Temple-Inland, Inc. Q1 2008 Earnings Call Transcript

Temple Inland Inc. (TIN)

Q1 FY08 Earnings Call

April 29, 2008, 09:30 AM ET

Executives

Chris Mathis - Director of IR

Doyle R. Simons - Chairman and CEO

J. Patrick Maley III - President, COO, Director

Analysts

George Staphos - Banc of America Securities

Mark Wilde - Deutsche Bank Securities

Richard Skidmore - Goldman Sachs

Peter Ruschmeier - Lehman Brothers

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2008 results conference call. My name is Jasmine, and I will be the operator for today. At this time, all attendees are in listen-only mode. We will be conducting the question-and-answer session towards the end of this conference. [Operator Instructions]

I would now like to turn the presentation over to your host for today's call, Mr. Chris Mathis, Director of Investor Relations. You may proceed, sir.

Chris Mathis - Director of Investor Relations

Good morning. My name is Chris Mathis, Director of Investor Relations for Temple-Inland, and I would like to welcome each of you who have joined us by conference call or webcast this morning to discuss the results for first quarter 2008.

Joining me this morning are Doyle Simons, Chairman and Chief Executive Officer of Temple-Inland; Pat Maley, President and Chief Operating Officer; and Randy Levy, Chief Financial Officer.

Please read the warning statements in our press release and our slides concerning forward-looking statements as we will make forward-looking statements during this presentation. In addition, this presentation includes non-GAAP financial measures that require reconciliation to GAAP financial measures can be found on our website at www.templeinland.com.

This morning, Doyle Simons will give a presentation on the results for first quarter 2008. After the completion of this presentation, we will be happy to take your questions.

Thank you for your interest in Temple-Inland, and I would now like to turn the call over to Doyle Simons.

Doyle R. Simons - Chairman and Chief Executive Officer

Thank you, Chris. Good morning and welcome to the Temple-Inland first quarter 2008 earnings call.

We reported a net loss of $0.12 per share in first quarter versus net income of $0.35 per share in first quarter 2007 and $10.76 in fourth quarter 2007.

Special items in first quarter 2008 raised $0.07 per share charge related to completion of the transformation plan and final resolution of pending antitrust litigation versus $0.20 per share income in first quarter 2007 and $10.53 per share income in fourth quarter 2007, primarily related to the sale of our timberland.

We had a net loss per share excluding special items of $0.05 per share in first quarter 2008 versus net income of $0.15 per share in first quarter 2007 and $0.23 per share in fourth quarter 2007. Segment operating income was $34 million in first quarter 2008 versus $80 million in first quarter 2007 and $60 million in fourth quarter 2007.

Now turning to corrugated packaging, operating income was $55 million in first quarter 2008 compared with $64 million in first quarter 2007 and $75 million in fourth quarter 2007.

Our first quarter 2008 average box price was up $23 a ton versus first quarter 2007 average and up $2 a ton versus fourth quarter 2007 average. Our first quarter 2008 box price was up over $40 a ton compared with August 2007 prices, reflecting full realization of the September 2007 price increase.

Our box volumes continue to outpace the industry. On a volume per work day basis, our box shipments were up 3% in first quarter 2008 versus first quarter 2007, and the industry was down 1% during the same period.

Our recycled fiber costs were up $27 a ton versus first quarter 2007 and up $2 a ton versus fourth quarter 2007. Current recycled fiber costs are up $3 a ton versus first quarter 2008 average price.

Energy costs were up $6 million versus first quarter 2007 and up $12 million versus fourth quarter 2007. And freight costs were up $4 million versus first quarter 2007 and fourth quarter 2007.

Let me also remind everybody that we had two other items that impacted earnings in the quarter. As previously disclosed, we had an operating issue at our Bogalusa mill in January, resulting in a negative $6 million impact to earnings. This issue was resolved in February, and our mills ran at record level… production levels… at record production levels in March.

Second, we had a scheduled maintenance outage at our Rome, Georgia mill, which impacted production by approximately 24,000 tons. In second quarter 2008, we have scheduled maintenance outages that will impact production by approximately 30,000 tons.

Turning to building products, we had an operating loss of $21 million in first quarter 2008 versus $16 million in operating income in first quarter 2007 and $15 million loss in fourth quarter 2007.

In lumber, our average price is down $24 versus first quarter 2007 and down $7 versus fourth quarter 2007. Lumber volume was down 2% versus first quarter 2007 and flat versus fourth quarter 2007. Current lumber prices are up $8 versus first quarter 2008 average prices.

In gypsum, average price was down $64 versus first quarter 2007 and down $6 versus fourth quarter 2007. Volume was down 27% versus first quarter 2007 and down 10% versus fourth quarter 2007. And current prices are up $3 versus first quarter 2008 average price.

In particleboard, average price is down $7 versus first quarter 2007, but up $9 versus fourth quarter 2007. Volume was down 16% versus first quarter 2007, but up 9% versus fourth quarter 2007. And current prices are flat versus first quarter 2008 average price.

Based on these very difficult building products markets, we have taken aggressive actions to reduce our losses in this business going forward.

We have lowered our headcount by over 18% and have reduced operating rates to match our production to our demand, including significant production curtailment at our West Memphis, Arkansas; and McQueeney, Texas gypsum facilities and our Buna, Texas sawmill. The benefits from these actions will begin to show up in second quarter 2008. We incurred $2 million in severance charges in first quarter 2008 related to these actions.

Before concluding, let me highlight a few financial matters. Long-term debt at the end of the quarter was $1.05 billion. The increase was primarily driven by typical increases in working capital in the first quarter.

Capital expenditures for 2008 are currently projected to be approximately $170 million to $175 million for 2008, down $20 million to $25 million from prior guidance and approximately 85% of depreciation.

Net interest on financial assets was approximately $3 million in first quarter 2008, primarily due to timing issues. Going forward, we continue to anticipate this number will be approximately $1 million per quarter.

And general and administrative expenses was 21 million in the quarter versus 25 million last year. We anticipate that for full year 2008, this number will be in the $90 million to $95 million range, down 5% to 10% from 2007, and 2007 was down approximately 7% from 2006.

To conclude, in corrugated packaging, box pricing in first quarter 2008 was in line with expectations and our volume continued to outpace the industry. But on the input side, we experienced significant cost inflation in energy, freight and fiber.

Looking forward, we expect higher seasonal corrugated packaging shipments in the second quarter. We remain focused on driving for low cost through asset utilization and manufacturing excellence. Increasing asset utilization in our box plant system has enormous leverage to improving earnings and returns.

In building products, we have seen some seasonal improvement. However, markets continue to be very difficult, and we took steps in first quarter 2008 to reduce our losses going forward.

With that, we will open it up for questions.

Question And Answer

Operator

[Operator Instructions]

And your first question comes from George Staphos. You may proceed.

George Staphos - Banc of America Securities

Hi, guys. Good morning. Thanks for the details as always. Doyle, you are saying that box pricing pretty much materialized as you expected. Was there any variability through the quarter? I would imagine not.

Are you pretty much resolved now on the August price hike? And can you give us a flavor in terms how trends are shaping up early in April in that side of the business? And then I have some follow-ons.

Doyle R. Simons - Chairman and Chief Executive Officer

George, as we indicated in... as I indicated in the prepared remarks, we did realize over $40 from August 2007 through the first quarter of 2008. So, I would tell you we have fully realized the price increase from last year. In terms of current market conditions, box demand has been and remains solid currently.

George Staphos - Banc of America Securities

Okay. One question, are you done now pretty much with your national account customers? I know you said that you got it implemented, but is there any residual left for 2Q?

Doyle R. Simons - Chairman and Chief Executive Officer

No, we were essentially done with that process.

George Staphos - Banc of America Securities

Okay. One of the things that's obviously been a strategy at Temple and the box side has been to improve utilization rates. And obviously, that's had a positive on your returns as we understand. But given the focus on utilization in a somewhat sluggish macroeconomic environment, whether or not it's affecting the box business, I think views vary.

How do you incentivize your managers to avoid pricing at uneconomic levels? How do you factor in return on capital perhaps on that side of the ledger to keep price from dropping too low and the drive for utilization rates.

J. Patrick Maley III - President, Chief Operating Officer, Director

This is Pat.

George Staphos - Banc of America Securities

Hey, Pat.

J. Patrick Maley III - President, Chief Operating Officer, Director

How we approach that piece of the business is we are focused on return on investment and profitably growing our business. And the drive for asset utilization is a drive towards achieving the lowest cost position. It doesn't mean that you transfer or translate that to decreased pricing in the market.

And I think if you look at our price performance versus the industry over the last three years, I think it's been relatively in line with the industry averages.

George Staphos - Banc of America Securities

I guess at the end of the day that if you are driving for volume, realizing it has a benefit on return, don't you have to at some point guard against… manage against pricing it too low a level or how do you manage against that, Pat?

J. Patrick Maley III - President, Chief Operating Officer, Director

Well, structurally you can change your cost position without impacting your --

George Staphos - Banc of America Securities

Got it.

J. Patrick Maley III - President, Chief Operating Officer, Director

Your volumes.

George Staphos - Banc of America Securities

Okay.

Doyle R. Simons - Chairman and Chief Executive Officer

George, just let me make one more point there. One of the reasons we may have been able to grow our business is because we have been able to deliver quality boxes on time to our customer specification. That's how we have been able to grow our business and that's how we will continue to grow our business going forward.

George Staphos - Banc of America Securities

All right. I appreciate that, Doyle. A quick one and I will turn it over. You've made out some significant moves in building products to reduce costs. Anything else that you can do at this juncture? You have obviously been reducing G&A as well. Anything else that we should expect out of you in the next three quarters?

Doyle R. Simons - Chairman and Chief Executive Officer

George, we are going to continue to look at opportunities to drive down cost in every facet of our organization as we move through the balance of the year.

As you indicated, we have taken what we think are some dramatic steps in building products, and we think we will or we know we will start to see the results of that in the second quarter. And then anything we have on top of that in terms of improving markets and building products, we will improve that situation as well.

You mentioned the move we made on our G&A, and we will continue to look at opportunities to drive down costs there. And I can just tell you throughout this organization, there is a real focus on cost cutting.

George Staphos - Banc of America Securities

All right. Thanks, Doyle.

Operator

And your next question comes from Mark Connelly. You may proceed.

Doyle R. Simons - Chairman and Chief Executive Officer

Good morning, Mark. Hello, Mark.

Operator

Mark, your line is open. And your next question comes from Mark Wilde. Please proceed.

Mark Wilde - Deutsche Bank Securities

Good morning, Doyle. Good morning, Pat. Hello?

Doyle R. Simons - Chairman and Chief Executive Officer

Good morning, Mark.

Mark Wilde - Deutsche Bank Securities

Doyle, wondered if you guys can talk at all about sort of the impact of these higher freight costs and whether this has got you rethinking how you run the box business at all. Obviously, shipping boxes any distance is getting more and more expensive.

Doyle R. Simons - Chairman and Chief Executive Officer

Right, Mark. Clearly, there is cost inflation that is impacting our results. And we outline that's primarily on the energy, freight and fiber costs out of the equation. Does that affect the way our... or impact the way we run our business? The answer to that is no.

And I'm going to ask Pat to spend a little time, Mark… and thanks for the question. I'm going to ask Pat to spend a little time to talk about what we are doing specifically on the box plant side and how we're starting to see the results for some the changes we've made in our asset utilization and how that's going to impact our cost structure going forward. Pat?

J. Patrick Maley III - President, Chief Operating Officer, Director

I guess a contrast the quarter between the mills and the box side of the house, the mill side of the business, given the input cost push and the issue at Bogalusa, I'd say from an execution standpoint, I don't think we executed to our potential on the mill side.

And I contrast that with what I thought were some really encouraging things coming out of the box side of the house. Our volumes were roughly in line with expectation. Pricing was as well. But I think we began to see some of the glimmers of structural cost reduction on the box side given what we're doing over there.

We've currently got about eight of our box plants, our large box plants in a state of some continuum of total transformation, which we expect all of which will be completed before yearend. But this transformation is structural and it's in line with the strategy that we've articulated over the last number of years.

And it's early innings in this transformation. But I was very encouraged with some of the signs that we saw both anecdotally and in the financial numbers.

Mark Wilde - Deutsche Bank Securities

Okay. Doyle, also on the box business, I wonder if you, Pat, can talk about sort of how you think Temple is positioned right now vis-à-vis some of the other consolidation that's taken place in the business? You're going to have one competitor with probably 30% of the market, maybe a little north of that; another with about 20% of the market. You guys have got roughly 10. Does that disadvantage you at all, and if not, why not?

J. Patrick Maley III - President, Chief Operating Officer, Director

Mark, as you know, when we acquired Gaylord a number of years ago, we did that because we thought we needed to grow to have scale in this business. As you mentioned, we now have 10% market share. We have a national presence and are able to serve customers across the United States and in Mexico. So, no, we do not believe we are at any disadvantage in terms of our size.

We believe we do have national coverage. We were able to serve customers wherever they may be. And while we clearly have one of our two key objectives is to profitably grow our business and look for opportunities to do that, we do not feel compelled to grow and think we can compete very well in this business going forward.

Mark Wilde - Deutsche Bank Securities

Okay. Final question I have, can you give us some sense of that 18% headcount in cut in building parts? Where exactly did that take place?

Doyle R. Simons - Chairman and Chief Executive Officer

Well, it took place across the organization in... across our building products organization. Clearly, some of it was... had to do with the substantial reductions that we took. And as I mentioned, that was both at West Memphis and at McQueeney. So, clearly part of it had to do with those two operations.

Also, we reduced a shift to Buna, so that was part of it. And then like I said, we're looking across our entire organization in building products and elsewhere at opportunities to reduce our cost. But we have reduced over 18% of our work force in our building products operation, Mark.

Mark Wilde - Deutsche Bank Securities

And how much would those two gypsum mills be running right now, Doyle?

Doyle R. Simons - Chairman and Chief Executive Officer

I'd say West Memphis is running approximately 15%, and McQueeney is running less than 50%. So, we've substantially cut down West Memphis as essentially just running specialty products to serve our customers.

Mark Wilde - Deutsche Bank Securities

Okay, very good. I will pass it on. Thanks, Doyle.

Doyle R. Simons - Chairman and Chief Executive Officer

Thank you.

Operator

And your next question comes from Rick Skidmore. You may proceed.

Richard Skidmore - Goldman Sachs

Good morning, Doyle.

Doyle R. Simons - Chairman and Chief Executive Officer

Good morning, Rick.

Richard Skidmore - Goldman Sachs

A quick question for you. As you look at your box volumes in the quarter, clearly better than the industry average. How do you think about the tradeoff between volumes and the fact that prices didn't go up in the quarter? And how do you think about strategically your decision with regards to volume versus price?

Doyle R. Simons - Chairman and Chief Executive Officer

Rick, thanks for the question. And I was very specific in the prepared comments to note that price did go up slightly in first quarter 2008 versus fourth quarter 2007. But more importantly, we did fully realize the price increase that went back... that went in place in September of 2007. So, I'll just tell you we are not sacrificing price in order to get volume.

I made the comment earlier in response to someone else's question that the way we have been able to grow our box shipments and will continue to grow our box shipment is because of our ability to deliver quality boxes on time to meet the needs of our customers. And that will continue to be our focus going forward.

Richard Skidmore - Goldman Sachs

Okay. And can you talk about just generally shifting maybe to the forest products side of things? What kind of operating rates you currently at across the various businesses?

Doyle R. Simons - Chairman and Chief Executive Officer

Yeah, in our gypsum operation, Rick, I would tell you we're roughly 50% to 60%, probably 60%. In lumber, it's close to 75%. And then in our industrial panels, it's somewhere between 70% and 80% of capacity, so very low levels.

Richard Skidmore - Goldman Sachs

Okay. And then just one final question maybe back to linerboard, it looks like your third-party linerboard sales were a bit stronger in the quarter. And forgive me if I don't have that right, I'm traveling. But it looks like maybe prices price were down a little bit on the external board sales. Can you talk about that?

Doyle R. Simons - Chairman and Chief Executive Officer

Yeah, I don't have that… those numbers right in front of me. But I would tell you that demand for corrugated or for container board has been strong and from what we see is going to continue to be strong going forward.

Richard Skidmore - Goldman Sachs

Thank you.

Doyle R. Simons - Chairman and Chief Executive Officer

Thank you, Rick.

Operator

And your next question comes from Peter Ruschmeier. You may proceed

Peter Ruschmeier - Lehman Brothers

Thanks. Good morning.

Doyle R. Simons - Chairman and Chief Executive Officer

Good morning, Pete.

