Rock-Tenn Company (RKT)

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Rock-Tenn Company (RKT)

F1Q2012 Earnings Call

January 25, 2012 9:00 am ET

Executives

Steve Voorhees - CFO

Jim Rubright - Chairman and CEO

Analysts

Philip Gresh - JPMorgan

George Staphos - Merrill Lynch

Mark Wilde – Deutsche Bank

Chip Dillon - Vertical Research Partners

Mark Weintraub - Buckingham Research

Philip Ng - Jefferies

Al Kabili - Credit Suisse

Steve Chercover - D.A. Davidson

Bill Hoffman - RBC Capital Markets

Presentation

Operator

Good morning. My name is [Gweney], and I will be your conference operator today. At this time, I would like to welcome everyone to the Rock-Tenn’s First Quarter Fiscal 2012 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 a 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, January 25, 2012. (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. Voorhees, you may begin your conference.

Steve Voorhees

Thank you, Gweney. Welcome to Rock-Tenn first quarter 2012 conference call. This is Steve Voorhees, Chief Financial Officer. I'm joined by Rock-Tenn's Chief Executive Officer, Jim Rubright.

During the course of this 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 discuss.

We include a description of these risks and uncertainties in our filings with the SEC including our 2011 Form 10-K. 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 the appendix of this slide presentation, which is also available on our website.

Jim is going to begin with a commentary on the performance of our businesses during the quarter, and then I will discuss the progress we're making on capturing synergies as well non-operating items in our financial statements. After our prepared comments, Steve and I will be available for questions. Jim?

Jim Rubright

Thanks Steve. We reported $1.18 per share in adjusted earnings in a period marked by lower export demand and pricing and falling pulp pricing. In addition, our earnings were lower than the sequential period as we expected due primarily to the combined effects of seasonality because the period from mid-November through January is our seasonally weakest period particularly in the container board business, and the major maintenance outage expenses that we incurred in the quarter as we had no major maintenance outage expenses in the September quarter.

These seasonally market factors primarily impacted our Corrugated sector where our earnings declined $0.39 per share. We continue to maintain our progress integrating Smurfit-Stone acquisition and even though our corrugated segment earnings were down sequentially the acquisition was still $0.15 per share accretive during the quarter.

Consumer Packaging was down about $0.03 per share as lower recycled fiber prices and natural gas costs had a greater proportional impact in offsetting seasonal weakness in that business. Our Recycled earnings were down about $0.01 a share since recycled plant margin normally compress in a period of fall in recycled fiber prices. Steve will detail the changes in both expenses in Other that we show slide 6.

Our trailing 12-month EBITDA, credit agreement EBITDA was about $1.3 billion and free cash flow at $64 million for the quarter as we used substantial funds to build primarily container board inventories and to fund our pension plans as we detail in slide 8.

As you can see, we generated $307 million in cash from operations. This of course is non-GAAP number but it is in fact the cash available for the uses that we've shown. The largest of the ongoing uses were $82 million in capital expenditures, $69 million in pension contribution in excess of expense and $69 million of billed container board inventories as we discuss to support our planned outage use in the spring.

In addition, we paid $89 million to acquire Corpak, and we paid $13 million to Smurfit’s former CEO, which was an acquisition related payment that had to be differed for six months under Section 409A of the Internal Revenue Code. Steve will comment later on the proceeds from property sales, all of the resulted in net debt increase $31 million in the quarter.

As I mentioned, Corrugated segment earnings reflected the seasonality of our business and major maintenance outages, as well as a significant production loss that at our West Point white top liner board mill that was caused by a power failure, which combined to reduce container board production by 81,000 tons in the quarter. Our segment earnings was $16 million lower due to container board sales volume, $13 million lower and lower export and pulp prices, $14 million lower from seasonal sales mix changes, which I will detail, and were about $14 million higher due to softening commodity input prices from primarily recycle fiber. We detail these changes further in slide 10.

Commenting on our seasonal converting sales mix generally in the December quarter, we have a higher proportion of sheet sales, which have lower margins and a higher proportion of sales, the national count direct merchandisers, which are driven by the holiday season. These mix changes should reverse as we move out of the second fiscal quarter particularly into the third and fourth.

Our overall converting volume trends were positive with converted product shipments up 5% over the preceding quarter on a per day basis and up 2.6 % Q1 fiscal '11 on a per day basis. Over the course of the year, we exited about 2.5% percent of our total box volume on the basis of pricing decisions that we made in rationalizing the Smurfit business portfolio, although we had replaced most of these volume by the end of the first quarter of fiscal 2012.

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