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Packaging of America (NYSE:PKG)

Q2 2012 Earnings Call

July 17, 2012 10:00 am ET

Executives

Mark W. Kowlzan - Chief Executive Officer and Director

Richard B. West - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Paul T. Stecko - Executive Chairman

Thomas A. Hassfurther - Executive Vice President of Corrugated Products

Analysts

Chip A. Dillon - Vertical Research Partners Inc.

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

Anthony Pettinari - Citigroup Inc, Research Division

Mark A. Weintraub - The Buckingham Research Group Incorporated

George L. Staphos - BofA Merrill Lynch, Research Division

Mark Wilde - Deutsche Bank AG, Research Division

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

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

Scott Gaffner - Barclays Capital, Research Division

Albert T. Kabili - Crédit Suisse AG, Research Division

Joshua L. Zaret - Longbow Research LLC

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

Operator

Thank you for joining Packaging Corporation of America's Second Quarter 2012 Earnings Conference Call. Your host today will be Mr. Mark Kowlzan, Chief Executive Officer of PCA. [Operator Instructions] I will now turn the conference call over to Mr. Kowlzan, and please proceed when you are ready.

Mark W. Kowlzan

Good morning, and welcome to Packaging Corporation of America's Second Quarter Earnings Release Conference Call. I'm Mark Kowlzan, CEO of PCA, and with me on the call today is Paul Stecko, our Executive Chairman; Tom Hassfurther, who runs our Corrugated business; and Rick West, PCA's Chief Financial Officer. Thanks for participating in the call this morning, and after the presentation, we'll be glad to take any questions.

Yesterday, we reported second quarter net income of $45 million or $0.46 per share, which included after-tax debt refinancing charges of $2.5 million or $0.025 per share. Excluding the refinancing charges, earnings were $48 million or $0.49 per share, which is the second quarter record compared to the second quarter 2011 net income of $40 million or $0.39 per share. Net sales were a record $712 million, up 7% compared to the second quarter of 2011 net sales of $665 million.

The $0.10 per share increase in net income, excluding the refinancing charges, was driven by higher containerboard and corrugated products volume of $0.07; and lower costs for energy, $0.05; recycled fiber, $0.02; chemicals, $0.02; and maintenance, $0.02. These items were partially offset by higher costs for transportation of $0.02; medical, $0.02; depreciation, $0.02; and interest expense, $0.02.

Excluding special items, net income for the first 6 months of 2012 was a record $88 million or $0.91 per share compared to the net income for the first 6 months of 2011 of $79 million or $0.78 per share, excluding special items. Year-to-date net sales were record $1.4 billion compared to the $1.3 billion in 2011.

Overall, we had another strong quarter setting several records and generating earnings, excluding special items, $0.04 per share better than the earnings guidance we provided on April 17.

The higher earnings came from better-than-forecasted mill cost and better-than-expected export prices, and better-than-expected mix improvement in the corrugated business. We also achieved all-time record corrugated product shipments and record second quarter mill production despite having 3 of our mills down for their annual maintenance outages during the quarter.

In addition to strong operations, we completed important strategic action during the quarter, the refinancing of $400 million in notes due in 2013. Considering the risks and uncertainties in the debt market, we're very pleased to have this refinancing behind us, and Rick West will provide more details on the refinancing later on the call.

Moving to operations. Higher mill production and corrugated products volume improved our earnings by $0.07 per share compared to last year's second quarter. Our corrugated shipments were strong, up 6.6% both on a total and a per day workday basis compared to last year's second quarter. This increase in shipments included 3.6% from our box plant acquisition in 2011 and our first quarter 2012 acquisition. Even excluding our recent acquisitions, total shipments were a new all-time record for any quarter. Our corrugated shipments volume also improved compared to the first quarter of this year, with total shipments up 2.7% and per workday shipments up 4.3%, with 1 less workday in the second quarter.

Domestic and export containerboard demand remained steady compared to the first quarter. With the higher containerboard consumption at PCA box plants from increased demand and considering that 3 of our mills will be down during the quarter for their annual maintenance outages, we made a decision to sell fewer containerboard tons into the export market. As a result, our export shipments of containerboard were down about 13,000 tons compared to last year's second quarter.

Our mills produced 638,000 tons of containerboard, a second quarter record, up 32,000 tons or 5.3% over the second quarter of 2011. The increase in production was driven by strong productivity and no energy project-related downtime this year. In total, annual mill maintenance outages, including an overhaul for the 23 days of our 50-megawatt turbine generator accounts and major wall panel replacements to the large T2 boiler accounts, resulted in lost production of about 23,000 tons during the quarter.

