Boise Management Discusses Q4 2012 Results - Earnings Call Transcript

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 |  About: Boise Inc. (BZ)
by: SA Transcripts

Boise (NYSE:BZ)

Q4 2012 Earnings Call

February 26, 2013 11:00 am ET

Executives

Greg Jones

Alexander Toeldte - Chief Executive Officer, President, Director, Member of Special Committee and Member of Executive Committee

Samuel K. Cotterell - Chief Financial Officer and Senior Vice President

Analysts

Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division

Mark W. Connelly - Credit Agricole Securities (NYSE:USA) Inc., Research Division

Phil M. Gresh - JP Morgan Chase & Co, Research Division

Joseph Stivaletti - Goldman Sachs Group Inc., Research Division

Fritz Von Carp

Operator

Good morning. My name is Stephanie, and I will be your conference facilitator today. At this time, I would like to welcome everyone to Boise Inc. Fourth Quarter and Year End 2012 Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce you to Greg Jones, Director of Investor Relations, Boise Inc. Mr. Jones, you may begin your conference.

Greg Jones

Thanks, Stephanie. Good morning, and welcome to Boise Inc.'s Fourth Quarter 2012 Earnings Call. Joining me today are Alexander Toeldte, our President and CEO; and Sam Cotterell, Senior Vice President and CFO.

Please note that some statements made on this call constitute forward-looking statements within the meaning of the federal securities laws, including statements regarding management's future expectations of company performance. Management believes these forward-looking statements are reasonable. However, the company cannot guarantee that its actual results will be consistent with the forward-looking statements, and you should not place undue reliance on them.

These statements are based on current expectations and speak only as of the date they are made. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of future events, new information or otherwise. Important risk factors regarding the company that may cause results to differ from expectations are included in the company's filings with the SEC, including our annual report on Form 10-K for the year ended December 31, 2012, which will be filed later today.

This morning's call is posted as an audio webcast on our website. To access the replay, go to www.boiseinc.com and click on About Boise Inc. to reach the link to the webcast under Webcasts & Presentation on the Investors menu. A replay will be available shortly after the call.

With that introduction, I would now like to turn the time over to Alexander.

Alexander Toeldte

Thank you, Greg. Welcome to our fourth quarter and year-end 2012 earnings call.

Before we begin, I want to take this moment and recognize that yesterday marked Boise Inc.'s 5-year anniversary as a public company. I want to thank our employees, our customers, our suppliers, the communities we operate in and our investors for their contributions to our success.

Today, I'd like to highlight key aspects of our overall performance in fourth quarter and for the full year of 2012. Then I'll talk about our individual Packaging and Paper businesses, and after that, Sam will take you through our financial results in more detail.

We were pleased with our 2012 overall operating results, although EBITDA did not fully meet our expectations. Our mills and converting operations ran well and we generated significant free cash flow and paid 2 special cash dividends to our shareholders.

In our Packaging segment, we had a good year although we continued to experience margin compression in our converting operations primarily in California and Texas. Our operating or converting operations did not benefit much during the fourth quarter from our announced $50 per ton linerboard price increase, but we expect to see the increase show up on our bottom line in first quarter 2013. At the end of January, we had implemented over 90% of the $50 price increase through our converting operations.

Despite the margin pressure, Packaging EBITDA increased compared with 2011. This increase was attributable to strong corrugated sales volumes, partly due to our 2011 acquisitions, but almost equally due to organic sales growth. As we announced earlier this month, we are making targeted investments in our converting operations to support that sales growth and improve efficiency as, for example, the new corrugator at our facility in Waco, Texas. This new corrugator is expected to start up in third quarter 2013 and will add low-cost production capacity to our system.

Turning to our Paper segment. The story is price. Paper sales and EBITDA were down slightly in fourth quarter and for all of 2012 compared with '11. We experienced price declines for communication papers throughout 2012 and those declines worsened in fourth quarter.

