Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Rock-Tenn Company (NYSE: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

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.

Our integration continues to go smoothly, and we continue to make progress in our systems and operational improvements. We've announced the closure of seven box plants since we completed the acquisition, consistent with our plan to migrate our operations to a system of a very low cost, very high volume box plants. Given the strengths in capitalization of the box plants that we're moving our business to and our commitment to work with our customers to make these transactions successful for both of us, our customer retention from our box plant closures have been very high.

We provide a margin bridge slide quantifying the margin impacts of various input components. Recovered fiber, energy and freight reduced our margins by 200 basis points and that was partially offset by higher pricing and synergies. Recovered fiber prices have fallen sharply since quarter-end Q4. The OCC Chicago Index averaged $160 per ton in Q4, November was $110. OCC Southeast declined $63 per ton, OCC Buffalo and New England in the Northeast declined $35 per ton by November. OCC markets continue to be soft and we wouldn’t be surprised to see further weakening in December based on the markets as we see them now, although normal seasonal trends would suggest tighter markets and increasing OCC index pricing for the end of the second fiscal quarter.

The fourth quarter is our strongest sales quarter and as I mentioned, we also build inventories to support our system needs and we didn’t take any major maintenance outage downtime. As there is a material seasonal impacts on both our Corrugated and Consumer businesses, together with action we plan to take to improve our cost structure will adversely affect income in the next three quarters compared to Q4. We plan to build inventories by an additional 115,000 tons through January 2012 to support our system needs during the major maintenance outages we’ll take in February through June 2012. We took 46,000 tons of major maintenance downtime in October, and we expect to take a total of 237,000 tons from October to June. This is 50,000 tons to 60,000 tons more than our normal annual outage downtime, which we estimate to be about 180,000 to 190,000 tons.

As we’ve discussed, we’re taking several extended outages this year as we implement several large capital programs that together with another project at our Hopewell, Virginia Mill in Q1 2013, we believe will significantly lower our overall mill system cost structure. In late October, we acquired a company called GMI Corpak which is a privately held corrugated packaging company that operates four specialty box plants focused on pizza boxes and micro-flute clamshells. It is a very strong strategic fit for Rock-Tenn in what is a large product category for us. Corpak is known for its outstanding customer relationships which is also a strong fit for us.

We will integrate Corpak’s 94,000 tons of containerboard with mill trims that are particularly valuable to our large mill system. Because of the very high potential operating synergies due to this system fit, the $86 million purchase price represents less than 4 times trailing-12 EBITDA plus expected synergies. Due to some existing supply contracts, we expected over – it will take about 12 months to build the full synergy run rate.

Our consumer segment earnings increased $21 million in the quarter and EBITDA margins improved to 15.9% due to several specific factors in addition to the excellent operating performance of our coworkers. First, Q3 was adversely affected by the major maintenance outage at our Demopolis bleach board mill, which was about $6 million reduction in quarterly earnings and then the former Smurfit-Stone’s employee manufacturing plants added about $5 million the segment earnings and higher earnings and average pricing per paperboard and folding cartons much more than offset higher commodity input costs.

Folding carton volumes increased 2.2% over the prior year as we continue to outperform the industry’s reported volume trend. Our recycling and weight solutions segment continue to gain volume during the quarter. Although this is a low margin business, we consider the very strategic position in relation to our overall business portfolio given the market insight we gain and our ability to provide security and ability to optimize the recycled fiber supply to our mills. We plan to invest over $30 million in this segment in fiscal 2012 in projects that we believe we’ll raise the overall returns of this business.

Looking forward to the December quarter, domestic box and folding carton demand have held up well to-date, although we would expect the normal seasonal slowdown to occur later in this month and through December. Export demand and pricing per containerboard and pulp are definitely weaker, but the impact of these effects should be offset by lower recycled fiber costs. We include for your information a slide summarizing our integrated system fiber supply and mill and converting plant outputs, and Steve will provide further information to assist those of you who develop models of our business performance. Steve?

Steve Voorhees – Chief Financial Officer

Thanks, John. I will start with an update on the progress that we continue to make on capturing the $150 million in synergies and $400 million in performance improvements that we have targeted for the Smurfit-Stone acquisition.