Pricing for corrugated products and domestic containerboard remained steady. Export prices for containerboard were higher, and our corrugated products mix improved compared to the first quarter. Compared to the second quarter of 2011, corrugated and domestic containerboard pricing was essentially flat and export containerboard prices were lower. The lower export prices reduced our earnings by about $0.01 a share compared to last year's second quarter.

With regards to cost, energy costs were down $0.05 per share compared to last year's second quarter, driven by major energy projects at Counce and Valdosta and by lower natural gas costs in our box plant system. In addition, chemicals and maintenance costs were each down about $0.02 per share, driven by completion of the energy project and reduced spending. Lower recycled fiber costs improved earnings by $0.02 per share in industry published prices for old corrugated containers or OCC. Excluding our delivery costs, we're down about $25 per ton in the second quarter of 2012 compared to the first -- second quarter of last year.

We continue to see more moderate inflationary cost pressures than we did last year. However, some costs did increase compared to last year's second quarter, including outbound transportation costs, up about $0.02 per share; and medical costs, up about $0.02 per share.

In addition, depreciation expense was up $0.02 per share compared to last year's second quarter, driven by the completion of our energy project, corrugated products strategic capital expenditures and newly acquired box plants. Interest expense was up $0.02 per share, driven by non-capitalization of interest with our energy project completion.

I'm now going to turn it over to Rick West, our CFO, who will give you an update on our cash position and our biofuel tax credits.

Richard B. West

Thank you, Mark. In the second quarter, PCA generated cash from operations of $115 million. Capital expenditures were $35 million. We paid our quarterly common stock dividend of approximately $25 million and repurchased 371,000 shares of our common stock for about $27 per share or $10 million.

As of June 30, 2012, our diluted shares outstanding were 97.1 million shares. During the second quarter, cash tax payments of $5 million were made, and fuel credits of $44 million were used to offset federal taxes. We have estimated remaining fuel tax credits of up to $100 million. The final amount of the available fuel tax credits and the final cash tax rate and taxes paid in 2012 is contingent upon the conclusion of the IRS audit currently underway.

As Mark Kowlzan spoke about earlier, we completed a public offering of $400 million, up 3.9% senior notes due in 2022 on June 26. In connection with the offering, we also made a $65.5 million payment to settle an interest rate protection agreement. The net proceeds -- or the note proceeds, excuse me, of $397 million net of fees will be used to complete the redemption of our 5.75% notes due in 2013 on July 26, with an estimated redemption premium payment of $21 million, plus an additional $11 million for accrued and unpaid interest through the redemption date.

We currently estimate third quarter after-tax charges of $13 million or $0.14 per share related to the debt refinance. Our June 26, 2012 press release provides more detail of the refinancing. Excluding both the proceeds and the debt from the senior note offering, we ended the second quarter with $118 million in cash and debt of $801 million.

With that, I will turn it back over to Mark.

Mark W. Kowlzan

Thank you, Rick. Looking ahead to the third quarter, we expect seasonally higher sales volumes, increased mill production and lower mill costs. With an added note on mill costs, we do expect prices for purchased electricity and chemicals to increase and prices for OCC to decrease compared to the first quarter. Considering these items and excluding the estimated debt refinancing charge, we expect third quarter earnings to be above $0.54 per share.

With that, we'll be happy to entertain any questions, but I must remind you that some of the statements we have made on this call constitute forward-looking statements. These statements are based on current estimates, expectations and projections of the company and involve inherent risks and uncertainties, including the direction of the economy and those identified as risk factors on our annual report on Form 10-K on file with the SEC. Actual results could differ materially from those expressed in these forward-looking statements. And finally, we will not comment or respond to any questions concerning forward pricing on today's call. Thank you.

With that, operator, I'd like to open the call up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Chip Dillon of Vertical Research Partners.

Chip A. Dillon - Vertical Research Partners Inc.

First question is, it looks like, Rick, you were saying the net debt ended the quarter at about $683 million, which I believe is about $38 million below the first quarter level. Should we sort of -- I think one element of the numbers that you've laid out, I don't believe included, unless you said upfront, the -- I think it was $57 million in credits you got based on, I guess, the energy projects you did. Did that also come in? And should we view that sort of as an offset to the hedge?

Richard B. West

That is correct, Chip, and you're correct on your numbers. For the second quarter, the net debt was $683 million, with the increase in cash. We did pay down $4 million in debt in the second quarter on our term loan.

Mark W. Kowlzan

Chip, before we go any further, I just want to correct one of the pieces of data, where I commented about OCC prices. Prices for OCC are expected to decrease compared to the second quarter, not the first quarter. So I just wanted to correct that.

Chip A. Dillon - Vertical Research Partners Inc.

Got you. And then when we look at what's left with the black liquor credits, if I'm not mistaken, if -- let's say that you -- that Filer City doesn't go your way, I'll put it that way, the way you view it, then basically, it's -- you're done on the black liquor credits. And -- but if Filer City gets viewed the way you view it, then that would be the $100 million. Is that -- or some percentage of that, in other words, it all hinges on Filer City at this point. Is that fair?

Richard B. West

That is a fair statement.

Chip A. Dillon - Vertical Research Partners Inc.

Okay. Got you. And then last...

Paul T. Stecko

Chip, this is Paul. The comment I'd make when you said the way you view it versus the way somebody else views it, we expect there's only one way to view this thing. And that is that although the process was different in Filer City in terms of how black liquor's -- to how the liquors converted, that doesn't mean that there's anything out of the ordinary here.

Chip A. Dillon - Vertical Research Partners Inc.

Got you. Got you. And then as we look out at the second half of the year, any major changes either in CapEx or your view toward buybacks?

Mark W. Kowlzan

Chip, we've stated as far as the capital for the year, $110 million was the target, and we're still on target for the $110 million. But we've also commented that we were setting aside approximately $60 million for the acquisition side on the box plants for Tom to work with. And year-to-date, with the box plant acquisition that was completed in February in the Pittsburgh area, we've spent roughly $30 million of that $60 million. So we do have some room left on the acquisition side. So Tom, do you want to comment at all about where you stand this year on some of the opportunities?

Thomas A. Hassfurther

Well, I would just say on the acquisition front, Chip, we constantly look at opportunities. We turned down a much higher percentage, obviously, than we pursue going forward, and we continue to review opportunities as they exist right now. We have, however, taken some of that money out of the acquisition area and plowed it into some strategic capital investments within the box plants, which have some returns that are essentially equal to what an acquisition would give us, and that's primarily based on customer demand.

Chip A. Dillon - Vertical Research Partners Inc.

Got you. And any update on where you stand on the buyback, how much is left?

Richard B. West

There is $117 million left on the buyback.

Operator

Our next question comes from Phil Gresh of JP Morgan.

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

Just on the OCC comment, I'm just wondering, are you basically just kind of run rating what we're seeing here in July in saying it's going to be lower? Or do you actually think from here, it actually might take another step down?

Mark W. Kowlzan

Run rating what you've seen published and what the data is telling us.

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

Got it. Okay. And then just on the export pricing, is there any more color you can give us on where you saw the outperformance there versus what you're expecting? Is it a specific region? Or what were you seeing there?

Paul T. Stecko

Yes, this is Paul. I'll take that. The answer is no, except for the fact that when you pull 13,000 tons out of export like you do, you obviously pull out your worst business. So that in itself is going to help your pricing.

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

Okay. And just on the export markets in general, are you seeing any impact on your business right now from the temporary mill shut over in Europe?

Paul T. Stecko

We really don't comment about any specific relationship with customers, and that would fall on that category. So we're going to have to pass on that question.

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

Okay. Last question, Rick, just in terms of the buyback. Is there any reason to think that you guys wouldn't buy back as much this year as you did last year? Is there anything specific going on this year that would limit that or is it more just kind of how you're feeling about the share price?

Richard B. West

There's no reason. We're still going to look at both buyback and other alternative for cash that we've talked about earlier. So we'll just continue to address the buybacks each quarter.

Operator

Our next question comes from Anthony Pettinari of Citigroup.

Anthony Pettinari - Citigroup Inc, Research Division

Can you talk about how demand trended through the 3 months of the quarter and maybe how you're seeing it play out in July? And then given the box numbers that came out this morning, can you just talk sort of generally about the current state of demand you're seeing, whether the summer has been stronger than expected, weaker than expected or whatever color you can give?

Mark W. Kowlzan

Yes, for the second quarter, our box numbers were flat. Obviously, we had good numbers, but we saw constant, steady numbers. And if you look at where we are for the first 8 days of the third quarter through July, we're looking at probably 7.2% up for that period of time. But also, one of the difference this year, with the 4th of July being in the middle of the week, it's a tough comparable. So again, the other thing to think about too was that the acquisitions and the organic piece, they're both contributing about equal, 3%, 3.5% on average.