Average sales price decreased $22 per ton for full year 2012 versus '11 and were down $27 per ton in the fourth quarter compared to the third quarter of 2012. $15 of that difference was headline price and the rest were negative product mix changes. These declines factored into our decision to cease paper production on our last paper machine at our St. Helens mill.

In the fourth quarter, we took market-related downtime in addition to our scheduled maintenance outage at our Jackson mill. In 2012, we made significant productivity gains that among other improvements increased pulp production at our mills in Jackson and International Falls, which enabled us to reduce our external purchases of pulp and consequently, lowered our cost.

I want to take a moment to highlight our 2012 safety performance. Safety is a key value at Boise and we followed 2011's record-breaking performance with an even better year in 2012 with our recordable incident rate dropping to 1.03. This makes us a safety leader in the industry according to AF & PA statistics and I want to thank all of our employees for putting safety first.

Finally, as we have for 3 consecutive years, we continue our record of returning cash to shareholders. In 2012, we paid 2 special cash dividends of $0.48 and $0.72 per share or approximately $120 million in total for the whole year.

And with that summary, I'll turn the call over to Sam, who will walk you through the numbers.

Samuel K. Cotterell

Thanks, Alexander. Total company sales in fourth quarter were $628 million, up 5% from fourth quarter 2011. Packaging segment sales were up 14% while Paper segment sales were down 2% for fourth quarter 2012 versus fourth quarter 2011.

During fourth quarter, we took 16,000 tons of market-related downtime in addition to the 8,000 tons of downtime from our annual maintenance outage at our mill in Jackson. Going forward, we'll continue to balance production with the demand for our products.

Net income for the fourth quarter was $14 million compared with $16 million in fourth quarter 2011. EBITDA excluding special items was $79 million for fourth quarter. Fourth quarter Packaging EBITDA was $47 million, up slightly from fourth quarter 2011. We benefited from 2 additional months of operations at Hexacomb in the quarter, but overall, this was offset by higher fiber, energy and chemical costs and margin compression on the sale of some of our corrugated products at our converting operations.

Fourth quarter paper EBITDA, excluding special items, was $39 million, down 13% from fourth quarter 2011. The decrease was due primarily to lower sales prices of uncoated freesheet offset partially by operational improvements and lower maintenance outage costs.

Total company sales in 2012 were $2.6 billion, up 6% from 2011. Packaging sales in 2012 increased 19%. We increased our vertical integration from an average of 71% to 84% year-over-year. This meant we were able to decrease our lower-priced external linerboard sales in 2012 by over 30%. Paper sales were down 2% due to lower sales prices of uncoated freesheet and lower sales prices and volumes of market pulp.

Net income, excluding special items, was $72 million or $0.71 per diluted share in 2012 compared with $80 million or $0.75 per diluted share in 2011. EBITDA, excluding special items was $332 million in 2012, down from $340 million in 2011. Packaging EBITDA, excluding special items was $163 million in 2012, up 2%. Again, margin compression partially offset the full year impact of our acquisitions and increased sales volumes of corrugated products.

Paper EBITDA, excluding special items, was $193 million for 2012, down 4% from 2011. Operational improvements could not overcome decreasing sales prices for communication papers, higher wood prices, particularly in the Pacific Northwest and higher overall chemical costs.

During 2012, we generated strong free cash flow of $97 million compared with $121 million in 2011. $19 million of the $24-million difference was the result of additional pension contributions and increased capital expenditures. During the year, we contributed $35 million to our pension plans, a $10 million increase from 2011.

Total capital expenditures for 2012 were $138 million, up from $129 million in 2011. The increase relates to enhancements and efficiency improvements in our box plant system.

As of December 31, 2012, our total net debt was $734 million or 2.2x our 2012 EBITDA excluding special items. We maintained good liquidity with $488 million of availability under our revolving credit facility and $50 million of cash on hand.

Turning now to input costs, our most significant input costs, fiber, energy and chemicals, totaled $970 million in 2012, a decrease of $9 million from 2011. Lower fiber and energy costs offset slightly higher chemical costs year-over-year.

