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

Temple-Inland Inc. (NYSE:TIN)

Q1 2010 Earnings Call

April 21, 2010 9:30 am ET

Executives

Chris Mathis – Vice President of Investor Relations and Treasury

Doyle Simons – Chairman and Chief Executive Officer

Pat Maley – President and Chief Operating Officer

Randy Levy – Chief Financial Officer

Analysts

Gail Glazerman – UBS

Richard Skidmore – Goldman Sachs

Mark Weintraub – Buckingham Research

Claudia Hueston – JPMorgan

George Staphos – Bank of America

Mark Wilde – Deutsche Bank

Chip Dillon – Credit Suisse

Peter Ruschmeier – Barclays Capital

Joshua Zaret – Longbow Research

Presentation

Operator

Good morning. My name is Cherise, and I will be your conference operator today. At this time, I would like to welcome everyone to the Temple-Inland first quarter 2010 earnings call and webcast. (Operator Instructions) I would now like to turn the call over to Mr. Chris Mathis, Vice President of Investor Relations and Treasury. You may begin.

Chris Mathis

Thank you. Good morning. My name is Chris Mathis, Vice President of Investor Relations and Treasury for Temple-Inland; and I would like to welcome each of you who have joined us by conference call or webcast this morning to discuss the results of first quarter 2010. Joining me this morning are Doyle Simons, Chairman and Chief Executive Officer of Temple-Inland; Pat Maley, President and Chief Operating Officer; and Randy Levy, Chief Financial Officer.

Please read the warning statements in our press release and our slides concerning forward-looking statements, as we will make forward-looking statements during this presentation. In addition, this presentation includes non-GAAP financial measures. The required reconciliation to GAAP financial measures can be found on our website at www.templeinland.com.

This morning we will give a presentation on the results for first quarter 2010. After the completion of the presentation, we will be happy to take your questions. Thank you for your interest in Temple-Inland, and I would now like to turn the call over to Doyle Simons.

Doyle Simons

Thank you, Chris. Good morning, everybody, and welcome. We had a solid quarter despite challenging operating conditions due to the extreme weather in the quarter and rising input costs. Excluding special items, we recorded a net loss of $0.01 per share. This compares with a net loss of $0.07 per share in fourth quarter 2009 and net income of $0.30 per share in first quarter 2009.

Special items in the quarter were an after-tax charge of $0.03 per share including a charge of $7 million or $0.07 per share related to closing three converting facilities in connection with the second phase of box plant transformation, a charge of $3 million or $0.03 per share due to enactment of the Patient Protection and Affordable Care Act, and a benefit of $7 million or $0.07 per share from the reversal of reserves related to alternative fuel mixture tax credits.

Now let me specifically address each of our segments. Corrugated packaging. In corrugated packaging, we delivered solid operating results as cost improvement and higher volumes somewhat offset dramatically higher input costs in the quarter. Corrugated packaging segment operating income was $46 million. This compares with $57 million in fourth quarter 2009 and $105 million in first quarter 2009.

Operating results in first quarter 2010 compared with fourth quarter 2009 were down due to rising input costs. Our mills ran well in the quarter, and we continue to realize the benefits of box plant transformation.

In terms of absolute input costs comparing first quarter 2010 with fourth quarter 2009, input costs were significantly higher with OCC up $34 million, virgin fiber up $7 million, energy up $12 million, and freight up $7 million. OCC costs escalated throughout the quarter and the first quarter average price was up almost $70 per ton compared with the fourth quarter average. The extremely wet weather in the south and southeast resulted in higher virgin fiber prices.

The increase in freight costs were primarily attributable to higher prices and the fact that we had five more shipping days in first quarter 2010 compared with fourth quarter 2009.

Compared with first quarter 2009, OCC costs were up $53 million, virgin fiber was up $9 million, freight was up $5 million, energy was up $3 million, and chemicals were down $4 million.

While OCC prices rose throughout the first quarter, going into the second quarter OCC prices are declining and were down by approximately $30 in the month of April compared with March. Virgin fiber costs have also began to moderate.

Published linerboard prices moved up $50 a ton in January 2010. Most of our box prices are either directly or indirectly influenced by adjustments in published linerboard prices. Our average box price was up $2 in the first quarter compared with fourth quarter 2009. The majority of the earnings benefit from the January linerboard price increase will be realized in the second quarter. Current box prices are up $40 per ton from the low in February.

On an average week basis, our box shipments were up 4% in first quarter 2010 compared with first quarter 2009 and were essentially flat compared with first quarter 2008. On an average week basis, industry box shipments were up 2% in first quarter 2010 compared with first quarter 2009. On an actual basis, our box shipments in first quarter 2010 compared with fourth quarter 2009 were up over 6%. We continue to see a steady improvement in box demand as the economy recovers.

We took 36,000 tons of maintenance-related downtime in the quarter primarily at our Bogalusa, Louisiana, mill. Our quarterend inventory levels were at their lowest first quarterend levels since 2002. This inventory level is below the practical minimum we need to cost effectively run our system. In second quarter 2010, we anticipate maintenance downtime of approximately 26,000 tons, primarily at our Rome, Georgia, and Ontario, California, mills.

As we move into the second quarter, box demand is improving, prices are rising, OCC and virgin fiber costs are easing; and we will continue to realize the benefits from box plant transformation.

Building products. Building products lost $9 million in first quarter 2010 compared with the loss of $18 million in fourth quarter 2009 and a loss of $2 million in first quarter 2009. Building products markets remain challenging in the first quarter as housing starts continue to languish near historically low levels. Despite these difficult markets, our earnings improved in first quarter 2010 compared with fourth quarter 2009; and we generated positive EBITDA of $2 million.

Lumber prices were up $62 in first quarter 2010 compared with fourth quarter 2009 and up $72 compared with first quarter 2009. Rising lumber prices were partially offset by higher log prices in the quarter due to the weather. Lumber volumes were down compared with fourth quarter 2009 and first quarter 2009 due to log availability.

Gypsum prices were down $3 in first quarter 2010 compared with fourth quarter 2009 and down $26 compared with first quarter 2009. Gypsum volumes were up compared with prior quarter and year ago levels.

Particleboard prices were up $4 compared with fourth quarter 2009 but down $24 compared with first quarter 2009. Particleboard volumes were up compared with fourth quarter 2009 and flat compared with year ago levels.

As we move into the seasonally stronger second quarter, pricing and demand have improved for all of our building products. In fact, compared with first quarter 2010, current lumber prices are up $45, gypsum prices are up $10, and particleboard prices are up $5. With the changes we made to our cost structure, we are well positioned to capitalize on this recent recovery in pricing and demand and anticipate being solidly profitable in the second quarter.

Now let me address a few financial highlights for the quarter. Let's start with cash flow. For the first quarter, total cash provided by operations was $1 million. The operations portion, which can be thought of as funds from operations, provided $52 million in the quarter which more than covered the sum of our capital expenditures of $33 million and our cash dividend of $11 million. The working capital portion in the quarter was a $51 million use of cash, which was consistent with our typical first quarter seasonal usage.

Moving to the balance sheet, our long-term debt was $764 million at quarterend, which was up $54 million in the first quarter, again, due to our seasonal working capital needs. Our liquidity at quarterend was very strong. Our committed credit facilities totaled $1.075 billion. Our unused borrowing capacity was $836 million with no limitations, and we have significant headroom versus our covenants.

To wrap up the financials, interest expense was $13 million in the quarter down $6 million or 32% versus a year ago. General and administrative expenses were $18 million in the quarter, which was consistent with our prior guidance.

Just one final point regarding our effective tax rate. That is our guidance for effective tax rate for the year has not changed and remains at 39% on a book basis. As noted in our earnings release, we recognized a onetime income tax expense of $3 million related to the impact of health care reform legislation on the Medicare Part D retiree drug subsidy program.

In summary, first quarter 2010 was a solid quarter. We continue to execute our strategy, focus on integration, striving for low cost, improving our mix and margins, and profitably growing our business. In the quarter, we began to implement the second phase of our box plant transformation and announced the closure of three converting facilities. Our earnings and returns will continue to benefit from structural cost improvement resulting from our box plant transformation.

Looking forward, we are optimistic as box demand is improving, prices are rising, input costs are easing; and we continue to realize the benefits of box plant transformation in corrugated packaging. In building products, demand and pricing is improving for all our products; and we anticipate a return to solid profitability in the second quarter in this business.

Thanks for your interest in Temple-Inland. Operator, we will now open it up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Gail Glazerman – UBS.

Gail Glazerman – UBS

Good morning. Doyle, you mentioned your current box prices are up, I guess, $40 from the low. Would you expect to see further pricing on top of that from the first price increase or is that about it?

Doyle Simons

No, that's where we are currently and that's why we gave you that price point, but we would anticipate a full pass-through of the linerboard price increase of $50 in boxes from the low point to the high point.

Gail Glazerman – UBS

Okay. On building products, can you give me some of your thoughts on what drove the pricing trend, particularly in the lumber markets in the first quarter and how, I guess, you see that playing out in the second quarter? Do you think it really is sustainable? And just talk about that a little bit.

Doyle Simons

Building products has been interesting through the first quarter and into the second quarter. As we see it, the rally started based on what was happening on the supply side with the lack of supply due to capacity closures, curtailments, and fiber availability, Gail. Then you layer on top of that the fact that you had very, very low inventories throughout the supply chain. That was first on the supply chain.

Then on top of that you had some things happen on the demand side, which started with the restocking of inventories by our customers and then as you moved into the March, April type timeframe, a seasonal pickup in demand. And then you also had weather improvement in March and April after some very tough weather in January and February.

Again, from our viewpoint, the rally started on the supply side and has now been supported by some help on the demand side. In terms of the sustainability of the rally, Gail, I think we need to see an improvement in housing beyond seasonality.

With that said, I will tell you we're very encouraged by the numbers that came out last week including the March housing permits that were up 7.5% above the February 2010 levels and up 34% compared with March 2009 levels. Then also to support that, housing starts were up 2% compared with February 2010 levels and up 20% compared with March 2009. That's the way we see the rally.

Again, we're encouraged by what we've seen; and for it to be sustainable we just need to see some continued improvement in housing permits and housing starts.

Gail Glazerman – UBS

Just last question. On the input cost side, can you talk a little bit about kind of what you're expecting for OCC over the next couple of months and maybe wood as well?

Doyle Simons

On the OCC front, as we mentioned in our prepared comments OCC ran up throughout the first quarter; but encouragingly OCC was down $30 in the month of April. As you very well know, predicting what's going to happen on OCC has historically been very difficult and visibility is limited. I can tell you our best guess, and it's nothing but that, but our best guess is that OCC will be down another $10 to $15 in the month of May.

In terms of virgin fiber costs, clearly we saw it run up in the fourth quarter and it continued into the first quarter. Virgin fiber costs have started to decline or moderate as we've seen the weather improve, and we think that will continue through the balance of the second quarter.

Operator

Your next question comes from Richard Skidmore – Goldman Sachs.

Richard Skidmore – Goldman Sachs

Good morning, Doyle. Can you just talk about the box plant transformation a little bit and how we should anticipate the pacing of cost savings to roll through in 2010?

Doyle Simons

Let me give a general comment on that, and then I am going to have Pat talk about specifics. The general comment would be as we indicated when we announced box plant transformation II, we anticipate $10 million of benefit in box plant transformation I in 2010 and $10 million of benefit from box plant transformation II in 2010.

As we indicated at that time, it will be lumpy; and we will provide you with an update on the progress at the end of the year, Rick. With that, let me turn it over to Pat so he can give you a general sense of the progress we're making in box plant transformation II.

Pat Maley

I would say that phase II is off to a very encouraging start. The technology that we've employed is yielding better than forecasted results. We've got a lot of moving pieces to the transformation across the U.S., but so far results are ahead of plans.

Richard Skidmore – Goldman Sachs

Then just maybe on a separate topic, just in building products, can you just talk about where your utilization rates are and how you expect those will move from first quarter into the second quarter in building products?

Doyle Simons

As we said, the first quarter markets remained fairly difficult. Operating rates throughout the system were in the 50% to 60% range. As we move into the stronger second quarter and hopefully see some improvement in housing demands, we would anticipate that those operating rates would move up.

Operator

Your next question comes from Mark Weintraub – Buckingham Research.

Mark Weintraub – Buckingham Research

Thank you. Doyle, can you give us a sense as to how much the higher log costs hurt you in the first quarter and has there been any signs of that easing in the second quarter?

Doyle Simons

Mark, I would say, I am not going to quantify this, but clearly a portion of the run up in lumber prices as I said in my prepared comments was offset by higher log costs in the first quarter due to the weather. As we move into the second quarter, the weather has improved and log prices have begun to decline. What you are going to have hopefully in the second quarter is lumber prices going up and log prices moderating.

Mark Weintraub – Buckingham Research

Okay. Then unrelatedly, you gave us information on your maintenance downtime in the corrugated business? Can you provide us with a sense of how much in the second half of 2010, how much maintenance downtime there will be?

Doyle Simons

Mark, we, as you know, provide that on a quarterly basis; and we will update you on the third quarter when we report second quarter earnings.

Mark Weintraub – Buckingham Research

Okay. But would it be fair to say, it seems like you will have taken maintenance at certainly more than half of your mills already through the first half of the year. Am I right to extrapolate that maintenance downtime in the second half of the year would probably be less than in the first half of the year?

Pat Maley

That would be correct.

Operator

Your next question comes from Claudia Hueston – JPMorgan.

Claudia Hueston – JPMorgan

Good morning. I was just hoping you could elaborate on the inventory situation in containerboard. You talked about being below practical minimum. Can you just provide a little bit more color on how that situation is fairing now since the end of the quarter? Have you been able to build inventory now that the weather is getting better and how sort of the inefficiencies are remedying as you move through the quarter?

Pat Maley

This is Pat. I would characterize the inventory situation at Temple-Inland as the following. We're scrambling to keep our plants in paper, even after significantly reducing our export shipments. We cut our export shipments in the first quarter from the fourth quarter in about half, and in the second quarter we would expect to reduce that export exposure by another third.

We've essentially, I wouldn't say backed out, but we've significantly reduced our containerboard shipments to the export markets to keep up with domestic box demand. We're going to have to really hustle to keep making enough paper to supply our box demand.

Claudia Hueston – JPMorgan

Thanks, that's helpful. Then just broadly looking at demand in the containerboard and corrugated market. Are there any end markets that have been particularly surprising to you from a demand standpoint either from upside or downside or is the recovery you are seeing now pretty broad based?

Pat Maley

I would say that we've seen volume improvement across the board, a broad based recovery that is steadily improving and reflective of the overall economic conditions in the country improving.

Operator

Your next question comes from George Staphos – Bank of America.

George Staphos – Bank of America

Thanks, good morning. Just the first question I had, if I look at your cost detail, and thanks for providing that, you absorbed roughly speaking $50 a ton sequentially in cost from fiber, etc.

Your performance, I don't like to editorialize on calls, but your performance in the quarter was exceptional on a cost basis. The variance or your ability to absorb that, what drove it? Was it at the mill level? Was it at the box plant level? I am assuming some of it was driven by BPTP, the box plant transformation program, but give us a little bit more color to how you were able to take that bullet and put up what looked to be a pretty good quarter?

Doyle Simons

Thanks for that comment, George, and you're right. It was on the cost side, and it was essentially all of the things you listed. We did have, versus the prior quarter, roughly $60 million in absolute increase in input costs. That was partially offset or mostly offset by higher box volumes which we outlined in the prepared comments, slightly higher box prices.

We did benefit on the containerboard side in our outside sales also. As Pat alluded to, we cut back in the export markets; but we did benefit from the higher containerboard price. But one of the key drivers was lower cost both on the mill side and on converting and part of that is clearly due to box plant transformation.

George Staphos – Bank of America

Doyle, I hear you. If we can exclude pricing from the analysis, which we try to do on the back of the envelope, again, on the cost side, was it more in the mills or more in the box plants? Can you parse a little bit more? If you can't, we respect that but just want to try one more time.

Doyle Simons

George, as I said earlier, we will provide a complete reconciliation at the end of the year on box plant transformation and the benefits. I guess my message to you is we continue to get benefits from box plant transformation in driving down converting costs. And as also mentioned, our mills did operate well in the quarter so that benefited us also.

George Staphos – Bank of America

One last question then I will turn it over. As we think about the strategy for Temple-Inland, not sort of the next couple of quarters, but looking out over the next few years, clearly the biggest thing that would appear on your windshield right now is the box plant transformation, at least in terms of what you can talk about.

Are there any other things that we should keep in mind in terms of your strategy, you know, how Temple-Inland, especially within the box business here, how you may develop from a commercial standpoint over time? And how does the new transformation program allow you to access markets? How is it going to change your approach to the market from here on a going-forward basis? Thanks a lot. Good luck in the quarter.

Pat Maley

I would add, I guess, that the technology that we're employing in phase II, I think, is somewhat revolutionary in that we're going to be able to run shorter orders with less changeover time and be able to supply higher graphics to our customers. That's going to allow us to not only lower costs, but also serve markets where there's a premium paid for those features of quicker delivery, shorter orders, and better graphics.

We think that phase II is going to be a pretty exciting time. I they Doyle has mentioned that as with any large undertaking it's lumpy, but we're pretty encouraged from what we see through the first three months.

George Staphos – Bank of America

Thanks, guys, I will turn it over.

Operator

Your next question comes from Mark Wilde – Deutsche Bank.

Mark Wilde – Deutsche Bank

Good morning. Doyle, can you just talk about what you think the right debt level is for the company going forward?

Doyle Simons

Sure, Mark. Let me talk generally about our financial priorities and then I will tie it directly into our debt level as we go forward. We have been very consistent with our financial priorities. First and foremost is returning cash to shareholders. As you know, we actually raised our dividend in the first quarter of this year.

Our second financial priority, Mark, is to reduce debt. We believe we can continue to create value by paying down debt. We were very pleased with our progress in 2009 as we paid down over $480 million of debt. While debt was up seasonally in the first quarter as I mentioned, we clearly anticipate reducing debt as we move through the balance of the year. I will come back to our target level in just a minute.

Third is to continue to invest in our business. We're doing that through box plant transformation II. As we've already said on the call today, we are really excited about the progress that we've made so far and the opportunities we have in front of us.

Finally, we look for opportunities to profitably grow our business. But it's always being very disciplined based on ROI. In terms, Mark, of our targeted debt level, we believe our book debt, the total cap, should be in the 35% to 40% range. As I mentioned, our first priority, our nearterm priority, will be to continue to pay down debt until we each that level.

Mark Wilde – Deutsche Bank

Okay. I wondered, Doyle, can you provide an update of pension status at the end of the year?

Doyle Simons

I will ask Randy to do that.

Randy Levy

Good morning. As you know, we've got a little bit different asset allocation in our book. We're over 80% matched with high-grade credits to our duration. The pension status at the end of the year from a PPA kind of perspective, which drives the cash, is at about 90%. You're going to see in the 10-K something that looks a little bit lower than that because in the 10-K you are going to see the difference between the projected benefit and the accrued benefit plus our [surp]. It will be 9 or 10 points lower when you look at it on an accounting basis. That's where we stand.

Mark Wilde – Deutsche Bank

Okay, then just one other question maybe for Pat or Chris Mathis, just a really kind of nit here. If I look at your box volumes on the earnings release, it looks like on an actual basis you were up about 2% and the FBA actual was up just shy of 4%. When I look at your presentation on an average week, it's actually the opposite of that. I wonder if you can just help me understand what's going on there?

Pat Maley

Can you repeat that question, Mark? I'm sorry.

Mark Wilde – Deutsche Bank

Yes. If you look at the FBA numbers for the first quarter for the actual shipments, they're up about 3.7%. If I look at your numbers for the first quarter, which are actual, you're up about 2%. But when I look at the graph that's in the handout here, which you label as average week, you're up 4% and the industry is only up 2%. I am trying to figure out what causes that relationship to get inverted when we go from actual to average week.

Pat Maley

Mark, on an absolute basis, our box shipments in Q1 2010 were up about 18,000 tons over Q1 2009; and we had one less operating or shipping day in 2010.

Mark Wilde – Deutsche Bank

Listen, I will chase this down with you offline; but I am a little bit kind of puzzled trying to reconcile it, the numbers here. It's not a big issue.

Operator

Your next question comes from Chip Dillon – Credit Suisse.

Chip Dillon – Credit Suisse

Good morning. Just a quick question on the timing of the box prices. I guess also, thinking about the reduced exports, too. You mentioned, I guess as of today, in mid- to late April, you are up 40 from the bottom. Does that effectively mean that maybe some of your customers, say 20% of your sales, are protected for say three months? And will we expect a similar pattern with the next round of price increases, which I believe is at least $60 a ton?

Pat Maley

We don't provide the exact percentage, but it's fair to say that the number of our larger accounts' pricing adjust either on a quarterly basis or on a semiannual basis. So to Doyle's point, we will see some additional benefit ex any mix changes come June 1 from the first increase.

Chip Dillon – Credit Suisse

That wouldn't mean you would necessarily have to wait until September to get all of the April board and May box increase or would that mean that?

Pat Maley

Essentially, come June 1, the first price increase will have fully manifested itself.

Chip Dillon – Credit Suisse

And when will the second one be fully manifested?

Doyle Simons

You will see the same pattern on the second one as you saw in the first, Chip. It will be the same formula.

Chip Dillon – Credit Suisse

Okay. Also on this, you know in past cycles, particularly in '93 to '95, you tended to see box price increases gradually become bigger than the board increases, mainly because the first box increases were a little bit less and the independents had to make that up and the market was just stronger. Is there any prospect that you see where you might actually net more than $60 a ton in the second round of box price increases?

Doyle Simons

Sure, that's possible. If you go back to the price increase that was back in the 2008 type time frame, we got a higher pass-through on boxes than we did on the linerboard. Clearly there's an opportunity for that as we move forward.

Chip Dillon – Credit Suisse

Then the last real quick one. You told us about the downtime in the first quarter. Was there any additional downtime that you had to take because of difficulty procuring wood? If there wasn't, did you really have to stretch at least distance-wise to get your wood?

Pat Maley

We did not incur any downtime due to a lack of fiber, but I would tell you that we really had to hustle to wood the mills and that did come at a higher delivered fiber price than would be normal for sure.

Operator

Your next question comes from Peter Ruschmeier – Barclays Capital.

Peter Ruschmeier – Barclays Capital

Thank you, good morning. I have a couple questions maybe for Pat. I was curious in the building products business, Pat, if we've seen this uptick in order activity, I think, of late. If there's any way you can kind of qualitatively break it down for us in your estimation how much is end market demand pullthrough versus how much is channel stocking? And does it vary by product line across gypsum lumber and particleboard or is it pretty consistent? In part, I am trying get at what level of inventories do you think are out there in the pipeline and how much stocking is going on?

Pat Maley

I would characterize it as Doyle said that across all our product lines we're seeing pretty good demand lift and pricing is following. I would say that it feels like to us that the housing start numbers are going to be coming up given the permit level increases. I would reinforce the fact that our markets are better than the national averages. When you look at the U.S. housing starts or U.S. housing permits, the markets that we serve are our advantage. We are seeing, I think, better end demand pull than maybe is general demand in the United States.

Peter Ruschmeier – Barclays Capital

That's helpful. And when you look at your own raw material inventories, log inventories, both in building products and also fiber at the mills and containerboard, any way to quantify on a scale of one to ten how low are your log decks and how long do you think it will take you to get them back to more normal levels?

Pat Maley

I would say that we saw the ground, if you will, across the sawmill system pretty frequently in the first quarter. As of late, we've been able to build our inventories such that we're approaching pretty good, viable, sustainable inventory levels that would be on the building products side. On the containerboard side, it's somewhat similar. Our pulp wood inventories are quickly approaching those that we need to begin ratcheting down further the price that we're paying for fiber.

Peter Ruschmeier – Barclays Capital

That's helpful. Then on the export liner side. Pat, I think you mentioned you've really brought those tons back in to feed into your own converting. Can you remind us for last year how much export volume did you have say for all of' '09?

Pat Maley

Yes.

Peter Ruschmeier – Barclays Capital

Or even as a percentage of your output?

Pat Maley

I am looking here. But I would say we're going to end up maybe 50% of where we were in 2009.

Doyle Simons

Pete, we're not big players in the export market, as you know.

Peter Ruschmeier – Barclays Capital

I guess on a related point. Any update on what you're seeing in Mexico in terms of the trends you are seeing there?

Pat Maley

Our Mexican business performed well. I guess a point of color would be that from an industrial production standpoint and business that boxes go into in that segment, basically we see that's returned to about 2007 levels. So the kind of shock wave that went through the U.S. and Mexican markets, at least in Mexico as returned to 2007 levels.

Peter Ruschmeier – Barclays Capital

Just lastly and then I will turn it over. You mentioned that box price up $40 from the low in February. Can you give us a number for how much it's up from the average of 1Q?

Doyle Simons

Pete, that number would be approximately $30 versus the average in first quarter.

Operator

Your last question comes from Joshua Zaret – Longbow Research.

Joshua Zaret – Longbow Research

Thank you. First question, one of your unusual items was the reversing of reserves established in connection with the alternative fuel credits. I was wondering is that related to the fact that you were voluntarily paying about 15% of the 20% alternative minimum tax or is it some other issue?

Randy Levy

No, it's not related to the cash taxes we were paying. Let me just walk you through this real quick. In 2009, we used alternative fuel that generated credits totaling $228 million. We recognized $218 million in credits; and due to a potential risk that a portion of the alternative fuel we used might not qualify for the tax credit, we recorded a book reserve of $10 million.

In the first quarter of 2010, the Office of the Chief Counsel of the IRS issued a memorandum; and that memorandum provided us sufficient clarification that all of our alternative fuel that we used qualified for the tax credit. As a result, what we did was we reversed the reserve and recognized $10 million in alternative fuel mixture tax credits in the first quarter of 2010. Of course that's related to the actual alternative fuel that we used in 2009.

Joshua Zaret – Longbow Research

So then going back to the tax situation, when are you going to have an idea whether you get that 15% back or you are going to owe another 5%?

Randy Levy

That will happen when we finally go through a final audit with the IRS.

Joshua Zaret – Longbow Research

So it's an April kind of time frame or is it later?

Randy Levy

No. A lot of times those could be on multipleyear delays. It just depends on when they want to take a look at it. A normal audit cycle sometimes is two or three years in arrears.

Joshua Zaret – Longbow Research

Wow. Thanks. Second question for Doyle. I believe I have this right, but I think I've heard you say in the past that in the cycle on the box side the first increase is usually easier, excuse me, the second increase is, let's see if I have this. The first increase is usually easier than the second. Or do I have that backwards?

Doyle Simons

You have it backwards.

Joshua Zaret – Longbow Research

I have it backwards. Do you think it's going to be different this time?

Doyle Simons

Let me just make a point. That is I think currently industry conditions are very constructive for a price increase. As you well know, operating rates are high at 94%. Containerboard and industry containerboard inventories are extremely lean, in fact, the lowest monthly level since February of 1981. Domestic demand, as we've talked about, is improving. Export demand is strong. So again, we think industry conditions are very constructive for price increases. To your specific point, the first price increase in a series is normally the most difficult.

Joshua Zaret – Longbow Research

[inaudible]. Then as a followup to that, do you think the fact that OCC has begun to come down, will probably come down a little bit more, will be a headwind for this increase to some extent?

Doyle Simons

Josh, we don't believe input costs have a significant impact on price increases. The industry conditions that I just laid out are the key drivers of price increases.

Joshua Zaret – Longbow Research

Okay. Perfect. Then last question. In terms of a pipeline for asset sales, just assets you are selling, the industry be it box plants or whatever, has there been any change in what's been out there and what you're looking at or is it been pretty much status quo?

Doyle Simons

I wouldn't say there's been any significant change in that, Josh.

Joshua Zaret – Longbow Research

Okay. Thank you very much, Doyle.

Doyle Simons

As I understand it, there are no additional questions. Again, I would like to thank you for your interest in Temple-Inland; and we look forward to talking to you next quarter.

Operator

Thank you for participating in today's conference. You may now disconnect.

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: Temple-Inland Inc. Q1 2010 Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts