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Executives

James Rubright – Chairman and Chief Executive Officer

Steve Voorhees – Chief Financial Officer

Analysts

George Staphos – Bank of America/Merrill Lynch

Mark Wilde – Deutsche Bank

Phil Gresh – JPMC

Anthony Pettinari – Citi

Philip Ng – Jefferies & Company

Alex Ovshey – Goldman Sachs

Chip Dillon – Vertical Research Partners

Mark Connelly – CLSA

Bill Hoffmann – RBC

Mark Weintraub – Buckingham Research

Albert Kabili – Credit Suisse

Jonathan Chen – Private Management Group

Steve Chercover – D.A. Davidson

Rock-Tenn Company (RKT) F3Q 2012 Earnings Conference Call July 25, 2012 9:00 AM ET

Operator

Good morning. My name is (Becker) and I will be your conference operator today. At this time, I would like to welcome everyone to the RockTenn Third Quarter Fiscal 2012 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. (Operator Instructions) As a reminder, slides are being presented today as part of the conference call. These slides can be accessed at www.rocktenn.com under the Investors page. Ladies and gentlemen, this call is being recorded today, July 25, 2012. (Operator Instructions) Thank you.

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

Steve Voorhees

Thanks, (Braca). Good morning. Welcome to RockTenn’s fiscal third quarter 2012 earnings conference call. This is Steve Voorhees, Chief Financial Officer. I am joined this morning by RockTenn’s Chief Executive Officer, Jim Rubright.

During the course of this call, we will make forward-looking statements involving our plans, expectations, estimates and beliefs related to future events. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from those that we discussed.

We include a description of these risks and uncertainties in our filings with the Securities and Exchange Commission including our 2011 Form 10-K and our Form 10-Qs filed for the period ending December 31, 2011 and March 31, 2012. During the course of the call, we will refer to non-GAAP financial measures. We provide reconciliations of these non-GAAP measures to the most directly comparable GAAP measures in the appendix to the slide presentation. The slide presentation is available on our website.

Jim is going to begin with commentary on the performance of our businesses during the quarter and I will discuss the status of our integration as well as various items on our financial statements.

After our prepared comments, Jim and I will be available for questions. Jim?

James Rubright

Thanks, Steve. Good morning. We had solid operating performance during the quarter with very strong consumer segment earnings performance, a mid lower demand for folding carton board grades. Corrugated results were also generally consistent with our expectations for the quarter with the exception of higher costs than we anticipated in connection with the Hodge rebuilding and capacity increase projects and we continue to make good progress on synergies that Steve will discuss achieving our run rate in excess of $200 million by the end of the quarter.

As those of you who follow us closely know, we run our businesses to maximize long-term free cash flow returns and those returns are the primary measure by which we judge our performance. It’s now 13 months since we closed the acquisition of Smurfit-Stone. In the last 12 months ended June 30, we generated $458 million or approximately $6.37 per share in cash that we applied to debt reduction and dividends, two small corrugated acquisitions and for pension contributions in excess of expense, which we used to reduce the liability for the largely closed pension plans we acquired in the Smurfit acquisition. In the three months ended June 30, 2012, we generated $133 million or approximately $1.84 per share in cash flow available for those purposes even though is a major maintenance outage quarter.

Now, I’ll turn to more detail regarding our segment performance. Given seasonally stronger domestic box demand, our corrugated shipments were up 2.1% over the March quarter. And also given our planned maintenance outage of 165,000 tons on the destruction from the Hodge shutdown that I mentioned, we reduced containerboard tons sold in export markets by 42,000 tons compared to the March quarter.

During the quarter, we actually completed major maintenance outages at 5 of our 9 virgin containerboard mills, Fernandina Beach, Stevenson, Hodge, West Point, and La Tuque. Four of those went well. We had a disruption at Fernandina Beach where we did the seven year maintenance outage on the mill’s turbine. And we concluded we need to do a rewind of the turbine, so that cost us some production at Fernandina Beach as we operated in a slightly constrained mode, but otherwise those outages went as planned.

At Hodge we undertook a number of major rebuilding projects that when fully implemented will modernize a number of important areas of the mill. And with the other changes we’ve made over the course of the last year to mill will increase productive capacity by 100,000 tons per year. But actually in terms of lightweight liner because it shifts the mix by 200,000 tons of lightweight liner since we exited the craft paper business and the medium business. And we will do that on two rather than four paper machines. However, in the course of the outage we ran into a number of issues in completing these complex projects and reduced expected production from the mill by about 20,000 tons in the quarter and caused higher supply chain and other costs that we estimate it cost us approximately $10 million or $0.09 in the quarter.

The mill is currently working through the many start-up issues from a complex series of projects and we expect that it will take a number of months to realize the full benefits of these improvements. As a system we don’t expect to take any significant amount of major maintenance or economic downtime in the quarter. By the end of June our inventories were down to our normalized target level. They declined further in July by about 32,000 tons and we expect further tightening that will continue through October and November of this year.

Our largest input costs in the corrugated segment are virgin and recycled fiber and energy. Slightly lower virgin fiber costs compared to Q2 2012 increased earnings by $2.3 million, but that was more than offset by higher system OCC prices which reduced earnings by $5.5 million in a quarter.

Nationally, we are seeing low demand for recycled fiber particularly for export sales, so we expect to benefit later in the quarter and likely for the balance of the year including the calendar year from lower OCC prices. Our containerboard only production is approximately 40% of recycled fiber input based as a company as a whole including our consumer segment were approximately 45% recycled fiber input based.

Natural gas prices have increased after very low levels earlier in the year and we expect that this will increase our system costs for purchased energy by about $10 million in Q4 over Q3 as higher natural gas and in related higher electricity costs more than offset lower fuel and coal costs. We also expect to see several million dollars in higher costs for corn starch given the drought induced corn crop shortages.

Total segment box and sheet shipments were up 2% over the preceding quarter on continued strengthening in corrugated sheet sales and growth in Mexico. We completed the acquisition of two sheet plants in Mississippi and Alabama they convert approximately 26,000 tons of containerboard annually and integrate very will with our system. Box demand so far this quarter has been stable and it’s been generally consistent with shipment levels that we experienced at the end of the June quarter.

Our consumer segment performed very well during the quarter with earnings up $23 million over the prior year quarter. $11 million of the increase was from lower fiber and energy costs, $6 million of the increase was from the fact that the Demopolis mill major maintenance outage occurred in 2011 and not in 2012, $2 million was from improved converting operations and $4 million was from our merchandising displays operations.

Earnings were about $700,000 lower than the preceding quarter as lower volumes and selling prices were offset by lower commodity input costs. Folding carton and folding carton board demand has weakened this year compared to last year as a result we took a total of 15 days of economic downtime in our coated recycled mills and we expect to take about 8 to 10 days this quarter. Display earnings in Q3 were down about $6 million from Q2, but that was in line with seasonally lower sales volumes and otherwise the business performed well and we expect seasonally stronger volumes and earnings this quarter.

We expect that fourth quarter capital expenditures will bring the total for the year to approximately $500 million to $525 million and that’s largely depended upon project completion timelines. We’ve done our work in capital planning for 2013 and we now expect capital spending to be in the range of approximately $425 million to $450 million.

Looking to the quarter’s earnings, we expect earnings to be in the range of approximately $1.35 per share or $0.40 increase over the June quarter. We expect the higher container sales, lower fiber costs, and lower maintenance cost will be more than offset by the effect of other changes, including the higher natural gas, electricity, and cornstarch costs that I mentioned as well as continued supply disruptions from the continuation of the startup curve at the Hodge mill.

In the last week, we made a number of leadership changes in our corrugated operations. Tom Stigers now leads our containerboard mill system. Jeff Chalovich leads our box plant and preprint operations. John O’Neal, who now leads the corrugated supply chain, a critically important piece of the overall segment operations. And Tom, Jeff, and John report to Jim Porter who continues as President, Corrugated Packaging. Tom Stigers has led our consumer segment coated mill system, Demopolis, the SBS mill, and the five CRB mills for several years. And in those operations, we have achieved significant operational and profit improvements.

Jeff Chalovich joined Rock-Tenn in 2008 with a Southern Container acquisition and has been leading corrugated sales for the last year. John O’Neal joined us early this year and previously had been Chief Commercial Officer for Mirant Corporation. In addition, Erik Deadwyler now leads our Recycled Fiber segment and will report to Mike Kiepura, President of Consumer Packaging. Erik led our recycled business prior to the Smurfit acquisition, where he had transformed our business into a very high performing and a high returning platform that was integrated with our mill system. All of these leaders are focused on realigning and strengthening their teams to accelerate our performance improvement initiatives and I’m confident they’ll have a very positive impact on our business.

Now, I’ll turn it over to Steve to go through some of our financial performance numbers.

Steve Voorhees

Thanks, Jim. Our trailing 12-month credit agreement EBITDA was about $1.2 billion and free cash flow remained strong during the quarter at $58 million. Our fiscal year-to-date capital expenditures are approximately $348 million. And as Jim mentioned, we expect our full year 2012 capital expenditures to be in the range of $500 million to $525 million. For fiscal year 2013, we expect to invest between $425 million and $450 million in capital into our businesses.

At the end of June, our net debt was $3.34 billion and our credit agreement debt to EBITDA ratio was 2.84 times. Liquidity was $1 billion at the end of the quarter. Our credit agreement leverage covenant declines from a maximum of 3.75 times at June 30 to 3.5 times at September 30. Overall, our balance sheet and liquidity continued to be in good shape to support our business. We continue to make progress on integration during the June quarter. We began the process of converting the acquired box plants to the (indiscernible) operating system. We continue to focus on box plant operating improvements and recently announced the closure of our 11th box plant. We’ve included a slide that categorizes the areas of run rate synergies that we have achieved to-date.

As of June 30, our run rate of achieved synergies and performance improvements was in excess of $200 million. Approximately 47% of this is administrative areas, procurement, and energy. We balanced our 53% as in the mills, box plants, and other operational areas. In the current quarter, as was true last quarter, the benefits of the synergies and performance improvements have been more than offset by lower market pricing for containerboard and corrugated packaging.

Our cash restructuring costs for plant closures, acquisition, and integration expenses were $64 million over the past 12 months. Over the same 12 months, we received $38 million in cash proceeds from the sale of real estate and equipment. The net cash cost of $26 million for plant closures and integration are well below our initial expectations, and consequently, have had a positive impact on our cash flow over the past 12 months.

Turning to our key cost inputs, wood cost decreased about $5 million as compared to the March quarter. As Jim noted, our recycled fiber costs were higher in the quarter due to the indices that affect us most and to the fact that our Jacksonville, Florida recycled mill returned to full operations in the quarter. In the current quarter, recycled market prices have declined. OCC Chicago averaged $107 per ton in the June quarter, and with the July posting now at $95 per ton our expectations are that recycled fiber prices will continue to decline over the near-term. We continue to benefit from low natural gas prices with prompt month prices at approximately $3.15 per MMBtu and the 12-month strip at approximately $3.45 per MMBtu.

The recent pension funding legislation increased the interest rates used to calculate the required cash contributions to our U.S. qualified pension plans. Our actuaries have estimated our required contributions at about $300 million in each of fiscal years ‘13 and ‘14. This is a reduction of $167 million in total from our previously expected contributions during the same two-year period prior to the passage of this legislation, whether this funding reduction is a permanent reduction or a deferral of funding will depend to a great extent upon interest rate levels in 2015 and thereafter.

Turning to our guidance for certain financials statistics. We have made a slight reduction to our depreciation and amortization for the year from $540 million to $535 million. We expect corporate and interest expenses for the September quarter to each be $28 million. Our book tax rate for the June quarter was 34.5% lower than we expected due to the reversal of certain tax reserves and the true up of our tax provision to the tax returns we filed during the quarter. We expect our book tax rate in the fourth quarter to be between 37% and 38%. Our cash taxes will continue to be very low for sometime as we continue to expect to use our available federal net operating losses and other tax credits to reduce cash taxes. These unused tax items aggregate to approximately $380 million in reduced future federal cash taxes.

In addition to these items, there is also an unrecorded asset related to additional federal net operating losses that would be available if the Smurfit-Stone black liquor tax credits claimed as an excise tax credit proved to be non-taxable. If these tax credits prove to be non-taxable, the cash benefit of our unused tax items will increase by $227 million to a total of $607 million. For your cash flow modeling, our fiscal fourth quarter is our largest pension contribution quarter. We estimate that we will contribute $153 million to our plans in the quarter.

That concludes our prepared remarks. Jim and I are now available to respond to your questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions) Our first question will come from George Staphos from Bank of America/Merrill Lynch.

George Staphos – Bank of America/Merrill Lynch

Thanks. Hi, guys. Good morning. I guess the few questions the start, the capital spending moved – I think from a previous range of 480 to 500 to now 500 to 525 if I am remembering from the slide correctly, what drove that?

James Rubright

Well, Hodge is a significant piece of that as well as completion this year of some projects that we might have done later.

George Staphos – Bank of America/Merrill Lynch

Okay. And Jim, can you discuss a bit more in terms of what didn’t go as well as you would have liked with Hodge and what the remedy is related to that and the timeline associated as well?

James Rubright

Sure. At Hodge, we had a number of major rebuilding projects and we used EPC, engineer, procure, and construct contracts for the majority of the work. I’m going to be circumspect in what I say, because I believe we’ll search significant claims with respect to the work that was done at the middle, but essentially we took the mill apart and when we went to put it back together, a lot of pieces didn’t fit. So, a lot of stuff that had been prefabricated to be assembled on-site had to field fabricated. The result of that was we ended up taking 5 days of additional downtime on paper machine five, the largest machine in the company. 9 days of additional downtime on paper machine four. And then incurred significant cost overruns associated with the project.

As I mentioned in the prior calls, though this is a very complex project and you have large paper machines that make lightweight paper that we’re starting up and we expect at a relatively slow startup curve because of all the components of it and we are experiencing that. We’ve taken a lot of resources from Rock-Tenn and parked them in Hodge right now to deal with the startup issues. So, I’m confident we will work through them, but ultimately production is significantly below where it ultimately will be. And George that’s about the best summary I can give you.

George Staphos – Bank of America/Merrill Lynch

Okay and I appreciate that. Does this affect at all your timing on any of your other projects like Hopewell since you have some resources now dedicated to Hodge maybe you would have had directed elsewhere?

James Rubright

George you asked about Hopewell, the Hopewell project permitting requires us to convert some secondary boilers to natural gas. And the utility that is providing the natural gas service has advised that they are significantly delayed in constructing the natural gas line and we don’t have a completion date for the natural gas line, so the Hodge project is at least three.

George Staphos – Bank of America/Merrill Lynch

Hopewell

James Rubright

Months delayed contingent upon starting up with natural gas that we don’t have so we don’t have service to the mill right now. So, that however will give us a significant amount of time to really re-review the Hodge project to make sure that we don’t have a recurrence of the circumstances we had at the Hopewell project – to see that we don’t have a recurrence of what we had at Hodge.

George Staphos – Bank of America/Merrill Lynch

Okay, last question, I will turn it over. You mentioned a number of management changes and we wish everyone the best of luck in their new roles. In terms of your existing management or within containerboard and corrugated is Mike Exner and Steve Strickland still on the team?

James Rubright

No, Steve is retired. Mike is not with Rock-Tenn. And the changes you have seen are the senior level changes. There are other changes, George essentially we have one business that’s performing extremely well that’s our consumer business. And then in a number of respects the corrugated business has not performed as we expected. In consumer, we developed a very strong bench of operators and technical talent and we’re really in the process of enabling those people to have a greater impact in Rock Tenn by moving them into the corrugated business. Jim Porter and I believe we need to significantly strengthen that team to just take advantage of the opportunities that we have now and we’re in the process of moving to do that.

George Staphos – Bank of America/Merrill Lynch

Okay. Thanks very much. I will turn it over.

Operator

Our next question is from Mark Wilde with Deutsche Bank.

Mark Wilde – Deutsche Bank

Good morning, Jim.

James Rubright

Good morning Mark.

Mark Wilde – Deutsche Bank

So, just one more issue on Hodge, can you give us some sense of what you think the curve that kind of full optimization looks like there is two quarters, three quarters?

James Rubright

Mark, I just can’t tell you. We have taken a team of people from Demoplis and put them in Hodge right after the startup. They are working through the issues right now. There are number of really complex paper making issues and they will probably report to us again next week or beginning of next week regarding their view with respect to solutions. But to try to give you an estimate of precisely what the ramp up curve would be just wouldn’t be productive today.

Mark Wilde – Deutsche Bank

Okay, just to kind of recalibrate versus what you might have expected in the fourth quarter out of Hodge, say three months ago, what’s the change in EBIT as we look at your current view of the fourth quarter?

James Rubright

As I said Mark, I am not going to make an estimate of – to Hodge’s production during the quarter, last quarter has it cost us 20,000 tons of production.

Mark Wilde – Deutsche Bank

Okay, alright. A few other questions, your EBITDA in the corrugated business right now is just a little bit under 12%. One of your bigger competitors have talked about sort of they think that their business can up in the mid-20s in terms of an EBITDA margin, some other competitors are in the upper-teens right now. Where do you think the potential is in your containerboard business, your containerboard and corrugated business?

James Rubright

I am not sure I think it’s productive to try to give an upward bound on the potential of the corrugated business. We’ve indicated the range of performance improvements we think we can believe we can achieve in the near-term. The issue is what is the upward bound on containerboard pricing and we believe there is significant room for containerboard pricing to increase in the United States to increase the returns on the business.

If you look at the landed cost of containerboard in the United States from US mills versus anywhere else in the world trying to get it here, there is very significant headroom for increases in containerboard price in the United States. And I think you have people like us, well that means certainly the legacy Smurfit business was not returning an appropriate level of capital. Some of that can be improved by capital and performance, but a lot of it I think could be achieved through higher pricing for containerboard, but I don’t think it makes sense for me to try to speculate.

Mark Wilde – Deutsche Bank

Okay, that’s fair enough. You mentioned starch and electricity as being some of the issues from a cost standpoint in the fourth quarter, how big are those issues, particularly the starch, which I guess you use sometimes on sizing for the paperboard, but it’s also the adhesive you use when you put together a box?

James Rubright

Right. Well, we estimate in the quarter, Steve, a couple of million, we’ve got a chart in our presentation I thought that basically broke out the quantities that we are using from which you could do that, but I’d say it is $0.5 million for starch.

Steve Voorhees

Mark, each dollar a bushel of corn with (indiscernible) by about $5 million might be between $5 million and $6 million starches per year. And so we have had an increase, it looks like a little bit over $1. So, if you take that, whatever the change in corn prices times that and quarterize that and we end up with I think about a couple of million dollars.

Mark Wilde – Deutsche Bank

Okay, alright. And then finally you talked about the situation at Hopewell, but I think you are also working on a new power supply to the Solvay mill and I know that there have been some stories in the press about just trying to get permitting push-through up there. Can you just update us on the situation?

James Rubright

We don’t anticipate any issues with respect to permitting the boiler change at Solvay. We are working through that. The reports I have had indicate that, that should not be a problem.

Mark Wilde – Deutsche Bank

Okay, alright. Fair good. I’ll turn it over.

Operator

Our next question will come from Phil Gresh with JPMC.

James Rubright

Good morning, Phil.

Phil Gresh – JPMC

Hey, good morning. Just one follow-up question on Hodge, just as you think about the capital budget that you talked about for next year, the $425 million to $450 million. The issues that you had there, I mean, how much of – how one-time do you consider those versus perhaps, does this make you think more conservatively about your budget for other projects moving forward, maybe just give some color on that?

James Rubright

Yeah. Well, we – I’ve been saying for a long time we thought, this year would be at, this mean ‘13 would be in the range of $400 million and we’ve done a lot of work looking at what we should spend and where we’ll spend it as well as the cost improvement initiatives that we’ve got in the numbers $425 million to $450 million. So, I think that’s your answer.

Phil Gresh – JPMC

Okay, fair enough. And then just on the demand side, there is comments in the release about demand trends being encouraging towards the end of the quarter and we’ve obviously all seen the industry data, but that said yesterday, UPS was out being very cautious about their domestic volume trends. They are talking about weaker economic outlook for the domestic economy in the second half and they obviously ship a lot of boxes. So, I guess I was just wondering what you’ve been seeing from a demand trend recently and just in general, what your overall view is on the economy right now and whether you think things might get worse before they get better based on what you are seeing?

James Rubright

Well, July typically sees a slight slowdown from June, because a lot of your customers take vacations and say you have planned outages and so forth. And what we are seeing is simply seasonally adjusted stability relative to last quarter. Now, why would we have the disconnect from somebody else? And the answer continues to be food, food, and food. I mean our business packages food, consumer non-durables, and paper. As you know, the United States has the number of, let’s say, safety nets in place that are going to make food in consumer non-durables as resilient as anything to continued economic downturns, that is why I believe our business is relatively stable in an environment in which you do have people seeing concern about economic deterioration.

I think it has affected consumer spending for a long-time because we’re very driven by consumer levels. We are also driven by gasoline prices and gasoline prices have not really escalated recently although they are higher than say optimal prices at the beginning – at the end of Bush era and the beginning of the Obama administration as I understand it. So, I think that’s the explanation. With respect to where is the economy going I'm not an economist and we've got lots of data and forecast by people who are far most far most forecasted than I’m, so my offering view, personal view again I don’t think adds a lot to this dialogue and I apologize, but that’s just my view.

Phil Gresh – JPMC

The color you provided there is helpful. I appreciate that. Just the last question on the performance improvements $50 million higher kind of quarter-over-quarter run rate despite the issues. Is this right run rate to be thinking about on quarterly basis moving forward or were there some one-time benefits in this quarter that we should perhaps think a little bit of lower rate as we move through the next couple quarters?

James Rubright

I’m going to let Steve do that he is kind of in-charges of synergy development and monitoring.

Steve Voorhees

I think a lot of the trajectory now is a function of the operating improvements and the mills and the capital programs. So, I think I’ll just to fore back Jim’s comments on it’s premature to comment on that. We do have a series of projects continued efforts and procurement on the administrative side now that way have JD Edwards project and so I’d expect incremental improvements in those areas.

Phil Gresh – JPMC

Okay, alright. Thanks. I’ll turn it over.

Operator

Anthony Pettinari from Citi.

Anthony Pettinari – Citi

Good morning.

James Rubright

Good morning.

Anthony Pettinari – Citi

Just following upon George’s question given the issues at Hodge and potentially a three month delay at Hopewell if I heard that correctly, when we think about Hopewell and Stevenson and Florence with you recalibrated view, can you give us kind of a rough outline of the timing of the projects over the next 12 months. And then in terms of sort of total capacity additions or changes that might come out of all of the projects in aggregate, when would those kind of final decisions be made is that early next year or how should we think about that timing?

James Rubright

Right with Hopewell what I said was we know we’re off at least three months and really the sort of the project is indefinite because without natural gas line and that ultimately is in the hands of the utility in it’s right away issues, we don’t have a project, so that when we will commence when we are certain we got the energy supply we need in connection with the change in the air permits for the mill. Stevenson was schedule June – when did we schedule Stevenson if we’ve done in it one of the major outage which is nine month its almost 12 months from now because we just did the Stevenson outage, so that one won't be until the late spring of next year. Florence is also the late spring to outage just because of schedule wrapping around the major maintenance outage.

Anthony Pettinari – Citi

Okay. And then in terms of the sort of final capacity footprint, is there a timeframe for when you would sort of make those decisions?

Steve Voorhees

The Hopewell project is a project that one fully implemented adds something in the range of 120,000 tons of capacity to the Hopewell mill. Nothing that I know about the project would suggest that’s not achievable although I’ll just say we are going to significant work with respect to further insuring integrity of the project. Stevenson is not really capacity increase project its primarily a cost reduction project. There is some increase in capacity it’s relatively small, relative to the other projects and Florence is an infrastructure project it is rebuilding the infrastructure of the mill, it is not really intended to be capacity increase. It will allow however, some increase in productive capacity.

So, as our view has been that the total capital capacity increased from performance improvements, maintenance capital and capital projects is in the range of 600,000 tons. But you have to understand Jim and I just put a pretty significant new team of people in-charge of all the stuff, because as I mentioned the leadership changes as you have seen are just the visible ones. There are many change underneath those and it would frankly surprise me if we don’t recalibrate a number of those plans relative to the effectiveness of the capital that we spend and the initiatives that we achieved based on the work that they do, but I don’t have a basis today to say that there is a difference in our expectation.

Anthony Pettinari – Citi

Okay. And is it safe to say that you are still comfortable with the kind of normalized CapEx range of $350 million and you think you could get there by 2014?

James Rubright

Well, we could, whether we choose to do so or not is another question, because there are a number of really significant number of cost reduction projects that we’ve got into the future. And so the $350 million is just if we – that’s sort of an ongoing maintain where you are capital expenditure number for the system. And as a practical matter, there are pretty significant opportunities that will continue to be able to take advantage of if we decide to do so.

Anthony Pettinari – Citi

Okay, that’s helpful. I’ll turn it over.

Operator

Next question will come from Philip Ng from Jefferies & Company.

Philip Ng – Jefferies & Company

Good morning guys. You guys have done a good job realizing the gross synergies on a run rate basis your guidance of Q4 is not really reflecting much of a real improvement on year-over-year earnings trajectory versus 3Q. Can you talk about some of the drags in Q4, I mean, some of these projects, I guess, got pushed out, just want to get better understanding?

James Rubright

Well, we’ve just taken the cost environment and the pricing environment and projected it into the quarter. It’s easy to say it’s not a significant increase, but it’s $0.40 a share. End of the quarter, you will have a couple of drags as we get to the full amortization rate with respect to outage, which we as you know we amortized outage expense over the course of the period to the next outage and we did take five in the last quarter and therefore that amortization shows up in Q4. I think on a quarterly basis, the full run rate of amortization, Steve, isn’t it about $18 million a quarter, so it’s $20 million a quarter. So, you have that effect on the quarter, but that’s simply our view.

Philip Ng – Jefferies & Company

Okay. And then, I mean, it sounds like Hodge is still going to be a lingering issue in Q4, how much of the drag will it be on earnings for Q4?

James Rubright

Again, I’m saying I’m not really trying to be precise with respect to guidance. With respect to that, there are lot of moving pieces, all of which when put together we think that the most probable outcome for next quarter is $35 we’ve indicated.

Philip Ng – Jefferies & Company

Okay. And in your slide deck, you talked about how you are seeing improving fundamentals in containerboard, can you elaborate a little bit more, is that more on a demand supply or pricing environment on the export side?

James Rubright

Exactly, it’s a mix of a number of factors. I would not read into it that I see the U.S. economy improving, because that’s certainly not what I was referring to. With respect to domestic demand, what we are seeing is we see seasonally adjusted stable demand for our corrugated containers and containerboard in the United States. What we see is tightening. We had operating rates of 96%, the last reported period that I saw that’s very tied. Our system is moving out of balance into a highly constrained inventory situation, which we see continuing at least until November. You have good demand in Europe for kraftliner exports and you have production disruptions in Europe. So, there are number of factors that say to me that demand for domestic containerboard is tight. We have been contacted in the last quarter by number of major containerboard manufacturers with respect to could we source containerboard supply to those companies. And so it tells us that the industry is really quite tight and that’s what I was referring to.

Philip Ng – Jefferies & Company

Okay, that’s helpful. And then in the current – in fiscal 3Q, you did comment that you are unable to slide in the export market as well as you would hope and some of these projects are referred along the process. Would you be able to access the export market a little better in Q4?

James Rubright

Well, domestic demand is really strong in – at the present time. So, while – I think we’ll probably increase our export ton somewhat from the last quarter, because we’ll have more production not significantly. There are a number of export orders that we are either not able to accept that we are deferring out of August into September.

Philip Ng – Jefferies & Company

Okay. And just one last final question, and then so I guess based on that is it safe to assume that mix should improve sequentially in Q4?

James Rubright

Actually, if I understand what you just said, and what I said, I think I said export tons would actually increase in Q4 relative to Q3.

Philip Ng – Jefferies & Company

Okay.

James Rubright

So, that is not going to have a positive effect. Our mix is also affected largely by or to some extent by the mix of sheets versus boxes and the mix of white versus brown and the mix of pre-print versus post-print. And those are factors that we cannot forecast with a great degree of certainty on the margins. So, I don’t expect mix to improve materially, but depending upon all the factors I’ve mentioned mix could be better or worse than we think.

Philip Ng – Jefferies & Company

Okay alright. Thanks.

Operator

Next question will come from Alex Ovshey with Goldman Sachs.

Alex Ovshey – Goldman Sachs

Good morning Jim and Steve.

James Rubright

Good morning.

Steve Voorhees

Good morning.

Alex Ovshey – Goldman Sachs

As I look at the operating earnings in the corrugated packaging business and going back to the fiscal fourth quarter of 2011 it was $154 million and now it’s about half that level. And I realize there are a lot of moving parts, but from a high level can you talk about what the main drivers of the compression of the operating earnings that we’ve seen has been over the last three quarters and what you think to be more one-time related costs that will find themselves out of the model over the next 6, 9, 12 months?

James Rubright

By far the largest driver of the variance has been price erosion. I think we’ve mentioned we’ve seen significant price erosion in our business. And the vast majority of that so far has been in the corrugated sector. Steve what we’ve said with respect to price erosion over the period on an annualized basis is what?

Steve Voorhees

That it’s more than offset the synergy.

James Rubright

I know but we’ve.

Steve Voorhees

In excess of…

James Rubright

It’s an excess of $200 million, so that’s the largest driver of the variation. Then secondly if you take the base line quarter as the first quarter in which we own Smurfit, there was no amortization of outage expense nor was there any downtime. Because when we say it’s a $20 million amortization, we’re simply amortizing the expense, we’re not reflecting the lost production. So, this is a high loss production quarter relative to Q4, but you see you can consider that one-time but it’s going to be one-time every year.

The only real one-item items in the quarter that I would say were the supply chain disruptions associated with Hodge. I would also add though that you I think most people have heard us say that we’re incurring some duplicative administrative costs that are synergy related. Although we have migrated off of SAP on to JD Edwards for our main financial systems, we still have some operating plants that have SAP in their operations, so we’re maintaining duplicative SAP and JD Edwards staff with respect to that.

And then we have a fairly massive project that we talked about converting all of the Smurfit 100 box plants from six different procure-to-pay systems to one financial system that is – this is the Rock-Tenn system that will integrate with our financial systems. We have a lot of people doing that. So, we have a lot of duplicative costs that we’re running right now that ultimately in 10 to 11 months come to an end and then we can address a number of consolidation synergies associated within staffing associated with generating and processing the numbers that flow out those systems. There are – but that gets planted into our expectations with respect to synergies. I think that’s been helpful.

Alex Ovshey – Goldman Sachs

That has been Jim. Thank you. The other couple of questions I had was if you can comment on what you see your production levels to be in the fiscal fourth quarter given you are not taking any maintenance or economic downtime or at least not expecting…

James Rubright

Sure. If you go across our system our Demopolis SBS mill is going to run full to SBL and pulp operations and the containerboard mills are going to continue to produce at roughly the same levels they did last quarter. I don’t see any issues there Panama City didn’t go down last quarter that’s our major pulp mill and the containerboard mill system our uncoated recycled mills will be at about the same level. CRB system is going to be slightly higher because we expect a little less downtime 8 to 10 days of economic downtime versus 15 days last quarter. So, that segment in the containerboard system the 165,000 tons of economic downtime or maintenance downtime that we took we’re not going to take, so you should see in that increase there Hodge is probably going to produce more but again I’m not trying to really fine tune an estimate with respect to its production during the quarter. I mean, when do you think, I mean, the things running is just not running at the accelerated levels we’d expect to based on the completion of this project or I shouldn’t say expected, but that we expect to achieve.

Alex Ovshey – Goldman Sachs

Okay, that’s very helpful gentlemen. Last question on the boxboard business in the slide that you talked about softening SBS prices, can you provide a little more color around what you expect the price erosion to be and whether or not you are seeing any competitive pressure from some of the new capacity that’s coming on line in the Far East?

James Rubright

Yeah. The competitive pressure in the Far East is difficult for me to judge, because we don’t export SBS and our major competitors do. And it’s a very important component of the end markets for SBS. What I see is softness in domestic demand and lower operating rates. Because of our integration, our SBS mill is going to run full and as dedicated to the folding grades, which I believe were probably the strongest segment. But if you look at industry-wide SBS backlogs, they are down that levels that are significantly below the levels of say 18 to 24 months ago and we’ve got two to three-week backlogs and that’s kind of just where we are right now.

Alex Ovshey – Goldman Sachs

Thanks very much, Jim.

Operator

Chip Dillon from Vertical Research Partners

Chip Dillon – Vertical Research Partners

Yes, hi, good morning. When you provided your guidance of $1.35 for the fiscal fourth quarter, how much of the price initiative that we’ve been heard of widely reported is included in that amount?

James Rubright

Sure. Well, you understand I cannot comment on the likelihood of receiving the increase. However, what I would say to you is that because of the mechanics of receiving the increase, it’s to get published in the index that essentially controls a great deal of the pricing of containerboard. The first date that could publish would be August 20. So, while with respect to box pricing domestically we’ve announced a price that we can confirm since its public we announced August 1. So, you might see price begin to move with respect to third-party sales in that period of time. But the major portion of your prices don’t adjust contractually until it publishes that would be August 20, and then contractually, it begins to follow thereafter. So, just the mechanics of the way prices will move would suggest that it’s not possible for us to realize a very significant portion of the overall price increase in the fourth quarter of fiscal 2012.

Chip Dillon – Vertical Research Partners

Got you. And then let’s leave pricing aside, as you look at the fiscal first quarter, the fourth calendar quarter, how would that look based on what it looks like right now versus the fourth knowing what you know now which would be some guess as to how much the energy projects and the other synergy improvements would kick-in, I guess, offset by seasonal factors. Is there sort of a direction you can give us and then we can all figure out what we think happens to price?

James Rubright

Well, if you go into the fourth calendar quarter or first quarter, the moving pieces are you begin to see seasonal slowness in November and December. It occurs faster in the consumer business and comes out sooner in January. Corrugated tends to slow down towards the end of the year as well and then stay slow longer in the January and February. So, you begin to see seasonal slowness in box and folding carton demand. We actually expect to see OCC begin to strengthen again – again at the seasonal strengthening, not necessarily related to export demand, but much more related to generation as you move into the end of the calendar quarter.

So, you have some things offsetting the benefits of the fact that it’s really not a maintenance outage season. So, you are not incurring the significant disruption that you get out of maintenance outages. Energy, I don’t really have a very strong view with respect to what energy costs are going to do. Seasonally, wood costs get little higher in the winter, because North America has wet winters and therefore you got increased costs associated with fiber acquisition, virgin fiber acquisition in the period, but those are the major drivers that I see.

Chip Dillon – Vertical Research Partners

Okay. And then one last quick one, I believe on the last call you were looking for probably a mid fiscal ‘14 completion of the profit improvement objectives and I think the number was $550 million. And is that a number that you still feel comfortable with or is it kind of early given the management shifts you put in place in the containerboard side?

James Rubright

Right, I don’t have a basis to change my view with respect to that and the changes that we made in leadership were really intended to do it as I say to accelerate the performance. And to a large extent and I’ve said this before the acquisition will be successful if we remake the acquired operations in Rock-Tenn’s image and not the other way around. And these changes are really directed that, but again I mean we’ve put a lot of people in different and substantial positions and they are not – they really haven’t been there at all let alone long enough to have a view with respect to whether they would reprioritize some of those things, so it will be premature for me really to comment further.

Chip Dillon – Vertical Research Partners

Thank you.

Operator

Next question will come from Mark Connelly with CLSA.

Mark Connelly – CLSA

Thank you two questions Jim before this Smurfit deal you put a lot of resources into strengthening the print and other capabilities of your consumer business. As you look at the two businesses together, is there an opportunity to bring the Smurfit business up to the standards that Rock-Tenn had set early on or is that market not big enough. And then the second question is just the small one on the share count, we’ve seen about 700,000 shares of dilution in the last twelve months on a diluted basis, I am just wondering is that a reasonable pace of dilution we should assume?

James Rubright

The dilution I’m to have to ask Steve to address and it may be something we have to follow-up on, but consider that while I’m answering the first question. I’m not sure I understand exactly where you were going with respect to the question on Rock-Tenn verse the Smurfit operations particularly as it goes to graphics. I mean Smurfit as it had terrific graphics capability. First, it had the display capabilities which were fully integrated with our display business and performing really very well and sort of no improvement is needed there although we are making improvements and continuing to invest to integrate those businesses.

On the pre-print graphics side in Smurfit I think that our approach will enable that those assets to be exploited better and we are really trying to capitalise on the assets that Smurfit have from a graphics standpoint. But the main difference I think was if you consider the migration of Rock-Tenn’s folding carton plants over a decade from a lot of $25 million folding carton plants to now a much smaller number in the aggregate very large very well capitalised folding carton plants. That’s exactly the model we are attempting to drive in the Smurfit system. We’ve reduced the number of plants by 11 and a lot of that capital that you’re seeing is supporting the ability to increase the productive capability of those box plants really pretty significantly. So, one other things I like about the acquisition and really haven’t changed in my view is that we can do the same thing to the Smurfit box point system that we did to the Rock-Tenn folding carton plants. And it’s a multi year project, but it’s very achievable.

Mark Connelly – CLSA

That’s exactly what I was looking for. Thank you.

Steve Voorhees

Mark just little points out of them is probably as good as a number to use for that.

Mark Connelly – CLSA

Okay. Super. Thank you.

Operator

Bill Hoffmann with RBC.

Bill Hoffmann – RBC

Yeah. Thanks. Good morning. Most of the questions have been answered, but just a quick one on the Hodge lightweight liner market just sort where that’s headed. Can you just talk a little bit about where you are in the mix shifting customers’ lightweight liner and where you expect that to go over the next sort of 12 to 18 months?

James Rubright

I don’t know that we expect the mix overall in the system to change dramatically or that I think the U.S. is moving rapidly to a lightweight liner market. Rather what we’ve done is create a much lower cost environment for the lightweight liner that we make at Rock-Tenn to be produced in Hodge. Geographically it’s a great location because it’s the centre most in the country of our mills and it has very large machines. So, to the extent that our system has lightweight liner demand we can meet it very cost effectively out of Hodge. The other places we make it are Solvay and Semino. And while they are making great product, they also sit on the coast, so it’s more strategic to us to increase the concentration of it in Hodge than it is necessarily a function of growth we see in demand for these lightweight liners although they are growing.

Bill Hoffmann – RBC

I think that’s helpful. And just a question on the export markets, can you just talk about you mentioned before that you saw the export markets in Europe, you saw some decent demand there. I just wonder like on a month-by-month basis that stays consistent there and/or whether you are seeing strength or weakness in any other specific markets at this point?

James Rubright

Well, we clearly see strong demand in Europe, particularly for US craftliners and we increased our percentage of exports to Europe to about 18% of total exports in the last quarter and we see that continuing. The Middle East probably was 18% of our exports last quarter, but the Middle East is pretty much everybody’s swing market. So, as we really refine and develop our production forecast for the balance of the quarter, I think you will see that we will respond primarily in swing in the Middle East. Asia was about 18% of our exports last quarter and the Asian demand is consistent, probably is challenged from a price standpoint, but the demand is really pretty good. Now, Latin America, because it’s an agricultural market moved out of its seasonally strongest period into a seasonally weaker period, so most of that 42,000 ton reduction was a reduction in the share of exports to Latin America. I don’t see any wrong with Latin American demand, but it’s a seasonal market. John, what did you say our percentage of exports in Latin America was left for?

John O’Neal

It was about 43%.

James Rubright

Yeah, it was about 43%, but over the course of the year, it’s 65%. Anyway, that’s a view of the markets that we export to.

Bill Hoffmann – RBC

Great, thanks. Very helpful.

Operator

Mark Weintraub with Buckingham Research.

Mark Weintraub – Buckingham Research

Thank you. Just following up on the exports, obviously your containerboard prices were up a little bit and presumably that was largely in the export that would have been in the export business. Can you maybe run through what you saw in the quarter in those key regions, Latin America and Europe in particular?

James Rubright

Well, Latin America we got a little bit of price early in the quarter and that held through the quarter. Jim, Europe when did we get pricing in Europe?

Unidentified Company Speaker

We’ve began to get it midway through the quarter.

James Rubright

Okay. Europe, we got – we saw the European price firming midway in the quarter. We also started to get price in Europe. Really, it’s just not wise for me to comment on where I see price going, so I am just going to say we did get price later in the quarter. I think the Middle East is relatively challenged from a pricing standpoint, but we saw some increase in the Middle East. So, you are right that, that price increase was largely affected by two things the export price. And then we implemented a price increase in the West Coast on medium at least six months ago and it took a while for it to get traction and then we got. So, pricing the medium on the West Coast was up $30 that we had announced. All of those amounted to the price increases. Well – and then there is some mix change in there that also affecting it.

Mark Weintraub – Buckingham Research

Okay. And obviously you announced the price increase in the U.S.?

James Rubright

Yes.

Mark Weintraub – Buckingham Research

I believe some others have announced some of the European producers have announced on craft products in Europe, have you communicated anything to customers either in Europe or Latin America?

James Rubright

Well, the answer to that is we are in the process of seeking to get price increases with respect to all of the export markets. And again, I am not going to comment on the likelihood of over timing of realizing that.

Mark Weintraub – Buckingham Research

Okay. And then lastly, I understand obviously you are aggressively making personnel changes to optimize what you can get in the profit improvement program and the speed of it. How – what impact do you have as to whether the assets themselves may approve in somewhat more stressed in certain instances than you thought and what type of color might that provide on Europe expectation or do you really think it was largely just about being able to execute on the programs?

James Rubright

Well, there is really two separate issues. First, the assets are what we thought we would get. But what we thought we would get would be assets that had significant deferred maintenance associated with the fact that we bought them from a company that over a number of years went bankrupt. And secondly, we thought there would be significant opportunities to modernize those mills because modernization goes down on your list, when you’re trying to conserve resources for maintenance. So, the assets are where the assets are that doesn’t mean they don’t require lot of work and lot of capital, they do. And but concurrently there is a lot of opportunity. I doubt there is anybody who has the same degree of opportunity with respect to the mill system that we have for ultimately cost reduction and sort of consistent quality improvements that we do. So, the assets were where what we saw.

With respect to the infrastructure I was surprised at the extent to which Smurfit had eliminated engineering staff both at the mills and there really wasn't corporate engineering staff that was – that existed. And so we are in the process of building that and it has delayed our ability to execute projects and it affected our ability to execute projects. Certainly last year, we had greater reliance on EPC contracts than we ever would have at Rock-Tenn. And it does fall into our plans with respect to how we’ll execute projects in the past. Fortunately as I mentioned we got terrific resources within Rock-Tenn from the legacy mill systems that we’ve operated. We did operate 13 virgin and recycled mills some of them large, some of them small. And so we are basically building that infrastructure to be able to execute much better than the new organization we acquired.

Mark Weintraub – Buckingham Research

Okay. I'm sorry, I think and as exactly basically you ended out doing more external – more external folks helping out and you are now in the process of bringing more of that internally is that a fair – something on that?

James Rubright

It was we’re building internal engineering staff that can provide oversight in project supervision that’s necessary to really have control of these projects and that capability have been seriously diminished at Smurfit.

Mark Weintraub – Buckingham Research

Okay. Thank you.

Operator

Albert Kabili with Credit Suisse.

Albert Kabili – Credit Suisse

Hi thanks. Good morning Jim and Steve.

James Rubright

Good morning.

Steve Voorhees

Good morning.

Albert Kabili – Credit Suisse

I guess first on the CapEx outlook you talked about timing driving some of the increase this year versus your regional expectations, how are you seeing sort of CapEx over the next three years, is there upward tension on that or is the increase this year in the preliminary outlook that you’ve provided for next year sort of more just the timing related issue?

James Rubright

Right, well. In the beginning of 2012, we estimated $480 million in CapEx. Two principle things occurred in the course of the year. One was we acquired a corrugated operation that was a very focused operation on certain segments that integrated very well with our business, but it was growing and growing rapidly. And in order to support the growth of that acquisition it required about $15 million in capital which we're going spend this year or next year and I don’t really have the timing of that exactly in mind. So, just in one shot we added $15 million to our expectations. But that was simply to take advantage of the growth opportunity that we had and its corrugated operation. Some of that’s supported by contracts and so forth, but anyway we just bang at $15 million.

Hodge had significant overruns and then in the course of the year we identified maintenance projects that we thought were appropriate that we could do or needed to do just really with respect to the Smurfit system. All of that in total made $480 million, $500 million to $525 million depending upon on timing. The $400 million that we estimated was really a very preliminary estimate with respect to what we would want spend this year, it didn’t have into account things that we would need to do be meet customer requirements or growth opportunities within the business. And it was very preliminary based on our understanding which expect what the maintenance needs would be and the opportunities with respect to particularly the contain of mill system.

And then the box point system which I’ll come back to. Certainly with the respect to the containerboard mills, we’ve identified things we wanted to do enhance basically to maintain those assets and bring them up to what we believe to be industry standard operating conditions and so some of that capital is there. But with respect to the box plant system, we see a much greater opportunity to improve the operations of the box plant system, some of which supported by capital, which really at the time of the acquisition we just wouldn’t have had visibility into. So, there is a component of capital that is associated with significant improvements in the productive capacity of the box plant system that will improve its cost structure and ultimately its footprint. So, when you add all of those things together, you change 480 into 500 to 525 and 400 into 425 to 450.

Albert Kabili – Credit Suisse

Okay, that’s really helpful. Thanks. And from a MACT boiler regulatory perspective is there any increase or what are you having in there from that perspective?

James Rubright

Right. We do not have any boiler MACT capital in those numbers. The final rule has not been promulgated and until that rule is promulgated, we are able to evaluate the changes, which we understand are significant. It’s simply not possible for us to have a good estimate.

Albert Kabili – Credit Suisse

Okay, alright. And then on the synergy side, the sequential improvement you saw in the run rate, this quarter can you kind of help us with that, I know that you talked about the Hodge project kind of off to a slower than expected start. So, what drove the big sequential improvement in synergies this quarter and then with some of the delays on the mills side, does that impact how you see in terms of timing on getting synergies and improvement out of the box piece of the business?

Steve Voorhees

Just the first part of your question, the sequential improvements really across a broad number of areas and the mill system, box plant system will continue to make incremental progress at improving the operations as well as on the administrative procurement side. So, there is no major particular project or adding on area that causes the increase.

James Rubright

I think we do have a chart in the supporting slide that show you the breakout of where the 200 came from, I don’t know that we – from that you can piece out directly the fourth quarter – the third quarter amount, but if you compare that slide, in the prior quarter, you can see if there is any mix change.

Albert Kabili – Credit Suisse

Okay. And from the – and what the delays on the mill side, you talked about, is that impact how you see the box plant synergies and improvements progressing?

James Rubright

No. From a supply chain standpoint, the changes we are going to make in the mill system will have some supply chain benefits, but that’s not really box plant benefits. The efforts we are making on the box plant system are really independent of the changes in the mill system. And as I said that’s the area where we’ve probably seen greater opportunity than we would have anticipated at the time we closed the acquisition.

Albert Kabili – Credit Suisse

Okay, I appreciate that. And then final question to conclude from my end, Jim, just want to get your perspective on looking at SBS and CRB, we are certainly we are seeing backlogs lighter pricing in those grades are a little lighter. A lot of this, I know lot of this is kind of weakness on packaged food. On the other end, you mentioned containerboard, the improving industry fundamentals there and I am wondering if you can just kind of help us bridge the dichotomy between what the CRB, SBS industry is seeing and doing and containerboard. And then also any thoughts on the potential impact of the Midwest Drought on containerboard? Thanks.

James Rubright

Well, I think you hit it, I mean, there is unquestionably weakness in packaged food markets if you look at the major consumer goods products who are makers of various food categories, you are going to see some announcements that are suggesting the pretty bearish market conditions for packaged food. That shows up in our folding carton business. SBS, you have to add to that the global exports, there is a lot of SBS exports into Asia. And as I said I don’t have as good a visibility into that as some of our major competitors have in their public companies. You got the opportunity to ask the two other really major producers of SBS, and they will give you that much better insight into just what’s happening in Asia as it relates to their business. But that affects that’s really a major component in the operating rates in SBS.

Albert Kabili – Credit Suisse

Okay. And then Midwest Drought, any risks or thoughts on how that could potentially impact your containerboard business or the industry?

James Rubright

Well, for us, it’s the biggest thing we’re going to see for sure is corn starch increases and we’ll use an inconceivable amount of corn starch in our business. Rest of this stuff is really more associated with demand ultimately for the products and again that consumer product companies are the best witnesses for what they see in terms of production.

Albert Kabili – Credit Suisse

Okay great. Appreciate it. Thanks again.

James Rubright

Thank you.

Operator

(Operator Instruction) The next question will come from Jonathan Chen with Private Management Group.

Jonathan Chen – Private Management Group

Hi Jim.

James Rubright

Good morning, Jon.

Jonathan Chen – Private Management Group

Last call you talked a little bit about customer turns on the Smurfit acquisition, if one of you can update on that. And then also as you guys shift more to national accounts if you can talk about the quarterly revenue issues of scalability of equity versus the local account?

James Rubright

Well, we’re making a lot of changes today that are I clearly have in mind performance improvements within our box plant system. So, we think there is significant opportunity there we really haven’t seen the degree of improvement that we think we should be achieving. With respect to the other question in terms of increasing mix of national accounts, the place where we’ve had a change and it’s been a fairly long-term change has been in the folding carton business. And we have very high quality customers in with somewhat greater degree of concentration in national accounts that’s really a function of growth in that business. In the box – in the container sales I don’t know of a change, so I don’t what you’re referring to or what we might have said that might have created that impression, but there really is not a change in the overall mix of national and local accounts in the box plant system today.

Jonathan Chen – Private Management Group

Okay. Thank you.

Operator

Last question I show will come from Steve Chercover from D.A. Davidson.

James Rubright

Hi, Steve.

Steve Chercover – D.A. Davidson

Good morning. First of all, the fact that crystallizing the price increases contingent in part on printing and Pulp & Paper Week, is there any way that the increasingly consolidated industry can remove the middle man or just Pulp & Paper Week have any benefit to you?

James Rubright

Yeah what we said that is the way of the industry works I really don’t have a really anything that I can add to that dialogue.

Steve Chercover – D.A. Davidson

It just seems amazing that a third party dictates how you deal with your clients. And then just with respect to the management changes it seems like a lot came down all at once, is that because you wanted to give kind of one year look to the system or was there anything else that precipitated?

James Rubright

I mean certainly the fact that we had a year to I really work with this system better understanding assets much better understand what needed to be done put us in a position to I address on a pretty global basis opportunities for improvement. And to a certain extent I mean guys like Jeff, Jeff was in the business as head of sales and it he gave him a great window on the business. And so therefore he’s go into come into a position a much greater responsibility in a much better position to really act than he would have if he had been in that position a year ago which would have been the alternative. I think in the case of Tom his – he had extra year in the job he had where he just continued a lot of stuff he has been doing really paying the fruition. So, hey he was kind of completed a run, but we also had a great track record to have high confidence that he is the right person for this job. There are a lot of factors like that, but certainly we’ve had year to understand what the needs of the systems are and where we’ve been successful and where we have and we can, it - it is a recalibration on a pretty broad scale of some of the approach that we’re talking.

Steve Chercover – D.A. Davidson

Very good, okay. Best of luck going forward.

James Rubright

Thank you.

Operator

At this time, I show no other questions.

James Rubright

Alright, thank you very much for joining our call.

Operator

Thank you for your participation. You may disconnect at this time.

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