In Paper, our fiber costs decreased $34 million. Our pulp mills in International Falls and Jackson ran well and reduced our consumption of purchased pulp. Low pulp sales prices negatively affected our Wallula, Washington mill, which also experienced high wood prices throughout the year. Our sales volumes of market pulp decreased in 2012 as we slowed production in Wallula and also began shipping market pulp internally from Wallula to International Falls.

In Packaging, we recorded higher fiber costs. A full year operations of Tharco and Hexacomb increased our purchased rollstock cost $17 million and we experienced $3 million of increased fiber costs at our mill at DeRidder.

Finally, I'll wrap up with maintenance outage costs. During fourth quarter 2012, we completed our scheduled annual maintenance outage at our Jackson mill. Our overall outage costs for fourth quarter 2012 were $5 million, bringing our total maintenance outage cost for the year to $26 million, down from $31 million in 2011.

Our planned annual outage in Packaging at DeRidder during first quarter 2013 is scheduled to be a cold outage. Cold outages there occur every 5 years and are more extensive and costly than normal annual maintenance outages. We expect outage costs of approximately $23 million at DeRidder for 2013 with $20 million expected in first quarter. This compares to $2 million in first quarter and $11 million for full year 2012. We expect to incur about $17 million of annual maintenance costs in 2013 in Paper.

Now let me turn the call back over to Alexander for some concluding remarks.

Alexander Toeldte

Thank you, Sam. Looking ahead to 2013, we will continue to manage costs aggressively. As for key input costs, we expect somewhat higher fiber cost, higher energy cost due to higher electricity rates and slightly higher natural gas prices, and we expect relatively stable chemical prices for the year.

We expect capital investments to be between $152 million and $162 million excluding acquisitions and major capital expansions. This level of capital investment represents an increase from prior years. The increase relates to cost reduction and capability improvement projects in our corrugated operations.

In 2012, these types of projects resulted in approximately $30 million of CapEx and should account for approximately $32 million in 2013. While these investments target greater efficiency and continuing the nice growth we've seen in our converting businesses, we see them also as complementary to any conversion options at DeRidder. Our overall capital spending targets also include $7 million for compliance with the new boiler MACT regulations in 2013.

Looking at the Paper business, we will also continue to match paper production to demand for our products. This includes further evaluation of the optimal configuration of our white paper assets.

Finally, we congratulate OfficeMax and Office Depot on their announced merger. As you know, we've had a long-standing relationship with OfficeMax that began when we were part of the same company. We also sell recycled papers to Office Depot, and we value these relationships and strive to earn their business every day through excellent supply chain performance and outstanding customer service.

Our Paper business has been recognized by OfficeMax for its outstanding performance as a supplier last year, as it has been during the 3 preceding years. While our relationship with OfficeMax extends far beyond the contractual terms, we do have a formal purchase agreement with OfficeMax that was renegotiated in 2011. The terms of that agreement commit OfficeMax to buy and commit us to supply at least 80% of OfficeMax's requirements for office papers through December 2017. And in 2012, OfficeMax purchased more than these requirements from us.

While there are circumstances that could cause the agreement to terminate before 2017, the agreement survives the announced merger for the OfficeMax business we currently enjoy. We look forward to the opportunity to serve the combined company with the same level of service and quality products we've provided in the past.

Thank you for listening. We appreciate your interest in Boise and will now open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Alex Ovshey from Goldman Sachs.

Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division

On the uncoated freesheets side, can you talk about what the main drivers as you see them have been of the price compression throughout the year? Because if you just look at where utilization rates are for the industry, they actually look okay, in the low 90s. So I just want to hear your perspective on what you think is driving the price compression. And then, as you think about uncoated freesheet pricing to start 2013, are you expecting to see further price compression in the first quarter of '13 based on what you've seen through the fourth quarter of last year?

Alexander Toeldte

Well, the -- as I said, the -- if you look at our price compression that we experienced, part of it is market price. That's the $15 that I indicated that's just headline price declining, and the other part is product mix, again, as I indicated. I think what we're seeing here is the continued effect of secular decline, and while we've had some capacity withdrawals during the year, we also had one operation, Grays Harbor, come back into the market, negating some of the withdrawals. And that clearly has softened the supply-demand balance somewhat for the market. We also see some imports. Interestingly, the largest rise in import has been from Australia. China, which is often mentioned, has only increased by about 7,000 tons. So China is not the driver. Indonesia, may be more, adding I think around 20,000 tons of imports. And when you look at the import parity which sets, certainly in our mind, a certain ceiling on the price, we're quite competitive against Europeans and South Americans, but the Asians have had some pricing advantage on that front throughout the year. And then turning to the -- your Q1 question, we see some continued pricing pressure, but it should be a lot less than last year.

Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division

And to add just a couple of quick questions, you mentioned that you took, I believe, 16,000 tons of market-related downtime in uncoated freesheet in the fourth quarter?

Alexander Toeldte

Yes. You're right.

Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division

Would you able to give us a sense of the financial impact that, that had in the quarter? And then to start the year, are you continuing to take the downtime in the system?

Samuel K. Cotterell

So, I mean, if you -- we don't disclose our margins on our paper. I mean, just take that times overall price of somewhere just under $1,000 per ton that would give you just an order of magnitude of the revenue side of it. And then as we look ahead to fourth quarter -- or excuse me, to the first quarter, as we said, we'll, as necessary, take the necessary actions to balance our own production with what we do, but we're not going to forecast pricing looking ahead.

Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division

Understood, Sam. And then just one last question, you announced incremental new converting capacity that'll be coming online on the packaging side. Can you give us a sense of how many more tons you'll now be able to cut up with that new capacity that -- coming online in the third quarter? And then an update on the timing of the potential conversion of the idle newsprint machine at DeRidder. I mean, what else are you waiting to see in the marketplace before you make the final decision on whether you go ahead with the conversion of that idle newsprint machine?

Samuel K. Cotterell

The newsprint machine adds about 180,000 msf of capacity -- or excuse me, the corrugator adds CTC at about 180,000 of capacity. Now that's not all incremental capacity because we'll replace our current 2 machines, but it does increase our throughput and the speed that we'll get off of that machine.

Alexander Toeldte

So we get some incremental corrugating capacity exactly as you point out. The capacity is not as important to us as is the capability, the enhanced customer service capability and greater efficiency including lower cost. As you remember, we have the unfortunate effect of this is -- for some of our employees is that we have about 30 people that will lose their employment in the process here in lower labor costs. As pertaining to the question about the conversion, we see the conditions for the conversion continuously improving, including our own growth through acquisitions and our own organic growth. So the picture continues to improve for a D2 conversion.

Operator

Your next question comes from the line of Mark Connelly from CLSA.

Mark W. Connelly - Credit Agricole Securities (USA) Inc., Research Division

Just 2 questions, Alexander. You talked about short-term pressure from fiber and energy costs. Are you seeing anything that suggests that, that pressure will get better from saw mill restarts in any of your key locations? And then secondly, can you give us an update on where stand in integration levels, actual integration rather than your theoretical with the -- as you shift tonnage over?

Alexander Toeldte

The -- so first of all, good morning. In terms of -- yes, I mean the fiber picture will be regionally different. So there is a different picture by basket. We would expect that the residual fiber situation gets better as we -- as the building economy improves, particularly in the Pacific Northwest. We've seen some gradual price easing on the fiber costs there. That doesn't change the fundamentally high level, but the question is really as you look at this, which we are not totally certain yet, is as the industry -- the saw mill industry has restructured and the more productive larger-scale mills, sawmills, have survived, I think the overall quotient of residual fiber has gone down, so we expect some easing, but it's not going to be the same -- to the same level as we've seen in the early 2000's.

Samuel K. Cotterell

Mark, I would also add that Alexander has spoken primarily to what we see in the Pacific Northwest. In our other wood baskets, in DeRidder, Jackson and International Falls, we really don't buy much residual chips and would see quite the contrary as particularly OSB mills come on and other demands for fiber, biomass and pellet mills and things of that nature, we actually expect to see some pressure on pricing in those wood baskets.

