Thank you for joining Packaging Corporation of America's second quarter 2013 results earnings conference call. Your host today will be Mark Kowlzan, Chief Executive Officer of PCA. Upon conclusion of his narrative, there will be a Q&A session. I will now turn the conference over to Mr. Kowlzan, and please proceed when you are ready.

Good morning, and welcome to Packaging Corporation of America's second quarter earnings release conference call. I'm Mark Kowlzan, CEO of PCA, and with me on the call today is Paul Stecko, Executive Chairman of PCA; Tom Hassfurther, who runs our Corrugated business; and Rick West, PCA's Chief Financial Officer. Thanks for participating in this morning's call and after the presentation, we'll be glad to take any questions. Yesterday, we reported second quarter net income of $64 million or $0.66 per share, which included a one-time after-tax noncash charge of $5 million or $0.05 per share for pension plan changes. Excluding this charge, earnings were a record $69 million or $0.71 per share. This compared to second quarter 2012 net income, excluding special items of $48 million or $0.49 per share. Net sales were a record $800 million, up 12% from the second quarter of 2012 net sales of $712 million. The $0.22 per share increase in net income, excluding special items, were driven by higher containerboard and corrugated products prices and mix of $0.27, higher corrugated products sales volume of $0.05. These items were partially offset by: higher costs for energy of $0.04; labor and fringe benefits, $0.03; and the timing of annual mill maintenance outages, $0.03. Excluding special items, net income for the first 6 months of 2013 was $130 million or $1.33 per share compared to net income for the first 6 months of 2012 of $88 million or $0.91 per share. Year-to-date net sales were $1.56 billion, up 12% from $1.38 billion in the first half of 2012. We had an outstanding quarter in all aspects of our operations with record earnings driven by higher prices for containerboard and corrugated products and higher corrugated products volume. The annual outages at 3 of our mills went extremely well…

Thank you, Mark. In the second quarter, PCA generated cash from operations of $187 million. Capital expenditures during the quarter were $54 million. We paid our quarterly common stock dividend of approximately $31 million. Cash tax payments of $6 million were made and fuel credits of $66 million were used to offset federal taxes. We currently have estimated remaining fuel tax credits of $4 million, which will be used to partially offset tax payments in the third quarter. However, the final amount of the available fuel tax credits and the final cash tax rate is contingent upon the conclusion of the IRS audit currently underway. We ended the quarter with $370 million of cash on hand, up $102 million from the end of the first quarter. Our total long-term debt outstanding at the end of the quarter, excluding capital leases, was $786 million. As of June 30, 2013, our diluted shares outstanding were 97.7 million shares. As Mark mentioned earlier, during the second quarter, PCA recorded a one-time noncash charge of $5 million, which was related to a change in our hourly pension plan. We recently negotiated an agreement involving 25 of PCA's corrugated plants who will transition from a defined-benefit pension plan to a defined contribution 401(k) plan. The pension charge is based on accounting guidance which requires us to accelerate the recognition of prior service pension cost for employees affected by this change. With that, I will turn it back over to Mark.

Thank you, Rick. Before discussing the third quarter, I want to mention that based on our strong cash flow and cash position, we are accelerating about $25 million of higher return capital projects from 2014 into the second half of 2013. These projects are all on our corrugated products plants where additional capacity is needed to support anticipated growth. Now moving ahead to the third quarter. We expect higher corrugated products prices, higher sales volume and with no planned annual outages, increased mill production and lower mill operating cost. We also expect higher purchase electricity cost with summer pricing, higher amortization of annual outage repair cost and a higher tax rate. Considering these items, we expect third quarter earnings to be about $0.88 a share. With that, we'll be happy to entertain any questions, but I must remind you, some of the statements we've made on the call constitutes forward-looking statements. The statements are based on current estimates, expectations and predictions of the company and involve risks and uncertainties, including the direction of the economy and those identified as risk factors in our annual report on Form 10-K on file with the SEC. The actual results could differ materially from those expressed in these forward-looking statements. With that, operator, we'd like to open the call for questions. Thank you.

[Operator Instructions] Our first question is from George Staphos, of Bank of America Securities.

I guess first off, Paul, congratulations to you on the recent announcements and I guess best of luck, everyone in their future roles at PCA. My first question would be, can you comment at all on how early third quarter bookings and billings have been? And can you comment at all on the June box containerboard data, which came out whether the data was more or less in line with your expectations or if there was any variance? And I have a couple of company-specific questions.

