Jul 21, 2009
Executives
Paul T. Stecko – Chairman and Chief Executive Officer Richard B.
West – Chief Financial Officer
Analysts
Chip Dillon – Credit Suisse Mark Weintraub - Buckingham Research Richard Skidmore – Goldman, Sachs & Co George Staphos – Banc of America-Merrill Lynch Mark Wilde - Deutsche Bank Securities Mark Connelly - Sterne Agee [Dan Wewer] - Morningstar Andrew Fineman - Iridium Asset Management
Operator
Thank you for joining Packaging Corporation of America's second quarter 2009 earnings conference call. Your host today will be Paul Stecko, Chairman and CEO.
Upon conclusion of the narrative there will be a question-and-answer session. I will now turn the conference over to Mr.
Stecko. Please go ahead when you're ready.
Paul T. Stecko
Thank you and good morning and welcome to Packaging Corporation of America's second quarter earnings release conference call. I'm Paul Stecko and with me on the call today is Bill Sweeney, who runs our Corrugated Products business, Mark Kowlzan, who runs our mill operations, and Rick West, our CFO.
And as the operator said, once we conclude the presentation, as always, we will open the call lines up and take any of your questions, so let me get right to it. Yesterday we reported second quarter earnings of $109 million or $1.07 per share.
Second quarter earnings included income of $80 million or $0.79 per share from alternative fuel mixture tax credits for the period from December 13, 2008 through June 30, 2009. Our net sales for the second quarter were $549 million compared to $616 million in the second quarter of 2008.
Excluding income from alternative fuel mixture tax credits, net income was $29 million or $0.28 per share versus second quarter 2008 earnings of $35 million or $0.34 per share. This $0.06 per share decrease in earnings compared to last year was driven primarily by the downtown in the economy, which lowered our Containerboard and Corrugated Products volume and increased down town, thereby reducing earnings by about $0.14 per share as well as by higher costs for labor and benefits, which reduced earnings by about $0.02 per share and pricing, which held up quite well, reducing earnings by only $0.02 per share.
These items were partially offset by lower costs for recycled fiber of $0.05 per share, lower transportation costs of $0.04 per share and lower energy costs of $0.03 per share. Net income for the first six months of 2009 was $135 million or $1.32 per share excluding the alternative fuel mixture tax credits.
Earnings were $54 million or $0.53 per share compared to $67 million or $0.65 per share in 2008. Year-to-date, net sales were $1.06 billion compared to $1.19 billion in 2008.
Our earnings were significantly higher than we expected entering the quarter. These higher earnings were basically the result of two things - higher volume, which improved earnings by $0.10 per share more than we originally expected, and lower energy costs, which were $0.05 per share better than expected.
As we reported on our first quarter earnings call, our Corrugated Products volume had increased significantly during the first half of April over our first quarter shipments. The question at that point was would this pickup in volume be sustained?
Well, it was sustained, not only in April but also through the entire quarter. And our Corrugated Products volume was up 10% or 40,000 tons over the first quarter, which was much higher than our normal seasonal demand pickup of 2.5% to 3% over these two quarters.
This pickup in demand has carried into July and for the first 10 work days our shipments are down about 5.4% compared to July 2008. But this is better than our June shipments year-over-year, which were down 6.5% compared to the previous year.
During the quarter we also saw a significant pickup in outside sales of containerboard, with domestic sales up 24% or 11,000 tons over the first quarter and export sales up 14% or 5,000 tons. We had originally expected about 90,000 tons of mill downtime comprised of 50,000 tons from our annual mill maintenance outages and 40,000 tons from market-related downtime.
With the pickup in demand, we ended up having to take only 10,000 tons of market-related downtime. This allowed us to increase our mill operating rates from 85% in the first quarter to 91% in the second quarter while at the same time dropping our containerboard inventories by 2,000 tons.
Taken together, all of this improved our earnings by $0.10 per share over our original guidance. With regard to energy, we ran very well in both our mills and our box plants.
What was especially significant this past quarter was that we had to start up three separate mills after annual outages. Starting up and then running well without problems after an outage, which we did, has a very positive effect on efficiency and energy consumption.
We also completed several projects early in the quarter that produced even better results than we had originally assumed. One project involved upgrades to our combustion control capabilities on our big bark boilers at both Counce and Valdosta, which allows us to now produce about 25% more steam burning the same amount of bark as before the upgrade.
