarter of 2012 versus December quarter of 2011 on a year-over-year basis?

Jim Rubright

Right, let us just get back to that. I mean, we’ll be flipping books, looking for exact tonnages and just, if you don’t mind just follow up with John and he can give you the exact specifics.

Alex Ovshey – Goldman Sachs

Okay, no problem, Jim. And just one last thing. In terms of thinking about the cost of the downtime in the containerboard business, is there a rule of thumb that you can put out there to help us think about what the cost to downtime would be?

Jim Rubright

From a competitive standpoint, I’d rather not and it really depends a little bit on the mix of mills and whether you’re looking at variable cost, but I think you could take the impact that we’ve indicated and then just extrapolate that over the expected downtime, and as I said, it’s 117,000 tons containerboard in the second quarter.

Alex Ovshey – Goldman Sachs

Thanks, Jim.

Operator

The next question is from Philip Ng.

Phil Ng – Jefferies

Good morning. Good morning, guys. Hey, Jim, if I heard you correctly, it sounded you were generally a little more upbeat about the demand profile for containerboard both on the export side and domestically. I know you guys built some inventory in January, but we’re heading into very peak downtime periods. So when I think about that going forward, is there any risk that supply could get pretty tight like on the September-October timeframe in a hurry?

Jim Rubright

September and October is pretty far out. I think that what we’re experiencing right now is a pretty tight marketplace. I think supply and demand in containerboard is in pretty good balance, and it did get tight last year. So I wouldn’t expect that fundamental to change, but it’s a little far out for me to forecast within that degree.

Phil Ng – Jefferies

Well, I was referring September and October of last year it got really tight in a hurry. So I’m just saying with the downtime you guys are taking rest of an industry, is there any concerns that I could get that tight relatively quickly, because you sounded a little more upbeat about demand.

Jim Rubright

Well, I don’t know what other people’s plans are with respect to downtime precisely and gauging short-term demand fluctuations is hard. But I think the markets are generally in relatively tight balance, and all I can tell you is that our external demand and the demand that our external customers foresee for us is stronger than we would have expected on a seasonal basis, and we’ve shown our volumes increasing. So I think the current snugness or tightness in the market is likely to continue.

Phil Ng – Jefferies

Okay. That’s helpful. And then I think you’ve – in the past you guys have highlighted some high-cost capacity you have in containerboard and which won’t change even with some of the changes you’re going to be making on the cost front. Are you going to reassess some of that capacity once you get closer to wrapping up Hodge later this year or is it just more of a 2014 event once you have Hopewell done?

Jim Rubright

Well, we got to figure out what we’re going to do with respect to the Hopewell expansion, that’s true, but Hopewell is 120,000 tons. So if you’re really saying, are we going to close a mill, we will not have the need or from our overall cost structure, a desire to close any of the existing containerboard mills, it will be more a balance of the incremental tons across the system from sort of the marginal fiber supply source into the mix that we would look at.

Phil Ng – Jefferies

Okay. And just one last question. I mean, in the last call, you guys gave us some color on what you’re expecting in terms of paperboard and pulp prices in terms of impact, year-over-year impact, I think you guided toward the $60 million headwind. But since then, pulp prices are up a little bit, and SPS prices have fallen. So can you give a sense of where that’s shaking out now in terms of your outlook for 2013?

Jim Rubright

No, I don’t have a crystal ball. I think the answer is the SPS is going to be a function of consumer demand, what really the sort of the economic developments in the United States and globally. So if I knew what the demand trends are going to be, I have a better view with respect to SPS. CRB, I think stays relatively tight just because the demand factors that I’ve talked about, but I just don’t have a crystal ball under the ultimate GDP growth over the course of this year, but that will be the driver on the margin for the effects you and I are trying to guess at.

Phil Ng – Jefferies

Okay. All right. Thanks, guys.

Operator

The next question is from Chip Dillon.

Jim Rubright

Hi, Chip.

Chip Dillon – Vertical Research

Hey, good morning. First question is, you mentioned on some of the payroll tax issues, it’s gone up $0.15 in this quarter, and then you said another $0.05 in the June quarter; is that on top of what we see in the March quarter or is that versus the December quarter, that $0.05?

Jim Rubright

No, it trends down, because the payroll taxes ultimately get paid based on people’s income. So it’s $0.15 in the March quarter versus December and $0.05 in the June quarter versus December.

Chip Dillon – Vertical Research

Got you. Okay. And then I think Steven mentioned a number I think tied to taxes, $227 million up to $582 million that kind of ran past me. What was that about again?

Steve Voorhees

There is an issue with respect to black liquor excise tax, which is not been recognized as income. And if it does get recognized and we get the cash, that’s the $227 million, which is not shown on our financial statements. But in the event we fulfill on that issue, then we would get the balance sort of that NOL over time. And it would be additive to our existing NOL.

