Temple-Inland Inc. Q2 2008 Earnings Call Transcript

Aug. 4.08 | About: Temple-Inland Inc. (TIN)

Baxter International Inc. (NYSE:TIN)

Q2 2008 Earnings Call

July 30 2008 9:30 am ET

Executives

Chris Mathis - Director of IR

Doyle Simons - Chairman & CEO

Randy Levy - CFO

Pat Maley - President and COO

Analysts

Gail Glazerman - UBS

Mark Winetribe - Buckingham Research

Peter Ruschmeier - Lehman Brothers

George Staphos - Banc of America Securities

Mark Wilde - Deutsche Bank

Chip Dillon - Citigroup

Richard Skidmore - Goldman Sachs

Chris Mathis

Good morning. My name is Chris Mathis Director of Investor Relations for Temple-Inland, and I would like to welcome each of you who have joined us by conference call or webcast this morning to discuss the results for second quarter 2008.

Joining me this morning are Doyle Simons, Chairman and Chief Executive Officer of Temple-Inland; Pat Maley, President and Chief Operating Officer; and Randy Levy, Chief Financial Officer.

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

This morning, we will give a presentation on the results for second quarter 2008. After the completion of this presentation, we will be happy to take your questions.

Thank you for your interest in Temple-Inland, and I would now like to turn the call over to Doyle Simons.

Doyle Simons

Thank you, Chris. Good morning everyone. Before I get started on the quarter, let me highlight some changes we have made to our earnings release and earnings presentation to provide additional timely information to investors and analysts.

In our earnings release, we have added a summarized balance sheet in cash flow statement. And in our earnings presentation, we have added a financial highlight section and Randy Levy our CFO will review this with you later on the call.

This morning, we reported net income of $8 million or $0.07 per share. We had no special items in the quarter. Second quarter 20008 net income per share compares with $0.18 per share in second quarter 2007, and a loss of $0.05 per share in first quarter of 2008.

We were pleased with our improvement in earnings in second quarter 2008 compared with first quarter 2008. Second quarter 2008 income reflects unprecedented cost push in corrugated packaging, a return to profitability in our building products operation and our commitment to lower costs throughout our entire organization including lower general and administrative expenses.

Turning to corrugated packaging. Segment operating income was $52 million compared with $78 million in second quarter 2007 and $55 million in first quarter 2008. As I mentioned, we have experienced unprecedented cost push in this business. Key input costs were up $42 million in second quarter 2008, versus second quarter 2007 including an increase of $15 million in energy, $9 million in freight and $7 million in recycled fiber.

Compared with first quarter of 20008, key input costs were up $17 million, including an increase of $7 million in freight, $6 million in energy and $2 million in chemicals. As energy costs have been a substantial part of the cost escalation over the past year, we thought it would be helpful to provide a breakdown of the purchased energy mix of our mills.

As shown on slide 6, natural gas and oil make up only 23% of our purchased energy with the balance being primarily lower cost bark and oil. I am sorry, lower cost bark and coal. Over the past few years, we have been successful in improving our purchased energy mix.

For example, 5 years ago higher cost natural gas and oil were 33% of our purchased energy mix. We will continue to look for, and pursue opportunities to optimize our mill energy mix going forward.

In terms of price, our average box price was down approximately $8 per ton versus second quarter 2008, but up $21 per ton versus second quarter 2007. The decline in box prices in second quarter 2008 was primarily driven by lower shipments of higher price wax boxes, and an increase in lower price sheet feeder business in the quarter.

On an average week basis, our box shipments were down 2% in second quarter 2008 versus second quarter 2007. Industry box volumes for the same period were down 4%. Year-to-date our box shipments are up 1% and in the industry is down 2%. Compared with first quarter 2008 our box shipments were up almost 2%.

Looking forward to the third quarter, we are committed to and focused on aggressively implementing the current price increase which will more than offset the cost inflation experienced Year-to-date. While we will see some benefit from this price increase in the third quarter, an entire quarter's benefit will not be realized until the fourth quarter. We also continue to make progress on our strategic initiative of lowering cost in our converting facilities through improved asset utilization.

We currently have approximately 10 of our larger box plants undergoing total transformation, most of which will be completed by year end. We continue to be encouraged by the significant structural cost reduction and ROI improvement opportunity in our box plan system.

In terms of input cost, we anticipate continued cost inflation in the quarter. However, the rate of increase appears to have slowed. And seasonally, our box shipments are normally down in the third quarter compared with second quarter and historically have been approximately 25 to 30,000 tons lower in the third quarter versus second quarter. We've essentially no mill maintenance downtime scheduled for the third quarter.

Building products. I am pleased to report that as a result of a seasonal rally in lumber prices and our cost reduction efforts, building products returned to profitability in the quarter reporting segment operating income of $1 million compared with $11 million in second quarter 2007, and a loss of $21 million in first quarter of 2008. Lumber prices were up $46 in second quarter 2008 compared with first quarter 2008, and up $11 compared with second quarter 2007.

Lumber volumes were up 2% in second quarter of 2008 compared with first quarter 2008, but down 8% compared with second quarter 2007. Gypsum prices were up $2 in second quarter of 2008 versus first quarter 2008, and down $39 versus second quarter 2007. Gypsum volumes were essentially flat versus first quarter 2008, but down 33% versus second quarter 2007.

And particle board prices were up $8 in second quarter 2008, versus first quarter 2008 and up $1 versus second quarter 2007. Particle board volumes were up 13% in second quarter 2008 versus first quarter 2008, and flat versus second quarter 2007.

While we were pleased with the improvement in building products in the quarter, we believe these markets will be very difficult for the balance of 2008 and into 2009. As a result, we will continue to match our production to our demand and be prepared for the seasonal slowdown that normally occurs late in the third quarter. We will also maintain our laser focus on cost. And on the pricing front, we have announced a price increase in gypsum of 12% effective August 11.

Before turning it over to Randy to discuss our financial highlights for the quarter, let me talk about an acquisition we announced late last week. On July 25th, we announced that we had acquired the remaining 50% interest in Premier Boxboard Limited, a joint venture between Temple-Inland and Caraustar.

PBL operate 308,000 ton per year mill in Newport Indiana. The mill is a well invested low cost asset and obtains its process steam pursuant to a long-term contract with an adjacent coal fired power plant. The mill will produce approximately 50% lightweight gypsum facing paper, and 50% containerboard.

The lightweight gypsum facing paper will serve the needs of Temple-Inland's building products operation and external customers. The containerboard will primarily be used by our corrugated packaging operation. At closing, we terminated a management and marketing agreement between PBL and Caraustar.

Fees under this agreement have been approximately $4 million per year. Eliminating these fees immediately adds $4 million to the earnings of this mill. In addition, we are confident that we will realize additional synergies of at least $10 million over the next twelve months from reducing costs, improving productivity, and optimizing the mix of the mill as the mill has integrated into our system.

This acquisition is consistent with our two key objectives of maximizing ROI and profitably growing our business, and we will provide very attractive ROIs for our shareholders with low execution risk. Let me now turn it over to Randy to discuss our financial highlights.

Randy Levy

Thanks Doyle, and Good morning to everyone. I have a few items that I would like to highlight this morning. As Doyle mentioned, we've added a balance sheet and cash flow statement to our earnings release. Both are summarized and presented on a consolidated basis. The balance sheet is straight forward, and the presentation and format of the cash flow statements is designed to give you a clear view into the cash generation of the new Temple-Inland. We have summarized the first section cash provided by or used for operations into two categories.

The first being operations, which can be thought of as funds from operations or FFO, and the second being working capital. We have noted for a year, the significant amount of cash payments we have made in 2008 related to the completion of our 2007 transformation plan, as well as voluntary discretionary contributions to our defined benefit plan.

Since 2008 is the beginning of the new Temple-Inland, this year we will update the cash flow statement in future releases by adding by each successive quarter to this format and updating the year-to-date column. That should provide you with a good comparative base, as we move into next year.

Doyle covered the segments in detail, so I would like to add a little color regarding our expense performance. General and administrative expenses not included in the segments, were $21 million for the quarter and $42 million for the first six months. That's down 22% and 19% respectively, as compared to a year ago. On our previous earnings call in April, we anticipated that for the full year 2008 that this number would be in the $90 to $95 million range.

Based on our progress to date, and our current pace being ahead of our earlier expectations, we anticipate the full year number to be in the 88 to $90 million range, down 10 to 12% from 2007, and 2007 was down 7% from 2006. Still on the subject of G&A, let's step back and consider the G&A expense for the entire company on a comparable basis. For the first six months company wide G&A excluding share base compensation was $71 million, down $17 million or 19% as compared to a year ago.

Another key metric that we are managing is company wide G&A as a percent of our cost base. When I say cost base, I mean company wide G&A excluding share base compensation plus cost of sales plus selling expense. That metric is 3.7% for the first six months and that is down 1 full percentage point compared to a year ago.

Now moving on to the balance sheet, net debt was up $9 million as compared to first quarter end. Long-term debt including a $1 million of current portion was $1.74 billion at second quarter end. That's up $15 million from first quarter end. Cash and equivalents was $44 million at second quarter end, up $6 million from first quarter end.

Moving to liquidity. Our committed credit facilities at second quarter end were $1.85 billion. Our unused borrowing capacity at second quarter end was $836 million. During the second quarter, we amended our borrowing agreements to revise limits imposed by certain covenants and definitions and as a result at second quarter end, our unused borrowing capacity is no longer limited. Turning to cash flow, for the second quarter total cash provided by operations of $50 million was pretty clean.

The operations portion or FFO was $57 million, but it includes $15 million voluntary discretionary contribution to our defined benefit plan. Adjusting for this contribution, the number becomes $72 million, and the working capital portion was up $7 million.

For the first six months, I would mention that the operations portion or FFO was $76 million, but that includes $39 million of 2007 transformation plan related payment and the $15 million voluntary discretionary pension contribution. Adjusting for these two items, the number becomes $130 million. And then lastly a few comments to follow Doyle’s comments on PBL.

The venture was accounted for on the equity method through July 2008, and will be fully consolidated perspectively beginning in August 2008. Related to the balance sheet pro forma debt at second quarter end should be up $112 million, $62 million for the purchase price and $50 million for the debt of the venture.

Liquidity related pro forma unused borrowing capacity at second quarter end should be $724 million down $112 million reflecting the purchase price and the refinancing of the $50 million of the venture debt.

Depreciation, I would add $1 million for the third quarter and add $2 million for the fourth quarter of ’08. On CapEx at this point, we believe that we can absorb the incremental capital needs for PBL for the remainder of this year within our prior projection of approximately 170 to $175 million.

And then on general and administrative expenses not included in segments. The incremental cost of the PBL acquisition will be absorbed within the $88 to $90 million, I gave you a few minutes ago. And then lastly, interest expense on debt, our prior projection was $19 million per quarter for 2008, add a $1 million to that for third and fourth quarter. So we would expect interest expense to be $20 million for third quarter and fourth quarter of 2008. And that concludes my financial highlights this morning.

Doyle Simons

Thank you Randy. Before I open it up for questions, let me provide a brief close. We were pleased with improvement in earnings in the second quarter. Looking forward, we are focused on fully implementing the corrugated packaging price increase, and we'll begin to see the benefits of this price increase in the third quarter. We are also pleased with our progress on strategic initiatives to lower cost and improve ROI in our converting facilities through improved asset utilization.

In building products, we benefited in the quarter from our low cost position, location and a seasonal rally in lumber prices. Going forward, we remain committed to matching our production to our demand, lowering cost, and minimizing losses for the year. Finally, we are excited about our recent acquisition, and we'll work to quickly realize identified synergies.

Thank you for your interest in our company, and we will now open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Gail Glazerman with UBS

Doyle Simons

Good morning Gail.

Gail Glazerman - UBS

I was really surprised by the improvement in wood products, and I was just wondering if there is any more color you can give into the drivers, specifically how much did your restructuring activities contribute to that and is that something that you see as sustainable moving forward?

Doyle Simons

Gail, we don't break down the, we don't give a breakdown of the amount that was a result of the improvement in prices versus the, our cost reduction initiatives, but let me just answer the question this way. We did provide the volume, and the price for lumber, as well as our other products in the quarter. So you are able to make a determination of the benefit from that.

In addition, we had things like lower saw timber prices in the quarter, which benefited and finally we did see a significant benefit from the cost reduction initiatives that we took in the first quarter, which included as we had previously highlighted, a reduction of headcount by approximately 18%. So to answer your question Gale, it's a combination of higher prices, improvement in volumes primarily in lumber, lower input costs primarily in saw timber and in the cost reduction initiatives that we undertook in the first quarter.

Gail Glazerman - UBS

Okay. And then, just looking at corrugated, can you talk a little bit about what you are seeing in box demand, what trends you've been seeing I guess, in the, moving into the third quarter and for the balance of the year.

Doyle Simons

Yes Gail our box demand continues to be solid, as we've moved into the third quarter.

Gail Glazerman - UBS

Okay. And your customers feeling pretty confident, there are no signs worry or changes in order activity?

Doyle Simons

Not at this point Gail.

Gail Glazerman - UBS

Okay. Thank you.

Doyle Simons

Thank you.

Operator

The next question comes from Mark Weintraub with Buckingham Research.

Doyle Simons

Good morning Mark

Mark Weintraub - Buckingham Research

Good morning Doyle. Two questions one on, it's a small one, but on the PBL acquisition, you talked about optimizing the mix of the mill, does that mean potentially swinging more into medium or is that something other then that?

Doyle Simons

Mark, I ask Pat answer that question.

Pat Maley

Relative to PBL Mark, the mix improvement that we highlighted is primarily a conversion of medium production into whitetop, and I would say that we're close to producing commercially competitive whitetop products there. We got work to do, but I would say we're close in our trailing efforts.

Mark Weintraub - Buckingham Research

Okay, is it, your intention is to not produce any more containerboard, then historically the facility had been producing.

Pat Maley

Our intent, as I mentioned is to convert the existing, our intent is to convert the existing medium production to whitetop, now that said, where it's very logical, we will have medium production sprinkled around some of those plants that we have approximate to Newport.

Mark Weintraub - Buckingham Research

Okay. And then, can you give us, I believe in the time of the acquisition you indicated that PBL would likely be accretive from the get go. Is there any more color you can help us out with on that comment.

Doyle Simons

Mark I guess, the way I would answer that -- we gave what the mill had earned historically. We then talked about the $4 million, and that resulted from the elimination of the management and marketing fee, and then this morning I talked about the fact that we would realize at least $10 million in synergies over the next 12 months, and then this of course did not factor into our decision to acquire the mill at the price we paid for the mill, but half of the, as Pat just alluded to half of the production of the mill will be containerboard, whether it'll be whitetop or medium and that will clearly benefit from the price increase.

So I think those will be the key drivers to the earnings accretion and ROI accretion that result from the acquisition of the mill.

Mark Weintraub - Buckingham Research

Terrific. And then just lastly on the box price increase, is this a situation where you think you can get at least full passthrough of the board, or is it even possible that you might get more than full passthrough of the Board.

Doyle Simons

Mark as you know, we announced an 11% price increase on boxes, and we are aggressively pursuing the implementation of that price increase, and we're focused on getting as much as we can to the bottomline, which could be, clearly could and should be more than the $55 price increase on linerboard.

Mark Weintraub - Buckingham Research

Thank you very much.

Doyle Simons

Thank you.

Doyle Simons

The next question comes from Peter Ruschmeier with Lehman Brothers.

Peter Ruschmeier - Lehman Brothers

Doyle, I was curious if you could help us to understand the natural gas impact in the second quarter, and if gas prices hold where they are today, how much of an add back is that for 3Q?

Doyle Simons

Yes. Pete, as we indicated in our prepared remarks, our energy costs were up $6 million in the second quarter versus the first quarter. That was primarily driven by natural gas, which was up probably 2.5 bucks, second quarter versus first quarter.

Now looking forward, our July natural gas cost was actually a little higher than the second quarter average, but as you know the recent trend has clearly been down, and natural gas is now approximately $9.50. The average for second quarter was approximately $11, but again July prices were actually above the second quarter average just from a timing perspective. As you know, we purchased approximately, or used approximately 16 million MMBTU of natural gas a year. So approximately, 4 million MMBTU a quarter.

Peter Ruschmeier - Lehman Brothers

Okay that's very helpful. On the box price increase, if you assume a 100% success on the box price increase, can you help us to understand based on the timing of contracts, how much of that would fall into 3Q versus 4Q, or percentage mix, if you could maybe say that way.

Pat Maley

Yes Pete this is Pat. Clearly we will see pricing move beginning in late August and through September with the bulk of the increase materializing in the fourth quarter.

Peter Ruschmeier - Lehman Brothers

Okay. All right, that’s helpful. And then, just lastly maybe for Pat, I was curious if you could update us Pat on the strategic initiatives and kind of what's on your plate now and over the next coming months? And if could share with us what you think your run to design philosophy is doing for you in your box plants?

Pat Maley

Well, we are clearly seeing the benefits of it relative to the cost side in box plants. I would say from a progress perspective, we are wrapping up a number of these transformations that we have highlighted to all of you through the third quarter and into the fourth, and we expect the majority of that run rate benefit to accrue in to 2009. As I think, you saw Pete the transformation of the plants is rather extensive and we've chosen to do it while we are running. So the disruptions inherent in that kind of transformative event are significant and those cost associated with those transformative event start dissipating into the fourth quarter and well into ’09.

Peter Ruschmeier - Lehman Brothers

Thanks very much.

Doyle Simons

Thank you Pete.

Operator

The next question comes from George Staphos with Banc of America Securities.

George Staphos - Banc of America Securities

Morning. Hey Pat I wanted to pick up on that question and topic that Peter tabled, during the transformation within the box network, what unforeseen issues or operating problems have you had within the box network, obviously you're pleased with the progress. Obviously you like the strategy, but as you've been implementing it and coming up the learning curve what have been some of the negatives that you've found, and while I don't think you will give us this number, what kind of from a dollar standpoint inefficiencies have you absorbed in 2008 that you hopefully will not have in 2009?

Pat Maley

Well, since I don't have to answer the last part of that question, I will begin with the first part. I would say from an efficiency standpoint, obviously when you transform a plant from the inside out, you have got volume that shifts around and you incur incremental freight costs in order to satisfy customers from different locations.

You also have relatively higher cost due to lower volumes and inefficiencies within that plant as well as we mentioned the big part of it is reducing the number of machines and people. So all of those costs and inefficiencies, now on top, I am very proud of the organization and how they have responded to those challenges and I really get a really good feeling, when I go to visit the plants and see the kind of work going on and see the great attitudes that our folks undergoing a difficult change, but as I said I am excited about where we are at and I'm more excited as we get closer to wrapping some of these things up and seeing all the benefits at the bottomline.

George Staphos - Banc of America Securities

Pat, do you see a fair amount of overtime in that sort of thing, as people are learning to run machines 24/7 or something closer to that then what they have done historically? Or is that not really an issue and I didn’t want to give you an easy out, but could you give us some color in terms of the dollar expense and if you can obviously respect that?

Pat Maley

I think the question relative to overtime and labor cost increase is right on, and yes we are seeing those things, and as I said before, I appreciate all the easy outs that I can get it.

George Staphos - Banc of America Securities

Okay, thank. Now maybe a couple of others, and I'll turn over. You mentioned why from a reported standpoint pricing in the box business was down sequentially, but as much as you can estimate and stripping out sheet sales and mix, were your price is still down sequentially for the average box in your network.

Doyle Simons

George, I would tell you that the primary reason that the box prices were down for the, were the two reasons that I outlined in the prepared remarks, which was a lower sales of high priced wax business and more sales of sheet feeders.

Pat Maley

I think just add on to that the reality is while pricing on that mix is down, I mean you got to look at the margin contribution from those sales, and just because you have higher volume of sales of sheets during the quarter, doesn’t mean that from a margin standpoint that you suffered any so. Hopefully that gives you a little color.

George Staphos - Banc of America Securities

Yeah fair point. Just want to see, if there is some deterioration otherwise in the marketplace. It sounds like that's not your sense right now. I guess last question, and I will turn it over, and I realized that you don't want to get in to the dollar improvement per say and that you expect rather from business improvement and corrugated or cost reductions in building products. One, should we expect accelerated improvement from business improvement within corrugated over the next call or three quarters, and within building products should we see related to the actions you've already taken, should we see incremental savings in 3Q and 4Q, or is basically the cost savings from those efforts fully in the 2Q numbers? Thanks guy.

Doyle Simons

Let me address that question this way. In terms of our business improvement in corrugated packaging, George as you know we've been very public in what we think the potential benefit is, and we've said from 2007 to 2009, our business improvement opportunity in corrugated packaging which is primarily driven by our asset utilization was a $100 million.

We realized $37 million of that in 2007, and at the end of 2008 we will give you an update as to where we are and then another update in 2009, and I can just tell you we're confident that we will be able to realize at least the additional $63 million in business improvement in corrugated packaging.

In building products, we did take dramatic steps in the first quarter to lower our cost but we will continue to look for opportunities to lower our cost in our building products operation as we move forward.

Pat Maley

And Doyle just a piggyback on the building products piece of it, I think the story in the second quarter and our results speak to the strategy, the proximity, the superior end markets, the tailored portfolio of products, the laser cost focus, first class assets run by first class people.

We are going to continue to battle as we limit any losses going forward. That said we are not probably [antis] about the markets and where we're at as well. So we've made good progress. We've got a number of other things that we're going after in building products to get better to lower cost further, but clearly markets are going to be difficult going forward, and we are battening down the hatches, and we like what we have done so far.

George Staphos - Banc of America Securities

All right. Thanks for the color.

Operator

The next question comes from the line of Mark Wilde with Deutsche Bank.

Mark Wilde - Deutsche Bank

Good morning Pat.

Pat Maley

Good morning Mark.

Mark Wilde - Deutsche Bank

I want to just first of all say that I thought that this presentation you did this morning as well as the improved detail in the earnings release, are both big steps forward from kind of an analyst and the shareholder perspective, so we appreciate that and then moving kind of questions, I wonder on the input cost side can you just talk with us a little bit about some of the other inputs that may have an effect in the third quarter and fourth quarter. We got big caustic soda increases out there. Looks like OCC, if anything has probably eased over the last few months.

Doyle Simons

Yeah well first Mark, thank you for your comment. And secondly, let me give just a little bit of color on the input cost and what we have seen. As you know, we don't give projections on input cost, because we just like everybody else don't really know where they are headed, but let me try to provide a little color.

In terms of natural gas, as I mentioned earlier our second quarter averages was approximately $11, and July was hired in the second quarter average, but current cost for natural gas are in the $9.50 range.

OCC, as you just mentioned is currently down approximately $15 a ton. In other key cost component is of course freight, and if you look at freight, which is primarily driven by diesel costs, and those costs were up 57% from second quarter ’07, second quarter ’08. We are up in the additional 25% in second quarter ’08 versus first quarter ’08 and are currently up approximately 10%. As you mentioned, caustic and other chemicals continue to rise as well. So the overall comments we made in our prepared remarks was that we anticipate continued cost inflation, but at least in some categories i.e., natural gas, OCC, it seems to have slowed in terms of the acceleration.

Mark Wilde - Deutsche Bank

Okay. Next can you just talk briefly about Mexico, you have one of the bigger box businesses down there, and I wondered if you could give us just a little color on how Mexico is performing versus the US and you have got some struggling players down in Mexico, I wonder if there is any opportunity for you to kind of expand your footprint there?

Pat Maley

Well I would say this that we have been very pleased with our operations in Mexico. We continue to be pleased. When you look how the Mexican market relates to the US, generally it trails, so as the US economy and the box market specifically move, Mexico moves in step with that but a little bit later. We have publicly stated that we want to profitably grow our company, and I wouldn’t rule Mexico out of that equation.

I do think that there is some ratcheting or improving of global competitiveness in the US that some call at near shoring or whatever, where some of the manufacturing exodus that went to China and other parts of Asia, I think are starting to look at Mexico and the US maybe as a more attractive place, because of the improvement in global competitiveness and the relative strength of the dollar and the exploding ocean freight rates. So I think, I think we like our position and we would look to expand it if the right opportunity came along.

Mark Wilde - Deutsche Bank

All right. And lastly just on wallboard, I wondered if you could give us some sense about where you think pricing is going go, why you would have confidence in this 12% hike that you have got out there. Others have I think two more beyond that and also whether ultimately you may have to make some decisions to reduce the size of your footprint in wallboard, looks like you are running at about 50 to 60% of capacity.

Doyle Simons

Mark in terms of prices for gypsum, current prices are up approximately $5 versus second quarter average. As we said that we have announced a price increase effective August 11th, and we're focused on implementing that price increase.

In terms of operating rates, we are currently operating at approximately 56% that versus the industry average of 63%. As we have previously mentioned, one of our mills is actually running at 15% of capacity and that is to make some specialty grades for customers.

But if you look at our portfolio of mills throughout our building products operation, we have low cost facilities throughout our entire organization. I think as Pat mentioned earlier we saw the benefit of those low cost operations in the second quarter, and I think we will continue to see the benefits of those going forward.

So yes we are committed to match our production to our demand. We are doing that in gypsum Mark, and we'll continue to benefit from our low cost position as we move forward.

Mark Wilde - Deutsche Bank

Good luck, in the third quarter.

Doyle Simons

Thank you.

Operator

The next question comes from the line of Chip Dillon with Citigroup.

Chip Dillon - Citigroup

Good morning Doyle and Randy? It seems like yes this call should keep going on, because your natural gas is down to 8.82, it's down $0.30 again today, so we might have to add a penny there if it stays. My first question is on premier box board, to understand the way the numbers work. The reason that your revolver, you're talking about the 112 million is I guess you are paying your $62 million, this $62 for cash to buy the half of the equity, you don't earn and you're refinancing the joint ventures totaled I guess debt of $50 million is that right?

Doyle Simons

That's correct.

Chip Dillon - Citigroup

Okay. And the balance sheet impact, I can't tell for sure from the K, because unless you're giving like no value to Delton, it looks like to me that you are paying about book for this, or maybe slightly less, is that a fair number?

Doyle Simons

No the book, and that's actually disclosed by Caraustar, the book at the mill is about $78 million for the whole venture?

Chip Dillon - Citigroup

Okay, okay. So you are paying--?

Doyle Simons

And compared to the 62.

Chip Dillon - Citigroup

All right, so. Okay, so you are paying obviously more than book. Okay I see, and how will that work on your balance sheet, because obviously you are, I think you are carrying this at much below your half was being carried at much below the $62 million for the equity, so and you're obviously going to the equipment and everything, is there going to be much of an increase to goodwill, or will most of this be added to the PP&E and current assets.

Doyle Simons

Well we haven’t gone through the evaluation exercise, but the only adjustment from the goodwill will be on the half that we bought.

Chip Dillon - Citigroup

Okay, got you. And then

Doyle Simons

It is not going to be a big real big number Chip.

Chip Dillon - Citigroup

Got you. And then when you, switching over to gypsum, so I understood, did you say the price was up $5 on average from the second quarter average?

Doyle Simons

I did.

Chip Dillon - Citigroup

Okay. And looking at lumber, what's the same number for lumber, where was your lumber in July versus the second quarter average?

Doyle Simons

Yes, Chip lumber prices are currently approximately $10 above second quarter average. Now with that said Chip let me be very clear that the trend in lumber price is clearly down as the lumber price is peaked in June and it trended down since that point in time. So yes current prices are $10 above second quarter average, but I would tell you the trend is down in lumber prices going forward.

Chip Dillon - Citigroup

And Doyle having, it seems like over the years, and I want to know your perspective on this. Do you think you are being helped a little bit in building products based on where you have a lot of your operations? I mean, it seems like night and day when you look at the housing market in Louisiana, Arkansas and Texas versus say Nevada and California?

Doyle Simons

There is no doubt, and we mentioned it in our comments and thanks for brining it up again that we are benefiting and in my opinion we'll continue to benefit from our location of our facility, which are set up to serve some of the best markets currently, and we believe longer term will be the best markets going forward based on demographics.

Chip Dillon - Citigroup

And it seems like, short-term that the saw log prices, at least I am not sure what your arrangement exactly is with the transformation but it seems like saw log prices especially in that area you are in have been coming down or you expect those to be lower in the third quarter for you guys.

Doyle Simons

Chip, you are right, saw log prices have continue to decline, and we paid market rates for saw log through our long-term fibers supply agreement, as well as what we buy in the outside market, and don't know what's going to happen in the third quarter in terms of saw log prices.

Chip Dillon - Citigroup

Got you. Thanks again. Take care.

Operator

Next question comes from the line of Richard Skidmore with Goldman Sachs.

Richard Skidmore - Goldman Sachs

Question for you just on the box business, as you have grown your box volumes faster than the industry year-to-date is that volume growth coming from existing customers or new customers?

Doyle Simons

Yeah, I would characterize most of that growth coming from existing customers?

Richard Skidmore - Goldman Sachs

Okay. And then just shifting to the building products business, can you just elaborate a little bit more on were the cost savings are coming from with regards to the headcount reduction, is that from consolidating your operations into a couple of the mills or you still operating all of the mills?

Doyle Simons

Rich, as we say we are still operating all of our mills, but many of them had much reduced production versus capacity. The cost reductions, as we mentioned in the when we reported first quarter earnings are coming from throughout our building products operation not only just in the reduced, in the mills where we have reduced productions, but throughout our organization. As you know, we have a keen focus on lowering cost throughout our entire organization, and we continue to benefit from that focusing on low cost.

Richard Skidmore - Goldman Sachs

Right. And then just a follow up on the lumber price, your lumber price was up really sharply quarter-over-quarter, as we look at sort of Southern pine prices they weren’t up nearly that much. Was there something else that happened in your lumber business specifically to have prices or is that we're just looking at the wrong benchmark price?

Doyle Simons

Well I think part of it is what we alluded to earlier based on our location, and being in better market. Part of it is the, are continued work to upgrade our mix of products. We've done a lot of work in our mills to upgrade our mix to where we are doing more prime type lumber, and we benefited from that in the quarter as well.

Richard Skidmore - Goldman Sachs

Thank you.

Doyle Simons

Thank you.

Operator

At this time we have reached the allotted time for question. Thank you for joining Temple-Inland second quarter 2008 Earnings Call and webcast. You may now disconnect.

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