Alexander Toeldte

The other question you asked, Mark, was about integration. We're up now to 84%. We've got about 6% to go to full potential.

Operator

Your next question comes from the line of Phil Gresh from JPMorgan.

Phil M. Gresh - JP Morgan Chase & Co, Research Division

First question, just wanted to follow up on the paper pricing side, the mixed element that you called out, $12 million. Could you just elaborate on what that mix issue is? Is it something that you saw as one time or kind of continuing? Or something that perhaps even could reverse? And then secondarily, on the pricing side, the Premium and Specialty was down as well quarter-over-quarter, so I was wondering if you could talk about what's driving that. Is there an underlying element, label and release versus the other kind of areas of Premium and Specialty?

Alexander Toeldte

Well, first of all, on the mix side, there is definitely some element of temporary effect on it. The -- as we closed St. Helens, our rate of sales slowed down there, and that just gives some timing effect that definitely will work themselves out because we're trying to sell at a responsible rate and not trying to do a fire sale. We also saw our customers have a higher share of tax-supported bids where we made the choice to support them although that translates into lower pricing and profitability. That typically is a temporal phenomenon and is -- was just particularly pronounced throughout the -- particularly the fourth quarter. So I don't want to tell you that all of that mix effect will work itself out immediately in Q1, but most of that should be temporal phenomena. So that's the answer on the mix. And then you asked something else and I forgot it.

Phil M. Gresh - JP Morgan Chase & Co, Research Division

Yes, it was the underlying elements of the Premium and Specialty side in terms of label and release versus the other grades within that?

Alexander Toeldte

Yes, there again, we had -- that again is a short-term mix effect. That's not an actual change in overall headline price, but there, too, we just had a very clearly identifiable and confined mix effect that's definitely contained to that quarter.

Phil M. Gresh - JP Morgan Chase & Co, Research Division

Okay. Second question is, you talked about the Office Depot-OfficeMax merger, and you've given some of the contract information to us in prior filings. If I were to kind of summarize how that works, would it be fair to say that the only way between now and 2017 that, that contract would really terminate is if OfficeMax sought a bid that you wouldn't be willing to match?

Alexander Toeldte

OfficeMax can seek bids for certain shares of the business. And if that then is -- goes to the point where we say we can't match it, then the contract adds a wind-down phase. So it's certainly not something that under a normal course of business can kind of blow up in a single step.

Phil M. Gresh - JP Morgan Chase & Co, Research Division

Okay. Is that the only way that it could enter a termination and a phase down then? Or are there other things that perhaps weren't in that filing that we wouldn't know about?

Alexander Toeldte

Well, look, I can't talk too much about the undisclosed part of the contract, but basically, the company would have to hit the walls for that to happen. The only commercial way to do that is the way I've described to you.

Phil M. Gresh - JP Morgan Chase & Co, Research Division

Okay. Excellent. That's helpful. In terms of the cost savings projects, just 2 questions there. One is, would you consider those to be kind of discrete projects, that $32 million in spend, and would that end in 2013? And then, how should we think about the returns on those projects?

Alexander Toeldte

Well, the -- no, the projects will continue into 2014. What we're trying to do is we have very strong regional market positions. There is some degree where customer demands are evolving and we see them evolving beyond our current capability. So we want to both grow with our customers, but also continue to be able to serve them. And secondly, because we have assets that are highly efficient but are getting a bit older, what we need to do is do some investment to retain a low-cost position in those markets. So we expect to -- some of that to carry over in 2014. Now the returns are roughly aiming at about 2x cost of capital on -- in aggregate and we're feeling quite confident that those are good cash flow and profit-generating investments for the future.

Phil M. Gresh - JP Morgan Chase & Co, Research Division

And if I were to separate that return between cost versus revenue, is it -- how much would you say is cost driven?

