Rock-Tenn Company's CEO Hosts Investor Conference (Transcript)

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Rock Tenn Co. (RKT) Investor Conference February 22, 2013 9:00 AM ET


Steven C. Voorhees - President and Chief Operating Officer

Michael E. Kiepura - President of Consumer Packaging & Recycling

Craig A. Gunckel - Executive Vice President and General Manager of Merchandising Displays

James B. Porter - President of Corrugated Packaging

Thomas M. Stigers - Senior Vice President and General Manager of Containerboard Mills

Jeff Chalovich

John L. O'Neal - Senior Vice President of Supply Chain & Specialty Products

Erik J. Deadwyler - Senior Vice President and General Manager of Recycling

James A. Rubright - Chairman of the Board, Chief Executive Officer and Member of Executive Committee

John D. Stakel - Senior Vice President and Treasurer


Joshua L. Zaret - Longbow Research LLC

Chip A. Dillon - Vertical Research Partners, LLC

George L. Staphos - BofA Merrill Lynch, Research Division

Unknown Executive

Once again, good morning and thank you, all very much for joining us today. You honor us by your presence, and our goal today is to update you on RockTenn's development and our businesses and also to introduce to you the people who are really driving the results at RockTenn and who have done that consistently for a long period of time. Our lawyer insists that I remind you as you've heard many times and in the course of these presentations, we may make forward-looking statements and actual results may turn out to be different than we assume and believe and understand in these forward-looking statements, and you can see all of the risks associated with them that we could think of in our 10-K filed with the SEC. And we also refer to non-GAAP measures and we have reconciliations in the back of our presentation in our filings to the most nearly comparable GAAP measures.

RockTenn is a company that has leading market positions in what we believe to be very attractive paper-based packaging businesses. They're very attractive because they have enabled us for a long period of time to develop really very strong free cash flows that have translated into very strong shareholder returns and have provided us the opportunity to grow through acquisitions that have continued to better position our business.

Today, we're somewhat unique in the industry in we're relatively balanced in virgin and recycled fiber mix. As you know, it's about 55% virgin, 45% recycled. Certainly, I'm of the view more strongly today than when we acquired both the Demopolis mill and the Smurfit virgin mill systems that these virgin assets are essentially irreplaceable. They're irreplaceable from a cost standpoint and they are strategic. The demand for U.S. virgin containerboard domestically and in export markets has continued to grow and notwithstanding economic turmoil, across Europe and many regions in the globe. They've continued to have strong demand for our products and over the last year, you've seen recovering pricing today to a very healthy export price environment for the virgin containerboard that we export.

In the near term, we have a treadmill of cost. We tried to quantify that for you in our last call, but we believe the synergies and performance improvements off of the acquisition will outrun the treadmill, and indeed we're going to identify opportunities to continue to invest and improve our business that we believe can continue to do so.

And lastly, the point of this today is to introduce, as I mentioned, the people who are driving those results and give them an opportunity to describe for you the things that they do that have produced these results. But I want to reflect on what this team has done. These are our 10-year returns. Obviously, the first few years, we were taking cost out, working very hard. But beginning with the opportunity with Gulf States for the first few years after the acquisition, we had a 16% compound return to shareholders, then we became convinced the containerboard business is a really good business. We went shopping. We're unbelievably lucky to have the opportunity to acquire Southern Container of all the businesses we could have acquired, accelerated the return to shareholders, 36% until the acquisition of Smurfit. And then since the acquisition of Smurfit, closed in May of 2011, we've had a 20.7% CAGR to our shareholders.

How do you produce those returns? In our business, you produce it with free cash flow. This is the 10 years of free cash flow returns. Now, the way we measure this and actually the way we're compensated, if you review our proxy statements, you'll see that our long-term incentive compensation is measured by a 3-year free cash flow return on beginning market equity. So all of these returns take whatever the equity market capitalization of RockTenn is at the beginning of the year. That's the denominator and the numerator is the free cash flow, which is generally what we've used to pay dividends, buy back stock, reduce debt or make pension contributions in excess of expense, ex since we acquired Smurfit where we have an unfunded liability for essentially frozen plans.

Now if you look at those numbers, 12%, 21%, 16%, 20.5%, 20.2%, remember, our equity has grown, 15.1%, 21.1%, 14.2%, 12.9% and 15.1%. The low number on that chart, that 12.9%, remember that is the year we acquired Smurfit. We have not deducted or normalized any of the expenses associated with integrating the acquisition, major disruptions in our business and the cash flow that's going out to integrate that acquisition. So in that circumstance, we were still able to generate almost the 13% free cash flow return on beginning market equity and then in 2012, return to a more historic 15% free cash flow return on beginning market equity.

As we'll explain today, we think that, that trend can continue. We have a view that we'll generate strong free cash flow this year. We're well into the year. We've given you guidance with respect to free cash flow for the following year, as well as capital expenditure guidance and we'll talk about what those plans are. But since we acquired Smurfit in May of 2011 through December 31, that's a 19-month period, we generated about $13 a share in free cash flow in that period of time.

Now today, we're going to go through our businesses, starting with an overview that Steve Voorhees will give you. Steve, as you know, recently became President of RockTenn, a great decision by our Board. One that I'm very personally pleased with. You may know, Steve joined RockTenn a year after I did. It took me a year to talk him into joining. He had worked together at Sonat with me where I thought he was as talented as any person I'd ever worked with. But he joined RockTenn as CFO, and he'd never been a CFO, he'd never been a controller, didn't have an accounting background and never had a finance job.

At Sonat, his beginning experience was in business development and after that, he was head of origination in energy, marketing and trading business, then founded an electric power trading business, now all of which, by the way, in our case, made money and were sold for a lot of money. The year between Sonat and RockTenn, he developed a 680-megawatt power plant that exists in the state of Georgia today by threading the needle of the power grid and natural gas grid and winning an RFP from Southern Company. But my view of Steve as a CFO was I wanted somebody who came to work every day saying, how am I going to make money for RockTenn today? Right? The page is blank. I'm going to fill it in with some way to make money. And that is the mentality that you'll see of everybody in this team and it's one that every position in our company needs to be filled with a person who comes to work with exactly that idea.

First, it turned out that business development wasn't the way for the first 5 years. Steve almost exclusively devoted himself to taking cost out, not cutting cost, taking cost out by essentially centralizing everything that should be centralized and then reiterating improvements on everything you do from purchasing, transportation, logistics, IT. And it was only really after about 5 years that business development became an important component of what we did.

After that, you'll hear from Mike Kiepura. Mike became Head of the Folding Carton business in 2005. It was an interesting experience. We had to work hard to convince our Board to let us buy Gulf States. It was 125% of our equity market capitalization for starters and upon closing, I went to him and I said, well, thanks for letting us do this acquisition, but we're going to change out the entire leadership team and Mike Kiepura is going to lead the folding carton business. It was a good decision. I think more -- he'll go over some numbers, he's more than tripled the profitability of what had been a relatively, I'd say, unprofitable folding carton business. Today it has industry-leading returns, a very stable platform, a terrific business and Mike has responsibility also for essentially all of our consumer-facing businesses.

Craig Gunckel is here. Craig leads our Display business. Craig was a Regional Vice President of Sales in the folding carton business and his next job went up about 3 levels. Not a lot of people -- there's some unhappy people as he went to -- the leader of the Display business. But the reason was on that Craig went -- we had a problem with a pretty big customer and he was so big that the sales was there, Craig was there, then head of folding sales are there, the head of folding carton business was there, I was there, so this was not a happy situation. And we all just sit down and sat down and Craig fixed the problem. So I hadn't met him before, so I kind of said, who was that guy? He's really good. And so Craig has the ability with customers to absolutely convince them that there's only one person they should do business with and it's RockTenn. So we put him in a position where he could leverage that to a much higher degree.

Then you'll hear from our corrugated team, Jim Porter, Tom Stigers and Jeff Chalovich and they have been together for a long time. They were fortunate enough to team up with Steven Grossman and Jim early in the '90s, and that team essentially built the most profitable corrugated packaging business in North America has ever seen. At the time we acquired them, they had EBITDA margins of 26% and packaging of course were 19%, and the rest of the industry was significantly below that. That team is together leading a much larger platform, applying the same commercial skills and market approach and capital discipline, driving terrific returns on a much larger business as they'll explain.

John O'Neal joined the team this year. John was the Chief Commercial Officer at Mirant, so he was essentially responsible for the gross margin side of a 15,000-megawatt merchant power business. John came to us and said, I'd like to come and work with you. We've had a lot of different ways that John could contribute value, and we thought the corrugated supply chain was the most important one and that he was willing to take that job. He will explain to you what he's doing. Supply chain for us is not purchasing or procurement. Supply chain is optimizing the production of containerboard and the delivery of the containerboard through our box system, which is actually quite complex operation and one that has a lot of opportunity.

Erik Deadwyler will talk about our recycling business, which he now leads. He also took the job in July. Erik joined us in the early '90s as a Commodity -- Head of Commodity Risk Management. Our view was we needed a more sophisticated approach and daily approach to Commodity Risk Management. We had large commodity exposures. But in addition, Erik has a trading background and we were of the view that we could trade around our long positions and our short positions successfully and incrementally gain profits. We did that, very liquid markets, as you know, for fiber and containerboard. So we're never able to make a lot of money but a million here, a million there, just simply trading around the position is -- adds up over time. And as a result of success in that we put Erik over in the recycled fiber business, and he did 2 things. One was create a very low-cost trading platform, shrink a business that was not well organized or thought out, get the plants that we kept operating at a very low cost, focused on optimizing our [indiscernible] fiber out and fiber into mills and really created a very high returning but small, efficient recycled fiber business within RockTenn. In July, he went over to a much larger business, which is the Smurfit platform and he'll tell you about what he's doing today to apply that business model to the Smurfit business.

Steve will wrap up with some information, summing up our financial position, and then we'll be available for questions. So I'm going to turn it over to Steve at this time. Steve?

Steven C. Voorhees

Thanks, Jim. That's my picture. I'm Steve Voorhees. I did join RockTenn in 2000 as Chief Financial Officer. I've had at a great time as Chief Financial Officer. I'm having an even better time in my role in operations. As Jim told you, my background was more operationally oriented. And I'm just very excited and very enthused about having the opportunity to work with Mike Kiepura and Jim Porter and the rest of the team at RockTenn, going around to the facilities. We're a $9 billion company. We employ 26,000 people. We operate 213 facilities. That's a lot of facilities. Hard for me to communicate the breadth and depth of our footprint. I thought a way to start would be to take you on a short tour of 3 of our facilities. So we start by going south to Virginia, near Williamsburg. We have a mill in West Point Virginia, which is the premier white top linerboard mill in North America. The total capacity of the mill is 891,000 tons. The capacity to produce white top is a little over 700,000 tons. There's 500 employees there. The annual revenue of this facility is $550 million.

Everybody here is in finance and business, $550 million is a large business into its own. This was part of the Smurfit acquisition. It was a great asset. Smurfit didn't have the greatest reputation for the asset quality. This is a high-quality asset. We operate 9 paper mills with annual revenue in excess of $300 million, 7 of those we acquired through the Smurfit acquisition. We have 2 others, one is Solvay, near Syracuse, New York, which we acquired as part of Southern Container in 2008. We also own, I think, the best bleached paperboard mill in North America in Demopolis, Alabama, we acquired as part of the Gulf States acquisition.

Let's go to Chicago. New Lenox, Illinois is part of a 5-plant business unit in the Chicago area. The total revenue of the business unit is $300 million. Smurfit invested hundreds of million dollars in the box plant system in the second half of the last decade. One of their investments was in New Lenox. It's a great plant. It's highly conveyorized, highly automated. There's pictures of the plant in the middle 2 columns. It's a great, low-cost facility. There's 160 employees there. They produce $130 million worth of boxes. They convert 148,000 tons of containerboard per year.

Let's go to North Carolina. Marion, North Carolina, we have what we think is the most sophisticated folding carton plant in North America, serving the health and beauty aid market. We built this during 2011. The first full year of operation was 2012. It is a great facility. There's a picture there of the new 3 -- the 3-sheet fed offset process that we installed as part of the building of this new plant that we consolidated with another plant that we have in Marion. Mike will talk more about that when he's up.

New Lenox and Marion are 2 of the 77 facilities that we have that we operate that have annual sales of between $50 million and $300 million. We operate a host of other facilities. They are smaller in revenue. They are well designed to serve the markets and the customers that they serve. Examples of this would be the pre-front facilities in corrugated. We operate fulfillment locations from facilities in our Display business and recycling facilities, as well as other non-folding carton and box plants. We've got a great footprint and so that's an overview of our 213 facilities.

Each one of them provides a service or a, really, manufactures a product. You think about what you do in a corporation with 213 facilities, how do you get everybody aligned to do what you need to do? And manufacturing business there is very little, if any, room for error. If you don't make it right the first time, you make it again. You don't make it right the second time, you make it again until you get it right. And it is so competitive, if you don't get it right the first time, you've got an ongoing problem. So we started with core business principles. 12, 13 years ago, when Jim and I started with the company, and that starts with the notion of respect. So you have the objective there. We want to be the most respected company in our business. They do not give out a reward for that every year, so you don't -- we don't know, however, we know ourselves how we're doing. And what we found is if you're an employee just looking for a paycheck, you really don't want to be working at RockTenn company. We want people working to do their job as well as they can. Each one of us has jobs and you figure out how do you know whether you're doing your job well or not. The people who know it best are the people you work with every day. And we find people who want to do a good job, work for the respect of the people that they work with day in and day out. So I work very hard to achieve Jim's -- to earn Jim's respect, work very hard to earn Jim Porter, Mike Kiepura's, Steve Meadow's [ph], all the people I work with. And I find it more effective if I look at myself as, I've got to do a great job and I've got to earn the respect of the people I work with. That is very empowering throughout our company. We have a culture, which is based on disciplined execution and high performance and this is the beginning point from which we build a culture of disciplined execution and high performance.

Now you don't make boxes with respect. You make boxes because you have equipment, you operate it well and you serve customers. And when we turn to the task at hand, we need to provide superior packaging solutions to customers at very low cost. How do we do that? We invest. We look at our manufacturing processes, we look at our administrative processes to come up with the best combination that we can to be the preferred supplier at any price point. We have customers who want very low cost because they need very low cost because they're in a high-volume business and they're buying the box to protect their product, we need to be able to be the preferred supplier for that particular product. We have other customers that are looking at, at Display, help them increase sales. We need to do that. So we need to be the preferred supplier at any of our price point. We've done that very effectively over the years through our investment and our assets and our investment in our people. We have over 400 employees who have been trained in Six Sigma techniques to be able to take cost out. That's a fundamental aspect of our culture to go through and see what we can do to take tens of millions of cost out each year. And we need to do that because our costs are going up and we need to increase our productivity in order to outrun our cost increases.

We measure a lot of things at RockTenn. One of the things that we need to do is satisfy our customers every time. We contract with an independent survey firm to measure customer satisfaction. There's a host of questions. The first question is, how satisfied are you with RockTenn on a 1 to 10 scale? I'll just leave that with you because I met the owner of the survey form, I checked in a hotel and I had a very bad check-in experience. And I got a call from this survey from a couple of days after I stayed and I said, we'd like to survey you and they said, how would you rate your experience on a 1 to 10 scale? I said 8. So next question is, what do we have to do to get to a 10? I said, I had a very unsatisfactory check-in experience. You had one person, there were 5 people to check in line. I was tired. I wanted to go to my room and go to sleep, and they got that feedback. Now we add up all the scores and there's a score on here which is 8.77. The 8.77 does not tell you what to do to improve satisfaction. So we ask the next question is, what do we have to do to increase the satisfaction to a 10? We record that. We get that feedback and we act on it. So just like I did the feedback to the hotel, we get feedback from our customers, here's what you got to do to improve. This is a very integral part of the way we go to market and the way we operate our business.

In the corrugated box business in 2011, our score was 8.35. That was higher than the first couple of years we did surveys at RockTenn. Last year, in 2012, that score is 8.65. So we're improving customer satisfaction across the business, including the corrugated box business.

When we completed the Smurfit acquisition, we made a commitment to generate $550 million in underused [ph] and performance improvements. The last call, we said we were over $300 million. We were at $325 million. So this is our run rate as of the end of December. I'd like to go over a couple of the larger pieces. $100 million of that was procurement. Smurfit was organized with a supply chain in Chicago and their corporate procurement function was in Chicago. We moved all that to Atlanta. We have a floor of people in Atlanta whose job it is to aggregate or spend and reduce the spend where we can. And in aggregate, they've been very successful, achieved $100 million in purchasing cost reduction as a result of that.

On the mill and supply chain, we've generated $95 million in annual rate of synergies and performance improvements. There are a host of projects. So we have a list of projects at each and every containerboard mill. And you should know, in our company, the synergy and performance improvement goal is very important as an ongoing goal. So when we get to $550 million, there'd be generations of additional performance improvements. But for this particular one, the $95 million, each and every containerboard mill has significant cost improvement that we've generated since the acquisition.

A couple of them, I'll point out, were the closure of our Matane corrugated medium mill that we announced about a year ago and we shuttered 2 paper machines at Hodge. One got us out of the Kraft bag business. Another reduced our medium production. We've taken that asset and Jim Porter will talk about what we've done with the asset to make it -- to increase the production of lightweight containerboard, lightweight linerboard, which is much needed by the market and improves our balance of liner and medium around the company. In the box plants, we've got $42 million of savings. The $42 million, now the primary component of that is $27 million in reduced cost in box plant closures. Then $15 million in cost reduction from operating improvements, the most significant of which is waste reduction.

