Packaging Corporation of America (PKG)

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Packaging Corporation of America (PKG)

Q4 2009 Earnings Call

January 26, 2010 10:00 am ET

Executives

Paul Stecko - Chairman and CEO

Rick West - CFO

Tom Hassfurther - EVP, Corrugated Products

Analysts

Mark Weintraub - Buckingham Research

Claudia Houston - JPMorgan

Chip Dillon - Credit Suisse First Boston

Mark Connelly - Sterne, Agee

Richard Skidmore - Goldman Sachs

George Staphos - Banc of America Securities

Mark Wilde - Deutsche Bank

Stephen Atkinson - Bank of Montreal

Presentation

Operator

Thank you for joining Packaging Corporation of America's fourth quarter and full year 2009 earnings conference call. Your host today will be Paul Stecko, Chairman and CEO. Upon the conclusion of the narrative there will be a Q&A session.

I would now turn the conference call over to Mr. Stecko. Please go ahead when you're ready.

Paul Stecko

Thank you and good morning and thanks for joining us on our call. With me on the call are our Tom Hassfurther, who runs our Corrugated Products business; Mark Kowlzan, who runs our mills operations; and Rick West, who you all know is our CFO. And again, thanks for participating and we will take your questions when I complete the presentation.

Yesterday we reported fourth quarter earnings of $59 million or $0.57 a share. Fourth quarter net income included $44 million or $0.42 a share from alternative fuel mixture tax credits and after-tax non-cash charges totaled $1.2 million or $0.01 a share from assets disposals related to previously announced major capital projects at our Counce and Valdosta mills to reduce energy costs.

I should note that in 2010 and 2011 we will also be taking an after-tax non-cash charge of about $1.5 million or $0.01 a share each quarter to account for all of the expected asset write-offs related to these major capital projects.

For the fourth quarter net sales were $532 million compared to $546 million in the fourth quarter of 20008. Excluding income from the alternative fuel mixture tax credits and the asset disposal charge, net income was $16 million or $0.16 a share versus fourth quarter 2008 earnings of $30 million or $0.30 a share. This decrease in earnings was driven by a lower containerboard in corrugated products price and mix of $0.32 a share, which was partially offset by higher volume of $0.08 a share, lower cost for energy of $0.08 a share and lower cost of transportation of $0.03 a share.

For the year, net income was $266 million or $2.60 a share. And excluding the alternative fuel mixture tax credits and the fourth quarter energy project asset disposal charges, earnings were $96 million or $0.94 a share compared to $136 million or $1.31 in 2008.

Full year net sales were $2.15 billion compared to $2.36 billion in 2008. Our fourth quarter earnings were about $0.03 a share higher than our earnings guidance. As a result of stronger than expected volume, which added an additional $0.02 per share to earnings and a lower than expected tax rate, which added an additional $0.01 a share to earnings.

Looking at the details of operations, fourth quarter demand picked up significantly with corrugated product shipments per workday up 8.3% over last year and up 4.3% over this year’s third quarter and put the 4.3% pickup over the third quarter in prospective over the last five years excluding the severe downturn in 2008.

Our fourth quarter shipments per workday were basically flat with the third quarter, let me say that again, our fourth quarter shipments per work day were basically flat with the third quarter with no fourth quarter being up more than a percent and half over the third quarter. So you can see this was an unusually strong fourth quarter for us volume wise.

Another positive sign was that we saw no decline in box shipments, the second half of December when the normal seasonal slow down usually kicks in. As a result, not only were fourth quarter shipments up 8.3% over last year, they were only 2% below fourth quarter 2007 which was a very strong quarter for us. So all in all, demand for us has improved steadily and significantly since the end of the first quarter.

Our asset sales of containerboard also remind very strong, up 28,000 tons or 29% over last year’s fourth quarter. In fact, we set a new all time quarterly record for export shipments. These higher shipments allowed us to run our mills at a 97% operating rates, which reduced our mill downtime to only 18,000 tons. About half of this downtime was in our October that our Counce mill with the wood fiber shortage that we talked about on last quarter’s call.

We produced 600,000 tons of containerboard and that’s up 67,000 tons from last year’s fourth quarter when we had an operating rate of only 86%. At the end of 2009 with our containerboard inventory on plan an up about 600,000 tons over year-end 2008. In anticipation of a five day mill outage at Valdosta in January to make necessary tie-ins for our energy optimization project.

We will also have Counce, our largest mill down for a week at March for its annual maintenance outage. These two outages will reduce production by about 27,000 tons in the first quarter.

As I sated earlier, pricing and mix for containerboard and corrugated products were lower including the full impact of previously published changes in containerboard prices this year reducing earnings by $0.32 a share compared to last year’s fourth quarter the [result] changes in published prices for containerboard during the fourth quarter, however, pulp and paper we reported last Friday that prices for containerboard increased $50 per ton in January in the East and $70 per ton in the West.

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