Alexander Toeldte

The -- it is -- there's a significant part of it is cost driven. Actually, the large part of it is cost driven. To some degree, it is also margin improvement as it allows us to deliver product features to the customers that we currently can't deliver and therefore can't charge for. So it's a fairly healthy balance of cost reductions. I wanted to add one point just on your question on OfficeMax, if I may. One important piece to remember when you think about the OfficeMax and Office Depot merger, those are distribution businesses. Distribution businesses are a supply chain game. We're very good at supply chain, and 80% of what we sell to OfficeMax goes through their wholesale business-to-business channel, which we, in fact, expect to be strengthened from the combination and therefore, the exposure to potential retail consolidation is not of a great concern to us.

Phil M. Gresh - JP Morgan Chase & Co, Research Division

Understood. Sam, just one question for you. Pension contribution and expense for '13?

Samuel K. Cotterell

Sure. As I mentioned, we contributed $35 million this last year. That was very much in excess of the required contributions, very negligible required contributions. We feel it's important to essentially pay down that debt with that $35-million contribution and change in discount rates. We've improved our funding levels from about 70% last year to about 80% this year. As we look forward on contributions, we'll take into account requirements, which again will be very minimal in 2013. We'll also take a look where we stand at our funding levels. We want to maintain a robust funded level, but there's some disadvantages of getting too high. So I would expect to spend less this year than we did last year. But we're going to monitor where the year goes to make a final determination as we go throughout the year on pension funding. In terms of expense, we were at about $11 million of expense last year. We expect to be less than that this year.

Operator

Your next question comes from the line of Joe Stivaletti from Goldman Sachs.

Joseph Stivaletti - Goldman Sachs Group Inc., Research Division

I wondered if you could talk a little bit about your outlook on the pricing side on the Packaging business. I know you're saying that you had some margin compression. I assume that with this flow through of the September increase, you should be in good shape. I also wondered what your thoughts were on this -- the outlook for pricing as we move through the year with some increases having been announced out there. If you think the market is well situated for that?

Alexander Toeldte

So let me give you a little bit of perspective on the market. There's been some talk about the increase in inventories in the industry. We see that as a necessary refilling of the supply chain. We, ourselves have to build inventory because of the cold outage. So we're part of a significant contribution to the inventory build. The industry seems to be in good shape. Having said that, earnings calls are not the place to make any announcement about price. So let me leave it at that.

Joseph Stivaletti - Goldman Sachs Group Inc., Research Division

So can you talk, though, about -- so the margin compression you talked about in your earnings release and sort of how things will look as this September increase is flowing through your numbers? How you'll be sort of situated on a year-over-year basis now in the first part of the year when you consider, also, cost changes and whatnot?

Alexander Toeldte

Well, we -- as I told you in the earlier part, we are at the run rate at the end January of 90% on the $50 price increase, then you can fold that through to the bottom line. We expect a full realization of the increase as we walk through the year. Some -- the last little bit will take a bit longer because we have contracts that have relatively few openers during the year or just one annual opener. So that last tail will take a little bit to fold through, but it will fold through. And we will see the moderate price pressure on fiber costs in the Packaging business. We will see some of the energy cost price pressure there, and we'll work to aggressively manage those out or at least contain them. So we're not -- we don't typically give guidance, but that gives you a sense of where the year is going.

Operator

[Operator Instructions] And your next question comes from the line of Fritz von Carp from Sage Asset Management.

Fritz Von Carp

Couple of questions on the white paper side. First off, across -- outside of your industry, across the economy, there was a great deal of inventory destocking ahead of year-end and the issues going on in Washington D.C. How much of the weakness in white paper -- I mean, uncoated freesheet volume was destocking, do you think?

Alexander Toeldte

First of all, good morning, Fritz. The -- we certainly saw a distinct slow down at the very end of the year, basically the last 3 weeks of December, that was more pronounced than other years. And our interpretation was that aside from some after effects of Sandy, that was really that people were uncertain about the fiscal cliff and just were exceedingly cautious on any further product purchases into inventory. So some of that clearly was the case. How exactly that played out in -- with sharp numbers is very difficult to estimate. As we're looking forward -- if you look at the uncertainty, our share of sales to the federal government is actually de minimus. What is not clear to us is to what extent any slowdown of spending by federal agencies, which reportedly has already begun, will fold itself through to general business activity. And that's something that will certainly -- has a potential to be a bigger impact than the de minimus amount that we're selling to the federal government or to other governments directly.