As we’ve discussed on prior conference calls, we expect to achieve $150 million in synergies by the end of calendar year 2012. Many of the performance improvements require capital, so we expect the performance improvements to take longer to achieve fully, up to 30 months from the completion of the transaction or toward the end of calendar year 2013. We achieved $110 million run rate of synergies and performance improvements at the end of the September quarter, a $33 million increase of our run rate at the end of June. The increase results primarily from box plant closures during the quarter and reduced input costs from purchasing initiatives, primarily in chemicals.

We also continue to benefit from additional administrative cost reductions. Through the end of September, we’ve spent $48 million of the expected $135 million in cash restructuring costs. We plan to incur most of the remaining $87 million in cash restructuring costs during fiscal year 2012 as we further consolidate our box plant system and complete the integration of most of our financial systems and many of our business systems. We have spent $5 million of the $170 million in capital expenditures that we plan to spend to drive performance improvements. We will spend most of the remaining $165 million in fiscal 2012 and early fiscal 2013, as we implement our plans for our Hodge and Hopewell mills and implement energy projects that will displace fuel oil with 5.4 Bcf of natural gas at four of our paper mills.

Turning to key cost inputs are most consumed 19 million tons of wood fiber and 4.4 million tons of recovered fiber per year. Jim has already discussed fiber market conditions. We use 26 Bcf of natural gas across the company. We will complete our first natural gas conversion project at the Stevenson mill around the 1st of January 2012. This will displace approximately 10 million gallons of annual fuel oil consumption with 1.5 Bcf of additional natural gas consumption. The fuel oil to gas conversions at the other three mills will be fully operational in about 12 months toward the end of calendar year 2012. We expect corporate expenses in the December quarter to be in the $29 million range and interest expense to be approximately $33 million.

We expect depreciation and amortization for the full fiscal year 2012 to be $550 million and capital spending to be approximately $500 million. The $20 million difference between our last quarter’s call estimate is due to our view that we now believe we will be able to execute more of our 2012 and 2013 spending in fiscal year 2012 than we originally thought. In addition, we have conformed the accounting for major maintenance outages in the Legacy Smurfit-Stone mills to Rock-Tenn’s policy of recognizing the expense ratably over the period from the time incurred to the next scheduled outage. There was no accumulative expense recorded in connection with acquisition, so there was limited maintenance outage expense attributable to the Legacy Smurfit mills in the September quarter.

We expect our book tax rate in fiscal year 2012 to be between 36% and 37%. Our past tax rate will be substantially below this level as we utilized the $535 million federal net operating losses that we acquired with Smurfit-Stone. We expect to use these NOLs over the next three years. We also expect to receive the cash benefit from our $146 million in cellulosic biofuel producer credits beginning in fiscal year 2013 and 2014 after using most of the NOLs.

Finally, we have $70 million of alternative minimum tax credits available from Legacy Smurfit that we expect to receive in 2015 and 2016. All told, these tax items aggregate to about $400 million in reduced U.S. federal cash taxes. This combined with the tax deductions from our expected cash contributions to our pension plans, which we expect to be about $352 million in fiscal year ‘12 provides the basis for our expected combined U.S., state and foreign cash tax rate that will be very substantially below our book tax rate of 36% to 37%.

Our unfunded pension liability of $1.4 billion at September 30 is about $300 million higher than at the end of June. About half of the increase is due to lower long-term interest rates and the remainder is due to investment results from the very weak general market performance in the third quarter. At the end of September, our net debt was $3.4 billion and our credit agreement debt-to-EBITDA ratio was 2.6 times. Liquidity was $1.1 billion at the end of the quarter more than adequate to support our business.

That concludes my prepared remarks. Jim and I would now invite your questions.

Question-and-Answer Session

Operator

(Operator Instructions) George Staphos, you may ask your question.

George Staphos

Thanks. Hi, everyone. Good morning. I guess first question I had was on capital spending, you mentioned that CapEx will be up $20 million this coming year, you mentioned this because you are able to do things more quickly that you had initially anticipated might tell into 2013? Given that we don’t have the benefit of the forecast for 2013 for capital spending, could you provide us at least qualitatively where some of the things that you are anticipating for ‘13 are now showing up in 2012 capital spending? Thanks.

James Rubright

Yeah, we laid out a long-term plan. I think we talked about in the last call, where we thought we would spend about $480 million in 2012 and then 2013 the number trended down $375 million, $400 million was my estimate and then I thought the long-term sustaining rate would be about $350 million, which – the higher rate of spending than Smurfit would have historically spent on their mill system, but very consistent with Rock-Tenn’s expectations and then on a long-term trend basis probably $200 million less than depreciation and amortization.

George, I think that clearly we have the ability, I think, to execute some projects we anticipate it would be 2013 projects later in 2012 and that’s why our current estimate is around $500 million. But it’s a substantial task that we have to add infrastructure to execute properly. So, these are estimates, but it doesn’t change really my long-term view of what the aggregate capital will be. Similarly, there may be some 2014 projects that we're able to execute in 2013 and if so, we will. But as we have discussed these are – probably over that entire period there is somewhere between $125 million and $150 million, what I think of is deferred maintenance that really has no to low returns and the balance our projects that we think are just terrific and have very high returns.

George Staphos

Okay. I mean, this is probably getting too granular, but would it suggest then given the range you provided on fiscal ‘13 that now that you are at the lower end of that range or even below it, so $375 million maybe adding towards $350 million in fiscal ‘13?

James Rubright

George, this is too early for me to make an estimate of what that capital will be, because we have a very dynamic capital program anyway and so my guess is that whatever we are estimating for 2013 and 2014, there will be enough changes in it that to get to within $20 million is just more discrete that I can be.

George Staphos

Okay. I appreciate that. On the mill side as you are beginning to work on optimization, are there any conclusion that you can share with us in terms of how you might balance production across the system in ‘12 and ‘13? Are you finding areas where your productivity improvement is allowing you more flexibility around the footprint for the next couple of years? Can you provide some color on that?

James Rubright

Well, on the positive side of the equation we can. I mean, I think you’ll see from the capital projects and performance improvements 500,000 tons to 600,000 tons of capacity added at much lower cost over the next 20 – we’ve been saying two and a half years. What action we’ll take to balance the system, I am not prepared to state right now. We will say, of course, that we will run our system to system demand and so one would expect that we’d be making some changes.

George Staphos

Okay. I appreciate that. The last question and I’ll turn it over. You performed well certainly relative to our model within the Consumer segment, that's not a hinder there, but nonetheless it was good performance, if you had to rank-order these areas or provide your own, Jim, in terms of what the drivers were, was it performance in folding carton that was the biggest driver? Was it – I think all the paperboard companies ran relatively well in the September quarter in cartonboard, or was it synergies and displays as you are putting together Smurfit, what were the drivers? How would you rank-order them in terms of the consumer performance in fiscal 4Q? Thank you.

James Rubright

Right. Our folding carton business has really performed very well. They've continued to take cost out and grow against the market. Really, a lot of this, George relates back to the Gulf States operations. I mean those assets the folding carton plants in Demopolis mill that we acquired in 2005 made $34 million a year. We acquired it. They made $107 million in fiscal year 2011. So, we just had outstanding performance integrating that acquisition, particularly on taking advantage of the folding carton opportunity and the investments we made in those plants and the consolidations we affected.

In addition, coming out of the Q3 maintenance outage Demopolis just performed very well from an operating standpoint. So, we've done a lot to optimize those assets, and then the rest of the folding carton division, we've consolidated that into very low cost plants and their cost structure is allowing them to grow. And so, I'd say the first thing would be the folding carton performance. Second would be the performance of Demopolis. The consumer – the merchandizing display business had an extremely strong quarter, strong sales and then a very nice profit impact from the acquired Smurfit plant, so I think they contributed $5 million of earnings during the quarter, and volume there is continue to be very strong through October. We'll see some seasonal weakening in November and December in that business and that's we always see that, but again, the projects we're working on through January and February look very good.

So, I think we are back on a growth track on merchandizing displays and all the impact is smaller relative to all of Rock-Tenn, still it's a very important business to us and it's one in which we get very close to our customers at the front-end of the marketing cycle. So, it has paybacks with respect to the rest of our business. But that's the best I can do ranking them, George.

George Staphos

I appreciate it. Thank you.

Operator

Phil Gresh, you may ask you question.

Phil Gresh

Good morning.

James Rubright

Good morning, Phil

Phil Gresh

So, I just want to ask another question on the CapEx, just to make sure I understand the numbers you’ve – $170 million in the performance improvement CapEx, previously that number was $195 million. So, I guess the first question on that is, are you basically able to do more with less or the same with less, I should say?