Going to get to the $550 million, we have another $225 million to go. $140 million of that will come through the corrugated packaging business. About $60 million of that will come from the mill and supply chain and $80 million will come from the box plants.

In 2012, I think everybody's familiar, we changed out a lot of the corrugated leadership. We've got the right leadership in place. I will tell you, personally, it's a lot more fun to come to work today than it was a year ago. And it's difficult to describe the change, the impact on culture, but I think you've seen through our results particularly the last quarter, we're on the right track. While that occurred, we still generated nearly $8 in free cash flow per share. In '13, we're doing more of the same and we've put out guidance of $700 million or $9.50 to $9.75 per share of free cash flow. And in '14, we're going to conclude on the $550 million synergies and performance improvements and this year, we're going through the next generation of performance improvements. As we look at that, we think we've got a significant amount of opportunity in capital. Previously, we've given long-term guidance of $350 million of capital to support the business over time. We think over the next 2 years, '14 and '15, we're going to have to spend about $250 million to maintain our assets. And then we have another set of very attractive return projects on the order of 20% after tax, 30% after tax, the quantity of which would be $150 million to $200 million, which brings us to the total guidance here of $400 million to $450 million in capital.

We're also providing free cash flow guidance for '14, $10.50 to $11.50 per share. There's a couple of qualifications on that. This is containerboard pricing as it existed through the end of this last year, sort of takes into account the price increase we saw in the second half of last year, does not take into account additional price increases. And also increases our cost by 2% to 2.5%, which is what we see for a lot of our cost compliance.

So with that, I'll turn it over to Mike Kiepura.

Michael E. Kiepura

Thanks, Steve, and good morning. I've spent -- this is my 31st year in the paper packaging business and it's kind of ironic to me that I started my career right out of business school at Smurfit and now to be back and have Smurfit under RockTenn is a great part in the circular part of my career. But I spent about 11 years at Smurfit, primarily in the folding carton and the box board mill side of the business before I left to become President of a small independent folding carton company that RockTenn acquired about 2 years later. So for the last 18 years, I've been at RockTenn, primarily in the folding carton part of the business and then that grew and expanded to being the head of all of consumer packaging and the recycling business. So it's been a great, great experience for me.

Today, the consumer packaging business of RockTenn is really a portfolio of 11 paperboard mills and various -- converting it downstream, converting operations that make various forms of paper packaging. We have strong positions in all of those businesses, and particularly in our converting, our 3 main converting businesses, folding carton, merchandising displays and solid fiber petitions, we are either the largest or have the #2 position in the markets that we serve.

Let me talk a little bit about those individual converting operations and I'll start with our folding carton business because it represents about half of the sales at consumer packaging, about $1.25 billion of business. And you may have seen the samples as you came in on the floor today, but a folding carton is basically the packaging that we all touch and use every single day. If you go into your kitchen pantry, the cookies, the crackers, the energy bars, are packaged in a folding carton. If you open your refrigerator, a frozen pizza, a Stouffer's lasagna, that's a folding carton that we make. If you -- a facial tissue, Puffs facial tissue, the container that holds that is a folding carton that we make in our plant in Clinton, Iowa. And we make those folding cartons for consumer packaged goods companies with household brand names like Puffs, like the Krafts, the Kellog's, the General Mills, the Nestlés of the world. And so we're their primary packaging to protect that product and promote it on the store shelves.

Our second largest part of consumer packaging is our merchandising display business, about $650 million, about 25% of consumer packaging. We're the largest producer of temporary and permanent displays in the country. And the same customers that folding carton plants serve, the display business serves to promote their products at the retail store shelf level.

And then our third converting business is our solid fiber partition business called RTS. We're the largest producer of solid fiber partitions. And think of a case of wine, the paperboard partition that protects those bottles in transit, that's the solid fiber partition that we make. And we convert the board from our uncoated recycled mills to do that.

Now consumer packaging has been a very good business for RockTenn over the years. It's good because we're serving household brand names, very steady businesses, consumer staples. We have long-term relationships with our customers. We typically have multi-year contracts that have price mechanisms to adjust price as the underlying paperboard markets change. It's also good business because those big companies require companies like ours that are able to provide good quality and service and consistency to have highly automated packaging plants, packaging lines that require product that will run very consistently and very efficiently, and we're very good at doing that. That's part of our value proposition to them in terms of the innovation and the value add that we bring in terms of consistency and quality.

So we're also focused on cost. We all face the similar treadmills. So they're looking to take out cost. We've become very proficient at forming joint process improvement teams to help drive costs out of our customers' lines and improve margins for ourselves at the same time as we reduce cost. And the real proof of the pudding is really positive financial performance. In our fiscal 2012, consumer packaging's EBITDA as a percent of sales was 17.3%. It's also a business that generates good cash flow. Over the 5- or 6-year business cycle, our CapEx as a percentage of depreciation over that time has been about 85%. So strong earnings generator, strong cash flow generator.

I mentioned part of our value proposition is value add and innovation, and let me give you a couple of examples of that, of how our R&D and tech services operations and people are able to provide that value. And I'll use a couple of examples from a paperboard side.

We make a product called MillMask. We make -- it's a 100% recycled paperboard made in our St. Paul, Minnesota mill. And there are products that our customers have. It might be facial tissue that's impregnated with a lotion to be more sensitive and soft on your skin. That lotion or aloe that's in that product will have a tendency to go from the product into the paperboard and would reek through and make the graphics look soiled. Our MillMask product masks that effect so that it doesn't look like the carton has been soiled and the customer isn't going to say, "I'm not going to buy that because it looks like it's been damaged." It's been a very good product for us.

The same thing, if a customer has a product, maybe a cookie or cracker that has a high fat content, that fat can go from the product into the paperboard and soil the appearance of it. Our MillMask prevents that look from occurring. And what it -- how it was able to reduce cost is -- what the customer had to use before then was they had to have a poly coating that was extruded on to the back side of the paperboard at pretty expensive cost, and we were able to eliminate that cost.

A second example is our Millennium. It's a 100% recycled sheet that we make in our mill in Stroudsburg, Pennsylvania that's a very strong paperboard, square sheet, would be used in applications like frozen food and beverage. And so it's a recycled alternative to the virgin product that a MeadWestvaco or a Graphic Packaging makes, SUS or CNK, for customers who want the recycled aspect for their sustainability and marketing purposes. So that's been very successful for us.

Let me turn a little bit to the folding carton and our paperboard mill business. Let me talk first about the CRB market. It's about a 2.5 million ton a year business. Graphic Packaging is the largest with about 35% share, a little over 800,000 tons. They're highly integrated. They're probably 80% or more internal in their use of the CRB. RockTenn is the #2 player, a little over a quarter of the industry. We produce a little over 600,000 tons of CRB. Different from Graphic Packaging, we're about 45% integrated. And what I like about that level of integration is that it keeps us market competitive in terms of quality, innovation, service and price. When you're selling half or more than half of your board in the marketplace, you've got to be competitive on all those parameters, and we get good market feedback from doing that.

Third player is Paperworks, and Paperworks is really the 2 mills that Graphic had to spin off as part of its acquisition of Altivity several years ago. And on the balance of the industry, about 27% is, for the most part, single mill operations that serve a regional market.

Turning to the SBS side of the house, a little over $6 million a year market. But for RockTenn, it's really more like a $3 million market because about half of SBS goes into the liquid beverage market, aseptic packaging, milk cartons, orange juice cartons, things like that. We don't participate in that market. IP and MeadWestvaco dominate that market. Between them, they've got 50% market share, and you see RockTenn at about a 7% share. So we're fairly small in that. But like Steve said, we think we've got the premier quality sheet, we're a low-cost mill, and we have enjoyed a very nice position in that marketplace.

And the chart you see that the operating rates -- particularly for SBS, you see RockTenn at 100% operating rate versus an industry that last year was at 93%. We're able to do that because back in 2005 when we acquired Gulf States and got the Demopolis mill, that mill was running full. RockTenn's base business was a significant purchaser of SBS board in the open marketplace. We chose not to internalize that business, and the advantage that, that has created for us over the years is that as the market cycles up and down, particularly today where the SBS market is a little bit softer, we were able to repatriate tons that we buy in the open market and run those in our Demopolis mill so that we stay full. And we've not taken any economic downtime in this cycle at the Demopolis mill. So we stay full, and we expect to continue to stay full.

Turning a little bit to the folding carton market, it's a market that has largely consolidated. Today, the top 4 players are 59% of the industry. And if you go back to 2000, the top 10 players represented about 60%. So Graphic's got the largest share at about 32%, RockTenn is the #2 player at 13% and then drops off rather quickly. MeadWestvaco, their 9% position is largely beverage and a little bit of pharmaceutical. And then AGI-Shorewood is the spin-off of MeadWestvaco and IP's Health and Beauty Aids and Entertainment business. So you really only have 2 large general folding carton manufacturers, that being Graphics and ourselves.

As the industry is consolidated, we've really mirrored what's going on in our customer base. As the food companies and our other customers have consolidated, they typically have national footprints. Graphics and ourselves are the only 2 that have that national footprint. They've got the range of capability from the production side and redundancies to give comfort to those large national account-type of customers. So after the top 4, you really drop down to companies that have a 1- or 2-plant type of operations that primarily serve a local market.

Our mix of business on the folding carton side is very stable. 90% of it serves the food industry or consumer staples. So we don't have the big swings up and down. We're kind of the Steady Eddie, very stable, very consistent demand. In our mix of business, very much is proportionate to the overall industry, folding cartons in North America, with the exception of -- we choose not to compete in the tobacco market, and we're underrepresented in the beverage side because MeadWestvaco and Graphic make the primary substrate for beverage that serves the soft drink and the beer companies. So we have some businesses in there. We tend to serve the more -- the smaller players and the regional players. But we don't have as big a position in the industry overall.

The proof in the pudding of our value proposition in terms of value-added innovation, quality in service and delivering that at low cost is how do you perform relative to the market over time? So over the 6-year period, 2007 to 2012, RockTenn has consistently outperformed the industry in terms of sales, volume and price. And we think that's because we've executed on our value proposition and delivered that value to our customer base.

And if you look specifically at how have sales and profitability grown at RockTenn, it's been a very positive story. Sales have grown a little bit faster than the industry, but it's only about 2.2% a year. But the returns and the income improvement that we've generated have been pretty good. We've increased the average size of our plant by about 33% over the 6-year period to about $68 million per plant for our general folding carton plants. Again, if you go back to about 2000, the average size of our plant would have been a $25 million or $35 million plant. So we've significantly increased the scale of our individual facilities.

The operating income we've nearly tripled today, it's about $4.4 million per plant in our 21-plant network. Our CAGR over that time has been 19% improvement year-on-year, which is a pretty healthy improvement rate. And that's enabled us to double our profitability in terms of return on sales to 7.6%, which we think is certainly an industry-leading kind of return.

How we did that really was -- the strategy that we employed was that we wanted to optimize and standardize everything that we did. Previously, RockTenn's folding carton group had been run pretty much as an individual collection of plants. And back in 2005, we started a process where we said we're going to run it as a network. We're going to treat our customers as customers of RockTenn, not as customers of individual plants. And so in our systems and our processes and how we designed product for those customers, how we service them, we said we're going to optimize everything that we do and then standardize it throughout the operation. And that's enabled us to dramatically increase our sales per employee, our productivity and the way we measure our efficiency, our overall equipment effectiveness to substantially improve on all of those metrics.

We also said we think that we could be more efficient if we had fewer, bigger, better-capitalized plants. So over the last several years, we've closed 7 plants. But in the closing of those plants, we've kept greater than 95% of the volume and been able to distribute that business across our remaining network of plants. That's enabled us to better spread our fixed cost and to reduce our SG&A by about 20% to today, where that SG&A is about 6.7% of sales.

We're a capital-intensive business, and we've been able to strategically deploy our capital to improve our ability to serve customers. Steve mentioned in his opening remarks our Marion, North Carolina plant. That's an area where we took an existing plant that was constrained but in a very good segment, the health and beauty segment, built a new plant, added significant capacity that we have already largely been able to fill with growth in existing accounts, as well as new accounts. And so the Marion facility today is a very successful one for us.

But we've been able to take advantage of other market opportunities as well. A year or 2 ago, we had a customer in the dry foods business who wanted to grow with us. So we invested in a state-of-the-art web offset technology, and we were able to grow our sales with that customer by over $50 million in about an 18-month period of time. So as we get the opportunity to grow in specific areas with specific customers, we're deploying capital to take advantage of those opportunities.

So as our strategy in folding carton for 2013 and beyond is really to continue what we're doing and really intensify that focus. And it's something that we call performance excellence, and so there's a strong and intense focus on improving our productivity, driving cost out of the process. And how we're doing that is focusing on all forms of loss and engaging 100% of the people in the plant floor in that process.

It's very consistent with the culture that Steve talked about of respect for the employee, valuing the contribution that they can make. And in our typical folding carton plant, we'll have 200 people or more who are really experts at making folding cartons. And what we're doing now is saying we're going to tap into that strength, enable them to be a greater participant in a team effort to improve the productivity. So as we've rolled that out in the first year in individual profit machine centers, we're seeing improvements in productivity of 20% or more on average. So the employees have very much embraced the opportunity to be a bigger part of the play and be a bigger part of the team. And unleashing that is just a tremendous force for improvement.

Let me turn a little bit to our paperboard mills. I've mentioned that we have 11 paperboard mills. 10 of those are 100% recycled coated or uncoated mills, and then we have the one virgin mill, our mill in Demopolis, Alabama.

We've got a very good geographic footprint of our mills. You'll see that they're on the eastern half of the country, which is where our manufacturing is and where the population centers are. And I'll just go around the wheel. Our St. Paul, Minnesota and Battle Creek, Michigan mills, our 2 CRB mills, serve the upper Midwest. That's the single largest producing region of the country for folding cartons, and they serve that market well. Our mill in Vermont is highly integrated with our 3 Canadian plants and also serves the Northeastern market. I mentioned that mill in Pennsylvania where we primarily make the Millennium grade. And then our fifth CRB mill down in Dallas, Texas is highly integrated with our plants in the South and south central part of the United States, about 85% of the output of the Dallas mill we use internally. And then we've mentioned a few times the mill in Demopolis, Alabama, which we think is the premier SBS mill in the country.

We also have 5 uncoated recycled board mills. Three of those, Chattanooga, Cincinnati and Eaton, Indiana provide the uncoated recycled boards that our RTS solid fiber partition business converts themselves into the beverage market. They also sell a significant portion, about half of their output, into the independent tube and core market. The major competitors to us in URB, the Sonocos, Caraustars, the Newarks, have major positions in the tube and core market. So we're the supplier of choice to the independent market because they would rather buy from us. We don't compete with them in tube and cores than from those others.

And then our mill in Lynchburg, Virginia makes gypsum facing paper. And at first thought, you might say, well, that's in the housing industry, that's been in the doldrums. It's actually been an outstanding asset for us. We have a joint venture partner in that mill, Lafarge, who's in making -- makes wallboard. They guarantee to take 100% of the output of that mill as part of our arrangement with them. So it's been a very successful facility for us.

And then the last slide that I'll talk about, this is a 13-year history of the price, the published price for the 3 main grades in consumer packaging. And you see that over that time, it's been a fairly consistent and generally rising pricing environment. And of those 3 grades today, I would say that SBS is the softest of those 3 grades. We think that, that's largely due to about 30% of the SBS market, the SBS produced in the U.S., is exported. And as there's been a relatively soft global economy, exports are down, and there's tons that would have otherwise been exported, need to find a home in the North America, and so that puts some pressure on the supply demand balance. The good thing for RockTenn, we don't export any SBS. All the SBS that we produce out of our Demopolis mill goes into the folding carton markets and is consumed either internally or in the domestic U.S. market. So we're in, we think, a relatively better position than our competition on the SBS side.

So that's a general overview of consumer packaging, and I'll turn it over to Craig Gunckel who heads up our merchandising display group.

Craig A. Gunckel

Thank you, Mike. Good morning. My name is Craig Gunckel, I'm the Executive Vice President at RockTenn and the General Manager of our Display business. I, too, remember the story Jim told earlier. However, at the time, my perspective was I had -- I better not mess this deal up. There was a lot of important people in the room. So that worked out fine and went on to lots of other things. But I've been with the company for approximately 18 years. About 4 years ago, Jim called me and asked me if I would step into this role, and so I've been in this role coming up on 4 years now.

As Mike mentioned, RockTenn is the largest manufacturer of point-of-purchase displays in North America. What we do, what we employ at RockTenn is what we refer to as concept-to-consumer. So we not only manufacture the components, we start with insight. We develop designs and creative work for our clients. We manufacture those components on our 6 manufacturing locations. We have 14 assembly locations for a big bulk of the work we do. We actually do the co-packing and the development -- or the build of the display and pack the product into display, either ship back to our customers' DCs or ship direct to retail. So we're a full turnkey supplier in this marketplace.

We like this business a lot for several reasons, the first of which is this is a growing business. This has been, from an organic standpoint, one of RockTenn's fastest-growing businesses over the years. We acquired these assets in 1995. And at the time, the business was a $35 million business. By 2000, the business had grown to $100 million. And just prior to the Smurfit acquisition, the business had grown to $400 million.

