Rock-Tenn Management Discusses Q2 2013 Results - Earnings Call Transcript

| About: WestRock Company (WRK)

Rock-Tenn (RKT) Q2 2013 Earnings Call April 24, 2013 9:00 AM ET

Executives

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

Steven C. Voorhees - President and Chief Operating Officer

James B. Porter - President of Corrugated Packaging

John D. Stakel - Senior Vice President and Treasurer

Analysts

Mark A. Weintraub - The Buckingham Research Group Incorporated

Anthony Pettinari - Citigroup Inc, Research Division

Scott Gaffner - Barclays Capital, Research Division

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

Mark Wilde - Deutsche Bank AG, Research Division

George L. Staphos - BofA Merrill Lynch, Research Division

Chip A. Dillon - Vertical Research Partners, LLC

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

Philip Ng - Jefferies & Company, Inc., Research Division

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

Adam J. Josephson - KeyBanc Capital Markets Inc., Research Division

Albert T. Kabili - Macquarie Research

Operator

Good morning. My name is Mary Ann. I will be your conference operator for today. At this time, I would like to welcome everyone to the RockTenn Second Quarter Fiscal 2013 Earnings Conference Call. [Operator Instructions]

As a reminder, slides are being presented today as part of the conference call. These slides can be accessed at www.rocktenn.com under the Investors page. Ladies and gentlemen, this call is being recorded, April 24, 2013. [Operator Instructions]

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

James A. Rubright

Thank you. And thank you, all, for joining our call. During the course of the call, we'll make forward-looking statements involving our plans, expectations, estimates and beliefs related to future events. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from those that we discuss. We describe these risks and uncertainties in our filings with the SEC, including our most recent 10-Q and 10-K for the current fiscal year and the end of last year.

Also during the call, we'll refer to non-GAAP financial measures. And we'll provide reconciliations of these non-GAAP measures to the most directly comparable GAAP measures, and it's in the appendix of the slide presentation. The slide presentation is also available on our website. I'm going to begin with an overview of the quarter, Steve Vorhees will comment on our performance of our businesses during the quarter, and then I'll return to review our balance sheet and key financial statistics and to give you some thoughts with respect to guidance for the remainder of this year and update the '14 guidance.

Our adjusted earnings of $1.12 per share resulted from strong operating performance and the box market decreased slowly at a relatively slower rate over the prior year, when the market was characterized by relatively tight containerboard markets. Our earnings per share of $4.45 include the release of a tax reserve that we established when we closed the Smurfit acquisition to reflect the possibility that proceeds of the black liquor tax credits received by Smurfit in 2009 might be taxable.

This quarter, the IRS notified us that it completed its examination of Smurfit's 2009 income tax return. The IRS reviewed and accepted our volumetric calculations of the credit, and they did not raise any questions regarding the taxability of the credits. As a result, we released the reserve, thereby increasing by $649 million the amount of federal NOLs that are available to offset future taxable income for RockTenn. The $254 million credit income represents the cash tax benefit we'll realize from these additional NOLs in future periods. The way it looks now, that's about $3.50 per share in additional cash flow that we'll realize in fiscal '14 and '15. In total, the total expected cash tax benefit of all of our federal tax and state tax loss carryforwards and tax credit carryforwards is about $625 million in cash tax benefit.

The $1.12 of adjusted earnings is higher than the guidance we gave last quarter of about $1 a share for this quarter, and the actual pricing and commodity input costs were generally in line with our expectations, as were the normal quarter end accruals and our effective tax rate. The principal difference from our expectations was much better operating performance during the quarter in our box plant system and in our containerboard mills. This favorable operating performance contributed about $0.09 or $0.10 to the increase in earnings per share over the guidance we gave at the outset of the quarter.

Our Corrugated segment income of $108 million was $32 million higher than last year. As of the end of the last quarter, we've realized $53 per ton on an integrated basis of the $50 per ton price increase published in September of last year. Higher pricing was partially offset by higher commodity input costs, principally for wood, chemicals, natural gas, freight and labor, and by the cost of reduced production from the major maintenance outages that we took during the March quarter.

Consumer Packaging segment income of $63 million was in line with our expectations for the quarter, with lower pricing and lower display volumes driving a lower profitability. Recycled segment earnings were lower than the prior year's quarter due to lower tons sold and lower recycled fiber prices, which compressed margins, as Steve will discuss.

Right now, I'll turn it over to Steve to discuss our operations in more detail, who, as I mentioned, will turn it back to me at the end of the call.

Steven C. Voorhees

Thanks, Jim. I'm going to start with our corrugated box business. Industry box demand increased 1.1% over the prior year and declined 3.2% from the December quarter. Both of these numbers are adjusted for shipping days. The growth of RockTenn's box shipments succeeded the industry. RockTenn's box shipments increased 4.8% over the prior year quarter and decreased only 2.2% from the December quarter. Demand trends for March and the first 3 weeks of April continue to support our view that total shipments in April will be up, although given the 2 more shipment days, may be down slightly on an average day basis.

As of the end of March, RockTenn operated 93 corrugated container plants in North America. This includes 72 corrugated box plants, 4 sheet feeders and 17 sheet plants. This compares to the 99 plants we operated in the same quarter 1 year ago. We're realizing the mindsets of producing more corrugated boxes from fewer operating locations. Full implementation of our announced closures will further reduce the number of operating locations to 91 at the end of June.

We're investing in our box plants to improve productivity. During the quarter, we completed the investment of $9 million in high-return de-bottlenecking projects at our Fresno, California, and Fort Worth, Texas, corrugated box plants. These projects have improved the volume and cost structure at each plant.