Chip Dillon – Vertical Research

Got you. And when do you think though, is that sort of a revenue rolling that you’re waiting for?

Steve Voorhees

Well, in fact, it will have to go through a – because we either have to get a opinion from our accountants that’s more likely than that will prevail income in and audit our returns and agree with the position that we’ve taken that we’re entitled to the balance of that issue.

Chip Dillon – Vertical Research

Got you. And so far, you haven’t claimed that with the IRS so far.

Steve Voorhees

We have claimed it.

Chip Dillon – Vertical Research

Oh, you have. I got you. So the cash is already sort of....

Steve Voorhees

That’s not the point, I have claimed it. I think it’s an issue which is out there, and if we prevail on that issue, then we’ll get the benefit of that.

Chip Dillon – Vertical Research

Okay. Got you. And then last question is on the – the last one on taxes. You mentioned, just so I’m clear on the NOLs versus the credits, so obviously credits are dollar-for-dollar, but on the NOLs you mentioned, should we just assume about 35% of that amount is what will be cashed to you in the future as an offset?

Steve Voorhees

I think $129 million is what I called out as being the benefit of NOL. That is the cash benefit.

Chip Dillon – Vertical Research

Okay.

Steve Voorhees

And operating cost would be grossed up.

Jim Rubright

Got you. And then the last question is just from the last quarter, it looks like you’re – both your pension contribution and the especially the pension – I’m sorry, the pension expense and the contribution came down a bit from what you had estimated on the last call and I didn’t know if there was – if that was reflective of anything in the yield curve or what might have resulted in that?

Steve Voorhees

We have – there are some changes in the contribution requirements in Canada, but we selected in the lower contributions.

Chip Dillon – Vertical Research

Okay. In Canada, Okay. And then last question, as you mentioned that you’ve shelved 145,000 ton increment, and could you just remind us what mill that was to take place at?

Jim Rubright

We never said where it was going to be. So we’re not saying it now.

Chip Dillon – Vertical Research

Okay. Got you. All right. Thanks, guys. Look forward to see you in February.

Operator

The next question is from Steve Chercover.

Steve Chercover – DA Davidson

Thanks. Good morning. First of all, could you please explain the deferred outage expenses that were $16 million in the quarter and I think you said $93 million for the year. Is that an accrual or maybe you can just expand on what it is.

Steve Voorhees

We underpaid outages that are containerboard mills and there’s an expense associated with that that we put on the balance sheet when incurred, and then recognized that expense over time. When we did the opening balance sheet accounting for the acquisition, there was no deferred outage expense. And so those were not on the balance sheet at that time. So what’s occurred during this first year is we’ve accumulated those expenses and those are now flowing through the income statement. So they’re a meaningful change on a year-over-year basis, and we’ve tried to call that out for the use of analyst in assessing our income year-over-year.

Steve Chercover – DA Davidson

Okay. And so once we anniversary the acquisition and we’ll kind of stop seeing that.

Steve Voorhees

Yeah, we started seeing the change. And then we’ve called out I think on slide 16, the annual rate is $93 million, which is a combination of both Demopolis and the containerboard mills. Demopolis is on the order of $8 million out of the total, so the containerboard piece would be $85 million.

Jim Rubright

But I think your point is, once you get to a full run rate, assuming you don’t change the aggregate cost of your maintenance outages, it doesn’t change. And that’s right, the quarterly amortization will be about the same.

Steve Chercover – DA Davidson

Great. Thank you for that clarification. And then one other quick – I guess a question about a comment, which was that box demand was particularly strong through late December. I mean, that’s terrific color. Do you attribute this to the advent of online shopping or why do you think the seasonality is going away?

Jim Rubright

I don’t know if the seasonality is going away. I think we had good demand, and we are seeing good demand in January. It’s across the board, and it’s from external customers and so forth. So I don’t have – I just don’t have a great explanation.

Steve Chercover – DA Davidson

Well, it’s good news nonetheless. Thank you.

Jim Rubright

Yeah.

Operator

The next question is from Scott Gaffner.

Scott Gaffner – Barclays

Good morning.

Jim Rubright

Good morning.

Scott Gaffner – Barclays

You mentioned the new Corrugated team had found some reliability products that were available and you talked about improving the reliability of the virgin mills specifically. Was there an issue that was found that the new team uncovered, first of all? Second, any cash cost related to this and maybe just some details around those projects, the $0.05 of maintenance expense?