With the Smurfit acquisition and continued growth through the integration, we are now $650 million and growing. The market -- the total in-store marketing market is estimated to be a roughly $12 billion market. $4 billion to $5 billion of that $12 billion is made up of temporary displays, and $4 billion to $5 billion of that $12 billion is made up of permanent displays, both of which are key markets or key products that we offer to the marketplace. That coupled with the fact that our large strategic customers and large CPG companies in North America are focused on having fewer, more strategic suppliers, we believe this business will continue to grow. In fact, we think it has the possibility of being a $1 billion business at some point in the future.

Another great thing about this business that's very strategic and that we like, it's a low return on invested capital business -- a high return on invested capital business. Sort of backwards. The cost of capital is fairly low to support the growth. So relative to some of our other converting businesses, the margins are quite good. When we look at our facilities and the locations we have, one of the great things that happened the last couple of years was the integration or the acquisition of Smurfit and the integration of those assets into our display business. What most people may not know is at the time RockTenn was the largest display company, Smurfit might have been or probably was the second-largest display company. When we merged those assets together, a couple of really cool things happened.

First, we got needed capacity, manufacturing and geographic capabilities that would allow RockTenn's legacy business to continue to grow into new markets and with new customers. Second, RockTenn has always been known for its high-quality, promotional display services associated with project management, design and fulfillment. We will bring those services to the legacy Smurfit customers, so allowing both businesses to grow faster than they would have independently. So the great example of this integration being one plus one equaling more than 2. Really good integration, really good business that we have today because of it.

As I move on, I talk about what our key strategic differentiators are in the marketplace. We view those as innovation, execution and low cost. Our customers believe we are the industry leader in these areas, and it's important to maintain that industry leadership position. First, we'll talk about innovation. We have 22 sales and design offices strategically located throughout North America to serve our customer base. These offices are located close to our customers. Cincinnati, for example, to service Procter & Gamble. We have an office close to New York here to service Colgate. We have an office in Burbank that services Disney and other West Coast clients. Strategically located gives us the ability to provide creative, value-added solutions in real time for our customers.

But it's not just the crazy or -- not just the creative, unique things we do for our customers, it's also the supply chain solutions we bring to the table. It's the things that we bring that allow our customers to be more productive and, as Steve mentioned earlier, drive greater return on their investment and our displays.

The second is execution. We are in the promotional business. Everything we do has to be done on time, every time. Our customers can not afford for us to be late. What we do is tie the new product launches, maybe a circular and a weekly ad for a grocery store or Wal-Mart, could be tied to the Olympics or the Super Bowl or an event such as that. So we have to have the products packed in the display, on shelf, every time, on time. We have a great reputation in the marketplace for doing that.

Again, when we look at our network of facilities, we have 14 assembly locations throughout the country, which allows us to be close to our customers, in many cases, in our customers' DCs packing the display.

Finally, we talk about low cost. Just like all of RockTenn's businesses, we are focused on continuous improvement in our low-cost platform from a manufacturing standpoint. But we also have great assets that allow us to provide high-quality, creative solutions at very low cost, example being Winston-Salem, North Carolina, where we've got a facility we can print offset, flexo, digital. We can laminate in line, we can do everything that the market needs in one location. We believe that is one of the premier plants, if not the premier display plant in North America.

So when you couple our design centers, our assembly locations and our manufacturing footprint, we truly can provide the total lowest delivery cost to our customer base, and that allows again for strong margins and continued growth.

We believe one of our greatest assets at RockTenn in the display businesses is our customer base. If you look at this slide here, you'll see some of the world's greatest and best consumer brands companies and retailers. We not only have this list of customers, we tend to have long-standing contractual relationships with all these folks. These relationships tend to be very strategic in nature. We're typically dealing with marketing and sales and higher up the chain, or closer to the entry point for these products. Allows for a very high-level strategic discussion with senior executives from these customers. We not only provide insights to these customers that we developed and that we help them understand, we also get insights on current trends and market -- developing market concepts that we can share across all of RockTenn's businesses. That allows us to take a much more strategic approach to bringing solutions across, not just displays, but folding and corrugated and it really is a strategic advantage and differentiator for all of RockTenn.

So again, we really like this business. It's a very strategic business for RockTenn, a highly integrated business for RockTenn, and we think we've got a very strong future.

Thank you. I'll turn it over to Jim Porter.

James B. Porter

Thank you, Craig. Good morning. I'm Jim Porter, and I have the privilege of leading our corrugated packaging and containerboard business. A number of you in the room I think know my background, but most don't, which is kind of an interesting one. I guess I've been in the business, time flies, but 39 years now and really have pretty much covered the whole gamut of opportunity sets within the forest products, the corrugated business. I began in the Midwest with a somewhat unusual degree in forest management. I usually can say that there's nobody else in the room that has a forestry degree, and yet Josh joins me with that. So we -- there's 2 of us here today.

But my career has been a lot of fun. It did start in -- while I later went back to business school to embellish that, it started managing timberlands in the Pacific Northwest. I did that for a few years. and fortunately was promoted to Woodland's manager at a virgin containerboard mill in the Midwest. And I was quite intrigued with what was going on across the road. And as a part of the leadership team, got certainly interested into the manufacturing side of the business and been pretty aggressive. I was given a shot at pulp mill superintendent. And from there, I kind of wiggled through all the responsibilities and I was able to have my first mill, a virgin mill, general management role in 1987.

So I've been doing it for a long time. Had the good fortune in the early '90s of meeting Steven Grossman. Some of you know Steven, but -- I've labeled him as kind of the consummate entrepreneur, owner/founder of Southern Container, which at the time was the largest independent corrugated box company in the country, challenged by the fact they were buying all of their raw materials from their integrated competitors. And Steven's vision was to build a very automated, state-of-the-art paper manufacturing facility in upstate New York. He and I hit it off and fortunately was able to take the challenge of building that business into what turned into a really great company. We put together a phenomenal team of people, built the first paper machine in 1994, second paper machine in 1999, third paper machine in 2002, today producing 800,000 tons of very low-cost, very high quality containerboard. And we did sell in a very innovative, non-union team concept work culture, which has been a really powerful foundation that we spread across the Southern Container assets at the time. I went on to be President of Southern and Steve's -- and Jim generously shared the margins that we were able to create.

But along the way, the most important thing is that we build a team of leaders that -- many of which are leading RockTenn today. Two are here today and -- Jeff Chalovich, Tom Stigers, you'll hear from. I'm also joined by John O'Neal and together, my colleagues will have a discussion with you about what we think has grown into a really exciting business that has a lot of upside potential.

As I begin to reflect upon our business, I can't help myself but to reflect on how tremendous our product portfolio is, and it kind of begins with the corrugated box, which I think is the neatest product on the planet. It's light, it's really strong, it protects, it ships, it markets our customers' products on these fabulous print billboards. It's made out of renewable fiber resources. It's recyclable, it touches literally everything that you and I do every day. So I think it's a pretty cool product. And even cooler today, though, is that RockTenn has tremendous scale in this industry.

We're the second-largest producer of corrugated packaging. We likewise are second-largest producer of containerboard that is the raw material for the corrugated packaging. We're the #1 producer of the most profitable containerboard segment, that being white top linerboard. We're also the largest producer of the most profitable graphics segment of the corrugated packaging industry, that being the preprint linerboard market.

We produce about 78 billion square feet of converted products in over 100 manufacturing operations, producing corrugated packaging across North America. We produce 7.3 billion -- or million tons of containerboard in 13 mill assets, both recycled and virgin, of which about 70% of that containerboard is integrated within our converting business, or about 5 million tons. The other 2.3 million tons are sold into the marketplace, balanced by about 1.3 million to our independent corrugated converters in North America and about 1 million tons that goes to literally every country in the world in the international containerboard market.

Scale is pretty solid, north of $6 billion, close to 16,000 coworkers. So our business has a tremendous amount of opportunity to optimize both assets and a strong portfolio of products.

I'd like to spend a minute on our mill system, of which I am really excited about, particularly these virgin containerboard mills, and I've labeled this slide as economically irreplaceable. I think Jim made that same comment, but I'll be pretty bold and go out on a limb that candidly, I don't believe there will ever be another virgin containerboard mill built in the United States of America. The environmental and capital footprint required to build those assets I don't think will get done again, approaching $2 billion. The demand for virgin containerboard continues to grow solidly. Depending upon the economist you choose, somewhere between 30 million and 50 million tons of additional containerboard capacity is going to be needed over the next decade. And yes, much of that will be supplied by regional recycle facilities built in the countries of that growth. However, the agricultural requirements that require very high strength and the moisture resistance in the temperate climates to the high temperature and cyclicality that those agricultural regions have require virgin containerboard. And North America has the lowest-cost virgin containerboard in the world.

So when you put this portfolio of mills together, producing approximately 6 million tons, and the customer base and book of business that goes with that, that's largely why we've spent several billion dollars to acquire Smurfit-Stone.

I'll walk around the assets, not speaking to each of them, but highlight a few. First of all, the West Point, Virginia mill, Steve put a pretty picture up of that mill, but I'm going to speak to it again because it is a great facility. It's the premier producer of white top linerboard in North America. Big mill, 2 excellent machines, very high quality sheet of paper. It really is the gold standard for print quality across North America, a very profitable, important asset in our system.

Next mill I'll highlight is Fernandina Beach down in the Jacksonville, Amelia Island area. Very large, 2-machine, low-cost containerboard mill, among the biggest in North America. Very profitable. An asset in our portfolio that we will continue to invest and grow. Extremely important. Located on the coast, so it's excellent shipping for our international markets, as well as our domestic markets.

Hodge, Louisiana, another very important strategic asset for us. Big mill, very low cost. Located in an excellent wood basket. You're familiar that mill has gone through a transformation this past year. It was trying to do too many things, so we closed the kraft bag machine. We closed a recycled medium machine. We transferred the pulp and energy to the other 2 machines. There are 2 large, very lightweight, very high strength linerboard machines. And literally, that is the most in-demand product from our North American customer base because of its lightweight -- light basis weights at very high strength.

We've had some challenges starting up out of the shutdown. We've corrected most of those design efficiencies. And the remaining few, we'll take care of in May. But that asset continues to be a very important strategic one for us going forward.

The last one I'll highlight in Stevenson, Alabama -- and I hate to leave the rest of them out because I love them all, too. I guess this is kind of like your children. You don't want to leave any of them out, but we won't talk about all of them today. But Stevenson, Alabama is another really great asset. It is the largest virgin medium machine in North America. 2 big machines, very low-cost wood basket, has a lot more upside potential. It's a great asset today, but we see a big runway of improvement. So this portfolio is something that we're very proud of and is the cornerstone of our containerboard packaging business.

We also have a nice portfolio of recycled facilities, approximately 2 million tons. The demand for recycled containerboard is growing. All of our consumer products companies are having a much more intense focus on sustainability. And for that reason, they're driving towards more and more recycled fiber. FSC certification is something that is becoming more prevalent, and we're able to do that out of all of our recycled facilities.

You can see they're also located in the highest population centers of North America. And so what that means is we have very low freight for our fiber, as well as freight for our finished goods shipment. The biggest advantage, though, of these recycled mills however, is their flexibility. The big virgin mills are pretty tough to start up and shut down. And once you get them running, you want to leave them running. And you've heard RockTenn say repetitively that we want to match supply/demand. So to do that, we need to be able to have some dispatchable assets that are able to turn on and off if we need in order to match that demand. And so that's clearly what these will give us the ability to do.

Highlighting a couple of these, first of all, Solvay. A great facility, 3 machines, highly productive. Product is interchangeable with virgin craft. It's a sheet that is in very high demand and is -- requires low capital and candidly is just a cash cow, continues to run daily with this non-union team concept work culture.

We've married up with Solvay, the Uncasville, Connecticut mill. It's a much smaller mill, but it's a highly profitable asset. But we now have rolled that under the leadership of the Solvay organization. So all of the technical skills, the synergies between operations and fiber, both facilities are non-union. So culturally, we're able to build a lot of synergies there. So we think that really strengthens the Northeast supply for recycled fiber.

The other asset I'll speak to is Seminole. Seminole mill, 2 machines, 600,000 tons and I think, as some of you may know, was on the shortlist for closure from Smurfit-Stone's view of things. They had the footprint project that was going to shut this mill and try to transfer it to some others. And I recall the first time I -- we were out trying to understand these assets and the strategies, and I remember driving into the Seminole mill thinking, my gosh, I don't know the heck we're going to shut this thing down. It has really good bones. The recycle system is top notch, just as good as Solvay's is. It's got 2 strong paper machines. The infrastructure is very solid. The bad news is it was very poorly fibered. The fiber cost was way too high, and the energy cost was way too high. There was an energy contract that had been negotiated over the years that had a very high fixed cost component to it. Even though we had on-site natural gas boilers, we weren't able to use them. And so the whole energy thing was just out of whack and enlisted Steve Voorhees and others on our team, and we fortunately were able to go through and we believe we've negotiated a new energy contract that when implemented will substantially improve the cost structure of that mill. We've also reengineered the fiber supply chain. We're very knowledgeable about how to find the right fiber for each of our mill processes. So net-net today, we've got this mill in a position where it is a very competitive asset and will be the asset that we can use to have 1 machine or 2 machines idled if necessary to match supply/demand. So very important assets in our portfolio and something we're proud to own.

Now each of these assets on the mill side as well as on the converting side have a tremendous runway for improvement opportunities. And as we frame those improvement opportunities, we really break it down into 3 buckets. First is people. And as with most things, it starts with leadership. You're all familiar that last summer, we went through a pretty substantial transformation of the senior leaders with the Smurfit-Stone organization when we acquired the company. All good people but candidly, we just were not making the pace of progress that we needed to. We also weren't getting the cultural traction, which is critically important to RockTenn at aligning all of our employees to a core set of values.

We've now put in place a team that I'm used to working with over 1 or 2 decades. We're building a depth within the organization, adding additional technical and engineering talent. The pace of decision-making has accelerated. There's a very high degree of trust and respect. So what you have is a very cohesive team that gets it. We are living RockTenn every day, and the pace of progress has accelerated a lot.

From an operating perspective, really job one is making sure that we've got the right balance of assets, both in our mill system and our box system. In the mill system, we've idled 3 paper machines since we have taken control of Smurfit-Stone's assets. The Matane, Québec mill, I think you're familiar with, was just too high a cost asset to be able to optimize. The Hodge, Louisiana mill, we've retooled that business, shut the kraft bag machines, shut the corrugated medium machines. So together with that -- those decisions, we really think we've got an asset base that is right at the present time. With the reduced cost at Seminole, we are in a very good supply/demand balance situation and know what to do if we need to match demand.

On the packaging side, a similar thing. We've gone through a pretty substantial review of all of our assets. Smurfit did the same. If you recall, they shut 50 plants over their last few years. When we achieved -- received control of these portfolios, there was about 116 plants. We pretty quickly saw that there was a number we could take out. It's publicly been announced the closure of 16 of those assets. 15 are shut today. The Burlington, Ontario facility is under process of closure. And it's a concept of trying to do more with less. We've got a solid group of assets that are very well capitalized, have a very efficient, high-quality processes. However, there's a number that have too much market overlap. They don't have the scale, the ability to reinvest in them is just not practical. So that's the component of our asset base that we're consolidating into our stronger assets. And then investing for competitive advantage. There's a lot of opportunity to put in new technology that allows us to do more at lower cost.

We're a manufacturing company. We've got a lot of assets, and there's a lot of levers you can move in running a manufacturing operation. What can you do to improve uptime? How can you reduce waste? What can you do to improve the operating efficiencies in every facet of the business? Reducing setup time, reducing chemical cost, reducing energy cost. So we apply something we call performance excellence to this concept of continuous improvement in manufacturing. And it's founded upon a base of Lean Six Sigma. We have a portfolio of, I think, close to 300 Green, Black and Master Black Belt technicians across our portfolio of assets that are working daily with our operating team to pull on all of those levers. So it's a very -- the culture at RockTenn is one of constant, continuous improvement, and we have an excellent process to try to drive that every day in our business.

Another platform is trying to make better decisions. We've got a lot of assets. We make a lot of sales decisions. We like -- we make a lot of pairing between manufacturing assets and customers, and all of that can be done or by -- done better through the implementation of improved systems. Expanded platforms, tools across the supply chain, changes in our mill system, and you'll hear from Tom and Jeff and John a little bit more about those things. So that's an important part of driving our portfolio.

Third pillar, customer. RockTenn's brand is founded upon high customer satisfaction. That's our go-to-market. Previous administration was more volume. Our focus is satisfied customers, which begins with the no-fail basics of perfect products on time every time, and providing an innovative portfolio of products, some of which like this and many others that give our customers the ability to compete in the marketplace. And that's really job one.

Job two is making sure we get paid for what we do. We need to make a substantial margin on the investments that we have. We go to market with the concept that we're selling value for our customers, but we're going to get paid. We have something we call commercial excellence. And I have to give Jeff credit. A lot of -- Jeff Chalovich, a lot of credit who over the last 18 months, has really reengineered that go-to-market, retrained our 400-person sales organization, centralized pricing offices, putting in place decision tools that take control of how we price our products and create more discipline in the marketplace.

I think you've seen from the latest price increase that we executed that very well. We've got $51 in the bank out of the $50 that was announced, and there's a little tail still creeping in at some of our national account business resets. So a very important part of our management system is getting paid for what we do.