During the quarter, we completed the installation of our new standard corrugated box operating system in 4 more plants. This brings to 18 the number of plants operating with the new system. We continue to expect to complete installation of this system in all of our corrugated box plants and sheet feeders during the fiscal year '14. We completed the recovery of the fall containerboard price increase during the quarter, and we're moving to implement the $50 per ton price increase published in Pulp & Paper Week last Friday.

Moving to containerboard. March industry inventories of 2.2 million tons represent 3.9 weeks of supply. This is below historical averages. Our inventory levels at the end of March were comparable to our inventory levels at the end of December. Our inventories have declined since the end of March and will drop further as a result of increased seasonal demand and the downtime related to our planned outages during the June quarter. These planned inventory levels are within the range necessary for us to maintain customer service levels and minimize supply chain costs.

Industry operating rates of 92.8% in March were higher than the 10-year average of 92.4% for March. March is typically a high maintenance average month for the industry. During the quarter, we completed the outages at our Fernandina Beach, Florence, Panama City and West Point mills. These outages were very well executed, with the result that our quarterly production was 14,500 tons higher than we planned. We will complete the planned outage at our Hopewell, Virginia, containerboard mill later this month, including the first phase of our major modernization program at that mill.

Our performance at our Hodge mill continued to improve during the quarter, and during the outage planned for Hodge in June, we will invest $14 million in a number of capital projects that will address most of the remaining operating constraints that's been keeping the mills from realizing full potential from last year's major rebuilding.

Our overall shipments of containerboard increased by 25,000 tons over last year, reflecting improved market conditions and improved execution at our mill operating locations. In the March quarter of last year, we've produced 12,500 tons at our Matane corrugated medium mill that we operated for a portion of the quarter before permanently closing the mill.

During the past year, we focused on increasing our sales of higher-margin linerboard and white top. The results during the March quarter reflects the improved mix of our containerboard production. Compared to the prior year quarter, our shipments of medium declined by 31,000 tons and shipments of linerboard and white top increased by 56,000 tons.

Export markets continued to improve. Industry containerboard exports of 1.1 million tons in the March quarter increased 4.3% from the December quarter. However, export shipments of containerboard totaled 216,000 tons, an increase of 5.6% or 12,000 tons over the December quarter. Our average price in the quarter increased sequentially by $28 per ton, after an increase of $41 per ton during the December quarter. For shipments in the March quarter, average pricing was up $83 per ton from the March 2012 quarter bottom. Pulp pricing was up $13 per ton from the December quarter. We believe that pulp markets are currently stable to improving.

We've restructured our steam supply agreement at our recycled containerboard mill in Jacksonville. The impact of the restructuring is to eliminate the onerous fixed charge under this contract. This contract has been a primary impediment to our profitable operation of the 600,000-ton mill as a swing mill that we can use to balance supply with our market demand for liner or medium and also for aggregate demand for containerboard. The estimated annual savings from this restructured supply agreement are approximately $7 million per year through 2016.

Our fuel-oil-to-natural-gas conversion projects remain on track. Our annual run rate of savings from these projects, after taking into account the recent increase in natural gas prices, increased by $15 million in the quarter with the completion of the Fernandina Beach and West Point outages and capturing the benefit of the Hopewell project.

Moving to the Consumer Packaging segment. Folding carton shipments were up 1.4% over the prior year, but total revenue was down due to soft pricing. Folding carton shipments should continue to strengthen for the balance of the fiscal year due to seasonal demand patterns and some new business mandates that we've won. During the first 3 weeks of April, folding carton volumes are tracking slightly ahead of last year. Merchandising displays, sales and income declined compared to last year as consumer product companies reduced spending on promotion for new product introductions. SBS operating rates and backlogs have improved, and industry unmade orders of 482,000 tons have increased 51% from November 2012 loan.

At the Demopolis mill, we successfully completed a significant major maintenance outage during the quarter. Our SBS backlogs are currently somewhat over 6 weeks. CRB demand has been relatively stronger than SBS, with current unmade orders of 165,000 tons, up 39% since January 1, as seasonal demand at converting plants begin. We didn't take any SBS or CRB economic downtime during the March quarter, and we don't expect to for the rest of the fiscal year. Pulp & Paper Week published several price increases for consumer paper board grades on Friday of last week, including $25 per ton for CRB and $15 per ton for SBS. We're moving to implement these increases in these markets.

Turning to Recycling. We're in the midst of reconfiguring the business to improve profitability. We operate 8 single stream locations where we process multiple recyclable materials, including corrugated, paper, plastic, glass and metals. We're investing in additional single-stream capability in the Atlanta metropolitan area. This capacity will be online by mid-summer. We've exited 8 underperforming nonstrategic locations, and we're consolidating our customer service and accounting activities to one hub in Atlanta.

We expect profitability to improve, and while the absolute profitability of the recycle business will remain limited in the overall context of our company, the Recycling business continues to play an important role in our integrated company. Recycling earns returns in the -- in excess of the cost of capital that we have employed in the business. They acquire 4 million tons annually for our mills. They sell 700,000 tons of BOK [ph], box cuttings and other waste generated by our converting plants, and they provide us valuable insight through our participation in the global market for recovered fiber.

At the end of March, our run rate of achieved synergies and performance improvements was in excess of $375 million. This is $50 million higher than the $325 million rate as of the end of December. I've already spoken to the primary areas of improvement, that is the improvements we've achieved in the box plant system as a result of consolidation and capital investment and also the improvement in our containerboard mill system. We expect to achieve the remainder of our $550 million target by the end of fiscal year 2014.

With that, I'll turn it back to Jim. Jim?

James A. Rubright

Thanks, Steve. I'd like to address input costs. Wood fiber cost increased for us sequentially by about $1 million, energy cost increased by about $9 million, both of which are partly attributable to normal winter cost and consumption patterns. Our chemicals increased by $5 million, and the cost of recycled fiber increased $16 million. Market composite average prices for recovered fiber increased $15 per ton in the March quarter to $108 per ton.

If market prices did not increase in April, concurrent market conditions wouldn't support a further increase in May. After May, normal seasonal trends would suggest moderately higher recycled fiber costs, but that will depend in large part upon future Chinese demand. Natural gas front month prices are approximately $4.23 per MMBtu, and the 12-month strip of approximately $438 per MMBtu compares to an average price of $334 in the March quarter. Wood costs appear to have plateaued for the balance of the year. We would expect continued moderation of our wood costs based on our inventory position and improvements to our sourcing strategies.

With respect to our guidance for certain financial statistics, we estimate that our depreciation and amortization for fiscal '13 will be $565 million. We expect corporate cost of $27 million in the third quarter and $95 million to $100 million for the fiscal year. We estimate interest expense of $110 million for the year and $27 million for the June quarter. Excluding the impact of the $254 million settled tax matter and other discrete items, our effective tax rate for the quarter would have been 33.3%. This is lower than our expected rate of approximately 37%, and that's primarily due to credits that were reinstated when the federal income tax legislation was enacted in January. Our expected tax rate for the remainder of fiscal 2013 is in the range of 37% to 38%.

As I mentioned earlier, at March 31, we have unused federal and state tax losses and tax credit carryforwards that total approximately $625 million of cash tax benefit. Of this total, we expect to use the remaining $317 million of cash tax benefit of our federal NOLs during the next 2 and possibly 3 years, depending upon our taxable income. We'll use our net tax benefit of $228 million in cellulosic biofuel, alternative minimum tax and other federal tax credits over the next 3 or 4 years, again, depending upon our taxable income.

In any fiscal year, after we've used all of our federal net operating losses, we can use the cellulosic biofuel credits to offset a maximum of 75% of federal cash taxes due. We'll use our $80 million of cash tax benefit from the state loss and credit carryforwards over a potentially longer period, depending upon our state taxable income in the future periods.

As for capital expenditures, we expect those for this year, again, to be in the range of $425 million to $450 million. We're currently estimating total required cash pension contributions to be in the $192 million range in fiscal '13, and we expect pension expense to be about $30 million for the full year. We will make cash contributions of $49 million to our pension plans in the June quarter and $88 million in the September quarter. We estimate that the expenses related to deferred outage costs for the containerboard and bleach paperboard mills will be about $92 million in fiscal '13 as outlined in the table on Page 13.

At the end of March, our net debt was $3.1 billion, our credit agreement EBITDA was $1.22 billion and our credit agreement debt-to-EBITDA ratio was 2.65x. We had over $1.3 billion in available liquidity. In March, we repaid a maturity from our existing borrowing facilities for $80 million [ph] in 5 5/8% notes. And in March, Standard & Poor's put RockTenn on positive outlook, implying that our corporate credit rating may improve from BBB- to BBB over the near term. Moody's has maintained our Ba1 rating with a stable outlook.

During the quarter, we reduced debt by $92 million and made pension contributions in excess of expense of $30 million, which totaled $122 million or $1.67 per share, which is a 4% increase from $1.61 percent per share we generated in the prior year quarter. For the last 12 months, we've generated over $1 billion in cash from operations, we've applied $444 million of CapEx and this left $584 million or $8.04 per share for dividends, debt repayment, pension contributions in excess of expense and acquisitions.

Looking forward to the June quarter and the balance of the year. The business environment overall is very encouraging. Domestic box and containerboard demand and export demand is solid. Both domestic and export pricing continues to improve, and folding carton and paper forward demand is improving. Last quarter, we forecast full year fiscal 2013 free cash flow available for debt repayment, dividends and pension contributions in excess of expense to be in the range of $700 million or $9.50 to $9.75 per share. We also provided initial guidance for 2014 for the same cash flow in the range of $10.50 to $11.50 per share. These cash flow assumptions were based on assumed flat selling prices and 2% to 2.5% cost input inflation.

Now that PPW published last Friday the $50 per ton increase in containerboard prices, as well as the increases in SBS and CRB prices that we discussed, we're updating our cash flow guidance for fiscal '13 to the range of $10 to $10.50 per share. The 2013 increase reflects a lag that we'll incur this year between the increase in reported book earnings and the cash recovery from the price increases because as your revenues go up, our accounts receivable will go up. That will level out and won't have the same effect in '14.

We're also updating our fiscal year '14 guidance based on our revenue estimate, including assumed recovery of the containerboard and related box price increases as well as our current outlook for commodity input costs. We now expect fiscal 2014 free cash flow to be in a range of $14.25 per share to $15 per share.

This concludes our prepared remarks. And Steve and I are now available to respond to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Mark Weintraub of Buckingham Research.

Mark A. Weintraub - The Buckingham Research Group Incorporated

First question, just on that guidance for next fiscal year. Obviously, a very big increase from $10.50, $11.50 to $14.25, $15. That would give credit to the containerboard price increase, and is the -- which I would have thought would have been more to the order of about $3. So is the rest primarily the benefit of the cash taxes being low? Or are there some other drivers in there as well?

James A. Rubright

Right, Mark. The full benefit of the containerboard increase that we get will be sheltered by our NOLs. So book income will go up by 63%, cash flow will go up by 100% of the proceeds we get from the containerboard increase, and the SBS and the CRB increases.

Mark A. Weintraub - The Buckingham Research Group Incorporated

Okay. And were there any other -- that certainly would seem to get you there. Were there any other significant variables that got changed as well?

James A. Rubright

No. We assume the things that we do from an operating standpoint are going to offset the changes in commodity input cost. The major commodity input cost change that we've seen in the period is the increase in natural gas costs. And by the time we complete the projects that we have in place for the summer through our outage season, we'll be at about 35 Bcf of natural gas consumption, so $1.35 million, so that's probably the largest variance.

