Rock-Tenn Company (RKT)

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Rock-Tenn (RKT)

Q2 2013 Earnings Call

April 24, 2013 9:00 am ET

Executives

James A. Rubright - Chairman of the Board, Chief Executive Officer and Member of Executive Committee

Steven C. Voorhees - President and Chief Operating Officer

James B. Porter - President of Corrugated Packaging

John D. Stakel - Senior Vice President and Treasurer

Analysts

Mark A. Weintraub - The Buckingham Research Group Incorporated

Anthony Pettinari - Citigroup Inc, Research Division

Scott Gaffner - Barclays Capital, Research Division

Phil M. Gresh - JP Morgan Chase & Co, Research Division

Mark Wilde - Deutsche Bank AG, Research Division

George L. Staphos - BofA Merrill Lynch, Research Division

Chip A. Dillon - Vertical Research Partners, LLC

Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division

Philip Ng - Jefferies & Company, Inc., Research Division

Mark W. Connelly - Credit Agricole Securities (USA) Inc., Research Division

Adam J. Josephson - KeyBanc Capital Markets Inc., Research Division

Presentation

Operator

Good morning. My name is Mary Ann. I will be your conference operator for today. At this time, I would like to welcome everyone to the RockTenn Second Quarter Fiscal 2013 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, April 24, 2013. [Operator Instructions]

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

James A. Rubright

Thank you. And thank you, all, for joining our call. During the course of the call, we'll 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. We describe these risks and uncertainties in our filings with the SEC, including our most recent 10-Q and 10-K for the current fiscal year and the end of last year.

Also during the call, we'll refer to non-GAAP financial measures. And we'll provide reconciliations of these non-GAAP measures to the most directly comparable GAAP measures, and it's in the appendix of the slide presentation. The slide presentation is also available on our website. I'm going to begin with an overview of the quarter, Steve Vorhees will comment on our performance of our businesses during the quarter, and then I'll return to review our balance sheet and key financial statistics and to give you some thoughts with respect to guidance for the remainder of this year and update the '14 guidance.

Our adjusted earnings of $1.12 per share resulted from strong operating performance and the box market decreased slowly at a relatively slower rate over the prior year, when the market was characterized by relatively tight containerboard markets. Our earnings per share of $4.45 include the release of a tax reserve that we established when we closed the Smurfit acquisition to reflect the possibility that proceeds of the black liquor tax credits received by Smurfit in 2009 might be taxable.

This quarter, the IRS notified us that it completed its examination of Smurfit's 2009 income tax return. The IRS reviewed and accepted our volumetric calculations of the credit, and they did not raise any questions regarding the taxability of the credits. As a result, we released the reserve, thereby increasing by $649 million the amount of federal NOLs that are available to offset future taxable income for RockTenn. The $254 million credit income represents the cash tax benefit we'll realize from these additional NOLs in future periods. The way it looks now, that's about $3.50 per share in additional cash flow that we'll realize in fiscal '14 and '15. In total, the total expected cash tax benefit of all of our federal tax and state tax loss carryforwards and tax credit carryforwards is about $625 million in cash tax benefit.

The $1.12 of adjusted earnings is higher than the guidance we gave last quarter of about $1 a share for this quarter, and the actual pricing and commodity input costs were generally in line with our expectations, as were the normal quarter end accruals and our effective tax rate. The principal difference from our expectations was much better operating performance during the quarter in our box plant system and in our containerboard mills. This favorable operating performance contributed about $0.09 or $0.10 to the increase in earnings per share over the guidance we gave at the outset of the quarter.

Our Corrugated segment income of $108 million was $32 million higher than last year. As of the end of the last quarter, we've realized $53 per ton on an integrated basis of the $50 per ton price increase published in September of last year. Higher pricing was partially offset by higher commodity input costs, principally for wood, chemicals, natural gas, freight and labor, and by the cost of reduced production from the major maintenance outages that we took during the March quarter.

Consumer Packaging segment income of $63 million was in line with our expectations for the quarter, with lower pricing and lower display volumes driving a lower profitability. Recycled segment earnings were lower than the prior year's quarter due to lower tons sold and lower recycled fiber prices, which compressed margins, as Steve will discuss.

Right now, I'll turn it over to Steve to discuss our operations in more detail, who, as I mentioned, will turn it back to me at the end of the call.

Steven C. Voorhees

Thanks, Jim. I'm going to start with our corrugated box business. Industry box demand increased 1.1% over the prior year and declined 3.2% from the December quarter. Both of these numbers are adjusted for shipping days. The growth of RockTenn's box shipments succeeded the industry. RockTenn's box shipments increased 4.8% over the prior year quarter and decreased only 2.2% from the December quarter. Demand trends for March and the first 3 weeks of April continue to support our view that total shipments in April will be up, although given the 2 more shipment days, may be down slightly on an average day basis.

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