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Executives

John D Stakel - Vice President, Treasurer

Steven C. Voorhees - Executive Vice President, Chief Financial Officer and Chief Administrative Officer

James A. Rubright - Chairman and Chief Executive Officer

Analysts

Claudia Shank Hueston - JPMorgan

Christopher Chun - Deutsche Bank

Joshua Zaret - Longbow Research

Chip Dillon - Credit Suisse

Rock-Tenn Co. (RKT) Q2 2009 Earnings Call April 28, 2009 9:00 AM ET

Operator

Good morning. My name is Trey and I will be your conference operator today. At this time, I would like to welcome everyone to the Rock-Tenn's Second Quarter 2009 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions). As a reminder ladies and gentlemen, this call is being recorded today, April 28, 2009. (Operator Instructions). Thank you.

Your speakers for today's call are Mr. John Stakel, Vice President, Treasurer, Mr. Steven Voorhees, Chief Financial Officer, and Mr. James A. Rubright, Chairman and Chief Executive Officer. Mr. Stakel, you may begin your conference.

John D Stakel

Thank you, Trey and welcome to Rock-Tenn's fiscal 2009 second quarter earnings conference call. I'm John Stakel, Vice President, Treasurer of Rock-Tenn. Joining me are Jim Rubright, CEO, and Steve Voorhees, CFO.

During the course of the conference call, we may make statements that are not historical in nature and may involve forward-looking statements within the meaning of Federal Securities Laws.

For example, statements regarding our planned expectations, estimates, and beliefs related to future events, or forward-looking statements, which may involve a number of risks and uncertainties, many of which are beyond our control and that could cause actual results to differ materially from those discussed.

Additional information regarding these risks and uncertainties is contained in the filings that we made with the Securities and Exchange Commission. These filings include the companies include the company's Form 10-K for the fiscal year-ended September 30, 2008 and the Form 10-Q filed for the quarter-ended December 31, 2008.

During the call, we will be referring to non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are contained in the second quarter press release, which is available on Rock-Tenn's website at rocktenn.com.

With that out of the way I will turn the call over to Steve

Steven C. Voorhees

Thanks John. Rock-Tenn reported net income of 37.4 million or $0.97 per share, as compared to 17.1 million or $0.45 per share in the March quarter of last year.

Rock-Tenn incurred 3.2 million of pre-tax restructuring costs, including 0.8 million of integration expenses related to the Southern Container acquisition. 0.9 million primarily related to the closer of RTS Packaging plant located in Litchfield, Illinois. And the final quarter of acquisition related deferred compensation our ESU expenses of 1.4 million.

These restructuring expenses reduced by 0.3 million or the 35% minority interest in the RTS Packaging joint-venture, net to 2.9 million or $0.05 per share after-tax.

After those $0.05 adjustment, Rock-Tenn recorded $1.02 an adjusted EPS, a $0.36 improvement over the $0.66 in adjusted EPS reported last year.

Rock-Tenn reported sales of 676 million in the March quarter, a decrease of 10 million from the March quarter of last year. Corrugated Packaging sales increased 65 million over last year, a direct result of owing Southern Container for three months this year as compared to only one month last year.

Overall selling prices increased 2 to 3% on average over the last year in all of our businesses, except the Recycled Fiber business where prices declined by 47%.

Overall volumes declined by about 10% on average roughly 5 to 6% in our Consumer Packaging business and in the 12 to 15% range for the other businesses.

On a sequential quarterly basis, Rock-Tenn's sales declined by 27 million, down 4% versus the December quarter. Corrugated Packaging sales declined by the same 27 million, a 13% reduction from the December quarter, primarily due to the 33,000 ton decline in containerboard mill production to match reduced customer demands.

And the Consumer Packaging segment, folding carton volumes were flat and coated recycled board volumes increased 3% versus the December quarter.

The 6 million, a 1.6% decline in Consumer Packaging segment sales was primarily due to lower sales volume of rich paperboard and lower pricing of market pulp.

Merchandising Displays sales increased by 8 million as compared to the December quarter. For specialty paperboard products, a 5 million reduction in sales was due to a decline in sales prices in the Recycled Fiber business.

Recycled Fiber pricing declined significantly during the quarter. For Chicago and back for SEC (ph) was $30 per ton on average in the quarter, down $18 per ton from the December quarter, and $83 per ton from the March quarter of last year.