Fritz Von Carp

You and everybody else, I guess. Also on white paper, with the OMX merger, sometimes merged companies tend to consolidate their supply chain between them. It sounds like you're pretty deeply embedded in the one company. Is it possible that you might pick up some more volume from the combined entity?

Alexander Toeldte

Yes, look, I think we -- because of our outstanding supply chain performance, the combination of the 2 companies is as much of an opportunity as it is a risk. That's absolutely possible. It's the supply chain that, that performance that we're bringing to bear is, I think, industry-leading. It is also the fact that it is very difficult to figure out, given how the industry capacity balances out, how one or another player, us or someone else, would displace in terms of absolute volume the other participants. So I do think that the outlook is actually quite good for us there.

Fritz Von Carp

And then just -- as I remember, when you re-signed that contract just a little while -- few months ago or a year ago or something, are you -- do you give them concessionary pricing in return for the stability that you -- or whatever of having the long-term relationship in -- I guess I'm wondering what -- and then there's also the sort of what you've mentioned generally, your being embedded in the supply chain. What would be the costs to the entity to the customer of trying to switch to, let's say, some market-priced paper from a different mill that was not both. So what would the cost be then, both in terms of the concessionary pricing they'd have to abandon that you're giving them and then sort of the logistics costs?

Alexander Toeldte

Well, the -- first of all, we don't disclose pricing, but as we've always said, it is anchored in some public market index. What -- clearly, the economics need to work on both sides, and they do. One of the key metrics that where OfficeMax gets a great advantage is in turns of inventories. Their inventory turns on paper are extremely high and industry-leading. That reduces the capital commitment they have, and it gets paired with outstanding product availability and delivery performance. So when you think about what's important to somebody who runs a distribution business, that translates directly into economics. Between the 2 of us, we've estimated those economics and they're significant, but they're not subject of public record.

Operator

Your next question comes from the line of Alex Ovshey from Goldman Sachs.

Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division

Just a couple of follow-ups. On the commentary on margin compression in the converting business, specifically in California and Texas, I believe some of that was related to just execution. I think you talked about that in previous conference calls. If I'm correct on that, I mean, where are we in terms of fixing those execution issues at this point?

Alexander Toeldte

Look, the main aspect of it has been price. In terms of execution, we're doing well and we continue to improve. That's kind of witnessed by the fact that in terms of our cost synergies of the acquisitions of Tharco, which basically constitutes our California business, and Hexacomb. We're well ahead of all the targets we set. So really, at this point, the remnant level on this issue is market price level in those regions.

Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division

Okay, that's helpful. And just a question on capital allocation. It looks like '13 will be a heavier, organic investment year for you and, potentially, even a more significant one if you do move ahead with the conversion of the idle newsprint machine. So in that context, should we continue to expect that we see a potential special dividend come at the end of the year if 2013 does turn out to be a more significant capital investment year? Would you be willing to stretch the balance sheet a little bit further relative to where we are in order to maintain that track record of special dividends that you have now established?

Alexander Toeldte

Well, Alex, it's early in the year. The -- we have just come out of the year where we've paid a very significant dividend amount. The -- our record of creating value for shareholders and returning capital to shareholders is something we think a lot and carefully about. And as I -- as we've said previously, when our immediate past record and our forward outlook justify it, we will seriously consider returning capitals to shareholders through either dividend or other means. So it certainly will be something that we'll be carefully thinking about. But we're less than 3 months away, by my counting, from the last dividend, so give us a bit of runway here.

Operator

That concludes the Q&A session today. I will turn the call back over to the speakers.

Alexander Toeldte

Well, if there are no more questions, I want to thank you, all, for your interest today and your questions and look forward to seeing you on our next call for the first quarter report. Thank you very much.

Operator

This concludes today's conference call. You may now disconnect.

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