Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Rock-Tenn (NYSE:RKT)

Q3 2013 Earnings Call

July 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

John D. Stakel - Senior Vice President and Treasurer

James B. Porter - President of Corrugated Packaging

Analysts

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

George L. Staphos - BofA Merrill Lynch, Research Division

Chip A. Dillon - Vertical Research Partners, LLC

Mark Wilde - Deutsche Bank AG, Research Division

Mark A. Weintraub - The Buckingham Research Group Incorporated

Anthony Pettinari - Citigroup Inc, Research Division

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

Philip Ng - Jefferies LLC, Research Division

Scott L. Gaffner - Barclays Capital, Research Division

Albert T. Kabili - Macquarie Research

Steven Chercover - D.A. Davidson & Co., Research Division

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

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

Daniel Downes

Operator

Good morning. My name is Sherry, I'll be your conference operator for today. At this time, I would like to welcome everyone to the RockTenn third 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 today, July 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, operator, and thank you all for joining our call. With us -- with Steve and me today is Jim Porter, who is the head of our Corrugated Packaging sector.

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-Qs 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've provided reconciliations of these non-GAAP measures to the most directly comparable GAAP measures in the appendix to the slide presentation. The slide presentation is also available on our website.

I'm going to begin with an overview of the quarter, and Steve Voorhees will comment on the performance of this -- of our businesses during the quarter and our balance sheet and key financial statistics. I'll finish with some thoughts regarding guidance for the remainder of this year and preliminary fiscal year 2014 capital expenditure plans. We'll then open the line to answer questions.

With a respective overview of the quarter, our coworkers achieved another quarter of excellent results, marked by continuing sustained improvements on our Corrugated Packaging business, improvements that are visible broadly across our operations, and that accelerated rapidly over the last 2 quarters.

Higher production; reduced waste; sales volume growth; disciplined execution of pricing initiatives, which include our spring corrugated price increase; as well as careful rationalization of our account pricing all contributed to financial results that have met our own high expectations. Adjusted third quarter earnings of $2.16 reflect this strong operating performance, higher pricing and acquisition synergies.

Net income for the quarter included an $0.08 per share tax benefit from a change in Canadian law, as well as the benefit of research and development tax credits and provision-to-return adjustments that reduced our tax rate to 30.2% for the quarter. Net income also included a $0.10 per share noncash gain from the restructuring of the Jacksonville steam supply contract.

Our higher earnings delivered strong free cash flow, available for dividends, pension contributions in excess of expense and debt reduction, which totaled $216 million, or $2.96 per share in the quarter, which is 60% greater than the $1.85 per share in the prior year quarter.

During the quarter, we completed major maintenance outages at 4 of our virgin containerboard mills: Hodge, Hopewell, Stevenson and La Tuque, our Canadian white top liner mill. They were all completed on or ahead of schedule and on budget.

Reduced production for outage downtime during the quarter was in line with our expectations, about 67,000 tons. Our actual major maintenance downtime was 98,000 tons lower this quarter than the prior year quarter, but more significantly, if you adjust our production for the outage downtime, our quarterly containerboard production was 32,000 tons higher than the prior year quarter. And all of this reflects the capital -- the maintenance and the personnel investments we've made in our mills over the last year.

Hodge, for those of you who are following it, is perform extremely well after the steps we took during the outage to address a number of constraints following last year's rebuilding project. And then at Hopewell, the major modernization project that we did there has achieved our objectives of dramatically improving product quality and consistency. It enables the mill to produce lighter weight liner grades and it addresses the long-term capital needs of the mill.

Corrugated Packaging operations are also showing marked improvement. Our converted product sales again exceeded industry-reported averages, and this is an excellent result, it seems to us, given the fact that we've been implementing containerboard and box price increases. We've been systematically addressing the pricing in our lowest-margin integrated accounts, and we closed 19 box plants in the last 2 years, where we've experienced planned attrition from the closed plant that has ranged from approximately 5% to 30% per closed plant.

Our Consumer business operating income of $76 million was up $13 million over the preceding quarter, although it was down $8 million from the third quarter of 2012 due to generally lower selling prices. We've achieved partial recovery of our spring bleached paperboard and CRB price increases and with our currently high operating rates and strong backlogs, we're in the process of, again, seeking to implement price increases in those paperboard grades.

We've made significant progress on the realization of synergies and improved -- performance improvements, which reflects the improved execution across our businesses. In the third quarter, synergies and performance improvements were $60 million higher than in the prior year quarter.

With that overview, I'll now ask Steve to provide a closer look at our operations during the quarter.

Steven C. Voorhees

Thanks, Jim. I want to start with an overview of industry trends. Industry box volumes as reported by the Fiber Box Association increased by 1.3% in the June quarter over last year and 5.9% over the March quarter. These numbers are not adjusted for shipping days.

Industry shipments of containerboard for export markets increased by 3.8% over the prior year quarter and declined by 3.7% from the March quarter as the North American production was needed to serve domestic markets.

Industry inventory levels remained at 2.2 million tons at the end of June. This was essentially flat with June of 2012 and March of '13.

Industry operating rates for the quarter averaged 97% as compared to 94% one year ago and 95% in the March quarter.

Operating rates at the end of June were 99%. These improving market conditions provided support for our $50-per-ton containerboard price increase in April, and they provided an environment for our coworkers to deliver outstanding results from the continued improved execution across our Corrugated Packaging business.

In our box business, third quarter income reflected $18 per ton for the April containerboard price increase. As of the end of June, we were realizing a run rate of $36 per ton of the increase. We expect to complete implementation of our price increase during the September quarter.

As Jim noted, we continue to increase our box volumes and to outpace the industry. RockTenn's Fiber Box Association shipments increased by 3.8% over the June quarter of last year and 4% over the March quarter. Corrugated box shipments so far in July are up compared to the prior year period.

As of the end of June, RockTenn operated 93 corrugated container plants in North America. This is 7 plants less than we operated in the same quarter 1 year ago. This is consistent with our strategy of operating larger and more efficient box plants. Our average volumes per plant during the June quarter were 8% higher than last year and 4% higher than the March quarter.

We've continued to make progress rolling out our new box plant operating system and standard costing. To date, we've implemented the new operating system in 23 box plants and expect to complete the rollout in fiscal '14.

The combination of a common box plant system and standard costing will allow us to review and manage a better and more comparable metrics-per-plant operations, job costing and estimating, as well as implement common margin-based sales compensation plans.

Containerboard mill shipments to our box plants and external customers for the quarter increased to just over 1.8 million tons. Export markets remain healthy.

During the June quarter, we exported approximately 214,000 tons. This is in line with our recent quarters and last year's quarter. Average selling prices increased $102 per ton over the prior year quarter and $35 per ton over the March quarter.

58% of our export served Latin American customers.

Recently, export prices have increased the most in the Middle East, and we've reallocated tons to a point where the Middle East deliveries accounted for 19% of our total export shipments this past quarter.