Mark A. Weintraub - The Buckingham Research Group Incorporated

Great. And lastly, if you could give a little bit more color on the up -- on what you're doing at Hodge and Hopewell and how much progress you've seen to date at Hodge and how much progress, if the projects go well et cetera, you might achieve. And is that fully included in the $175 million of profit improvement and synergy target that you still have outstanding?

James A. Rubright

All right. The answer to the first question -- the second question first, the answer is yes. All of that is baked into the 2013 and 2014 assumptions. The new leadership team that we've had in Hodge has been there since -- basically, since July. They've significantly added to the staffing at the mill, and we've seen consistent increases in the productivity in the mill. While it's inconsistent for some of the reasons we discussed in Steve's call with respect to the capital we'll spend in June, we think we will get the full benefits of that project, which will take it up between 2,400 and 2,500 tons per day. We've been achieving that on some days late in the quarter but not consistently, and basically, there are things we need to do to enable the mill to achieve at that level. But we have made really remarkable progress on all fronts at Hodge over the course of the last -- particularly, the last 6 months as the team has been there long enough to take hold. And they've also identified what we think are the things that will basically remediate the issues that they've been struggling with since we did the outage last year. So Hodge is going to end up being a great asset. Hopewell is about to complete its outage. It was initially scheduled for 20 days, it's now 18. It's a major rebuilding. The thing -- the point I want to make clear is that this is a modernization of the mill and will have dramatic improvements in the quality and consistency of the product. This outage is not primarily related to the volume increase. It's the 2014 outage where we'll put in the extended net press and extend the dryer section that will enable us increase the productive capacity of Hopewell. But what we're doing now are just needed large capital improvements to this mill that will basically create an asset with a very long sustainable life.

Operator

Our next question is from Anthony Pettinari of Citi.

Anthony Pettinari - Citigroup Inc, Research Division

In your February Analyst Day, you talked about steps you've taken to improve commercial performance at your Corrugated business, like moving to standardized terms and pricing. I'm wondering, given those changes, are there differences in the way you're implementing the current price hike compared to the one last year. Do you expect it to be easier this year given some of the changes you've made?

Steven C. Voorhees

First of all, I don't think it's easy to mount a price increase. Second, the last price increase did go successfully, and from what you mentioned, Anthony, that team is essentially the same team that will be implementing the second price increase. So I wouldn't look at it as there's a nice significant change in the way that would go this time.

Anthony Pettinari - Citigroup Inc, Research Division

Okay. And maybe just a follow-up. I mean, when you look at the commercial excellence opportunities in corrugated that you've outlined, I mean, what percentage of those opportunities are realized? Or maybe what inning are we in, in terms of realizing that improvement?

Steven C. Voorhees

I think it's an ongoing slug of just trying to get better all the time. So I think we will continue to get better as time goes on, and so I really have trouble saying we're x percent or x inning to the game. The team has made substantial progress, and I think they're excited about the continued progress they can make. And I'd anticipate that they will make continued progress.

Anthony Pettinari - Citigroup Inc, Research Division

Okay. And then maybe just one last question. In terms of export markets, we've seen some firmness there, are you seeing any opportunities to shift tonnage from export markets into the domestic markets? Or how should we think about that given you had pretty strong volumes in the quarter?

James A. Rubright

Yes is the answer. We're growing our box plant volumes faster than the industry and the industry is growing and therefore, we are increasing our domestic tonnage. We have increased the total productive capacity of the system though, simply through performance improvements, and I think as this capital takes holds and as other investments we're making in the system in both the assets and the people, you will see our productive capacity increase. So I'm not sure that exports will decline in total, but we are going to increase the total amount of domestic shipments if the trends continue.

Operator

Our next question is from Scott Gaffner of Barclays.

Scott Gaffner - Barclays Capital, Research Division

I was hoping you could give us an update on what were the incremental synergies in the quarter. And what's the total to date, not on a run rate basis, but what's the actual total achieved synergies?

Steven C. Voorhees

Second question first. I don't have the actual amount at my fingertips, so we'll just have to get back to you on that. I think within the quarter, we see that we closed -- had an ongoing closure, set of closures, and that contributed to the increase in synergies. We had 2 capital projects at Fresno and Fort Worth that contributed, and then we had the natural gas -- the fuel-oil-to-natural-gas conversions. And we continued to have a series of operational improvements really across the box plant system and across the mill system, which are just a mass of activity that goes on, and I can't call out any individual one.

Scott Gaffner - Barclays Capital, Research Division

Okay. And then you mentioned the better operating performance at the box plants, and I think you invested $9 million on debottlenecking. Is there -- I know capacity utilization is typically lower in the box plant, but is there some measure you can give us, whether it's capacity utilization, just so that we can sort of understand year-over-year how much more productive you're actually being in those box plants, producing more boxes with pure assets?

Steven C. Voorhees

I'm having trouble coming up with a measure. I think if you look at our volumes and look at just the number of plants that we have, I gave you the number year-over-year, I think that would be almost a measure of incremental productivity. Our daily shipments in the second quarter were 305 million square feet per day, and that's up 298 million -- over 298 million square feet in the prior year quarter. And the 2 projects that we talked about would have increased the annual throughput by about 100 million square feet at each plant.

Operator

Our next question is from Phil Gresh of JP Morgan.

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

My first question is just related to the synergies. If I look back at the second quarter of last year, I think your run rate was around $150 million, now you're at $375 million, so that's about $225 million incremental run rate, and I know you guys aren't explicitly calling these synergies out in your bridges. But I guess like for the corrugated side, for example, I would have thought perhaps -- you called out $27 million headwind for other items, and I guess I would have thought perhaps there'd be a bit more of an offset from the synergies. So I was hoping maybe you could just elaborate a little bit more if there are some big buckets perhaps in that other category that are offsets to this. And specifically, I guess, I'm wondering if this implies we still should see some nice upside from Hodge as you get those projects completed?