Anthony Pettinari - Citigroup Inc, Research Division

Okay, that's helpful. And then maybe just a couple of questions for Rick. With the net debt about $680 million, do you think that you're kind of at an optimal leverage at this point or would you potentially consider raising the leverage to pursue some opportunities within acquisitions or strategic capital spending? And just how are you kind of generally thinking about that?

Richard B. West

Well, we look at more the financial flexibility that we have. We think we've got a reasonable debt level, but the positive for us in having the debt level that we do have is it does give us the opportunity if we see something that we want to borrow for us as we did in the third quarter of last year. We borrowed some to -- when we wanted to pick up some additional shares. So what we do with our cash, as well as our debt level, is going to depend upon the opportunity utilizing the flexibility we have.

Paul T. Stecko

And then, Phil, just -- this is Paul again. Just wanted to comment on your first question. As Mark said, our business has been steady all year and up roughly 7% a quarter, and that does include the acquisitions. And through the first 7 days of January, we're up about -- excuse me, July, we're up about the same, and that is on organic growth, which is really the major year-over-year improvement. We're up about 3.6%, 3.7% of that, and then we're up another 3.5%, 3.6% from acquisitions. And that gets back to that 7.2% number. So that's evenly split between organic growth and acquisitions.

Anthony Pettinari - Citigroup Inc, Research Division

Okay, that's very helpful. And maybe just one last question for Rick. Regarding the IRS audit that determines your kind of final cash tax rate, do you have any sense of the timeframe or how we should think about the resolution of that?

Richard B. West

It's taking what we consider the normal with the IRS. I really can't say anything other to be at the end of the year, beginning of next year. That's what we're hoping to have a final conclusion.

Operator

Our next question comes from Mark Weintraub of Buckingham Research.

Mark A. Weintraub - The Buckingham Research Group Incorporated

I was hoping to get some sense as to how you see the tenor of the markets right now, because we've got some -- we've seen contrary type of indicators. If you read the headlines, they all look so negative, yet obviously, your business has been doing pretty well in the demand side. And looking at industry statistics, operating rates and inventory seem to be pretty good for the industry, overall. How is this all coming together as you sense the tenor of the market?

Mark W. Kowlzan

Well, again, Mark, if you think about our model and what we've been talking about the last couple of years, with the strategic activity during the past 2 years and the work that Tom's done on the acquisition side of things, we've really created a new revenue engine. And if you also think about it, we've got 4 acquisitions, plus the new Reading plant, so we've got -- we're operating 5 additional plants, plus the strategic spending was applied to 5 plants. So really, we have 10 plants that are now contributing in ways that we never had before. So we've always talked that we have the demand, but we couldn't supply the customer base. We have that now. So we've grown into that and taken advantage of the acquisitions and the strategic spending. So with that, we only know what we're doing and we talk, and our model is definitely a different model compared to the industry.

Paul T. Stecko

Yes, Mark, I'd answer that just a little different. The market has basically met our expectations. We thought our business would be this strong, and it has been this strong. And we're projecting that, that trend is going to continue, and that's how we built our third quarter earnings model. And it's hard to -- for us to comment on the entire market other than we read the numbers you read. But we're really concentrated on our customer base, and we feel pretty good about it.

Mark A. Weintraub - The Buckingham Research Group Incorporated

Fair enough. And typically, you don't take much downtime, if any, in the second half of the year. Would that be your expectation at this juncture?

Mark W. Kowlzan

That's correct. The annual shutdowns are behind us, and now we're on a full run rate mode.

Paul T. Stecko

And Mark, just to amplify on the reason for that, our demand period is the weakest in the winter months, and labor is also a lot more available than to do shutdowns, energy cost is historically higher. So for the last 15 years, we basically concentrated all of our downtime in the first 4 months of the year. It's the lowest cost for us to do it that way, and then it also leaves us the most capacity when we need it the most. And that is the period we're about to enter now, which is the seasonally strong period of the year, now through -- it used to be now through Thanksgiving. But with Internet commerce, December is actually turning out to be a half-decent month for the last 3, 4 years, which it hadn't been before then.

Operator

Our next question comes from George Staphos of Bank of America Securities.

George L. Staphos - BofA Merrill Lynch, Research Division

I want to cover a little bit. Can you comment why you think you were able to see some improvement in your mix? What was perhaps behind that, either on the board side or the box side, specifically within domestic?

Thomas A. Hassfurther

George, this is Tom. Why improvement in mix? I mean, it's -- at that time of the year, second quarter seasonally starts to ramp up some of the graphic side of the business.

George L. Staphos - BofA Merrill Lynch, Research Division

Right. But you said it was a little bit ahead of your expectation, so I guess I was trying to get at why it was above what the normal seasonality would be.

Thomas A. Hassfurther

Well, I think because our customers are trying to do some creative things to drive their sales in this environment right now, and one of those vehicles happens to be the graphics area. That has -- that picked up seasonally a little faster than what we thought, and probably, on a volume basis for the year, it will be quite a bit higher than we had anticipated. Okay? In addition, you've got Ag business and some of the other things that have gone on that just help our mix typically in the second quarter.

George L. Staphos - BofA Merrill Lynch, Research Division

Okay. Tom, I know you don't want to speak for the market, but based on history, when you've seen a pickup in the graphics business, is that usually coincident with an ultimate improvement in the broader economy or is it really inconclusive, whether that actually happens to be the case or not from your vantage point?

Thomas A. Hassfurther

I really can't tell you if that's conclusive at all. All I can say is, is that this is -- depending on the customers you're aligned with, depending on their business and what their strategies are really determine how they're trying to drive their business, and if we get the net result of that, we're better off.

George L. Staphos - BofA Merrill Lynch, Research Division

Okay. Two quick questions on vertical integration in the model. Is there a vertical integration level right now that you think is normal for the existing mix of business that you have in production? And if you could share, what do you think that ratio is right now? And then bigger picture, I mean, the model has worked not just in recent periods, but looking back over time, PCA has continued to probably grow more quickly than the market. Is there a natural limit, do you think, Mark or Paul or Tom, to where are you -- you finally can do that anymore, whether it's sort of a bench and depth issue or a customer opportunity issue that would mean that you ultimately see a limit to the way the business model continues to outperform, if you will?

Mark W. Kowlzan

As we stated, the goal still is to get to the 90% integration rate. That's important because we feel the 90% still allows us some flexibility to supply tons into our customer base as they grow. 100% is not a good number to be at because then your customers then understand that you're going to be limited in that ability to help them grow as they move forward. So we're moving along, we're on track to get to the 90% and that's going to remain our goal for the remainder of the next couple of years here.

Paul T. Stecko

And with regard to your second question, there are limits, but we're nowhere near those limits yet.

George L. Staphos - BofA Merrill Lynch, Research Division

Okay. Last one. Rick, any benefit from the highway bill and pension for you, do you think, and if there is a number, what might that be?

Richard B. West

No. We're so low. And from where we stand, I don't see it being substantive to us. We haven't really gone through all the math, but I don't see it as substantive.

Operator

Our next question comes from Michael (sic) [Mark] Wilde from Deutsche Bank.

Mark Wilde - Deutsche Bank AG, Research Division

Couple of questions, one for Rick. Just maintenance costs, as we go from the second to the third quarter, we know all of your maintenance is done, but do you spread those costs over the year? And how would that change going from the second quarter to the third quarter?

Richard B. West

Really, it doesn't change. The run rate on the amortization of maintenance costs is essentially going to be the same in the third quarter as the second quarter, that's why we didn't cite it in our guidance for any change.

Mark Wilde - Deutsche Bank AG, Research Division

Okay. All right. And Mark, what's a good number for you guys at this point for just the mill volume on an annual basis, do you think?

Mark W. Kowlzan

Are you talking volume or capacity? We can tell you our capacity, we can't tell you our volume.

Mark Wilde - Deutsche Bank AG, Research Division

Okay, capacity.

Mark W. Kowlzan

Well, we published capacity at the end of last year at 2.575 million tons. We hope to get some productivity improvement, some crease -- creep capacities here, not much. So rough number, I wouldn't be surprised if we ended the year at about 2.6 million tons of published capacity.

Mark Wilde - Deutsche Bank AG, Research Division

Okay. And then last question for Tom Hassfurther. Tom, if demand remains similar to what we've seen in the first half, will you be able to continue that organic growth of about 3% to 3.5%?

Thomas A. Hassfurther

Well, we certainly hope to. That's the intent, Mark. And it's interesting when you look at our organic growth. I mean, most of it comes from our existing customers who have just chosen to do more business with us at various locations, and of course, that helps drive some of our strategic capital. And we continue -- that's the plan going forward. And so I would plan that we would continue to grow at these rates.

Mark Wilde - Deutsche Bank AG, Research Division

Okay. And Tom, just curious, is there any kind of -- do you have much of a display business buried within -- in the overall business?

Thomas A. Hassfurther

Yes, we don't typically break out our business, but certainly, we do have a graphics business.

Mark W. Kowlzan

One way we are different, Mark, is that some companies have specific graphic locations. We integrate our graphic business into our regular box plants to make -- and that helps us handle the seasonality of the graphic business. It is stronger in different parts of the year, and the beauty of that, when we need ground business in those plants, when graphic is down, that happens and vice versa. So we like our model in that regard.

Operator

Our next question comes from Mark Connelly of CLSA.

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

Mark, just a couple of things. Can you give us a sense of what your overall energy mix looks like now and whether you're looking to reduce coal further the way other people are? I'm also interested in how much energy flexibility you have or whether you think that's an old-fashioned concept.

Mark W. Kowlzan

Regarding the first part of the question, if you look at -- obviously, with natural gas prices falling last fall through the winter, we took advantage of that and shifted more coal into gas, and we continue to do that through the summer months. And also, we're still waiting on the EPA to issue the Boiler MACT rules to see where that's going to take us on any further changes. Flexibility-wise, we've maintained the flexibility with the work that was done on the boilers at Counce and Valdosta. We've maintained and built in further flexible capabilities. And so in that regard, it's still very important to us.

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

Super. And just one last question. You talked about recycled fiber. I assume that your virgin fiber costs overall have been pretty flat. Are you getting any helping from this pickup in lumber?

Mark W. Kowlzan

We started seeing some of this last year in the fall. Again, in particular, as an example, in Michigan area, we saw some increased chips available on the market for some hardwood sawmills. So in that regard, we've seen some benefit. Obviously, we're not where we were prior to the housing collapse, but we've seen a little bit of improvement.

Operator

Our next question comes from Philip Ng of Jefferies.

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

Thanks for the color on your raw material prices. I think you commented that OCC is going to be down, energy and chemical is going to be up sequentially. So collectively, should we expect input cost to be up sequentially?

Richard B. West

What we said, is the -- in fact, lower mill cost overall compared to the second quarter and the third quarter, Philip, embedded within that number is some increases for electricity a little bit and also some in chemicals, primarily starch, but overall, still lower.

Mark W. Kowlzan

What you see take place typically in the July, August period in some of the areas with the summer heat and temperatures, the utilities end up having to have some abnormally high real-time pricing. And so we just expect that there will be some days and some periods where we see some real-time pricing get out of hand.

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

I got you. But it didn't sound like it's going to be a sharp uptick from where you were at...

Mark W. Kowlzan

It's something we typically see, but we just -- we made that point.

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

Okay, that's helpful. And then I just want to get a little more color on what you're seeing on the export market right now. I think you did comment that things were a little better than you expected both from a demand and pricing standpoint. Certainly, the headline out of Europe and Brazil have gotten worse. I just want to get your view on a real-time basis.

Mark W. Kowlzan

Phil, I'll just comment on that real quick. I mean, it's -- sometimes, we're not the best barometer of the export market quite frankly because we send a lot of specialty products to that export market in terms of liner, but it's not great over in Europe. But I don't think it's as disastrous as what the press would have you believe.

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

Okay. And then during the quarter, you guys obviously shifted out of the export market. How much of that was just the downtime you guys were taking or just better integration on the box side from the acquisitions or you're just taking share? I just want to get a little color on that front. And should that -- will that trend reverse itself in Q3?

Mark W. Kowlzan

Well, again, all of the above. With the downtime that was being planned with the mills and the work that Tom had done with the acquisitions and the organic growth, we needed all of those tons to take care of our customer base here in North America.

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

Okay. That's helpful. And just one last question. I mean, your free cash flow was obviously quite strong, kind of like pretty nicely this year. When we think about maybe 2013, are there any major reinvestment projects in the horizon or should we expect it to be pretty much in line from 2012? So would the majority of that cash be returned to shareholders and acquisitions?

Mark W. Kowlzan

Well, again, we'll continue to look at box plant acquisition opportunities and strategic opportunities from the organic side as we see customers growing and their needs, demanding we can work with them. So that's something we hope that will continue. That's what we're planning on.

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

Okay. But nothing like what we've seen in the last few years. Is that fair?

Mark W. Kowlzan

No -- that's fair. Yes.

Operator

Our next question comes from Scott Gaffner of Barclays.

Scott Gaffner - Barclays Capital, Research Division

So you mentioned the lower energy cost was a $0.05 benefit in the quarter, and you talked about some of that coming just from lower fuel costs and then somewhat from the energy projects you completed. Can you just sort of break that down so we can get a sense of how much is coming from each of those buckets?

Mark W. Kowlzan

Well, the -- again, the energy projects have been contributing the bulk of that. So we continue to see good results from both the Counce and Valdosta piece. And so again -- so that's pretty much the -- all that savings contributed through the Counce and Valdosta projects. And probably, Valdosta is a little bigger contributor than Counce. Just to put a little technicolor on it, at our Valdosta mill, if you count the -- that was a boiler project. We still -- and we buy no -- basically, no purchased fuel at Valdosta. We run on 100% wood waste from our own wood yard and black liquor. And so no purchased fuel, and we buy very little electricity, we produce roughly 98% of our own electricity. And then we have byproducts that come out of burning black liquor, things like tall oil soap and turpentine. You throw that all together and our energy cost at Valdosta is actually a negative number. And that's obviously a big source of the savings.

Scott Gaffner - Barclays Capital, Research Division

And so are you returning energy to the grid through Valdosta? Is that...

Mark W. Kowlzan

On occasion, we sell some back to the grid, but most of the time, we run at about 80% -- about 98% of what we need. And we buy a little from the grid to maintain the utility tie in case there was ever an emergency. And we had to take that -- but we had to take the turbine down.

Scott Gaffner - Barclays Capital, Research Division

Okay. And also in the quarter, your maintenance cost came in at only -- you said $0.02 maintenance cost for the quarter. I think you were saying there was going to be a $0.03 headwind going into the quarter. Is that -- were you able to outperform on some of the projects? Where did those lower costs come from?

Richard B. West

The change from 1Q to 2Q was the accounting of the annual outage costs. From the standpoint compared to last year, in the second quarter, we were $0.02 per share better, and that's more driven by the fact that we're -- especially the energy project, we're not having to repair such older equipment. We've got new equipment -- new boiler at Valdosta and rebuilt boilers at Counce, which really helps us. So the majority of the $0.02 per share improvement year-over-year was related to the energy project.

Mark W. Kowlzan

And Rick raises a very good point. When we did this project, we noted that over a 5-, 6-year period, we would reduce maintenance on those 5 old boilers that we took out of service by about $80 million in terms of cost avoidance. Now some of that is capitalized and some of it is expense, but with $80 million in additional to the savings that we got, that we don't have to spend as Rick just pointed out. And that's an important point.

Scott Gaffner - Barclays Capital, Research Division

Okay. And then just lastly, you mentioned e-commerce is now benefiting the December month. But do you get any benefit from e-commerce in back-to-school sales? And maybe you could just also talk about your overall thoughts on e-commerce and how that could potentially aid the overall industry as we move forward.

Paul T. Stecko

I think year-round though, e-commerce is a positive factor. I think, again, seasonally, whether it's school-related time of the year, that's definitely been a positive for the industry.

Mark W. Kowlzan

Yes, and December is especially strong for 2 reasons: one, that's obviously the biggest buying period for things, and people are shopping more and more on the Internet; and the other beauty of buying things on the Internet as opposed to a store, when you have to send it back to the Internet, you got to pack it in another box to send it back because most of the time, you throw the first box away. So you get a double bang for your buck over the Christmas holiday.

Scott Gaffner - Barclays Capital, Research Division

And do you have any preference of those boxes versus your traditional boxes? Is that...

Mark W. Kowlzan

Well, I think you got to look at that. That volume is good for the entire industry. Where it ends up benefits everybody. And it doesn't matter who makes it, that's going into volume for the industry. And those kind of boxes tend to be lower priced. There are plenty of brown boxes, don't have a lot of graphics on. So that's not the sweet spot of our mix, but it benefits the industry in terms of total consumption.

Operator

Our next question comes from Al Kabili of Crédit Suisse.

Albert T. Kabili - Crédit Suisse AG, Research Division

I guess first question on inventory, down, I think, 1,000 tons sequentially. Can you just comment how you're feeling about your inventories right now, how they are versus where you want them ideally?

Mark W. Kowlzan

Well, we're basically on plan, but again, we are going into a busy time of the year for us. So we need every ton we have, and that's important. I mean, the mills have to run right now. It's critical, we've got now all the shutdown -- heavy shutdown period, which is the second quarter. And we basically held where we wanted to on-plan with inventories. But again, we need the tons and we've got the business and we've got to run.

Albert T. Kabili - Crédit Suisse AG, Research Division

Okay, great. The other question I had, just around -- just the tone of the market. I mean, I know you're outperforming the industry, but I was wondering maybe if you could just help us with -- if there's any notable changes with what you're seeing now, with what it was like this time last year. Has there been any differences in terms of what you're seeing in the environment, et cetera, notable differences, say, versus this time last year?