I'll close with some comments on the marketplace. And candidly, it's about as good as I've seen in a lot of years. You are all very familiar with the macro economics of the North American economy. You've seen us all come out of the housing-led recession, GDP is trudging along and housing starts are improving. And unemployment is improving, and non-durable goods are improving. And along with that goes box demand. And so I won't sit here today and say it's robust, but it is solid. We've got solid North American box demand that is flat to up. And flat to up is, frankly, pretty good right now. Given the political climate, I think that's what we get and so we need to live with that. But the good news is really this chart on the upper left-hand side, which is the global demand for North American containerboard, largely virgin containerboard. And you can see that, that has a pretty nice slope up. In fact, it's a 4% to 10% growth rate over the last number of years. We think that trend line will continue, as I shared earlier, because of the growing demand for particularly agricultural products. And so that increased export demand has given the industry the ability to have operating rates pretty stably in the mid-90%, 95%. In fact, this latest statistic came out at 97%. So the paper machines in the industry are running at high rates. And we've been able to have inventories because of the matching of supply/demand steadily march downward. And in fact, we're near benchmark 10-year lows. Right? Now yes, the last couple of months we've had inventories tick up, and I had a lot of people saying, "Gee, do you worry about inventories coming up?" And the answer is heck, no. We have to have a little bit more inventory right now because we're right in the middle of our major downtime season. We have to shut our big mills down for annual maintenance. And so we have hundreds of thousands of tons of downtime coming over the next number of months, and so we and the industry have to have an inventory build. But I guarantee, in our system, coming out of the April, May, time frame, it is going to be very tight.

Looking at price, you're all aware that we've been able to effect a price increase. Some of that, of course, is this set of industry fundamentals, and some of it is just the discipline to get paid. And that's clearly how we're facing our customers today.

So I wrap up my remarks with RockTenn is just a great company. I totally love working with each of my coworkers. We've got a lot of opportunities going forward. I'm extremely bullish on RockTenn, and I hope you are too. Thank you.

I'm now going to ask Tom Stigers to come forward. Tom is a great mill leader. I've worked with him for over 13 years. I characterize him as a great engineering-oriented businessman, and I'm very pleased to have Tom leading our containerboard business.

Thomas M. Stigers

Thank you, Jim. Good morning, everyone. It's great to be here with you this morning. I'm Tom Stigers, and I lead our containerboard mill system.

I've worked within the paper industry for 26 years now. I began my career with Champion International as a ship supervisor a long time ago and came a long way. I've worked in holding leadership positions for Champion, Donohue, Abitibi Consolidated. I've worked at large integrated facilities, as well as 100% recycle facilities. I had the good fortune in 2001 to join Jim Porter at Southern Container as the General Manager of our Solvay paperboard mill. Worked there until 2008 and came to RockTenn via the Southern Container acquisition. Since my time with RockTenn, I have been responsible for the coated mill group inside Consumer Packaging and last July was given the opportunity to be responsible for the containerboard mill system.

Today, I'm going to share with you information about our recent accomplishments in our system, as well as our plans forward, giving you details on how we'll make operational improvements and why we're confident in our ability to deliver strong results.

Our group has made great progress since the Smurfit acquisition. Most recently, in the past 6 months, made considerable progress in operating results. Making an assessment of the system last summer, we recognized that we had to upgrade and add leadership in a number of critical positions across the system. So we added 2 regional manufacturing vice presidents, each responsible for 5 mills. We also recently brought on board a great talent, an individual who's expert in wood procurement. He's going to lead our forest

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From a production reliability standpoint, we've made improvements in the short term by increasing maintenance expense and also by adding resources in the engineering and the maintenance departments in specific mills that were in need. We've delivered operational improvements of $95 million across the system, and that's inclusive of supply chain savings. We've also recognized $25 million in energy savings. Now a large part of those energy savings are from natural gas conversions at 4 of our largest facilities, and those natural gas conversions are being phased in over time. When complete, we anticipate that run rate to be at $50 million on an annual basis.

I'd like to speak about our Hodge facility. We've made great progress there. Jim and Steve both made mention of our Hodge facility. That facility is a large manufacturer of lightweight liner. It's low cost. It has an industry-leading strength properties that are in demand by our customer base. So it's an excellent facility. Last summer, we underwent a transformative capital process that you've heard, permanently closed 2 paper machines there, one associated pulping line. We also added an OCC plant to lower our manufacturing cost, lowering the cost of recycled fiber delivered to the machine.

During that outage, we greatly expanded the capacity of the 2 remaining paper machines. So coming out of that outage, we did an assessment of that facility, the facility itself, the equipment, as well as the organization.

So first, looking at the organization, we recognized that we needed to make some leadership changes. We also needed to upgrade the technical talent, technical and engineering talent of the facility, and that we've done.

Looking at the facility, specifically the paper machines, we recognized that there were a number of design issues that kept us from reaching the productivity levels that we originally wanted to reach during this project. The design issues on our number 5 machine, which is the largest at this facility and one of the most productive in our industry, have been completed. We did that over the course of a number of small, regularly scheduled outages over the first and second quarter of this year. Our number 4 paper machine has also completed a number of modifications, but there's yet more to do, and those design changes will be complete during our May annual outage of this year. We've made steady improvements at that facility, the new leadership team and the technical resources there, and they continue to make excellent progress.

Turning to our Hopewell mill. Our Hopewell mill is also a very profitable facility. It's in a great location. It's well located to service with low-cost freight, our middle Atlantic, our New England, New York customer base. This facility is going to undergo a substantial modernization in a 2-part project, the first part, which will transpire in April of this year. During that project, we'll lower manufacturing cost, improve quality and importantly, expand grade capabilities. During that outage, we'll make substantial modifications and additions of equipment throughout the entire facility. On the paper machine, notably, we're going to replace a head box, a new winder. We'll install new process control equipment, both on the paper machine and in our powerhouse. We'll also make substantial modifications to our biofuel handling system in the back end of the mill, which will lower manufacturing costs.

The second phase of this project will take place April of 2014. And during that project, again we'll lower manufacturing costs, but we'll also make a productivity improvement. We'll increase capacity by 120,000 tons annually. During that outage, we will install a shoe press and a new dryer section and new drives on the paper machine. Now all of those equipment modifications and additions will add great flexibility to this facility.

So based on our demand, we can either take advantage of the flexibility of this equipment and increase our productivity there by 120,000 tons, or if our system does not demand, does not need that productivity at that point in time, we can reduce manufacturing costs substantially and produce at the level that we're producing today.

Our next steps going forward. Steve Voorhees has mentioned our core business principles in his presentation, and those same business principles drive our plans in the mill system. On customer satisfaction, we need to improve our customer satisfaction. We hear from our customers every year. This year, our data showed that we can have opportunities to improve our on-time delivery and our quality of our product. So to that end, 2 areas in which we'll improve our customer satisfaction is first, we're going to improve on-time delivery by better system uptime.

And I'm going to talk in a moment about how we're going to do that, with reliability improvement. Secondly, the product quality. We're going to implement a quality management system, an ISO-based quality management system standard across our system that will drive consistency in our manufacturing processes and also uniformity in the quality of our product from mill to mill.

Reliability and operating results. We will improve that in 2 ways. First, the implementation of a reliability-based maintenance process that's been in place for many years across other RockTenn assets, most notably in consumer packaging, in the coated mill group, Solvay Paperboard, to name a few places in our company. That will have a favorable impact on operability uptime levels, maintenance cost, and in the long term, maintenance capital cost. We'll also utilize our Six Sigma group to do grassroots operating improvement projects as part of our continuous improvement efforts. Smurfit did not have a Six Sigma group. At RockTenn, it's a way of life. It is how we do continuous improvement day to day.

On the cost front, we have many opportunities to improve cost, many active projects that are underway, but 2 that I'd like to share with you, large cost items in our manufacturing base: fiber and energy. On the fiber side, 2 ways it will reduce the cost of fiber. First, on the incoming procurement side, improving quality. Improving quality of the incoming fiber on both the wood side, as well as the recycled fiber side will improve yield and lower manufacturing cost.

Secondly, through the application of capital. We're going to put in new fiber processing equipment, again, on both the virgin and on the recycle side, which will reduce our manufacturing costs. These 2 areas together combined will save the company on an annual basis over $50 million, and that's not included in the $95 million run rate I have shared with you earlier.

On the energy side. We've begun a process of doing comprehensive studies of all of our large facilities' energy systems. We've already completed them at a number of our mills. And the example I'll share with you today's is our Florence, South Carolina mill. Operating changes made based on the results of this study have yielded $3 million in savings annually, and we believe will yield similar savings as we go throughout the remainder of our system.

Capital investments going forward. We have a pipeline of high payback cost-savings projects in the 20% to 30% range. An example of that, one that we're going to move throughout the organization is the implementation of some new technology that we've installed on one of the paper machines at our Fernandina Beach mill. This new technology has allowed us to drop basis weight on our linerboard grades made at that facility and saved many millions of dollars already for the company, and that is something that we are going to use from that platform and spread across the company.

Environmental compliance. We have Boiler MACT coming up. So in the next 3 years, we'll spend $100 million on Boiler MACT. Included in that $100 million is a suite of companion projects that will reduce the cost of energy, and we anticipate that will be -- those savings will be at about $8 million on an annual basis. So we're confident that these plans will build upon the gains and the accomplishments we've already made and will drive strong operating results for our mill system.

So with that, I thank you for your attention, folks. And I'm going to turn it over to Jeff Chalovich.

Jeff Chalovich

Thank you, Tom. Good morning. So I'd like to spend the next 20 minutes talking to you about -- as a short introduction of myself, a little bit about myself, really who we are in the container business for RockTenn, the key market segments that we serve, and then the key drivers for our success in RockTenn. So I got into the corrugated business in 1989. I was just back from Germany. I served as an officer in the United States Army, and I came back through Bayonne, New Jersey. So I was at Fort Dix and came to Bayonne to pick up my car, and my car doesn't start. So I popped the hood and I'm scrubbing off the terminals of my battery in Bayonne, New Jersey. I don't anything about Bayonne. And I'm trying to get a jump from some stranger in Bayonne, anybody who'd give me a jump in Bayonne, and I'm tired, and I've been to Fort Dix. I just flew back from Germany, and I'm trying to get back to the Pennsylvania Turnpike -- the New Jersey Turnpike and I really have no idea where I am. So as I'm going over the Bayonne bridge I'm saying, this is a place I don't want to come back to. This is not where I'm going to be.

So a month later, I accept a job at Mecusa [ph] Packaging in Bristol, Pennsylvania, and I say to the sales manager, "Hey, where am I going? I'm from Pittsburgh, Pennsylvania." And he says, "Pennsylvania, I don't need people in Pennsylvania, you're going to New Jersey." I said, "New Jersey?" I said, "I don't know anything about New Jersey," He said, "What do you know?" I said, "I know, Bayonne." He said, "Great, you'll recognize it. That's your sales territory." So Bayonne, New Jersey, north was my sales territory. And so about 23 years later, until the last year I moved down to Atlanta, I've been in this area, in this marketplace. So I started in varied capacities in this business. I've been a sales manager, worked for Weyerhaeuser as a sales manager. I was fortunate enough to join Southern Container in 1998 in Jim's team. I served as a sales manager, general manager, vice president of sales, took over the operations of the preprint centers, and then vice president of sales for the combined RockTenn organization. So I've been part of that team for 15 years. I've known Jim that long. Tom and I have worked together for -- since 2001. So that's a little bit about myself.

So who are we? As Jim stated earlier, we have a variety of assets, unique assets in the marketplace, scale and scope to serve all the markets in North America with a variety of products. And today, I'd like to just cover a couple with you that are unique, that differentiate us in the marketplace and really drive value and are typical for what we do in RockTenn. It speaks to how we invest for competitive advantage, and also it speaks to our innovation in what we do.

And the first one is really our preprint. So we are the largest preprinter in North America. We have 4 facilities and 7 machines. 2 of those machines are unique in our industry. And what you're looking at on the screen here is called comprinter [ph] press. That's a belt-driven press. It's different than the typical presses in North America. And there's only 2 in North America of these presses, and we own them both. So this is a continuous-run preprint machine. It allows us to do short run preprint. And typically in the preprint world, it's long runs. There are 45-minute set ups per roll, and it takes 3 hours a lot of times to set up a job. This, you can run concurrently, you can set up a job concurrently, while you're running. And it allows us to set up a job in 15 minutes, just place into it and continue to run. The benefit for our customers is, they get to order a roll or 2 where typically it's 6 rolls. So they take advantage of the brand building of the color and the graphics. They don't have the high inventory and waste or the possibility of obsolescence. So we're very unique in this market.

And we also sell into the trade. So we don't just do this internally. We sell part of our preprint outside of the trade. We think we're the best printers in North America, and so this is a good market segment for us with higher returns.

The second piece that I'd like to talk about is a bit about manage [ph]. And Jim talked about this a bit earlier. And beyond the box, we make the machines that form these boxes. And so we have a licensing agreement that's ours in North America, no one else has it. No other corrugator can make the machines that form these boxes. And the benefit of that for our customers really, when you look at this box, it's mandrel formed, so it's precision die cut and formed around the mandrel. This box never folds. These boxes never fold more than 90 degrees. So it's only 90 degrees. It allows our customers to take advantage of our fiber and the strength of our fiber and the substrates. And as you add corners, we can do this in 4 corners. This is 8 corners. And it also has -- these tabs are called centering devices, and again, this is a patented product. It's unique to us, and we're the only ones who have a license agreement in North America. It allows our customers to stack these automatically. And when they tilt over the 20 degrees, they won't fall off.

So if you're trying to ship fruit, heavy product, oils, waters, this is how you want to go. You get to reduce your packaging, reduce your cost and improves the environmental footprint for our customers also, which to them and to their customers, us as consumers, is very important.

The second part of this that is even more unique is really the 2-piece, so the 2-piece is a new innovation, and again, this is what we own the license for. This package typically would have a tray and you'd have to hand pack this on an operation for a customer. So there's no way to do this automatically today in a customer's facility. You'd have to put it together and tape it or they'd put this tray inside the box, and it'd take more fiber, more substrate. So this is a two-piece machine and actually can put the tray and the box together on the machine and go through a normal packing line for a customer. The beauty about this product is for us though, the customer can take advantage of RockTenn's full suite of products. This can be a folding carton tray and a corrugated lid. So we can make substrates in this. It doesn't have to be just corrugated. It can be a single phase laminate, a preprint or a folding carton. And so one-stop shopping for our full suite of products for our customers. It's really unique in our business, and it's a tremendous business for us and has great pull. For every $1 of machine sales that we sell, we sell about $6 of boxes for it, better margins, higher return for us in the product.

That may be more than you ever wanted to know about a box, but I'm passionate about boxes. So a lot of questions last night about the box system. Tell me about your assets, give me assessment of the box system. So about 20% or 25% of our system is New Lenox, so high quality assets, leaders in the marketplace, leaders in the segment. About 40% of our plants and assets are good box plants, compete well in the market. They have tremendous upside potential with some targeted capital investment. About 15% of our plants are sheet plants. So we sell them sheets, they convert them. They're a niche place in the market. They serve a niche for us with small runs, double pass, triple pass, things you wouldn't typically put in a box plant, but it allows our customers, again, to take advantage of a full suite of products and everything they need in their supply chain. We have a very good sheet feeder system, about 5% of our assets are sheet feeders. High-quality, low-cost operations in the marketplace.

We have a tremendous segment lead in pizza. So We have a network of plants that in the Smurfit system, we're in pizza business. And also one of our acquisitions, GMI Corpak put us further into that space. So about 10% of our market share or our market is pizza business. And we have a large share in that. Again, that's a growing market segment, nondurables and a high return market for us.

And then another question I was asked last night was really, where are you in the wave of closures? So we're far down the path in the closures, Jim talked about this earlier, Smurfit had shut 50 plants. We have 15 down and 16 have been announced, so we're well on the way in the closures. We have about 10% of the plants left that we can either capitalize or may be further consolidation.

So this chart reflects really the markets that we serve. We're well-positioned in the nondurable markets. We match very well with the U.S. market in food and beverage. About 50% of the market in the U.S. market is food and beverage. We're about 52% of that in ours. And the other 36% are other nondurable markets. And really that's the markets that drive corrugated usage. So as those markets grow, we'll continue to grow with them. Our split of business is 45% of it is national and 55% is either large regional accounts or a local account business.

For the next 4 slides, I'll talk about briefly the key drivers of our business in the corrugated container segment. So the 4 key drivers are: really satisfy your customer every time, and I'll talk about what that looks like and what it means; improving commercial capabilities; improving our operational excellence; and then finally, investing for competitive advantage.

So how do you satisfy your customers every time? What does that mean? How does that -- what does that look like? First, you have to identify the unique needs of the customer and then commit to meeting those needs. Secondly, it's running high-quality boxes on time, every time. Third, you need to have a quality system that supports those things. So you need to be able to gather shop-floor data, customer complaints and then be able to -- at a touch of a button, tell the customers what you're really process capable of. They don't want to tell us what we're process capable of based on returns or nonconformance. We need to be able to tell them what we're process capable of, off of our machine. And the standard platform that we're investing in across the plants will help us do that. Again, it will give us a competitive advantage in the marketplace.

And then finally, it's really the voice of the customer. Steve talked about earlier our customer survey. And really, the voice of the customer helps us move forward, drive continuous improvement and really what's important to them in their space. And so the things that we've done in this space in quality have helped us reduce our cost of quality and have also helped us improve our customer satisfaction survey over the last year. The other thing we do is really leading indicators in quality. So we track every day, on-time delivery to the customers, which is a key metric for our customers. We also take cost of quality. And then there's some things unique to our customers with site-level agreements that we also track. So uptime on their machines, if they're doing OEE, uptime, waste. So we track those things with site-level agreements. And those are the things that really matter to our customers, and those are the things that we find out through the customer surveys.

