Rock-Tenn Company (RKT)

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RockTenn Co. (RKT)

Q4 2012 Earnings Call

November 2, 2012 9:00 am ET

Executives

James Rubright – Chairman, Chief Executive Officer

Steven Voorhees – Executive Vice President, Chief Financial Officer

Analysts

George Staphos – Bank of America Merrill Lynch

Phil Gresh – JP Morgan

Mark Weintraub – Buckingham Research

Chip Dillon – Vertical Research Partners

Philip Ng – Jefferies

Alex Ovshey – Goldman Sachs

Mark Connelly – CLSA

Anthony Pettinari – Citigroup

Al Kabili – Credit Suisse

Dave Zorub – BlueMountain Capital

Presentation

Operator

Good morning. My name is Gwen. I will be your conference operator for today. At this time, I would like to welcome everyone to the RockTenn’s Fourth 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 session. To ask a question at that time, please press star, one. 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, November 2, 2012. Should anyone need assistance, please press star, zero.

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

Steven Voorhees

Thanks, Gwen. Good morning. Welcome to RockTenn’s fiscal fourth quarter 2012 earnings conference call. I’m Steve Voorhees, Chief Financial Officer, and I’m joined this morning by RockTenn’s CEO, Jim Rubright.

During 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 discuss. We describe these risks and uncertainties in our filings with the SEC, including the fiscal year ’11 Form 10-K and the Form 10-Qs filed for the past three quarters.

During the call, we will refer to non-GAAP financial measures. We provide reconciliations of these non-GAAP measures to the most directly comparable GAAP measures in the appendix to the slide presentation. The slide presentation is available on our website.

Jim will begin with commentary on the performance of our businesses during the quarter and then I will discuss the status of the integration as well as various items on our financial statements. After our prepared comments, Jim and I will be available for questions.

Jim?

James Rubright

Thanks, Steve. Good morning. Our 46% earnings increase and adjusted earnings in the share in the quarter resulted from strong operating performance across our business units, payments we received to resolve a dispute over the termination of a paperboard sales agreement which contributed $0.16 per share, and a lower effective tax rate in our fourth quarter. Our credit agreement EBITDA margin of 13.7% was up 200 basis points over the third quarter, and we generated 128 million in free cash flow available for dividends, pension contributions and excess of pension expense, acquisitions and investments, all net of a small debt increase.

We continue to make solid progress on synergies and earnings improvements, achieving a net run rate at quarter-end in excess of 250 million, and the new leaders we put in place across our corrugated and recycled businesses are accelerating improvements in operating performance. The container board price increase was implemented and published in the PPW Index in September and export pricing is moving back up. While these increases provided only a small benefit in the fourth quarter, those increases coupled with the box price increases we are implementing now should contribute strongly to earnings as we move through the next year. We also increased our dividend to $0.90 per share on an annual rate and that reflects our confidence in our growing free cash flow.

Major negatives in the quarter compared to our internal expectations as we set guidance at the outset of the fourth quarter were the continued slow start-up curve at our Hodge Mill which reduced earnings during the quarter by at least $0.15 compared with our expectations, and the fact that the price increase was published in September, not August as we anticipated at the outset of the quarter, also slightly reducing our earnings for the quarter relative to our initial expectations.

Our team at Hodge, which we significantly strengthened during the quarter, has made very good progress towards realizing the project benefits; but their efforts have begun to produce good results in October, too late to benefit the September quarter. While the expected results at Hodge will be much better this quarter, we still believe that we will not hit the full project benefits until we complete two follow-up outages over the next six months.

On an adjusted EPS basis, our corrugated segment improvement contributed $0.33 to earnings. Consumer packaging contributed $0.13 as the contract settlement I mentioned before was partially offset primarily by lower paperboard pricing, and our recycling segment reduced earnings by $0.04 as lower OCC prices compressed margins and we took a lower cost to market charge on our recycle plant inventories.

As I mentioned, our cash flow generation continued to be strong in the quarter. We contributed 143 million to our pension plans in excess of pension expense in the quarter. Also included in other in Chart 6 is 17 million that we used to purchase a leased co-generation facility at our Florence, South Carolina mill; and although it’s a relatively small expenditure, the purchase of those assets will be accretive to earnings compared to the prior lease. We also used 10 million to fund debt issuance costs as we moved to term out some debt with a $700 million note issuance that Steve will discuss.

In fiscal 2012, we generated approximately 515 million in cash flow or $7.18 per share that we applied to dividends, debt repayment, pension contributions in excess of pension expense, and acquisitions. This is after 452 million in capital expenditures, the 17 million co-generation plant purchase that I mentioned, 14 million we paid in a redemption premium to retire our 300 million 9.25 2016 notes, and a total of 16 million in new debt issuance costs. Our capital expenditures of 104 million in the quarter and 452 million for the year are below our beginning of the year guidance of 480 to 500 million for the fiscal year; however, much of the shortfall is a matter of timing with expenditures running over into fiscal 2013, and it simply has the effect of increasing our full-year 2013 expectation for capital expenditures from 400 million to a range of 430 to 450 million, effectively no change in our capital expenditure plans over those two years.

Read the rest of this transcript for free on seekingalpha.com