Regarding bookings and billings, for the first 7 days, our bookings are up about 18%, billings are up about 11%. And again, we're off to a good start but also take into account the fact that the way the Fourth of July fell this year, on Thursday, Friday, in some box plants, was an operating day. So even though it was not included as an official day, it wasn't caught up that day. So the numbers are skewed somewhat. But we are off to a strong start, but we do expect those numbers to temper down over the rest of the month. And then regarding the FDA numbers this morning, the one comment I do want to make, if you look at PCA, we came out of our second quarter and we have the annual shutdowns at the 3 of the mills, we needed to run -- we needed to build some inventory. But we are actually, for the month of June, we've built some inventory. So our PCA number, we were up 5,000 tons, but we were still too low after the outages. And so for the quarter, we were still down 12,000 tons. So on an industry basis, if you think about the month of June and what the FDA numbers were reported, you're talking about a 30-day mill month as opposed to a 20-day box plant month. And again, that's a 10-day differential. Normally, you'll see a 9-day differential. So if you're talking about 100,000-ton mill contribution from this particular June, typically, you wouldn't see. So with that, I really don't have a lot to add to the FDA numbers, except again, volume has been strong in our case and the inventories have trended at the historically low levels.

Okay. I appreciate that. One question made more specifically to PCA, and you alluded to this on your comments, you are accelerating some projects to add some high return -- or accelerate some higher return -- projects in the box plants over the next 12 months into this year. If we had it stack rank, what investors see is the most likely sources of return improvement in PCA from here over the next couple of years, would it be coming from the market development as you see it in the economy? Would it be coming from the capital deployment as you just mentioned for operations? Or would it come from value return to shareholders? How would you stack rank the most likely sources of improvement on return to the shareholder from here, from those 3 resources?

Well, again, if you think about what our strategy has been for the last few years, we have a goal of getting our integration level up to the 91% level. And continuing to deploy capital, especially in the box plants, to help in that direction which would have been very successful. With that in mind, if you think about where we are, year-to-date, we're sitting at about 87% integration, but from a return point of view, again, I think the capital -- and we are spending in the box plant -- continues to give us extremely high return opportunities and as you're seeing that in the volume. Tom, do you want to add anything else in the capital. We don't really talk about it a lot, but your side of the business has been deploying well with good small pieces that have been returning the big volume growth.

Yes, Mark, I would just that, yes, that we're really a customer-driven company, a revenue-driven company. And so we will deploy that cash where that driver can accelerate our earnings. With that said, I think we've also taken all the above approach and we've developed a lot of flexibility and we're pretty opportunistic about where we want to deploy that cash. But right now, we have some opportunities in the box plants, as Mark alluded to, that have some good returns and we're accelerating those solely based on the fact that we have some very good customer opportunities and they're coming to us and we're taking advantage of those opportunities.

Okay. Last one...

You're out of questions. You have exceeded your limit on the first call. We're going to have to cut you off and move on. But just to summarize, that was the last, it was a good question. If I rank the first one, if we had to pick one -- I think Mark said, increasing our integration level will be our greatest source of value creation for shareholders. And so if you don't mind, we'll circle back to you later for other questions. We have -- 15 analysts now that cover us and we want to give everybody an opportunity. So we're going to have to cut you off, George. No malice intended.

Our next question is from Anthony Pettinari of Citi.

Mark, you referenced improvements and some capacity addition opportunities on the box plants side. And given that you're growing faster than the industry and your mills are running full out or near full out, I'm wondering would you consider capacity expansion on the mill side over the next 1 to 2 years? How should we think about your mill footprint in terms of capacity as you continue to grow kind of faster than the industry?

Well, just again, the #1 priority continues to be the integration level. We've spoken over the last year that we continue to have the tons available that come out of the outside sales, both to the export and the domestic sales side of the equation. So with the pre-capacity that we currently have on the mills and the efficiency with which we're running, and then with the opportunity to move tons of rationalized tons longer-term out of those export domestic markets, the mill acquisition, mill incremental capacity is a lesser concern at this point, as opposed to the integration itself.

Okay, that's helpful. And then maybe just a very quick follow-up. You referenced railcar shortages and maybe some higher transportation costs, and that's some things that other producers have talked about. Is this a problem that's getting worse as you go into the third quarter or is it isolated to a specific region? Or is there any kind of color you can give us about what the pressure is in terms of transportation costs?