In April, we successfully completed the first phase of our previously announced major modernization program at our Hopewell containerboard mill. The primary objectives of the $71 million capital investment were quality improvements, energy reductions and the capability to make lighter weight linerboard.

The project included a new primary dilution control head box and winder, as well as numerous upgrades to the paper machine dryers and controllers. We're seeing the expected quality performance and cost results coming out of the outage. Customers have noticed less variation in the quality characteristics of the paper. This is an improvement appreciated by Hopewell's external customers as well as RockTenn's box plants.

In Phase 2 of the mill upgrade planned for April 2014, we will install an extended nip press and additional drying capacity and continue to expect the capacity of the machines to increase by up to 350 tons per day. If market conditions do not support the increased production, then we'll be able to produce at levels comparable to those that we are producing today at lower operating cost.

We completed the scheduled outage of the #4 paper machine at Hodge in June. The outage was successfully completed in 10 days, 4 days earlier than planned. Since the outage, we're achieving the higher and more consistent production rates that we expected.

We continue to improve our operating performance across our mill system. During the June quarter, we set daily production records at our West Point mill, Coshocton mill and our recycled mill in Jacksonville.

As we discussed, we plan to increase our maintenance and repair spending for several quarters as we invest to improve the reliability of our mill system. These expenses were $15 million higher than in the prior year quarter. The cumulative result of the collective efforts of our coworkers was to increase Corrugated Packaging segment income for the June quarter to $196 million, or $123 million higher than last year's quarter.

Corrugated Packaging segment EBITDA for the June quarter was $297 million, $123 million higher than last year. Price increases accounted for $141 million of the increase.

Domestic corrugated box and board sales accounted for $123 million, or $73 per ton of the increase. Export containerboard sales accounted for $19 million, or $102 per ton, and were offset by pulp, which decreased by $1 million, or $10 per ton, over the prior year quarter.

Our volume variance over last year was 8 million. This is lower than might be expected from the shipment data until we consider that last year, we sold about 79,000 more tons from inventory than this year. This offset much of the increase in mill shipments during the quarter.

Moving to input costs, lower recovered fiber prices and higher wood prices effectively offset each other. Chemical, energy and freight cost would have increased by approximately $35 million; and labor, SG&A and other expenses would have increased by $29 million, but were offset by synergies and performance improvements across our integrated corrugated box and mill system.

Turning to our Consumer Packaging segment. SBS industry backlogs as of July 10 were 5.7 weeks, or 597,000 tons, up 83% from 326,000 tons at the end of December and up 28% from the 466,000 tons reported as of April 3. RockTenn's SBS backlogs now stand at 8 weeks. We informed customers of an SBS price increase of $45 per ton effective August 12 of this year.

CRB industry backlogs as of July 10 were 4.4 weeks or 187,000 tons, about twice the backlogs one year ago, up 27% from the 147,000 tons reported on April 3. RockTenn's CRB backlogs now stand at 5 weeks. We informed customers of a CRB price increase of $40 per ton effective July 19.

Sales volumes of our converted products of folding cartons and interior packaging were 5.3 billion square feet, up approximately 3.7% from last year. Sales increased by 1.2% and would have been higher but for the flow-through of lower paperboard prices over the past year.

Sales of merchandising displays increased by 5% over the prior year quarter and 3% over the March quarter. Margins were up in the quarter, both sequentially and year-over-year.

So far, in July, our segment volumes are flat to slightly higher than last year. We expect shipments to strengthen as the quarter progresses. The September quarter is typically the seasonally strongest quarter of the year.

EBITDA in the Consumer Packaging segment declined from $108 million to $101 million in the prior year quarter. While volumes of both paperboard and converted products increased, contributing an additional $8 million to EBITDA, selling prices of both paperboard and converted products declined and increases in energy and wood cost combined to more than offset the volume increase.

We expect improvement during the September quarter of seasonally strong demand and solid paperboard fundamentals. Recovered fiber prices were about $15 per ton lower this year as compared to the prior year quarter, due in large part to weaker Asian demand, including the impact of the Green Fence policy enforcement in China. While lower prices benefit our mill operations, they reduce the profitability of our recycled segment, where segment volumes declined by 10% over the prior year quarter as we operated 9 fewer plants and sold fewer tons to export markets.

We continue to focus on reducing the cost of our recycling business, and the benefits of the cost reduction efforts offset most of the effect of the decline in volumes. July postings for domestic and export prices increased by about $10 per ton, and we expect to continue modest increases in these prices during the September quarter.

At the end of June, our run rate have achieved synergies and performance improvements was in excess of $450 million, $75 million higher than the rate we reported last quarter. We've made significant progress in improving our box plants and containerboard mill systems for the long term, and we have a long runway of current initiatives in progress for us to meet and exceed our $550 million synergies and performance improvement target. We expect to reach the $550 million goal in the June quarter of 2014.

To say the obvious, we're going to continue to improve the performance of our operations well behind -- well beyond June of 2014. This is necessary in most manufacturing businesses and it's an area where we've excelled in the past and that we expect to continue to excel in the future.

Moving to input cost. Wood fiber cost declined, as we expected in the June quarter, sequentially by about 2% on a per-unit basis. Wet weather patterns, especially in the southern states, have tightened fiber markets.

We expect a small increase to prices of less than $1 per ton in the September quarter as we build inventory for the winter months. Natural gas month prices are approximately $3.74 per MMBtu, and the 12 month strip of approximately $3.92 per MMBtu compares to an average price of $4.09 in the June quarter.

We estimate that our depreciation and amortization for fiscal '13 will be $555 million, and approximately $145 million in the September quarter. Corporate cost decreased to $20 million in the June quarter, due primarily to various pension, post-retirement and other one-time items. We expect corporate cost of $28 million in the fourth quarter and approximately $95 million for the fiscal year. We estimate interest expense of $25 million for the September quarter.

RockTenn's effective tax rate for the June quarter was 30.2%. We expect the rate for the final quarter of fiscal '13 to be between 35% and 37%. At June 30, we've recorded unused U.S. federal, state and Canadian net operating losses and tax credit that can be used to offset a total of $592 million in cash taxes.

We expect to use the remaining $263 million tax benefit of our U.S. federal net operating losses during the next 2 years. We will use our remaining tax benefit of $231 million in cellulosic biofuel, alternative minimum tax and other federal credits over the following 2 to 3 years, depending on our taxable income.

In any fiscal year, after we've utilized all federal net operating losses, the cellulosic biofuel credits can only be used to offset a maximum of 75% of the federal cash taxes due.

Year-to-date, capital expenditures are $307 million, somewhat below the pace of our guidance of $425 million to $450 million. We continue to expect that our 2013 capital expenditures will land within the range of our guidance.

We expect to make cash contributions of $88 million to our pension plans in the September quarter, or $82 million in excess of pension expense. As you know, our unfunded qualified pension obligations vary based on the yield of long-term AA-rated corporate bonds.