Commercial excellence. A lot of questions around this last night, too. And so bringing a disciplined and standard approach to pricing. And I spent -- Jim talked about this a little bit, a lot of time as Vice President of Sales and Marketing really building the platform of how we go to market and how -- what commercial excellence looks like. And it was a culture change, I think, for the Smurfit system, but the sales managers, general managers, the whole system has reacted very well. We've put disciplines around pricing and commercial decision-making. There's delegations of authority, but everybody understands that price is the biggest driver in our business not volume. And once you get aligned around that, you start making decisions that drive good commercial decisions in our space.

There were some questions on like, the price increase seemed to have gone well, maybe better than typically, and we've recovered $51 as Jim said. And was that an accident? No, it's not an accident. It really is an outcome of alignment from all of us, and then also building tools to help the plants. And I described this briefly last night when there was a lot of questions. So everybody asked, "We'll how do you do that? How do you make sure across -- the system's so big in 100 plants and 300-plus salespeople will that happen?" And we give the plants and our central pricing group a look into account-level and also item-level detail. So a month before an increase or the increase, we know what every box is priced at. And so that is the benchmark price. And if we say that, in October 1, the price is going up 8% and that cost $100, on April 1, if that doesn't show $108, there's an exception report that prints at the plant on the booking of the order and also at corporate level. So our region vice presidents, our general managers, sales managers, all of us get to see if we've done what we committed to and if the price has gone up.

So it's item-level and account-level across our system. If you have 20,000 items in a plant, it's easy to miss some if you haven't booked them for a while. So it's not an accident. It's actions that drive the results and the outcomes. And our group has done a tremendous job executing the increase. And really, we give them the tools to support that.

Secondly, we centralized our national account pricing. Jim talked about this a little bit earlier. This gives us an opportunity look at our segments across the country and really place business that optimizes our plants, low-cost and also gives our customers that price that they need for us to be chosen on that line. So higher returns for us, we get the right assets aligned with the business that it fits in the segment.

Standardizing commercial terms. This is another thing that we've done across the system. Really, the pricing is one piece, but of all the things that degrade margins, extended terms, warehousing, rebates, drop trailers, all those things that degrade terms, we've put controls on. And again, we've set a standard of what needs to happen when we price it and what we'll do. And if we are going to do those things that add value, we need to be paid for them. And if we're not going to be paid for them, we can't do them. And so we brought a great amount of control to those other items that degrade margin.

Installing pre-pricing specialists. I believe strongly that pricing should be done by 1 or 2 people in the business unit, and that should be all they do. We really don't want customer service reps and other people trying to build pricing. We want it standardized and optimized across the system. That helps us build the perfect price, match it to the market and then win commercially.

And the last, we have to match our sales compensation to the margins of our business. Incentives work, right? People do what they're incented to do. So right now, it's a bit uneven in our company. We have the Southern Container RockTenn legacy group on a pay-for-performance margin and then the Smurfit system was really on a volume revenue plan. So as we roll out our standard cost system and our operating platform, we're going to migrate the Smurfit sales reps and the legacy reps into that program. And I think they're looking forward to that. People want to be paid for generating higher margins, and we think that will help us drive better earnings in our business.

So to date, we've closed 15 plants. We've talked about that. We basically maintained our volume flat at 78 million feet. But as Mike talked about earlier, we're doing -- and Jim, doing more with less. We're putting 100 million square feet more in each of our box plants that are open. 870 full-time employees, and to date, we've realized $27 million of savings, with $35 million through the first quarter of 2013.

This is the synergy and improvement chart. Steve talked about this a bit earlier. The first bar, you've already seen. We've talked about $27 million through end of December in closures, but with line of sight to $79 million at the end of 2014. Operationally, we talked a lot about Six Sigma. This is a potpourri of projects in this bucket. So Tom had mentioned earlier, Smurfit didn't have Lean Six Sigma. We aggressively train Six Sigma assets upon the acquisition and deploy them back into the field and to the acquired plants to match what we had. And today, we have over 170 Lean Six Sigma assets deployed back in the plants. These operational improvements Steve talked about earlier, waste reduction, but we also have projects going on, run to design. So the machine is running at design and what they're designed to do. Inventory reductions, warehouse reductions, all the things that drive operational improvement and drive out cost, that's what's in that bucket. So far $15 million, with upside of $40 million that we have line of sight to in 2014. $16 million will be realized by our capital investments. And to date, we have $42 million, with $135 million line of sight in 2014.

A lot of questions around this last night, too, when I talked about that 40%. What do your investments look like? What does the future look like for your business? So the top of the chart really reflects that 40% of the box plants we talked about. So typically, you might have 4 flexo, flexo folder gluers, 3 rotary die cutters and really with the new technology out today, we believe we can reduce almost by half the number of flexos and rotary die cutters we need in that 40% of the plant. So 2 flexos to do really what 4 were doing and then a rotary die cutter to do what 3 or 2 were doing, depending on the age of the equipment.

This allows us really to standardize the footprint, maintain the machines, less maintenance people, less headcount, also stores, inventories, parts, quality, all of those are synergies from that. And really if these plants, about 40% of the plants maintain a business where it is currently, high-20% returns on those investments. But beyond that, the difference is, someone was asking a lot last night, if that's -- was that a typical model? That's RockTenn model. Mike talked about that and what he's done in his business, we've done that at Southern Container. The difference is, when we execute this, it goes with commercial excellence, so we understand where we have to be in pricing. We're not going to give back the savings from our operations into the marketplace. We understand also that taking advantage of our unused human capital, people working Lean Six Sigma projects, continuing to drive savings in the operation give us tremendous upside in this business.

So we've accomplished much. We still have much to do. But to date, we've closed 15 plants. We've executed 2 strategic acquisitions. One we talked about was GMI Corpak, which really helped our integration and also put us deeper into the space of the pizza segment, where we have a competitive advantage. The other one was a customer of ours, Mid South. So again, helped our integration. It was one of our largest sheet customers that we supplied and also put us into a space in bulk packaging in protein, which is a growing segment for us also. Began implementing commercial excellence. So again, bringing discipline and process to how we go to market and how we price our product for a fair return. And then annual synergy, so far $42 million, with the upside of $135 million by the end of 2014. Going forward, we think we have tremendous runway in our business to invest for competitive advantage, performance excellence. We talked about mills, Mike talked about it. It's really engaging people at every level down to the shop floor and continuous improvement. It addresses waste in all of its forms, and it really helps us to get more efficient and continue to drive out cost. So beyond the synergies and savings, we can continue to improve our earnings.

We're going to continue down the path of commercial excellence. That's a key part of what we're doing. You can't do it by accident. It's planned. It's an important part of our business, and it's the biggest driver of our earnings. Pricing is a much bigger leverage than volume. And that was a paradigm shift and change in the culture. And what we've had at RockTenn, and certainly, we had before with Southern Container, and we're bringing to the whole entire organization. And then finally, we're going to continue to build on the One RockTenn culture. Really that's the platform and the foundation that all these other things are built on. So as we continue through, we continue to build the One RockTenn culture.

Thank you. I'll turn it over to John O'Neal.

John L. O'Neal

Thanks very much, Jeff. Good morning. I'm John O'Neal, and I am pleased to be a member of the RockTenn team. I'm especially pleased to be able to work with Jim and Tom and Jeff and to lead the corrugated supply chain. I joined RockTenn, as Jim mentioned, just in the last year or so. Before joining RockTenn, I was the chief commercial officer at Mirant Corporation, a merchant energy company headquartered in Atlanta. And when I left Mirant, I identified RockTenn as a place where I felt my skill set might fit, and I was fortunate that Jim and Steve, with their energy backgrounds, understood what a chief commercial officer was. And I appreciate the opportunity to work with them today.

Part of the reason I joined RockTenn was to really help the leadership team transform the supply chain from an order fulfillment function into a commercial platform in order to drive improved profitability of our integrated business. We've accomplished a lot in the last year. We still have much work to do. We think in fiscal year '13, we'll be able to achieve about $25 million in performance improvement. And I'll talk about those in a little bit more detail later.

Before I do that though, I want to talk a little bit about what are the functions of the supply chain at RockTenn. We're not procurement. We really have 3 main activities. I want to go over those at some detail now, and I'll talk about it a little bit more on my next slide. The 3 major activities are production planning. That's simply the matching up of orders for Jeff's business and for our internal -- our other external customers with our paper machines in the most optimum way. Really matching up the grade requirements and the width requirement to meet our paper needs with our paper machines in the most optimum way, taking into account paper machine capability, the freight to move it from the mill to our ultimate customer destination and the trim of each paper machine. Also, it's supply and inventory management. Supply and inventory management is the management of all the inventory to make sure we've got the right roll stock and the right quantities to meet Jeff's customer requirement. And then third, freight logistics. This is the management of inbound OCC into our mill system. The movement from containerboard from our mills to all of our internal and external customers, and the movement of corrugated packaging to our ultimate end-use customers.

When we acquired the company, we made the decision to move the supply chain from Chicago to Atlanta. The principal reason for making this change was to build better alignment between our supply chain and our mill division and our box plants. So we've accomplished a lot in that regard in the last year. Another benefit of that was it allowed us to hire a team who understood what it is we were trying to achieve from a culture perspective and also from a commercial perspective. Within the supply-chain team, there are about 75 team members, and of those, over 40 have been hired in the last year. So we've been able to significantly upgrade the talent we have in our organization and have been able to bring people in who understand the imperative to drive to more of a customer satisfaction-focused business with a commercial mindset.

You've heard everyone talk about Lean Six Sigma and our group of the 75 people, we started implementing Lean Six Sigma within the supply chain looking for opportunities to drive weight and improve our cost position. We've got 5 people of the 75 who have either gone through Green Belt training or in the process of doing it currently.

Another key part of our cultural transformation is building better alignment, as I said, with the mills and the box plants, and we've spent a lot of time doing this. One of the key aspects of that is going out and building relationships with our mills and our box plant partners. We spend a lot of time going out to the mills, understanding what their most productive capabilities are on each of the paper machines and understanding their freight and logistics challenges so that when we schedule orders on their paper machine, we're doing that in the most optimum way. Likewise, we've gone out and spent a lot of time in the box plant. So we understand what their customer requirements are, what their paper needs are, their own freight, shipping and logistics challenges, so that we can ship the right roll stock to them in the right quantities to help them meet their ultimate customer needs. If by doing these basics right, the blocking and tackling things well, that will begin to transform our business to make it more profitable. It also allows us to focus on other opportunities to drive revenue and lower our cost.

I want to now talk a little bit more detail about what some of the key functions are within the supply chain. As I mentioned, production planning, supply and inventory management, freight and logistics. We also manage all of our containerboard trades. We have a customer service function that's focused on all of our external customers. And we're increasingly focused on sales analytics to work with our external sales team to better match up our external sales portfolio with our paper machine capabilities. As we think about transforming to more of a commercial mindset, one of the real challenges we face is the tools and systems we use to make decisions. We recognize that we needed to improve our capabilities if we want to accelerate our efforts to build up a more of a commercial platform. We're undertaking an effort now to build an integrated suite of tools that will improve our ability to forecast, manage the supply of inventory at our box plants, order the paper for them, plan our production, schedule our orders and manage all of our freight and logistics. This improved suite of tools will greatly enhance our ability to manage the business. Most of these changes are scheduled to come online later this fiscal year, the beginning of the next fiscal year, but we'll see some of those modules come online even earlier, so we'll see some benefit even in fiscal year 2013.

As I mentioned earlier, we see $25 million of business improvement this year. And I want to talk about some of the areas in which we're going to get those. In the area of freight and logistics, we began to implement dedicated fleets throughout our system, where it makes the most sense. We've implemented a number already. We have 3 more going online this quarter, and we have a number scheduled for the balance of the year. Dedicated fleets allow us to take advantage of the natural front hauls and backhauls in our system to drive out empty miles and to lower cost. This is one example of ways we can drive improved profitability for our business.

In the area of production planning, we spent a lot of time, as I said earlier, with our mills understanding what their most productive grades are. And as we looked at that, we realized that we had, had grade proliferation over time, where we were making way too many things, which requires to schedule all those different grades on our paper machine. We identified a number of grades we thought we could eliminate. We went out and worked with our internal and external customers, and we were able to migrate them from low-runner grades into more common grades without affecting their business at all, but that better matched up with our paper machine capability. We've been able as a result of that effort to eliminate over 70 grades out of our system. This allows us to consolidate over 600,000 tons of containerboard into more productive grades on our paper machine. It also allows us to eliminate over 600 grade changes. Every time we go through a grade change at a paper machine, there's naturally some waste. And so by eliminating these 600 grade changes, we'll improve the profitability of the mill system. So by eliminating the grade changes and by moving these low-runner grades into a more common grade, we think the grade elimination will have significant proven opportunities for our mills this year.

In the area of supply and inventory management, we spent a lot of time understanding what is the right amount of inventory for our system. We believe we need somewhere around 500,000 to 540,000 tons of inventory to meet our box plant systems requirement given the geographic diversity of our system, our customer requirement, the complexity of our business. We've done a lot to try to standardize our inventory management system. We've implemented ABC SKU Classification. We've set safety stock levels at a SKU level, and we've centralized ordering across our system to ensure this is done in a standard way. This will allow us to reduce the number of stock outs we face at our box plant.

Stock outs have 2 costs to our system. One is, it forces Jeff's box plant to upgrade paper, which is a form of waste. But second, it also causes us to expedite the movement of containerboard from our mills to our box plants when we run out. We do that on an expedited basis, that's not run on least cost mode, so that's a form of waste and we incur that expedited freight. So by standardizing our system, we're going to be able to drive down the number of stock outs in Jeff's box plant system, reduce the number of upgrades and lower our expedited freight. This will translate into significant savings for our business this year.

In the area of containerboard trades, our larger footprint will give us significant ability to grow our book of trades with our integrated competition. Our integrated competition values doing business with RockTenn, and we now have allow a platform that allows us to put on more trades than we have in the past. We've grown that business quite considerably, and we think there's further opportunity to do so this year. These trades allow us to improve our mix of business, also allow a lower -- our overall freight expense and will result in significant business improvement for us this year.

Finally, in the area of sales analytics. We've spent a lot of time, as I said, understanding what our most productive grades are on our paper machines are. We're now working closely with our external sales team to line up what it is we're selling with what it is we make in the most productive way to improve the overall profitability of the business. We're already seeing our sales mix improve. We're seeing our ability to manage our prices in a more dynamic way. And we're seeing improved profitability as a result of these changes.

So we've accomplished a lot in the last year, but we still have much work left to do. We'll continue to focus this year on achieving the $25 million in business improvements I mentioned. We'll also focus on achieving the systems improvements I talked about. This will greatly transform our ability to manage our business in a more dynamic fashion to respond to the changes in supply and demand, both on a short-term basis, but also on a long-term basis to manage the business more commercially and more profitably. We'll continue to focus on our cultural transformation and to bring people into the company who think commercially and to think about how to make money each and every day. We think these changes will have significant benefits to our company this year. We think ultimately, our paper machines will run on their sweet spots more frequently. We'll be able to lower our freight and logistics cost, both out of the mill system and into our box plant system, and we'll improve the supply of inventory across the entire supply chain, resulting in more stability in Jeff's business. All of these things will translate ultimately into much improved -- lower cost and improved profitability for the business. And just as importantly, will help Jeff and his team achieve very high levels of customer satisfaction, continuing with our goal of being the most respected company in our business.

With that, I want turn it over to Erik Deadwyler to talk about Recycling.

Erik J. Deadwyler

Good morning. My name is Erik Deadwyler, I lead our Recycling business. As Jim Rubright mentioned, I started with RockTenn in 2002 as Director of Commodity Risk Management working for Steve Voorhees. And then in 2006, I had the opportunity to lead our Recycling business. And over the next 5 years, we really transformed the business. We did so by, first, upgrading the quality of the management that we had in place. Second, we updated our facility, so we had traditional wastepaper packing plants, but what we did in several of the facilities was invest in modern single stream technology. And we also transformed our traditional brokerage business into a very low cost, very profitable trading operation. So we have the business model down for the Recycling business. With the acquisition of Smurfit-Stone, we have the size and scope that we now need to really make this a very valuable business to RockTenn.

I'll talk a little bit about who we are. So RockTenn Recycling is one of the largest paper recyclers in North America. We handle over 8 million tons a year. So to try to put that in perspective, 8 million tons is 400,000 truckloads per year or about 1,600 truckloads per day. So this is a very transaction-intensive business. Last year, that 8 million tons translated to just under $1.2 billion in sales. We have 850 employees. And most of these employees reside at 1 of our 32 recycling operations. And if you look at the map, about 2/3 of our operations are located in the Central Southeast part of the United States. These plants are very well positioned to supply our internal mills with recycled fiber. And then we have 1/3 of our operations out in the West Coast. But we don't have mills of the West Coast. But if you look at those locations relative to major ports, they're very strategically located and can take advantage of the growing export market.