It was a combination of -- we went to the outages in the spring. We obviously had opportunities and issues combined with how to take care of the box plants during that period of time and get the tons moved to the right places from the remaining mills that we're running. And again, we had some spring issues, again, just with the normal seasonality with regards to our rails and trucking. And then just again, just the nature of where we are with the trucking industry. And so that being said, again, the fact that we have compressed our annual shutdowns into the April, May period probably created the most -- the biggest factor in that transportation dilemma.

Our next question is from Mark Weintraub of Buckingham Research.

With more and more cash flow that you're generating, you have the enviable problem of finding a home for it, and I know you've increased your dividend a lot in the recent past. I don't think you were too active on the share repurchase during the quarter, if you could confirm that? And maybe just help us understand, I realized there's the 25-minute incremental that you're pulling forward, but you still seem to have a lot of additional cash beyond homes that have been identified for it. Can you help us on what you're thinking about at this stage?

Yes. Again, as we've said in the past, if you think about the use of cash being dividend, share buybacks, CapEx, Paul and I speak regularly about this and we're -- in past years, we've been opportunistic in buying shares back, but it was rather hard to justify these past 6 months buying shares when the market was performing the way it performed. That being said, I'm going to have Paul make some comments as we've done in the last few quarters because this is typically a board matter and we've discussed this at every board meeting. But in regards to the uses of cash besides the $25 million, into the third quarter we already have plans to make a $30 million pension plan contribution. And also our federal taxes, we're looking at $31 million of taxes in the third quarter. So again, the benefits of the black liquor credits essentially have run out. We only have $4 million left on those credits going into the third quarter. So again, we have roughly $51 million of incremental cash besides that capital. But, Paul, do you want to make a comment regarding that?

Yes. Well, you know what, Mark, you're right. We're going to continue, we're going to have cash. If things keep going the way they are, this is not a forecast, but we should have a strong cash flow generation in the second half, which, in your terms, exacerbates our problem a little bit. What do we do with it? We've had a strategy long term that we want to buy back shares, that's right up high of the things we do. We thought maybe what the Fed is talking about tightening up are not easy. Tightening up on the bond buying up, buying back as much as the market mix. Correct. The market is not corrected so we missed it again. In other words, if we had to do it over again, I wish we had bought shares back during the quarter, we didn't. On the other hand, the stock kept going up so I hate to root for the stock to go down just because we want to buy shares. So I'm kind of in a dilemma. I win in both ways, or lose both ways, however you want to look at it. We did increase the dividend. We thought that made a lot of sense and we increased it appreciably to get rid of some cash. We had a strong quarter and we're back in the dilemma again. We've got more cash than we need. We really have 2 things that we can look at: share buyback and share -- and dividend increases. And it's a moving target. We're kind of hoping that something happens that may make the decision easier, but in the end, we're eventually going to have to buy back more shares or increase the dividend and we'll probably do some of each. And when and how much, will depend on a lot of things and I'm not prepared, including board approval, so I'm not prepared to go much further than that other than we know the situation, we know we have a lot of cash, we know we've got to do something with it. We haven't quite figured it out yet. That's not the best answer in the world, but that's the truth.

Our next question is from Chip Dillon of Vertical Research Partners.

First question is, you guys pointed out a $0.27 improvement from price and mix. And just looking at the mill production, that would suggest $60 a ton. And I know a lot of that has to be the mix side of it with your forward integration strategy. But could you give us an idea on how much of the price increase you actually realized in the quarter and how much we would expect to see in the third?

Yes, let me take this one. We don't give the exact numbers in that regard. We view that as a company confidential information. However, as Mark said on the call, as of roughly today, we're done with the increase. And we have achieved a full passthrough. Now we've got no, obviously, none of the increase in the box plants last April because our price increase began May 1. So we're going -- when you throw it all together, we're going have to realize this is both the mill containerboard increase, about 40% of the total in the second quarter and the other 60% in the third quarter. And that's the best way that I can describe it. So if you can figure out, which I know you're capable of, what the total price increase is and how many times we produce, we've got about 40% in the second quarter and we'll get the other 60% in the third quarter. And that's what I'd given into specific dollar amount of increases.

And second question is, you mentioned you're -- you have a strong beginning to July. And one thing we noticed this morning is in the last couple of years, it seems like the box shipments, at least when you look at year-over-year and even in absolute terms, seem to be tilted more towards the beginning of a quarter and tend to fall off at the end of the quarter and we certainly saw that in June. But we've also seen it March and December and going back to September and June of last year. And I didn't know if something had really changed in the last couple of years that would explain that. And is that good or not good for the industry?

Again, if you just talk about PCA, our numbers are basically flat. If you look at the beginning of the month, the beginning of the quarter, we've been seeing a consistent run rates throughout the quarter. What is interesting about this July, July has started out stronger. Normally, the Fourth of July week holiday followed by the second week is typically a big vacation. Things are slow, but we've seen a good strong start this year. So again, we're strong but again, flat historically, through the latest quarters.

Yes, just to amplify on it. If you looked over our monthly box shipments, April, May and June, they're all pretty much the same, there wasn't a lot of volatility month-to-month. So pretty constant. It's usually more volatile than this. And beginning of the month, to end of the month, there's not been a lot of volatility there and what you've said, we have it seeing time to time, historically, but not in the past quarter.

Got you. I know we're in a time constraint, could you just talk real quickly about what you're accelerating in CapEx wise into this year? How much of the dollars and what shall we expect in terms of the box plant improvement?

Well, Tom, why don't you comment about some of the projects you're looking at in terms of just the opportunities.

This is Tom. We're going to accelerate about $25 million into 2013. Now, $5 million, it really doesn't have any real return in terms of income, but $5 million on infrastructure, which we just need to do and we might as well get that done now. $20 million is spread out in a lot of different projects and a lot of different plants, and again, as it relates to the previous discussion that we had regarding our customers and their demand and opportunities they present. And so that's where those are geared towards and the it's a handful of projects really spread out across the country.

Next question is from Mark Connelly of CLSA. Mark W. Connelly - Credit Agricole Securities (USA) Inc., Research Division: Just 2 things: You generated a lot more cash than we expected you do this quarter, I wonder if you could tell us if there's something different going on in working capital or somewhere nearby? And secondly, do you have a view on fiber cost in the second half and whether they're going to be affected much by the volatility you're seeing in lumber prices?

Rick, why don't you talk about cash first, then I'll talk about fiber.

I really didn't see anything that abnormal in the cash flow or the cash we expected. We were targeting a level of cash generation at the level we've set. Our working capital did not change significantly from the first to the second quarter. So Mark, there was really nothing unusual there. We may -- we do have some larger cash payments in the third quarter as Mark mentioned earlier, but it's really nothing unusual.

And regarding fiber, we're seeing basically flat trends currently on virgin fiber plan hardwood costs. We have few periods with wet weather that costs some momentary increases in southern states. But again, as we go into the middle of summer right now, earning's flat with the wood-based fibers. A little bit of ups, increase on recycle we're seeing around the country, but nothing dramatic.

Our next question is from Phil Gresh of JP Morgan. Phil M. Gresh - JP Morgan Chase & Co, Research Division: Just on the box plant side. You mentioned that this is the first quarter you didn't any acquisition impact on the box volume, so I'm just kind of curious how you're thinking about the pipeline for any additional box plant opportunities or whether the acceleration on the CapEx side of things means you're going to be more internally focused in the second half?

Well, again, if you think about it, I know Tom is constantly evaluating opportunities. And Tom, why don't you add a little color to that?

Well, Phil, I would say that as we said before, we are always looking at potential acquisition opportunities. We do have a high threshold for what they have to meet in order to make the acquisition. Of course, the quality, great quality and sustainable customer base, the quality management team and accretive earnings. So there are a lot of factors that have to be met. It's got to be of side that makes sense to us as well, quite frankly. But we're still looking out and we're exploring them. We have some opportunities that we're certainly looking at right now, and that's certainly an area that we will continue to deploy our capital.

And I guess -- and I'm going to have to add to that, all things being equal, an internal investment will produce a better return than an acquisition because if you just put a piece of equipment in the box plant, all of the overheads already been absorbed in that box plant. The only thing you're adding is a bit of a variable labor, a little bit of energy. So the margin on some of the things that we're doing and some of the things we've done in our internal investment program, produced very, very good returns. And we've had a good list of projects to look at. Tom and Mark have gone through them, they've picked the best of the best and said, "Hey, we need to accelerate these, these returns are that good. And that doesn't mean you don't keep looking for acquisitions, but an internal project, if it's a good one, because in the overhead absorption benefit, we'll beat an acquisition. Phil M. Gresh - JP Morgan Chase & Co, Research Division: And then just to the extent that mix has been helped, as you look at the numbers year-over-year, how much of that is just kind of driven by using more of that board internally and these initiatives that you think you had versus some other kind of mix-related factor that you you've been going after?

Yes, some of the mix improvement is a result of that, Phil, as you mentioned. There's no question about that. We're going to deploy our paper where we have the best returns, there's no question about that. But in addition, I think it's representative of quality of the account base we have. They put a very high demanded on us, they have value. And as a result of that, we expect to get paid for that. So I think it's a combination of all the above. I think in addition, the improvement in the pricing also as a result of containerboard increase on the mill side, which did go into effect starting in April. So we got some benefit from that as well. Phil M. Gresh - JP Morgan Chase & Co, Research Division: Sure, Okay. And then Rick, did you intend the last quarter that the maintenance tailwind from Q2 to 3Q, I believe, would be $0.06 a share and obviously, you guys had a strong performance this quarter. So is that delta still the same or does that change the delta?

I think that the delta is essentially the same. It's going to be somewhere between 2Q to 3Q after you net out the increase in repair job, amortization of an improvement from $0.06 to $0.08 per share.

Our next questions is from Mark Wilde of Deutsche Bank.

I have just 2 questions. One, Paul, could you just talk about the topic of the potential special dividend as opposed to just an ordinary dividend? And then Tom Hassfurther, are you benefiting at all in the box business from just the consolidation that's taken place among the bigger players and maybe customers wanting to add suppliers, additional suppliers?

On the dividend, we've never done a special dividend and I really can't comment on that, more than that because then people read speculation into that and I don't want speculation to occur when I really don't have anything to say on the subject. So we've never done one before and I will leave it at. And Tom,you want to take the second part of that?

Yes, Mark, I would say that I say we gained for many reasons, not primarily at all because of consolidation. I think more so because of our existing customer base. The fact that we've been able to align with some customers who have been able to grow through this period where the box business has been relatively flat. I think we've proven to our customers that we provide the best value and that's benefited us greatly.

Our next question is from Alex Ovshey of Goldman Sachs.

If you look at the consensus forecast for the U.S. economy, there is hope that we see a pickup in the second half of this year and then into '14. And as you look at your book of business and talk to your customers, do you see a potential pickup in your business in the back half of this year versus the first half?

I don't really have an answer to that, that's just speculative. Yes, we're not seeing anything in the market that says one thing or the other. Our business has been stuck in a rut pretty constant. The good news is it's the high earnings so we're so we're not complaining about it. But as I said early, we've been pretty consistent. We've not seen any change. We've heard, as you've heard and report up, so that if the feds change, it's policy. It may have an effect on the economy, et cetera, et cetera. So we're kind of like you, we're waiting to see what happens, but we don't know what's going to happen. But if it stays where it is, we'll be pretty happy. If it gets better, we'll be happier. So that's about all we get out on that. We really don't' know where the economy is going.

I would just ask in addition say in addition, Paul, our customers, like ourselves, were hopeful and optimistic.

Okay, fair enough. Let me ask you a question on...

Next question, please.

Our next question is from Scott Gaffner of Barclays.

Good morning.

Next question?

My first question is really a clarification around the capital spending.

Operator, is there any more questions in the queue?

Can you hear me?

Operator?

Yes. We're on. Can you hear Scott Gaffner?

We've lost the call.

Can you hear me?

Yes, I can hear you. I believe something happened to their line. [Technical Difficulty]

Now we're back on. First question is really just a clarification around capital spending. I think on the first quarter you mentioned $120 million of CapEx. And then $50 million for either some box plant acquisitions or some strategic investment. Should we think about the acceleration of the $25 million from 2014 and add it to that number, meaning, $195 million in total now versus the $170 million, or how should we think about that?

Yes. If you look at it, originally, we had $180 million of planned normal capital spending for the mills and box plants. We also had an additional $10 million that we had planned on this year for the Boiler MACT spending, so total of $190 million. But again, for the $180 million plus, the $25 million, that will be the total CapEx between the mills and box plants. And so again, about $205 million of normal plus the $10 million of the Boiler MACT.

And then just around the capabilities that you're actually adding to the box plant, are these customers specific capabilities, meaning, are you coming up with ways to hold customers accountable for the investments that you're making? Or are these more broad investments that you can utilize to serve broad customer base?

Scott, this is Tom. They are driven primarily by what in essence is customer demands that we don't have the capacity for. So we obviously will be able to fill the capacity of customer demands that we have existing and obviously have some potential to handle some additional demand.

Our next question is from Philip Ng of Jefferies. Philip Ng - Jefferies & Company, Inc., Research Division: A quick question. I mean, from a growth standpoint, your boxing business has obviously outpaced the market pretty nicely. I think it's around mid-single-digit rate for the last few years. Is the $75 million type of investment the new run rate going forward to sustain that growth rate going forward?

You can say that. We'll take advantage of opportunities. I think Tom said that's very important. Where we see demand opportunities and growth opportunities based on our customer activity, we'll continue to deploy capitals for that growth needs. So the dynamic manner, we will be very flexible in how we deploy capital into the box plants. Again, it's a very, very dynamic process. And CapEx will slow down as we get towards the 90% -- not mid-90% to 93%, 94% integration level. As we approach that obviously, our need for additional box plant capacity will diminish unless we add more milk capacity or unless we expand our mills and then you're in the game, the same cycle, because our strategy revolves very strongly about -- around high integration level. So it's dynamic, you would expect it to slow down. And then, it could pick up again, depending on what we do on the mill side of the business. Philip Ng - Jefferies & Company, Inc., Research Division: Got you. And that's actually a great seg-way. So on the mill side, do you guys have a lot of projects that are still available that you can easily add some capacity down the road or would you actually have to step up spending pretty meaningfully to get that incremental capacity?

We said this before. It's all related to the amount of capital you want to spend. So capital per ton of capacity. And so you can add capacity virtually to most mills. It's just how much -- is it going to cost and how much are you willing to spend? How valuable is that incremental fund? Yes, another way you can increase capacity at percent, 2% a year. For not a lot of capital. But if you want a big pop in capacity, that cost, that's a big pop in capital. And so yes, you just have to determine that you go through this, what's the best way to do it. Maybe accelerate creeping a little bit, maybe do a big mill expansion, maybe make an acquisition. That will depend on the factors in play at the time. Philip Ng - Jefferies & Company, Inc., Research Division: Got you. Just probably still too early to call that.

Yes, again, as we've said, until we get that 91% integration level in the low 90s, and then understand what our balance is going to be for outside sales with remaining funds, we're not making any plans for any large mill expansions. Just to add to that. As you've said,we've been -- our demand is -- and our growth has been, I think, very good the last 3 years since we embarked on this project, but we're only halfway there. This is an ambitious project to get from 80% integration to the mid-90s. It's not something you do quickly because every piece of business we expand, we don't want tons per tonnage sake. We want box business that comes from customers who appreciate and pay for the value we provide. And so we're only looking for good business to fill up our system, not business in general. And that makes this objective even tougher. But we are on page. I think we're doing about as we expected and we're going to finish this before we move on to something else. Philip Ng - Jefferies & Company, Inc., Research Division: Okay. That's really helpful. And just switching gears a little bit, just to broader emerging markets and timings like Brazil, China, Middle East, seem to have slowed a little bit. I know you guys don't export too much abroad, but have you seen your export business slow down a little bit on that?

We haven't seen this really slowdown, but again, during the second quarter we intentionally decreased our outside sales. In particular, some of the export tons to make sure that we took care of our own internal box plant. But Tom, if you think about last year into this year, we're probably the last guys to answer that question quite frankly, just because of the position we've taken in the export market. We cannot handle the demand we have right now and we have shrunk our supply base to the export market as it is. So all I can tell you is what we see right now have no idea what somebody who's really large in the export market and participates in all the markets around the world, what they see. In addition, I would just add that as Mark made mention in his comments, the price has risen significantly or certainly appreciably in the export market as well, at least the one's we're involved in.

Our next question is from Al Kabili of Macquarie.

Just 2 questions. Mark, first is just if you could help us on the box plant investment. Just help us frame what that means for your capacity this year? How much that boosts your capacity this year or how does that help your integration rate?

Well, if you look at year-to-date, we are sitting at an average of about 87% integration. And we believe in what we're forecasting internally is that the integration level will remain about 87% due to the remainder of the year in that area. So as far as for a full year average.

That's really helpful. And is this investment related more to improving throughput, or some of this is just increasing your capabilities that's going to help with the mix component of your business?

Both. And just as Paul said back on the CapEx, we had a program where we spent $80 million to $100 million over the last couple of years to increase our integration level. This is only $25 million of capital. So you're talking about a couple of percent increase in integration level at most year. So this is not a big, big project, don't misunderstand that. We simply accelerate it about $25 million from last year to this year, and it's all equipment. It's a piece of equipment that we're out of capacity on. It's a piece of equipment that we need because we got a new piece of business specific to a customer that we could use in other places. And as Tom mentioned, about $5 million is just for infrastructure improvement. When you're running box plants, some of them, as far as we are, you've got to make sure the infrastructure is still able to support it. If it means that another track top or an improvement in -- so we can get more input through the whole plant, et cetera, et cetera. But again, it's only $20 million for equipment, probably in 7 or 8 plants, and it's going to -- on the margin, increase our integration level a couple of percent but it's not going to increase to 10% because of the amount -- we're only spending $20 million in capital, it's not that much money, but the returns are all very good.

Okay. And that's $20 million on top of the $50 million? So $70 million?

Yes. And we put that in really on top of the $50 million because we'll do that and we'll make an acquisition. And that's the plan for this year. As Tom said, we're still working on the pipeline. That number could change too if a really good acquisition came up, but we've got no comments on that at this point.

The next question is a follow-up from George Staphos, Bank of America Securities.

My third question, only question here, is this: If we look at the level of operating profit relative to revenue and subtract once on the other, you get cost both this quarter and the year-ago quarter. Cost went up about $50 million some-odd, yet production declined for all the maintenance outage reasons. As you think about, maybe the question more for Tom, as I listened to what your number is kind of the cost factors in the quarter, would much of that increase in cost be a function of mix, i.e., as you've picked up business, you've picked up more profitable business but business that in turn, requires you to add more value to the profit before you sell it to the customer. What would drive that increasing cost relatively lower production year-on-year that you saw in quarter?

I'll take it. This is Paul. Now, let's not relate it to that. We've told you where the cost items that went up. Obviously, energy prices are up. Coal, gas, labor and fringes are up. Our hard incentive compensation payments will be up. If we continue with this rate, we'll make appreciably more earnings than we did last year and our bonus plan is a function of our profitability. The more profitable we are, the higher bonuses we can play until our labor and benefits are up, but there's nothing related to the mix on that. That is the short answer to your question.

Okay. I'll follow-up offline because the numbers on a per share basis don't add up quite to the overall level of cost increase. But in any event, good quarter and luck on the third quarter.

Yes. Let me comment on that. We don't understand the intricacies of every analyst model, so when you throw a model question out on us, we don't necessarily agree with what you're saying, not because we don't believe it, we just don't understand your model. So it's hard to respond to questions like that. Unless we do it offline and you tell us what your model means and we can respond to that as long as it's publicly available information.

Sure. I was just referring to what you published in terms of revenue and operating profit.

A follow-up from Chip Dillon of Vertical Research Partners.

Just a quick one, for Rick. On the black liquor credits, you mentioned there's just a little bit left and could you just give us a range of what the possible outcomes would be based on the Filer City audit? Could there be more or could there be -- where it would be reversed some of these credits?

Jeff, as far as anymore, no. We have recorded what we expect what we will get and we have the $4 million remaining. And if you look in our 10-K, it does layout how much we have built in, in the event that it does -- if there's a lot of which we do not believe that will be the case. And as we've said last quarter, we believe the worst case would be $120 million payback if no credits were allowed. And we don't anticipate that.

Got you. And when do you think this gets resolved? Any update on that?

From our standpoint, we are still hopeful that it will be resolved by the end of the year.

I have a follow-up from Al Kabili from Macquarie.

Just a quick one for you, Rick, on pension. With the changes to the plan, any thoughts on how that influences the pension expense?

It doesn't really influence the pension expense that much. I did mention on a voluntary pension contribution that we're making irrespective of the change in the third quarter, but it does not impact the pension expense.

Okay. Thanks for that clarification. And with the black liquor $4 million left, should we just be assuming your cash tax rate goes close to your 36% book tax rate. How should we be thinking about it or is there's some depreciation items that could change that?

There are some differences between tax depreciation and book depreciation, as well as some credits that are available under the normal course. I would say our cash tax rate reverting back to about 32%, probably about 28%, on third quarter a little over 32%.

I see there are no more questions. Do you have any closing remarks?

Thanks, everybody, for joining us today, and we look forward to seeing you on the next call on October. Have a good day. Thanks.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.