Rock-Tenn Company (RKT)

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Rock-Tenn Company (RKT)

F1Q13 Earnings Call

January 23, 2013 9:00 AM ET

Executives

Steve Voorhees – EVP, CFO and Chief Administrative Officer

Jim Rubright – Chairman and CEO

Analysts

Mark Weintraub – Buckingham Research

Phil Gresh – JP Morgan

George Staphos – Merrill Lynch

Mark Wilde – Deutsche Bank

Anthony Pettinari – Citigroup

Mark Connelly – Credit Agricole

Alex Ovshey – Goldman Sachs

Phil Ng – Jefferies

Chip Dillon – Vertical Research

Steve Chercover – DA Davidson

Scott Gaffner – Barclays

Presentation

Operator

Good morning. My name is Julie. I will be your conference operator for today. At this time, I would like to welcome everyone to the Rock-Tenn First Quarter Fiscal 2013 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker remarks, there will be a question-and-answer session. (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, January 23, 2013. (Operator Instructions).

Your speakers for today’s call are Mr. James Rubright, Chairman and Chief Executive Officer; and Mr. Steve Voorhees, Chief Financial Officer. Mr. Voorhees, you may begin your conference.

Steve Voorhees

Thanks, Julie. Good morning. Welcome to Rock-Tenn’s First Quarter of 2013 Earnings Conference Call. I’m Steve Voorhees, Chief Financial Officer; and I’m joined this morning by Rock-Tenn’s CEO, Jim Rubright.

During the course of this call, Jim and I 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 discussed. We describe this risks and uncertainties in our filings with the SEC, including our most recent Form 10-K.

During the call, we will refer to non-GAAP financial measures. We provide reconciliations of these non-GAAP measures to the most directly comparable GAAP measures in the Appendix to the slide presentation, which is available on our website. Jim will begin with commentary on the performance of our businesses during the quarter, then I will discuss the status of the integration and various financial items. Jim?

Jim Rubright

Thanks, Steve. Our first quarter adjusted earnings per share of $1.35 are the result of strongly improving operating performance in our Corrugated and Recycling businesses and solid progress in recovering the fall containerboard and box price increases. Given the $0.04 per share non-cash deferred tax charge we took in the quarter that’s attributable to a change in California corporate income tax laws and the apportionment factors we apply to our business, the implied $1.39 per share well exceeds our EPS guidance for the quarter from our last call where we forecast adjusted earnings to be down significantly from the $1.39 of last quarter and last quarter included that $0.18 per share gain from a favorable contract dispute settlement.

Also, in light of a largely seasonal weakness in our Consumer business, which produced results well below last year and somewhat below our expectations and the fact that we incurred major maintenance outages at two mills in the quarter and build 74,000 tons of containerboard inventory in anticipation of the late winter and spring maintenance outages, the $28 million Corrugated segment income increase over the prior year and $25 million increase sequentially suggests how much our Corrugated segment performance is improving. Our EBITDA margin for the entire company for the quarter was 14.4% and 15.4% for our Corrugated segment.

We generated a lot of cash in the quarter. Our net debt repayment was $155 million. We paid dividends of $32 million as we doubled up the dividend as a result of the change in the tax law and our pension contributions in excess of pension expense of $13 million, a total of $200 million for the quarter or $2.75 per share.

As shown on the next slide, for the last 12 months, we generated $578 million in free cash flow available, and used for these purposes were $7.99 per share.

During the quarter, our Corrugated business showed improving performance in essentially all respects. Domestic box demand held up better than we expected, with seasonally adjusted strong demand, particularly through late December and so far in January. Our domestic box volumes were up 3.2% over the prior year quarter. Containerboard demand for external sales was also strong.

Although we reduced export shipments to certain markets to meet domestic demand, export demand continued strong and pricing has been moving up nicely, as I’ll detail. We didn’t take any brown containerboard economic downtime in the quarter, but we did take 4,000 tons of bleach footboard downtime in our Canadian mill. We took major maintenance downtime totaling 27,000 tons in the quarter, as we took action this year to adjust our maintenance outage schedule to better match seasonal demand.

Also, as I mentioned, we made substantial progress recovering the fall containerboard and box price increases. By the end of the month of December, we had recovered approximately $40 per ton in domestic box prices, although the average for the quarter was about $29 per ton over the September quarter average. With the year-end contractual adjustments I referred to on our last quarter’s call taking hold this month, we believe we’ll have recovered about $51 per ton by the end of January. That recovery will represent the vast majority of our expected total recovery from this price increase, although over the next few quarters, we expect to realize some further contractual increases as well take advantage of opportunities either to further improve the pricing of our base of business or the margin mix of our domestic box business.

Turning to exports, as I mentioned, export demand for containerboard continued to hold up across the quarter, and pricing has been recovering nicely. Our containerboard exports were 203,000 tons. They were down 18% for the preceding quarter, but pricing was up. On average, for containerboard only, about $40 a ton over the September quarter, although pulp pricing was up less.

For shipments in the March quarter, we expect pricing to continue to increase in all of our markets. And while pricing to the Middle East has also improved from its 2012 bottom, we’ve curtailed shipments to that region to meet our internal system demand and demand in other higher-value domestic and export markets.

Pulp pricing began to improve in the last few months as well and we expected overall, including our SPSK pulp, our pulp pricing should be approximately $18 per ton higher in the March quarter than in the December quarter.

Read the rest of this transcript for free on seekingalpha.com