Mark W. Kowlzan

From our perspective, there's not much of a change. We've taken advantage of what we built into the box plant system and mill system. And again, Tom's group is taking advantage of that with the customer base and working with them, and the results speak for themselves.

Albert T. Kabili - Crédit Suisse AG, Research Division

Okay. Great. And then final question is on mix. You highlighted earlier that you did a little better from a mix perspective this quarter than you initially anticipated. Sequentially, can you help us with how you're thinking about mix sequentially?

Mark W. Kowlzan

Our mix will be pretty similar to what it is in the past going forward. We may see -- as I mentioned earlier, we probably will see a slight pickup on the graphics side of the business going forward just because I think we've got customers that are trying very hard to feature their products in a relatively flat market.

Operator

Our next question comes from Joshua Zaret of Longbow Research.

Joshua L. Zaret - Longbow Research LLC

I have one question. I guess the thing that caught my interest was, you mentioned you're doing strategic spending on 5 box plants. Now I think, and correct me, you have about 70 box plants. So the question is, a, are there -- is this something that's going to be ongoing? And b, what is the focus of this spending? Are you adding -- is there a need for more corrugated at some of these plants or are you changing markets? So if you could answer those questions, I'd be very interested. And how much capital you'll be investing over time? You mentioned the amount of -- you're investing for your acquisition. I assume this is small, but I'd like to know that.

Mark W. Kowlzan

That was in reference to the spending that was done in 2010 and 2011 with the 5 box plants we had identified. We spent $80 million during those 2 years on the strategic opportunities. Now the point that was made, we will continue as we go forward. As we're working with our customer base, if we have the opportunity to grow with them and we see an opportunity, we might make some strategic investments.

Joshua L. Zaret - Longbow Research LLC

So is this about scale, basically?

Thomas A. Hassfurther

Joshua, this is Tom here. I just want to point out that I think it's very important to understand, we have never, never invested capital on a "build it and they will come" basis. I mean, our capital is always strategically invested around our customers and around demand that we see in particular marketplaces. That, we will continue to do.

Mark W. Kowlzan

Yes, and to amplify on that, we did that with the $80 million we spent. We're into that, we like the results, they're showing up in our numbers, bottom line. And as we go forward, we now have more competition with internal projects because of that success versus acquisitions. So in order to make an acquisition, this money has got to compete against internal projects, and our success in the last few years on internal projects has been very good. And so the competition for that last dollar of capital is even more keen within the company than it has been in the past, and that's the point we've been trying to make. So we got -- we've had good choices. We can't make them all, but it's good to have a more good choices than fewer good choices.

Operator

Our next question comes from Alex Ovshey of Goldman Sachs.

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

On the export front, can you comment what percentage of your volumes went into the export market during the quarter and longer term, whether you see a strategic rationale to be a player in the export market?

Mark W. Kowlzan

Yes. Typically, we've said this -- quarter-to-quarter. In terms of year-to-year, we might go from 8% to 10%, 11% of our products go offshore. And our trend is down in that regard. That's an historical number 8% to 10%, and we've cut back a fair amount from that number, which we're not going to divulge.

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

Okay. Any incremental color you can give on just the mill net differential right now between selling to Europe and then selling domestically. The data seems to imply it's about $100 a ton. Is that a good ballpark figure to be thinking about?

Mark W. Kowlzan

We're not going to comment on this.

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

Understood. And last question, just on the chemical side. Can you comment on what you saw in terms of pricing trends, for the key chemical costs that you use in the second quarter on a year-over-year basis and what the outlook is going forward for the balance of the year?

Mark W. Kowlzan

Well, again, we saw an easing on the inflationary pressure from last year. But going forward, on the commentary about chemicals into the third quarter, most things are flat. We are anticipating -- as an example, corn, obviously is going to be under pressure, theoretically with what's happening with the drought. So that's one example.

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

Just remind us, what are the key chemical input: starch, caustic, any other big ones we should be thinking about?

Mark W. Kowlzan

Well, again, right now, on the box plant side, the starch and starch-related products, all the adhesives. But on the mill side, obviously, the caustic chemicals and then wood fiber obviously is the big one, which has been very stable.

Operator

[Operator Instructions] Mr. Kowlzan, I see there are no more questions. Do you have any closing comments?

Mark W. Kowlzan

I'd like to thank you everybody for participating today, and we look forward to seeing everybody on the next call. Have a good day. Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect, and have a wonderful day.

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