James A. Rubright

Well, what we went over in the call for the year end was the treadmill. And the treadmill includes $70 million for wages and benefits. Then in the quarter that just ended, you start up with the $0.15 per share in the quarter effect of the federal tax withholdings and so forth.

So there are a number of things that are in the treadmill that -- and I think we discussed this last time, Phil, that we used the performance improvements in capital to offset so that at least today the principal driver in the delta between earnings and prior periods is the increased pricing.

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

Okay. And then my second question would be just in terms of kind of the timing of when you would expect the full run rate of the containerboard pricing increase to flow through to the box side and perhaps any color you might have on how you're thinking about this next fiscal quarter. You usually give a little bit of color on that.

James A. Rubright

We haven't dialed in this particular quarter because I think that it's easier for us to look at how the price increase will get implemented over the balance of the year than to try to slice it into specific months. Our estimation is that we will execute the price increase as we executed the last one. And we gave almost quarterly updates with respect to how much -- we did give to quarterly updates with respect to how much of the box price we've recovered. So I think that you can assume that within a range of a month or 2, that's the way this one's going to work.

Operator

Our next question comes from Mark Wilde of Deutsche Bank.

Mark Wilde - Deutsche Bank AG, Research Division

Jim, just curious, on the box side of things, you did very, very well, looks like, on the price hike, and you've also picked up volume relative to the industry. Those 2 things often don't go together. Is there anything you'd kind of point out here that you think helped you?

James A. Rubright

Yes. We've made leadership changes throughout the box plant system this summer and essentially introduced the RockTenn model with respect to box plant performance, so there's been significant improvements in the way we've gone to market with respect to the market strategy. So I agree, I've been -- it is nice to see price go up as volume goes up. So the team has done a great job. I think it's the people and the results that they produced. The other thing was we came into 2000 -- the first year after the Smurfit acquisition, we knew there was a fair amount of national account volume that have been lost that was going to show up last year. So we had a mountain to climb just to overcome -- just to get to even, and then what you're seeing is that year is over and now we're in a new year where at least we started from scratch and the team has had the ability to perform in the marketplace and have its -- the benefit of its actions actually show up in the net increase.

Mark Wilde - Deutsche Bank AG, Research Division

Okay. And if I could just kind of follow on that. Often in the business, we hear about sort of individual box plant salespeople or managers kind of making the wrong pricing decisions. Just generally, how much discretion is left at the individual plant level and how much of this has been centralized?

James A. Rubright

Well, we're organized regionally and then within region, within business units. So if you think of a relevant geographic market where we have multiple plants, those plants will ultimately report, from business standpoint, to a business unit leader. Within that business unit, they have decision rights with respect to certain pricing. Then that -- as that cascades up, it ultimately may get to me, just depending upon what it is. But there is visibility and sort of defined rights with respect to pricing. But an individual plant would have input into its business unit, but the first level pricing decision is made at a business unit level by a person whose responsibility is pricing for that business unit and who reports up through a structure with respect to which you have visibility and pricing control, overall pricing decisions. So if you said why is your pricing more effective, the answer is we actually have visibility and discipline with respect to those decisions.

Mark Wilde - Deutsche Bank AG, Research Division

Okay. And then the last thing I was curious about, you mentioned again the idea of using Jacksonville as kind of swing capacity. And I wondered if you could just talk about how you do that from a practical sense. Because you've got highly trained staff, how do you manage to kind of furlough them, bring them back, furlough them? What -- how do you manage that process?

James A. Rubright

Right. With the first swing -- this is a mill that can make medium or liner, and so we can balance our system and balance our needs from a product category in Jacksonville at essentially no disruption. Because it is a recycled mill, the costs of turning it on and turning it off are not great. And so it does become the swing capacity. That is not our choice, it is not our desire to send people home, but if we have to, that is the most efficient place in the entire system with which we can do it. As you know, we've invested an awful lot of time, money and effort in order to stabilize that mill so that it will be a part of our system for as long as we can see. But it, nonetheless, will be a mill that if we need to do, will be the mill that we will idle. Again, as I mentioned, it is -- from an operating standpoint, a recycled mill is completely different from the standpoint of temporary idling than a virgin mill. And I think you're familiar with some of the reasons why.

Operator

Our next question comes from George Staphos of Bank of America Merrill Lynch.

George L. Staphos - BofA Merrill Lynch, Research Division

I guess, I had a few questions to start. Jim, to the extent that you've seen good volume here in the quarter that's just concluded, do you think any of it's related to trying to buy ahead of the next price increases in the market? Or have you seen fairly broad-based volume? And what actions, if any, do you take to try to prevent somebody from trying to build inventory on the customer side ahead of price increase that you want to implement on a going-forward basis?

James A. Rubright

Right, they're good questions. The answer is -- to the first one, is we did not see significant efforts to buy ahead of the price increase, for starters. Second, with respect to how do you stop it, we know, with respect to every customer, how much they buy and the trends on which they buy. And there is a pricing organization that monitors those volumes, and to the extent that we see an order that comes in that is outside the bounds of what we have established as what that customer will be allocated for the period, the order is not accepted. So it's really making sure that you got systems in place, the visibility to essentially ensure that you're not allowing the marketplace to take advantage of you. And we now have that in place, and we have people who have the discipline to enforce that.

George L. Staphos - BofA Merrill Lynch, Research Division

Fair enough. To the extent that -- obviously, the business is a very diverse business in terms of end markets, and this question comes up in other conference calls, is there any market right now that you're seeing particular strength that you can attribute their growth and the tightness in the market for that matter as well?

Steven C. Voorhees

We don't have extreme visibility. However, we do serve the agriculture market, primarily out in California, and I think we're seeing some firming of that market. I think other than that, it's hard to discern trends. Overall, nondurable goods consumptions remain pretty steady, and that's what we're tied to. So again, other than agricultural markets, hard to spot on.

George L. Staphos - BofA Merrill Lynch, Research Division

Understood. Looking at the outage projection for the upcoming quarter. I have the slide deck from last quarter in front of me. I want to say that outages are now projected to be lower by, I think, something around 40,000 tons. Could you confirm or validate that? And I'm assuming it's just being driven by, again, the better-than-expected volume outlook in corrugated relative to, say, perhaps, would have been the case 3 months ago.

Steven C. Voorhees

George, I don't have that slide.

James A. Rubright

Jim is here. Jim Porter is here. Jim, you want to -- I'm going to hand the phone over to Jim.

James B. Porter

So your question is the difference in volumes for shutdowns this next quarter?

George L. Staphos - BofA Merrill Lynch, Research Division

That's correct. It looks like it's dipped and I wonder -- say, Jim, about 40,000 tons or so from the last projection. And I'm assuming that's just the volume outlook improving relative to the last 3 months. Could you validate that and confirm the reasoning?

James B. Porter

Okay. We're currently targeting about 66,000 tons for the current June quarter, and we executed 100,000 tons in our second quarter that just completed, which was favorable to our forecast by approximately 15,000 tons. We're expecting the June quarter volumes to also be down from what was originally forecast by about that same amount. It's largely due to refinement of our shutdown planning and better execution.

Steven C. Voorhees

And George, I think we need to get back to you about the outlook.

George L. Staphos - BofA Merrill Lynch, Research Division

Steve, that's fine. The last question, I'll turn it over. To the extent -- and this is piggybacking on Mark's question from a couple of minutes ago. To the extent that the regions have a fair amount of discretion, obviously with central oversight in terms of pricing decisions, do the regions and do the plant managers actually know what their own level of profitability is by plant or by region or within the customer base so as to help them make their pricing decisions? If not, is that something that ultimately will evolve and become more the case within the system?

James A. Rubright

No, I mean all of our plants are profit centers so that we have a plant level P&L that is visible to every plant manager and they're -- while they have a variety of financial measures to which they manage, the profitability of the plant is one.

Operator

Our next question is from Chip Dillon of Vertical Research Partners.

Chip A. Dillon - Vertical Research Partners, LLC

First question, just to be sure, on the free cash flow guidance. I know that this basically includes EBITDA and takes out maintenance CapEx -- sorry, CapEx, interest and cash taxes. But I believe, on the pension contribution, should we use the gross number, I think 190-some, or the net number in the 160s to sort of -- if we wanted to take that out?

James A. Rubright

The net number. We're referring to the amount of free cash flow available for pension contributions in excess of expense.

Chip A. Dillon - Vertical Research Partners, LLC

Got you, okay. And on that, this year, it looks like the net number is around 162. What would -- and I know you've given us the pass with the highway bill last year. What do you expect next year to look like? Do you have an early sort of guesstimate?

James A. Rubright

We do. John, what's the number?

John D. Stakel

It should be probably closer to 200 -- $200 million roughly plus or minus, but I could follow up with you on that.

James A. Rubright

Were you able to hear John?

Chip A. Dillon - Vertical Research Partners, LLC

Yes, absolutely. And then, I guess, as we look into next year, going back to the original merger or acquisition a couple of years ago of Smurfit-Stone, I know that you expected several years of elevated CapEx, and you've updated us for this year. Can you give us an update as how you see, in rough numbers, the CapEx trending in '14 and again in '15?

James A. Rubright

I think we've said we think CapEx for '14 will be the same $425 million to $450 million. That's our current view. '15 is pretty early days for us to say. Certainly, we could run our system on significantly less CapEx than that. But we think the opportunity to invest in the mills and the box plant system will continue beyond '14 into '15. We also, as you know, have about $100 million in boiler MACT that we'll pay in -- that will extent at the back end of that period. Not a lot of that will be spent in '14, I think it's '15 and '16 capital. That's about $100 million so that's not in the '14 -- not much of that's in the '14 guidance.

Chip A. Dillon - Vertical Research Partners, LLC

Got you. And last question, looking at Slide 7, in the improvement year-to-year in the Corrugated Packaging segment, there is that $27 million in other. Was there anything that was -- you would regard as unusual? Or is that sort of the typical, I guess, employee compensation and health care and all that, that is reflected in that increase?

James A. Rubright

That's the treadmill.

Operator

Our next question is from Alex Ovshey of Goldman Sachs.

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

I just wanted to follow up again on that other line of $27 million negative on a quarterly basis. I mean as we think about your fiscal '14 guidance, is that the assumption that the treadmill minus productivity and other cost-savings initiative that you have in the system is still going to be a negative $100 million in fiscal '14 relative to fiscal '13?

James A. Rubright

I'm not sure we get the $100 million. The $27 million in the quarter, of course, as we indicated, this quarter, you have [indiscernible] taxes, and that's $0.15 in the quarter. That declined by $0.05 quarter over the next 2 quarters. So the answer is no, you can't multiply $27 million by 4 and get the right answer. There are a lot of moving parts in the assumption with respect to what goes up and what goes down, so I'm not able to parse all of them for you into the actual numbers in the box plant system, but the net is the cash flow guidance that we gave you at the outset.

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

Okay. Maybe the other way I'm asking the question is for fiscal year '13, I mean, that other line, is that supposed to really come back to 0 once the seasonality for the different costs is smoothed out throughout the course of the year?

James A. Rubright

Well, to the extent that you're comparing year-over-year, the other line, there's always going to be negatives in the other line. And in order to outrun the other, you've got to either increase pricing, increase volume through productivity or reduce your input cost, which is I think of that as the nonemployee cost of goods sold, which you may -- by reducing waste, you may enhance your chip sourcing to optimize the cost of your fiber into your mills. You may optimize the freight. I mean, there's a million things you do. But they're not necessarily going to show up in the freight line, they're going to be blended in the price mix, volume and input cost lines.

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

Okay. All right, sure. And then just shifting to Consumer business, you talked about Pulp & Paper Week recognizing, I believe, $25 of the CRB increase and $15 of the bleached board increase. So can you talk about what your expectations are for further potential price improvement? And be curious to hear your thoughts on why CRB pricing appears to be moving up quicker than SBS pricing is?

James A. Rubright

Well, first of all, with respect to our intentions with respect to future price increases, I can't speak. With respect to the what's happening in the marketplace is that with respect to CRB unmade orders have increased really to historically very strong numbers, and that suggests the tightness in the CRB market that is a criteria for the ability to move pricing. We are moving into a seasonally stronger period for paperboard, and folding cartons is the principal end use. So I would say that the industry conditions overall are healthy, although the markets are extremely competitive. There's -- in the bleached market, SBS, it's more complex than CRB because bleached is an exported commodity. There are 2 very large producers in the market, and we're not either of them. But -- so our visibility with respect to the tightness of that market is really limited to the published data, and that would suggest that unmade orders have increased really pretty significantly. In the folding space where we operate, because our end market for substantially all of our bleached paperboard is folding cartons, our backlogs have trended up nicely, and they were over 4 weeks at Demopolis today. So again, you see improving conditions in the marketplace, and that is about as much as I can say with respect to that.

Operator

Our next question is from Philip Ng of Jefferies.

Philip Ng - Jefferies & Company, Inc., Research Division

In terms of price increases on containerboard, you guys were able to get prices above market levels because you had some below-market contracts. Is there still a good amount of opportunity for this round?

James A. Rubright

Well, first of all, I don't agree with your premise. The reason you generally try to get more than a containerboard increase is that the box price increase attempts to give the box plant the opportunity to capture margin that they've lost over a period of time. So box prices tend to -- at least there's an effort for the box prices to increase more than the underlying containerboard price increase. And in our market, markets are either -- prices are generally either going up or going down. And the time that the box plant can perform best is in a market in which prices generally are going up, including tight containerboard market. So that is what is driving the increase, as well as simply our discipline and execution of the implementation of the box price increase downstream of containerboard. My expectations for this box price increases that the team will perform in a similar manner, whether that suggests that they'll do exactly the same or not, is going to play out over the next 2 or 3 months. A lot of the increases -- a lot of the stuff is contractual. Typically your national account contract and many other contracts with local accounts will adjust with PPW so there's a lot of business that's going to increase generally dollar per dollar, sometimes at a discount, with the containerboard increase.

Philip Ng - Jefferies & Company, Inc., Research Division

Got you. And then at least in the trade publications, there has been a lot of chatter that some larger national accounts may look to put more business up for bid. Have you seen any of that? Or is it still too early to call?

James A. Rubright

Yes, it's too early to say.

Philip Ng - Jefferies & Company, Inc., Research Division

Okay. All right. That's fine, Jim. And then on the Consumer Packaging business, I understand the lag is associated with passing pricing to the folding cartons typically is a little longer than your Corrugated business. So my first question is really the declines in CRB and SBS prices last year, has it fully flowed through to your P&L for Consumer Packaging yet? And then on the flip side, how quickly should we expect this recent round of box price increase flow through your P&L?

James A. Rubright

Well, we've talked about the fact that price increases over time have, generally, like a 6-month as opposed to a 3-month run rate period, and I think that the erosion generally should be offset relatively near term by the price increases. So I would expect -- it's hard to say, but I would expect more or less stable pricing over the balance of this quarter, possibly slightly deteriorating. And then the impact of the price increases should enable us to improve overall pricing in the out quarters. But again, it's pretty competitive market, and we will just have to see.

Operator

Our next question is from Mark Connelly of CLSA.

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

Just 2 things. With respect to display activity, some of the consumer products companies are telling us that they are changing the timing of their promotion and not especially the amount. But everything written in the newspapers says consumers are pulling back. So what do you think is actually driving the weaker display activity?

James A. Rubright

Fewer new product introductions and fewer promotions. We're just seeing fewer -- less activity.

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

Okay, okay. And do you attribute that to a pullback with the economy or are you just not close enough to it?

James A. Rubright

Mark, I don't know what drives the decision of the consumer products company. I see the result of that decision, and the result is we've seen some delays and cutbacks in promotional spending. It's not dramatic, but it is definitely a factor.

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

Sure, sure. And just one last question, your market pulp exposure is not that big. But is that something over time you expect to live with or try to work down?

James A. Rubright

The market pulp at Demopolis is pretty structural. We've seen incremental gains in paper machine production, but the cost of significantly increasing the paperboard production at Demopolis is really pretty significant. With respect to containerboard, our -- the pulp primarily comes out of Panama City, and again, the cost of significant increases in containerboard production in that mill would be relatively significant. So while you'll see some marginal increases through productivity and so forth in capital on the machines, you're not going to -- you won't -- we don't have an easy ability to dramatically swing that market pulp exposure down.

Operator

Our next question is from Adam Josephson of KeyBanc.

Adam J. Josephson - KeyBanc Capital Markets Inc., Research Division

Jim, regarding OCC, you're expecting those costs to inch up over the next few months. But obviously, longer term, you expressed your belief that those costs could be significantly upward-biased owing to higher Chinese demand and a finite supply. Do you expect future increases to be more substantial than what you're expecting this year?