Jim Rubright

Well, I mean – I don’t think it was any secret that the – or something that one wouldn’t have expected that Smurfit-Stone, which operated under what I would think of is significant cash constraints for a number of years and then went through a bankruptcy. We had expected when we did the acquisition and priced in an expectation that there would be some deferred maintenance capital associated with the mill systems and we had estimated that $100 million in the first year and $50 million in the second year, which we’re – in our experience, has been consistent with that. But the effect of what I’m going to refer to is the cumulative, let’s say underspending of maintenance spending has – shows up in reliability.

In July, we made a material change in not only the senior leadership, but the leadership at various levels throughout the mill system and started building in the infrastructure and the capability simply to assess different and set different expectations with respect to the reliability of the system, and have spent a good bit of time identifying the most important things that we can do to improve the reliability of the system, kind of just placed greater focus on it, that have quantified the effect in the next two quarters which is we think it will be about $0.05 a share in each of the March and June quarters as we implement spending that, although it’s effectively deferred maintenance, it is maintenance spending that will be expensed as a period cost as opposed to capitalized.

Scott Gaffner – Barclays

But these are projects you would have identified at the – initially when you did the acquisition, but you maybe just didn’t have the management capability to get these projects done sooner. Is that – am I hearing that correctly?

Jim Rubright

Well, it would have been consistent with our expectations of what we would have expected in the mill system, but we wouldn’t have specifically identified what the issues were. We didn’t own the mills, we wouldn’t have had visibility into the specifics of what their needs are. And – no, I can’t say we would have known the specifics 18 months ago, but we certainly had an expectation that’s consistent with our experience today.

Scott Gaffner – Barclays

And just looking quickly at the synergy run rates, you were at $250 million at the end of the September quarter. Now, you’re saying you’re at $300 million run rate at the end of this – at the end of December quarter. Is there something that would – when you say $400 million run rate by the end of the year, is there something as we move through the year that makes the run rate, the incremental run rate quarter-by-quarter start to slow a little bit as we move to the middle of the year. If you stand at $50 million per quarter run rate, you should be above the $400 million.

Steve Voorhees

I’m not tracking the $400 million, but we said that last quarter. So right now, we have a broad set of initiatives on the synergies and performance improvements which included the box plants and those systems. I don’t think there’s any particular thing which is going to cause the run rate to do much other than accrete from the $300 million plus to the $550 million toward the end of fiscal year 2014. And I think trying to specify a particular goal post for guidelines in any particular quarter, it’s pretty difficult for us to do because there is just so much effort going on in the company.

Scott Gaffner – Barclays

Great. Thanks. Good luck in the quarter.

Jim Rubright

Thank you.

Operator

The next question is from Phil Gresh.

Phil Gresh – JP Morgan

Hey, just one follow-up question. Jim, in your prepared remarks you talked about other opportunities to improve your pricing, I believe on your base business. I was just wondering if you could elaborate on that a little bit more, what those opportunities are, are they contractual or how are you thinking about doing that? Thanks.

Jim Rubright

Well, Phil, I think I have discussed this in the past, but when we looked at the overall pricing of the Smurfit business once we own the asset, well, we really felt that overall, the pricing was better than what we had expected, the tail or the distribution was troublesome to us. And the poor end of the tail, we weren’t sure what all other reasons for that would’ve been, but to a certain extent it was the lack of the systems that are required to impose discipline on pricing decisions at very local market decisions as well as visibility into pricing and cost that would enable better decision.

So those are things that we spent an enormous amount of time developing over the last 18 months, not only the visibility into the cost structure at the level of decision-making, you need to understand it, but also imposing the discipline from the top and the guidance on the top to have more efficient pricing. So I think that our view is that we can improve the dispersion at the low end of the overall pricing, and that’s what I was referring to.

Phil Gresh – JP Morgan

Got it. Any way for us to think about what the magnitude of something like that might be?

Jim Rubright

I mean, I have some views but I think that it’s better for us just to leave that as part of our belief that we can exceed the $550 million and deliver it.

Phil Gresh – JP Morgan

Okay. Understood. Thanks a lot.

Operator

The next question is from Chip Dillon.

Chip Dillon – Vertical Research

Hi there. Just had a quick follow-up. I know you built 74,000 tons of inventory in the quarter, and then you mentioned something about a high water mark in January being up 95, and maybe I just misunderstood. Does that mean there is an incremental 21,000 tons that you expect to build in January and then it starts to come down?

Jim Rubright

Yes.

Chip Dillon – Vertical Research

And so that’s versus September 30?

Jim Rubright

Yes.

Chip Dillon – Vertical Research

Okay. That’s very helpful. Thank you.

Jim Rubright

Thank you.

Operator

If there are no further questions. (Operator Instructions).

Jim Rubright

All right, thank you very much for joining our call.

Operator

That concludes today’s conference. Please disconnect at this time.

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