We estimate that our GAAP discount rate for our U.S. plan at September 30 will be approximately 5%, or 78 basis points higher than the 4.22% rate used last year. Using 5%, we estimate that our unfunded qualified pension plan obligations at September 30 of this year will be approximately $1.1 billion. This is approximately $40 million lower for each 10-basis-point increase in the long-term rate.

We estimate that our cash contributions to our qualified pension plans in FY '14 will be approximately $213 million, and pension expense will be approximately $20 million to $25 million, a little less than fiscal year '13.

We estimate that the expenses related to deferred outage cost for the containerboard and bleached paperboard mills will be about $91 million for the full year fiscal '13 as outlined in the table on Page 13.

At the end of June, our net debt was just under $3 billion. Our Credit Agreement EBITDA was $1.35 billion, and our Credit Agreement debt-to-EBITDA ratio was 2.29x. We had over $1.5 billion in available liquidity. During the quarter, we reduced net debt by $144 million and made pension contributions in excess of expense of $45 million.

At this point, I'll turn it back to Jim.

James A. Rubright

Thanks, Steve. If we look forward to the September quarter and the balance of the year, the business environment for Corrugated and Consumer Packaging is encouraging. As Steve detailed, the industry fundamentals, operating rates, inventory levels, unmade orders are all healthy. Export demand remains firm, and export pricing continues to improve.

On our last quarter's call, we increased our full fiscal year 2013 guidance of free cash flow available for debt repayment, dividends and pension contributions in excess of expense from $9.50 to $9.75 per share to $10 to $10.50 per share.

Based on the strong results we achieved during the June quarter and our outlook for the fourth quarter, we're increasing this to almost $4 per share in the fourth quarter and to $11 to $11.25 per share for the full fiscal year.

We expect to be at or close to our 2x leverage ratio target by the end of September. In 2014, we expect that total CapEx will be in the range of $525 million to $550 million, against depreciation and amortization of $580 million. These capital expenditures are about $100 million higher than our prior guidance, but that prior guidance expressly excluded any capital for Boiler MACT compliance.

Based on the work that we've done so far, we now expect to spend about $45 million on Boiler MACT in 2014, which accounts for almost half of the increase. $28 million of that compliance cost will be part of our total estimated spending of about $80 million on our containerboard mills. We will also spend about $17 million in 2014 on a project with a total estimated cost of $68 million to build a new fluidized bed biomass boiler at our Demopolis bleached paperboard mill. This new boiler will replace 2 1950s power boilers, and thereby will avoid about $30 million in capital that would have been required on those 2 old boilers, solely for Boiler MACT compliance. The new biomass boilers' economics just on their own are high enough to justify this project, but with the avoidance/compliance capital, the project is very attractive. So we decided to move it forward into 2014 and '15.

In addition, we plan to build a new wood yard and chip delivery system at our Florence, South Carolina containerboard mill, and that will add about $40 million to CapEx.

The inadequacy of the current wood yard at Florence, as well as the recent experience we had with a similar project at our Demopolis bleached paperboard mill, support our view that this project is very low risk and will generate mid-20s returns based solely on fiber cost savings.

We also plan to spend about $8 million for some wet end improvements on PM2 at our Solvay recycled containerboard mill. We've done the same modifications at our Fernandina Beach mill, and so we expect again mid-20s returns from the modest capacity increase that will result at the Solvay mill. Our system balance needs these additional tons in the Northeast.

Regarding our expectation then concerning 2014 free cash flow available for debt reduction, dividends and pension contributions in excess of expense, although we're increasing our capital expenditure guidance by $100 million to include Boiler MACT spending in 2014 and the additional project I mentioned, we also believe we'll generate about $30 million in cash before capital expenditures, then -- was embedded in our prior guidance.

Thus, our free cash flow per share guidance after capital expenditures is now in the range of $13.25 to $14 per share.

With our current expectations and our higher earnings just reported this quarter and next quarter, we'll drive our credit agreement leverage ratio to or close to our 2x target by September, and we'll drop significantly below that target as we move through the next fiscal year. We believe that moving forward now in these high-return capital projects is a good use of a small part of the substantial free cash flow that our company is generating.

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 Phil Gresh from JPMorgan.

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

Just -- first question on the CapEx guidance that you talked about for FY '14. At your Analyst Day, you talked about a number of those, $4.25 to $4.50. And so obviously, this is higher than that. But I just want to get a sense of how much of that is kind of simply for FY '14 versus something that may carry forward. Obviously, there's the Boiler MACT component of it, but just want to get your thoughts on kind of the longer-term CapEx in light of this.

James A. Rubright

Right. Well, when we gave the $4.25 to $4.50, we were very clear that it didn't include Boiler MACT, and we hadn't done the engineering work, nor had we developed compliant schedules. And so $45 million of that, we're just going to -- we're going to spend in '14, and it's just our decision as to what the appropriate timing for those expenditures are. As I mentioned, if you back into the number, about 17 of that is -- we're treating as Boiler MACT, but it's part of a much larger project at Demopolis. As I mentioned, Phil, the cash that we're generating and the rate at which we're approaching our target has suggested to us that we ought to be moving forward on low-risk, high-return projects, and we're doing so in '14. The ones I've mentioned to you are very, very solid low-risk projects, and they're good uses of our cash. If we can invest in the mid-20s after-tax returns, we think we should do that. It's very difficult to go out beyond '14 at this time. I think we've been very consistent throughout at saying we felt that there was essentially a -- I won't call it unlimited -- but there is a very substantial list of opportunities to invest in our business beyond those that we've described that will provide very good returns, basically, on the basis of cost reduction, not productivity increases. So -- where that is total capacity increases. So I'm just not prepared to give a developed view with -- beyond 2014. Our view with respect to sustaining maintenance capital, though, has not changed significantly. We could run the business for a significantly lower number than even the $4.25 if we had to. That wouldn't be a wise long-term decision, but we could do it for a while. But once you get beyond -- we've got $350 million, those projects are going to have returns, and we're -- if you look at our history, we've had very good returns off of the kind of projects, like those that I've described, that we anticipate executing on.

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

Okay, that's helpful. And I guess somewhat related to this, as you think about the performance in the Corrugated business, you've talked in-depth on the call about the enhancements you've been making across a variety of mills. And so if you think about generally your margins in this business relative to your peers, your expectation that you're going to be achieving these performance improvements faster, can you talk about how you think you can close that margin gap versus the peers over time? How much do you think at this point is something that's structural versus something that's under your control with these CapEx projects that you're focused on?