Peter Ruschmeier - Lehman Brothers

I wanted to ask you, if I could, some questions in the balance sheet and cash flow items if you have them available. Doyle, I think you mentioned the balance sheet was $1.50 billion in long-term debt. Do you have a short-term debt figure handy and the cash balance?

Doyle R. Simons - Chairman and Chief Executive Officer

Pete, we do not have that available at this point in time. We will be filing our Q very early next week, and it will have all of that information.

Peter Ruschmeier - Lehman Brothers

Okay. And I guess the same thing will go for items like offering cash flow and D&A for the quarter?

Doyle R. Simons - Chairman and Chief Executive Officer

Yeah, we will break that out as we always do in the 10-Q. We don't provide that in our earnings release.

Peter Ruschmeier - Lehman Brothers

Okay. Now, you mentioned energy, freight, fiber cost pressures. And I think you gave us some guidance on where OCC is today versus the 1Q average. Any guidance you can offer on where some of those other costs are today relative to the first quarter?

And I'm curious to the extent that those costs represent spot costs or whether there is contractual obligations and how much of the cost pressures have been felt versus how much might be felt going forward?

Doyle R. Simons - Chairman and Chief Executive Officer

Yeah, let me try to provide some color on that. In OCC, I did mention that our current prices were up slightly versus the first quarter average, Pete. But as you know, actually if you look at it versus March levels, they are down. It went up the balance of… through the first quarter and then tailed off in April.

So, actually the trend in OCC prices, if you just look at it month-to-month, is down slightly versus March levels.

In terms of energy, and natural gas is part of our energy costs, just to give you a sense there, our average cost per MMBTU in the first quarter was roughly $8.25. Current natural gas costs are in the $9.50, $9.75 range, so up from first quarter levels. And, Pete, as you know, we hedge very little of our natural gas.

In terms of freight, that's going to be primarily driven by diesel cost or partially driven by diesel cost. Just to give you a sense on diesel, and I know that personally because I have been driving a diesel truck, but back in the first quarter of 2007, diesel was $2.50 a gallon; first quarter 2008, $3.50. And I filled up this morning and it was $4.19. So, that gives you some sense on freight.

Now, Mark Wilde asked a question earlier what are we doing. And one thing I did mention is we're doing a lot of work in our supply chain to make sure we were optimizing all of the routes that we have, not paying one penny more than we have to on freight, and we'll continue to do that. But clearly, fuel cost is having an impact on our freight cost and will continue to do so going forward.

Peter Ruschmeier - Lehman Brothers

Okay. And those are obviously some of the big cost pressure items. But you did mention chemicals. Can you comment on what you are seeing in your chemical costs?

Doyle R. Simons - Chairman and Chief Executive Officer

Our chemical costs, there is a wide range of chemicals obviously between building products and corrugated packaging. And I hate to be speculating on raw material costs going forward, because it's a guess and speculation at best.

But resin costs and building products look like they are coming down. Starch costs look like they're going to remain elevated in corrugated packaging. And caustic, obviously, is anybody's bet, but it looks to remain elevated as well.

Peter Ruschmeier - Lehman Brothers

Okay. And just lastly if I could, I think if I heard you correctly, Doyle, you mentioned strength in particleboard volumes and price I believe sequentially. I'm curious if you could elaborate on that? And related to that as well, I think you also indicated gypsum prices up currently versus 1Q average if that's just a mix issue or if there is something else behind that?

Doyle R. Simons - Chairman and Chief Executive Officer

No, I think there is something else behind that. The way I see building products or we see building products is demand across the board, lumber, gypsum and industrial panels, is probably better currently than it's been since June of last year.

As I mentioned, lumber prices currently are up versus first quarter average. Gypsum prices are up slightly versus the first quarter average. And we've seen the same trend in particleboard and MDF.

So, again, as I mentioned in my closing comments, we have seen some seasonal improvement in building products. Markets are still very difficult, but we were pleased with the slight seasonal improvement that we've seen. And really that started, Pete, in March… late March and early April.

Peter Ruschmeier - Lehman Brothers

Thanks, Doyle. I will turn it over.

Doyle R. Simons - Chairman and Chief Executive Officer

Thank you, Pete.

Operator

You have no questions at the time. I'd like to turn it back to management for closing remarks.

Doyle R. Simons - Chairman and Chief Executive Officer

Well, thank you very much. Thank you for your interest in the company. And this call is adjourned

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