Rock-Tenn Company (RKT)

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Rock-Tenn (RKT)

Q4 2013 Earnings Call

November 05, 2013 9:00 am ET

Executives

Steven C. Voorhees - Chief Executive Officer, President, Chief Operating Officer and Director

Ward H. Dickson - Chief Financial Officer and Executive Vice President

James B. Porter - President of Corrugated Packaging

Michael E. Kiepura - President of Consumer Packaging & Recycling

Analysts

George L. Staphos - BofA Merrill Lynch, Research Division

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

Mark A. Weintraub - The Buckingham Research Group Incorporated

Chip A. Dillon - Vertical Research Partners, LLC

Scott L. Gaffner - Barclays Capital, Research Division

Christopher D. Manuel - Wells Fargo Securities, LLC, Research Division

Philip Ng - Jefferies LLC, Research Division

Albert T. Kabili - Macquarie Research

Anthony Pettinari - Citigroup Inc, Research Division

Alex Ovshey - Goldman Sachs Group Inc., Research Division

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

Mark W. Connelly - CLSA Limited, Research Division

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

Presentation

Operator

Good morning. My name is Crystal. I will be your conference operator for today. At this time, I would like to welcome everyone to the RockTenn Fourth 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 today, November 5, 2013. [Operator Instructions]

Your speakers for today's call are Mr. Steve Voorhees, Chief Executive Officer; and Mr. Ward Dickson, Executive Vice President and Chief Financial Officer. Mr. Voorhees, you may begin your conference.

Steven C. Voorhees

Thanks, Crystal. Thank you all for joining our call. This is Steve Voorhees, Chief Executive Officer. I'm joined this morning by Ward Dickson, Chief Financial Officer; Jim Porter, President of our Corrugated Packaging business; Mike Kiepura, President of our Consumer Packaging and Recycling businesses.

This is the first quarterly earnings call since 2000 that I'm not sitting with Jim Rubright. So I think you are all aware, Jim retired from RockTenn last week. Jim guided RockTenn's exceptional business performance and financial results over the past 14 years. When he joined RockTenn, our sales were $1.3 billion, RockTenn's stock price was $14 per share and our equity market capitalization was $500 million. Today, RockTenn's sales are $9.5 billion, our stock price is $109 per share and our equity market capitalization is approximately $8 billion.

During Jim's tenure as RockTenn's CEO, total shareholder return including dividends was 863% for a 17.4% compound annual rate of return. This is an exceptional result. Jim's going to be missed as a mentor, as a colleague and as a friend to us all, and we wish him the best.

Before I turn to our review of the business for the quarter, I need to review our cautionary statements. During the course of the call, we 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 these risks and uncertainties in our filings with the SEC, including our most recent 10-Qs and our Fiscal 2012 10-K.

Also, during the call, we will refer to non-GAAP financial measures. We have provided reconciliations of these non-GAAP measures to the most directly comparable GAAP measures in the appendix of the slide presentation. The slide presentation is available on our website.

I'm going to begin with the discussion of our operating results during the quarter. Then Ward Dickson will turn -- will discuss our input costs, balance sheet, pension and other financial measures. I'm going to discuss our capital allocation strategy and outlook. We will then be available for your questions.

Our coworkers continued to make solid progress in improving all aspects of our business and delivered strong financial results during the quarter. We've established a RockTenn record for quarterly adjusted earnings per share. Adjusted fourth quarter earnings of $2.66 per share increased by $1.27, 91% over last year. These results reflect strong operating performance, higher pricing and continued productivity improvements, partially offset by a higher commodity cost.

Our Corrugated Packaging segment EBITDA was up strongly over the last year. EBITDA margins in our Corrugated segment were 20%, an increase from 17.3% in the June quarter and 13.7% in the September quarter of last year. Included in our results are the following items: first, a pre-tax gain of $12 million related to recording additional value for spare parts at the containerboard mills acquired in the Smurfit-Stone acquisition; second, a $9 million gain net of start-up expenses related to a terminated steam supply contract at the Solvay Mill; and third, an $8 million gain related to a partial insurance settlement of property damage claims associated with the turbine generator failure at our Demopolis Mill in May of 2012.

As background, the failed turbine generator was originally built in the 1950s with a capacity of 17 megawatts. The replacement turbine generator has capacity of 35 megawatts. The additional capacity improved the economics of the upcoming $68 million fluidized bed boiler project at Demopolis. We discussed this project on our July call. The project will provide an attractive return while addressing the Boiler MACT requirements at the mill.

Our effective book tax rate of 30.6% was favorably impacted by various state and international tax items. Our effective book tax rate was 31% in the prior-year quarter.

Our higher earnings drove record quarterly free cash flow available for dividends, pension contributions in excess of expense and debt reduction. Free cash flow totaled $277 million, or $3.78 per share in the quarter. This was $2.02 greater than the $1.76 per share in the prior-year quarter. Free cash flow of $11.16 per share in fiscal '13 was 55% higher than the $7.18 per share in fiscal '12. Net debt reduction was $176 million in the quarter and $567 million for the full year. Our leverage ratio of 1.95x at September 30 is below 2 for the first time since March of '11, the quarter immediately preceding the completion of the Smurfit-Stone acquisition.

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