Jul 30, 2014
Executives
Steven C. Voorhees - Chief Executive Officer, Director and Member of Executive Committee Ward H.
Dickson - Chief Financial Officer and Executive Vice President Michael E. Kiepura - President of Consumer Packaging & Recycling James B.
Porter - President of Paper Solutions
Analysts
Mark A. Weintraub - The Buckingham Research Group Incorporated George L.
Staphos - BofA Merrill Lynch, Research Division Scott L. Gaffner - Barclays Capital, Research Division Adam J.
Josephson - KeyBanc Capital Markets Inc., Research Division Deborah Jones - Deutsche Bank AG, Research Division Alex Ovshey - Goldman Sachs Group Inc., Research Division Albert T. Kabili - Macquarie Research Christopher D.
Manuel - Wells Fargo Securities, LLC, Research Division Philip Ng - Jefferies LLC, Research Division Mark Wilde Steven Chercover - D.A. Davidson & Co., Research Division Chip A.
Dillon - Vertical Research Partners, LLC Max Salk
Operator
Good morning. My name is Wendy.
I will be your conference operator for today. At this time, we would like to welcome everyone to the RockTenn Third Quarter Fiscal 2014 Earnings Conference Call.
[Operator Instructions] As a reminder, slides are being presented today as part of the conference call. These slides can be accessed at www.rocktenn.com under the Investors page.
Ladies and gentlemen, this call is being recorded today, July 30. [Operator Instructions] Your speakers for today's call are Mr.
Steve Voorhees, Chief Executive Officer; and Mr. Ward Dickson, Executive Vice President and Chief Financial Officer.
Mr. Voorhees, you may begin your conference.
Steven C. Voorhees
Thanks, Wendy. Welcome to those of you are listening to the call.
This is Steve Voorhees, Chief Executive Officer. I'm joined this morning by Ward Dickson, Chief Financial Officer; Jim Porter, President of our Paper Solutions Business; and Mike Kiepura, President of our Packaging Solutions Business.
During the course of the call, we will make forward-looking statements involving our plans, expectations, estimates and beliefs related to future events. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from those that we discuss during the call.
We describe these risks and uncertainties in our filings with the Securities and Exchange Commission, including our most recent 10-K and the 10-Qs filed for the quarters ending December 31, 2013, and March 31, 2014. We will also refer to non-GAAP financial measures during the call.
We've provided reconciliations of these non-GAAP measures to the most comparable GAAP measures in the appendix of the slide presentation. The slide presentation is available on our website.
I'll start by discussing our operating results, and then Ward will discuss our balance sheet, pension and other financial measures. I'll complete our prepared remarks with comments on our outlook.
Then Ward, Jim, Mike and I will be available for your questions. Our team delivered solid operating results in the June quarter.
We're improving quality, service, reliability and productivity in our mills, as well as in our corrugated box, folding carton and other converting operations. These operating improvements are driving our improved financial results.
Adjusted earnings were $1.97 per share, and free cash flow for the quarter was $206 million or $2.82 per share. Our free cash flow for the last 12 months was $12.39 per share.
This is 35% higher than the prior year. Over the last 12 months, our credit agreement EBITDA has increased by 19% to $1.6 billion.
This is over $250 million higher than 1 year ago. We completed the acquisition of the Tacoma mill on May 16.
The mill is performing quite well and has set a new production record in May. Tacoma's internal and external sales of $44 million or 62,000 tons contributed $0.10 to adjusted earnings in the June quarter.
We're ahead of schedule on the realization of our expected synergies from the acquisition. We expect the synergies from the acquisition to be in the range of $10 million to $15 million annually.
We've been very pleased with the enthusiasm and performance of our coworkers at the Tacoma mill. Our Merchandising Displays business achieved organic sales and income growth of greater than 20% compared to the prior year quarter, due to a strong promotional environment and our service offering focused on value and innovation.
In April, we created our paper solutions and packaging solutions business units to serve our customers better and simplify the way we do business. We're better structured to provide our customers with a set of packaging and promotional solutions that best fit their needs.
In the 3 months since this new customer-facing structure was put in place, we've seen very good momentum. We've had several new business wins that likely would not have occurred without this new structure.
This new structure is fostering better internal collaboration and customer focus. On Monday, we announced a 2-for-1 stock split that will increase our outstanding shares to approximately 143 million.
The split will take effect on August 27. The fourth fiscal quarter adjusted EPS and full year cash flow guidance that I'll give later in this call reflects the stock split.
We're delivering very strong current cash flow returns for our shareholders, have significant flexibility to improve these returns by deploying this cash flow to implement our operating strategy and by returning this capital to our shareholders through dividends and share repurchases. Sales for the quarter of $2,531,000,000 set an all-time record for our company.
For the first time, our quarterly sales have exceeded $2.5 billion. $1.97 in adjusted EPS reflects a very good quarter.
For comparative purposes, last year's June quarterly adjusted EPS of $2.16 included a $0.10 benefit from the successful renegotiation of our steam contract with Seminole mill, as well as a $0.17 per share benefit from an effective book tax rate of only 30% due to certain tax items recorded in the June quarter of last year. Our total company credit agreement EBITDA margin over the last 12 months is 16.8%, about 200 basis points higher than the 14.7% for the 12 months ending June of 2013.
We recorded a $0.08 benefit this quarter related to the additional value from spare parts at our former Smurfit containerboard mills. We also recorded a $0.03 benefit due to a reduction in pension expense that reflected positive experience from our recently completed annual actuarial report.
In total, for fiscal year '14, we expect our pension expense to be approximately $7 million lower than our previous estimates. April's black liquor intrusion at the West Point mill negatively impacted results in the quarter by approximately $0.08 per share.
Our balance sheet continues to be in great shape. Our leverage ratio of 1.9x is consistent with our 2x target and also with the 1.9x to 2x range that I gave when I spoke publicly in early June.
Turning to our Corrugated Packaging segment. Industry containerboard mill operating rates averaged 96.3% for the quarter, higher than the March quarter rate of 95.6% and slightly lower than last year's June quarter operating rate of 97%.