The closing price of the NYMEX natural gas contract averaged $4.94 per MMbtu during the quarter. This is down $2 from the December quarter and about $3 from the March quarter of last year. The April contract closed at $3.53 and the May contract recently at $3.25 closes later today.

July to October is the time of the year when gas prices can increase due to hurricanes and our extreme hot weather. We've got 20% of our July to October gas needs prices slightly over $4 per MMbtu. Without speculating on future gas prices, what we do when we see attractive pricing at to reduce our full exposure to weather driven winter and hurricane driven fall price spikes as we've done this year.

Rock-Tenn segment income of 96.7 million for the March quarter increased sequentially 6.7 million from the December quarter. Improvements in operating efficiency and lower pricing for fiber and energy is more than offset lower volumes, which particularly affected our Corrugated Packaging segment, or segment income declined by 9 million or 18%.

Rock-Tenn segment income for March increased by 39 million over the March quarter of last year, primarily due to the Southern Container acquisition for which we included only one month of operating results last year.

The Southern Container acquisition added approximately $0.29 per share to earnings for the quarter, and $1.23 per share to earnings for the 13 months, since we closed the transaction in March of 2008.

At the time of the acquisition, we anticipated $10 million in annual synergies and subsequently raised that number to 15 million. We achieved an annual synergy run rate of 16 million during the March quarter. We had spent 10 million since the acquisition to integrate Southern Container and also achieve these annual synergies.

The integration of Southern Container is substantially complete. We do not anticipate additional acquisition, integration expenses in future quarters.

Non-allocated expenses were 8.9 million in the quarter, slightly higher than normal due to certain compensation related accruals. We expect non-allocated expenses to run at about $8 million per quarter.

Rock-Tenn reduced working capital as defined by account receivable plus inventory plus accounts payable by 21 million in the quarter. For the year, working capital was about 12.

Capital expenditures for the quarter were 17 million below depreciation and amortization of 37.3 million. We expect approximately 80 million of capital expenditures for fiscal year 2009 below our current annual of depreciation and amortization expense run rate of approximately 150 million.

For the three months ending March 2009, Credit Agreement EBITDA was 124 million. For the 12 months ending March 2009, Credit Agreement EBITDA was 469 million, equating to an EBITDA margin of 18% in the quarter and 16% for the year. This strong operating performance combined with capital expenditures about $70 million loss per year when depreciation creates very strong free cash flow that we have used to pay down debt.

Rock-Tenn reduced net debt during the quarter by 93 million. We have reduced net debt by 276 million for the 12 months since March 2008, when we acquired Southern Container.

Rock-Tenn's debt-to-EBITDA leverage ratio has declined from 12.2 times, at the time we closed the Southern Container acquisition to 3.25 times at March 31, 2009.

The current portion of long-term debt at the end of March was 183 million. The 183 million includes 124 million from the receivables securitization facility that extents through September 1 of this year and 59 million that is primarily amortization of the term loans under our senior credit facility.

We expect to renew our receivable securitization facility during the June quarter. We expect the new facility to precise in the 140 to $150 million range. Of the 1.5 billion in debt as of March 31, fixed interest rates declined 1.1 billion or 71% of the total, consistent with our fixed rate target of 70%.

Floating interest rates to approximately 400 million or 29% of the total. Of the 400 million in floating rate debt about 200 million as a LIBOR's lower of 3%. At the end of the quarter, we had borrowed 57 million under our 450 million revolving credit facility.

Rock-Tenn had approximately 370 million in availability under our credit facilities as of the end of March. We continue to have very good liquidity for our business.

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

James A. Rubright

Thank you, Steve. As Steve described, our employees continue to deliver outstanding results in a very challenging environment. The principle challenge we faced of course was volume declines across our businesses. And I'll speak more about that subsequently in the call.

And the second was pricing pressure, particularly in containerboard or in Corrugated Packaging. And we saw that pricing pressure both were independence and several integrated containerboard producers.

Pricing for coated recycled paperboard was better than corrugated as industry operating rate stayed in the mid 90s for the quarter, reporting the published industry data. And although pricing is down somewhat from its peek, during the quarter we renewed a number of long-term contracts with folding carton customers that had embedded paperboard price increases in them over the levels of the contracts established three and four years ago.