In terms of our volume though, only about 20% of our volume actually moves through our plants. 80% of our volume is just a buy/sell brokerage transaction. So we've created a centralized hub to manage those trading operations in Atlanta. Of the 8 million tons we manage, 1.3 million tons gets exported every year, so that makes us one of the largest exporters of wastepaper. To support that activity, we have employees and offices in Shanghai, Rotterdam and Montréal. The RockTenn approach on the recycling business model is very much a service model. So if you're a GM of a recycling plant, you're coming to work every day, collecting and processing recyclables. But really in order to serve your suppliers' needs, one, we have to make recycling convenient, and two, you really need to have the capability of handling multiple recyclables or what we call single stream. So for those of you that recycle at home, you may recall it wasn't long ago that you either had to push multiple carts up on the curb or when the collection truck came by your house, the driver would get out and separate the paper from the plastics, from the metals and so on. Today, all those recyclables can go into one container, onto one truck, the truck comes to a RockTenn single stream facility, where it's unloaded, and we run those materials through a automated system by which we use optical sorters, sorting screens and magnets that separate the stream back into its respective commodity, and then we market that back out to its respective end user.

The great thing about this model, it's really proven to be the low-cost solution for both the collection and the processing of recyclables. But what's more important from the RockTenn perspective, particularly in operations, that if we want to maintain access to the fiber supply, which is ultimately what we care about, we have to have the capability to handle these other commodities.

Another example of how we are a service business is we have a waste spend management group. So this rolls in under our national account function. So we go out and manage the waste spend for major retailers and restaurant chains, such as J.C. Penney's and Starbucks. Last year, we managed just under 20,000 locations and over $100 million of waste spend. And there's a couple of benefits of how this business ties into our overall platform.

First, is that a lot of our major recycling customers were coming to us and say, hey, you guys do a great job on the recycling side, do you want to handle our trash, too? So this group gives us that capability. But having -- the second point is also having $100 million of waste spend is meaningful, and so that becomes a very valuable negotiating tool with the waste haulers when we sit down to negotiate on either supplying fiber into our mill system or single stream into our recycling operations.

And talk a little bit more about the strategic role we play. I want to highlight just a couple of our strategic priorities. First off, with the management changes in July, we moved quickly in making changes to the organization. So we streamlined the organization. We dramatically flattened it out. As a result, we eliminated 60 salaried positions, which is about 15% of our headcount. That's resulting in about $8 million a year run rate savings. So to put that in perspective, the EBIT for the Recycling segment in fiscal year '12 was $7 million. So this is a meaningful improvement to our bottom line.

When I started, we had 39 plants. Today, we have 32 plants. So the 7 operations that we shut down all of them were unprofitable, all of them were deemed nonstrategic to our overall system, and all of them are what we call non-fixable. So either through management changes or reinvestment of the capital, we really couldn't make a meaningful improvement in the financial performance of those plants.

As I mentioned, we're also a big transaction buy/sell organization. So to optimize that, we centralized the mid- and back-office functions into one location outside my office in Atlanta. Prior to doing this, we had these activities at 24 different locations, including our own recycling plant. So the benefit to this have been some cost savings associated with the headcount reduction, but I think the more significant benefit is, we noticed with the centralization of these activities in Atlanta, the quality of both the customer service and the accounting functions have improved dramatically. We've standardized processes. We're now all working on one system. We've got good quality controls and metrics in place. So that's been the key initiative.

So now we kind of got our cost down. We got our house in order. We're now very much focused on figuring out how can we leverage our scale, now that we're one of the largest paper recyclers to create an incredibly efficient low-cost fiber optimization platform. So a key pillar of this is utilizing our market expertise to supply fiber into our own mills. A great example of that is at our Seminole mill, which Jim Porter mentioned that we need to dial up and dial down, well relative to Seminole, we have 7 recycling plants are strategically located in that market and very cost effectively can supply fiber into that mill. That ensures that we get the right fiber, the right quality at the right time, regardless of market conditions into the mill. My kind of vision for what we're trying to create is really a 2-phased approach. One of which is, I want to create the lowest cost transaction platform in the industry. So when buyers and sellers who want to interact, I want them to transact their wastepaper deal through RockTenn. So as a result of doing that, we'll have some incremental volume, incremental margin associated with that, but as important is the market intelligence we gain from having those transactions moving through us and in turn we can make overall better commercial decisions.

And finally, the single-stream technology, we're investing in. We've got a really neat project going on right now at our Atlanta facility where we're putting in a state-of-the-art commercial and residential single stream facility at our location there. So the project's got a very high IRR, so the benefit of that will just flow through our P&L. But as important, we like being long fiber in Atlanta. Atlanta is a great ship point for several of our internal mills. It's a great place to supply our third-party mills. And it's also becoming more strategic for export, so we can load up a container and float it out of the Port of Savannah opportunistically with that.

And to wrap up, market conditions. The U.S. supply, we feel will be up a little in '13 versus '12. I can tell you right now, generation is definitely seasonally low, but we expect that to rebound and to overall be a little higher than it was last year. Domestic recovery rates are expected to tick up about 50 basis points to 89%. We expect U.S. demand to increase modestly. This is really driven by just overall economic improvement, plus you have a couple of recycle projects that are coming on later this year.

In terms of Asia, for every 3 tons of wastepaper that comes out of the waste stream, one of those ends up going to China. So China continues to be a major player. They are forecasting an incremental 5 million tons of capacity to come on over the next 24 months. But we believe in order to meet that demand, these low recovery rates, which are currently at 44% are going to have to increase in order to meet that need.

With that said, I'm going to turn it back over to Steve to talk about our financials.

Steven C. Voorhees

Thanks, Erik. I got up at 9:15, I looked out in the room and there were like 100-plus people, 200-plus eyes, and everybody was taking notes. I turned around several times and everybody kept on taking notes. And so I very much appreciate everybody coming and paying attention to us for 2-plus hours as we go through our business. I do want to talk about our financial strategy. I think about finance as being the right hand of the balance sheet. I think about finance as taking care of the asset side of the balance sheet. We need to have the flexibility on our balance sheet to be able to do what we need to do, meaning finance what we need to finance to maintain and improve our businesses. If we're not doing that, we're not doing our job as managers of the company. We need to have the flexibility on our balance sheet to execute our business plan.

Fortunately, we've been able to do that. Since I've been with the company, we have maintained I think very strong relationships with our lending community, also the financial markets. So when we needed a few billion dollars to acquire Smurfit, we were able to put that together in short order, and that worked to our advantage for without that support, it would be very difficult for us to organize that transaction.

Our leverage is now around 2.7. We are at a point now to where we're generating cash -- we're anticipating during FY '14 getting down below 2x. Our internal forecast, which has a bunch of assumptions in it has us going down below 1.75x. So we're feeling very good about our financial wherewithal. Our intent is to maintain an investment-grade profile. I think we're very close to that. We're rated investment-grade by S&P. We're one notch below investment-grade by Moody's.

What do we do in the event we have "extra" cash flow? We think we can create value by paying down debt and create value through share repurchases. We can create value by -- through dividends. We're going to look at all of them depending on the facts and circumstances at the time. We get asked periodically when we're going to do the next acquisition. And the answer pretty simply is, I don't know. Because we don't know what the opportunities are, and we only want to make good acquisitions. So if you can tell me when the next good acquisition was going to come up, I might be able to answer your question. We look at opportunities all the time. There is a flow in the packaging space of deals that we can look at. We got some, so we don't want to do it. We got some, we say, well maybe, this might make sense. We have some that we execute.

The main criteria that we use are, does it fit with us strategically? Can we get it at a reasonable price, meaning, a price which is favorable to us as a buyer, okay? And then the test that ends up working best for us is more of a qualitative test is, if we make this acquisition, are we a better company? And you'd be surprised how powerful that test is. You can look at many acquisitions and you just very, very quickly come to a conclusion that we're not a better company with this. We're just paying market price for this company, and we're not getting really -- not a better company, so why waste the time to do it? So that's our overall financial strategy.

I do want to talk a little about our capital expenditures. Just as repeating what's we've said before. I do want to tell you, technology has changed dramatically, and packaging technology has changed dramatically over the past decade. We've invested for competitive advantage, taking advantage of that technology. It has given us a cost advantage, where we've been able to do that. We expect to continue to do that. In the past, just I think recently, we've said our run rate of CapEx might be somewhere around $350 million. Now we're seeing more opportunities for us. So at least, for the next 2 years, we're thinking we can deploy $400 million to $450 million in capital, which would be broken down about $250 million in maintenance and then $150 million to $200 million in return generating projects, with returns in the range of 20% to 30%.

I wanted to talk for a minute about our pension plans. When we came out of the completion of the acquisition, if you looked at fiscal years '13 and '14, we were projected to make contributions of $689 million into our pension plans. The world has changed. The pension contributions are subject to a myriad of factors. Our projected contributions this year are $192 million. Next year are $231 million. If you add those together, I think we're $262 million, if I remember the number correctly. Lower than we thought 2 years ago. And that generates -- that's cash that can be used to pay down debt or invest in our business.

Our balance sheet is solid to be able to execute our business strategy. Our next significant maturity is in 2016. That's of a receivable securitization facility, which we'd expect to be able to roll over at that time. The credit agreement goes through FY '17. John Stakel led a couple of refinancings last year that have extended our maturity into the 2017 and on range. So we have significant flexibility in order to execute our business strategy. Our average interest rate is less than 3.5%. Our fixed rate debt is 47%. We're well balanced between fixed and floating.

This is the last chart. And it's a summary of what we said, so I am not going to repeat it. You've been very good with your time and attention. We are available for Q&A now.

Question-and-Answer Session

James A. Rubright

You'll have to wait for a microphone because we are webcast. So Tyler is bringing up the microphone.

Unknown Analyst

You guys have a lot of projects going forward that could be a great opportunity in improving your margin. And one of them that really stood out for me was the switch from going from a volume approach to pricing on the box side. But from what I understand, I mean, it's going to take time getting it implemented in the system, can you talk about the timing in terms of when the flow -- the full blowout will come through?

James A. Rubright

I couldn't hear you. Can you just ask the last part of the question again.

Unknown Analyst

Sure. I mean, it seems like there's a big opportunity to shift from a volume-based approach through the pricing on the box system. I understand there's a system implementation, can you help me understand the timing of that full rollout going forward.

James A. Rubright

The system that we refer to is -- I think you've heard us talk about this before, but I think there's 7 or 8 procure-to-pay systems across this merchant box plant system because of the way they were put together through acquisitions. We're implementing one system across all the box plant systems, and that should be completed by mid-2014. It's a very complex undertaking because you're completely changing everything from the order entry to inventory management in the plants and there's a lot of training associated with it. So there's a limit to how fast you can roll it out. That will be about the end of '14. However, what Jeff is doing is, as you do it by region, we'll then change the compensation system of people in the region to a margin-based compensation system. So the overall change -- most of the change we really saw over the course of the last year because we're simply instilling a pricing discipline and pricing visibility, it's just very manual today. What this system will do is automate it a lot. It will enable us to put in standard cost, which helps you a lot in your estimating and your compliance generally. But the compensation system requires basically the underlying infrastructure to allow it, and that's going to run out to about 2014.

Unknown Analyst

And I guess a follow-up question to that, you guys, obviously, provided free cash flow guidance for 2014. All the opportunities you guys presented seems like it was outside going forward. Does it fully encapsulate that in the free cash flow guidance for 2014? It seems a bit conservative at this time.

James A. Rubright

I think we tend to be conservative in our guidance, and we like to say what we believe we really can do. Is there upside with respect to what we could do in terms of investments and performance improvement, yes, but this is a commitment we've made that we believe we can achieve.

Unknown Analyst

You had one intriguing slide or point made in the box plant discussion, saying that if I heard right, you need about 540,000 tons, I believe that was just in the box plants to feel like your operating comfortably. And assuming your share, I think is in the 20%, low-20s range, that would almost imply, if I'm right, that the system needs like more than 2.5 million tons just in the box plants. Is that -- am I reading that correctly as an industry based on your -- what I think I heard your experience to be?

James A. Rubright

We don't attempt to extrapolate into others' inventory needs, which essentially you're asking me to do. I'm not familiar with their systems. We know that Smurfit attempted to operate at lower levels of inventory that we think is optimal for our system. And yes, if you translate our total system inventory that John was explaining, you're going to get above the 4 weeks. People will just have to accept the fact that 20% of the industry over the course of the cycle is going to carry more than 4 weeks of inventory because we're just leaking money if we don't. Now from a discipline standpoint, is that really a concern? It's not a concern if we don't sell it, right? If we hold it, that's our view. But we actually haven't been successful in building those inventories because demand again in January exceeded our expectations, but our view is that why should we leak money for a psychological impact relative to somebody else's benchmark with respect to what containerboard inventory should be.

Because demand, again, in January, exceeded our expectations. But our view is that, why should we leave money for a psychological impact, relative to somebody else's benchmark, with respect to what the containable inventory should be?

Unknown Analyst

And again, that 4 weeks is just the device plants, not the mills?

James A. Rubright

Jim, in total, that's how it's measured. So yes, that's the comparable number.

Unknown Analyst

Okay. And then one other quick one, some of the details really helped, we appreciate it. I think when you were talking about the consumer packaging business, I believe it was mentioned that the folding carton revenues were about $1.234 billion, and the mills were selling, including the Interest segment, $925 million, and that's a little bit less, about $400 million less, than the total segment sales. Is there something that plugs that?

Unknown Executive

It's a saying that comes to mind. I don't think that includes the [indiscernible].

Unknown Analyst

Two questions from my vantage point. You mentioned with Hodge that the demand for lightweight has certainly been very, very good. And I think you mentioned that at least with one other mill. And so if we take a step back, what do you think the implications of that are for you for investment that you might need to make in the years ahead, not just '13 and '14? And for that matter, for the whole of the North American system? And then I had a follow-on.

Steven C. Voorhees

The things that we're doing are responsive to that demand need. Hodge is a major shift and it creates a significant amount of lightweight container board. The Hopewell, also we talked about great optimization and great expansion. Hopewell, currently, is limited to 42-pound liners, and that will take the mill then to 35 -- to somewhat less economically 33. So we think that'll balance our system for today. So we have other opportunities going forward, yes, but we don't target them as a need for capital in the near-term.

Unknown Analyst

So in other words, it doesn't sound like the initiatives are going to have to recapitalize relative to a growing wave of lightweight demand. The lightweight demand is growing, but it's at a measured pace, really is what you'd say.

Steven C. Voorhees

Well, it's really, overall, our system balance, right, and then it's just relative to what we saw in the existing demand has been.

Unknown Analyst

The other question I had, maybe for Jim, and I'll turn it over. You spent a lot of time talking about your learnings in the Box business. You talked about changing out the number of grades or reducing the number of grade changes over time and certainly, we're seeing it in the performance now. In exports, what have you learned? It wasn't a place where you played as much as you do now with Smurfit-Stone. Earlier, about a year ago, you had some difficulties there. What have you learned about exports that makes you a more effective seller into that market on a go-forward basis?

James A. Rubright

We've broadened the regions of the world that we sell in. We've broadened the customer base. And really attempted to anticipate better changes in demand, so that you're not dumping quantities into the marketplace or dumping it in through brokers, which can be pretty disruptive in the marketplace. So really, we've broadened, significantly, the staffing and planning around export sales. And we knew we needed to do that. It just took some while -- it just takes a while to develop those relationships to do it. You had a second question?

Unknown Analyst

No, that was it.

Unknown Analyst

Can you just talk a little bit about the customer satisfaction survey? You said you're at 8.77 now. What's the optimal level to be at? And can you also talk a little bit about the dips in the survey? If I look back, it looks like 2007, 2011, and then the third part would just be which -- this is for the total company, I would assume, which businesses have the highest returns, and which have the lowest?

James A. Rubright

Sure. First of all, the remarkable thing about the customer surveys is that and our consultants, CMS Research, can just demonstrate that, when you and I say 8, we mean exactly the same thing. It also means that when you and I say 5, we're the enemies of the person we're rating, because we're telling people don't use X, they're terrible. So the bandwidth within which you've achieved the value-accreting customer’s satisfaction is really pretty narrow. And around 7, 8, you stop destroying value and you're at least neutral. And in the mid-8s, you begin to accrete value. The research that these people do and the conventional wisdom is that about above a 9.2, you should stop spending money on customer satisfaction, because you're not delivering value relative to your investment in that. We actually don't accept that premise. Our Partition business, which actually is a joint venture with Sonoco, we've got about 65% of the venture, they've got 35%, has consistently had 9.5 customer satisfaction, which is the highest anybody has ever seen. They can't believe you can do it in a manufacturing business, which is much more difficult than a service business. And we're the exclusive supplier to our 3 largest customers. Well you tell me, would you rather be the exclusive supplier to a largest customer or not? The answer is yes. So we think we do accrete value. So for all of it, we have several businesses that are above 9. But in the Partition business, for example, the mode answer to the question, what is it RTS can do that would give you a 10? To a person who doesn't give you a 10 is, “I don't give 10s.” So the fact is, our targets and our aspirations for the business are really very high. Now you noticed that there were some dips, but the years follow acquisition. So the most recent dip was the dip for the total scores after we acquired Smurfit because we brought them on -- their scores, actually, were higher than we anticipated based on their reputation in the marketplace. At 8.3 was actually the good news, because their starting point was okay, but that brought down RockTenn’s. And then you can see the total coming back up. When they saw it -- when the Smurfit people saw what we were doing, they wanted to do it before we closed the acquisition. And we have that, because it's such a powerful tool. I hope that's responsive.

Unknown Analyst

Second question is just around the inflation assumption, 2% to 2.5%. Can you talk about some of the underlying assumptions there, wood costs, energy, benefits? How are you coming to that 2% to 2.5% inflation target?