Our containerboard mill operating rate for the quarter was 97%, higher than March quarter -- March quarter's rate of 94.1% and lower than the prior year number of 98.5%. Our containerboard mill system downtime in the quarter was 89,000 tons, primarily due to the scheduled maintenance and capital outages at Hopewell, Stevenson, La Tuque and Hodge.
Industry production of containerboard for export markets increased by more than 4% from the prior year and increased 9.8% on a sequential quarter basis. RockTenn's export shipments of 284,000 tons increased by 17,000 tons or about 6% sequentially and 71,000 tons or about 33% over the prior year.
We shipped approximately 55% of our export shipments to Latin America, 25% to the Middle East and 10% each to Europe and Asia. Export pricing was up on a sequential basis in both Europe and Latin America and flat in the Middle East and Asia.
Our 311,000 tons of domestic sales containerboard were 55,000 tons more than the March quarter and flat with last year. Our third quarter containerboard inventories declined by approximately 12,000 tons.
At the end of June, our containerboard inventory was about 4.5 weeks of consumption or about 0.5 week higher than we ran 2 years ago. We expect to continue to maintain these levels of inventory to support our business and our customer needs.
In the corrugated box business, we continue to see the results of our strong focus on operational improvements in our box plant system. Over the past 3 years, we've closed 21 facilities, and our volume per plant has increased 8.9% from June of 2012.
Our goal is to satisfy our customers every time. We're focused on improving quality as we increase productivity.
We use customer satisfaction surveys in our business to monitor our success. Our latest survey results indicate improvement in many of our corrugated container metrics, including overall satisfaction and quality.
As such, our customers are recognizing the improvements and investments that we're making. Two key metrics that we monitor are on-time delivery and quality.
Both of these metrics year-to-date have improved over the prior year. In addition, capital investments and Lean Six Sigma efforts at our plants have improved our waste and product quality.
Year-to-date, our average net waste has declined by 5% from last year's -- from last fiscal year's average. Our corrugator, flexo folder gluer and rotary die cutter productivity have increased year-to-date on average by 2%, 4% and 7%, respectively, all over last year's fiscal year average, reflecting the positive strides we're making in these areas.
We've completed the scheduled installation of our box plant operating system in our U.S. plants in the June quarter.
We're well positioned to implement and sustain additional operating improvements across our box plant system. During the June quarter, we successfully installed new EVOL flexo folder gluers in our Syracuse, New York, New Lenox, Illinois and Covington, Georgia box plants.
Each of the 3 plants is operating more efficiently as a result of the new equipment, as well as producing higher-quality boxes. We will install an additional 2 EVOLs during this fiscal year, bringing the total number of installs in 2014 to 7.
In fiscal 2015, we will continue the modernization of our box plant system by installing 10 EVOLs. Industry box volumes on a per day basis, as reported by the Fiber Box Association, increased 1% in the June quarter but declined 0.8% in the month of June alone, both as compared to the prior year.
When I spoke publicly in early June, I said that we thought our June quarter box shipments would be up as compared to the March quarter but down as compared to last year. This proved to be correct as our domestic box shipments were up 3.4% on a per day basis versus the March quarter and down 2% against the prior year.
Approximately 1/3 of the decline year-over-year is due to the fewer number of box plants that we're operating. The rest of the decline can be largely attributed to our focus on profitability over volume.
The net result of the quarter was an increase in Corrugated Packaging segment sales to $1.77 billion, up 3.2% over last year's June quarter, with overall prices increasing by $13 per ton, more than offsetting reduced volumes from our closed box plants. Corrugated Packaging segment EBITDA margin for the June quarter was 17.4%, an improvement of 220 basis points over the March quarter.
We expect for the September quarter that volumes will be flat to slightly down on a sequential basis and down approximately 2% to 3% compared to the prior year quarter. This is a continuation of recent trends, which have been the direct result of our commercial decisions, our plant closures and soft demand in specific end-use markets, including food, beverage and pizza markets.
Turning to our Consumer Packaging segment. SBS industry backlogs as of July 16 were healthy at 578,000 tons.
RockTenn's SBS backlogs now stand at 7 weeks. CRB industry backlogs as of July 16 were 124,000 tons, about 60,000 tons less than a year ago.
RockTenn's CRB backlogs stand at approximately 3 weeks. We took no economic downtime at our CRB and SBS mills during the quarter.
We took our mini maintenance outage at Demopolis in April. The cost of the April Demopolis outage was approximately $0.03 per share.
In our Consumer Packaging segment, total sales were up 3.1%, and segment EBITDA was basically flat with the prior year. We expect our results in Consumer Packaging for the full year fiscal '14 to be in line to slightly above our prior year results.
Demand for July remained strong for SBS and stable for both folding cartons and CRB. Our $11 million project to install a new printer and die cutter for our Nicholasville, Kentucky folding carton plant was completed in mid-May, on time and on budget.
We've delivered exceptional results, including setting a new production record in the first full month of operation. We're making comparable investments in our Knoxville and Clinton folding carton plants over the course of the next year.
These investments generate attractive returns by increasing productivity; reducing waste; reducing maintenance and repair spending; and in the case of Knoxville and Clinton, provide the capability to meet customer growth requirements. Merchandising Displays achieved record sales of $225 million in the quarter as compared to $166 million last year.
The NPG acquisition contributed $17 million of the approximate $60 million in incremental revenue. Segment EBITDA margins of 11.3% were lower than what we would expect, as there's been incremental costs associated with onboarding the large volumes of new business into our system.
The promotional environment continues to remain very healthy, with consumer products companies finding more ways to differentiate their products in store, including multi-vendor promotional displays and major redesigns of existing display programs. During the June quarter, we supported Pfizer's rollout of new Nexium 24HR over-the-counter heartburn medication.
We worked with Pfizer's team for 2 years to design, develop, produce and distribute 160,000 temporary promotional displays to their U.S. retail network.
We expect slightly lower sales and also to maintain margins in the Merchandising Displays business in the September quarter as compared to the June quarter. Our Recycling segment volumes were approximately 14% lower than last year, due primarily to the prior closures of 10 underperforming recycling plants since February 2013 and also due to the generally soft global recovered fiber markets.
Segment income of $2.1 million was flat with last year. We expect to invest about $5 million in the Recycling business in fiscal year '15.
The $5 million compares to $11 million in annual depreciation and the $11 million in capital expenditures we've averaged in the past 3 years. Ward will now discuss various financial aspects of our business.
Ward?
Ward H. Dickson
Thank you, Steve. During the quarter, we realized the benefit of price increases in our business of $44 million as compared to the prior year.
Average selling prices in the Corrugated Packaging segment were $13 per ton higher than last year. Average selling prices in Consumer Packaging were $51 per ton higher than the prior year, with gains in SBS and CRB increasing by $74 per ton and $16 per ton, respectively.
The net impact of volume changes was a positive $1 million. The estimated inflationary impact of commodities was $33 million higher than the previous year, with lower recycled fiber costs and board costs only partially offsetting higher virgin fiber, energy and freight costs.
Recycled fiber costs were approximately $11 per ton lower than last year's fiscal quarter and about $4 per ton lower than the March quarter, as the extremely wet weather during the winter and spring carried into the June quarter. Natural gas costs averaged almost $0.60 per MMBtu higher than last year.
Other manufacturing and SG&A cost, which includes direct labor, repair and maintenance and indirect manufacturing costs, among other items, increased by $22 million. Quarterly productivity improvements of $21 million include cost reduction projects in areas such as procurement and logistics; as well as Six Sigma projects, the majority of which improved operating efficiency, reliability and quality at our manufacturing locations; and the impact of capital projects that reduced costs.
Finally, the Tacoma mill and Retail Solution acquisitions contributed $10 million in segment income during the quarter. The $32 million in higher expense in other items category is comprised of the $13 million for the Seminole energy contracting gas savings, $9 million for the West Point black liquor intrusion, $2 million for increased outage amortization and other items, partially offset by the $9 million related to the additional value from spare parts at our former Smurfit containerboard mills.
During the quarter, we generated free cash flow of $206 million. Over the last 12 months, we have generated free cash flow of $12.39 per share.
Our biggest use of cash during the quarter was $341 million for the purchase of the Tacoma mill. We financed the acquisition under our accounts receivable securitization facility, which has an annual borrowing cost of less than 1%.
We repurchased 206,000 shares in the June quarter at an average price of approximately $101. Cumulatively under our 5 million share repurchase authorization, we have repurchased 766,000 shares at an average price of approximately $96.
At the end of June, our net debt was approximately $2.95 billion. Our LTM credit agreement EBITDA was over $1.6 billion, and our credit agreement debt-to-EBITDA ratio was 1.9x.
We have more than $1.5 billion in liquidity available to us for general corporate purposes. Let me highlight some key assumptions for the fourth quarter.
Our effective tax rate for the June quarter of 36.4% was in line with our expectations. We expect a tax rate for the fourth quarter of between 36% and 38%.
At June 30, we have recorded unused U.S. federal, state and foreign net operating losses and tax credits that can be used to offset a total of $361 million in cash taxes.
We expect to use our remaining U.S. federal net operating losses during the September quarter.
We will use our remaining U.S. federal tax benefit of $235 million in cellulosic biofuel, Alternative Minimum Tax and other federal tax credits during fiscal year 2015 and 2016.
Based on current assumptions, we estimate our cash taxes at approximately $10 million to $15 million in the fourth quarter and $20 million to $25 million for the full year. We estimate, based on our current earnings forecast and tax credit position, a cash tax rate of approximately mid-teens percent in fiscal 2015 and mid-20s percent in fiscal 2016.
The September quarter is our lightest pension quarter, and we expect to make only $6 million in cash contributions this quarter. Last evening, the Senate removed the pension smoothing benefit from the House version of the highway funding bill.
So any possible benefit from pension smoothing appears to be in question at this time. As an update to our CapEx guidance, we expect that our 2014 capital expenditures may be slightly higher than our $550 million guidance, perhaps as high as $575 million, reflecting the Tacoma acquisition and other items.
Steve will talk about our forecast for 2015 capital expenditures in his closing remarks. We are not planning any major scheduled maintenance downtime during the September quarter.
Now I will turn it back over to Steve, who will discuss our business and outlook.
Steven C. Voorhees
Thanks, Ward. We're seeing a mix of business conditions across our operations.
Within Consumer Packaging, we have good supply and demand balance in SBS. CRB markets are stable in light of the announced closure of the Fusion mill last week.
Folding carton operations are stable. The corrugated box business continues to operate well with decent demand.
Containerboard and box pricing is competitive and stable. In mid-July, we took steps to balance our production with our customer demand by taking economic downtime at 2 of our corrugating medium machines, one in Jacksonville, the other at West Point.
The Jacksonville and West Point medium machines produce approximately 15,000 tons each per month of corrugating medium. We expect we will export more tons in the September quarter than the June quarter.
We believe that wood costs will decline in the September quarter as compared to the June quarter and that recycled fiber costs will be flat or slightly up. With all that being said, we expect our September quarter adjusted EPS, after our 2-for-1 stock split, to be in the range of $1 to $1.10 per share.
We expect to generate over $1.70 per share in free cash flow in the quarter, putting us at or slightly above $6 per share in free cash flow for the year. The $1.70 and $6 reflect the stock split.
We're finalizing our CapEx plans for fiscal 2015 and expect capital expenditures next year of approximately $500 million. Two of our key projects are the Demopolis biomass boiler and the Stevenson pulp mill upgrade.
The $68 million Demopolis project is underway, and the expected startup is January 2016. This project will enable us to install new renewable energy technology instead of spending $27 million on Boiler MACT compliance for 2 1950s vintage power boilers.
When finished, the biomass boiler will be Boiler MACT compliant and will drive $10 million per year in savings in purchased electricity, fuel and reduced operating costs. We're investing approximately $46 million to upgrade the Stevenson pulp mill.
When complete, we expect to generate after-tax returns in excess of 25% through reduced fiber and chemical usage and lower maintenance expenses, offset by slightly higher energy usage. Perry Capital published a letter last week discussing the opportunity to create master limited partnerships for virgin containerboard mills.
We've been investing and are continuing to invest the time and resources necessary to evaluate this complex structure. Once we've reached a conclusion on the merits, we will communicate it as appropriate.
I remain confident in our ability to provide our shareholders with strong current cash flow returns and our ability to improve those returns by deploying our free cash flow to further develop our strategy and by returning this capital to our shareholders through dividends and share repurchases. Ward, Jim, Mike and I are now available to respond to your questions.
Operator
[Operator Instructions] The first question is from Mark Weintraub with Buckingham Research Group.
Mark A. Weintraub - The Buckingham Research Group Incorporated
Steve, question for you on the last comment on using cash. So far, you haven't been buying back stock particularly aggressively.
But of course, you did just complete the Tacoma acquisition. Is that the main reason why share repurchase has been at a relatively slow rate?
And assuming there isn't another acquisition that comes soon, would in all likelihood the rate of share repurchase accelerate?
Steven C. Voorhees
I think your premise is correct. I think we have found opportunities to deploy capital to support our business.
We're very happy with both the Tacoma and NPG acquisitions. Our target leverage is 2.
We're very well within that range and I think it ends up being a balance of the opportunities we have versus share repurchase. I do have a preference for improving our business over share repurchase since I think it generates better long-term returns for our shareholders.
Mark A. Weintraub - The Buckingham Research Group Incorporated
And then one real quick follow-up, if I could. You'd indicated that in the September quarter, you're expecting box volumes to be down 2% to 3% for you year-over-year.
Is -- do we begin to see a leveling off of that or where you can start to be performing more in line with the industry, if we go a quarter or 2 out in your expectation?
Steven C. Voorhees
Yes. That would be our expectation.
Mark A. Weintraub - The Buckingham Research Group Incorporated
And can you provide a little bit more color on that? Or you want to just stick with that at this point?
Steven C. Voorhees
I'd just as soon stick with that. I think we'll see the results, but I think that is our expectation, and we'll see as we report out how we do on that.
But that -- our expectation is not to level off, and it would be a -- just a direct result of what we're doing in our box business. We're very comfortable with the execution we have on our box business.
We've been working very hard to improve the capabilities. And we feel like we've been successful and I think we're going to continue to be successful.
Operator
The next question is from George Staphos with Bank of America Merrill Lynch.
George L. Staphos - BofA Merrill Lynch, Research Division
My 2 questions: First, maybe piggybacking on Mark's last topic. Can you comment as to what the reorganization on the commercial side in terms of paper solutions and packing solution -- packaging solutions should afford you in terms of volume growth?
And kind of related to your point there, you're still seeing weakness in your box volumes for reasons you've discussed before, in the upcoming quarter, of down 2% to 3%. When should we start to see any meaningful benefit from the new commercial strategy affecting your volume?
What would the volumes have been otherwise without this reorganization? And then I had a follow-on.
Steven C. Voorhees
George, Mike leads our packaging business. I'm going to let Mike respond to that question.
Michael E. Kiepura
Sure. George, I think the organization has only been in place since mid-April.
But I would say in the first -- really now 3.5 months, been very encouraged by the greater cooperation among our various business segments, by the reception by our customer base to that different organization and bringing the full capabilities of the -- enterprise-wide capabilities of RockTenn to our customer base. So I'd say we've seen some early and significant wins in the marketplace that will take a few months to onboard as we transition that business on.
So we're encouraged and think that in fiscal '15, we'll see positive year-over-year volume improvement.
George L. Staphos - BofA Merrill Lynch, Research Division
Okay. If I could ask a clarification and a follow-on.
Mike, is it possible to gauge at this juncture what the current wins here? I think you mentioned 3 means from a volume standpoint.
And then on CapEx, you mentioned that capital spending would be higher. We had assumed and you mentioned that a lot, it was Tacoma.
You said, Steve, that there might be some other elements behind that. What are the other elements, if you can disclose in terms of the potential nudging up on the CapEx?
Steven C. Voorhees
Just, George, to your question on the CapEx refers to our 14...
George L. Staphos - BofA Merrill Lynch, Research Division
Yes, correct.
Steven C. Voorhees
It's going to be Tacoma. And I think we've been successful in completing the projects on the converting side, probably a little bit faster than we thought.
But if you had to pick one item, that would be Tacoma.
George L. Staphos - BofA Merrill Lynch, Research Division
Okay. And on the wins?
Michael E. Kiepura
I think, George, it's really hard to say how we would have done if we hadn't changed the organization versus how we have because that's pretty hypothetical. But I would say that we've got very positive momentum building, and I think more than we would have had otherwise.
Operator
The next question is from Scott Gaffner with Barclays.
Scott L. Gaffner - Barclays Capital, Research Division
I was hoping maybe we could discuss a little bit some of the recent shipment data -- some of the data points that you gave in your box shipments versus the industry, but also maybe box shipments versus corrugated shipments. Because if we look year-to-date, right, you mentioned box shipments down but the containerboard consumption numbers are actually up.
And you've got this Merchandising Display business, which I assume consumes a large portion of your containerboard. Can you just sort of talk about your general thoughts on the overall health of the containerboard business, including these nontraditional box markets, and how you see that?
James B. Porter
This is Jim Porter. Just to clarify your question, you're asking how is the overall containerboard business performing in the global market relative to supply, demand, is that your question?
Scott L. Gaffner - Barclays Capital, Research Division
Well, in the aggregate, there's obviously some nontraditional markets that consume some containerboard. And yet, we talk about box shipments a lot.
I'm just wondering if you think that the overall health of the market is better than what's apparent in the box shipment numbers?
James B. Porter
I think globally, the containerboard and packaging business is really quite solid. We've got a global containerboard market -- round numbers, 150 million tons.
And we have certain markets that are doing better than others certainly, as you would expect from the variety of the economic conditions in those countries. But North America box demand's relatively flat.
Global production -- or production in North America for global consumption up 4%, 5%. So we generally have what I would say is a positive structure within the containerboard business.
In our markets, we match our supply with our customer demand. Fortunately, we've got a big system and we've got a big portfolio of international customers, so we're able to take advantage of the markets of the world as they improve or flex accordingly.
So we think it's a very healthy business, and we're continuing to be quite excited about it.
Scott L. Gaffner - Barclays Capital, Research Division
Okay. And then just looking at the converting operations for a minute.
You continue to roll out the EVOL machine. You now have the box plant operating system in place.
Can just talk a little bit about some of the qualitative benefits of having maybe the box plant operating system in place, as well as some of the quantitative benefits of having both of those initiatives going on?
Michael E. Kiepura
Well, from the EVOL standpoint and our focus on improving our operations, Steve mentioned in his talk about the improvement in terms of lower waste and better productivity on our corrugators, flexo folder gluers and rotary die cutters. And I think we'll continue to see those kind of improvements as we continue to invest in more EVOLs and other capital projects on the corrugated side of the business.
So I think that continues to be very positive.
Operator
The next question is from Adam Josephson with KeyBanc.
Adam J. Josephson - KeyBanc Capital Markets Inc., Research Division
One question on the additional containerboard capacity in North America. How would you -- Jim, how would you characterize the impact that it's having on your business specifically, in light of the downtime that Steve just talked about at 2 of the medium machines?
James B. Porter
Okay. Clearly, we're all aware that there's been the conversion of a couple of machines from alternative products into containerboard, and those conversions have had some success in penetrating our product.
We really don't compete from a quality perspective with them so much. The new machine addition in the north, together with those conversions, adds about 1.2 million tons of capacity.
Containerboard is really a global business, though. As I said earlier, it's 150 million ton market, and we would expect new capacity additions.
And we have a strong portfolio of virgin containerboard products that are consumed all over the world. We sell into all of the channels of the marketplace.
And so clearly, there has been an increase in capacity, but we have been very successful at competing and winning in the marketplace. Now as we think about the -- to your question about the 2 machines that we've said taken down, our mills are running very well right now and in a marketplace that's relatively stable and slightly up.
Steve's indicated that we have no maintenance -- major maintenance downtime planned for Q4 and as you've seen us behaving historically, we match our supply with our customer demand. And so you'll continue see us managing our business in that fashion.
So I think it's quite logical.
Adam J. Josephson - KeyBanc Capital Markets Inc., Research Division
Thanks, Jim. And just one, Steve, on Tacoma.
So I know you talked about expecting synergies of about $10 million to $15 million annually. Obviously, the acquisition was $0.10 accretive in the quarter and you only had half a quarter of that business.
So can you give us any sense of how accretive you expect that acquisition to be on an annualized basis in light of the synergies that you talked about earlier?
Steven C. Voorhees
We're very happy with the performance and the -- really, the first 1.5 months of operations. I'd hope we'd be able to continue that rate.
I think that their production is very strong. They had no significant downtime.
And so hopefully, we'll be able to sustain that, but I don't have a specific number to put out about how accretive it would be.
Operator
The next question is from Debbie Jones with Deutsche Bank.
Deborah Jones - Deutsche Bank AG, Research Division
You guys addressed your inventory levels earlier on the call, and other producers have suggested that transport issues are leading them to keep inventories higher. I know you said legacy Smurfit levels needed to be higher.
But I would assume that some consolidation of the box plants could lead to lower inventories. So I would just like to get your thoughts on this.
And then also if you think the current inventory levels are actually the new normal.
Steven C. Voorhees
I think for us, the 4.5 weeks, we're comfortable with that in the near term. I think over the -- we have been affected by transportation.
I think our system is, I'd say, large system. We operate 12 containerboard mills.
I think that's the number, because that's kind of -- 13. Jim's telling me it's 13.
Of 90 box plants, we have 50 or so domestic customers. We have export customers.
And we are, like I think many companies, looking at our supply chain and our network and trying to optimize that. Whether that ends up with higher or lower inventories, it's difficult to figure out for me exactly whether you'd end up higher or lower.
The cost of inventory at today's interest rates is relatively small. And so if you can strategically place inventory in a place where it allows you to better serve your customers, you would do that.
At the same time, inventory is a use of cash that you'd prefer not to have, unless it was absolutely necessary.
Deborah Jones - Deutsche Bank AG, Research Division
Okay. And I guess my follow-up is the $9 million spare parts benefit in the Corrugated Packaging, is that something that you had allowed for in the guidance that you gave in June?
Steven C. Voorhees
No.
Operator
Our next question is from Alex Ovshey with Goldman Sachs.
Alex Ovshey - Goldman Sachs Group Inc., Research Division
Steve, I wonder if you can comment just on the MLP line of questioning, if you can comment on how long you've had to look into that question and give us a sense of how long do you think it may take RockTenn to really figure out whether or not such a structure would be appropriate and sort of -- any preliminary obstacles that you see as you've started to look at such a structure for -- that may prevent the company from moving in that direction?
Steven C. Voorhees
No. We've had a couple of months to look at it, and it's just -- it's a very complex project.
You have to look at it from -- multiple vantage points, may underestimate the number of vantage points you have to look at it. And I think it's potentially attractive enough to where we're going to spend the time looking at how we'd come out.
I can't really predict how long it would take. I think the IRS would want to get a private letter ruling if we were to proceed in that direction and there's really not much more I can say or I think would be helpful to say.
Alex Ovshey - Goldman Sachs Group Inc., Research Division
Understand, Steve. Yes, and I appreciate you taking a shot at answering it.
And then just on the SBS side, can you talk about why the backlogs are strong as they are? Because as I think about the end market exposures, they're not that different relative to some of the other paper packaging grades, like containerboard where it seems like the net profile is softer.
So kind of what's so different around what's happening in the SBS market that it appears so much tighter than some of the other paper-based packaging markets?
James B. Porter
I think you're right. We -- this is Jim Porter.
I think you're right. We are seeing a tightening condition in those grades and industry backlogs, our backlogs are up in the 6-, 7-week range.
And so it's really a positive segment right now. I think there's been some conversion from traditional styrofoam products into paper-based products.
And I think as the sustainability awareness of the global consumer continues to get traction, we'll continue to see that kind of migration. So that's just one dimension.
I think we're also moving into a seasonally stronger period. And so it's a time when things are quite tight, and we're pleased with our execution in that business.
Operator
The next question is from Al Kabili with Macquarie.
Albert T. Kabili - Macquarie Research
I wanted -- the first question is on the Hopewell, how that's performing post the outage, and are you getting the increased productivity and output that you are expecting from that?
Steven C. Voorhees
Jim?
James B. Porter
This is Jim Porter. We're really very excited with how the Hopewell project unfolded.
A big project, a complex project, but I think our team did an outstanding job of executing all aspects of it. We're seeing significant improvements in quality.
Our customers are giving us very positive feedback. We're able to make some lighter grades than we were historically.
The machines are running faster and more productively. And so really, on all fronts, we're quite pleased with the performance of that project, and we will achieve the stated objectives, as we've communicated publicly.
Albert T. Kabili - Macquarie Research
And the follow-on is with this productivity and increased output and the market still, from a demand perspective, pretty flattish in terms of box demand. Any implications as you see the manufacturing footprint and any opportunities there for consolidation, et cetera?
James B. Porter
This is Jim Porter again. So you've seen us consistently behave in a way in which we are very much in touch with our large portfolio of international containerboard customers, both internally and externally.
And we will always match our mill supply to meet that demand as it grows and as it flexes. So the -- as our assets change and get better, we will constantly make decisions relative to where we make our products to satisfy our customers.
Albert T. Kabili - Macquarie Research
Okay. And currently, I mean, do you see a market -- an increased market for that output via export, et cetera?
Or how are you kind of thinking about things right now with current trends?
James B. Porter
I think we, as I said earlier, are very focused on meeting emerging demand conditions, and we really won't try to forecast those, we all read the same things relative to the North American domestic economies. And a little bit of good news today, from my standpoint, is we saw a 4% GDP announcement.
Globally, there's some improvements that we're seeing. And so as I said earlier, we will always operate our facilities in a way that tries to capture the value of the demand across the world.
Operator
The next question is from Chris Manuel with Wells Fargo.
Christopher D. Manuel - Wells Fargo Securities, LLC, Research Division
Most of my questions have been answered. Just a few kind of follow-ups, if you will.
But one, I want to kind of drill a little bit into some of what you said regarding your box shipments. It sounded like your box shipments will continue to lag a little bit.
I think you said, help me fill this in, but 2% to 3% maybe below industry for the next few quarters. I guess, my question is, is that the right numbers you gave, first?
And then second, how much of this -- you talked a little bit about mix and related to some of the food, pizza, et cetera components. But how much of this is related to the heavy upgrades that you're doing and you've talked about those, bringing in the new EVOLs equipment and such.
Is it some of it related to that? Is it some of it related just to mix?
And if so, after you get past this next couple of quarters, can you kind of resume that market rate? Or can you recapture some of that?
Any color there would be helpful, please.
Steven C. Voorhees
Okay. So just -- I put out the 2% to 3% relative to our volumes versus last year.
I don't have an underlying assumption for the industry. That's just what we're seeing now in our particular business.
I'm not sure I would continue that for the next few quarters. We're -- so just the guidance we're giving was looking at 1 quarter out, we would see our volumes down 2% to 3% over the prior year.
I think you’re -- the installation of the new capital equipment is a -- I'd look at as being a volume-accreting investment. But the decline we're experiencing now is, I'd say, it's the cumulative effect of a series of actions we've taken on the plant closure side and the commercial side, I think, to get our business to where, I think, it ought to be.
So I would see us transitioning to, call it flat or hopefully a volume-accreting performance, relative to where we are now. Of course, that's going to be based on our execution and how we perform in the marketplace.
Christopher D. Manuel - Wells Fargo Securities, LLC, Research Division
Okay. And then just a follow-up to an earlier question regarding Tacoma.
If it did do $0.10 for the quarter -- for half the quarter, that's at a run rate of $0.80 on a full year basis. What's -- maybe there was no downtime in that number, so maybe it's $0.70, $0.75.
Is there anything unusual with -- that you captured a bunch of synergies right away or early that makes that not the right run rate as something as -- on an annual basis, call it, $0.75 $0.80, something like that?
Steven C. Voorhees
I don't think there's anything unusual on an operating basis, but it did perform exceptionally well. I think it's a characteristic of our business, when you have heavy manufacturing equipment performing well -- is appreciate it while you have it because things can't go much better than that and things can -- and just the unexpected can happen.
But we're very pleased with the acquisition. We've incorporated our expectations into our guidance for the quarter, and I'd just repeat, couldn't be happier with the acquisitions and certainly the results we've had.
Operator
The next question is from Philip Ng with Jefferies.
Philip Ng - Jefferies LLC, Research Division
Based on your outlook on demand for containerboard, can you help us get a better feel for how much more downtime you're expecting to take at those 2 machines that you've taken offline in July?
Steven C. Voorhees
No. We can't comment on our operations going forward.
Philip Ng - Jefferies LLC, Research Division
Okay, that's fine. And then you flagged Fusion.
One of your competitors is shutting down some capacity in the CRB side. Is that an opportunity for you to pick up some new business, because I think you have some overlapping capacity in that region?
Steven C. Voorhees
Yes, it does.
Philip Ng - Jefferies LLC, Research Division
Okay. Is it going to be pretty meaningful like a 1% lift on demand?
Or...
Steven C. Voorhees
I don't want to speculate on what it would be. I mean, we do have the opportunity from the customers that were formerly served by that mill.
Philip Ng - Jefferies LLC, Research Division
Got you. And just one question on the pension comment that I think, Ward, you made on some of the rulings that might be changing on pension smoothing.
Can you help us understand what the impact could be for pension contribution over the next few years?
Ward H. Dickson
Yes. So if you look over the course of the next 3 years, our cash contributions were projected to be about -- average about $200 million a year.
What we were hopeful with, with the House version of the bill, is that there could be a potential reduction of $75 million to $100 million in those contributions over the next 2 years. But it appears that in the Senate version of the bill that occurred last night that, that provision was removed.
So it's just very uncertain at this point in time.
Philip Ng - Jefferies LLC, Research Division
Those $200 million a good number? Or would be $200 million-plus something incremental on top of that?
Ward H. Dickson
No, $200 million is the number with the facts that we have today.
Operator
The next question is from Mark Wilde with BMO Capital Markets.
Mark Wilde
Steve, I have a couple of questions. One, you talked about a preference in terms of using cash to grow the business rather than repurchase stock.
I wondered if you could just set some parameters around how you would prefer to grow the business, whether it's kind of filling in, in existing businesses domestically or growing offshore. Just some general guidelines.
And then I have a follow-on.
Steven C. Voorhees
I think all of our businesses have opportunities. I think in corrugated, we have the opportunities to grow domestically.
I'd probably put a little bit higher priority if there were an opportunity that would support our export business. Our export business, we're establishing very good customer relationships, so I think there would be a natural growth in that area.
In our consumer businesses, which I would put packaging opportunities there, I think we have the potential to expand product lines in that business and I think I would include the display business as part of that. We've been very happy with the NPG acquisition, and it has given us, I think, the opportunity to deepen our customer relationships.
So those -- I think if you look at -- a question we'll get is fill in versus larger transactions and I think we're -- I tend to just look at what the opportunity for what it is, is rather than the size or particular attributes of it. And I think we have a platform to where we have potentially a lot of different opportunities.
And I think we can naturally grow our business along the packaging and paper lines and be very successful. My feeling is that those opportunities are going to be tangible enough to where we'll be able to, I think, grow our business within the balance sheet that we have.
And if we can't, I'm not so focused on that, that I'm not going to take advantage -- trying to just take advantage of an opportunity just to do it. It has to make economic sense.
It has to make us a better business. And I don't know -- I want to communicate we're going to have proper leverage on the basis on -- proper leverage on the business, and we'll use stock repurchases to maintain a proper leverage on the business.
Mark Wilde
Okay. The other question I had, Steve, is just if you look at the 2 other large public competitors who've already reported this quarter, their margins are about 500 basis points above yours in the containerboard and corrugated business.
And I just like to get your thoughts on how much you think you can kind of shrink that gap over time.
Steven C. Voorhees
That's a hard one to answer. I think we have significant opportunities to perform -- to improve the performance of the corrugated business.
And I don't want to speculate on what our competitors are doing or how to fill the gap. I just want to get the most out of the business that we have.
And I think we can improve the results that we have in the business, and I think we are improving the results.
Mark Wilde
Is there any reason to think that, that 500 basis point gap should continue, should persist over time?
Steven C. Voorhees
That's difficult for me to respond to because I don't have insight into their operations, I only have insight into our operations.
Operator
The next question is from Steve Chercover with D.A. Davidson.
Steven Chercover - D.A. Davidson & Co., Research Division
I just want to talk about the landscape of mills that are available because I'd be surprised, frankly, if you're evaluating any additional containerboard facilities. But can you discuss what might still be out there in terms of stand-alone mills?
And is there half dozen or a dozen?
Steven C. Voorhees
I don't want to speculate on specific mills or how many that would be out there. I will say from an opportunity standpoint, there seem to be opportunities out there.
And I think I'd look at -- I expect we'll have opportunities to look at. Whether they make sense for us or not, I can't really conclude.
Steven Chercover - D.A. Davidson & Co., Research Division
What I mean was it looks like Tacoma was a great acquisition for you, but I can't imagine that's the only asset that you looked at. So, well, let's assume for a moment that you're getting close to your optimal containerboard mill structure.
Where are we likely to see growth from RockTenn going forward? You generated a lot of shareholder value by growing this company over the last 6 or 8 years.
And if it's not containerboard, would it be bleached board or what's next?
Steven C. Voorhees
We're going to continue to look at a series of opportunities that fit with our business. So we're going to look at display opportunities.
We'll look at opportunities on the paper and packaging side. And I think we'll grow naturally with the opportunity set, which is out there.
We have -- continue to have very good opportunities to invest in our own business and we're going to continue to do that. And then to the extent we can accelerate growth through acquisition, we'll do that as well.
I'll repeat, if we can't do that, I think we can grow shareholder value very nicely by buying back shares.
Operator
The next question is from Chip Dillon with Vertical Research Partners.
Chip A. Dillon - Vertical Research Partners, LLC
Steve, as we look at the displays business, that continues to show tremendous growth. And could you just talk a little bit about whether there's still some runway left organically?
Have we peaked in terms of what the system that you have now can do in terms of its volumes? And if that's the case, would you -- are there still acquisition opportunities in that business that you could do to help you grow it, if you hit a wall organically?
Steven C. Voorhees
That's a great question. I'm glad you asked it.
Our display business, we acquired it, I think, in 1994, before 1995, and it's $40 million in sales. And we grew it to $350 million in 2011, primarily organically.
We made a couple of acquisitions, but they really weren't that significant. We did that organically, and we did it by focusing on the needs of primarily consumer products companies that are looking at promoting their product.
And we've looked at the business as a merchandising business as compared to an outlet for us to sell our paperboard or corrugated. And we've been -- I think we've been very successful.
We have -- we execute extremely well. The programs are exceptionally complex.
And then with the Smurfit acquisition, we took, I guess, Adams in West Chester and Chicago, we have a display facility in Chicago, a corrugated box facility, and we moved them over into the display business and they've been very nice facilities for us to serve our consumer products companies' display needs. And that's taken us to a run rate of, I think, of -- it is about $800 million.
As compared to some of our business, other businesses, which I think are somewhat constrained by the size of the manufacturing business, this business is not as constrained and is -- probably, its ability to grow is a function of the -- both the manufacturing facilities, but also the creativeness and innovation that we have in the display business. I think there are acquisitions, and I think we have a runway to grow.
So I would not characterize us as having peaked out at that level. I would be hopeful that we'll be able to grow -- continue to grow the display business as we've done in the past.
Chip A. Dillon - Vertical Research Partners, LLC
And -- which is a great rundown of how that's -- I appreciate that. Just in a very rough sense, what would you say your share is?
I mean, obviously, it was 0 when you started in 1994. And I know the market has grown quite a bit.
But are you like 1/4 of the market, 1/3 or smaller?
Steven C. Voorhees
That's a tough one because there's an organization called POPAI, which the last I looked, the total business was a $15 billion to $20 billion business. And there's so many different product categories.
I really can't estimate the share that we have in the business.
Operator
[Operator Instructions] The next question is from Mark Connelly with CLSA. We'll move on to the next question.
The next question is from George Staphos with Bank of America.
George L. Staphos - BofA Merrill Lynch, Research Division
My last question, guys. Certainly, the productivity gains that you're getting with the EVOL machines have been impressive.
Could you comment at all, though, whether the continued introduction of the EVOLs might change the type of customer that you might need to take within the corrugated market? In other words, does it tend to bias you towards larger volume, larger-run customers?
Or is that really not a consideration at all? It just makes you more effective no matter the customer base.
Michael E. Kiepura
Thanks, George. George, the EVOL is really a quite flexible piece of equipment.
It certainly makes us more efficient on long-running business. But also some of the other -- the make-ready features and other aspects has made us much more effective with shorter run and smaller boxes as well.
So typically, it has been replacing 2 and sometimes 3 other machines in our plants, so it's certainly is -- drives better cost profile, better quality. But it has a lot of flexibility, so it's not just geared to volume.
It's really making our plants more flexible and nimble in being able to serve a broader range of customers.
George L. Staphos - BofA Merrill Lynch, Research Division
Mike, I know this is a tough question to answer and it's looking back with a benefit of hindsight, which is never fair. But if we look back to the mid-2000s, obviously, Smurfit went through a very large recapitalization program that they initially focused really on their box plants.
And there's still opportunities for RockTenn now as the owner of these assets to improve productivity. That's, I guess, ultimately a good news story because you have a further runway on this.
But one could question, given the capitalization program that had been done, why are there still so many opportunities left to go?
Michael E. Kiepura
George, going back to the mid-2000s and a much bigger footprint of box plants, many more opportunities to invest and improve probably than there was capital to go around. I started my career over 30 years ago in the Smurfit organization.
And recognizing how they allocated capital, they were always tight on capital. So I think with the numerous acquisitions they did in the '90s and in the early 2000s and the debt that they took on, I don't think there was amount of capital available to go to all the hungry mouths, so to speak, to feed.
So I think at one point, they had over 150 box plants, and that takes a lot of capital in a capital-intensive business. So we brought the number of plants down.
And we're investing back into those businesses, I think, at a rate to really develop a strong network of plants from a quality and ability to serve both the local, regional and national box markets.
Operator
The next question is from Max Salk with PPM America.
Max Salk
A quick question on the Fusion mill closure and what impact you see that having to CRB utilization rates, and if there's anything to draw from pricing there.
James B. Porter
This is Jim Porter. I think we're all aware that Fusion is about 6% of the market at about, what, 146,000 tons, and we have capacity within that region.
And so -- and there will be an impact, but we in no way would want to comment on price. We see opportunities with customers in that region, and we will operate our business in a way that hopefully we can earn some of that.
Operator
Our final question today is from Chris Manuel with Wells Fargo.
Christopher D. Manuel - Wells Fargo Securities, LLC, Research Division
Just a couple quick follow-ups. First, on working capital.
What are your thoughts for the balance of this year? And from where you sit today, I know you've taken -- you said some inventory is up to levels you're comfortable at.
But if we remain relatively static on the volume front, your thoughts next year as well.
Ward H. Dickson
Well, I'd talk about the third quarter working capital performance. In the quarter, it was actually better than the guidance that we gave.
We said it was going to be a use of about $20 million in cash in the quarter, and it was significantly smaller than that. As we move into Q4, we actually think it's going to be a source.
So we should have a reduction in working capital moving from Q3 to Q4. Although we talked about the inventory levels, we will also -- I think we'll have an increase in our days payable outstanding as we move into the fourth quarter.
We're at around 44 days, between 44 and 45 days on a net working capital basis, and I think we're comfortable with that as we move into the fourth quarter.
Christopher D. Manuel - Wells Fargo Securities, LLC, Research Division
Okay. And then one other kind of related question to a different topic.
But the discussion around $10 a ton price decrease in medium, any -- it seemingly has not had any impact on anyone. But have you noticed any differences in your selling prices in those 2 regions relating to what was at Publisher's?
Or is this something really that goes back to 6, 8 months ago as just sort of a book adjustment?
James B. Porter
We can't really comment on what was published in PPW. It's an index.
But we have no comment on that topic. Our business is solid.
We continue to see strong demand for our corrugated medium products, and we feel the market is strong for our customer base going forward.
Christopher D. Manuel - Wells Fargo Securities, LLC, Research Division
And then last somewhat related topic. The 2, I think Seminole and, something in my notes, West Point, where you had taken down the 2 machines, I think you said about 180,000 tons a year or directionally in that range, 15 a month.
The thought process regarding just doing it as an indefinite idle or versus a permanent close, how do you balance that? And what would be the triggers that would make you go back and revisit, making it permanent?
James B. Porter
This is Jim Porter. I think as I shared earlier, we always are focused on our production capability versus our customer demand.
And we sell our products into 3 channels: our domestic customers, our internal box plants and our international customers. And it's a big system, and we will always try to ensure that we've got the right production capability to meet customer needs.
So it's an ongoing never-ending process of running our business day to day.
Christopher D. Manuel - Wells Fargo Securities, LLC, Research Division
Okay. And then just last clean-up question with regarding repurchase.
Is there anything that prohibits you from being in the market today, repurchasing?
Steven C. Voorhees
I think there's a couple day window after the press release, and it's ongoing beyond that. We really can't answer the question about whether we're prohibited or not.
Operator
I have no further questions.
Steven C. Voorhees
Okay, perfect. Thanks, all, for participating on the call.
Bye-bye.
Operator
Thank you. This does conclude today's conference.
Thank you for joining. You may disconnect at this time.