Buckeye's CEO Presents at UBS Global Paper & Forest Products Conference (Transcript)

| About: Buckeye Technologies (BKI)

Buckeye Technologies Inc. (NYSE:BKI)

UBS Global Paper & Forest Products Conference Transcript

September 13, 2012 11:15 AM ET


John Crowe - Chairman and CEO

Steve Dean - Chief Financial Officer

Doug Dowdell - Head, Specialty Fibers

Eric Whaley - Director, Investor Relations


Gail Glazerman - UBS Securities

Gail Glazerman - UBS Securities

All right. So we are again moving to the home stretch, most of the focus to the later morning, early after is going to be on various forms of pulp, mainly towards the value added in. To that end, I’m happy to be able to introduce John Crowe from Buckeye Technologies, Chairman and CEO. With him today also we’ve got Steve Dean, Chief Financial Officer and perhaps, I can put, Doug Dowdell, Head of the Specialty Fibers business to be test during Q&A.

But Buckeye is a leading producer of high-end specialty pulp, as well as they are now moving, they’ve been through a huge transformation over the last couple of years. I’m very happy to turn the mic over to John Crowe

John Crowe

Thanks, Gail, and thanks for having us. I’d like to also introduce our Investor Relations -- Director of Investor Relations plus Eric Whaley. So Eric with us here and Doug and Steve are originally promoted to Executive Vice President also of Buckeye Technologies.

So thanks for having us. It’s a pleasure to be with you and take this opportunity to talk about Buckeye Technologies. Before discussing, however, I’d like to at least direct your attention to our Safe Harbor statement, which is up on the screen. I’m sure you have seen several of those today.

And then real quick, we’ll go to the next one. This is our agenda. This is what I plan to talk about today with you. As you can see particularly if you are familiar with, if you are not familiar with us. We have made some excellent progress over the last few years, growing our sales, our EBITDA and earnings per share.

We’ve been generating returns well above our cost-to-capital and we continue to generate strong fee cash flow. The bulk of our free cash flow has been used to reduce our net debt and today our net debt is close to zero. We are clearly under leveraged and positioned, and this has position us to take advantage of investment opportunities.

Our CapEx has increased significantly as we work on high rated return projects, it also enables us to look at complimentary acquisitions and return cash to shareholders through the combination of dividends and share repurchases.

Reflecting that, we initiated our first dividend in Buckeye’s history on August of 2010 and we have raised it four times since then and have repurchased over 3% of our stock outstanding during fiscal year 2012.

Despite our strong performance, our stock trades at lower EBITDA multiples in the average paper company. Analysts compare us to other paper companies most of which we have little in common world.

Looking at our margins, our return on invested capital and product mix all of which I will be discussing. We are much closer to our financial and product characteristic in specialty chemical companies, which trade at much high multiples. Many of our customers are chemical companies. Our major product, high-purity pulp is a chemical product.

Now let me explain our products and results, so if you can understand us better and view us properly, after that I will discuss our vision and how we are positioned to continue to generate increased shareholder value.

Looking at slide number four, Buckeye is a leading producer of value added cellulose-based specialty products. Our specialty pulps are made from both wood and cotton linter fibers which undergo chemical processes.

They go into many of the niche markets displaced on this slide and their prices are generally higher and more stable than traditional paper pulp of lower purity viscose is like lower -- traditional paper pulps are lower-purity viscose dissolving pulps. They are also highly technical in nature which limits competition.

This is our pulp pyramid. Our specialty pulps are at the top of this pyramid they are most difficult to produce and have the highest level of purity or alpha cellulose content. We are focused on the 94% to 99% alpha area. Low end dissolving namely viscose use for producing rayon is round the 92% alpha level.

In addition, we produce fluff pulp which is mainly used in absorbent end applications. It is represented by the green portion of the pyramid, fluff pulp is traditionally been more commodity like although it has been more stable in the recent years. In fact, we attribute to demand growth, which we estimated about 4% per year, primarily out of emerging markets.

Over the last 12 months, the fluff pulp price has declined after reaching record levels. However, since a recent of low of $910 per ton, the recent index has generally trended upwards and was $940 per ton last week. Buckeye fluff pulp has priced up this index.

90% of the world’s fluff pulp is produced in Southern United States due to the favorable absorbency characteristics for diapers, feminine care and other products that the Southern Yellow Pine wood provides.

No one is building a new fluff pulp mill in the Southern U.S. and has not done so for many years due to the cost and issues residing on. While several existing paper pulp mills have recently converted to fluff there are also a couple of convergences away from fluff including projects we are undertaking to increase our capacity of higher purity pulps. I will discuss this product -- project in more detail later. Bottom line the fluff pulp demand is growing at a good rate and long-term supply has somewhat limited.

Finally, we are one of the world’s largest producer, producers of airlaid nonwoven materials. We sell our nonwoven products into expanding markets like baby wipes, feminine hygiene, which are growing at approximately 2% to 5% per year.

The base input for this product is fluff pulp and we current supply approximately 50% of our needs through internal sources. A year ago we lunched a nonwoven substrate for use in the growing market for moist toilet tissue. We have a patent on our flushable product called AIRspun Flushable and have experienced strong growth and demand for this product.

Moving to slide six, this slide displaces our end market in little more detail. As you can see we have a diverse product mix. We also hold either the number one or number two market share include casings, wood and cotton (inaudible) which is primarily used in cigarette filters and flat panel displays, auto filtration, tire cord, cotton paper and airlaid wipes.

In terms of capacity and utilization, our wool mill in Perry, Florida is operating at 100% capacity. Our cotton mill at Memphis, Tennessee operates at about 50% to 60% of capacity. That is raw material constrain due to a shortage of cotton linter feedstock.

Cotton linters are that short, fuzzy fiber left on the cotton seed after the ginning process. There availability is dependent upon the oil crushing market where oil producers trimmed the cotton linters off the seed before they crush it and the internal demand for textile fibers.

Nonetheless, we right size our mill and have leveled out our supply chain through customers supply arrangements, so that even at 50% to 60% full, the Memphis plant is enjoying some of the most profitable years in its history. Our prices are linked to cotton linter costs.

On the nonwoven side we currently have three sites running at about 70% to 75% of capacity. But we are consolidating and we’ll transfer volume from our facility in Delta, British Columbia, Canada to our facilities in Gaston County, North Carolina and Steinfurt, Germany. Doing so, should remove costs from the business and should increase our total nonwovens utilization to about 85% to 90% capacity in early 2013.

Slide 7, just here is our geographic footprint. We have a manufacturing presence in North America and Europe and on the ground marketing presence in North America, Europe and Asia.

Our product ship around the world and we are a net exporter with close to 70% of our net sales generated to markets outside the U.S., and increasingly sold through emerging markets. These sales are mostly dominated – denominated, excuse me in U.S. dollars and most of our production costs are in U.S. dollars, which helps to minimize our exposure to foreign currency translation.

Our strong assets and well-positioned businesses in growing markets have enabled Buckeye to post financial results over the last few years, which I would like to now ask Steve to review with you. Steve.

Steve Dean

All right. Thanks, John. I just want to review what these recent financial trends kind of at the high level. Let me get to the right side. Yeah. Couple of more. There you go.

First, starting with the balance sheet. We’ve generated significant cash flow these last few years. Buckeye has always been a strong cash flow generating business. Since 2007, we’ve delivered an average of close to $110 million a year of cash flow from operations excluding special items.

During the same period, we spend an average of about $55 million a year in CapEx, resulting in about $55 million a year in net free cash flow. To date, we’ve used the bulk of the free cash and addition to cash tax benefits received from the fuel tax credits and site closures to reduce our debt outstanding to $59 million at the end of our fiscal year on June 30th and on a net debt basis to $11 million.

In fiscal 2012, we balanced the use of cash with $50 million of the $85 million capital spend, targeting higher return in capital projects, particularly completing the energy project which has made our fully wood pulp mill just about 100% energy self sufficient. And beginning the specialty expansion project where we are going to convert 42 tons of fluff pulp to high end specialty wood pulp.

We also returned $44 million to shareholders in a combination of share repurchase and dividends and we applied $38 million to a debt reduction. We recently announced our fiscal year 2013 capital budget of $114 million, which includes further investment in the specialty wood expansion project, recently approved oxygen delignification project. John will discuss both later in this presentation.

Our capital spending is currently well above our depreciation rate of about $50 million a year. Our assets require approximately $30 million to $35 million a year for capital maintenance. So everything over and above that goes toward growth in cost savings initiatives. So, as you can see one of the many strengths of our business is its ability to generate strong consistent cash flows, which enables to reinvest and grow our business and return cash to shareholders.

Moving to the next slide, sales and earnings growth. The main driver of these cash flows over the years has been an improvement in our sales and earnings profile. As you can see except for a decline during the economic downturn, we’ve steadily grown both top and bottom lines and are out to company records in fiscal 2012. The 909 was a record sales, 23.9% record gross margin and 223 is record EBITDA in this last fiscal year.

Improve selling prices and mix were major contributors. So we’ve also lowered our overall cost structure through consolidation and a focus on lean management front support. Just in the last year, we closed and sold our Americana, Brazil business, which was an under performer for us for a number of years and we also sold off our converting business in King, North Carolina which was non-core. It was reasonably profitable, but not really meeting our profit goals either.

On the next slide, we talk about improving return on capital. Big focus metric for us at Buckeye has been return on invested capital. The same trends that I just talked about on our sales and earnings growth are reflected in our return on invested capital offset the impact of the economic downturn. We’ve steadily increased our ROIC over the last several years to improvements in our cost structure and consolidation efforts.

For fiscal 2012, we posted a return on invested capital of 16.5% and additional efforts come in the next year such as our specialty wood expansion project in particular and the closure of our Delta British, Columbia airway facility, should help to keep our ROIC well above our weighted average cost of capital moving into the future and we peg our cost capital at about 10%.

John, now back to you.

John Crowe

Thank you. And I got to smile. Let’s get to couple of slides and you did good, very catching up and you did pretty good and you did. But I’m going to go back and pick those up. So let’s go back to slide eight.

The question I get, asked a lot is John, are you worried that with all this new dissolving capacity coming on line that you will see overcapacity in your high end specialty markets. And my answer is that’s supported by these next two slides and points out, what we believe is necessary to compete in the high end dissolving fiber market.

First, it takes a significant investment commitment to compete in the high-end specialty markets. Large number of conversions that are underway are targeting the commodity dissolving wooden markets to whisk those rayon for textiles, requires less of a capital, technical development or time commitment.

Our business has unique assets that differentiate us in the marketplace. Our wood facility in Perry, Florida is one of only two facilities of its kind in the world. The facility was built in the 1950s and to build a similar facility now would require a significant capital that is likely to be in access of $1.5 billion to build this kind of asset and permitting that would be difficult if not impossible to obtain.

Our cotton facility in Memphis is the largest cotton cellulose mill in the world and makes it the highest purity cellulose in the marketplace. And then finally our nonwovens facilities include the world’s largest airlaid nonwovens machine.

Slide 9 points out another competitive advantage. The wood mill and quality is where we produced our high and dissolving wood pulp. Our process is one that has been developed over the last 50 years and is not easy to duplicate. We have many customers that we have worked with for decades to ensure that our process results in a product that fits their exact specifications. This process and these customer relationships create significant barriers to entry into many of the markets we sell into.

The Southern slash pine and loblolly pine are our superior fiber for the niche applications in markets we serve. The key to our process is removing the lignin extractives and as much of the hemicellulose as possible without damaging the cellulose. This is part of our unique competitive advantage.

To high end dissolving pulp product, we produce is a natural polymer. It is actually a specialty chemical produced from the pine trees. So it is renewable sustainable products, which fits our sustainability business model on the next slide. Sustainability has many elements, and all of them must be considered together.

In 2009, we established a sustainability strategy in recognitions of the importance of protecting the environment and resources for future generations while leveraging long-term business and shareholder value. We’ve been successfully implementing sustainability business practices throughout our business operation. For example, we are a certified practitioner in the practice of sustainable forest management. This contributes to the renewability of the forest resource and the continued balance of the carbon cycle.

We are committed to forest sustainability. Buckeye is a member of SFI, Sustainable Forestry Initiative and I serve as a member of the all volunteer Board of Directors for SFI. Our sustainability efforts also include internal stewardship initiatives to ensure our workplace is not only a safe place to work, but our people and processes are continuously being improved upon to training efforts and lean manufacturing techniques.

Now, I’d like, well I have already done that. Steve has done the financial. That’s where is good at doing it. No, you did well the first time. I think they got it. Let’s go then to slide number 14. How do we sustain this momentum that I’ve talked about and Steve has presented and we believe is by focusing on three key business elements and present this three here, A, B &C.

First, profitable sustainable growth and through to these four bullet points, the addition of complementary assets, we are exploring a number of opportunities today. We have not yet satisfied our strict evaluation criteria. Ultimately, we need to expand to satisfy our growth objectives. But each opportunity must first be earnings and cash flows accretive, earn returns in excess of its cost of capital and must complement our core competencies and assets to [bonafide] their consideration.

The second bullet, a continuous focus on proving mix and filling up our existing assets. Third bullet, increased penetration into emerging markets and then finally a continuous focus on green initiatives like sustainability and renewable energy. And second b, continuous business improvement through and I would say the first one is operational excellence, additional advances and safety product quality and plant reliability.

Secondly, a continuous focus on the three Cs, our customers, cash flow and improving our cost structure and thirdly, addressing underperforming assets which to date include the closure of this subsequent sale of our Americana, Brazil cotton linter pulp facility, the closure of our airlaid nonwovens facility in Delta, B.C., Canada effective at the end of this calendar year and the sale of our converting in King, North Carolina, all three Steve mentioned. These are reducing our sales, but improving our profits and returns.

The third bullet there is developing our people and organization capability through a continuous focus on lean enterprise methods. We’ve yielded great results today, but there is still plenty of opportunity to remove waste and increase efficiencies throughout our system.

Lean is a continuous process that we have gotten good at doing and now it’s embedded in our organization. Secondly, the identification and mitigation of business risk and we have a robust risk management program and thirdly, a continuous effort to retain knowledge and train our future leaders.

Our financial targets included on this chart, we’ve exceeded all of those but one. Earning return is greater than our cost of capital, which Steve shared, was 10%. Unconsolidated gross margin was 25% or better. If he had been here last year, that would have said 20% or better. So we've proven that that was too low, so we’ve changed to go to better than 25%. Maintain a leverage ratio of less than two points, five times levered, build cash flow per share and achieve adjusted earnings per share growth of greater than 10%.

We are also implementing efforts to return cash to shareholders for the use of cash dividends and share repurchase and we believe all this together add up to increasing and growing shareholder value. To date, we’ve been very successful in exceeding these benchmarks and our share price has responded.

Steve mentioned that we earned return on invested capital for last year that we just completed was 16.5%, certainly better than our cost of capital and our gross margin in 2012 of 24% gets us close to our 25% target.

And we ended the fiscal year with debt-to-EBIT ratio point three time leverage. So moving forward, we will continue to pull our cash responsively taking the balanced approach to allocating capital between returning cash to shareholders, investing and high rate of return projects and adding complementary assets.

Slide 15, we are returning cash to shareholders by dividends and share repurchases. As mentioned, we started our first dividend in 2010, we raised it four times. We're going to continue to grow it modestly. We repurchased more than 3% of our stock outstanding in the last year and we will continue to do so opportunistically to offset not only dilution, but to -- if this is the best use of rate on return on cash that’s what we are going do.

Moving to slide 16, we are investing high rate of return projects like our Foley Energy project, Specialty wood expansion project and we recently announced oxygen delignification or O2 delig projects. The energy project was completed in March. The projects enable Foley to electrically independent on most ways. It clearly supports our sustainability model and was a high rate of return project, it was partially funded by government brands.

There are additional annual costs savings still to be realized to steam saving projects and eventually the returns could be even higher, since it provides the opportunity to show green energy back to the grill.

Slide 17, our specialty wood expansion is another high return project. We’ve committed to spend approximately $85 million to increase our high-end specialty wood capacity by approximately 42,000 metric tons per year. While displacing an equal amount of lower margin fluff pulp capacity, holding total mill capacity constant 465,000 tons -- metric tons per year.

We already have customer commitment for 75% to 80% of this new specialty volume. We had expected to complete the construction and startup other project in December of 2012. We have experienced some delays due to equipment shipment delays in weather problems. We now expect to startup to begin in April of 2013 and we ramped up through the calendar 2013 and early 2014.

Expansion provide much needed volume to our high-end specialty markets including casings, tire cord, ether, filtration and wood acetate. When fully implemented, we expected to provide annual incremental EBITDA of greater than $20 million and aftertax rate of return of between 15% and 20%.

Finally, the construction and conversion can be done without requiring a major outage. When we announced the project, we had budgeted for $79 million, the additional spending has been because of expanded stoke and refracts the delays and equipment deliveries. Most importantly, we still anticipate in IRR of between 15% and 20%.

We’ve recently announced our O2 delignification project on our fluff pulp production line. The oxygen delignification project has been in planning for several years and began as an environment improvement project that would improve the quality of color and the content of chemicals in our effluent, allowing water treatment to even more effective and efficient.

This is also a steam savings projects. We were fully -- more fully utilize the capability of the Foley Energy project, but there are several additional benefits provided through this project.

Lignin is the glue that holds wood together. We remove this lignin in order to make high quality cellulose products. This project replaces the amount of Florida oxide chemical required to remove lignin from the wood by using oxygen.

The other two delignification process brings some obvious costs saving benefits such as chemical reductions and improving recovery of our caustic. It also brings other benefit such as improved wood yield and increases flexibility in our operations to produce more specialized products on our fluff line and improve our environmental performance.

It is a $25 million to $30 million investment with estimated costs saving to $5 million per year and initial rate of return of 12% to 15%. And it is scheduled for completion by the end of calendar year 2013.

We also looked at complimentary assess to either acquisition, joint ventures or partnership. We are currently engaged with the University of Florida to steady the value of converting some of the existing way streams into revenue streams such biochemicals and biofuels. The University of Florida was ordered at $20 million grant from the state of Florida and has constructed pilot biorefinery of our specialty wood campus impurity.

On January 9th of this year, we cut the ribbon on this facility. There is no capital investment on Buckeye’s part however we are committed -- we committed to the utilities and some manpower and the hemicellulose feed stock to run the pilot plant. Eventually, this could lead to commercial viable biorefinery producing specialty chemicals. And we will continue to look at other opportunities to add bolt-on assets that make sense strategically.

The next slide is a vision for Buckeye. It’s a vision. It’s not a forecast. We have a vision of profitability sustainable growth measured by increasing our EBITDA and gross margin by greater than 50% based on calendar year 2011. To do this by calendar 2015, we would like to increase our revenue to about $1.5 billion or about by 50% based on the calendar 2011 results.

This would be accomplish though the combination of organic growth, improve product mix, capital projects like the specialty wood expansion project and importantly from JVs and acquisitions, which we could finance using our strong free cash flow and debt.

We are targeting our 25% gross margin, which is slightly above the 24% that we have achieved recently and in calendar 2011. Product mix, our works in Lean Enterprise costs reduction projects like the energy, Foley Energy project and restructuring work we will continue to contribute to this target.

If we can grow our revenues and gross margins to these target levels, this would result and increase of 65% to our EBITDA from our calendar 2011 based. For Buckeye gross profit is a good proxy for our EBITDA, they are newly identical. If we can achieve this aggressive vision will be creating a strong cash flow shareholder value. As you can see we’ve make great strives to shown by the just the progress we made in calendar 2011 over comparison to 2010.

Now, I would like to provide you with the brief update of our current business conditions, those of you closely follow us now we had a failure of steam drum in our Foley plant mid June, this cause the sloppy disruption at the mill. We recovered quickly and mill is back in production in early July. We expect to have all of damaged drums replaced by the end of calendar year, which should return the mill to full operating capability.

As a result noted -- as previously noted fluff pulp prices have been under some pressure. Our specialty cellulose prices are solid. However, we have seen some softness in demand in tire cord, filtration and the acetate markets. Starting to stream of this year there has been some deep in LCD demand, which have some small impact in our cotton pulp volume our nonwovens demand remains steady.

So in summary on slide 21, Buckeye is well-positioned with unique assets and strong balance sheet. We believe our discipline approach to execution of our strategy, our alignment with major global trends such as growing prosperity of the emerging economies and expanding middle class aging population increasing to demand for health products and the focus on renewable energy and sustainability initiatives and diverse end markets we served position Buckeye well for the future.

Our most popular markets have high various entry that I have already stated we have a very strong balance sheet and generate strong free cash flows, we plan to use those strengths to our advantage by profitably and sustainability growing our business to balance approach to allocating capital between shareholders high return projects and complementary assets. And in doing so, we will continue to increase shareholder value.

As I mentioned at the beginning of this presentation, we are not very similar to the commodity paper companies we get compared with. We are producer high margin products and more similar to special the chemical company. We believe our -- these provides on excellent opportunity for investors.

I appreciate listening to our story. Now, I will be glad to answer the questions or any my colleagues has been answer the questions you might have. Thank you, Gail.

Question-and-Answer Session

Gail Glazerman - UBS Securities

Yeah. I mean think about there is an opportunity, one moment I will back in earnings call. So, a couple weeks ago in the past indicating pretty quickly that you are looking at Buckeye asset and I don’t know so they can set that procedure or transaction that you can indicate such as generally speaking when you look at division and some of the growth that might be require for that, in fact that everything which will be looking at and can you just give any for a clarity into what you might going to do into what you will need to do?

John Crowe

Well, that is just type of thing that would piped with Buckeye, but that’s about all I can say right now.

Gail Glazerman - UBS Securities

And if you look at potentially your expanding full year going to hygienic version and do you think I believe that can kind of [Capo] incremental structure what you could do, as I correct but the going Foley but that project for any major changes would be there and if they aware and how would you get where and have you look -- we’ve seen a lot of emergence into lower end resolving what are we take replicate quality and we took consultancy thing assets, talk about that?

John Crowe

Okay. We started with Foley the expansion project just give us quite a boost in the mix where we create 42,000 tons of high end, high margin product for fluff which we like fluff, but obviously fluff margin are considerably less than specialty.

We can do that without shrinking the mill some of this substitute delayed project and our energy project they give us a little bit room and also the -- work with University of Florida we can take some of our side streams and turning into high value added chemicals and not have to run through our recovery system that will give us a little more room to grow at Foley and high end specialty products.

Now, that’s not going to be a tremendous amount. But another 10,000 to 15,000 tons would be very significant there Foley. But after that you pretty much spending by your water permit, your air permit and sizing recovery (inaudible), so bio refinery work with our perfect structure for potential of some bio refinery, bio chemicals assets it will be collocated with us that we have the water, we have 40 million gallons a day of what we call great water that we put back into the river. We pull out of the aqua for a bit, put it back in the river and so that’s available for process water for something like a bio-refinery.

So it’s a brilliant infrastructure for that. But more important from that, we quite frankly we’re going to be top down on units we have to sell. And so on acquisition of something that really builds up. And there is some chemical opportunities out there that would fit chemical things that come from pines that would be something that Buckeye would be considering.

Gail Glazerman - UBS Securities

Okay. And in terms of your last comment on some of the markets prior filtration proceeds, these were things you tried on the earnings call. Has been there any incremental change over the past month or the conditions that you’re seeing, is that where they were a month ago?

John Crowe

I’ve got Doug here, the advantage of having Doug here kind of surprise state of royalties, glad to have him cheer up. So Doug I want to add to defer that.

Doug Dowdell

I would say modestly so that that decline is increasing up significantly but we’re seeing even more softness, especially I would say in the entire core market, globally.

Gail Glazerman - UBS Securities

In terms of what we -- conversions like that, you talked about being 80%, 85% or so. Is that in higher end with specialties and if not, how should we think about that given the filtration process?

Eric Whaley

Yeah. Eric. When we talk about those percentages, it’s always in relation to high-end, high-value products. We can make other products on that line and it’d be starting up. We likely would do that but we’re not counting that in our economics and financials.

Steve Dean

Number you said 75% to 80%?

Gail Glazerman - UBS Securities


Steve Dean

Yeah. That’s right number.

Gail Glazerman - UBS Securities

Okay. We’re approaching, I guess, the final closure of the Delta. Can you give us some help thinking about that in terms of the impact on the rest of the business? Is it really just picking out the cost or are there other benefits or is there drag because what percent of sales at this points having kept, do you think to continue?

John Crowe

Our Delta was -- we thought there little over 20 years ago and when we went there, it was profitable where it’s located. But as the years go by, you’ve been closer to your customer with an airlaid product is where you need to be. You need to be on the same content, often times you need to be just closing on the content as you can because of the cost to ship the product.

So Delta has it -- makes a great product, has a great team there, it’s just on that location. And so what we can consolidate through our plant close to start-up that will be closer to the customers that brought products there, which are pretty much in the Eastern U.S. and Eastern Canada. That makes us much more competitive with freight costs.

And it also then fills up -- we’ve been able to -- we ran the big machine in through there continuously, its 100% goal. Little machine set for years not been utilized and that’s where we put some money recently. We have the capability and so when we transfer the product there, then we can fill that machine up and so it really it isn’t -- every incremental ton there is a big deal in terms of what it does to your margins and your profitability.

So we finally get -- that’s in pretty much up to the 95%, 100% capacity. And it can make the excellent product there. That’s really one of our growth led to our tissue. And in Europe, it’s a color table top. It’s really not the product that will move us there so. We will fill up both plants. Remaining plants will be near capacity.

Gail Glazerman - UBS Securities

Okay. And you have little bit of what they get in early stages the customer is looking for multiple course of supplier site, that in the past that we’ve covered the matter.

John Crowe

Yeah. It’s just been a reshuffling, we were supplying Wal-Mart basically. They wanted customer diversification. They wanted our customers to have more than one suppliers. So it was kind of a reshuffle but in the end, the product volumes came up about the same and if anything, we’re a little bit higher right now.

Gail Glazerman - UBS Securities

Okay. Let me talk a little bit about the cotton linter market. Are you seeing improved supply, I think is it October that usually that (inaudible) and just want to cover that?

John Crowe

In my prepared notes, I talked about the LCD market dropping off a little bit in the spring time and it’s pretty volatile. It comes and goes. I know you cover [coins]. You know that they are bullish on what the LCD market is going to be for their glass and so we looked at that market. It continued to be very strong but that did sell us down a little bit but we are a little on 50% to 55% capacity and that’s what we staff for.

That makes that plant very profitable with 7, the best profitability it’s ever had in its -- times it’s running at 90% capacity. Now, it’s there an upside there one day. You have it until the market is really that solid and you know that you’re going to have the long-term lift to make that product for the customer.

You don’t want to add people and go up and down and staffing one year and then cutting out people the next year. So we’ll like to see how that progresses. Right now, the competition for the length has kind of slowed down. China is not in North America buying with. That allows us to spend the past that cost due to our customers maintain our margins which -- it's good for the customers.

Our revenue will come down but our earnings will be in the cotton business pretty much to be strong. We have (inaudible) what we’ve had probably in three years right now.

Gail Glazerman - UBS Securities

It’s a moment that you can necessarily mention it as more market dynamic and this works?

John Crowe

It’s just when we flex up to go get more market and it has capability in ethers and ethers is a growing market. So we will take advantage of that if that makes sense.

Gail Glazerman - UBS Securities

All right. In the earnings call, I think that was reference that you were saying look at calendar 2013 pricing, our references probably getting noticed a little bit incremental pricing this year but certainly not and that’s we’ve seen in the last three years. Is that still the case and is there any more color that you can offer?

John Crowe

Yeah. Let me say some thing to start with and then I will pass it to Doug as he is dealing with it right now and will deal with it through the end of the year. Certainly, with some new capacity coming on next year, I think there is a -- everybody wants to sign up customers for the long term and you’ve heard us and you’ve heard our major competitors say that the new capacity is in the range of 75% to 80% sold out.

But that said, there is still going to be, there is going to be excess capacity initially into 2013 until that’s heated up. So I’ll turn it over to Doug.

Doug Dowdell

Yeah. We do our negotiating basically beginning by October, finishing up by December and I think you have it mailed. I mean, I think there will be some markets that will have some increases, some rather flat and some they have some slight decreases. It will depend. In the end, what our customers really ask of us over the past three years, our prices are up 40%.

We’ve had a very healthy level and doing very well. And so we’ll combine what we think affordable and right for the customer, what the market can better right now. So it’s yet to be determined. We’re not willing to put a lot of percent to what it may be but we will certainly be trying our best to improve our mix and value in pricing.

Gail Glazerman - UBS Securities

But net-net, flattened out, you still think is -- net net they are selling faster?

John Crowe


Gail Glazerman - UBS Securities

And I think, you wanted to adjust this one but 12 markets have been relatively weak. Commodity markets are very weak. Are you seeing lower in terms of some of the product activity and what’s your outlook?

John Crowe


Gail Glazerman - UBS Securities

Until ‘13?

John Crowe

Actually, since our earnings call, we have actually seen an improvement in the stock market and frankly we have seen our demand from long-term contract customers which we indicated in that call that have been down a bit, have come back much better than we even anticipated.

And that’s going to be positive for this quarter. Also we do -- with that said, there is no capacity, just getting more mid-summer, where do you see that and we could -- RISI Index went down $5 in August (inaudible) and if we would not be surprised that it didn’t trickle down a little more but we don’t see anything of great significance and likely which starts back up hopefully next spring and summer.

Gail Glazerman - UBS Securities

Great. With that, we have used up our time but I want to thank John, Doug and Steve and Eric. Thank you so much for your time today.

John Crowe

Thank you.

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