James A. Rubright

When we look at the individual commodities, whether it be energy, recovered fiber, wood cost, we come to a conclusion we really don't know which way they're going to go. So that almost -- we just assumed 2% to 2.5% because it just is. The underlying treadmill cost, the biggest component is labor and healthcare. And that, in fact, it's not unusual for salaries to go up by 2% to 2.5%. And then healthcare has been going up by more than that. So it's more of a benchmark number from which there's a reasonable guide, because, I think, for us to say those costs are not going to go up, we would -- just would not be realistic. So we have to make an assumption, and that's what it is.

Unknown Analyst

Just trying to kind of tie some of the stuff back together. You gave a great presentation, a lot of good information about the productivity opportunities that are ahead. If I tie it to your guidance from '13 to '14, on a dollar basis, it looks like it's maybe $100 million improvement year-over-year. And so one of the questions I have is, how sustainable is that type of improvement over the long term? And you gave a free cash flow, I know we're going back a number of years. So I'm just wondering, are there elements to that, that you think are the performance improvement initiatives that are kind of onetime and you finished those? Or is productivity, in excess of inflation, possible in the long run?

James A. Rubright

Well, I think we've got a pretty long record of achieving productivity improvements that are in excess of the treadmill cost. What we've done is try to take a near-term view because we have our plans. We know what we estimate to achieve. I mean, we've got 6 Sigmas in just some main leaders. There's a list of hundreds of projects, and those projects all have numbers next to them. So we have visibility with respect to what they can do. Clearly, the remainder of the performance improvements that we have offered via acquisition, combined with some of the capital that we've indicated, give us a view with respect to what we can achieve in the near term. And you're right, so if you think of the treadmill as being $100 million plus, $70 million of labor and then make some estimates with respect to commodity inputs, first thing you got to do is outrun that. And the combination of what we see in place, plus the performance improvements does that. The largest opportunity we have with respect to capital deployment is in the box point system. But we have really just finalized those plans, and started placing the equipment orders. So we're not going to be even starting that until 10 months from today. So those numbers are out and run out beyond the forecast period. Do I think we can outrun a treadmill? Yes, because we always have. But somebody's got to think of the ideas and currently we’re focused on what we've been executing presently.

Unknown Analyst

Fair enough. I guess the second question is, if you look at the free cash flow profile, it’s obviously been very steady, though recently, there's been some volatility on the earnings profile. And so I'm wondering how you think about the earnings profile longer term, and whether that volatility is something we should just, as investors, be comfortable with, particularly concerning the leverage there is to price, or if it's something that you would want to smooth out over time, through some kind of measure.

James A. Rubright

Well you have to tell me whether we're valued on peak earnings or mid-cycle earnings, right? Because if I'm valued on peak earnings, I don't want to smooth it out if I'm valued on the level though I would. But the fact is you can't do it, right? I mean, remember, we make -- it was like $1.35 a share. If I was making $0.20 a share, and I missed by $0.05, you wouldn't see it, it'd be in the rounding. But we missed by $0.05. It was like, you missed by $0.05. But remember, it's in aggregate numbers. It's not that big a miss. And literally, I can have somebody walk into my office at the end of the quarter and say, "Okay, workers comp, right, is $0.05." And it's unbelievably frustrating because accounting has gotten so formulaic that what we’re doing is we're estimating future expenditures with respect to claims at a point in time. And the way we do it has no judgment in it at all. It's a formula and you plug the formula in, and it's $0.05. I know I'm going to get it back, right, because it's an anomaly, but you just plug the formula in, and that's how you calculate it. So in terms of earnings volatility, do I know what wood price is going to be? Do I know what natural gas price is going to be? And do I know what recycled fiber price is going to be 3 months from now? No, okay? I don't. I tend to think commodities are reverting, and you have pricing power that will enable you to recover, increases. But the fact is, there is volatility in the earnings of a company with large commodity inputs that's highly subject to volume swing. And again, as I say, there's just no opportunity to manipulate your earnings. It's just immediately transparent. So yes, you will see some volatility. What do I think over time? I think that cash flow comes from earnings. So if you really look through quarterly changes, you have a view with respect to what our earnings are, because you can get pretty close to what you think EBITDA is going to be off of that and from EBITDA, you can get to earnings. But we haven't found it productive to really try to forecast earnings because of the volatility on -- of quarterly earnings.

Unknown Analyst

Two questions. Jim, as you think about recycled versus virgin, do you think over the next cycle your best, primarily, virgin mill, will generate a higher return on capital than your best, presumably, Solvay recycled liner mill?

James A. Rubright

Well, the issue there is its sunk capital, right? So it's hard to say in terms of return on invested capital, because the invested capital is simply a function of purchase accounting allocating a purchase price across a mill based on a value. Where do I think the highest returns will come from? Solvay, we have the potential to crank that one up, with some pretty attractive returns and relatively low capital, but across the mill system, across the virgin mills, we, again, have pretty significant opportunities. Hodge and Hopewell are not, like, really high-return projects, but they're mills that just needed to have the infrastructure rebuilt. If you want that mill to last another 30 years, you got to -- you have to do what we did. So it's pretty hard to say. Where would I like to invest? Or where do I think the core of the system is? I think, if you agree with the premise that China will drive recycled fiber prices higher over the long term, you just get the sustainable competitive advantage in virgin containerboard, where your cost structure, at least the volatility of wood fiber costs have not been as volatile as recycled fiber. The distinguishing characteristic for us, though, is that in an economic downturn, recycled fiber price tends to really drive down, and then give us the opportunity for peak earnings in a countercyclical way to the industry. But long term, that virgin fiber, I think, is -- has a sustainable advantage, because of the availability of wood in the Southeastern United States.

Unknown Analyst

Okay. And just one more question, the large producers of container board have not been the innovators, historically, in the big ships. 69-pound linerboard was forced out of the market by foreign exchange rates. Nobody did it voluntarily. Europeans have pushed much more aggressively toward lightweight than any of the big American producers. Do think that lightweighting is just not going to happen here? I mean, you've talked a lot about reducing fiber, and that's an easy way to do it.

James A. Rubright

Well, I had my view. Jim, you're the closest one to the market here, why don't you address that?

James B. Porter

I think lightweight is happening. If you look out over the last couple of decades, you've seen a steady movement in the North American basis weight reduction. The 59 pounds, 57 pounds are shifting down into the 35-pound kind of range. With respect to ultralights though, the 26-pound and below grade 30 years ago was like 5%. And today, it's 5%. So we're seeing a shifting in lightweights down into that middle lightweight range for North America, not into the ultralights, and I think, largely because the supply chain in Europe is much different. The freight units, the distance of travel, the inventory systems, the distribution systems is radically different than North America. And 2, we've got virgin containerboard. We've got a very healthy forest, and the European Community has had to use these ultralight fibers, and there's also some subsidies from the governments and the European entities that have funded capital investments that would not be funded in North America.

Unknown Analyst

Any thoughts, just given the fact that you've got so much exposure to things like energy and fiber costs, I wonder if there's any way to change the business model that takes some of the volatility that might produce in your earnings and cash flow out of the game to make things more stable, or is that just not matter, you can live with the volatility, it kind of balances out over time?

Steven C. Voorhees

I think the short is answer is we can live with the volatility. The alternative is to try to hedge our -- and you could either hedge with your customers, you could hedge -- and we could buy Nymex contracts. We're not in the business of speculating on commodity prices. When Jim and I came from the industry and learned that it's very difficult to predict what natural gas prices are going to be. So I think the way we manage the volatility is we accept that there is -- that there will be volatility, and then we keep a balance sheet that allows us to absorb that volatility.

Unknown Analyst

Okay. And just as a follow-on, Steve, you guys talked a lot about kind of customer satisfaction and kind of where you're at on that. But my perception 18 months ago is that there was a pretty wide spread between how satisfied a RockTenn customer was and how satisfied a Smurfit customer was at the time. How much have you done to narrow that gap, do you think?

James A. Rubright

The surprising thing for me when we did the Smurfit acquisition was the large customers of Smurfit who called us who were happy customers of Smurfit, but knew that we did other things and had other locations, and it was looking for opportunities to expand with RockTenn. So the notion that Smurfit, across the board, had very low customer satisfaction was disproven, and it was disproven by our surveys. Now on the weekend, they had some very unhappy customers. And that's what you were hearing from. I think we've made significant progress in on-time delivery and quality. And certainly, significant progress, with respect. People know that's the expectation, and so they've got to change that, and that is where the differentiation will occur on what is the tail end of the Smurfit -- legacy Smurfit customer base. Josh -- why don't we just go right to Josh right next to you.

Joshua L. Zaret - Longbow Research LLC

Jim, if we talk about shifts in the marketplace, it seems like one of the shifts we're seeing now is this move to retail-ready packaging. And I'm wondering, one, how significant a shift that is? Is it a positive for the industry? Because you probably use less board to produce that. And how are you, as a company, positioned relative to your competition?

James A. Rubright

Jim's right in the heart of that bed, so Jim that's a great question for you to take.

James B. Porter

Well, I think it is a, clearly, an emerging concept, right? It has not happened, however, at the same pace that it has in Europe. Some of which due to the previous comments, the supply chain differences have not made it as quick of a transition here. But we think it's a great opportunity for RockTenn. And those designs that we showed up here are shelf-ready packaging designs. So we have the ability and, frankly, have proprietary technology and licenses that give us shelf-ready designs that, in fact, use folding carton substrates, marry them with corrugated substrates and literally everything in between in order to provide that pipeline from the case packer to the shipping container to the shelf. And so, we're prepared. We've got a lot of dialogue with some of the major customers in North America in that regard. We think the graphics, as well as the ability to marry substrate, yes, takes fiber out in some cases for our customers, but it's an opportunity to put the value and engineering into the price as well. So we think it's a positive thing.

Joshua L. Zaret - Longbow Research LLC

One quick one for Jim. In your presentation, you showed how the Hodge Mill is having 800,000 tons of capacity. Does that include any of the improvements?

James A. Rubright

That's the current run rate today.

Joshua L. Zaret - Longbow Research LLC

And where do you see that eventually when you finish this?

James A. Rubright

It's possible it will go up somewhat from there. But that's really our view, pretty much, what the capacity of the mill is.

Unknown Analyst

Jim, you've laid out, really, a large number of pretty detailed initiatives. And when you look at what you're trying to achieve over the next 12 to 24 months, you've got mill projects, you've got changes in the box plans, you've got leaders in new roles, cultural changes. From your perspective, kind of broadly looking at the company, where's the biggest risk? Or where is sort of the degree of difficulty, maybe higher for some of these projects? And how should we think about that over the next kind of couple of years? Is it still at the mills or...

James A. Rubright

Certainly, executing mill improvement projects are the most complex, and mills, themselves, are extremely complex. So you identify the process changes you want to make, and you execute them. And then, as in Hodge, you find out we're like -- there were actually few that we didn't anticipate. So I mean, clearly, transforming a mill is a process that has -- will have some bumps in the road and they're, by far, the most difficult. A lot of the stuff that we're doing is really not. The box plant transformation program, you have to change the expectations of performance in a plant pretty dramatically, increase the training of the operators pretty significantly, improve the maintenance training and practices. But this is blocking and tackling. This is really stuff that we can do. So the challenge is scale. Can you organize it on a scale that meets the opportunity? But they're not -- they're pretty straightforward things that we're doing.

Unknown Analyst

If I understood correctly in the presentation, when you were talking about a theoretical greenfield virgin mill, it was mentioned that you've got about a $2 billion investment, and therefore, not likely to occur. But I just wanted to understand the accounts. Is that right, $2 billion, would that be about 1 million tons? Does that really mean that the sub-capital per ton of capacity if someone were to build a new mill would be $2,000 per ton? And what would the cash cost be on that kind of a new mill?

James A. Rubright

What Jim was referring to was the difficulty of permitting the time associated with constructing a virgin mill. Jim, you've done a lot more work than I have recently on replacement costs and so forth. Go ahead. Expand on your...

James B. Porter

Purely round numbers. There is not an engineering scenario that lays out all of the details of the virgin mill. But if you look at some of the pulp mills in Latin America, it is order of magnitude and that kind of framework. And so, hence, when I'm thinking about trying to permit and build, not just the pulp mill, but a paper machine and all of its logistics, round numbers within that zone.

Unknown Analyst

So you'd need about a $300 pretax margin to justify something like that?

John D. Stakel

John, one -- John Stakel here. One of the things that we did, of course, was have experts -- we have to and purchase kind of go out and appraise your mill system. And what did they come back with the replacement cost of the mill system? You recall it was a big number.

Unknown Executive

For insurance purposes, which replacement value our assets about 20 -- must be $1 billion or so. So there's a huge cost.

Unknown Analyst

Can you compare the margin profile in your Converting business within consumer to the margin profile and your Converting business within Containerboard? I know you clearly have laid out the cost-savings opportunities within the converting systems and containerboard. Where if we just think about margin points, I mean how much upside do you see in the margin profile within the containerboard converting systems?

James A. Rubright

It's a really difficult question to answer. We've had 13 years to optimize the margin position in the Folding Carton business. The technology's somewhat different. So what was 17% EBITDA margins in the Folding Carton business. Do I think the potential is there in the converting and containerboard? I think we're a long way from that. I think the industry's a long way from that. You have to talk about what's the pace in which we can effect the conversion. So our view is that we can get out of simply cost takeouts, 20% to 30% returns off of the conversion. But our business is really integrated. So for me to attempt to try to tell you what the segregated converting margin is in an integrated system, I can't give you a meaningful number. So that's really why we talked about it in terms of what we see the returns off the capital as opposed to trying estimate true converting margins.

Unknown Analyst

Okay. And just switching topics on M&A. Clearly, acquisitions are part of the company's DNA. And you've created a lot of value by doing that. And as I look at the key businesses that you're in today, it doesn't seem like there's really any transformative opportunities out there, given consolidation. So as you think about potential acquisition going forward, are there any geographies around the world that you think are particularly compelling to you? Would you potentially consider to do a deal outside of the key substrates that you're currently in today?

James A. Rubright

The answer is, we look at a lot of things. We look at other geographies, we look at other businesses, other substrates. Right now, could I tell you that I have conviction with respect to anything? No, personally, I don't have conviction with respect to anything that appears to me to be as attractive as our basic businesses. Steve was saying the screen that always trips us on acquisitions is, are we a better company? Right? And I don't know of anything that, right now, for a packaging company, is a better business than our business. So I think we are challenged today with respect to some transformative transaction. On the other hand, we're early days in executing a pretty big transformative transaction with a lot of run rate. So it's not -- we never felt driven to do an acquisition, but we certainly don't feel driven today.

Unknown Analyst

Two questions. In converting to natural gas, what are the fuels you're converting from? Presumably coal and other things. And to John O'Neal, with the supply chain, I saw your degree in Industrial Engineering and Operations Research. And I took a lot of the same classes. What does your group have to do that requires 75 people, or a lot of the supply chain management would be a big linear programming model? So are there issues of data compatibility and compatible computers? Or has the organization asked you to prepare a lot of things, over and above the things they didn't teach you when you're in programming class?

James A. Rubright

I'll answer the first question, we're primarily displacing fuel oil. So the economics we've indicated are all based on the MMBtu conversion of fuel oil to natural gas. We're moving across boiler systems, and that's why it's being implemented. We've got gas to the gate of all of our plants. But it takes the outages to convert the boilers ultimately to burn the natural gas. But that's it, just an MMBtu conversion from fuel oil.

John L. O'Neal

To address your question on personnel. So we have 75 people across that group, and just -- there are folks in freight logistics, and we've got people out in the field. So we have regional logistic managers working with Tom's team and Jeff's teams to manage all the really -- the regional logistics associated with our business. We have a centralized ordering group, so managing all the supply of paper to Jeff's business and there are number of people in that department as well. And then we have a customer service function, which is our external customer facing group that manages all the incoming orders from all of our external customers. And then, you're right, we do have a group of folks in our production planning group, and those are the folks who are really tasked with a very complex job of matching up orders to our paper machine capabilities. And we have in the past used a linear programming model to try and solve that solution. But that tool, really, is not dynamic enough for us. And so part of what I alluded to earlier is we're developing a new suite of tools that allow us to do that better. And...

Unknown Analyst


John L. O'Neal

That's right. I mean, we cannot react as quickly as we'd like to. We want to be more dynamic. We have variable supply, variable demand. We want to be able to respond to short-term changes in the system to eliminate the waste that goes on and be able to respond to that more dynamically, to understand really what is the right decision to make. Many times, our planners are faced with a situation where somebody shows up with incremental demand, and we've got to figure where to put that, and you don't really know what's the right solution because our tools just aren't equipped So we're improving our tool set. We're improving the capabilities of the members of our team. We're hiring a lot of industrial engineers to come in and help us solve these problems. So that's all part of this transformation to building a more commercial platform to make better decisions for the business.

Unknown Analyst

I had a quick question on the pensions. On the pension slide, you're showing that by '16, the GAAP liability -- or rather, the unfunded liability would actually turn into a surplus. But then you look at the cash contributions you're talking about, they are still in excess of the income statement amount. So why is that? And then secondly, I guess, on a related basis, if rates were to rise, let's say, 100 basis points, right, so that moves your pension deficit, say, by $400 million, what's the right way to think about the cash pension contributions? Would you like to maintain a percentage funding balance? Or would you kind of fill the deficit as quickly as possible?

James A. Rubright

On the first question, I'll tell you, I asked the exact same question. So Stakel can -- I'm not going to ask John to answer it, because the answer is, we've got our actuary in. And all I can tell you is, that's just the way the calculations work. There's some lag in the way the cash contributions flow out even when you get to that funding level. Now if you go beyond that, then you'd end up to a point where you'd be normalized.

Unknown Executive

Also it's a different calculation. The IRS funding is a different calculation than the GAAP liability funding. Ultimately, they are trend together, but you can see there's a significant disparity. But it’s simply a different calculation.

Steven C. Voorhees

Okay. And then just with respect to a -- hypothetical, Bob, what happens if there's a change in interest rates? Our policy has been to contribute the minimum amount necessary to fund the pension plans according to the IRS regulations. Now there are some economics there because sometimes if you contribute more, you can save money on your unit cost that you paid to the pension guaranteed corporations. So we'd look on an economic basis. We'd rather preserve the capital for use within our business, rather than put it in the pension plan, and you're going to a scenario, which we think about, because if you have a dramatic change in interest rates, and you've put the money in, then that capital, effectively, is stranded with respect to our ability to put it back in the business. So that's the way we look at it.

Unknown Analyst

And just when you look at the forecast for the unfunded liability, are you using present rates or the present curve for the future or...

Steven C. Voorhees

It'd be a curve.

Unknown Analyst

You'll use a curve. I see.

Chip A. Dillon - Vertical Research Partners, LLC

I just got a quick one. Great chart on Page 46 about the source of your end markets on the corrugated side, container -- on the box side, and, I guess, 2 questions. One is, you mentioned paper goods at 20%, and if you could sort of split that between, I would hope most of it is tissue-related, and maybe the part that's not so great, going forward, which is the, say, uncoated or cut-sized part. And then maybe Jim could talk a little bit about -- it's amazing you look at this pie chart, and only 7% of what I see here, if you don't count Other, is not consumer-related, whereas, I think, 20 years ago, durables and other industrial-type demand was more than 1/4, maybe even 1/3 of the demand. And so, how much more could that go down? And in fact, are there signs it could even come back?

James A. Rubright

Jim, why don't you go -- please respond to that.

James B. Porter

I don't have the exact [indiscernible] split on the paper, but it's largely on the absorbency and consumer products, versus the cut-sized paper. We do have customers in that space, but it's much larger or in the consumer products portion. And your second question was?

Chip A. Dillon - Vertical Research Partners, LLC

Just how you look at the pie chart, and almost nothing's left in non-consumer-related area.

James B. Porter

We're all very familiar with the off-shoring of the durable goods manufacturer. And it has been a pretty transformative event, and that's what retooled the industry, it's what took a lot of paper machines down and a lot of capacity out of North America. Right now, we're very much a non-durable goods sector. If you look at box shipments and all the other indices that we all measure the accounting by, the only one that really tracks is non-durable goods. So we're very aligned with that. Now is it coming back? General Electric is doing a great thing. I don't know if you've been through Appliance Park lately. Used to have 10,000 cars in the parking lot that went to 0. And when I was there the other day, there were 10,000 cars there, and they're making refrigerators and all the stuff. So there is some movement back to North America. How much? I would not try to predict that.

Unknown Analyst

I guess, one of the risks that I see is the retention rate of OCC. And if you include [ph] a long-term perspective, the competitive advantage of virgin versus OCC, over time. As you look to, call it 3 to 5 years, and China turns into more and more of a consumer-driven economy, so you're seeing less boxes of being shipped out here, and then over here, the benefit from higher retention rate. Is that something which actually has a negative impact on how many boxes actually get retained or get collected back? When I say retention, I guess what I'm trying to say is, how much -- what is the collection rate? Maybe that's the better word. So that's one that -- how does that impact the supply of OCC over a longer period of time? And second, which is something I haven't been able to figure out, the marginal cost of collection of OCC. So as you think through the -- if you want to increase the collection rate, let's say, in this country by 2% or 5%, do you have to step up in a very big way on the OCC side? I'm not sure if you guys have done any work on this, but just to see how virgin versus OCC will move? That's 1 question.

James A. Rubright

The answer to your first question is I don't know, right? He was asking 6 years out changes in China, what -- how's it going to affect global flows of recycled fiber? I don't have a view. Does anybody have a view on that they'd like to offer? All right. More demand means more -- if -- that's a tough one. And then let's go to the second question, let's just ask that one again.

Unknown Analyst

So if you want to increase the collection rates in this country.

James A. Rubright

Actually, the cost of collection for the collectors is going down, because the whole movement of single stream collection is driving the cost down, because we have to have 2 of the [indiscernible] in my house for the stuff that goes down the stream, and it all goes to a single stream facility where magnets and belts and everything spins that stuff off, throws it down and it all just ends up in piles and comes back to us. Now you have to spend money in your mills to clean it and refine it, but I think the marginal cost of collection is, in fact, lower.

Unknown Analyst

And then last one. You said by the end of your first quarter of fiscal year 2013, run rate synergies were $325 million. How much of that is in the EBITDA number?

James A. Rubright

How much is what?

Unknown Analyst

How much is already in the EBITDA number? So out of the $325 million, which is run-rating, so if I was to say how much of that is already in the EBITDA number, how do I think about that?

James A. Rubright

So he wants to know -- not run rate, but how much of it was in the EBITDA and [indiscernible] quarter. So...

Steven C. Voorhees

I can't answer that easily. All of it will be in the EBITDA number for the past year. I don't have the number at the top of my head for how that rolled in by quarter for the prior year. And I think that's your question I'd have to answer how much out of the trailing 12 EBITDA was contributed by the $325 million.

James A. Rubright

We can go back and say what we had by quarter, but that's the way we've measured it.

George L. Staphos - BofA Merrill Lynch, Research Division

Two questions. One, let me just start with your Consumer business, which I think we've learned a lot about today, but generally speaking isn't really most people's focus. You run the business really well. My question is, at this point, as you reported and you think about increases in free cash flow and better running the businesses, I mean, how much more can you do there? You've run that at extraordinary margins, you're well exceeding the industry. I mean, going forward, is it just sort of incremental? Or can you tell me what the economy is going to do, and that's how much you can grow it?

James A. Rubright

Mike, you want to...

Unknown Analyst

[indiscernible] wrong, that would be great.

Michael E. Kiepura

I do think we have opportunities, not only to improve our base business when we talked about the 2013 strategy and beyond, what we're doing. That could result in modifying the network of plants in terms of how productive the plant can be in taking advantage of customer opportunities. We only have a 13% market share, so we do think there's opportunities to grow in the U.S. and Canada. But also, a significant portion of our customers are putting operations in Mexico, and that's certainly an area that we look to, trying to find the right opportunity to grow with our customers in that part. So we think there are opportunities to grow internationally, as well as to improve and grow the base that we have in North America today.

Unknown Analyst

And, obviously, there's been price pressure in the SPS market. How significant is that when we look at the results for that segment? And also within that segment, is there much in the way of M&A opportunity there or not?

Michael E. Kiepura

Well, today, there's 5 -- basically 5 players. You have [indiscernible], ourselves, Clearwater...

James A. Rubright


Michael E. Kiepura

And Evergreen. So there's -- and our share of that market we had on the chart was 7%. So theoretically, there's opportunities for acquisition to grow there.

Michael E. Kiepura

But following your criteria, I guess?

Unknown Executive


Unknown Analyst

And one other question. Jim, there's been discussion, I mean, about, really, the outstanding, I guess, industry discipline, recognizing that clearly price matters more than volume, particularly in the containerboard business. Talk about the supply risks. How many -- I mean, maybe, I know we've been through this before, but, I mean, what other grades do you worry about being converted into containerboard? And does export represent much risk into the U.S. given our, generally speaking, favorable OCC and virgin position?

James A. Rubright

Yes. We saw the export-import data. So if you just look at the trends, you don't get very concerned about exports into the United States. Secondly, what is manufactured outside of the United States is, generally, recycled. It is not of the same quality as U.S. recycled, because of the high OCC content in domestic recycled. But we've done a lot of work with a couple of different over time true experts on global cost of production, and they give you great comfort with respect to the competitive advantage from a cost standpoint of domestic containerboard, relative to the opportunities of the rest of the world and to export to the United States. So that is not something that I currently see as being an issue. And if you, again, believe that the cost of recycled fiber will trend up over time, China's basically a recycled fiber economy, and they would be the exporting nation. So no, that's not a major concern. Substitution risk, the substitution risks that -- we've only really seen one successful conversion so far, which was IPs. Newsprint Mills were out there, certainly as the successor to SP Newsprints asset in Georgia, they're trying to convert so. That's the place that we're aware of, but there are some technological challenges with being successful converting a newsprint machine into a linerboard machine. So we'll have to see whether that's successful. Certainly [indiscernible] which had the resources to do so and determine that it -- their experiment suggested to them that they would not. So I don't know of any other real targets of opportunity in the United States. Jim, can you think of any that caused you material concerns?

James B. Porter

Well, there are a couple being discussed, certainly. And is it a concern? It's certainly a concern when you think about the conversion. But it's high-cost, it's risk, and whether you can end up with a competitive product both in terms of product quality, as well as cost, the jury's out. But I think we need to stay focused on making high-quality containerboard as well.

Unknown Analyst

Just one last final little question regarding -- I mean, is there much in the way of quality idle machines that you could imagine coming back online or not? Not your own, obviously, but others.

James B. Porter

I don't see them that they’re cost-effective. They've been idled or shut because of their cost competitiveness and -- but we don't see that.

Unknown Analyst

A couple of capital allocation questions, if I could. First off, you updated, for fiscal '14 and '15, cap spend probably in the $400 million to $450 million range. Now beyond that 2-year frame, do you anticipate it going back more to $350 million, while attaining the productivity improvement, which, on the earlier question had asked about, matching inflation, et cetera? Or do you think it stays more in the $400 million and $450 million range? First question.

James A. Rubright

My hope would be that we would be able to identify in excess of cost of capital projects that tend through the continuation of the kind of investments we've made. We continue to have confidence in our ability to invest. And if I can invest the 25%, 20%, 30% after-tax, we're going to do it. So that's how we have grounded ourselves in higher CapEx for the next 2 years. You've heard what we plan to do with the converting system. Those opportunities are simply there, and we plan to take advantage of them. It's pretty hard to see out in '15 and '16. So the better way to look at it is just say, "Okay, I know that you guys said $250 million in maintenance CapEx." So that's going to spend, and the rest, really, is their opportunity capital. But you've got to tell me what the economy is doing 3 years out, 4 years out. There are other shifts that are going to occur that could affect our capital plans. But if we were spending $350 million a year, it's because we're idea-deprived. But depreciation, $550 million, so even at our high end of our capital expenditure ranges, we're not spending our depreciation. The one thing we didn't include in that was Boiler MACT, because that $100 million is going to be spent primarily in '15 and '16 because of the compliance deadlines.

Unknown Analyst

And just to clarify, it was my sense, though, that the $400 million to $450 million that you'll be spending in '15 and '16 will enable you, hopefully, to get better than meeting the inflation pressures? That was...

James A. Rubright

Right. Absolutely. Yes.

Unknown Analyst

Great. And then just as a follow-up, too. The 2 other bigger competitors, publicly held competitors in the space, pay out pretty big dividends and pretty high percentage of their earnings, probably in part because they’re perceived as a mature industry. Longer term, and I realize I may be getting a little ahead of myself, because you've got to get to the financial profile you want, would you envision ultimately having a meaningful dividend? Or is that still up for grabs?

James A. Rubright

What's a meaningful dividend? I mean, first, our plan is attested to be a dividend that at least parallels whatever index we're trading in. So it's not just a disincentive to invest. Once you get our capital structure in line, I think you didn't have to -- that is achieve the goal, we said we're going to 2. So that takes you out 18 months. Then you really have to look at what your opportunity set is. If you believe the opportunity for material acquisitions is there in some reasonable timeframe, it might affect your viewpoint with respect to dividends and your ability to reinvest in the business. I think that you have to let us get out 18 months and decide, where are we now and what is the appropriate dividend level. Because I don't -- we haven't focused on it beyond today. We have said, though, with respect to material returns of capital, we like stock repurchases, because, I mean, if you look at the return chart, we had nice stockholder returns, but there sure have been buying opportunities. And when we've seen them, we would capitalize on those, and it's really pretty efficient if you're a shareholder like Steve and I are and all the rest of us here.

Unknown Analyst

And so when you think about share repurchase, you think about being opportunistic?

James A. Rubright

Sure, yes. George, did you have another question?

George L. Staphos - BofA Merrill Lynch, Research Division

Sure, if we have time, [indiscernible]. There's nobody else who hasn't had a question yet?

James A. Rubright

We'll come back, but go ahead.

George L. Staphos - BofA Merrill Lynch, Research Division

I'll make it quick. I want to take another shot on Alex's question. Historically, we've been of the view, maybe incorrectly so that the margins in converting have been generally lower than the margins in papermaking. But the asset intensity tends to be an equalizer and so returns can be, in some business, pretty equivalent. If you had to -- or give us some sense of the indexing, let's say, of your return on capital right now in converting in corrugated versus the paper side of the house, where would that stand? And when you're done with the program the next 2 to 3 years, how would Jeff's returns on capital look, comparable to Tom's, if that's possible?

James A. Rubright

I'm going to come back to you. It is a meaningless comparison, because the capital was invested in those box point systems over a long period of time. So what they're carried at now is a function of purchase accounting, right? I could do an ROIC in which we attempted essentially to appraise our -- set our own values on these things and say, "Okay, what's the return on that?" It's just not a meaningful comparison.

George L. Staphos - BofA Merrill Lynch, Research Division

I took the shot because you all -- obviously, have a view that you want to be 70% vertically integrated, 30% external. So you have to have some view in terms of why that's the case. But I understand. I'll...

James A. Rubright

Wait, we are 70%, right? We -- I've also said we would like to be more integrated, because it is a secure position. We've done some acquisitions that have enabled us to do that. Those particular acquisitions, we feel, have greater than cost to capital return, so it is possible to by converting assets, that we're making money. But we look at them on an integrated basis. So it's, again, it's just not a meaningful comparison from -- as we see it.

Unknown Analyst

Just a quick question on the $325 million of run rate synergies, you guys couldn't capture per quarter with how much has actually been realized. But can you talk about, maybe, some of the offsets, because we haven't really seen it flow though to the bottom line, thinking out $325 million, might have been $100 million and then there's $225 million?

James A. Rubright

Sure. With the one we've talked about a great deal after the acquisition was that we had roughly 15 months with no price increase in an environment at which you had a very slow growth economy. So you had price erosion, and that's just a fact, we had price erosion. Second, we had commodity cost inflation. Our labor and healthcare treadmills, we've said, is about $70 million a year. Wood is more expensive today than it's been. In fact, if you look at wood today, it's very expensive. We had a very wet winter in the Southeast, which tends to drive up wood pricing. You've got pellet plants in Virginia that have put pressure on pricing in Virginia. Sort of been a number of cost escalations. Oil has trended up. The one that's come down is natural gas, and which we've migrated to. We've got a broad range of cost increases. Chemicals are, as you know, are up. Corn's been up over the last 18 months. So just a broad range of inputs to have offset that.

Unknown Analyst

Jim, just following up on some of the questions around returns on capital. Historically, the containerboard business has been viewed, rightly so, I think, as a bad business. Cyclical, commodity-driven, lack of pricing power, lack of discipline, lower return business. And when you bought Smurfit, you talked about how you thought it could become a better business over time. We've tried, but it's hard to sort of gauge how industry returns are evolving over time, and particularly, from a financial perspective, this perception has been a real overhang on sort of the valuation of your business and the peer group. As the free cash flow yields that your business has tended to trade on. Can you talk about, just in the couple of years since you've bought Smurfit, any objective evidence in your mind or even anecdotal of improving industry structure, and what you think also needs to happen from here? Because obviously, even a modest change in the perception of the quality of the industry can have a very outsized impact on the valuation of the business.

James A. Rubright

Yes, well, obviously...

Unknown Analyst

And that's not a question about price.

James A. Rubright

No, no. I don't understand the valuation of our business compared to other industries that have similar structures, meaning degrees of consolidation and end markets. We've had a period of at least 20 years of off-shoring of American manufacturing. So if you go back to 1975, 1980, and then try to say what is the percentage of durable goods, in which containerboard and corrugated packaging in North America end markets, it was a lot. I don't have the data, but I mean, it's an enormous amount. As that shrank, you just had excess capacity. So you had a very long period of time where you had to rightsize the industry. But if we look at today, 7% of our end markets are durable goods, the rest are consumer goods. So you've got a stable end market for your products. And capacity is in relative balance. If you had anything like GDP growth approaching our -- because of our relatively still healthy demographics in the United States, you're going to have growth that at least, offset [indiscernible]. So you have the opportunity to maintain system balance. I've talked about this before. The dramatic change in the industry that like hit me, like, "Oh, why didn't I think of that?" It was after we bought a certain container, was that disaggregation of the forest, and manufacturing has an enormous impact. If you plant a tree 4 years ago and you harvest it, and you got a paper mill for the sole purpose of selling that tree, you don't care what your manufacturing margins are. You're selling the tree, true, right? And if you look at the volatility of pricing in the industry, it was largely a function of the fact it's integration back to the forest, in my view, an excess capacity. Those conditions are all different today. And just listen to -- everybody talks like this is -- this is my manufacturing business. I'm focused on making manufacturing margins and realizing that my value proposition is commercial excellence and pricing. Those are observable changes.

I think we've come to the end. Thank you very much. We appreciate your interest and ownership in RockTenn. We'll be around for a little bit if you want to come up and say hello. If we haven't had the chance to say hello, we're here.

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