As a result, we can now run Valdosta on 100% wood waste and black liquor and at Counce we've been able to reduce fossil fuel usage to only about 15% of our boilers' needs. We also completed a project at our Counce mill during its annual outage in April which allows us to increase our self-generation of electricity and thereby reduce purchased electricity by over 15%.
Finally, energy prices were a little lower than expected and our box plants ran very efficiently, which also helps reduce energy consumption. Taken together, all of these energy items amounted to about $0.05 per share better than we originally anticipated.
Our mill production was 555,000 tons compared to 614,000 tons in the second quarter of 2008 and that's down 59,000 tons. Annual maintenance outages at our Counce, Tomahawk and Filer City mills reduced production by about 50,000 tons and market-related downtime reduced production by about 10,000 tons.
In the second quarter of 2008 annual maintenance outage downtime was only 12,000 tons and we had no market-related downtime. I should add that we now have all of our 2009 annual maintenance outages behind us.
Our Corrugated Products shipments compared to the second quarter of 2008 were down 7.8% in total and down 6.3% per workday. But as I stated earlier, this was much better than this year's first quarter, where our total shipments were down 12.6%.
Outside sales of containerboard were down 30,000 below last year's second quarter, with domestic sales down 17,000 tons and export sales down 13,000 tons. The Fiber Box Association reported last Friday that industry corrugated products shipments compared to last year's second quarter were down 8.5% per workday and 9.9% in total.
Compared to the first quarter, however, industry shipments were up 5.3% in total, while, as I mentioned earlier, PCA shipments were up 10%. With this improvement in demand, industry containerboard inventories fell by 180,000 tons during the quarter and ended the quarter at 2,246,000 tons.
And this is the lowest June-ending inventory in almost 30 years. Industry operating rates also improved each month during the quarter, with April at 79%, May at 83%, and June at 91%.
We see these industry results as well as our results as positive indications that containerboard supply and demand remains in very good balance and demand continues to pick up, although still down year-over-year. Industry published prices for containerboard dropped $15 a ton in April, an additional $10 in May and were flat in June, ending six consecutive months of price reductions by trade publications.
These lower published prices reduced our second quarter earnings by about $0.02 per share compared to last year's second quarter and will also impact our third quarter as the full impact of the second quarter price reductions are fully realized. Turning next to costs, second quarter 2009 recycled fiber, energy and transportation costs were down significantly from second quarter 2008 levels.
Industry published prices for old corrugated containers or OCC, excluding delivery costs, were down from $126 a ton in the second quarter of 2008 to only $49 a ton in the second quarter of this year. And that's a 60% drop.
This reduction in prices improves our earnings by about $0.05 per share compared to last year's second quarter earnings. As a result of the economic downturn, delivered prices for OCC in the Southeast dropped below $50 per ton in January, a price level not seen since the early 1990s.
But by June, as a result of less waste paper collections because of low prices and greater demand, the price of OCC had risen to about $85 a ton delivered and it's now moved up another $15 a ton to $100 a ton delivered in July. These higher OCC prices will adversely affect our earnings in the third quarter, but fortunately for us PCA will be less affected than most other producers by this increase as we use much less OCC than most other producers in the industry.
Our cost of virgin fiber, on the other hand, was essentially flat with both last year's second quarter and this year's first quarter. Transportation costs were down about $0.04 per share compared to last year's second quarter, driven more by availability of trucks and rail with the economic downturn as well as by lower diesel prices.
Our energy costs, including both purchased fuels and electricity, were down compared to last year's second quarter, improving earnings by $0.03 per share, driven primarily by operations improvements and lower prices. Chemical costs compared to last year's second quarter were actually up about $0.01 per share.
We did not fully realize the benefit of lower caustic soda prices in the second quarter due to contractual commitments and working off some high-cost inventory on hand, but full realization of lower caustic soda prices is expected in the third quarter. Higher labor and benefit costs reduced second quarter earnings by about $0.02 per share compared to last year's second quarter.
Now turning to cash, capital expenditures were $22 million during the quarter. We ended the quarter with $193 million cash on hand, up $53 million from the end of the first quarter.
We received no cash payments from alternative fuel mixture credits during the quarter; however, we did benefit from $19 million of these credits, which were used to reduce our second quarter cash tax payments. Our total available liquidity at the end of the quarter was $365 million, including cash on hand, and $172 million in borrowings available under our credit facilities.
Our total long-term debt at quarter end, excluding capital leases, was $658 million net of debt discounts of $1 million, the same as the end of the first quarter. To sum up the first half of the year I'd have to say I'm pretty pleased that our operating earnings excluding income from alternative fuel mixture credits of $0.53 per share is down only $0.12 per share from last year's results despite the severe downturn in the economy which has caused us to take record containerboard mill downtime.
Both our mills and box plants have performed extremely well during these very difficult and challenging market and operating conditions, and the black liquor credits we're receiving may allow us to do some important things that otherwise would probably have to be delayed. Looking ahead to the third quarter, earnings will be impacted by lower selling prices resulting from previously published changes in prices for containerboard.
Sales volumes are expected to be higher but some market-related downtime is still likely. We also expect the cost of recycled fiber to be significantly higher, with some offset from lower caustic soda prices.
Considering all of these items and excluding any income from alternative fuel mixture tax credits we estimate our third quarter earnings to be at about $0.24 per share. With that, we'd now be happy to entertain any questions, but I must remind you, as always, that some of the statements we've made on this call constitute forward-looking statements.
These statements were based on current estimates, expectations and projections of the company and do involve inherent risks and uncertainties, including the direction of the company and those identified as risk factors in our annual report on Form 10-K on file with the SEC. Actual results could differ materially from those expressed in these forward-looking statements.
With that, I would ask the operator to please open up the phone lines and we will take your questions.
Operator
(Operator Instructions) Your first question comes from Chip Dillon – Credit Suisse.
Chip Dillon – Credit Suisse
Could you talk a little bit about the timing of the cash payments from the alternative fuels credit? You mentioned I think you effectively got $19 million of the $80 million of benefit in the second quarter.
Does that mean that you already are owed, if you will, $61 million that we haven't seen on your balance sheet yet going forward?
Paul T. Stecko
I'm going to let Rick take that. I'll let him answer that.
Richard B. West
That's correct, Chip, that we have not received those amounts at this point. And it's sitting as an asset on our balance sheet, but no cash has been received.
Chip Dillon - Credit Suisse
I noticed it looked like you recognized $76 million of it sort of above the tax line and about $4 million or $5 million of it as an offset to taxes. Why was that?
Richard B. West
Chip, really it was the full amount of $80 million. The other $5 million that you're referring to, the net, is what our expense would have been for other expense items, similar to what you saw last year in the second quarter of 2008.
And, you know, what I would say on that is that many of the companies that are publicly reported on the alternative fuel mixture tax credit, they've appeared to use the excise tax method, which allows you to apply for an immediate refund of the credit. You can get the cash, which is taxable.
A second method, which we are using, allows you to take these credits against your income tax owed. As Paul said earlier, we did reduce our second quarter cash tax payments.
And both our independent public accountants and other advisers have concluded, based on their assessment of similar credits and circumstances, that no provision for income taxes is required at this point and that these credits may not be taxable.
Chip Dillon - Credit Suisse
Because you have other income you can, in effect, use them against?
Richard B. West
That is correct.
Chip Dillon - Credit Suisse
And then the second question is it looks like you're getting about $12 million a month; is that a good way to look at it?
Richard B. West
You know, we really haven't commented on that. We started up in the partial month in December and it probably varies somewhere from $12 to $18 million a month depending on as we ramped up and put this in full production.
The rate's a little higher than that; I'm going to estimate $17 million, $18 million a month.
Chip Dillon - Credit Suisse
And as we look at the third quarter, you mentioned, obviously, the OCC -
Richard B. West
Now let me just qualify. The reason I was a little hesitant to ask, you know, you don't get as much in a month when you've got the mill down for annual maintenance outage.
This assumes that you're running full; you don't have any marketing downtime. So it's not a steady number because our production rate obviously affects it, Chip, but in the ballpark $17 - $18 million a month.
Chip Dillon - Credit Suisse
And I guess just to make sure we all understand this on the same page, because of the way you're accounting for it - which certainly will benefit you more than the excise tax method - is it fair to say that you probably won't really get the full benefit on the balance sheet until probably some time in 2010, assuming it were to end at the end of this year?
Richard B. West
I think that's a good assumption, Chip.
Chip Dillon - Credit Suisse
Okay. And then this is the last question.
As we look at the third quarter, you mentioned the headwinds with the published prices having edged down in April and May and the OCC going up. Could you give us an idea of how the energy investment; you made in Counce and Valdosta will phase into the numbers?
Is it pennies a share that we can see and does it get phased in in the third and fourth quarter? And the same for the cost of chemicals going down.
Paul T. Stecko
Well, the answer is definitely yes, it gets phased in to the third quarter. We didn't get a full quarter's worth but we got almost a full quarter's worth because we took our shutdowns early in the quarter.
Counce, which is by far the biggest, went down in mid-April and so we got 2.5 months roughly on that one. And so, although we didn't get it all, let's say we got two-thirds of it, to make a rough guess, and that will stay with us in the third quarter.
Chip Dillon - Credit Suisse
And beyond?
Paul T. Stecko
And beyond, yes.
Operator
Your next question comes from Mark Weintraub - Buckingham Research.
Mark Weintraub - Buckingham Research
Paul, two things. First, you had mentioned that the black liquor credits were going to enable you to do a few things that you perhaps otherwise were going to be pushing back, if you could elaborate on that.
And perhaps more generally, with your cash balance growing, with your cash flow still very strong, what are you prioritizing for the use of your cash at this point, in particular when returning anything to shareholders, what's your thought about share repurchase versus increasing the dividend again?
Paul T. Stecko
Well, it's a long answer to a long question but let me try to do it within some time constraints. I think the good news, you know, we did lower our dividend at the beginning of the year for a lot of reasons, one, the economic uncertainty.
Bank covenants, we had about $200 million of free bore, if you will, on our covenant of net worth, you know, we had a net worth at the beginning of the year about $684 million; we had a bank covenant to be north of $500 million. That was a fair amount of headroom, but who knew how bad things would get?
The good news for us is we ended the quarter with a net worth of about $794 million, so we're up $110 million, so we're up about $300 million now. And so we have definitely gone in the right direction there.
In terms of cash, we view the funds from the alternative fuel mixture credit as a one-time item. That thing is set to expire at the end of the year; it may end earlier.
So that is not something obviously that's a continuing stream of income and we treat that as such. In terms of the longer-term, the ability to buyback shares and increase the dividend will come from continuing income.
You know, the black liquor credits, we've talked about it and I think it's really provided a lot of companies a lot of good. We've got some companies in this industry that have teetered on or have gone bankrupt, and I think this credit had arrived at the right time to help them through difficult situations.
In our case, fortunately, we're much stronger financially and we're looking at using that credit, those last liquor credits, I think in a way the government would have conceived of as a good use of the money and we think it's a good use of the money. We've got a couple of projects, one at Valdosta, one at Counce, that can enable us to, with the same amount of black liquor, produce 50 megawatts more electricity, and we are probably looking very hard to use most of that if not all of that black liquor money to fund these two projects, so it'd be on the order of a couple hundred million dollars.
We think the return is on an after-tax basis is over 20%; it could be even higher if some of the energy legislation goes through, specifically Section 45, which gives credit to producers of green electricity, you know, primarily the utilities, but we believe the forest products industry would also be included in this credit, which encourages people to produce and sell green energy. And the energy that we would produce at both Counce and Valdosta would meet the green criteria in that it's produced solely from black liquor and wood waste, and what this would do is produce then a stream of income for the future that then we could consider operating income and use for such things as share buyback or increase dividends.
So we're excited about the possibility. We're still studying it; we haven't made a decision.
That'll happen later in the year. And we view that as a fairly low-risk investment because it doesn't involve selling any more tons or things of that nature; it just involves reducing costs, which you can control a lot better.
And we think electricity costs are going up a lot. At that point, then, you look at all the income you have and, as I've said many times, we view both share buyback and increased dividends as a very shareholder-friendly thing to do.
A lot will depend in terms of the mix of those two items - and I think we'll continue to do both - on what the new tax laws do and how they treat shareholders with regard to both of those things. So that's a longwinded answer, but it's a complex situation.
Mark Weintraub - Buckingham Research
Just one quick follow up. The electricity you'd be producing, would that all be for internal consumption or would you potentially be selling some or even a lot of that back into the grid?
Paul T. Stecko
No, this would be for internal consumption. Basically at Counce and Valdosta we could produce 100% of our own electricity and what the Section 45 legislation that's being introduced, it gives you the ability to either sell it or use it yourself because the Congress does understand if it's produced it doesn't matter if the utility sells it to you and it's totally green or if you produce it yourself and it's totally green.
And the law makes a lot of logic. I guess it's in Congress; you never know where it's going to go, but we're fairly optimistic.
This thing makes a lot of sense if you're a supporter of green energy. It doesn't make or break a project, but it really enhances the return.
Operator
Your next question comes from Richard Skidmore – Goldman, Sachs & Co.
Richard Skidmore – Goldman, Sachs & Co.
Can you just talk about the deflation that you're expecting to see in the third quarter and specifically are you anticipating that you'll see any deflation in wood fiber costs as you go into the back half of the year?
Paul T. Stecko
No. As I said, our wood costs have been fairly stable for about the last year.
They're not going up, they're not going down. And fuel costs have dropped; that's helped.
But it's kind of reached a plateau and, if anything, fuel costs have gone up a touch. We expect higher OCC prices.
Our average price was about $75 a ton in the question; it'll probably be $100 to $105 a ton in the third quarter, so that's roughly $25 to $30 a tone. That's kind of what we're looking at.
We'll get some offset in caustic soda. Other than that, we think things cost-wise will be the same quarter-over-quarter.
We may use a little less energy with warmer weather, but not much because where our mills are in the South that second quarter's already pretty warm. So not a lot of changes in cost except for those two items.
Richard Skidmore - Goldman, Sachs & Co.
Just one other question. Where did you see the strength in the quarter in your box shipments?
Was there any particular area of surprise? And as you look out to the third quarter, do you get the sense that you might see continued surprises on the upside or are you feeling pretty good about how your volumes are trending here?
Paul T. Stecko
Well, I would say - and, Bill, chip in if you've got anything to add - but, no, our volume was strong and picked up all over. We didn't have any particular regions that were weak.
We've got about seven regions of the country, each run by an area general manager. All performed very, very well.
It's been slow, steady improvement. As I said last call, it's like a light went on in April and it stayed on.
It's getting a little brighter, but it's not blinding yet. We're hoping it gets blinding, but we're not there yet.
So we're just seeing slow, steady improvement. August and September historically are very strong months for us; July, it's kind of a normal month and then we usually get a nice pickup in August and September.
So, you know, in April, in May, we were up about - April we were up about 6.7% - excuse me, we were down 6.7% over the previous year, May, down 5.6%, and then June down 6.5%. But you've got to be careful with that because there's a large difference in the number of days in these months; it's a weird year.
But on a total volume point of view, June was by far our strongest month and I think that's also the case for the industry.
Operator
(Operator Instructions) Your next question comes from George Staphos – Banc of America-Merrill Lynch.
George Staphos – Banc of America-Merrill Lynch
Paul, I want to come back to the energy projects, both the ones that you've been working on and the ones that you might work on funded by the black liquor credit. What type of change might it mean for your mix of energy consumption and source over the next few years if, for example, natural gas was, I don't know, round numbers 25% of volume and BTUs that you'd use in prior years.
What could that number drop down to over time? How much could coal, bark and steam ultimately reflect or represent in terms of your overall mix?
Paul T. Stecko
Well, not much because we're already there on not using much fossil fuel. For example, today at Valdosta we use no fossil fuels in our boilers.
We do put a touch of diesel in with the black liquor, as is required to qualify for the credit, but other than that we don't use any fossil fuel. What would happen at Valdosta is that we have three very old recovery boilers that would be replaced by one very high-efficiency recovery boiler.
And with the same amount of black liquor we could produce 70% more steam than with the three old boilers. And that 70% more steam can drive a turbine generator that would produce about 25 megawatts of electricity.
So basically what the investment gets you is 25 megawatts of free electricity that should also qualify - if the Section 45 legislation goes through - a tax credit on that in addition to producing it for nothing. And so it's really efficiency; that's why there's not a lot of risk in terms of where the prices of things are going.
And then of course there's some other savings there also in the project in terms of manpower required, maintenance cost, etc. But primarily it's just a big, big step up in efficiency.
And the project at Counce is much smaller but, again, we have the ability with almost basically the same amount of steam to produce a lot more electricity. And what's going on in the country, there's a lot of utilities that simply can't get a coal-fired power plant permitted.
We think with government incentives for utilities to burn more wood instead of coal, the cost of that - it's more expensive to burn wood than coal; probably today it's twice as expense - and the utilities will have no recourse but to pass that onto the consumer. We're a consumer.
And so we see escalating electricity prices and that's why if things go the way we think now is the opportune time to become self-sufficient in electricity production at our big liner board mills.
George Staphos - Banc of America-Merrill Lynch
That makes sense, Paul, and that's been a theme you folks have been talking about, I guess, for the last quarter as well. That's helpful.
Just out of curiosity, the net gas consumption in the quarter, then? If you're pretty much where you'd be, were you at 20% of total MMBTUs, just out of curiosity?
Paul T. Stecko
No. In our boiler it's virtually none.
Boiler consumption, during the shutdown we may keep a pilot light in a boiler just for safety reasons, but we're - Rick can look up the number, George; as soon as we get it I'll come back on the line and report that number, but it's so small Rick can't even find it.
George Staphos - Banc of America-Merrill Lynch
Okay, that's fine. I'm just comparing it to what you have in your 10-Ks and 10-Qs.
Paul T. Stecko
Yes, he just told me it's about 4% or 5% max, natural gas and fuel oil. And, again, a lot of that is for pilot lights; a lot of that's for when you start up you start up on some gas and oil.
But the steady state numbers probably half that.
George Staphos - Banc of America-Merrill Lynch
Switching gears to just the market, if we think about your operations and then maybe more broadly if you can thing about the industry, we're seeing steady progress. You haven't gotten to, as you put it, a blinding light type of environment, but what do you think about our ability to meet a potential demand surge down the road?
Inventories are low; you've seen some stabilization in pricing. Suppose, as strange as this might have sounded two or three months ago, suppose you see a demand surge and you start to see some pricing pickup, how do you think your operations could handle that kind of environment a la, say, 2004 and the same, for that matter, from an industry standpoint?
Paul T. Stecko
Well, the situation's a lot different - well, let's put it's a lot different than 1995, when demand really took off, because the industry didn't have any capacity. The situation here, let me comment on inventories.
I did read in a trade publication the other day and they're talking about industries - they're a little lower than last year. And that's the mother of all understatements.
They're at a 30-year low. And so, yes, they're lower than last year, but a 30-year low it's, you know, every 30 years you get below that.
I mean, it's a long time. So inventories are incredibly low; they're not just a little lower than last year, in my opinion.
But I think the good news is if there is a surge in demand the industry only ran at a 91% operating rate last month, 85%, so the industry has capacity, we have capacity - we ran at 91% - so if our demand picked up 9%, which would be obviously a mammoth increase, we have the capacity to handle that. So the situation that's different is if the industry was running at 98% at this inventory level, I think that would be more cause for concern than when you've got some room in your operating rates, and we certainly do.
George Staphos - Banc of America-Merrill Lynch
Paul, last one and I'll turn it over. Realizing it's tough to project into the future in these businesses, if you keep at this run rate that you're running at in July, are we looking at year-on-year increases in volumes by the time we get into the fourth quarter?
Paul T. Stecko
You mean for the year or just for the third quarter over the second quarter?
George Staphos - Banc of America-Merrill Lynch
Either third quarter versus third quarter or fourth quarter versus fourth quarter, when do you think we finally see an actual percentage of positive increase in shipments?
Paul T. Stecko
I don't know.
Operator
Your next question comes from Mark Wilde - Deutsche Bank Securities.
Mark Wilde - Deutsche Bank Securities
Can you give us a little bit of color on that export market, including the export prices? I mean, it seems to me it's kind of interesting that export volumes seem to be picking up at a time when we still see trade papers report very low export prices, so I'd just like to get your perspective on that.
Paul T. Stecko
Well, you know, yes, I saw a piece you wrote this morning and I think you got it just right when you talked about the weak dollar helping. And so I certainly think over the last few months the dollar weakening after getting real strong - well, not real strong but relatively - has helped the export business.
And, you know, there are other countries that have stimulus programs and some of those countries' stimulus programs actually appear to be working better than ours. And that's helped with the export business.
So it's just picked up and I think it's a combination of those things. Other countries have done things to stimulate their economy; they're working, to some extent, just like ours is working to some extent.
And the weaker dollar certainly makes you more competitive in export markets. I think it's a combination of those two things.
Mark Wilde - Deutsche Bank Securities
And then you talked about the projects, the energy projects, at the two Southern mills, but I wondered if you could just update us on any thoughts at the two Northern mills, including that bio refinery up at Siler City?
Paul T. Stecko
Sure. Well, you know, the Northern mills, the two medium mills, consume a lot less electricity than the big Southern mills, primarily because SemiCam is SemiCam; it's not cooked fully.
You use probably in a typical SemiCam furnace 40% OCC. It's a blend of the two.
So your energy needs are lower. And we do not generate as much electricity ourself; we tend to buy more in the Northern mills simply because of their size and the fact that they don't have recovery boilers that can churn out loads and loads of energy.
But the bio refinery is doing well. The one thing - I wouldn't call it a disappointment, it's just economic fact - we have not ramped it up.
You know, we were sitting at about 70% of capacity this time last year and we're still running it at about 70% of capacity, not that it can't run more but the price of OCC got so inexpensive that it made sense to use more OCC than produce bio gas from liquor. And it looks like that situation is turning, with OCC going to now be probably over $100 a ton in the third quarter, and we're looking forward to ramping that thing up and getting to 100%.
With regard to Tomahawk, I would just comment that as a result of wood costs in that part of the world, upgrades on a wood waste boiler that we're looking at, we're pretty optimistic about the cost for Tomahawk. Last quarter our cash costs at Tomahawk were the lowest in the last five years as a combination of those things.
So it's not as dramatic a picture on energy in the Northern mills just because they're medium mills, but we're fairly pleased with the progress we've been able to make.
Mark Wilde - Deutsche Bank Securities
I was kind of surprised in your comments on virgin fiber because some of the trade papers are actually showing a reduction in Southern pulp wood costs over the last couple of quarters and it doesn't sound like you're seeing that. Are there contractual arrangements that are making things a little different for you?
Do you think the trade papers are a little bit off there? What's the situation?
Paul T. Stecko
No, you know, it's a very regional thing. I think you have to look at where you started and where you are.
You want to try to keep your loggers - prices fell. Our prices fell, then they went back up.
I think the one thing that has affected our wood costs and maybe more than others is that we had some very, very bad weather in the South in April and May in terms of rain, wet weather, etc., and with the sustainable forestry initiative, it's much harder, if you want to comply with that and we certainly do, to get into woods too quickly after wet weather, get too close to streams that may have overflowed, and so wet weather can increase your costs. But I don't see anything contractually.
We don't have a lot of wood under long-term contract. We float with the market.
I think it's just where you are in the region. At one time one region's a little lower in cost than the other.
And it's hard to pick a point in time and compare companies because they come at it in different ways. So ours is flat.
We're pretty happy where they were a year ago and we're pretty happy that they've stayed where they were.
Operator
(Operator Instructions) Your next question comes from Mark Connelly - Sterne Agee.
Mark Connelly - Sterne Agee
Paul, I don't think I've ever heard you sound as bullish as you sound right now. A couple of questions.
First on the balance of internal and external sales, can you help us understand where that is. You like to sell into the outside market and I'm just curious where that balance sits today and whether it's where you'd like it to be given how cruddy the economy is.
Paul T. Stecko
Our basic balance has always been rough number about 18%, 18% to 20% of our sales go to outside. And usually it's been two-thirds domestic, one-third export, and that's where it is basically now.
In the export market we're not as big a spot player as others. We try to have a longer-term relationships.
Some of the things we like to sell, because we have capabilities and there's not as much supply in some of these products, super heavyweights, for example. We also sell some specialty product, a very high quality, to Japan, for example, where some of the requirements are exacting.
But our biggest markets have historically been Europe and South America. We do sell some product into China.
And obviously, of all the markets I've mentioned, Europe has been by far the weakest because of severe over capacity on the continent. So that would be the only noteworthy thing; we are selling less into Europe than we have historically.
Mark Connelly - Sterne Agee
You don't typically tend to give us a whole lot of color on the changes in your mix, but I'm curious with the 10% volume pickup, how much of that is simply increases in volumes on existing orders from existing customers and how much is that, you know, relatively new-ish orders if you'd think about it that way? I'm just trying to get a sense of who's doing the order.
Paul T. Stecko
The overwhelming majority of our increase in volume is more business from existing customers. They've added more business, they need more boxes, we sell them more boxes.
That would be the vast majority of our increase in demand over the last three months.
Mark Connelly - Sterne Agee
And just one last question and I'm sorry to beat a dead horse here, but on the virgin fiber issue we're seeing the same thing, with utilities looking more heavily towards solid fuel, and that suggests that at some point there's some fiber competition out there. Just specifically in the baskets where you're operating, are you seeing any of that that's going to start competing with you for wood?
Paul T. Stecko
Yes, I think we certainly are, as others are. And where wood grows the fastest is in the U.S.
Southeast; that's where all the big liner board mills are and that's where some of these utilities are contemplating adding capacity burning wood. One of the things that the AF&PA has stressed in terms of some of these incentives for people, particularly utilities, to burn wood instead of coal and get credits for that, we think that incentives need also to be placed on the supply side as well as the demand side, and that is incentives to encourage people, including utilities, to give incentives to people that are growing and selling trees because you want to try to obviously keep supply and demand in balance or the price of wood will go up and it will go up preferentially in regions.
And those costs have to be passed on, obviously, to the consumer and obviously it's a lot easier for a utility to do that than it is for a paper company.
Mark Connelly - Sterne Agee
But it didn't sound from your earlier comments, Paul, that you're that worried about virgin fiber price pressure.
Paul T. Stecko
In the short term, I was talking, they have stayed the same and I expect them to stay the same. You're talking about a longer-term phenomenon over the next decade, and I think that what you're talking about will certainly put pressure on the price of wood over the next decade.
So I was speaking strictly in the - you know, we're talking quarter to quarter here; you're talking about a decade-long phenomenon.
Operator
Your next question comes from [Dan Wewer] - Morningstar.
Dan Wewer - Morningstar
I'd like to ask a question about your fiber flexibility. As the virgin versus recycled fiber cost differential has varied over the past several quarters and the tax benefits of virgin have come into play, how much have you adjusted your fiber content?
Are you still in the range of around, I think it was 17% net recycled in '08?
Paul T. Stecko
We were higher than that in the first four or five months of the year in terms of we flexed up to about 25% using more OCC because it was at 15-year lows in prices. Now that it's up over $100, we're flexing back down towards the 17% number.
And that's strictly an economic trade-off. When it was real cheap we used it; when it gets expensive, we try to use as little as possible.
Operator
Your next question comes from Andrew Fineman - Iridium Asset Management.
Andrew Fineman - Iridium Asset Management
I heard you say that your total long-term debt was $658 million but I apologize that I missed, I think, something you said right before that, which may have been current portion of debt, or is that the whole thing, $658 million?
Richard B. West
That's the full amount.
Paul T. Stecko
That's the full amount. Let me see; I've got my notes here.
Richard B. West
We included in that amount, Andy, of $658 million our asset securitization on our receivables, which is about $109 million that we turn over every month. But we consider that as part of our long-term debt because we keep it, so that's the amount.
Andrew Fineman - Iridium Asset Management
So that includes any current portion.
Richard B. West
That's correct.
Andrew Fineman - Iridium Asset Management
So that means that your net debt at the end of the quarter was $465 million and if you include the fact that the government owes you $61 million then your net debt is $404 million. And the last time your debt was that low -
Paul T. Stecko
What, do you need a loan, Andy? Is that what you're getting at here?
Andrew Fineman - Iridium Asset Management
I mean, your debt hasn't even been that low; on my spreadsheet there's nothing that's ever been that low. And I guess it's going to be lower at the end of the - I mean, now is when you start to really flow cash, in the third and fourth quarter.
So would you care to give us any idea of how low that number could get this year? And then the second part of the question is when you'd start spending the money on the $200 million worth of capital projects that you talked about?
Paul T. Stecko
As you know, Andy, we give guidance only a quarter in advance, so I can't handle the first part of your question. But we're not done studying the project yet, but we would envision possibly taking it to the Board in the fall, with spending in earnest starting in 2010.
Andrew Fineman - Iridium Asset Management
So you don't want to talk about how the debt - but clearly it's going to be lower. I mean, if you're at $404 million now including the $61 million that you're going to get in tax reductions, then it's going to be lower than that this quarter, next quarter.
Paul T. Stecko
Well, for the third quarter obviously, if the guidance we gave came to fruition it would be lower, yes. You can do the math as well as I can.
Operator
(Operator Instructions) Gentlemen, I'm showing no further questions.
Paul T. Stecko
Okay. Well, again, thanks, everyone for participating in the call and we look forward to speaking to you next quarter.
Have a good day.
Operator
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program.
You may now disconnect.