Rock-Tenn Company (RKT)

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Rock-Tenn (RKT)

Q3 2013 Earnings Call

July 24, 2013 9:00 am ET


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

Steven C. Voorhees - President and Chief Operating Officer

John D. Stakel - Senior Vice President and Treasurer

James B. Porter - President of Corrugated Packaging


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

George L. Staphos - BofA Merrill Lynch, Research Division

Chip A. Dillon - Vertical Research Partners, LLC

Mark Wilde - Deutsche Bank AG, Research Division

Mark A. Weintraub - The Buckingham Research Group Incorporated

Anthony Pettinari - Citigroup Inc, Research Division

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

Philip Ng - Jefferies LLC, Research Division

Scott L. Gaffner - Barclays Capital, Research Division

Albert T. Kabili - Macquarie Research

Steven Chercover - D.A. Davidson & Co., Research Division

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

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

Daniel Downes



Good morning. My name is Sherry, I'll be your conference operator for today. At this time, I would like to welcome everyone to the RockTenn third 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 under the Investors Page. Ladies and gentlemen, this call is being recorded today, July 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, operator, and thank you all for joining our call. With us -- with Steve and me today is Jim Porter, who is the head of our Corrugated Packaging sector.

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-Qs 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've provided reconciliations of these non-GAAP measures to the most directly comparable GAAP measures in the appendix to the slide presentation. The slide presentation is also available on our website.

I'm going to begin with an overview of the quarter, and Steve Voorhees will comment on the performance of this -- of our businesses during the quarter and our balance sheet and key financial statistics. I'll finish with some thoughts regarding guidance for the remainder of this year and preliminary fiscal year 2014 capital expenditure plans. We'll then open the line to answer questions.

With a respective overview of the quarter, our coworkers achieved another quarter of excellent results, marked by continuing sustained improvements on our Corrugated Packaging business, improvements that are visible broadly across our operations, and that accelerated rapidly over the last 2 quarters.

Higher production; reduced waste; sales volume growth; disciplined execution of pricing initiatives, which include our spring corrugated price increase; as well as careful rationalization of our account pricing all contributed to financial results that have met our own high expectations. Adjusted third quarter earnings of $2.16 reflect this strong operating performance, higher pricing and acquisition synergies.

Net income for the quarter included an $0.08 per share tax benefit from a change in Canadian law, as well as the benefit of research and development tax credits and provision-to-return adjustments that reduced our tax rate to 30.2% for the quarter. Net income also included a $0.10 per share noncash gain from the restructuring of the Jacksonville steam supply contract.

Our higher earnings delivered strong free cash flow, available for dividends, pension contributions in excess of expense and debt reduction, which totaled $216 million, or $2.96 per share in the quarter, which is 60% greater than the $1.85 per share in the prior year quarter.

During the quarter, we completed major maintenance outages at 4 of our virgin containerboard mills: Hodge, Hopewell, Stevenson and La Tuque, our Canadian white top liner mill. They were all completed on or ahead of schedule and on budget.

Reduced production for outage downtime during the quarter was in line with our expectations, about 67,000 tons. Our actual major maintenance downtime was 98,000 tons lower this quarter than the prior year quarter, but more significantly, if you adjust our production for the outage downtime, our quarterly containerboard production was 32,000 tons higher than the prior year quarter. And all of this reflects the capital -- the maintenance and the personnel investments we've made in our mills over the last year.

Hodge, for those of you who are following it, is perform extremely well after the steps we took during the outage to address a number of constraints following last year's rebuilding project. And then at Hopewell, the major modernization project that we did there has achieved our objectives of dramatically improving product quality and consistency. It enables the mill to produce lighter weight liner grades and it addresses the long-term capital needs of the mill.

Corrugated Packaging operations are also showing marked improvement. Our converted product sales again exceeded industry-reported averages, and this is an excellent result, it seems to us, given the fact that we've been implementing containerboard and box price increases. We've been systematically addressing the pricing in our lowest-margin integrated accounts, and we closed 19 box plants in the last 2 years, where we've experienced planned attrition from the closed plant that has ranged from approximately 5% to 30% per closed plant.

Our Consumer business operating income of $76 million was up $13 million over the preceding quarter, although it was down $8 million from the third quarter of 2012 due to generally lower selling prices. We've achieved partial recovery of our spring bleached paperboard and CRB price increases and with our currently high operating rates and strong backlogs, we're in the process of, again, seeking to implement price increases in those paperboard grades.

We've made significant progress on the realization of synergies and improved -- performance improvements, which reflects the improved execution across our businesses. In the third quarter, synergies and performance improvements were $60 million higher than in the prior year quarter.

With that overview, I'll now ask Steve to provide a closer look at our operations during the quarter.

Steven C. Voorhees

Thanks, Jim. I want to start with an overview of industry trends. Industry box volumes as reported by the Fiber Box Association increased by 1.3% in the June quarter over last year and 5.9% over the March quarter. These numbers are not adjusted for shipping days.

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