Rock-Tenn Company (RKT)

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Rock-Tenn Company (RKT)

F4Q 2011 Earnings Conference Call

November 10, 2011 09:00 ET

Executives

James Rubright – Chairman and Chief Executive Officer

Steve Voorhees – Chief Financial Officer

Analysts

George Staphos

Phil Gresh

Chip Dillon

Steve Chercover

Jonathan Cheng

Mark Weintraub

Presentation

Operator

Good morning. My name is (Jody) and I will be your conference operator today. At this time, I would like to welcome everyone to the Rock-Tenn’s Fourth 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.rock-tenn.com under the Investor Page. Ladies and gentlemen, this call is being recorded today, November 10, 2011. (Operator Instructions) Thank you.

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

James Rubright – Chairman and Chief Executive Officer

Thank you, (Jodi). Good morning. Welcome to our fourth quarter 2011 conference call. During the course of this call, we may 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 include a description of these risks and uncertainties associated with forward-looking in our 2010 Form 10-K and similar disclosures in our subsequent SEC filings. During the call, we may also 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 will begin with a commentary on the performance of our businesses during the quarter and then Steve will provide an overview of the progress we're making on capturing synergies and performance improvements until discuss non-operating items in our financial statements including interest taxes, financing, pension and some key forecasting assumptions for 2012. After our prepared comments, Steve and I will be available for questions.

Our co–workers delivered another solid quarter and financial results with very good operating performance across our businesses in an environment of stable demand and high commodity input costs. Our adjusted earnings of $1.70 per share reflect this performance and the continued successful integration of the Smurfit-Stone acquisition. We estimate that the acquisition added $0.55 per share to adjusted earnings for the quarter. We also estimate that higher fiber costs reduced earnings by $0.11 per share and other input costs aggregated to reduction of $0.06 per share.

Our GAAP earnings included $0.35 per share of primarily acquisition-related restructuring charges, of which $0.11 per share were non-cash write-downs of assets that were closing as we realign our acquired business assets, $0.03 per share for the remainder of the acquired inventory GAAP step up, and then my personal favorite for this quarter a $0.15 per share GAAP loss on an intercompany loans.

As we explained in our press release, our Canadian operations hold less money to the U.S. operations as a result of the strengthening dollars. So even though there was no net change to us, GAAP requires us to record a loss in net income on the financial statements and a gain accumulated other comprehensive income in the footnotes. At the end of this quarter, we repaid this loan with Canadian bank borrowings, so this accounting noise will not recur in the future. Comparing our quarter-over-quarter results by segment, there is $0.67 per share Corrugated segment increase due to the acquisition, a $0.20 per share increase in our consumer segment and a higher interest expense in share count expense of $0.10 and $0.37 per share, respectively.

Our credit agreement EBITDA for the quarter was $345 million, bringing trailing 12-month EBITDA to $1.35 billion. Our free cash flow for the quarter of $30 million reflected several reductions that we believe are not represented of future fee cash flow generation. First, we paid out $39 million in remaining acquisition fees and expenses and some severance and retention payments related to legacy Smurfit-Stone employees. We reduced accounts payable by $23 million, as we moved to take cash discounts on purchases related to legacy Smurfit operations, and we increased working capital by about $40 million to support higher sales and to build containerboard inventory levels to levels that we believe will allow our box plant system to operate most efficiently and at the lowest net cost. These items, all of which, we had anticipated at the outside of the quarter used the total of about $102 million of our cash flow from operations.

I'll turn to our segment performance. Our full quarter Corrugated segment EBITDA of $254 million represented an EBITDA margin of 15.6%. This was down from last quarter's 16.9% and June 15.2% as the effective higher commodity input costs that I have referred to more than offset higher average pricing. Our mills ran at 99% of capacity in the quarter as we took no economic or major maintenance downtime. Although export markets and pricing began to weaken in October, export demand was strong through the end of the quarter. Our box plant shipments were down modestly in the quarter as we're exiting some low-cost contractual box business as we continue to rationalize our sales and our approach to the market.

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