James A. Rubright

Right. Well, I think the first thing to note is we -- I think we're making very significant progress. You have to get apples-to-apples to compare ourselves to the 2 public competitors, Packaging Corp and IP. I think the easiest comparison is Packaging Corp because they're solely a corrugated business. But to get comparable, you have to then allocate to our Corrugated segment the unallocated costs at the corporate level. When we do that, if you dial back a year ago, there was about a 640-basis-point gap between RockTenn and Packaging Corp. In the most recent quarter that we just reported, doing that allocation that I've mentioned, the gap is closer to 300 basis points. So we more than halved the gap in a year. We think that our EBITDA margins in the fourth quarter are going to be in the range of 20%. That would be a no-maintenance downtime quarter, so that would give you an idea of where we see the business currently, and that's not with the most recent pricing increase fully implemented for the whole quarter, but implemented by the end of the quarter. So there's a rate at which we're narrowing the gap. Now I'm just not familiar enough with the actual investment opportunities that our competitors have in their -- particularly their mill systems. Ours is terrific. I know we can take cost out of the mills. As we indicated, we just produced another 32,000 tons on an apples-to-apples basis this quarter versus a year ago. That's just off of basic operations and reliability that we've achieved. So I think we got the ability to move rapidly there. On the box plant side, our strategy is quite clearly to build large, high-volume, very low-cost plants. You've -- I think you're familiar with the Southern Container model, where we had the highest average of the -- anybody I know in the industry in terms of volume across our plants. We're building that today. Part of the capital that we outlined at the investor conference related to significantly upgrading the converting capacity in our box plants, and those plans are laid out really pretty much through 2015. And I think, again, we will take significant cost out of the box plant system, partly funded by closures, partly funded by concentrating the conversion in a smaller number of large, very modern, very high-capacity machines. So it's a little -- I can't really talk about how the rate at which we can close the gap to our competitors, so I don't know what their actions will be. But we have actions in place that, absent changes in pricing or the fiber input, should significantly increase our EBITDA margins over time.

Operator

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

George L. Staphos - BofA Merrill Lynch, Research Division

I just wanted to piggyback on the line of questioning that Phil had regarding EBITDA margins within Corrugated. And to the extent that you can have visibility on this, which obviously is limited, projecting out farther and farther into the future, do you think that as you get past the $550 million of collective performance improvement and synergies, that the incremental amount that you generate in '15 and '16 can keep up with, or outpace even, the cost treadmill as you've related over time? Do you think you still have that many number of projects and opportunities where you can continue to expand the net margin from what you see right now?

James A. Rubright

Well, I think we've done it for 14 years in Corrugated Packaging and in -- if you could take Southern's history, RockTenn's history in Corrugated and then our Consumer Packaging business, so my answer is yes. History would suggest that you can. Clearly, with the investments that we contemplate, we think that we will do so. So the answer is yes, but that answer is with a high degree of confidence given the fact that there will be capital associated with cost-reducing projects.

George L. Staphos - BofA Merrill Lynch, Research Division

Jim, do you think that most of the return will come from the box plants? Or will it come more so from the containerboard mills? I know again that it's sometimes a difficult topic to have visibility on, or at least discuss -- if you had to advise us where we should see more progress, where would that be?

James A. Rubright

I think the mill system has just tremendous potential given the large investments we can make that have immediate, significant reductions in cost. However, we will make significant progress on the box plant front as well. I don't think we've attempted to quantify what we'll do on the box plant side. And really, if you just look at the schedule of deliveries of the evolves [ph] and so forth that we're ordering, they're pretty far out to the end of this year. So I think the impact on the box plant system, you're actually going to see in fiscal '15 and '16.

George L. Staphos - BofA Merrill Lynch, Research Division

Okay. The last question, and I'll turn it over and get back in queue, if -- I don't know if you had mentioned it, but what kind of return are you expecting actually on the biomass project within Demopolis?

James A. Rubright

Yes. I think we said mid-20s. And I think it pro-formas out in that range, it's -- I mean -- and the fuel system -- the fuel is there. In other words, this is a bark burner. We're not putting in a waste burner. This is a bark burner, and we have the bark on site. So that's why the economics are really pretty clear because you're just displacing fuel. But if -- I know what the return is today based on fuel costs today that I'm going to displace, but you have to tell me what natural gas and fuel oil are going to be in 2015 and '16 before I can tell you what it will actually be.

George L. Staphos - BofA Merrill Lynch, Research Division

Okay. And that approximately will be done by '15 -- by '16 or '17?

James A. Rubright

We'll complete that, we hope, at the end of '15.

Operator

Our next question comes from Chip Dillon from Vertical Research Partners.

Chip A. Dillon - Vertical Research Partners, LLC

You mentioned of a, and I really appreciate that, sensitivity measurement that Steve gave us on the pension measurement. And of course, we know the funding is not really tied to GAAP. It's tied, I guess, to how the government defines it. So could you give us some read on what you think '15 would be? Let me give you the assumption that -- let's say that with the -- let's say the break stays exactly where they are now. Would the funding requirement change a lot in '15 versus '14? You mentioned the 2013 going in, in '14?

James A. Rubright

Well, first of all, we've given you our current estimate of what the funding is. And John's here. For '14, John, the number is...

John D. Stakel

$213 million.

James A. Rubright

Yes. We're going to fund $213 million. That's the total contribution...

John D. Stakel

Cash contribution.

James A. Rubright

That's the total cash contribution. Inexpensively, about $20 million. '15, we have an estimate, but that's going to depend upon some assumptions that -- where interest rates and other factors, investment returns and so forth, I just can't predict. So those are the assumptions we've made. I know we've given you a schedule and it takes you out to about 2018 before we're finished. It is interesting, though, that the unfunded liability from an IRS standpoint is significantly less than the gap unfunded liability. But really, to get into the tale of why that's different than what they are -- probably be better to do not on this call.

Chip A. Dillon - Vertical Research Partners, LLC

Okay. And then this might be for either you, Jim Rubright or Jim Porter, but a couple of questions on what we're seeing out there in terms of the -- a couple of -- 3 start-ups have either converted or new capacity. And I guess one question is we haven't noticed OCC really changing much in terms of the dynamics of pricing in the Northeast, given that you have another competitor that is sizable, buying OCC in upstate New York and other places and just didn't know if you had some reflection on that to help us? And then secondly, are you seeing sort of in the more standard markets that you traffic in? Any impact from the Dublin conversion, or for that matter, the conversion up in Whitby, Ontario?

James A. Rubright

Yes. Jim Porter is the closest to that of the 3 of us here, so I'm going to ask Jim if he'll reply.

James B. Porter

Yes, Chip. Relative to the 3 containerboard projects that have been talked about quite a bit in the Norampac mill and the Dublin facility and Atlantic Packaging's facility up in the Toronto area, I'll speak to that first. We would expect that the Norampac asset will be a good one and will produce a solidly quality product that will fill in it's -- they're intending much like the Solvay project that we did some years ago. It will be a very modern machine that should produce quality products for those converters that use the product. Dublin and Atlantic, though, we really haven't seen signs of that yet. They've been operating for some time now, but we're not seeing that in the containerboard market. So it -- there's rumors that it's a -- particularly the Dublin facility, is being used for bag paper, but we've really not seen it in the market. And the same with Atlantic. So I think the jury is out as to how those 2 facilities will perform relative to the competitive needs of our industry. Turning now to recovered fiber, there's no doubt that, over time, demand for recovered fiber will go up. We really have not seen that regionally, however, as a result of the Norampac project. We think they did a pretty good job of distributing their initial procurement requirements, and so that marketplace was not disrupted at all. And with the global softening principally with China's demand being off, we generally see a -- I would label as a neutral to soft market right now. So how we forecast that's going to improve over time, it would largely be driven by what's going to happen in China. And I won't try to forecast that.

Operator

Our next question comes from Mark Wilde from Deutsche Bank.

Mark Wilde - Deutsche Bank AG, Research Division

Jim, just curious, between you and Steve, with the debt coming down here, as you guys highlighted, thoughts on other uses of cash going forward?

James A. Rubright

Sure. Mark, the first thing we'll do -- we've just raised our dividend. It's still based on our -- the market price of our stock. If below our target level, that would be sort of the S&P 600 mid-cap range of 1.5 to 1.6. So I think we'll continue to look at ensuring our dividend is competitive. Below 2x, I don't think there's any immediate need to try to buy back stock. And I think we can be opportunistic there because I think we've said we'd be comfortable if we felt we had a use for the cash to get down to something like 1.5x debt-to-EBITDA. But below that, you really feel like you're under-leveraged. Neither Steve nor I are philosophically against it. In fact, we're philosophically in favor of buying back stock. You just want to make sure that you're doing it on a basis that is reasonable relative to the relative market value of your stock. Frankly, I think that's attractive today. But we are going to get to our target before we make any moves. The other thing, people, I think, are focused on the 3 major acquisitions that we've done. But in my 10 years since 1999, we've actually done 24 acquisitions. The range of acquisitions has been from very small to $65 million to $100 million. So we see opportunities out there for infill in our businesses. We just closed a very small box plant acquisition in the Southeast this quarter that somebody has got a box plant in connection with a larger acquisition. They had no use for it, and so we were the logical buyer. We got it at a very attractive price to us and a good transaction for them. Those kind of things arise. But they're not going to use up the multi-hundreds of millions of dollars of free cash flow that we anticipate generating.

Mark Wilde - Deutsche Bank AG, Research Division

Okay. Would you be willing to look at larger acquisitions at this point? And if you did, what would be kind of the focus areas that you would -- you'd look at?

James A. Rubright

Well, we look at stuff all the time, Mark. We've always been willing to look. The problem is finding stuff that you have sufficient conviction to transact. I'm not really prepared to talk about what opportunities we would be most focused on now. I think our strategy has always been to identify what we thought were opportunities to acquire businesses that were undervalued, in our view, relative to the market's perception of the business and also places that we can create value because they're extensions of either our business model or our competencies. And so that would be a guide for you of the kinds of things that we would consider. Certainly, we have the balance sheet to effective large transactions, as we showed with Smurfit. If a transaction is attractive enough, we'll issue equity, and we can do that and also do so on a good basis that can be successful for our shareholders.

Mark Wilde - Deutsche Bank AG, Research Division

All right. Just 2 other quick ones: one, if you could update us on the CFO search; and then two, Smurfit closed down the 2 mills that they had on the West Coast, Snowflake and Missoula. I just wonder whether having some kind of a West Coast mill presence would be a real issue for you guys going forward.

James A. Rubright

No. The -- obviously, there was an opportunity on the West Coast recently that we didn't participate in. I think we're fine. We'd actually like to acquire some more converting capacity. So I don't think West Coast capacity is necessarily an issue that we think we need to solve.

Mark Wilde - Deutsche Bank AG, Research Division

Okay. And then the CFO search?

James A. Rubright

Yes, I think that we expect to be closing that out very, very shortly.

Operator

Our next question comes from Mark Weintraub from Buckingham Research.

Mark A. Weintraub - The Buckingham Research Group Incorporated

I think you had mentioned going out of the quarter that your corrugated prices was up by about $36 per ton versus the starting point.

James A. Rubright

That's correct.

Mark A. Weintraub - The Buckingham Research Group Incorporated

I thought -- did you mention what it was on average for the second quarter versus -- for the June quarter versus the March quarter?

James A. Rubright

We did. That was $18.

Mark A. Weintraub - The Buckingham Research Group Incorporated

$18. Okay, great. And then lastly, you had talked about increasing your expectations in terms of cash generated from operations for next year by about $30 million. That -- was that an after-tax number you said?

James A. Rubright

Yes, that's just cash. It's not really an earnings number, just cash generation.

Mark A. Weintraub - The Buckingham Research Group Incorporated

And what would be the big bucket drivers of that $30 million? And I guess, really, what I'm trying to understand is, was there -- because you beat consensus expectations by quite a bit in the quarter obviously, and how much of that is that you're operationally performing, perhaps, even better than you would've anticipated and, hence, would be driving higher your expectations of cash generating power?

James A. Rubright

Yes. I think we had a pretty good feeling with respect to pricing. So part of it is the effectiveness with which we're recovering price, not only the price increase but, as I mentioned, our ability to really improve the lowest margin integrated accounts that we have. So there is some change in our price realization expectation. Another large part of it is performance, as well as cost inputs. I think we have a more favorable view of recycled fiber pricing next year than we might have had in April. But I'd have to go down line-by-line at the April data, which I'm not fresh enough to do right now, to be more precise on that.

Operator

Our next question comes from Anthony Pettinari from Citigroup.

Anthony Pettinari - Citigroup Inc, Research Division

Just a follow-up question on the 2014, 2015 capital projects. I think you had mentioned that you would -- you were hoping Demopolis would be completed by the end of '15, but I was just wondering if you had a sense of when did that project start. Is it at the beginning of 2014? Or sort of what is the potential disruption to the business, given that you're normally [ph] SBS mill?

James A. Rubright

To update [ph], there will be no business disruption because you're building a new boiler. And as I said, the fuel source is there because when we built the additional chip mill, we now are covered with barks. So this boiler is going to burn an existing fuel source on-site, and the other power boilers will operate until it comes online. I think Jim has probably, again, the best view of the construction schedule and the operation schedule, so I'm going to ask, Jim, when do you think will -- you don't have to be precise on when we're going to start, but when do you think we'll have it in service?

James B. Porter

Yes. The majority of the cash flow for the spending will hit '15, I believe. And this number is going to be pretty rough, but I think we've got targeted approximately $15 million of cash that gets expended in '14 and then accelerates. I believe that's the precise ...

James A. Rubright

But it will be in service at the end of '15?

James B. Porter

Yes, exactly. But I think part of the question was what is the cash flow commitment?

James A. Rubright

Yes, I think I've said it was $17 million in '14. So it's the number that I cited in the comments, and then the balance, in '15, when we anticipate it will be in service in '15.

Anthony Pettinari - Citigroup Inc, Research Division

Okay, okay. And then maybe another question for Jim. You've outgrown that industry over the last couple of quarters in corrugated with very good price realization. I'm just wondering, to the extent that you can, can you give us any color in terms of where this new business is coming from? Is it coming from national accounts, local accounts, or maybe what the commercial or operational changes you've made that have really allowed you to pick up the business?

James A. Rubright

Well, the basic improvement that we've made is just a very intense focus on satisfying our customers with better quality products on time and a much greater level of customer service. And that's embedded in the DNA of our culture, and so that's really the major thrust and the reason that we're being rewarded with business. And it's no -- in no one place. It's clearly balanced in all of our accounts, repeat business, et cetera. And we're just seeing greater confidence from our customers to do business with RockTenn because we do what we say we're going to do.

Operator

Our next question comes from Alex Ovshey from Goldman Sachs.

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

Does your fiscal year '14 free cash flow guidance includes the potential benefit of the recently announced bleach board and CRB price increases?

James A. Rubright

It's our current forecast based on everything we know today, yes.

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

And so are you factoring in that you see some realization of the recently announced?

James A. Rubright

Yes.

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

Okay, that's helpful. And then on the corrugated or containerboard pricing in the export market, are you expecting any sequential improvement in the September quarter relative to the June quarter in terms of your containerboard prices in the export markets?

James A. Rubright

Yes, I don't think we can -- I don't think we feel comfortable responding to what our view is with respect to export pricing. We -- I've said in my earlier comments that the export demand was firm, and we have been realizing higher pricing. But I'm not prepared to be that specific with respect to forecasting prices in the next 2 quarters of '14.

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

Okay. Just one more quick question on the consumer side. You mentioned that I think your backlogs in SBS were about 8 weeks, and I didn't quite catch what the number was in CRB. But can you just remind us what is the historical average level of backlogs in SBS and CRB for you guys?

James A. Rubright

Yes, over time, SBS can range to 3 weeks or below to 8. There was a period of time at an absolute peak that we were out to about 9 weeks, but I would say 8 weeks is very high relative to the normal expectation there. 5 weeks, again, is very good in CRB, and the industry unmade order data is quite strong.

Operator

Our next question comes from Phil Ng from Jefferies.

Philip Ng - Jefferies LLC, Research Division

This time is the -- this quarter is the first time you guys actually called out the synergy number in the EBIT bridge. The run rate was about $60 million. Is that a good proxy going forward for the next 2 quarters?

James A. Rubright

Well, it was $60 million higher than the prior year quarter. I'm not sure we'll be able [ph] to say what we'll achieve in the next quarter.

Steven C. Voorhees

First of all, I appreciate you noticing that because I think we've been -- just appreciate you noticing that. I don't have the number at my fingertips for what to expect going forward. We are very -- we feel very good about the progress we're making, as you can tell from our report.

Philip Ng - Jefferies LLC, Research Division

Okay, that's helpful. And then on the consumer side, price was more of a drag than I expected. But as you've flagged, the April CRB price increase went through, and you're seeing pretty good traction for the July increases for CRB and SBS. How should we think about pricing flow in throwing [ph] the box -- on the folding carton side? Is it a 6-month drag or lag or a little longer? How should we be thinking about that?

James A. Rubright

Well, in the past, we've talked about the fact that the contractual structure in the consumer products business is somewhat different than in corrugated, so it does have a greater lag. A number of contracts also have trigger points where the margin -- the published index has to increase by x before you get any adjustments. And the publication last quarter didn't hit some of those triggers. So I think that you will see more realization if we get a publication with respect to this increase than you would've with respect to the last. But I'm not -- I can't forecast what will -- what the publication change will be, and therefore, it will be difficult to actually schedule out the time period under which we'll recover it. But as a practical matter, yes, there is something like a 6- to 9-month lag to the increase, to the realization of whatever you're going to get from a published index pricing in consumer, unlike corrugated, where 5 months out and you got it.

Philip Ng - Jefferies LLC, Research Division

Got you. And I guess just one final question, you did flag that the Norampac mill is coming on nicely. It's a niche product. But I do understand you have a few mills situated in the Northeast as well. Should we be concerned about some of the customers switching suppliers? Or have you gotten any early indication on that front?

James A. Rubright

Jim?

James B. Porter

We think they'll be making a nice product. And clearly, within their ownership group, there will be integration of much of that volume. There is some impact to our current customer base as a result of that. However, we've known this for quite some time, and we've made provisions to place all of our capacity in, frankly, a very profitable way. So we do not see this as a major disruptive event in the Northeast.

Operator

Our next question comes from Scott Gaffner from Barclays.

Scott L. Gaffner - Barclays Capital, Research Division

Just looking at the pricing in the export market, I realize you didn't want to talk about the absolute number on the pricing, but should we expect your mix of pricing to actually improve? I think you mentioned you're moving some tons into -- I think you said the Middle Eastern market because of higher pricing there. So all else equal, should we expect that to go higher?

James A. Rubright

Well, you'll see higher realized pricing in the September quarter if nothing changes because the run rate at the end of the June quarter was higher than it was at the beginning. In fact, in some markets, materially higher. So yes, you will see higher average realized pricing on the export side, we believe, for the September quarter.

Scott L. Gaffner - Barclays Capital, Research Division

And is the pricing in the Middle East, has that been driven by better demand? Or what do you think has been driving the pricing higher there?

James A. Rubright

Yes, I'm going to ask Jim again to respond to that.

James B. Porter

I think, systemically, we're seeing just better supply-demand balance all over the world, with the same types of balance you see in North America, with operating rates being very high and inventories low. We are matching our production to the demands of our customers. And we frankly view our international customers the same as we do our North American customers. So we sell into those markets in a very balanced way, and we think that provides a more rational and stable pricing structure.

Scott L. Gaffner - Barclays Capital, Research Division

Okay. And when I look at the synergy realizations in the third quarter versus the second quarter, the mill and supply chain synergy realization went up to $150 million. It was $110 million last quarter. Is the incremental savings there more on the mill side, on the supply chain side? Can you just parse that out a little bit for us where those incremental savings are coming from?

Steven C. Voorhees

It's a number of categories. I think it's hard to split it exactly between mill and supply chain. But on mills, we have a -- just a large number of projects. We've included the natural gas projects, but there's also projects that do not require capital. On the supply chain, it's, I'd say, a significant number of the increase, and it's -- we're getting very good momentum from our supply chain group just on dispatching our system. We have a very large complex system, and each quarter, we're getting better at trimming machines and arranging the freight and providing the containerboard to the box plants. And I have been very pleased with the progress they've made over the past year in that regard.

Scott L. Gaffner - Barclays Capital, Research Division

Okay. And once we reach the $550 million, any idea what the upside could be beyond $550 million?

Steven C. Voorhees

I think once you get past $550 million, you're back to -- I think we'd have a -- there's a normal, there's a treadmill, and we're back to the business as it exists, which is we've got to continue to increase the efficiency of our system and our overall productivity to overcome that treadmill cost. It must be year after year. And like the treadmill cost, we have $100 million to $150 million. So our objective would be to take out that level of cost and, hopefully, more.

Operator

Our next question comes from Al Kabili from Macquarie Group.

Albert T. Kabili - Macquarie Research

Just wanted to follow up on an earlier questioning related to outpacing the industry. And it does looks like you got some share last year as -- in the Corrugated business. And as we look to this recent spring price hike, can you give us any sense as to how your shares kind of trending post this spring price hike?

James A. Rubright

Well, there's various ways that you have to look at our business. The one that we can do best that is comparable to one of the published statistics that people look at, which are the fiber box statistics, and fiber box doesn't include all of our operations because we got Mexico and other product sales that don't come in the balance, but our business was up 3.8% in the June quarter versus June of the prior year versus the industry. So it's a really pretty strong outperformance of the industry on a year-to-date basis. Versus the industry, we're up 3.1% on a fiber box basis. Those numbers are a little different if you take all of our system into play, the sheet feeders, the preprint in Mexico and so forth, where the numbers are somewhat lower than that, we think, compared to the industry. But that's the best apples-to-apples comparison I can give you.

Albert T. Kabili - Macquarie Research

No, and I appreciate that. I guess what I'm getting at is a chunk of this is just I believe you gained some share later last year. And I guess, what I'm wondering is sort of how that's trending as you lap some of that this fall. And when you look into next year, do you see that outperformance that you've had this year? Do you see that continuing? Do you expect you'll be sort of more -- as the way things are trending now, you'll be kind of closer to the FBA data that we track, et cetera, I guess is what I'm trying to get at?

James A. Rubright

Well, I believe the team we've put in place can continue to outperform the industry, and it's our goal to do so, but I'm not really prepared to try to forecast what that would be.

Albert T. Kabili - Macquarie Research

Okay. All right, I appreciate that. Second question is just on inventory, and I know you mentioned your desire to build inventory versus your -- where you're at. And I just wanted to get a sense of sort of where you're at and if that's still an expectation or goal to try and build some inventory later this year.

James A. Rubright

That's a great question because we're trying to get it right. And currently, our view is that we're on the skinny side of things relative to inventory to most effectively supply our box plants on a reliable basis, so that they have exactly the right product every time they need it because that expense is upgrading or having out of stock is very costly to us and negatively impactful to the supply chain. So our bias has been to creep inventory assembly line, and I believe you'll see the -- our fourth quarter inventory number is coming up somewhat. At that point, we really should be in pretty good shape, though. We've tried to be cautious, but we've slowly biased towards building inventory over time.

Albert T. Kabili - Macquarie Research

Okay, I appreciate it. And maybe you don't want to give out in this form, but any sense for how much you'd like to build?

James A. Rubright

In the order of magnitude, $25 million to $50 million, in that zone.

Albert T. Kabili - Macquarie Research

Okay. That's helpful. I appreciate it. Last question is on the labor and SG&A and on the bridge in the corrugated segment, you called out the $29 million higher year-on-year. And I was wondering, is that inflationary outlook pretty -- do you see that sort of pretty normalized for the quarter and it will continue? Or was that a little -- or was that trending a little bit higher than typical?

Steven C. Voorhees

I think it's trending a little bit. That's a little bit higher that you should expect it to trend.

James A. Rubright

Yes, I want to turn back to the question on Demopolis. One of our people just pulled out the construction schedule, and we were right but wrong. We said the end of '15. It's actually the end of calendar '15 was the actual startup date. So it's going to start up either December of '15 or January of '16. So the spending will fall around after that period of time.

Operator

Our next question comes from Steve Chercover from D.A. Davidson.

Steven Chercover - D.A. Davidson & Co., Research Division

Just one question at this point. It's very encouraging to see EBITDA margins approaching 20% in Q4, and there's a bit more to come. Is there a point where there's like a terminal margin, that if you go beyond it, you would attract entrance into the industry?

James A. Rubright

Well, I'm sure there is. The question is what is that margin, and I don't have a developed view on that.

Steven Chercover - D.A. Davidson & Co., Research Division

Do you think, perhaps, low- to mid-20s is a sustainable margin once the price increases in and the economy is just kind of growing at this kind of low single-digit rate?

James A. Rubright

Yes, but I'm really not going to speculate on what the maximum sustainable margin of this business could be.

Operator

Our next question comes from Adam Josephson from KeyBanc.

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

Just 2 questions. Jim, one on the recent volatility in the reported industry box shipments on an average week basis. Given what should be a fairly stable market month-after-month, what would you attribute those fluctuations to?

James A. Rubright

We're all looking at each other too. The data just does fluctuate, whether it's the supply chain data that's reporting anomalies, I don't know, there are a lot of potential answers, but over time, they tend to level out. But I agree with you, there's volatility in the reported data. The data is the data, I don't have an explanation.

Steven C. Voorhees

There's a lot of segments of the business that do have strong seasonal components, so the agricultural business, the pizza business, the retail business with electronic commerce, had a strong seasonal time. So you're -- if you mesh all those out over the course of the year, you'd expect them to be pretty stable. But in any particular month, you could have any of those segments just have a significant impact on the aggregate reporting with the industry.

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

I appreciate that, Steve. And Jim, just one more for you. You mentioned earlier that you consider your stock fairly attractive where it is today. Can you elaborate on that view at all?

James A. Rubright

Well, if -- over the long term, I think 8% to 10% free cash flow returns are really attractive. In low-risk businesses, we generated free cash flow return significantly higher than that for 15 years. And we're generating higher free cash flow returns than that today. And we've basically given an indication of what we think our cash will be next year, and that's a pretty strong free cash flow return, yes. And ultimately, we -- that's -- we're counting the pension contributions, but that's like reducing debt to us, and ultimately, that ends. And in fact, as you know, because we've got the tax benefits. Essentially, the tax benefits offset the after-tax cost of the unfunded pension liabilities. So on a sustainable basis, we're generating a very, very strong free cash flow return. And what we see is a very stable business with great investment opportunities. So it was your words that it was fairly attractive. I'd say it was attractive.

Operator

Our next question comes from Mark Connelly from CLSA.

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

I'll leave the operating questions aside. Just Steve, one question on the pension contribution. There's a lot of excess contribution and a lot of moving parts. Is this going to increase reported EPS? I've asked this question earlier.

Steven C. Voorhees

No, our pension expense is relatively stable. I think we've said it's $20 million to $25 million. So the effective cash, I think as you said, was just on an accounting basis, is not a huge impact.

Operator

Our next question comes from Daniel Downes from B.C. Holdings.

Daniel Downes

The M&A question that was posed before, I know you mentioned you're open to deals of all size. But you guys have really made a name with shareholders in creating tremendous value out of sizable deals for this -- for the -- versus the size of the existing enterprise. And just curious, I mean, to what extent is that, now that you're a much bigger company now, your balance sheet's in good shape, are those kind of opportunities existent at this size to make a big difference and that you can improve their operations and make -- generate shareholder value?

James A. Rubright

Well, if you'd look at RockTenn today, we have promised capabilities relative to what our capabilities were at the stage at which we've done each of the large acquisitions that you indicate, so I wouldn't see a reason why we couldn't continue to create significant value. But again, I have to go back to the point that we don't ever have -- we don't ever view ourselves as having been opportunistic in acquisitions. I think our success has been we have identified what we felt were missed price opportunities, that we went and then pursued. So as long as we are able to adhere to that acquisition strategy, I think we can replicate what we have done. Where we would go awry, I think, is if we transacted without that high degree of conviction, that we had a different and better view of value than the market.

Operator

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

George L. Staphos - BofA Merrill Lynch, Research Division

On consumer, Jim, do you have a view to the extent that backlogs have gone out so far, especially within bleached, whether there is a greater than normal, if you will, double booking or preordering has been done? Or do you think it's really reflecting finally a pickup at the consumer level in a good way in terms of demand and what it means for your products? That's question one. Question two, given that the backlogs are greater in bleached than they are for CRB, not trying to get into forward pricing and how effective you think you will be or not, why is the effective data, if I'm not mistaken, on the bleached pricing increase later out in the summer than the CRB index -- CRB price even though CRB has a somewhat lower backlog?

James A. Rubright

The answer to the second question is simply a function of when we announced having an effective date that gives your customers the notice that you think is appropriate in circumstances with respect to the particular price increase. So they simply stand on their own relative to the timing that we made the announcements. With respect to the SBS backlogs, at 8 weeks, there will always be some effect of people ordering farther out as they see the need to stretch out their orders. So there is some compounding effect, but it's still well relative. You still have a very strong order book, which we see based on strengthening demand of the limited portion of the overall SBS market that we're a participant in, which is the folding carton market, where, yes, the demand seems to be the driver behind those backlogs.

Operator

Our next question comes from Mark Wilde from Deutsche Bank.

Mark Wilde - Deutsche Bank AG, Research Division

Yes, just have a couple of follow-ons as well. One, Jim, I just wondered, any thoughts on why the China effect that a lot of us had worried about in the boxboard market hasn't shown up?

James A. Rubright

I don't know.

Mark Wilde - Deutsche Bank AG, Research Division

It's something we've all talked about, all of this Chinese boxboard capacity that so many players over there have been building. And just at this point, it doesn't seem to be having any effect on these markets.

James A. Rubright

First of all, the U.S. is a pretty contained market itself. So the fact that you've got capacity in China doesn't really speak to the North American market that much. And if you just look at the cost curves of the global competitiveness of Asian capacity imported to the United States, it just doesn't look terribly attractive to me, and I think that's part of the explanation. The second one is there's very strong, essentially, barriers to entry of a foreign competitor coming into the United States because they've got to build the supply chain. And building that supply chain, I think, takes time and commitment. And those are factors that -- I don't know whether they are the factors that have resulted in the effect that you and I have seen, but those are things that we think are structurally part of our market and our relative competitiveness relative to the potential of competition from Asia.

Mark Wilde - Deutsche Bank AG, Research Division

Okay. The other question I had is just you talked about moving the box business towards the Southern Container model. And I just -- I'm kind of curious, if you look at the best margin guy in the business, over time, it's been Packaging Corp., which also runs a lot of these smaller sheet plants. Do you intend to continue to run any small sheet plants or are you going to go strictly to kind of large box plants, kind of high throughput?

James A. Rubright

Well, Mark, I have to disagree with your premise that Packaging Corp. had the highest margins in the industry traditionally. In the year before RockTenn acquired Southern Container, Southern Container's EBITDA margins were 40% higher than Packaging Corp's. The margins were 26.4% a year before we acquired Southern Container. So that business model, in fact, was a very highly profitable margin with large, high throughput, very high-performing box plants. Now Southern did, as RockTenn did, also operate some profitable sheet plants, which can address customer segments that don't fit that model. So then the answer to the second question is, yes, we have a profitable sheet feeder business, both sheet feeders that we own and sheet feeders that we joint venture. We have a profitable sheet plant business that we will continue to operate. And we also have the largest capacity in preprint in North America, as you know. So all of those sectors contribute to our model, but the -- in effect, some of those are pretty profitable segments. But the box plant model itself is going to be a box plant model that operates on the basis of very high capacity, very well-capitalized plants. And we have -- you're seeing the results of that. We've taken 20% of the box plant capacity out in terms of number of plants and increased the sales and throughput of the system.

Mark Wilde - Deutsche Bank AG, Research Division

Okay. That's the answer I was looking for, and I stand corrected because I do remember those 30% Southern Container margins. I was just never clear on how much of that was just the mill and how much of that was the converting business.

James A. Rubright

Okay. Sure.

Operator

[Operator Instructions] Phil Gresh from JPMorgan, you may ask your question.

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

Yes, a couple of quick follow-ups. Just On the M&A front, wondering whether you might, at some point, have international aspirations. You've obviously participated in some international markets, but you're largely domestic, so wondering how you think about that today.

James A. Rubright

Well, we have defined our principal markets as North America, and we're a large converter in Canada, both in Consumer and in Corrugated Packaging. We have a significant participation in Mexico in corrugated. As you know, Mexico is growing -- our operations are growing at 5% plus, and we need additional capacity in Mexico. We're a large exporter to Central America. It would be an attractive place for us to go. We like South America. We really haven't found the right opportunity in South America. I think we've indicated that we don't see the likelihood of Asia for us. And Europe would be challenged to apply our business model, but I wouldn't rule out Europe as a market for us, given the pull from our customers.

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

Okay, that's helpful. And then just one final question on cash taxes. Obviously, you had a lot of moving pieces in terms of credits and things like that. Just wondering if you could simplify it for us a little bit and share with us what kind of cash tax rate you're assuming for this year and next year in your free cash flow guidance.

James A. Rubright

Cash tax rates, close to 0 this year and in 2014. I think when you run through the NOLs and you're seeing better NOLs, you get out. And just I guess it's probably 16. And then we mentioned the cellulosic box. Credits can only offset 75% of your tax liabilities, so you will start to see some tax liability on a cash tax basis. And we do -- and then based on your state position, we do pay some state taxes, cash taxes now, but it's relatively small compared to the overall income picture.

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

So is it fair to say kind of low single-digit percent for -- all-in for the next 2 years?

James A. Rubright

Yes.

Operator

I have no further questions in queue.

James A. Rubright

Well, thank you, all very much for joining our call. We'll sign off.

Operator

This concludes today's conference. Thank you for participating. You may disconnect 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!

Source: Rock-Tenn Company (RKT) Management Discusses Q3 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts