Packaging Corporation of America (PKG)

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Packaging Corporation of America (PKG)

Q3 2009 Earnings Call

October 20, 2009 7:30 am ET

Executives

Paul Stecko - Chairman and CEO

Rick West - CFO

Tom Hassfurther - EVP of Corrugated Products

Analysts

Chip Dillon - Credit Suisse

George Staphos - Banc of America Securities

Mark Weintraub - Buckingham Research

Richard Skidmore - Goldman Sachs

Mark Wilde - Deutsche Bank Securities

Jason Marcus

Presentation

Operator

Thank you for joining Packaging Corporation of America's third 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 Stecko

Thank you and good morning and welcome to PCA’s third quarter earnings conference call. With me on the call today Mark Kowlzan, who runs our mills; Tom Hassfurther, who runs our Corrugated Products system; and Rick West, our CFO. And I want to thank you for participating. As the operator just mentioned, at the conclusion of the presentation, we will be glad to take calls.

Yesterday, we reported third-quarter earnings of $73 million, or $0.71 a share. Third-quarter earnings included income of $48 million, or $0.46 a share from alternative fuel mixture tax credits for the period July 1 through September 30, 2009. Net sales for the third quarter were $554 million and that compares to $621 million in the third quarter of 2008. Excluding the income from the alternative fuel mixture tax credits, net income was $25 million, or $0.25 a share and that compares to third-quarter earnings of last year of $38 million, or $0.37 a share. This $0.12 per share decrease in earnings compared to last year was driven by the downturn in the economy, which lowered containerboard and corrugated products price and mix by $0.19 a share and volume by $0.06 a share. These items were partially offset by lower costs for transportation of $0.05, energy of $0.05, recycled fiber of $0.02 and chemicals of $0.02 per share.

Net income for the first nine months of 2009 was $207 million, or $2.03 per share. And excluding alternative fuel mixture tax credits, earnings were $80 million, or $0.78 a share compared to $105 million or $1.01 in 2008.

Year-to-date, net sales were $1.62 billion compared to $1.81 billion in 2008. The pickup in business conditions that we saw in the second quarter, when our corrugated products volume was up 10%, or 40,000 tons over the first quarter, was sustained, and improved further with our box shipments up an additional 1.5%, or 6000 tons, over the second quarter. Compared to last year's third quarter, our corrugated product shipments were down 4.8%. Our shipments did improve each month as the quarter progressed. Compared to last year's third quarter, July shipments were down 7.4%. August was down 6.5%. And I'm pleased to report that September was even with last year. Of course, September's comp is easier this year because last September represented the beginning of the economic downturn. Our September shipments, however, were still up 2% over this August. So for us, business is continuing to slowly but steadily improve.

Our outside sales of containerboard were also strong, up an additional 24,000 tons, or 24%, over the second quarter. Of the 24,000 ton pickup in sales, domestic sales and exports were each up 12,000 tons. Compared to our last year's very strong third quarter, outside containerboard sales were only down about 8000 tons, or 6%. Higher shipments of corrugated products and containerboard compared to the second quarter did allow us to reduce our mill downtime by 50%, to 30,000 tons in the third quarter. We produced 588,000 tons of containerboard that’s down 33,000 tons from last year. Our mill operating rate increased to 95%, up from 91% in the second quarter. Even with this higher operating rate, our containerboard inventories still dropped 8000 tons compared to the end of the second quarter.

Last Friday, the Fibre Box Association reported that industry corrugated product shipments for September were down 4.8% compared to last year, but were up 3.3% over this August. It’s noteworthy that in the previous 10 years, only once were total shipments higher in September than in August. For the quarter, industry shipments were down 8% compared to last year. Containerboard exports, however, remained very strong at 347,000 tons. And industry inventories fell 87,000 tons to 2,236,000 tons, which is the lowest inventory level for September in 30 years.

As I stated earlier, lower pricing and mix for containerboard and corrugated products reduced earnings $0.19 a share compared to last year's third quarter. This reflects the full impact of previously published changes in containerboard prices this year, except for the September $10 price decrease, which was announced, which will begin to impact earnings beginning in the fourth quarter. The earnings impact of lower prices was somewhat higher for us in the third quarter because we completed essentially all of our August 2008 box price increases by the end of last year's third quarter, while other major producers reported publicly that their completion of last Augusts’ price increase ran well into the fourth quarter.

Moving next to cost, the downturn in the economy has resulted in lower costs, especially for energy and transportation. PCA is also benefiting from the work that we had previously done on our bark boilers at the Counce and Valdosta mills to improve combustion efficiencies. Average prices paid for purchased fuels dropped by more than 30% compared to last year, reflecting primarily lower natural gas prices, which dropped about 50%. Even with the relatively low use of natural gas in our system, this benefited earnings by about $0.05 per share. Transportation costs were also down compared to last year's third quarter, driven by lower diesel prices, which were about 40% lower than last year's third-quarter average US price, as well as by the availability of more trucks and rail cars with the economic downturn.

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