Rock-Tenn Company (RKT)

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Rock-Tenn Company (RKT)

Q3 2008 Earnings Call Transcript

July 29, 2008 9:00 am ET

Executives

John Spiegel – VP and Treasurer

Steven Voorhees – CFO

James Rubright – Chairman and CEO

Analysts

Claudia Hueston - JPMorgan

Joshua Zaret – Longbow Research

Christopher Chun - Deutsche Bank

Kevin Casey - Casey Capital

Presentation

Operator

Good morning, my name is Trey and I will be your conference operator today. At this time, I would like to welcome everyone to the Rock-Tenn third quarter 2008 conference call. All lines have been placed on mute to prevent any background noise. As to the speakers remarks, there will be a question and answer period and to ask a question at that time, please press star one. As a reminder ladies and gentlemen, this call is being recorded today, July 29, 2008. Should anyone need any assistance, please star zero. Thank you.

Your speakers for today's call are Mr. John Spiegel, Vice President and Treasurer; Mr. Steven Voorhees, Chief Financial Officer and Mr. James Rubright, Chairman and Chief Executive Officer.

Mr. Spiegel, you may begin your conference.

John Spiegel

Thank you, Trey and a welcome to all for joining Rock-Tenn fiscal third quarter 2008 conference call. Joining me are Jim Rubright, CEO; and Steven Voorhees, CFO. During the course of the conference call, we may make statements that are not historical in nature and may involve forward looking statement, then the meeting of federal securities law.

For example, statements regarding our plans, expectations, estimates and beliefs related to future events for forward-looking statements which involved a number of risks and uncertainties. Many of which are beyond our control and that could cause actual results to differ materially from those discussed.

Additional information regarding these risks and uncertainties is contained in the documents that we file with the Securities and Exchange Commission. These documents include the Company's Form 10-K filed for the year ended September 30, 2007, and the Form 10-Q filed for the quarters ended December 31, 2007 and March 31, 2008.

During the call, we will be referring to non-GAAP financial measures. Reconciliation of these non-GAAP measures to the most directly comparable GAAP measures are contained in the third quarter press release which is available on Rock-Tenn's website at Rock-Tenn.com.

With that out of the way, I will turn the call over to Steve Voorhees.

Steve Voorhees

Thanks, John. During the June quarter, Rock-Tenn completed to close full quarter of operating results to Southern Container. Rock-Tenn's net sales from the June quarter $771 million, an increase of $180 million. Southern Container accounted for 156 million of the increase in sale. Rock-Tenn sales excluding the Southern Container increased 4% over the same quarter of last year. Rock-Tenn reported third quarter net income of $18.8 million or $0.49 per share. Rock-Tenn's suggested earnings were $0.70 per share, $0.06 or 9% more than the $0.64 per share reported in the third quarter of last year. Adjustments included $0.7 for the impact of the purchase accounting step up from the value of the seven containers inventory at the time of the acquisition.

As you may recall from our prior conference call, (inaudible) requires a step up to the value of the inventory who require to a level that in the case of finish goods, approximate the selling price of the inventory (inaudible). As we saw this inventory, we assign the step up value of the profit sales minimal profit on these sales. We do not record the profit as we would have normally recorded this inventory, have been valued the cost.

For cost, the step up produced income for the June quarter by $4 million or $0.07 after tax. We will not have similar charges from the seven container acquisition in future quarters. We recorded $3.7 million of restructuring cost consisting of acquisition integration cost of $1.7 million, and that amortization of acquisition-related deferred compensation expenses of $2.1 million.

We will refer to the $2.1 million as ESU expenses during the conference call in April. During the quarter, we successfully completed the capital project of the Solvay mill to expand the capacity of the paper machine number two. The project reduced our income by $3.8 million primarily due to the loss of 12,500 tons of production during the outage.

Finally, we incurred $1 million of operating losses at our folding carton plant in Chicopee, Massachusetts as I showed with the wind down of operations of that plant and the relocation of this business.

Turning back to the consolidated results for the quartet, non-allocated expenses increased by $1.7 million to $6.9 million in the quarter. Most of the increase was for expenses related to the major of financial systems upgrade that we implemented this quarter. The cost to move to this new state-of-the-art financial system reduced income by 1 million in the quarter. The total project cost including capitalized expenses was approximately 7 million.

At the time of the seven container acquisition, we fixed a portion of our bank debt for a period of four years at an average LIBOR rate of 3.11%. When interest rate increased, we terminated these fixed rate agreements and received $10.4 million in cash. We then entered into new fixed rate agreements for accountable time period at a higher average labral rate.

The $10.4 million gain will be amortized over the original term of the fixed rate agreements. We currently have approximately 70% of our debt at fixed rates. Capital expenditures for the quarter were $22.5 million, below depreciation and amortization of $39.2 million.

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