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Buckeye Technologies Inc. (NYSE:BKI)

F4Q10 (Qtr End 06/30/10) Earnings Conference Call

August 4, 2010 11:00 AM ET

Executives

Daryn Abercrombie – IR Manager

John Crowe – Chairman and CEO

Steve Dean – SVP and CFO

Kristopher Matula – President and COO

Doug Dowdell – SVP, Specialty Fibers

Marko Rajamaa – SVP, Nonwovens

Dennis Livingston – Tax Director

Analysts

Gail Glazerman – UBS

James Armstrong – Credit Suisse

William Hiller – Ridge Crest Investors

Operator

Good day, and welcome to the Buckeye Technologies Inc’s Fourth Quarter and Fiscal Year 2010 Earnings Results Conference Call. (Operator Instructions) At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Daryn Abercrombie, Investor Relations Manager of Buckeye Technologies. Please go ahead.

Daryn Abercrombie

Thank you, (Melissa). Good morning and welcome to Buckeye’s conference call commenting on our results for the April to June quarter 2010 and our 2010 fiscal year. Today I’m joined on this call by John Crowe, Chairman and Chief Executive Officer; Kris Matula, President and Chief Operating Officer; Steve Dean, Senior Vice President and Chief Financial Officer; Doug Dowdell, Senior Vice President, Specialty Fibers; Marko Rajamaa, Senior Vice President Nonwovens; and Dennis Livingston, Tax Director.

After John and Steve make some introductory remarks, we will respond to your questions. Before we get started, however, I’d like to read our Safe Harbor statement. The matters discussed in this call include forward-looking statements that involve risks and uncertainties that may cause the company’s actual results to differ materially from those projected in such forward-looking statements.

For further information on factors that could impact the company and statements contained herein, please refer to the slides accompanying this presentation as well as the company’s most recent annual report on Form 10-K and quarterly report on Form 10-Q.

Now I’ll turn it over to John.

John Crowe

Thanks, Daryn. Good morning. Buckeyes’ fourth quarter results showed good improvement over last year’s results. While earnings were down from the previous quarter, I was pleased with the overall performance given the massive power failure in (inaudible) Florida facility. On June 17, we experienced the failure our utility provider’s incoming line that sent a voltage surge to most of our electrical components resulting in losses of variable frequency drives and other electrical controlled components. It is times like these when you see the strength and can-do attitude of the organization. Working around the clock, the Florida organization recovered on both mills, holding the outage to a total of five days.

As we reported yesterday, fourth quarter net income was $9.7 million or $0.24 per share. Excluding restructuring charges and early extinguishment of debt, fourth quarter’s net income was $10.6 million or $0.26 per share. Excluding special items this quarter in the comparison quarters, our adjusted earnings per share compares to adjusted earnings per share of $0.28 in the previous quarter and $0.18 for the April-June quarter last year.

Quarter 4 sales revenue of $205 million shows the continued improvement in our markets and compares to 177 million for the same period last year and 191 million for the previous quarter.

The power outage negatively impacted our fourth quarter operational results by approximately $4 million. Strong shipment volumes across the company were not enough to offset the expenses associated with the outage and recovery. We expect to recover some of the losses, less our $2 million deductible from our Business interruption and Property insurance. Also we had two major plan maintenance outages for our Florida facility in June. And both were impacted by the power outage, adding to increased expenses.

June 30 was the end of our fiscal year 2010 and we finished the year with sales revenue of $756 million, slightly above fiscal year 2009 totals. Our fiscal year earnings were a record, $114.6 million, or $2.90 per share, compared to a loss in fiscal 2009 of $65million $1.69 per share. Excluding special items, our fiscal year 2010 net earnings of $0.88 per share, compares to fiscal year 2009 of $0.58 per share. The improvement was due to better product mix, improved (inaudible) specialty in nonwovens’ volume, lower operating cost, and reduction in interest expense and improved pricing in several areas of our businesses.

We reduced balance sheet debt during the quarter to $238 million better than the target that we set up $250 million. In fiscal year 2010, we reduced our long-term debt by $90 million through a combination of free cash flow and the proceeds from the alternative fuel mixture tax credit.

