Rock-Tenn Company F2Q08 (Qtr End 03/31/08) Earnings Call Transcript

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Rock-Tenn Company (RKT) F2Q08 (Qtr End 03/31/08) Earnings Call April 29, 2008 8:30 AM ET


John Stakel - Vice President and Treasurer

Steve Voorhees - CFO

Jim Rubright - Chairman and CEO


Claudia Hueston - JPMorgan

Christopher Chun - Deutsche Bank

Kevin Casey - Casey Capital


Good morning. My name is Trey, and I will be your conference operator this morning. At this time I would like to welcome everyone to the Rock-Tenn second quarter 2008 Earnings Call. (Operator Instructions). As a reminder, ladies and gentlemen, this call is being recorded today, April 29, 2008. (Operator Instructions).

Your speakers for today's call are Mr. John Stakel, Vice President and Treasurer; Mr. Steven Voorhees, Chief Financial Officer and Mr. James Rubright, Chairman and Chief Executive Officer.

Mr. Stakel, you may begin your conference.

John Stakel

Thank you, Trey. Welcome to Rock-Tenn's fiscal second quarter 2008 conference call. During the course of the conference call we may make statements that are not historical in nature and may involve forward-looking statements within the meaning of federal securities laws.

For example, statements regarding our plans, expectations, estimates and beliefs related to future events are forward-looking statements which involve a number of risks and uncertainties, many of which are beyond our control and that could cause actual results to differ materially from those discussed.

Additional information regarding these risks and uncertainties is contained in the documents that we file with the Securities and Exchange Commission. These documents include the Company's Form 10-K filed for the year ended September 30, 2007 and the Form 10-Q filed for the quarter ended December 31, 2007.

During the call we will be referring to non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are contained in the second quarter press release, which is available on Rock-Tenn's website at

With that out of the way, I will turn the call over to Steve Voorhees.

Steve Voorhees

Thanks, John. During the second fiscal quarter, Rock-Tenn announced, financed and closed the acquisition of Southern Container. Rock-Tenn's second quarter results include 29 days of operating results for the acquisition.

Southern Container's operating results, including the results of the Solvay containerboard mill are shown in the Corrugated Packaging segment, along with our legacy corrugated operations and also the results of our corrugated medium mill in St. Paul, Minnesota.

Historical segment results have been reclassified to reflect this alignment. Rock-Tenn's net sales in the March quarter were $685.9 million, an increase of $100 million, up 17% when compared to last year's March quarter.

Southern Container accounted for $51 million of the increase, or about half of the increase. Rock-Tenn's sales, excluding Southern Container, increased 8% over the same quarter of last year and sequentially increased 6% over the most recent December quarter.

Rock-Tenn reported second quarter net income of $17 million, or $0.45 per share. We have $0.21 in adjustments, most of which are attributable to the Southern Container acquisition. $0.05 is the cost of the bridge facility that supported the financing commitment we made to the sellers of Southern Container.

$0.03 is the write-off of the unamortized financing costs on our balance sheet from the credit facility that was in place prior to the acquisition. $0.12 is the impact of the purchase accounting step up in the value of Southern Container's inventory at the time of the acquisition.

US GAAP requires us to step up the value of the inventory we acquired to a level that in the case of finished goods approximates the selling price of the inventory less selling cost. As we sold this inventory, we assigned the stepped up value to the cost of sales and recognized minimal profit on these sales.

In March we did not record the profit that we normally would have recorded if the inventory had been valued at cost. The step up reduced income for the month of March by $7 million, or $0.12 per share after-tax.

We expect to sell the remainder of the written off inventory this quarter, which will reduce June quarter income by $3 million, or $0.05 per share after-tax, after which there will be no further such charges and we will begin to recognize the normal ongoing profit margins at Southern Container's plants.

We incurred $1.1 million or $0.02 per share for integration expenses during the quarter. We expect to incur similar expenses over the next year that we will track and disclose. We do not expect that these expenses will be very material in the context of an acquisition this size.

As we explained when we announced the acquisition, Southern Container had in place long-term deferred compensation arrangements for certain senior executives that required the accumulated balances to be fully funded at the time of the acquisition and then held in escrow for one year while the employee continued to work for us, if requested to do so.

These escrows were funded at closing by these selling shareholders, and the funds will either be paid to the employee or returned to the shareholders if the employees fail to satisfy the employment obligations.

Under GAAP, even though the funds are not Rock-Tenn's, and Rock-Tenn cannot receive them under any circumstances and they were largely previously expensed by Southern Container, Rock-Tenn most record the entire fund balance as expensed over the one-year employment period following the closing of the acquisition.

This pretax charge was $700,000 in March, and we will expense the remaining $7.8 million, or $0.13 per share over the next 11 months. We will refer to these expenses by the plan's initials, ESU. We will call them ESU expenses in future earnings releases and just refer back to this discussion.

Turning back to the consolidated results for the quarter, on an adjusted basis Rock-Tenn earned $0.66 per share, $0.09 or 16% more than the $0.57 per share reported in the second quarter of last year. The acquisition contributed $0.05 during the 29 days that we owned Southern Container in the quarter.

Rock-Tenn's combined recycled capacity is now 1.89 million tons. This includes 904,000 tons of containerboard capacity, 986,000 tons of recycled paperboard capacity, including 606,000 tons of coated recycled paperboard and 380,000 tons of specialty paperboard.

Turning to the results of our Paperboard segment, realized prices for paperboard and pulp grades increased $30 per ton over last year's March quarter. Production of these grades increased by 4% over last year. Fiber, energy, chemical and freight costs increased by $37 per ton, accounting for the $1.2 million decline in Paperboard segment income.

Rock-Tenn's cost of recycled fiber for our Paperboard segment was $141 per ton in the quarter, up $30 per ton over last year, and an increase of $1.00 per ton from the December quarter. The April index for OCC in Chicago is $120 per ton, the same as last month but higher than the average index of $93 per ton in the March quarter of 2007 and $112 per ton in the December quarter of 2007.

Turning to energy costs, NYMEX prices were up $1.27 per MMbtu over the March quarter of last year. Based on current market conditions, the June quarter will be in the range of $10.65 per MMbtu, about $3.00 higher than the $7.55 per MMbtu NYMEX closing price in the March quarter of last year.

Rock-Tenn's annual consumption of natural gas and fuel oil is approximately 9 Bcf. This includes half of a Bcf of natural gas used at Southern Container. The Solvay mill's steam source is coal-based. Rock-Tenn's freight costs, excluding Southern Container were $3 million higher than last year on the 8% increase in sales.

The increase in freight costs resulted from increased fuel costs which were paid as fuel surcharges to carriers to compensate them for higher fuel costs. Capital expenditures for the quarter were $19.3 million below depreciation and amortization of $31.6 million. For fiscal year 2008, we continue to expect our capital expenditures to be in the range of $90 million to $95 million.

This includes project to increase the capacity of paper machine #2 at Solvay Paperboard by 33,000 tons per year. This project will take place in the June quarter and will take approximately two weeks. We expect to lose about 10,000 tons of production during this time.

After we complete the project, we expect the capacity of the Solvay mill to be 753,000 tons per year. Our current estimate of Rock-Tenn's ongoing combined annual depreciation and amortization is $145 million per year. This may change as we finalize the purchase accounting of the Southern Container acquisition.

Rock-Tenn's total debt was $1.85 billion at the end of March. Our net debt which deducts the cash on our balance sheet at the end of March was $1.77 billion. Rock-Tenn's pro forma credit agreement EBITDA for the 12 months ending March 2008 was $448.5 million.

Using the $448.5 million and our debt levels at the end of March, our credit agreement debt-to-EBITDA ratio as of the end of the quarter was 4.04 times as compared to our covenant of five times that will be effective from June 2008 through the end of this fiscal year. A reconciliation of these numbers to Rock-Tenn's and Southern Container's financial statements is posted as a presentation on our website at

We show $113.6 million of cash due to sellers at the end of March. This will return the cash required to be held under the terms of the industrial development bonds at Solvay Paperboard and also keep the sellers hold for the taxes they will pay as part of the Section 338(h)(10) election we agreed to make as part of the acquisition. The total amount will be repaid to the sellers in November of this year.

We have fixed a portion of our bank debt for a period of four years and at a LIBOR rate of 3.11%. This leaves us with about 65% of our debt at fixed rates through the middle of 2011. Rock-Tenn's effective tax rate for the March quarter of fiscal 2008 was approximately 37%, somewhat higher than the 36% rate in fiscal year 2007.

We expect Rock-Tenn's overall effective tax rate, reflecting the Southern Container acquisition to be 37%. Rock-Tenn's net cash provided by operating activities was $12.7 million in the quarter, compared to $36.9 million in the prior year quarter.

Accounts Receivable excluding Southern Container, increased $29 million in the quarter. Rock-Tenn contributed $9 million to our pension plans, and we made $17 million of cash tax payments during the March quarter.

We expect to contribute another $4 million to our pension plans over the balance of this fiscal year, bringing our total contribution for the year to be approximately $16 million. We continue to expect strong cash flow from operations over the next six months, and we continue to expect to reduce our debt-to-EBITDA ratio to below three times by September 2010.

Jim will now discuss our operating results and outlook. Jim?

Jim Rubright

Thanks, Steve. Rock-Tenn had another terrific quarter in March, particularly when you consider the cost environment that we experienced, and the relative weakness in general economic activity.

Packaging and Paperboard posted solid results with good volume gains and the Merchandising Display business hit sales and earnings records at new high levels. Southern Container's plants performed at the high end of our expectations and increased our earnings by $0.05. As Steve said, this is well ahead of the pro forma historical accretion we included in our SEC filings last month.

I am going to comment on each of these in turn starting with packaging. Demand for our packaging products, folding cartons and partitions for glass products continue to pace during the quarter inconsistent with the last year. Industry data shows that folding carton volumes were up about 0.8%.

Our volume growth was higher by approximately 2% measured primarily by square feet of paperboard converted. Our people have done a terrific job in picking the right customers who have been growing their sales and the right product segments for this business. Our sales growth has allowed us to better leverage our fixed cost base, and to keep our margins, which were 4.9% for the quarter, essentially at our target return on sales of 5% for this business.

I attribute this to the fact that our people have just done an excellent job of managing two critical drivers of our business results over the past year and a half. First is passing through paperboard and other cost increases through product price increases. The second is the reducing of our overall production cost to more than offset other cost escalations and materials, energy, freight and labor costs.

As I mentioned, we had another record quarter in Merchandising Displays. Here our employees have done a particularly good job of expanding our position with some of our major customers, i.e. picking up more products and our shares of their promotional budgets. Also, the demand for promotional displays has continued to be very strong.

Our 14.5% return on sales in this segment was at the high end of our expected range, and here I attribute that to two principal factors. The first is better leveraging our fixed cost due to the high sales volume, and secondly we've been increasing the mix of our revenues that are from design and component manufacturing, which have better margins than fulfillment, because we have been increasing the proportion of our lower margin fulfillment business that we performed through our PPSI minority joint-venture which provides a suite of products including fulfillment of third-party logistics and the provision of the actual displays.

Our Paperboard sales in tons shipped increased in the quarter as we disclosed. Our earnings were very good, particularly given the high energy and recycled fiber costs we experienced during the quarter.

Paperboard pricing was up over the prior year quarter, and our attention to operating efficiency gains and the capacity gains we have achieved over the last year in coated recycled paperboard, nearly managed to offset the narrowing of Paperboard selling price margins over fiber and other cost increases.

Our mills have actually run better late in the quarter in April than they did in the first part of the March quarter, which explains in part the 9.5% return on sales in the March quarter, which is a little lower than the 11% return on sales we experienced in the prior year quarter.

I would like to take a moment at this point to comment on the cost position we have achieved in our coated recycled paperboard business and to compliment our mill employers who have done just a fantastic job of reducing waste, improving quality, increasing production and reducing energy consumption.

The cost positions achieved lead our industry as I will explain the reason why I'm going into this in some detail. First, I think you are all aware how important we feel it is for our assets to occupy the left side of the cost curve. This is the place where we think we can make money throughout the business cycles.

This is what has driven our acquisition strategy over the last few years. We acquired the Demopolis bleach board mill, which the industry experts we consulted at the time believed to be the lowest cost bleach board mill in North America. Also, there was this year's acquisition of the Solvay mill, one of the lowest cost recycled containerboard mills in North America. Since it is one of the newest mills, it's structurally advantaged with its coal-based steam source.

Coated recycled paperboard is our second largest grade after containerboard, with over 600,000 tons of annual capacity. Our employees have worked extremely well over the last few years to improve their cost position. What we have not been able to do well in this sector until recently is compare our cost structure to that of our competitors.

There are published cost curves for coated recycled paperboard mills in North America. Unlike the cost curves that we have looked at for the other grades, we typically found that the coated recycled board cost curves didn't accurately reflect our costs. This gave us concern over the overall accuracy of these cost curves.

Recently this situation changed. Our largest competitor recently published an industry cost curve that gave investors and us a cash cost for their six coated recycled paperboard mills. They also included in this investor presentation estimates of the cash cost of our five mills and the six other mills in North America, in which not surprisingly since they published this chart in an investor presentation they estimated the cash cost of our mills to be higher than the cash cost of theirs.

First, we are going to assume that they know the cost of their mills. And secondly, I wish to state that of their estimate for the five other independent mills in their study is accurate. It is not that critical to the point I am making because the three largest of those mills are generally recognized as very high cost for reasons that are very well-known in the industry, and two of those three are located on the West Coast.

The publication of this cost curve has given us the ability to compare our actual cost to the actual cost of our competitors. Since our competitor widely published that data, we felt it was incumbent upon us to set the record straight. The actual facts are that based on their costs regarding their mills, our two largest Coated Recycled Paperboard mills are the two lowest cost coated recycled paperboard mills in North America.

In addition, a multi-mill owner doesn't just price their lowest cost mill; she prices at least with an eye to her system cost, the cost of all the mills she owns. Based on our competitor's study and our cost data, we can further state with confidence that our average system cost for our five coated recycled paperboard mills is the lowest cost recycled paperboard system in North America.

This didn't surprise us because we felt that our results were telling us that our costs had to be better than they were generally thought to be. But it is comforting knowledge for us given our view of the fundamentals that drive our paperboard business and our belief that the low cost provider. If our costs are low enough, we will be profitable throughout the business cycles.

Our Corrugated Packaging segment performed very well in the quarter. As we said in the press release, our legacy corrugated plant operations continued to grow their sales and their earnings, and Southern Container with its $0.05 per share accretion to earnings in 29 days performed very well.

Also, since we had just completed the acquisition, we had very little time to recognize any synergies. Essentially these results represent no combination benefits. Our integration planning for the acquisition has really gone quite well. We recently announced internally last week our integration plans, which contemplate a full integration of our legacy plant into the acquired operations, which we had not committed to doing when we announced the acquisition.

We have a lot of the integration work ahead. This being in Systems in-process integration, production optimization, and the internalizing of current outside purchases of Corrugated Packaging. We will spend several million dollars in transition costs primarily over the next six months to get there.

But with the work we have done, we are very confident that within a year we will comfortably exceed the $10 million run rate of synergies target we announced in January. That $15 million was one of those slips that we referred to, and I actually would be confident of establishing a target at that level as well.

I'm going to now turn to our outlook. First of all, demand for paperboard remains good. Demand for bleached paperboard is very good with lengthening backlogs. In fact, I believe the backlogs we have today at the Demopolis mill are the strongest that we have had since we have owned it.

Industry data for uncoated recycled paperboard suggests that operating rates are in the low 90s, and that unmade orders improved through mid-April. Our operating rates are at about that level. Coated Recycled Paperboard operating rates year-to-date are 100%, although we saw some weakness in operating rates in mid-April.

The folding carton volumes were very strong obviously in the March quarter. We have continued to see strong demand for folding cartons in the month of April. There is also a strong demand in our partition business where we are seeing a continuation of growth that tracks the growth and the sales of beverage glass in North America.

Demand for Corrugated Packaging on the other hand, is showing some signs of weakness. On the cost side, Steve referred to the current high-fiber energy and freight costs, all of which were higher than they were last year. For this coming quarter, we see OCC pricing actually coming down as export pricing has weakened and our costs for OCC should improve as seasonal generation increases recycled fiber supply this spring.

Natural gas is currently over $10 in Mcf however, and with fiber currently at $120 per ton OBM pricing, we believe that the right side of the cost curve for recycled paperboard and containerboard particularly are under severe pressure to further increase pricing to cover cash operating costs.

I said including containerboard. My comment really with respect to that sort of extreme price pressure relative to cash costs is actually focused on recycled paperboard, particularly coated recycled paperboard.

In that regard, although natural gas costs are very important to us in the production of recycled paperboard, we have materially changed Rock-Tenn's overall sensitivity to natural gas cost increases as a percentage of total energy costs with our last two acquisitions.

The 430,000 tons of bleached board and market pulp we produce at our Demopolis bleach board mill, rely primarily on the mill's recovery boiler for process energy requirements, and only about 20% of their total purchased energy requirements for fuel sources are natural gas. And the 720,000 tons of containerboard we produced at our Solvay mill have coal-based steam pricing.

As a result, today if you look and do the numbers on the basis of the tons produced, natural gas makes up about 29% of our purchase fuel portfolio, residual fuel oil, another 15%. Coal makes up the balance with the exception of about 100,000 tons of gypsum liner that we produced, which we passed through the cost of purchase fuel to our customer.

So we think we are in much better shape than the industry participants generally with respect to the overall production, particularly of Recycled Paperboard from a fuel source. On the pricing side, we've made good progress with the last round of price increases. And, indeed, the industry has done a good job passing those prices through.

The index for bleached paperboard was up $10 last month for a total of $30 per ton for the most recently announced increase. And coated recycled paperboard index prices are up $25 on the low end, of which together with bleached board represents over 900,000 tons of our total production. These price increases are welcome. We expect to recover them as we normally do in phases primarily over the next six months.

In our converting businesses, however you will see a further lag in GAAP earnings. We expect these increases will result in the normal LIFO inventory cost increases in our Packaging segment as these higher paperboard inventory prices get built into our inventories.

The net effect of all this is that I believe Rock-Tenn should continue to generate strong cash flow and earnings, and Steve and I believe our goal of reducing our debt-to-EBITDA ratio to less than three times by the end of fiscal 2010 is the right target for us.

With those prepared comments, Steve and I are prepared to respond to questions.

Question-and-Answer Session


Thank you. (Operator Instructions). Our first question does come from Claudia Hueston of JPMorgan. You may ask your question.

Claudia Hueston - JPMorgan

Hi, thanks very much. Good morning.

Jim Rubright

Good morning, Claudia.

Claudia Hueston - JPMorgan

Just a couple of questions, one was on just the Southern Container contribution. $0.05 a share was more than we had expected as well. Just wondered if you could talk a little bit more specifically about where the strength was, and how your expectations really track now going forward for that asset?

Jim Rubright

Yes. The strength was in two sources. The first was the contribution of income from the Solvay mill. And secondly, better performance from the graphics side of their packaging business than we had expected. The Solvay mill performed very well. It just operated great during the quarter, and its production was up a little bit over our expectations.

And then, we had expected a little higher recycled fiber cost than we actually saw. We had expected fiber pricing to really strengthen in the March quarter, and in fact, it really didn't, and at the end of the quarter in April, as you know we think the market is weakening, so that is the principal driver for the improvement.

But the trajectory of earnings of the Southern Container business all through the year improved, so actually the 12-month historical did not really reflect the full run-rate, so a little bit of the effect was that, Claudia, but the other was that the mill and graphics business performed ahead of expectations.

Claudia Hueston - JPMorgan

Okay. That is helpful. And how should we think about the outage that is happening at the Solvay mill? That's for the coming quarter, am I right, and can you quantify that?

Jim Rubright

It is. I think just on production tons lost, you've got a loss in earnings per share, and then with disruption and everything else going on in the mill, I think you could see $0.05 a share plus or minus. It might be a little bit less than that, but it might be a little more.

Claudia Hueston - JPMorgan

Okay, perfect. And then just on the Displays business. Can you comment a little bit on what you're seeing there in terms of the near-term outlook? Are there any signs of weakness, or how should we think about that business, which just has really done very well over last couple of quarters?

Jim Rubright

It really has, and we do not see any change. Demand continues to be good into late April, which is as far as we can see, and we just measure that by mainly by sheets produced in the converting business, because that ultimately drives the value chain all the way down the line and business continues to be strong.

Claudia Hueston - JPMorgan

Okay. And then just finally, are there any hedges in place for natural gas going forward?

Jim Rubright

There are not.

Claudia Hueston - JPMorgan

Okay, great. Thank you very much.


Christopher Chun of Deutsche Bank. You may ask your question.

Christopher Chun - Deutsche Bank

Yeah, thanks. Good morning, guys. I just wanted to follow-up a little more on the accretion that you saw from the Southern deal. $0.05 is, again quite a lot more than we expected from such a short period of time. And I am wondering, Jim, if you think that sort of that rate of accretion is sustainable for the rest of the year, so that we are looking at something like $0.60 of accretion for the year?

Jim Rubright

The answer to that question is I do with the exception of the outage that we're going to take for the capacity increase, which is a terrific project that we talked about. That's going to cost about $0.05. I think the questions for us really relate to continued market conditions for Corrugated Packaging, and then what happens to fiber pricing and energy pricing, energy pricing being less significant for us than the Solvay mill.

But the answer is, if we have a continuation of the business conditions that we experienced from January 1 through March 31, the answer is yes. I think it's a sustainable rate of accretion.

Christopher Chun - Deutsche Bank

That's very impressive. And then I wanted to ask about you mentioned that prices were going higher in a couple of your Paperboard grades. And I am wondering if you see a sort of typical rate of follow through in terms of your realizations, how much you would expect this quarter's average prices in those grades to be higher than last quarter?

Jim Rubright

Right. Well, we were starting to get the first 20 of the SBS a little bit in the quarter, but really not significantly. Because, as you know, you have to get them published before you get your contract pricing up, and then that contract pricing accretes primarily over a six-month period of time from publication.

So I think in this quarter you are going to start to see spot tons move to the full 30 there, and I think you will see movement in CRB, but it will take six to nine months to get them fully reflected in our pricing.

Christopher Chun - Deutsche Bank

Okay. And then the impact of that pricing on your Consumer Packaging business, will you actually see some margin compression there as you raise your package products prices, is there a lag there?

Jim Rubright

We always do, right. Because what happens is you ultimately, because we are on LIFO, and part of our competitors are on LIFO, and part of them are not, so you don't get an apples-to-apples comparison for everybody relating to product pricing. But you do get margin compression in your packaging business. As the LIFO inventory charges increase, your LIFO expense for the period in which you are in the process of passing those price increases through.

And for us it's not dramatic, but it might be $1 million a quarter to $2 million a quarter depending upon how broadly across our product categories that occur, so it shows up $2 million, or $0.03 or $0.04 of earnings, but it is a good thing, it is not bad. Because ultimately once you pass that cost through, your earnings then normalize out.

Christopher Chun - Deutsche Bank

Okay, very good. And then can you give us a little more detail on what we can expect in terms of interest expense by quarter?

Jim Rubright

Yes, Steve. How about you do that.

Steve Voorhees

Yeah. Our run rate of interest expense on an annual basis at current LIBOR is about $115 million per year.

Christopher Chun - Deutsche Bank


Steve Voorhees

Take that and divide by 4, and that would be the quarterly.

Christopher Chun - Deutsche Bank

Right. And then how much of your debt is indexed to LIBOR?

Steve Voorhees

Right now we are about 35% floating. And so some of that would move with commercial paper, but that is very closely related to LIBOR.

Christopher Chun - Deutsche Bank

Okay. Thanks for your help.


(Operator Instructions). Our next question does come from Kevin Casey of Casey Capital. You may ask your question.

Kevin Casey - Casey Capital

A couple of questions. One, what was that CapEx number?

Jim Rubright

$90 million to $95 million for the year.

Kevin Casey - Casey Capital

Okay. And then the 140 was the depreciation number?

Steven Voorhees

Yeah. 90 to 95 would be for the full year of fiscal year '08.

Kevin Casey - Casey Capital

Okay. And then can you talk a little more detailed about price and price increases? I'm hearing in certain segments that the customers aren't accepting some of the price increases.

Jim Rubright

Well, the place that.

Kevin Casey - Casey Capital

And they are struggling to go through?

Jim Rubright

Well, one you are referring to, Kevin, I think is the $50 announcement of an increase in pricing for containerboard, and that one did not go through in March. And a lot of people would then expect that the next best time for that to go would be late in the summer, which is the pattern of the last major containerboard increase.

But on the SBS side and CRB, I think SBS is very solidly done and reflected in the index. And as I mentioned in CRB, industry volumes have been high, but the right side of the cost curve is really under pressure to get prices up with costs at these levels, so I think that there is a solid basis to continue to see the CRB prices increase through the marketplace.

It is going to be dependent upon continued demand for the grade, but I think the cost increase, our mill division didn't really increase its income this year to last year, because the cost increases have matched essentially the pricing increases we have gotten, so I think you continue to see that the right side of the cost curve hasn't really made up any ground.

But I think that bodes well for continued discipline in the market place regarding pricing.

Kevin Casey - Casey Capital

Then what's the bigger driver for higher prices, the increasing cost or just overall supply and demand?

Jim Rubright

Well, absent the tightness in supply and demand, and we do have balance right now. It is pretty difficult to raise prices. On the other hand, in the current cost environment, if you saw price erosion, you would have people running below cash costs.

And last time that happened, it ultimately resulted in a significant round of capacity closures, which then followed with pricing power with the remaining people, so I think my personal belief is that the right side of the cost curve, as I have stated, is under strong pressure to recover additional price to cover the costs.

Kevin Casey - Casey Capital

Okay, great. Thanks, guys.


(Operator Instructions). At this time, we show no further questions.

Jim Rubright

Alright, thank you very much for joining our call.


Today's conference has ended. You may disconnect at this time.

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