These paperboard industry volumes were reported averaging below 80%, 77.5% actually year-to-date. But market pricing stayed firm. And high input cost for fiber and caustic soda continued through most of the quarter.

The strategy across our businesses has been the match production to customer demand. And we actually have executed our strategy. We've reduced containerboard operating rates to 80% during the quarter and coated recycled paperboard operating rates to about 90%.

Our bleached paperboard mill did run full during the quarter, but as we stated in the past, because of our ability to internalize production, because of our very large short position in bleached paperboard, and we can maintain full operating rates at our bleached paperboard mill as we did during the quarter.

The 7000 ton decline in bleached paperboard ton shift was caused by a drawdown in inventory during the earlier period, which we expect related to customers anticipating January contractual price increases. And then we saw a corresponding inventory build during the current March quarter.

Realized pricing for all grades for us with the exception of bleached paperboard declined over the quarter.

Based on recent published index prices, and our contractual deferrals of price increase and decrease implementation, we expect to see some continued reduced realized prices for our recycled grades over the next quarter.

As many of you may have seen, we received our certification to receive the tax credit available until the end of the year for burning black liquor. Since we produced primarily recycled grades, this windfall is proportionately less for us and for many of our integrated competitors.

However, we would expect our biofuel tax credits to total about 75 million through the end of the calendar year from our 400,000 ton bleached board mill in Demopolis, Alabama.

There are number of positive factors however that will influence the balance of our year. First, we saw an increase in box plant volumes in March over the January, February period. And April month to-date box plant were up about % over the rate of February, March.

Now two months of data is only that. But if that data continues or improves, we will clearly look back and see the end of February and early March as the market bottomed that we're moving up from. Fully carton coated recycled paperboard and bleached paperboard demand appeared to be continuing about flat, but they never declined as much as corrugated box volumes.

Folding carton industry volumes according to published data being of about 5% year-to-date.

I should note that we will take our major maintenance outage in our bleached board mill this quarter, mill went down in early April and it is now back-up in a full production. And this outage will reduce our quarter's earnings compared to the annual run rate.

As we have mentioned, we have moved from a 12 month to an 18 month major outage schedule, and we did that successfully this quarter. As a result, every third year there will be not be a major maintenance outing in next year fiscal 2010 is that year.

Another favorable factor influencing us is continuing reduction or new alteration in the high cost over the last few years. Recycled Fiber and natural gas cost continued to be low compared to last year, Steve gave you the data. But significantly for us recently virgin fiber and caustic soda prices have begun to ease as well.

Our full review, we're seeing continuing low input costs, would possibly have modest increase in Recycled Fiber costs later in the year. And we also see stable to increasing demand and with respect to containerboard and possibly recycled paperboards and further modest price erosion. And then continuing strong pricing for bleached paperboard.

I'd like to continue with some specific comments regarding our business unit before concluding. Our Southern Container acquisition continues to outperform our expectations in our commitment.

$0.29 per share accretion in the quarter alone and the $1.18 of accretion for the first full year after the acquisition, which incidentally is about twice the size of the accretion from the Gulf States acquisition in 2005. Within the Southern Container acquisition was about twice the size of the Gulf States acquisition.

The 276 million in debt reduction over the last four quarters plus the 15 million in dividends, which represents about $7.60 of free cash flow generation per share in a 12 month period, substantially exceeded our most aggressive acquisition cases.

In the corrugated segments EBITDA of 30% of sales in the quarter is much higher than the 26% EBITDA for Southern Container alone prior to the acquisition.

Part of the reason for this improvement is the 16 million in synergies we've achieved, compared to the 10 million initial commitment. We made when we announced the transaction.

But the greatest part is the very low cost positions of the Solvay mill and the great job our employees have done to control production costs, running the substantially reduced volume.

In addition, our box plants have also done well, they remained profitable in this reduced volume environment. And our rapid corrugated plants actually increased operating income 98% over the 2008 quarter, as we continue to prove out the value, this new low cost, very high quality graphics printing technology we've brought to the marketplace.

Our core folding carton business performed very well, with first half sales down only 3.6% compared to industry average declines of 4.8%. Segment return on sales was 4.5%, and although slightly below our 5% target, it's still very strong given the volume environment in the marketplace.