We recently received our fiscal year 2010 income tax refund of $67 million less and at the end of business on August 2, of $67 million. As I stated in our earnings call in April, Buckeye is better positioned to have a balanced approach to allocation of capital. While debt reduction is staying below two to two and a half times debt to EBITDA or properties, Buckeye will look at ways to return cash to our shareholders plus investing in high rated return projects to grow and enhance the value of our businesses.

Yesterday, our board of directors announced our first ever quarterly dividend of $0.04 per share to be paid on September 14. With approximately 40 million shares outstanding. This will initially represent approximately a $6.5 million annual distribution of cash to our shareholders. This is a milestone for Buckeye. It is one way to reward shareholders and reflects our strong financial and our confidence in our outlook. Additionally, we are in position to considerably purchasing shares when it can be done at a stock price it can provide an acceptable return of investment and is competitive with our other investment opportunities. Currently we have authorization to repurchase 5.6 million shares.

In summary, we had a challenging quarter with planned and unplanned outages, but still delivered improving results and finished fiscal year 2010 with significant improvement year-over-year. We have more to do, and we’ll discuss the outlook for fiscal year 2011 after Steve reviews the supplemental reconciliation charts. Steve?

Steve Dean

Thanks, John. Good morning. I’d like to refer you to the earnings slides posted on our website and streetevents.com which include more detailed reconciliations of our fourth quarter earnings versus prior period. This morning I’m going to focus my comments on comparing our results for the just completed April-June quarter, our fiscal fourth quarter to the January-March quarter, which was our fiscal third quarter. We’ve also included several slides with comparisons against the year ago quarter and it’s for your reference.

Starting with Slide four. You will see a consolidated earnings summary comparing our earnings for the just completed fourth quarter to the third quarter. Fourth quarter net sales of $205.1million were up 14.4 million or 7.6% compared to the third quarter. Specialty fiber sales were up 11.7 million or 8.5% due to higher selling prices and improved product mix even though shipment volume was down slightly.

Fluff pulp prices were up $83 per ton, which added 3.8 million sales for the quarter.

Specialty cotton fiber prices were up 16%, adding 3.7 million and specialty wood fiber prices were up 2%, adding 2.1 million to sales for the quarter.

Shipment volume from our Foley mill was only down about 1.300 times versus the third quarter in spite of an 8,000 time drop off on production volume. As would reduce our inventories significantly to meet shipment demand. We expect the fourth quarter Foley power outage in resulting production short fall to negatively impact first quarter shipments as we rebuild inventories to sustainable levels. An estimated negative EBIT impact of $2 million or about $0.03 per share.

Nonwoven sales were up $4 million or 6.7% on a 7percent increase in shipment volume. Selling prices were up about 2% and our mix was slightly improved that this positive effects were offset by an unfavorable currency impact due to the weakening of the euro versus the dollar compared to the third quarter.

Moving down the chart, you can see that adjusted operating income, excluding the impact of alternative fuel mixture credits and restructuring expenses on our results was down by 2.1 million compared to the fourth quarter. Operating income was down 1.1 million per specialty fibers and was up 0.4 million for nonwoven.

As John mentioned, the gym powered Foley negatively impacted fourth quarter operating income by $4.2 million. Excluding the impact of this event, earnings for the specialty fiber segment would have been up by 3.1 million compared to the third quarter. The selling price increases across the business outpaced the negative impacts of higher cut monocross and increases in spending conducted at the Foley mill during the quarter.

Operating income for nonwovens was up slightly even though selling price increases averaging in the 2% range continued to lag cost increases in fluff pulp which is a major raw material for this segment. The negative impact of this continued margin compression was fortunately offset by higher shipment volumes and lower energy cost relative to the third quarter.

The weakening of the euro from 138 to 127 only heard operating income by $400,000 compared to the third quarter as most of our sales and cost in Europe on this segment are denominated in Euros. This had no impact on our financial statements for the specialty fiber segment is all revenue and is almost all cost, except from Brazil, and that segment is denominated by US dollars.

You’ll notice that the corporate component of adjusted operating income. Was down 1.4 million compared to the third quarter. This is mainly due to increased bonus accruals as a result of a strong finish to our fiscal year. Below operating income, we benefited relative to the third quarter from a small reduction and interest expense, 0.6 million improvements related to foreign exchange gains and our adjusted effective tax rate of 32.8% where somewhat lower as we had expected.

On Slide five, we have a waterfall chart that explains the 2.1 million reductions in adjusted operating income between the third and fourth quarters. You can see that aside from the negative 4.2 million impact of the (inaudible) power outage at the Foley mill, the biggest impacts on fourth quarter operating income relative to the third quarter were an 11.3 million increase due to higher selling prices, a 4.4 million reduction due to higher raw material cost and a 6.1 million reduction due to higher direct cost.

The raw material increase is, as I mentioned earlier, were driven by higher prices paid during the quarter for cotton lanners, and for fluff pulp used by our nonwoven segment. The higher direct cost were primarily due to a heavy schedule of planned maintenance outages during the quarter. Aside from these larger impacts, favorable sales mix and lower energy cost more than offset the impact of higher SRA spending.

On Slide six, you can see at a more summary level the drivers behind the two set reduction and adjusting earnings per share between the third and fourth quarters. We picked up $0.18 per share from higher selling prices which was offset by a $0.18 in total cost, including the increase in direct cost spending related to maintenance outages at Foley and the increase in SRA expenses relating to our yearend bonus accruals. We also had a $0.05 improvement due to sales mix which was primarily driven by hired mix of specialty versus flagpole shipments from our bowling mill. All of these items add up to a $0.05 in adjusted earnings per share, which compared to the third quarter which was offset by $0.07.

Finally, moving ahead to Slide seven. I want to briefly comment on our outstanding debt and maturities. These slide shows the makeup of our debt as of the end of the day on August 2, after using the proceeds of the $67 million tax refund received last week to further pay down our bank revolver. As of that date, our long-term debt was down to $163 million consisting of 140 of senior notes maturing on October 2013 and 23 million drawn against our $200 million revolver which matures on July 2012.

At this point, we have produced our debt to a $0.37 million below the bottom of our target debt range of 200 million to 250 million. With the cal premium on our 2013 bonds dropping from 2.8% to 1.4% on October first, we will have an opportunity and generate significant savings going forward.

Now I’ll turn it back over to John.

Steve Dean

Thanks, Steve. As Steve has shared, we are making progress as the world economy recovers. The outlook for our market remains solid, and in many cases, we can’t meet all of our customer’s volume demands due to our overall low inventories plus our limited supply of cotton lenders’. We need to bring our inventories back to the level that allows us to better control plant operations, cost and flow of products to our customer.

This quarter we expect our specialty fibers to benefit from higher pricing but the volume will be down approximately 5% due to low inventories and wood specialty as a result of the power outage and in cotton pulp due to the limited supply of the lenders’ at this time of the year.

During July we experience some additional (inaudible) equipment failures and down time related to the power surge on June 17. We believe that this is now resolved. The equipment that has been installed should improve the reliability with the connection with the utility and prevent this type of incident from happening again. We expect to receive insurance proceeds related to the power outage during the first and second quarter.

While higher fluff prices are good for our fluff business, it does have a downsize for our nonwoven segment. The high fluff price will compress nonwovens margins in the near term. With continued strong market demand, operational reliability and procuring lenders will be a key to improvement and results. We are strategically addressing supply chain management in our cotton business, to provide certainty or supply to our customers while reducing our financial risk and stabilizing our earnings.

We will accomplish this by aligning a large portion of our raw material purchases with pricing and volume commitments from our customers. These three-way alignment of raw material supplier, Buckeye and our customers is good for all and allows for a longer term business planning and improvements.

With the completion of the modifications to one of two recovery boilers that needed to be modified during the recent planed outage in June, we remain on schedule to complete the final boiler modifications and the energy product in the fall of 2011.

Even the recent IRS chief memorandum addressing the applicability of $1.01 cellulosic biofuel tax credit to black liquor in calendar year 2009, we anticipate filing claims for additional benefits. We have filed the necessary applications with IRS and anticipate receiving our registration as a cellulosic biofuel producer soon. The cellulosic biofuel credit first became available by law in January 1, 2009, and the company began mixing diesel fuel with this black liquor to qualify for the alternative mixture credit on February 12, 2009.

As we understand Section 40 of the internal revenue code, Buckeye can claim credits for black liquor burn during the period of January 1 to February 7 of 2009. This anticipated after tax benefit from this credit claim would be approximately $21 million. Going forward we may exchange the previous received funds and income tax credits related to alternative fuel mixture for cellulosic biofuel credits with the potential after tax benefit of $56 million less any payable to the IRS on the repayments of credits or refunds.

The benefit will be dependent on the level of taxable income during the credit carry forward period. We believe the $21 million cash refund will be received this calendar year and any reversal of the alternative fuel mixture credits will be taken over the next several calendar and fiscal years. As more clarity on the reversal emerges, we will be in a better position to assess the present value of doing so against the risk. We can elaborate more on this potential in the question-and-answer period.

We continue to retire our 2013 bonds and plan to refinance our5 capital structure during the next six months to reduce interest cost and extend the terms of our debt. With the balanced approach to the allocation of capital, our board of directors approved the cap x budget of $57 million for fiscal year 2011. This includes completing the energy project and the start of other strategic projects. This compares to $48 million spending in the current fiscal year 2010 and the anticipated depreciation of $50 million in 2011.

In fiscal year 2011, we anticipate our revenue will be favorably impacted by higher average selling prices, stable cotton specialty volume, improving nonwovens’ volume and a favorable mix in our specialty fiber segment. We expect our largest absorbing end used markets, diapers, adult and continent and wipes to continue to grow with demand remaining very strong.

We should benefit from lower selling research and administrative spending while our cost for cotton lenders will rise significantly in the first half of the year. We anticipate we will see better cotton lender availability and volumes in the second half of the year as the new cotton crop is harvested and oil crushing nails returned to production.

Additionally, with our reduced debt, interest expenses will be lower and we expect additional cost benefit from our continued implementation of lean enterprise methods throughout the company. In addition, we should start realizing savings from the completion of the first phase of the energy independent project beginning in the second half of the fiscal year 2011.

In closing, we anticipate we will continue EBITDA and earnings growth in the next several quarters. Even with the estimate of a $2 million or $0.03 per share carry over impact from the power outage, we anticipate further improvements compared to the just completed quarter. First quarter earnings per share should be in the $0.28 to $0.32 range. This doesn’t include any insurance refund for the power outage incident which we anticipate to recognize in the second quarter.

This completes our prepared remarks, and we will turn the call back over to Melissa (ph) and look forward to answering your questions. Thank you. Melissa?

Question-and-Answer Session

Operator

And our first here from Gail Glazerman with UBS.

Gail Glazerman – UBS

Hey, good morning.

John Crowe

Good morning, Gail.

Gail Glazerman – UBS

I don’t know where to start. I guess on that incremental CapEx and other growth project outside of the energy project. Can you give a little more color on what you’re starting to spend on?

John Crowe

Kris, will give you some color on that, Gail.

Kristopher Matula

Yes, Gail. This is Kris. We expect to spend $57 million in the upcoming fiscal year. To date on the energy project, we’ve spent 30 million. We expect another 11 in this fiscal year with the carry over the balance about 4 million in FY ‘12. So, 11 of that will be applied to the energy project.

Then additionally, we’ve got capital expenditures at a number of our facilities focused on improvements and reliability and other cost measures to continue to lower cost as well as looking at it enhanced capabilities to produce improved product performance in a number of areas.

So, it’s a mixture of things in terms of improving our reliability and quality and taking cost out of the business as well as investing in some new capability that we can continue to supply our customers with the products that they need to meets their end market requirements.

John Crowe

The only thing I would add, Gail, is out of that 57 million about 30 million it takes to maintain the base business in expense and the repair.

Gail Glazerman – UBS

Okay. I mean any update on looking at fully phase 2 and some of the other energy related expansion, projects your looking out. Would you expect some decisions on that (inaudible) 2011?

Doug Dowdell

I think at this time, Gail, we continue to look at what our goal is to generate enough steam that we can utilized the balance of the turbine generator about 12 megawatts. And so we are looking at a range of projects that we can free up steam and then we’re going to look what the best return that we can generate on how we do that. So, we’re looking at multiple ways to do that.

Gasification is one of those. Gasification is a new technology and so we’re going to look at a number of avenues and make sure that wherever way we go, we’re going to get the highest return.

John Crowe

Several of the projects that we will start next year do lead to steam savings, water savings, which will give us an upside on complete utilization of that new turbine generator.

Gail Glazerman – UBS

Okay. And a few questions on the market are there any end markets that you’re seeing? Any sort of incremental slowdown or they’re all universally is seeing pretty strong? And –

Doug Dowdell

I would –

Gail Glazerman – UBS

Can you talk a little bit specifically that we’re seeing in loss (ph) and particularly pricing relative to the declines that we’re starting to see on the commodity markets.

John Crowe

Doug, why don’t you go ahead?

Doug Dowdell

Okay. This is Doug Dowdell. Addressing the fluff question, I mean what we are currently seeing is demand for fluffs is very robust and growing. We currently cannot supply all of our customers. There have been some pricing announcements for July and nothing new that we have seen in August. We do expect some continued price increase this quarter and frankly, as we look forward what we really see is increase demand from our customers.

We sell about 200,000 tons of fluff (inaudible) in the open market and we have already had for calendar year 2011, request for 20% more than we can produce and sell next year. So, about another 40,000 tons, so we see this market frankly remain very tight and price is firm.

Kristopher Matula

So, Gail, this is Kris. Just to close off, we really are not seeing any softness really in any of our markets at this point in time. And so we see really more the opposite continued very strong demand.

Gail Glazerman – UBS

Okay. And in terms of the more commoditize staple of this viscose market in China. Is that still strong? Has that come off at all? Has that still ahead of some your wood – your specialty pricing?

Doug Dowdell

Yes. The viscose market has cooled off this summer a bit. A number of the producers are taking downtime. But in our current plan, we have no volumes committed to this market; we use it as a spot basis. But still the prices in that market are very, very high and strong. And we see going into next year as you know our specialty prices are done on an annual basis and then we pass through quarterly cost changes and we expect a significant increase in January 2011 based on the current dynamics.

Gail Glazerman – UBS

Okay. And just last question to that last point, Kris, can you give us an insight or Doug, on what this price adjustment based on cost would be for the fiscal first quarter and can you just talk a little bit about where you stand in terms of cost pass through in the cotton business. You obviously had pretty robust pricing in the fourth quarter as well as perhaps on the early now (ph) move-ins where you are in terms of catching up those fluff prices.

Doug Dowdell

Yes, this is Doug. I’ll answer the question relating to the fluff. In the specialty cost pass-through, I mean basically our call star (ph) have moderated significantly they’re flat. This quarter that we’re in now, we’ve had a very small increase for cost pass-through, frankly, it’s insignificant. And as we look at, we see our calls remain flat.

Kris will answer the cotton (inaudible).

Kristopher Matula

Gail, on the cotton side, as John’s mentioned and we’ve said that this first half of the fiscal year kind of up to December, there’s very limited availability of lint, which has significantly increased the price due to the demand from the viscose staple fiber, Chinese viscose fiber industry as well as strong demand in our end markets. We have had to go out and import some raw material, which adds additional cost. So, our costs are going to be up significantly and we’re going to have to pass that through. So, we are increasing our prices significantly from that standpoint.

As we look in the second half, as the new crop comes in, frankly, the cotton crop looks much stronger this year and so does the crushing outlook. And so as we get into the second half of the year, we do think that the availability of our raw material will be better. I think the cost of that will still yet to be seen as we go depending on the demand dynamics for our end markets as well as the viscose staple fiber market.

Gail Glazerman – UBS

Okay. On nonwovens?

Marko Rajamaa

Gail, this is Marco. In terms of the nonwovens business, we obviously are being under pressure due to the increase fluff pricing and we continue to work with our customers. We do have contract the (inaudible) mechanism with number of them, so that’s going to be done deal. We work through those.

With others, it’s a case by case situation and we have had some success in the past quarter, passing through increases. Obviously, if the fluff price is continued to go up as they have, we will continue to be under pressure going forward. Bu we’ll continue to push through the increases.

Gail Glazerman – UBS

Okay. And actually this one last question, if I could take it in. the incremental issues you’re having at foliate (ph), are there something that you’d also be able to recover by insurance or is that something you just need to swallow in the operations?

Doug Dowdell

In terms of the first quarter, Gail?

Gail Glazerman – UBS

Yes, the couple of million that you’re expecting in this quarter or are you saying this shifts operational?

Doug Dowdell

What I – the couple of million here is really the follow on from the last quarter. So, we lost the production, the 5,000 tons of production in the fourth quarter, which got our inventory down to very low levels. So, we’re seeing the lost gross margin on those shipments in the first quarter.

And there are all the variable drive motors that were knockout and electronic controls. There is some follow on from that. I mean we had a short failure in July, where that motor went completely knocked out, but it was damage. So, the 2 million, it really just follow on, so if you add that 2 million to the 4, you got about a 6 million total cost related to the outage. We have a 2 million deductible and basically, we’re negotiating with insurance company on how much would that we’ll recover through business interruption and property damage.

Would expect – really don’t expect to finalize the insurance settlement until the second quarter, but it should be – a good portion of that $2 million, if not more.

Gail Glazerman – UBS

Okay, thank you.

Operator

And our next question comes from James Armstrong with Credit Suisse.

James Armstrong – Credit Suisse

Good morning, gentleman. Congratulations on a good quarter.

John Crowe

Thank you.

James Armstrong – Credit Suisse

Going back to cotton liners for a second, with the cost pass-through that you’re implementing with your customers in the second half of the year, would you expect to be closer to full capacity in your cotton liner business or what percent of capacity would you expect?

Kristopher Matula

Yes. This is Kris. As we’ve indicated, as we kind of look with the availability of our raw material, we position the facility to run at about 50% of capacity, so, roughly in the 50,000 ton range. And so that’s how we’re building our business model around that sort of product mix, that sort of cost in terms of people cost. So, we believe we’re going to be operating in and around that range for the foreseeable future based on kind of the current availability blend. And we –

James Armstrong – Credit Suisse

Okay. Even in the back half of the year, when lint becomes more available or will that grow up?

Kristopher Matula

Again, I mean I think while we’re going to be lower in shipments in this first quarter, but for the fiscal year, we’re going to average roughly about 50,000 tons. So, I mean I guess on a growing basis 50,000 is what you ought to be thinking about in terms of the Memphis Cotton Business.

Doug Dowdell

That’s the plan, James. But certainly you’ve identified an upside, if there’s more lint available then certainly we will have the opportunity to run more and we certainly have as Doug and Kris both covered, we have certainly have demand for the product.

James Armstrong – Credit Suisse

Okay, thanks. Then going to nonwovens, how long are your nonwovens contracts in general? When can you really get that pricing pass-through?

Marko Rajamaa

Our contracts are typically between one to two years, but the pass-throughs are usually and on quarterly basis, on the contracted volume.

James Armstrong – Credit Suisse

Okay. So, you should be able to pass-through at least some of that pricing into each of the quarters.

Marko Rajamaa

(Inaudible).

James Armstrong – Credit Suisse

Okay. And then on the – what’s the utilization rate in your air (inaudible) segment? I know a few years ago, you have lost a large customer. Can you update us on the utilization rate and how much spare capacity you have left in that business?

Marko Rajamaa

Overall, the utilization rate is probably somewhere in the mid-70s and we do have some opportunity, outside opportunity in North America.

James Armstrong – Credit Suisse

Okay, that’s very helpful. Thanks for your time.

John Crowe

Thank you, James.

Operator

(Operator Instructions) And we’ll go now to William Hiller with Ridge Crest Investors (ph).

William Hiller – Ridge Crest Investors

Yes. Good morning. I got two questions. First one, I believe you have said at meetings in the past that your facility in Florida, the big specialty fibrous plant is insured for a $1 billion. Is that basically the replacement cost of these assets? Are they that difficult and specialized because I’m trying to get a feel for capacity that could be coming on in the real high-end pulp area, specialty pulps.

John Crowe

You’re right. You’ve got it about right. It’s actually we have to insure it for more than the replacement cost and it’s more than $1 billion, but that’s a good round number. And it is –

William Hiller – Ridge Crest Investors

And –

John Crowe

And it is a specialty facility, there’s only one other like it in the world that we know of. That’s why we take very good care of it.

William Hiller – Ridge Crest Investors

Why is it that expensive to – is it relative to the other types of pulp facilities?

John Crowe

Well, if you understand this –

William Hiller – Ridge Crest Investors

What was the specialty? I know there’s a different type of pulps. This is the higher grade, but what is the main difference, if you could help us there.

John Crowe

Well, the largest expense in any of the crop mills turns out to be recovery system because you have to recover the liquor to make it feasible to operate the process. So, recovery (inaudible) start at a right size. Recovery (inaudible) starts in the hundred million dollar range and we have three of them down there, so that’s a great deal of the expense. Then it is a very complex operation with 19 badge digestors, specialty mill and then also the fluff mill, which complements the specialty mill. So, there are unique assets that are why they aren’t very many of them in the world.

William Hiller – Ridge Crest Investors

Okay. So, there’s really no economics to build new grass root facilities at least in this country?

John Crowe

Well, this country, permitting would be along difficult process. There hasn’t – a pulp mill hasn’t been built in North America, if my memory serves me right since 1993.

William Hiller – Ridge Crest Investors

Okay.

John Crowe

North America, so. (Inaudible).

William Hiller – Ridge Crest Investors

We’ve have had some other specialty pulp capacity expansion announcements, but these are, I believe –

John Crowe

Yes, they’re not grain field in North America. You’ve had some announcements –

William Hiller – Ridge Crest Investors

Okay, just some brown field.

John Crowe

Yes, they’ve taken craft mills and converting them.

William Hiller – Ridge Crest Investors

Okay. We’ll they be able to produce though the high-end (ph) specialty end pulps, specialty pulps?

John Crowe

We never say never, but it will be quite an investment and it will be very difficult to do in our opinion.

William Hiller – Ridge Crest Investors

Okay. Thank you. I want to just follow-up. I thought you mentioned something because I’ve seen this in other 10 – filings by other companies. On the black liquor, did you mention there still could be a potential tax issue or reversal that we have to watch for before this is finalized?

John Crowe

Dennis, let me send our corporate tax specialist is in the room with us. We’ll let Dennis address your question here on the reversal.

William Hiller – Ridge Crest Investors

Thank you.

Dennis Livingston

You’re talking of the reversal of the alternative fuel mixture credits or are you talking about the conversion of those credits to say you lost (inaudible) credits to get the additional benefit.

William Hiller – Ridge Crest Investors

Well, I’m not sure. I just I know some companies have talked about the potential to be taxed on these recoveries at some point, but maybe you can explain both of those issues.

Dennis Livingston

Yes. On alternative fuel mixture credits, there’s some issues around taxability of those credits, of whether you receive them as cash refunds or as income tax credits.

William Hiller – Ridge Crest Investors

Okay.

Dennis Livingston

Currently, we pay tax on the cash refunds and the portion that we receive is alternative fuel mixture income tax credits are not taxed.

William Hiller – Ridge Crest Investors

I see, okay.

Doug Dowdell

And I guess there’s been some discussions I mean about whether the cash refunds actually should be taxable or not. We’ve not taken the position, a conservative position, that they are tax (inaudible).

Doug Dowdell

That’s correct, Tom.

William Hiller – Ridge Crest Investors

I see, so you – okay. There’s nothing – no dates out there or any kind of things we should watch for when a decision could be finalize their though?

John Crowe

No.

William Hiller – Ridge Crest Investors

Okay.

Doug Dowdell

So, the big thing you’ve seen discussion about is the cellulose (inaudible) biofuels credit, which is a $1 per gallon and that’s the reason IRS, a memo that went out about that and a lot of people have been talking about their ability to utilize that credit in addition to the alternative fuel mixture credit or instead of.

Doug Dowdell

Right. We had a period of time from January 1st, 2009 to February 11th, when we did not mixed diesel with the black liquor.

William Hiller – Ridge Crest Investors

Yes.

Doug Dowdell

And so we would be able to go back and amend that return and claim an additional $21 million benefit by claiming (inaudible) credit. And then we have the rest of the gallons that were burned between February 12, 2009 and December 31st, 2009, we could exchange those alternative fuel mixture credits and cash refunds for the dollar ones say you lost the biofuels credit and it would give us a potential additional benefit of $56 million.

Doug Dowdell

So, we have a fairly large potential upside here.

William Hiller – Ridge Crest Investors

Okay, very good. Well, listen, I appreciate it. Thank you.

Operator

And there are no further questions, I’ll turn it back over to our speakers for closing remarks.

John Crowe

Thank you, Melissa, and thank you for listening to our earnings call, and we look forward to sharing results of our first quarter with you on October. We also look forward to a very strong year with growth and improved result over the year we just closed out. Thank you for participating today.

Operator

That does conclude our conference. We thank you for your participation.

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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.

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Source: Buckeye Technologies Inc. F4Q10 (Qtr End 06/30/10) Earnings Call Transcript
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