Steve Voorhees

There was at least one project where that's not capital we were able to contract with the supplier for natural gas pipeline that we thought we were going to build, but we did not have to build.

James Rubright

We also spent some in the last quarter. So, I don't know we could try to get more refined, but…

Phil Gresh

Okay. And then just so I understand, you mentioned $125 million to $150 million of deferred maintenance; I assume that’s above and beyond this $170 million number that kind of fold into ‘12 and ‘13 in terms of just getting back to George's question about how to think about 2013. There is – you said you’re going to spend the majority of your performance improvement CapEx in ‘12, but we should assume some deferred maintenance in ‘12 and ‘13 basically?

James Rubright

Yeah, I think we’ve said that there is a start with $500 million in fiscal 2012. What we said is there is approximately a $100 million of that that is what I referred to as deferred maintenance, then there is about $165 million that specifically identified some major performance improvement projects. Then the balance of the capital – rather you can create confusion by trying to identify the major capital spending at the mills versus the stuff that we'll do to support, for example box plant consolidations improvements. If you replace equipment with better equipment, that's performance-related too. So the vast majority of our capital is really performance improvement at that level because it certainly – we don't have maintenance capital levels in our system that even approach the $350 million that I indicated would be our sustaining capital because in that there is a very substantial amount of assumed performance improvement capital. So, I'm sorry if we created a lot of confusion, but I think it's just easier to look at course over which we're going to spend the money and I think we've been as clear about that as we can be.

Phil Gresh

I appreciate that, okay. And then just on the OCC front, I mean the prices you talked about, is there any lag in terms of how quickly you’d realize a reduction or – I mean you kind of – you rattle off some numbers that seemed to average out to about $50 a ton. So is that what we should be thinking about for potentially a quarter-over-quarter reduction?

Steve Voorhees

There is very little lag. It’s going to pass through pretty immediately. There is a little lag and then it has corresponding inventory effects and so forth with respect to the costing your inventory. So I guess its pretty complex, but in terms of our actual purchasing practices, they are pretty immediate.

Phil Gresh

Okay. And then the last question is just on the exports. You talked about the weakness in October, so just want to get a little more color on that. Has it gone worse in November or is it kind of the same and is it mostly Europe or is it other parts of the world as well, this is what you’re seeing out there? Thanks.

James Rubright

Well, I don’t think it’s gotten materially worse in November than what we saw in October, and then what’s happened is the euro slowdown has caused European manufacturers to start moving exports into markets that are not traditionally not large markets for them that weakens the Middle East and then ultimately the Middle East backs up and the Latin American then see an opportunity to take advantage of the market. So, you really have a bifurcated world. You have a very, very stable consistent demand for containerboard in North America and then the rest of the world basically is seeing a backup.

Phil Gresh

Okay, all right, thanks a lot.

Operator

The next question comes from Mr. Chip Dillon.

Chip Dillon

Yes, good morning Jim and Steve.

James Rubright

Good morning.

Chip Dillon

First question is just on the pension situation. It looks like you guys are going to be putting in exactly what you said you were a few months ago on the call. With the liability, I guess, up a few $100 million, I know that wouldn’t impact ‘12s contribution. But sort of this rate of $250 million above the expense rate that you talked about for ‘12 and ‘13, is that still a good number to use or do you think if, let’s just say, the pension funding rates and returns don't change that number might go up?

James Rubright

I think it’s fairly consistent. As I think, we gave you the number for this year. We think next year that is 2013 would be in the range of $360 million based on everything we know right now. So, the funding isn’t going to change as much as the volatility of the liability. Any other thing is you got to make some assumptions with respect to what interest rates are going to be 12 months out just to estimate that liability. And we got a material change in the assets since September. September was a pretty bad time in the world to measure the value of your assets.

Chip Dillon

Got it. And then you have the one slide that talks about the synergy improvement you got and I think you mentioned $29 million and I might be missing something here because it maybe a difference in how the bridge was done. But I noticed in the Containerboard segment on the bridge – or Corrugated Packaging it was 60 basis point benefit from synergies which is about $10 million in the quarter, $40 million annualized. So, does that mean that in the quarter, you saw – if you saw $10 million, if that’s right, the other $19 million from overhead and other areas?

James Rubright

Well, exactly because you have reductions across the board and only parts of those are actually allocated than you’ve unallocated costs, so that explains the difference.

Chip Dillon

Got it. And then, if you could just review for us, when we look at the Consumer Packaging segment, I remember back in ‘08 and ‘09, that area is well benefited from the substantial drop in wastepaper, not just in OCC, but I know you guys, by other substrates as well. Should we expect to see a similar type of improvement, I mean 100 plus basis points for several quarters because of what’s happened with the wastepaper cost, or do you think that that's aggressive?

James Rubright

Well, we have between 900,000 and 950,000 tons of recycled fiber input in the Consumer segment. So, the answer is yes, and there is a variety of grades that we use. As we say, the OCC component is much lower than it is in corrugated manufacturing. So, the range of other recycle fiber grades, news, box cuttings, mixed paper, I mean just go down the list, all of those things are components, and we have the ability to flex within them. So, there is some opportunities based on the differential changes in the markets that we can take advantage of.

Chip Dillon

Got it. And then the last question for you guys is, I noticed on the down timetable there is very little in December and January, which is I’m assuming typical because of the weather and the risk et cetera to pipes freezing. But you mentioned lower export price realization and we’ve heard about drops especially in Europe. Do you think there is anything more the industry can do if it becomes necessary? I know that the inventories are a little to start with, but as we go and now that you’re kind of in that market with Smurfit-Stone, are there other actions you can take? I mean is it possible if the demand just not there for export in those months to increase the downtime; if you feel that’s necessary or not?

James Rubright

Well, Chip, I am not going to comment on what the industry might or might not do because the industry doesn’t do anything, it really is a matter of individual decisions. What we have always said we’ve done in our history has been to balance our systems output to the requirements of the system. That would include export demand from what is a relatively stable base of export customers. But that’s all I am able to comment on.

Chip Dillon

Okay. I just meant what you guys could do, got you. Okay, thanks very much.

Operator

Steve Chercover, you may ask a question.

Steve Chercover

Thanks good morning. I hope this isn’t construed negatively, but everything you said about Smurfit-Stone thus far has been very positive. Have there been any negative surprises or transitions that are more challenging than you anticipated?

Steven Voorhees

I guess that’s the answer. We are sitting here looking at each other. No, okay.

Steve Chercover

Well, that’s good. One other quick one, and I guess your expertise, your previous history in oil and gas might help you with this. As you do these conversions from oil to gas, are you contemplating buying forward to lock in the benefits?

Steven Voorhees

No.

Steve Chercover

I have given you two monosyllabic answers. Thank you.

Operator

Jonathan Cheng. You may ask a question.

Jonathan Cheng

Yeah, thank you guys. You guys commented last quarter about backlogs and the fact that you guys were somewhat bucking the trend. Do you guys have any answers as to why that occurred in the last quarter? And if you can talk a little bit about your backlogs currently, that be appreciated? Thanks.

James Rubright

I think the place that we’re seeing backlogs come in and the low operating rates are in SBS would be I guess the place I would start and where we’ve seen weakness. SBS has a lot of uses including export. Our Demopolis mill is a folding carton mill exclusively selling to Rock-Tenn and domestic independent folding carton companies. I think that's the area of strongest demand, so Demopolis has not taken any economic downtime and we don’t anticipate that it will because we don’t export SBS and we're not major players in the other end markets for that and don’t have as good as visibility as our major competitors would have with respect to what’s happening there.

That explains our performance there. I think our own system and again our strong customer relationship with strong folding, independent folding carton companies in the CRB world are the reason why our backlogs are lower than they were 6 to 8 months ago, but they are fine and again we don’t really anticipate economic downtime, certainly, to any significant degree and my belief is through the end of the year probably none and it's a little hard to see beyond that. But I think we just, we based on the relationship we’ve developed with independent folding carton customers in United States who we supply reliably and with high-quality explains our ability to outperform the industry with respect to the utilization of our mills.

Jonathan Cheng

Thanks.

Operator

Mr. Mike Smith, you may ask your question. Mr. Smith your line is open. Please check your mute button. Okay, I go to the next question George Staphos. Your line is open.