And also significantly, we renewed a very substantial part of our term contract business in the first half of this year. And we had a net gain of customer mandates that will continue our trend to modest but sustained share growth.

Despite sales volumes of $83 million in the quarter, we're down compared to the blow out quarter we had last year. But the annualized sales base of 330 million is not troubling in relation to the full year 2008 sales of 350 million, given what we expected and logically make sense that there would have been relatively few product launches in the March quarter. And the extent to which this business depends upon and profits very well from new product introductions in its best quarters.

So displays, our best view for the balance of the year, sales will increase to at least the pace of 2008 based on the activity level we see right now.

Segment income of 9.7 million is pretty much on a seasonally adjusted pace of last year's total 42 million and return on sales of 12% is also consistent with our expectations for this business.

Our specialty paperboard group also performed well in the quarter, generating segment income of 6.2 million and EBITDA of 8.2 million on sales of 70 million.

Segment income was down 5% and sales were down 30%, and yet we maintain those margins. Published pricing for specialty paperboard is now down $60 per ton from its December 2008 quarter peak, although Recycled Fiber input cost continue to be off more than that.

In January and February, we saw major declines in beverage glass production which affected our specialty paperboard volumes, but we've been advised to expect those volume declines by our customers who took a number of major outages. What we've seen in the last six weeks, volumes have returned to much more normal levels. And we expect that to continue for the balance of the year.

That's overall, we see volume trends in our businesses at or either stable or improving. As in Corrugated Packaging and Displays, and a continuation of the favorable cost environment particularly for Recycled Fiber or natural gas and caustic soda, all major input costs.

As I mentioned virgin fiber prices also finally moves in our favor in recent weeks. And we think that should improve the results at our bleached board mill as should probably likely increases in pulp pricing which we think are coming off that market bottom.

So, accordingly if current market conditions continue, and we would expect to continue to generate strong cash flows, well in excess of our Southern Container acquisition related commitment of $200 million per year.

With the conclusion of those prepared comments, operator, Steve and I'll respond to questions.

Question-and-Answer Session

Operator

Thank you. At this time, we're ready to begin the question-and-answer session. (Operator Instructions). The first questions does come from Claudia Hueston of JPMorgan, your line is open.

Claudia Hueston - JPMorgan

Hi, thanks very much. Good morning.

Steven Voorhees

Good morning.

Claudia Hueston - JPMorgan

I was hoping you could put just a little bit more color around the trends you're seeing in corrugated, and the pickup that you noted in March and April, are there any particular pockets of strength or weakness in anyway to maybe, what gives you confidence I guess it's more than just a little bit of a seasonal pickup?

Steven Voorhees

Well, Claudia what was your GDP down in the quarter?

Claudia Hueston - JPMorgan

Yeah.

Steven Voorhees

Exactly. So, if corrugated box volumes are down three times GDP in -- from mid-November to mid-March, I don't think that's sustainable. So the pickup we've seen has been across our customer base, it's not one particular sector or segment of the industry.

And so it's fairly broad based and an 8% increase relative to say six week or even two to three months period of volume is a significant difference, it feels different. And so that's why I think that we're very likely had come off of the bottom. A, I think the bottom was unsustainably low and I think I've been pretty consistent expressing that view relative to underlying changes in GDP and unemployment.

So that's the first reason and then the second is like I said six weeks is not a season, but six weeks is not an insignificant period of time.

Claudia Hueston - JPMorgan

Yeah. And as you talk to customers both in corrugated and cost to other businesses, do you feel that confidence has improved or there visibility is starting to improve. I remember last quarter, you couldn't really give much color on displays but it sounds like you've got a better sense now?

Steven Voorhees

Yes, I do feel more confident about the marketplace from -- it's more customer activity though and what we see in terms of backlog then it would necessarily be there views of the marketplace going forward.

Claudia Hueston - JPMorgan

And then just on the folding carton side, it seems like you obviously have been gaining your volumes are better than the industry. Do you think that's more a fraction of share gains or is it your customer base there that's driving that?

Steven Voorhees

Well, several of our large customers are themselves gaining share in the marketplace. And so picking the right customer is really nice thing we've done. But we continue to pick off pieces of business that we -- that fit us very well. And so we definitely are not loosing share and we're gaining share in very specifically targeted places where our cost structure simply fits the product and enable us to meet our return expectations.

Claudia Hueston - JPMorgan

Okay. And then just finally your debts obviously coming down very fast and are there really good cash flow quarter, is debt reductions still your sort of main priority or how are you thinking about cash going forward?

Steven Voorhees

Yes. We think that for the next 12 months, we're very focused on debt reduction. There are -- there will be opportunities in the marketplace. But, right now we think that we'd like to continue to move our debt back into our target range of below three times debt to EBITDA. And that is our initial focus.

Claudia Hueston - JPMorgan

Okay. And then just finally, I don't know if you have any comment on how you'll do the accounting act for the alternative fuel credit, I don't know if given out any comment that you might be able to share.

James A. Rubright

Well, we have given a lot of thoughts and we think that it will not come into the tax line. It actually it'll be shown as an operating revenue because it's an excise tax rebate.

Claudia Hueston - JPMorgan

Okay. Thanks very much.

Operator

Christopher Chun of Deutsche Bank. Your line is open.

Christopher Chun - Deutsche Bank

Yeah, thanks. Good morning, guys.

James A. Rubright

Good morning. How are you Christopher?

Christopher Chun - Deutsche Bank

Good. Thanks. Just wanted to ask a couple of questions about pricing?

James A. Rubright

Yeah.

Christopher Chun - Deutsche Bank

First on the board side, you mentioned that this quarter is probably going to see lower prices at least on the recycle side. And I was wondering if you could tell us on average, where prices are today relative to last quarter's average?

James A. Rubright

Well, let me -- you've got the date on the published index pricing.

Christopher Chun - Deutsche Bank

Sure.

James A. Rubright

Good, for example; the biggest differential is in specialty paperboard, which is down about $60 a ton. And it ranges to 45 for certain grades to zero to bleach board. The reason I've said we'll see lower pricing is not because I expect the index themselves become down, because I'm really not commenting on the direction of the index. Rather there is a price lag or time lag between the point of time that an index publishes and when we see the pricing.

So that lag has a normal distribution I guess that will stretch out for several quarters, and maybe as much as a fiscal year based on contractual adjustments. And we've just passed through a calendar year, which is often significant for purposes of contract either that had mid-year or calendar year adjustments. So, that's really why as to we'll see some reduced realized pricing not market price changes.

Christopher Chun - Deutsche Bank

Right. Can you talk about how long that might is on average? And if we wanted to get a sense of, let's say where drop kind of realizations in April are. I mean, how much further back should we go in looking at the index prices, and say, trying to get a sense of that?

James A. Rubright

Yeah, I don't have that data that I can tell you. I can't give you a specific answer, but it's not that much. The tail is long because of some of the contractual provisions but, particularly, in containable, you realize that immediately. So we take container board and bleach board half of our production put in the spot terms that are at market today.

So, you're going to end up with something like 60 to 65% of your volume as the Egyptian venture will pass through pricing that is going to be pretty immediate. And then a reminder has a tail that I think it can run out as much as 12 months.

Christopher Chun - Deutsche Bank

Yeah, okay. And then how about on the converted product side. Do you expect there to be a lag there between the prices for those products relative the paper prices?

James A. Rubright

Yes, I was really speaking of it on an integrated basis Chris. I was saying, if you look at all of our turns, whether we sell them externally or whether sell them through as converted product that data I was giving you, looked that the entire integrated sales of both paperboard and converted products.

Christopher Chun - Deutsche Bank

Yeah, okay. And then you mentioned, an average at the mark plus.

James A. Rubright

Yes.

Christopher Chun - Deutsche Bank

Can you quantify the likely impact of that on this quarter?

James A. Rubright

Yeah, I think it's going to be more than $0.05 per share subroutine.

Christopher Chun - Deutsche Bank

Okay. And then I think you talked a little bit about this already. But can you talk about, did quarter-over-quarter decline and the tons are out of ... this quarter? Was that just strictly a market downtime or was it, was there other issues is going on?

James A. Rubright

No, we made a decision that we are not going to be the one taking the market down. And so we ran the contractual demand.

Christopher Chun - Deutsche Bank

Okay, very good. I'll go ahead, and turn it over.

Operator

(Operator Instructions). Our next question does come from Joshua Zaret of Longbow Research. Your line is open.

Joshua Zaret - Longbow Research

Thank you. A couple of questions; first on OCC pricing, obviously it's come off the bottom in last couple of months, have you seen any weakness starting to reappear again?

James A. Rubright

Yes, we didn't agree with some of the publication increases particularly in the northeast. So we think actually the publications has got ahead of the actual marketplace and we think the market is at least as soft as the indexes would indicate, and probably a little softer. The marketplace index is geographically are going to vary in their movement because of their relation to the exportability as a Recycled Fiber. And there is activity at the ports, although at prices that justify the transportation differential from the major Mid-Western markets after coast. But actually, I think, the market is little east as soft as the published indexes are indicating.

Joshua Zaret - Longbow Research

Okay. You sort of answered my next question and that had to do with -- is you're trained (ph) for OCC away from the port? In other words, obviously, you pay in less even though you are in New York, you have barrier in terms of prices from the ports?

James A. Rubright

Yes, we're in New York, we're in Syracuse (ph) within a $15 freight circle, there are 55 million people. So there's a tremendous recycle fiber market, for the Syracuse (ph) Mill, including markets that are west to Syracuse and the freight differential simply from the Syracuse market itself up to the port more than justifies the price differential that exist today. So there shouldn't be that significant effect from the current market place on that mill. And then if you look at the rest of our production, we're pretty far away from the coast.

Joshua Zaret - Longbow Research

Got you. Second question, can you tell us how much caustic soda you consume a year?

James A. Rubright

No.

Joshua Zaret - Longbow Research

Okay.

James A. Rubright

I'll ask you to come back in...

Joshua Zaret - Longbow Research

Okay, that'll be very helpful if the cost have started to come down.

James A. Rubright

Still don't know, but we'll just get back to you.

Joshua Zaret - Longbow Research

Great, that will be helpful. And third, can you sort of give us a feel for your recycled ... quarter recycle board and each board trending backlogs over the, let's say, last three and a half months?

James A. Rubright

Yeah, there really has not been a significant change, be it for mill backlog and industry backlogs and unmade order date of the day we published are not strong and they're consistent with the relatively low operating rates that we've seen which make sense given the fall off in export demand, particularly for bleached paperboard. So there when we did the Gulf States acquisition we said we think we're the right owner for this mill because we have a huge near natural short position in bleached board mill, and we'll just are just going to unfold.

So on bleached board which is, as you know, pretty significant for us that it's really not an issue and the issue is much more how do the industry participants protect pricing. And their absent hacks (ph) subsidy, I don't think people are making a lot of money on just the cash flow basis but at tax flow I mean the taxes and beyond that but recycled ... so you'd asked also about recycled, what was your question about recycle?

Joshua Zaret - Longbow Research

Well, same in that case...

James A. Rubright

Oh, yes, just backlogs; well actually backlogs are okay in our current recycled paperboards sector. No they're not. Demands are not robust but the backlogs are higher than the date they were in October and November.

Joshua Zaret - Longbow Research

Okay, then I guess, the follow up question that is when do you first begin to see the seasonality factor? Was it a late spring thing for your bleached board and recycled or would you be seeing it now, if there is?

James A. Rubright

No, you would see it now. The -- starts this part of the year are the mid summer, there are any number of plant outages in the month of July so marketplace will tend to slow down a little bit in the middle till the late summer and then the next time it slows down is November to December. So this quarter should feel good.

Joshua Zaret - Longbow Research

Okay, okay. And then finally and this is just an annual question before you talked about the alternative fuel credit and pretty long a revenue line, is that going to be taxable?

James A. Rubright

There is -- it really depends upon how you receive the credit as to whether or not it is taxable in our case, we think it will generally not be taxable although there maybe some inefficiency with respect to some portion of the credit.

Joshua Zaret - Longbow Research

Okay, great. Thank you very much.

Operator

: Chip Dillon of Credit Suisse. Your line is open.

Chip Dillon - Credit Suisse

Yes. Good morning.

James A. Rubright

Good morning.

Chip Dillon - Credit Suisse

You had a obviously a terrific quarter in consumer packaging. And you did mentioned that you saw some of the prices or you've seen them having down a little bit. And I m looking at the published numbers I guess if you look at clear recorded news as close proxy we've only seen that. I think about 20 or may be $30 in erosion.

James A. Rubright

Right.

Chip Dillon - Credit Suisse

So you might correct me on that.

James A. Rubright

No.

Chip Dillon - Credit Suisse

And so far and so I was sort of wondering it would seem to me that some of these, this elevated margin should persist?

James A. Rubright

Well, the fact is that the operating rates or coated recycle board have stayed pretty high in the 90s. So I think that explains a lot of the -- what happened from a pricing standpoint. And as I mentioned earlier in the call although the index prices are coming down. This was a year in which we renewed a number of legacy contracts that we entered into in an environment in which pricing was lower.

So that is when you get to the -- ultimately the Rock-Tenn realized by seeing the more meliorated effect of the market drops themselves.

So that business should continue to be healthy.

Chip Dillon - Credit Suisse

Got you. And is there some and I would assume that some of the structural changes we've seen in recent years are contributing to what I would say is a new paradigm for margins versus what we saw in the past?

Steven Voorhees

That could easily be the case.

Chip Dillon - Credit Suisse

And then could you talk a little bit about uncoated recycle board and any competition you're seeing there. And I know it can't be done on a dine but any of your customers looking at sort of lowering some of the quality that they are using because it seems like they're quite a spread at least when you look at the profitability between uncoated and coated?

Steven Voorhees

We definitely are not. Seeing people look for lower prices and lower quality, in fact the marketplace is probably going the other direction. As you know for several of the competitors in the uncoated market and it's highly consolidated as you know people are concerned about the financial conditions and several of the participants in that market, and we see ourselves face with really pretty attractive opportunities for our two market uncoated paperboard mills.

Chip Dillon - Credit Suisse

Got you. Okay. And then last question, when you look at the 30% EBITDA margins at Solvay was that a surprise to you, in other words are the recycled mills out there -- they have so much less operating leverage than you have say with the craft mill like you have done and the bleached board facility?

James A. Rubright

I'm not sure I understand this.

Chip Dillon - Credit Suisse

I mean the fact is...

James A. Rubright

What I surprised is if you told me that we were going to see a reduction in recycled fiber pricing of the order of magnitude that we saw, my belief would have been well I need to know what's going to happen to three and other input cost for virgin because 60% of the market virgin and 40% recycled. We will benefit substantially from a reduction in recycled fiber pricing and that's pretty much what's happened.

Chip Dillon - Credit Suisse

Yeah, I'm sorry Jim, what I meant to say is but you ran at well below normal operating rates at Solvay. And so I guess to ask differently if you had the recycle the OCC costs that you had in this last quarter with the pricing.

James A. Rubright

Yeah.

Chip Dillon - Credit Suisse

How much margin loss do you think you saw because you were running slower?

James A. Rubright

Yeah, I prefer not to quantify although we've done a lot analysis it's not perfect. But I do understand your question and the regarding the leverage is that you probably are significantly better able to take advantage of reduction in volume in recycle mill like hours running and Solvay does then we would have been in a comparable version now.

Chip Dillon - Credit Suisse

Okay, got you. And then last question you were talking earlier about this 65%, 35% sort of pass through dynamic with containerboard and boxes. When we look at some of your competitors, some of them are saying in the last quarter you only saw maybe a fourth let's say of the cumulative $60 ton drop, and maybe a fourth to a third so far. And would that be roughly consistent with your experience in other words could we see a 20 or $30 average price decline in your realizations in the corrugated segment in the third fiscal quarter versus the second?

James A. Rubright

You're definitely going to see some. But we because of our, what we're doing in these essentially we've cut out spot times pretty much of the entire quarters, so everything was selling under contract. And our contracts take the index into account the next month.

So for the increase I mean -- for any decrease that occurred were an effective date prior to April, 1 you saw it.

Chip Dillon - Credit Suisse

Got you.

James A. Rubright

So much back that up.

Chip Dillon - Credit Suisse

So for example the April, pulp and paper weak price would be reflected in March shipments?

James A. Rubright

April would be reflected in May shipments.

Chip Dillon - Credit Suisse

I mean May shipments. Got you. Okay. All right great, thanks very much.

James A. Rubright

Yeah.

Operator

At this time, we saw no further questions.

James A. Rubright

We thank you all for joining our call. We appreciate it. Thanks Steve.

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