Rock-Tenn Company (RKT)

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Rock-Tenn Co. (RKT)

F3Q 2011 Earnings Call

August 3, 2011 9:00 am ET

Executives

James A. Rubright – Chairman and Chief Executive Officer

Steven C. Voorhees – Executive Vice President, Chief Financial Officer and Chief Administrative Officer

Analysts

George Staphos – Bank of America Merrill Lynch

Mark Wilde – Deutsche Bank

Phil Gresh – JPMorgan Chase & Co.

Chip Dillon – Vertical Research Partners

Mark Connelly – CLSA

Steven Chercover – D. A. Davidson

Mark Weintraub – Buckingham Research

Bill Hoffman – RBC Capital Markets

Joshua Zaret – Longbow Research

Joseph Stivaletti – Goldman Sachs

Presentation

Operator

Good morning. My name is Caroline and I will be your conference operator today. At this time, I would like to welcome everyone to the Rock-Tenn's Third Quarter Fiscal 2011 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period.

(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 investor’s page. Ladies and gentlemen, this call is being recorded today, August 3rd, 2011. (Operator Instructions) Thank you.

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

James A. Rubright

Thank you, good morning all. We appreciate you joining our call and your interest in our company. During the course of this call, we may make forward-looking statements of course within the meaning of the Federal Securities Laws which involves statements regarding our plans, expectation, 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 include a description of certainties, risks and uncertainties associated with forward-looking in our 2010 Form 10-K and similar disclosures on our subsequent SEC filings. Also during the call we may refer to non-GAAP financial measures. We provide reconciliations of these non-GAAP measures to the most directly comparable GAAP measures in our earnings release and in the appendix of this slide presentation which is also available on our website on the investor tab.

This morning I’ll begin with the commentary on the performance of our businesses during the quarter and our recently closed acquisition of Smurfit-Stone. I’ll provide an overview of our plans and expectations for capital expenditures going forward and then Steve Voorhees will provide an overview of our segment disclosure and cover non-operating items in our financial statements. After our prepared comments Steve and I will be available for questions.

Our legacy operations at Rock-Tenn made about $0.96 per share in the quarter compared to $1.04 at last year in the quarter and this was due to lower production from the major maintenance outage at our Demopolis mill which as you know on a two year major maintenance schedule and as a result the disruption and production reductions from this outage reduced earnings by about $0.10 per share.

As a result higher pricing and volume in our consumer packaging business more than offset higher fiber chemical and freight costs. Our consumer packaging margins were good, our folding carton plants continue to gain share with our volumes up 1.6% against an industry that was down 3.7% over the prior year quarter.

Our beverage partition business, which we now report with our folding carton business were nicely over the prior year and performed very well financially during the quarter. Our integrated partition business is the largest customer of our uncoated recycled paperboard mills, which are now also included in our Consumer segment. Merchandising displays also grew over the prior year as we continue to differentiate ourselves with our customer value proposition and we included the five Smurfit display plants in this sector, they have annual sales of about $240 million bringing our total annual display sales to over $600 million per year.

Coated recycled paperboard market demand continues to be very strong, we again said no economic downtime in the quarter and we take – and we expect to take no economic downtime for this foreseeable future. At Rock-Tenn, our SBS backlogs are healthy and we [go] back to a normal level of about one month’s production as a result of the outage in that levels about normal for this time of the year.

However, we believe that our backlogs maybe significantly stronger than many of our competitors. So, at least for us as with coated recycled paperboard, we expect to take no economic downtime in our bleached paperboard operations.

Our legacy corrugated packaging plants and our Solvay recycled containerboard mill performed well during the quarter, particularly given the higher fiber, chemical and freight costs as we incurred.

I would say that balancing those freight costs, our volume increases and the integration benefits, which have continued to keep this acquisition on track to our 2008 acquisition cases. With that brief summary, I’ll turn to the Smurfit-Stone acquisition. The initial integration went very well renewal service of production disruptions and this allowed us to focus on synergy capture and business improvements.

The customer reception to this transaction has been terrific and it’s more than fulfilled our high expectations. We currently have many opportunities to increase sales of the combined operations.

As part of our plan to improve the cost structure of our corrugated box plant network, we announced the closure of four corrugated box plants. Our goal with these closures is to retain substantially all of the business by transferring into other well capitalized plants in our system.

Our containerboard mills also ran very well during the – one month that we own them. As we previously discussed with you, we believe that our challenge this quarter would be meeting our system demand.

During June, we accordingly took no economic downtime and we had about an average amount of maintenance downtime. During these running conditions, and the improvements we’ve made in the mill and box plant operations, corrugated packaging EBITDA margins were 16.2% for June for first full month of our ownership. When you compare our EBITDA margins to the – EBITDA margins of the other two high-performing integrated containerboard companies, our corrugated packaging EBITDA margins compared well. We were somewhat below IP, and that has given the value they created with Weyerhaeuser acquisition and they were slightly ahead of packaging core, our margins of course, were well ahead of Temple-Inland just we expected.

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