George Staphos

Thanks. Couple of questions on pricing, first, if you had mentioned it earlier on the call I apologize if I had missed it. Within Consumer, was there any benefit from lagged effects from prior year pricing actions during fiscal year 2011 that you’re now receiving either for contracts or other reasons?

James Rubright

There was a little pricing improvement in the Consumer segment in folding cartons. As you know there is a fairly long lag time, so it was a small amount, yes.

George Staphos

Is there more to go there, Jim, or have you now pretty much tapped out what would have been in the backlog, so to speak, on pricing?

James Rubright

Exactly, just exactly what I was doing, George. I think you’ve seen what you’re going to see out of the pricing initiatives that have taken place in that segment.

George Staphos

Okay. Next on corrugated and this is a rough calculation, but if I look at just your, if you will, growth revenues in the segment before inter-segment and just divide by production, obviously, it’s not a perfect analysis. And look at the same metric in the fiscal third quarter, I think that result, that implicit price dropped a bit from fiscal third to fiscal fourth quarter. One is that your own view, and two, what would have driven it considering that you said things were relatively stable within Corrugated for you? Have you seen any pickup in competition above normal since it’s obviously always a competitive sector?

James Rubright

We feel like box pricing has remained fairly stable and you would have seen that relative stability. We can have seasonal mixes. We can have mixes between boxes and sheets. I would have to go over your numbers with you to really understand how you are looking at it to confirm that, because I don’t know that I can explain that what you are looking at.

George Staphos

Third question, on the increase or decrease in payables as you have to some degree been converting prior Smurfit purchasing strategies to your own obviously for the benefit of improving your overall cost position over time, are we done with that, if you will, liquidation on the payable side, or Steve, are there another couple of quarters to go where you are pulling that forward to get the benefit on the expense side?

Steve Voorhees

We are not done. We are still in the process of doing that. And so probably I have another quarter or two before we get to a full run rate.

George Staphos

Okay. And the last question and I will turn it over. You had mentioned looking at the fiscal 1Q, obviously it’s a lower quarter for you typically, obviously, you have some constraints from a demand standpoint as a result. You mentioned that earnings – and here I am paraphrasing perhaps poorly, won’t be quite at the same level as fiscal fourth quarter. Could you go through a couple of points we should be mindful of again as we look at the fiscal first quarter in terms of direction of earnings and composition? Thank you and good luck in the quarter.

James Rubright

Thank you. Sure. You know you are going to have seasonal weakness in demand. So, you are not going to operate at the same level in your converting facilities and then the marginal dollar in the converting facilities are very valuable dollar, that’s number one. Second, you will see some shift from boxes to sheets which have lower margins and then you have the export market, where realizations in the export market are going to be lower. I think we quantified for you the extent of the expected inventory build that also will have a fairly material effect, and then as we indicated, we took a pretty significant amount of downtime in October for major outage maintenances at four of our facilities, two recycled and two virgin facilities. So, all of those will come into play.

George Staphos

Jim, the outages the biggest factor as we – obviously, you are not sizing it for us, so I know it’s hard for you to answer the question this way, but are the outages the biggest reason why an aggregate will be down despite lower OCC costs despite obviously the continued build in synergy and performance improvement benefit? Thanks.

James Rubright

I think the outages are important, the seasonal effects maybe equally important.

George Staphos

Okay, thank you.

Operator

(indiscernible), you may ask your question.

Unidentified Analyst

Has been answered. Thanks.

Operator

Chip Dillon, you may ask your question.

Chip Dillon

Yes, hey. Jim, after you guys did Gulf States and Southern, it looks like you held the dividend for about a year or so you didn’t raise it I guess, if I am not mistaken, and that of course is completely understandable, because you wanted to pay down debt which you did a great job with. Should we sort of see a similar pattern here? In another words, should we not expect a bump in ‘12 if you can address that or do you think the Board will look at it or do you think it’s better to sort of wait and see and get the debt down before you address that maybe a year from now?

James Rubright

That’s a great question. It’s one we have not concluded with our board. So, it would be premature for me to try to indicate where we stand with respect to the dividend, but our commitment is to have a reasonable dividend with respect to our earnings. Certainly, one quarter out wouldn’t be the time you would expect us to take an action on the dividend. But the other factor is we have not brought our leverage up to anything like the levels associated with either the Gulf States or the Southern Container acquisition. So, I don't think the facts are comparable.

Chip Dillon

Got you, because the debts are not as high?

James Rubright

Exactly.

Chip Dillon

Got you, and then I guess one for Steve. When you all were doing the Smurfit deal in the first half, I might be mistaken, but it just feels like a lot of the bank financing opportunities and maybe even, I don't know about the bond market, has even come in more. I guess, what I'm asking is are you seeing new opportunities to even ratchet the interest expense down, not to a degree because it's extremely low as it is, but are there any opportunities or not really as we look out maybe over the next six months or so?

Steven Voorhees

We are satisfied with our capital structure. We do have notes which are callable in March of this next year and I think John Stakel and I spent a lot of time looking at the markets and we'll continue to look at the markets and if there is an opportunity then we'll consider.

Chip Dillon

Got you, thank you.

Operator

Mr. Mike Smith you may ask you question.

Mark Weintraub

Hi this is me by chance Mark Weintraub. Can you hear me?

Unidentified Company Speaker

Yes. Hi Mark

Mark Weintraub

Okay, okay, I’m guessing, first time around, Mike Smith I didn’t think was me second time I guess it’s me, okay.

James Rubright

Okay.

Mark Weintraub

Two questions. One was on the exports. Can you remind us roughly what percentage of your business in Containerboard typically gets exported?

James Rubright

7% to 8%.

Mark Weintraub

7% to 8%, okay. And is that fairly balanced to Europe, Latin America, et cetera. Is it heavily weighted to one area or the other?

James Rubright

I say Latin America is our best and largest market, but then I don't know in 70 countries I mean that we export to, it's very large number.

Mark Weintraub

Really, is it low as 7% to 8%, that’s lower than I would have thought. Okay great.

James Rubright

Our total system – approximately right.

Mark Weintraub

Okay. And second, I think you clarified this on the call to George Staphos's question. In the slides, it says that the seasonality, the lower pricing for pulp and exports will just be partially offset by the OCC and synergy capture. In your comments, you just said offset, but I think in the follow-up question, you made it clear that it was going to be a partial offset. Is that the right read?

James Rubright

I had trouble following your question. Could you try that one again?

Mark Weintraub

Sure. For the fiscal year first quarter outlook, on the slides it clearly says that you're expecting the lower OCC and the synergy capture. Could you just provide a partial offset? When you were talking through it, you actually indicated that maybe they could offset it at one point and you skipped out the partial. So, I wasn't fully clear whether or not these sectors could come close to offsetting at all, but then when you answered George Staphos’ question, I got the sense again that you were reinforcing that, yes, earnings will be down in the fiscal first quarter relative to the fiscal fourth quarter. Is that the correct read?

James Rubright

Well, clearly, our fourth quarter is our highest earnings quarter. So, next quarter if normal seasonal factors supply will be lower and significantly lower, we do have the benefit of some lower fiber cost, but I think the slide is pretty clear, it's a partial offset. If I said something different in response to George's question, I missed both.

Mark Weintraub

You didn’t. You clarified everything. Thanks very much.

Operator

George Staphos, you ask your question.

George Staphos

Last question guys; bigger picture, in terms of OCC, one of the rationale points for Smurfit-Stone was obviously to increase the overall percentage of your fiber usage and mix to virgin from recycled from OCC. Clearly, here in the last quarter anyway OCC prices have been dropping. A lot of it from what we hear is obviously China at least temporarily is oversupplied in paper, so the demand for OCC probably isn't what it was. One, would you agree that that's been the primary cause for the drop in OCC or are there other reasons? Two, how sustained do you think OCC's drop can be realizing that's quite a bit, I guess, for understandable reasons? And three, from here, would you rather see further declines in OCC or would you extend that you could actually wish where it sees stability or increase in pricing given the other advantage that would give you across your whole system? Thanks and good luck in the quarter.

James Rubright

You’re asking me would I rather have lower input cost or higher input cost, I vote for lower.

George Staphos

Okay.

James Rubright

That’s the easy answer. Now, with respect to what’s in…

George Staphos

That’s an absolute answer. There is obviously relative issues that crop up from that, but I'll take that as it is.

James Rubright

Okay. Well, it makes our – what we make more competitive, right, and therefore, if the product cost goes lower you would expect it would have an effect on demand, which means demand for your product might go up. There are a lot of reasons why I like lower input costs, but anyway, we won’t debate that because I know what you’re trying to suggest, and I’m still vote for lower cost.

Now, with respect to the change in the domestic fiber market, clearly China is a major factor and the first thing you saw was import prices to China going down. We’ve been talking for months about the slowdown we’ve seen in China and then there are seasonal effects in Chinese demand as well that will make this a low season with respect to fiber price anyway.

Now, personally I have not really understood why recycled fiber cost held up as long as they did, and you’ll recall a couple of times, I was early on these calls suggesting we saw weakening in fiber and our bias was for lower fiber prices. That didn’t happen. That was very difficult to explain it. Was it lower generation of fiber in the United States that was then balancing against domestic demand; what was going on, I could never figure it out to tell you the truth. So, my own view is this significant drop in fiber cost is kind of fulfilling what I felt should have happened.

Now, our people think that fiber prices are going to go right back up when you get out March, April, the seasonal effects will catch up and in fact you may see prices back at the same levels we started from. I think those are relatively high. I think it’s a commodity and commodities have supply responses to pricing signals and you’ve had a very long pricing signal it, a $165 a ton OCC and $270 landed in China, so very well could be have a supply response that’s building. Alternatively, the lower prices might also have a supply response. So, it’s a very complex factor, but my view is that commodities tend to be mean reverting and the question is, what's the mean? Is the mean $165 or is it $100? I don’t know. But I think certainly we’re seeing some benefit now and we think we’ll see it on a sustained basis, and the question is just what happens when you get into the seasonal reversal pattern in March, April, May.

George Staphos

Okay, thanks Jim. Congratulations on the year.

James Rubright

Thank you very much.

Operator

Phil Gresh, you may ask your question.

Phil Gresh

Yeah, two more quick questions. One, could you tell us Steve, what the 2012 cash tax rate, what you think is going to be – obviously, there is a lot of moving pieces you gave us, just trying to get a sense of the net of all of that?

Steve Voorhees

I think it is going to depend on; just say, very low. I think we would not anticipate paying federal income taxes, cash taxes and then we’ll have some Canadian and state.

Phil Gresh

So, something in that 10% range is probably fair?

Steve Voorhees

Lower than that.

Phil Gresh

Lower, okay, helpful. Then just with the lower OCC prices recently, I know it’s somewhat early days in that, but have you seen any increased competition from the purely OCC-based competitors out there?

James Rubright

It’s always been very competitive with the independent. So, no, we’re not seeing an increase in the competitive environment.

Phil Gresh

Nothing incrementally different.

James Rubright

Exactly.

Phil Gresh

Okay, all right, thank you.

Operator

(indiscernible), you may ask your question.

Unidentified Analyst

Yeah, if you could just clarify something for me so, you’re talking sort of vaguely about – directionally about the December quarter. I am not surprised that we’re going to have holidays in that quarter, but if you could clarify, you had a bunch of one-time items buying – intercompany debt extinguishment cost, stuff like this, and I think most of us would probably – and in even in your slide deck, you’re excluding from the EPS. When you say that EPS would be down sequentially in the holiday quarter versus the peak September seasonal quarter, the seasonal peak, is that relative to the GAAP $1.17 or relative to the sort of operational number that we analysts like to use that would be one $1.70?

James Rubright

Absolutely. I am glad you asked that question because I should have made that more clear. I am always talking adjusted earnings when I make those comparisons. So, I was referring really to ultimately our view with respect to adjusted earnings in Q1 versus adjusted earnings in Q4 ’11?

Unidentified Analyst

Okay. So, just in case I missed something you might have said, so you are saying – all you are saying is that it won’t be as high as a $1.70, but you didn’t really specify with any more detail than that?

James Rubright

Well, I said seasonal factors and the things that I have mentioned would indicate that absent other drivers that might occur during the quarter, changes in market conditions or whatever, yes, earnings will be lower on an adjusted basis.

Unidentified Analyst

Lower than $1.70. Okay, thank you.

Operator

(Operator Instructions) At this time, there are no further questions.

James Rubright – Chairman and Chief Executive Officer

Thank you very much for joining our call.

Operator

Thank you. This concludes today’s conference. You may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Rock-Tenn Company's CEO Discusses F4Q 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts