Rock-Tenn Company (RKT)

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Rock-Tenn (RKT)

Q2 2014 Earnings Call

April 29, 2014 9:00 am ET

Executives

Steven C. Voorhees - Chief Executive Officer, Director and Member of Executive Committee

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

James B. Porter - President of Corrugated Packaging

Analysts

Scott L. Gaffner - Barclays Capital, Research Division

Mark A. Weintraub - The Buckingham Research Group Incorporated

George L. Staphos - BofA Merrill Lynch, Research Division

Anthony Pettinari - Citigroup Inc, Research Division

Philip Ng - Jefferies LLC, Research Division

Alex Ovshey - Goldman Sachs Group Inc., Research Division

Daniel Moran - Macquarie Research

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

James Armstrong - Vertical Research Partners, LLC

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

Mark W. Connelly - CLSA Limited, Research Division

Joshua L. Zaret - Longbow Research LLC

Presentation

Operator

Good morning. My name is Shirley, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the RockTenn Second Quarter Fiscal 2014 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, April 29, 2014. [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, Shirley. Welcome to those of you who are listening in. This is Steve Voorhees, Chief Executive Officer. I'm joined this morning by Ward Dickson, Chief Financial Officer; and Jim Porter, President of our Paper Solutions Business. Mike Kiepura, President of our Packaging Solutions Business, was diagnosed with appendicitis over the weekend and consequently is not able to be with us today.

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-K and also our 10-Q filed for the quarter ending December 31, 2013. We will also refer to non-GAAP financial measures during the call. We've 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 start by discussing our operating results, then Ward will discuss our balance sheet, pension and other financial measures. I'll complete our prepared remarks with comments on our outlook, and then Ward, Jim and I will be available for your questions.

We made progress across many areas of our business in the March quarter. Adjusted earnings per share increased by 13% over the prior year in the face of severe weather and associated impact on our operations during the quarter. Compared to our expectations coming into the quarter, the severe weather reduced income by $44 million on a pretax basis, or $0.38 per share after tax, due to a combination of lost production, unplanned overtime, increased energy cost, increased fiber cost and increased freight cost.

We're achieving productivity improvements in our mills, corrugated box and folding carton plant operations. We continued to invest in our converting and mill operations to improve quality, reliability and productivity.

Our Merchandising Displays business grew both sales and income by over 30% compared to the prior year quarter. Our effective tax rate for the quarter of 42.7% was higher than our expected range of 35% to 37%.

On March 31, the New York state legislature passed a new law that reduced the corporate income tax rate to zero for certain qualifying manufacturers, including RockTenn. While this is positive for us long term, this change also caused us to write off a previously negotiated Empire Zone tax credit associated with the Solvay mill that was previously recorded as a deferred state tax asset. The impact of this item during the quarter was a $10 million charge or $0.13 per share. And consistent with our past practice, we've not added this back to our calculation of adjusted net income of $1.27 per share.

We generated very strong free cash flow of over $170 million in the March quarter. This is an increase of 40% on a per-share basis over last year. For the first 6 months of our fiscal year, we generated over $420 million in free cash flow. On March 3, we announced an agreement to acquire the Tacoma mill from Simpson for approximately $343 million. The complementary West Coast mill location is quite strategic for our Corrugated Packaging and Containerboard business and will create significant operating efficiencies for our system. We will be able to greatly improve the service to our corrugated box plants on the West Coast and our external customers on both the West and East coasts. We are awaiting regulatory approval to complete this acquisition.

Over the past 12 months, Credit Agreement EBITDA has increased by 27% to over $1.5 billion. This is $331 million higher than 1 year ago. Our Credit Agreement EBITDA margin increased by 300 basis points to 16.5%. Our free cash flow of $12.53 per share over the past 12 months is 56% higher than last year. Our leverage ratio of 1.75x is also nearly a full turn below where it was 1 year ago.

We're providing our shareholders with strong, current cash flow returns. We have significant flexibility to improve these returns by deploying this cash flow to implement our operating strategy and also by returning this capital to our shareholders through dividends and share repurchases.

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