James A. Rubright

Well, if you look at the volatility of recycled fiber pricing over time, it looks like the Sawtooth Mountains, and then it has periods of plateaus. We're in a period of plateau. So what I would expect in the future is, at some point, a return to pretty significant volatility just because of the inelasticity of supply relative to demand. So when we have the steep pricing increases, I can't say. But the driver will be the growth of Chinese exports and domestic consumption and ultimately, the clearing price for containerboard in China. I mean, if you say what is the thing that bounds the price of recycled fiber in the United States, it's Chinese containerboard pricing. And I just have to tell you I'm -- if you ask me what Chinese containerboard pricing is going to be in 2016, I'm going to tell you I'm not sure.

Adam J. Josephson - KeyBanc Capital Markets Inc., Research Division

Right, understood. And for wood fiber, obviously, you think they peaked for the year. Beyond this year, do you expect any meaningful upward pressure for being -- owing to wood pallet exports or otherwise?

James A. Rubright

In some markets potentially. Virginia has seen some -- probably some more pressure on our markets than are others for just the things that you're talking about, pallet plants and wood burners and so forth. So I think we'll see some upward pressure in Virginia. In the other markets, no, I don't see anything that really necessarily changes the dynamic. The housing recovery, we think that's net neutral to us. It might impose some short-term constraints, but then I believe residuals overcomes that and you get back to where we are. In the performance improvements, we really have baked in a pretty significant amount for improving the virgin fiber sourcing. We've significantly improved the leadership team there with an identified need that we felt we had, which we're finally able to just fill with just the right people. And so I think you'll see our sourcing costs -- even if you have upward cost of wood in our markets, you're going to see our relative costs decline. So I think wood cost should be favorable, as well as I also think our chip efficiency with respect to our mill production is an area that was really unexploited, and so we expect net wood cost to the paper machine to actually decline regardless of what you see in the markets going forward.

Operator

Our next question is from Al Kabili of Macquarie.

Albert T. Kabili - Macquarie Research

Just a question on free cash flow for next year, which is impressive and well ahead of your initial expectation. And I was wondering how you were thinking about the allocation of that given the upside. Do you see sort of more of that just going to greater deleveraging than you initially anticipated? Or do you see more opportunity with that for box plant acquisitions to improve your integration rate, dividends, even potentially share repurchases?

James A. Rubright

Well, we stated a near-term goal of reducing leverage to 2x. So first things we're going to do is reduce the leverage to 2x. After that, it's a great question. We like box plant acquisitions, and we did one this quarter. It happened to be very small, but we did. The ability to make box plant acquisitions will be a function of what comes to the market and how well it fits with our system because typically the best buyer ends up being the buyer, and that has been true with respect to the cor pack acquisition we did last year, the one in Alabama, as I've said. So I can't predict our ability to do box plant acquisitions. It will be largely a function of what the opportunity set is relative to our system benefits.

Albert T. Kabili - Macquarie Research

And then, how...

James A. Rubright

Go ahead.

Albert T. Kabili - Macquarie Research

I'm sorry, no. I interrupted.

James A. Rubright

And then, obviously, our dividend rate right now is below what we've said is our long-term target. So I think we will look at the dividend. And then we basically don't have a problem returning money to shareholders, but we will deal with that opportunity, hopefully, really soon, see what we'll do.

Albert T. Kabili - Macquarie Research

Okay. I mean it just seems like you're going to have a lot of flexibility there. And share repurchases, does that also potentially factor in the equation? And how do you kind of look at assessing relative returns when making these decisions? Box plants, what are your expectations typically in hurdle rates there?

James A. Rubright

Well, we don't do an acquisition if we don't think it exceeds our cost of capital, and we don't look at our cost of capital as some theoretical exercise. We look at what our free cash flow returns on market equity are, and that's our hurdle rate. So you can impute that from what we've generated in the -- over the long term and what we expect to continue to generate. We are not averse to buying back stock, we've done so in the past, but over the last 7 years, our acquisitions have enabled us to apply free cash flow to deleveraging. But at some point, when you get significantly below 2x, share repurchases are a great means to return capital to your shareholders.

Albert T. Kabili - Macquarie Research

Okay, very good. And then just to follow up on some questions on the performance improvements. Does -- is there -- when you get to the $550 million run rate, are you also thinking about EBITDA margins, where you'd like to take those in your corrugated segment? You're still -- there's still certainly runway versus sort of where some of the top tier competitors would be in terms of margins. So I don't know if you have a thought in terms of where -- on a margin -- on an EBITDA margin basis, sort of where you'd like to eventually get the Corrugated business to.

James A. Rubright

Well, we've been saying in the past that we thought that high-teens were very achievable. I think the pricing suggests that a higher number than that would be possible. The Southern Container, when we acquired them, had 26% EBITDA margins, and they had -- they did so because they were the low-cost player in the marketplace. So I think that over the long run, somebody's going to have high-20 EBITDA margin in this business. I think IP has got a pretty good head start on us as does Packaging Corp, but I think we have the best opportunity to narrow that gap just because of the way the business that we acquired was managed and invested. So I think you'll see us closing that gap. How high the industry can take the margins is -- I think, remains to be seen.

Albert T. Kabili - Macquarie Research

Okay. And then just final question and the clarification on the free cash flow. Is it reasonable to assume -- in your estimate for '14, I know you're not getting real specific on some of the items, but $50 million to $100 million of cash taxes, is that a reasonable sort of ballpark estimate consistent with how you're thinking about things?

James A. Rubright

No, because in '14, I think, our liability will be for state taxes only, and that number is a little bit below $50 million.

Operator

[Operator Instructions] There are no further questions.

James A. Rubright

All right. Thank you, all, for joining our call.

Operator

This does conclude today's conference call. You may disconnect your phones at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!