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

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

RockTenn Co. (RKT) Q4 2012 Earnings Call November 2, 2012 9:00 AM ET

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.

Now I’ll turn to more detail regarding our segment performance. Our corrugated shipments were up 1.3% over the June quarter compared with a slight decline for the industry. Our fourth quarter 2012 corrugated shipments were up 4.3% on an equivalent per-day FBA basis over the fourth quarter of 2011, compared to the industry which was up 0.2%. Our containerboard production was up almost 176,000 tons as we had no major maintenance outages in the quarter, compared to the 165,000 tons of major maintenance outage that we took in the June quarter. Even though we had no planned maintenance or economic downtime in the quarter, our containerboard system inventories were very tight throughout.

Our export markets were strong and we exported 246,000 tons in the quarter, an increase of 37,000 tons over the quarter, as I mentioned in the face of stable to strong demand, depending upon the market, setting the basis for higher prices we’re seeing for the calendar quarter. Our exports to Latin America were approximately 40% of total export containerboard shipments based on the agricultural seasons in Latin America. Our exports to Europe and the Middle East were 50% of total exports, and exports to Asia 10%.

Higher containerboard and box shipments and lower fiber and energy costs increased segment income by 39 million and increased segment EBITDA margins by 240 basis points to 13.7%. As I mentioned earlier, given the late September timing of publication of the containerboard price increase, it had little effect on our overall pricing which on an integrated basis was down slightly on lower box pricing and mix. We show an EBITDA (inaudible) for the segment on Slide 9 reflecting the dollar effect and these other factors on a sequential quarter basis, which I won’t detail in this call.

Our consumer segment operated well during the quarter. Revenues were up 5% over the preceding quarter. (Inaudible) shipments per day were up 3% primarily due to seasonal strengthening, and segment earnings, which include the contract settlement I mentioned earlier, were up 15 million as volume gains contributed 6 million, more than offsetting the $4 million reduction due to price and mix.

During the quarter, we took a total of five days of economic downtown in our coated recycled mills to balance our production to our customer demand. Our CRB backlogs strengthened since mid-quarter and we didn’t take any economic downtime in October, and we don’t expect to take any in November. Pricing has been very competitive in both folding cartons and folding carton paperboard grades.

Our merchandise and display operations had another very good quarter, as we expected, with seasonally higher revenues of 12 million and earnings of 4 million than Q3. Our recycling segment lost 2.8 million in the quarter as sharply lower recycled fiber prices, which balanced the rest of our business, compressed margins in this segment and we took a $2 million lower cost to market charge on plant inventories and we had a $1.6 million bad debt charge in this segment.

We made a leadership change in recycling in July 2012 followed by many changes throughout the organization that we did in order to facilitate the execution of the integration plan we developed for the former Smurfit plants and operations that will essentially bring them into conformity with the prior RockTenn recycling business model. As a part of that restructuring, we reduced our staffing levels by 40 people, mostly in front and mid-office positions, and that will result in about $8 million in annual cost reductions. We also closed or are exiting from six recycling plants and we have plans to optimize the balance of our plant footprint to conform to our mill system requirements and to our return expectations for our west coast plants.

Looking to our outlook for the December quarter and for fiscal 2013, let’s start with free cash flow growth, which we measure as cash available for dividends, pension contributions in excess of pension expense, and debt repayment. For fiscal 2013, we expect to increase cash flow available for these purposes by about 25% to approximately 650 to 675 million or an increase of about 130 to 150 million over 2012. Achieving this goal will represent approximately $9 per share in cash flow available for those purposes. Our estimate of free cash flow is based on, among other factors, our current outlook for domestic and international markets for our products and for commodity input costs. We expect that the net benefit to earnings realized from 2013 from the phase-in of the containerboard and box price increases will be about 270 million, but we believe this will be partially offset by lower pulp, paperboard, and folding carton pricing that based on today’s current market prices we estimate to be about 60 million on an annual basis. We also expect to see higher energy prices primarily for natural gas, somewhat higher virgin fiber costs, and if current Chinese demand and higher pricing in the export markets continues to strengthen, higher OCC costs.

Steve will detail changes in our depreciation and amortization expense, which we expect will be higher; full-year outage amortization, as we have the first full amortization across fiscal 2013, and as you know it’s built over 2012 because of the acquisition accounting; as well as he’ll detail changes in operating costs and update our expectations for synergies and performance improvements.

I also want to point out there are several actions we are taking this year that will alter the slope of our quarterly earnings in 2013 from that in 2012. First, in comparison to last year, we plan to accelerate our major maintenance outages to better match our seasonal system demand; thus, we plan to take approximately 28,000 tons of maintenance outage downtime in the December quarter and we’ll take the majority of our downtime – 117,000 tons – in the March quarter.

As a result, we’d expect that December quarter earnings will be somewhat lower than this quarter as the beginning of the effects of the containerboard and box price increases are more than offset by maintenance outage expense, higher effective tax rate, and some book tax rate because of the difference between our book taxes and cash taxes, as you know, is a result of the carry forwards that we have; also, normal seasonal slowing towards the end of the quarter and seasonally increasing recycled fiber pricing, and also we’ll build some containerboard inventory in the fourth quarter and again into January and February which we need to support our system demand during the heavy maintenance outage months to come.

We estimate that March quarter earnings will be the lowest quarterly earnings for the year based on the high degree of containerboard maintenance outage downtime, also the major maintenance outage downtime from the 24-month outage we’ll take at our Demopolis bleached paperboard mill, typical seasonal weakness in demand in early January and early February, and then seasonally higher winter fiber pricing and energy use in our mills. Again, based on our current outlook and assuming pass-through of the October box price increase, our earnings should build significantly in our third fiscal quarter to our seasonally strongest fourth fiscal quarter earnings.

Steve, I’ll turn it over to you.

Steven Voorhees

Thanks, Jim. At the end of September, our net debt was 3.4 billion. Our credit agreement EBITDA was about 1.8 billion, and our credit agreement debt to EBITDA ratio was 2.96 times. Liquidity was 935 million at the end of the quarter. In September, we issued an additional 700 million in notes with maturities during the years 2020 and 2023. We also extended the maturity of our credit facility through September of 2017. Of our 3.4 billion in debt outstanding, approximately 70% matures in or after 2017. Our credit agreement leverage ratio covenant will remain at 3.75 times through the end of the current fiscal year 2013. Overall, our balance sheet and liquidity continue to be in good shape to support our business.

We made additional progress on integration during the September quarter. We are continuing to process converting the required box plants to a standard operating system and have installed the system in 14 of our locations, and we expect to complete the installation across our box plant system during fiscal year ’14. We continue to focus on box plant operating improvements and have closed 13 box plants and have closed or are exiting six recycling facilities. As of September 30, our run rate of achieved synergies and performance improvements was in excess of $250 million. Approximately 57% of this is in administrative areas, procurement and energy. Approximately 20% is in the mills, and 23% is in the box plants and other operational areas. The benefits of the synergies and performance improvements have been more than offset by lower market pricing for containerboard and corrugated packaging, as well as ongoing inflation in our business for labor, including wages and health insurance.

We expect theses headwinds to continue during fiscal year ’13 when we expect approximately 70 million of increased wages and health insurance cost, 30 million of increased depreciation expense, and recognize an additional 36 million in expense related to deferred mill outage cost. These cost increases will be mitigated by increases to our run rate of synergies and performance improvements. During fiscal year ’13, we expect to generate an additional 135 million in synergies and performance improvements over FY12 and achieve a run rate of 400 million by the end of the year. The 135 million will be generated from 55 million in improvements at our containerboard mills, 35 million in our box plants, 10 million in our recycling operations, and 35 million fro other areas including procurement.

Cash restructuring costs for plant closures, acquisition and integration expenses were 15 million during the fourth quarter, 79 million over the past 15 months since the acquisition date. Over the same 15 months, we received 42 million in cash proceeds from the sale of real estate and equipment. The net cash costs of 37 million are much better than our initial expectations and consequently have had a positive impact on our cash flow over the past 15 months.

Turning to our key cost inputs, the largest cost drivers during the quarter were wood and fiber costs. These costs increased almost 7 million on a sequential quarter basis due primarily to wet weather in the south. Our composite index for recycled fiber cost declined by $29 a ton from the June quarter, creating a benefit of 26 million as compared to the June quarter. Market prices for recovered fiber reached a low point in the September quarter and have increased since then. We expect some upward trend from here. Our recycled fiber composite index averaged $93 per ton during the quarter as compared to $122 per ton during the June quarter.

Although natural gas prices are higher than the recent past, they continue to be attractive. The current 12-month (inaudible) of approximately $3.85 per MBtu compares to an average price of $2.83 per MBtu in fiscal year ’12. Our current run rate of natural gas consumption is 29 Bcf per year. Our annual consumption will increase to approximately 32 Bcf when we begin to capture the benefits from our remaining three fuel oil to natural gas conversion projects at the Fernandina Beach, Hopewell, and West Point mills. Based on our current forward prices, we expect these three fuel oil to natural gas conversion projects to reduce annual energy costs by $30 million per year.

Turning to our guidance for certain financial statistics, we’re estimating depreciation and amortization for the year at 555 million. We expect corporate cost in the range of 95 to 100 million for the fiscal year. We expect interest expense to be in the range of 110 to 115 million for the year, including 30 million for the December quarter. Our book tax rate for the September quarter was 31%. This was lower than we expected primarily due to year-end adjustments to our state tax provisions in light of the first full year of operations of the larger company. We expect our book tax rate for the first quarter and fiscal year 2013 to be approximately 37%. At September 30, we have unused tax items that total approximately 376 million. These can be used to reduce future federal cash taxes.

We expect to fully utilize the 150 million in federal net operating losses during the course of fiscal year ’13 and fiscal year ’14. We will use our remaining 226 million in cellulose biofuel alternative interim tax and other federal credits over the following two to three years, depending on our taxable income. These tax items exclude the unrecorded asset related to additional federal net operating losses that will be available as the Smurfit-Stone black liquor tax credits claimed as an excise tax credit proved to be non-taxable. If these tax credits do prove to be non-taxable, the tax benefit of our unused tax items will increase by 227 million to a total of 603 million.

Turning to our pension assets and liabilities, we’ve recorded an unfunded pension liability of approximately 1.5 billion, about 50 million higher than the 1.45 billion at the end of last year. The liability increased by 522 million due to the decline in the discount rate used to calculate our liabilities. For our U.S. plans, this rate declined from 5.27% to 4.22%. This was a decline of 105 basis points. Going forward, each 10 basis points impacts the unfunded liability by 42 million. The recent pension funding legislation increased the interest rates used to calculate the required cash contributions to our U.S. qualified pension plans.

After final work with our actuaries, we are estimating total required pension plan contributions at 208 million for fiscal year ’13 and 303 million for fiscal year ’14. This is a significant reduction from our previous estimates. Whether this funding reduction is a permanent reduction or a deferral of funding depends to a great extent on interest rate levels in 2015 and thereafter. We expect to contribute 19 million to our pension plans in the December quarter. In fiscal year ’13, we expect lower pension expense for qualified plans of about 35 million for the full year as compared to 47 million of pension expense during fiscal year ’12. We estimate that our pension funding in excess of expense will be 173 million in fiscal year ’13, 132 million lower than fiscal year ’12.

We estimate that the expenses related to deferred outage costs for the containerboard and bleached paperboard mills will be 93 million, as outlined in the table on Page 16. As previously noted, in FY13 this expense is expected to be 36 million higher than we experienced in fiscal year ’12.

That concludes our prepared remarks. Jim and I are now available to respond to your questions.

Question and Answer Session

Operator

Thank you. [Operator instructions]

Your first question comes from George Staphos, Bank of America Merrill Lynch.

George Staphos – Bank of America

Thanks. Hi everyone, good morning. Thanks for taking my question. I guess the first question that I had was related to the paper supply agreement. Would it be possible to give us a bit more color in terms of what led to that cancellation of the agreement and the settlement, and why you included it in earnings? And then I had two quick follow-ons.

Operator

One moment, please. Please stand by, your conference call will resume momentarily. Again, thank you for standing by. The call will resume momentarily.

James Rubright

Are you there, Gwen?

Operator

Yes, sir. You’re back online.

James Rubright

Okay. We had a power outage here and we were cut off, I think, as soon as George was being introduced with a question. So if we could resume with George, that would be fantastic.

George Staphos – Bank of America

Good morning. I guess the first question I had was could you give us a bit more color on that paper supply agreement that you wound up settling and including in earnings, and then I had two quick follow-ons.

James Rubright

George, we signed a confidentiality agreement in connection with the settlement and termination, and I provided all the information we can provide, which is essentially the amount and the nature of the recovery.

George Staphos – Bank of America

Okay, I understand. The next question I had was can you—well, let me back up. I’m guessing that Hodge’s production issues have to some degree not only impacted the benefits you thought you’d get out of Hodge but also impacted the pace of your integration efforts around the rest of the system. Could you confirm or provide additional color regarding that and perhaps give us a bit more color in terms of what integration work might now be able to accelerate as it appears that Hodge will be getting back to your ultimate production goals by the end of this year.

James Rubright

We started out the quarter producing at a rate of about 1,700 tons a day where the project on the lightweight mix that we currently had planned for Hodge would have been more in the 2,350 to 2,400 tons per day range. So if you think of the $0.16, probably 8 million was—approximately 8 million was simply straight-up margin on lost production, 5 or 6 million was really increased maintenance expenses. We did the things we had to do that flowed out of the outage, and then the remainder was system disruption costs from the inefficiencies associated with making up the lightweight production from Hodge in other places. So those are the components.

The last 10 days, we’ve been over 2,000 tons a day with all except for one day, and a lot of days we’re in the 2,100 to 2,200 tons per day range, so if we can stabilize at that range, we’ll get a substantial portion of the project benefits. I mentioned in the call there were some things that were not done properly. I don’t really want to go into a lot of detail because there will be some likely claims dealt with associated with them, but we need to go back and fix two things that were done on the large paper machine five and do some other table improvements on four, and we’ll do that in connection with two outages that we’ll take over the first six months of this quarter, possibly into April – I guess that’s really into the third quarter. But a lot of it is simply a function of stabilizing operations. As I mentioned, we really put a lot of resources in to assist the people at the mill with the technical expertise they needed, so it took a while for them to basically start at one end of the mill and work through and get everything stabilized. But I feel that we are in a much better place at the outset of this quarter than we were last quarter and I think ultimately the project benefits are going to be realized.

George Staphos – Bank of America

Okay. Thanks for that, Jim. The last question, I guess, on exports – it would seem that export trends are a bit stronger than normal this time of the year. Can you comment as to what you’re seeing in the market and what is driving that phenomenon, if in fact you agree with that view? Thank you.

James Rubright

Yeah, whether it’s stronger than it otherwise would be is difficult to say. We’ve said pretty consistently if you don’t—once you got out of November, December and January where the export markets got really torn up, export demand has been okay. It’s really been—is very consistent with our expectations for the markets, and it took a while for pricing to stabilize and turn up but now we’re seeing good export pricing across most of the market. So I think we’re going to see 35 to $40 a ton higher export pricing probably for most of this quarter after October, so I’m pretty optimistic about where we are in export markets.

As you know, for us the significant decline in export pricing was a major contributor to the reduction in our earnings from our expectations at the outset of the year, as was the reduction in pulp pricing which is material to us. It’s highly cyclical, as you know, and it really does appear that we’ve hit a cyclical bottom and we’re starting to see improving pulp pricing as well. But we’re not very good at predicting the slope of recovery in pulp pricing, so I think we’re probably using some pretty conservative expectations in our cash flow guidance for next year with respect to what’s going to happen to pulp markets, and potentially with respect to export markets.

But demand is not the issue in the export containerboard markets.

George Staphos – Bank of America

Okay, thank you. I’ll turn it over.

Operator

Your next question comes from Phil Gresh, JPMC.

Phil Gresh – JP Morgan

Good morning. I just want a little bit of clarification on Hodge. I believe last quarter it was a $0.09 headwind, and then this quarter you’re talking about a $0.15 headwind relative to your expectations. So I just wanted to clarify what your expectations actually were heading into this quarter. Is it fair to say that we should think about kind of a peak to trough impact from this as the $0.09 plus the $0.15, or just wanted to calibrate that a little bit.

James Rubright

No, it’s a good question because if you don’t know what our expectations were in the third quarter compared to the fourth quarter, it’s pretty difficult to understand what we’re saying. We knew the mill was going to be down because of all the work we were going to do for an extended period of time during the third quarter, so therefore you’re going to have very low production and then all the cash maintenance expense in the quarter, which although you amortize, you really don’t make up the production loss and the system disruption. So our expectations included a very significant amount of expense in the third quarter but when the mill came up at the end of the quarter, it came up in a state that was not what we expected and therefore it cost us $0.09 more in the quarter than it would have, than we expected.

In this quarter, we assumed we could achieve a run rate of production faster than we’ve been able to achieve it, and therefore I went through the components of the difference between what we expected and what we achieved in response to George’s call, and that’s how you get the $0.15.

Phil Gresh – JP Morgan

Okay. So any way you could calibrate what you think you would be able to get back this quarter on an EPS basis, or should we should just take your prior comments?

James Rubright

No, I think it’s going to be somewhere between $0.10 and $0.15 back from Hodge, depending on how consistently we can run at the run rates that we’ve achieved today and whether we ramp up further in anticipation of the outages, or whether we simply have to get through the outages. But it’s somewhere between $0.10 and $0.15 improvement from Hodge.

Phil Gresh – JP Morgan

Okay. And then it sounds like you expect the full improvement to be after the maintenance outages, so perhaps on a six to nine-month basis we’re kind of back to where we should be?

James Rubright

Yeah, I think if my recollection right, the Hodge last maintenance—second maintenance outage is in April. It’s either April or May, but in any event there are some things we have to do that we can’t do until then that will ultimately set things right.

Phil Gresh – JP Morgan

Okay. And then just on the price increases, it sounds like the timing was maybe a bit longer than some of what your peers highlighted. You called out some customer contracts. Maybe you can just elaborate on that a little bit – is there an opportunity here moving forward to change some of the terms of perhaps those contracts, or how should we think about that?

James Rubright

Yeah, it’s a half-empty, half-full. If you take the slightly less than 7 million tons of domestic containerboard sales and multiply that times $50, assuming you pass through every dollar for the year, it’d be about 330 million. The thing didn’t publish until September and then box prices—you know, increases were effective in October, and everybody has some contracts that they pass through and so forth. So the 270 million that we said we would recover is about 80% of the total, which we’ll recover over this fiscal year, which since our year starts in October doesn’t compare to others’ calendar years. I can’t look into other people’s books and contractual situations.

The thing you need to remember about our contracts are if you lag on the way up, you also lag on the way down, so it simply is a trade that I’m not sure in all cases we would necessarily find in our interest to try to negotiate out of. But the bottom line is that in the first year of the increase, we’re going to get about 80% of potential benefit that we would have realized had we gotten 100% of it on the first day of the fiscal year.

Phil Gresh – JP Morgan

Okay. All right, thanks a lot. I’ll turn it over.

Operator

Your next question comes from Mark Weintraub, Buckingham Research Group.

Mark Weintraub – Buckingham Research

Hi, thank you. If I could—so if you’re expecting about a $0.10 to $0.15 benefit hopefully from Hodge in the December quarter, and we should be getting some benefit from pricing although, I guess, not fully clear how much of that ramps through into the December quarter, and yet you’re anticipating kind of flattish to down-ish quarter versus quarter. How much of that is the seasonal, and can you kind of help us with that bridging a little bit, please?

James Rubright

Sure. We had an $18 million contractual settlement in our fourth fiscal quarter that we will not have in the first fiscal quarter of 2013. Our effective book tax rate was 30 or 31%, and we expect it to be 37%; so those two things will more than offset the increase we anticipate from Hodge. And then as I mentioned, we will take 28,000 tons of maintenance downtime. We will build inventory during the fourth fiscal quarter in anticipation of the outages going forward. When you build inventory, you don’t record the gain on the sale, right? And then because you’re going into the winter, you’ll have higher energy usage particularly in the mills, and then if you have normal seasonal trends in December and it starts to get wet, you’re going to see a little bit higher fiber costs. So all of those things will seasonally affect our business, and that’s why we forecast somewhat down earnings from the $1.39 that we earned in the last quarter.

Now, I would just remind you that if you look at our input costs and the materiality of them and why we don’t try to give very precise earnings guidance, recycled fiber for us—a $10 change in recycled fiber is $40 million a year, $10 in a quarter. I promise you, in the 13 years I’ve been here, we haven’t been able to guess or forecast full-year recycled fiber prices within $10, and if there was a year when we did it, it was luck. Natural gas pricing is also about $25 million a year to us, and it’s going to 40 when we complete those projects. Again, $0.50 up or down in natural gas pricing is simply beyond our ability to forecast, and we use 19 million tons of trees in a year, so you can do the math on a $0.50 change in virgin fiber pricing over the year. Again, these things are not within those tolerances.

They tend to balance and they balance nicely over the course of a fiscal year, so while we have a pretty high degree of confidence of our ability to generate the $9 in free cash flow we said we’d generate over the course of the fiscal year, my confidence with respect to fine-tuning earnings on a quarterly basis is simply not that high.

Mark Weintraub – Buckingham Research

Okay, fair enough. And just real quickly on the pension, if I heard you correctly, the discount rate, that had about a $522 million negative impact but the pension underfunding was only a $50 million change, so what was the positive 475?

Steven Voorhees

We contributed 300 million-some odd into the pension plan, and we also earned investment returns on the assets that we have.

Mark Weintraub – Buckingham Research

Got it. Thank you.

James Rubright

Don’t we detail that in the appendix?

Steven Voorhees

I don’t think we do.

James Rubright

Oh, okay.

Steven Voorhees

It will be flushed out in our 10-K when we file that.

Mark Weintraub – Buckingham Research

Thank you.

Operator

Your next question comes from Chip Dillon, Vertical Research Partners.

Chip Dillon – Vertical Research Partners

Hi, good morning. First question is I know on the call, Jim, you mentioned sort of a free cash flow number that is available for pension contributions and debt reduction, et cetera of 650 to 675. I think that was for ’13. What was that number for ’12, and how do you exactly compute that quickly?

James Rubright

The number for ’12 was 518 million, and the number for ’13 is the number you just indicated. In ’13, assuming no acquisitions, we would use it for dividends, pension contributions in excess of pension expense, and for debt repayment.

Now, going back on why we treat pension contributions in excess of expense as a dollar for our shareholders is simply the fact that we assumed a largely closed pension liability with respect to Smurfit that we simply treated as an acquisition liability. Since you get a tax deduction for it, you have to look at it on an after-tax basis, so on the acquisition date we assumed it was about 700 million. Our discount rate declined by 1%, as Steve mentioned, so it results in a very large increase in the GAAP liability; but the fact is funding is what matters, and because of the Pension Relief Act which recognizes what is a relatively unsustainably low interest cost at the current, they reduced the funding obligation so it really didn’t change—the increase in the liability was matched by what is a decrease in our funding obligation over time. So whether that 1.5 billion turns out to be a real liability that we fund is a function of what interest rates are going to be in 2015 and beyond.

But at any rate, those three things are the components. Now in 2012, the number was 518 million. Steve detailed the amount of pension contributions in excess of expense. Dividend was $0.80 a share. We did do 125 million in acquisitions, which we also count – those acquisitions have been nicely accretive. We did not count the 17 million we used to purchase the lease out. We didn’t count the debt issuance expense or the premium on the redemption of the 16’s. But those are the components of those free cash flow elements and why we count them.

Chip Dillon – Vertical Research Partners

Got you. And given that depreciation and CAPEX from ’12 to ’13 don’t really change a lot, and I know there might be some puts and takes, but it looks like if you go up by the amount that you indicate, that in essence as we look out—I know it’s early days, that increment is about $2 a share. And it looks like all things being equal, that would be kind of a ballpark guess as to how you see 2013 on an EPS basis versus ’12. Am I reading that correctly?

James Rubright

Well, except you’ve got a book tax rate of 37% and a tax provision that is significantly lower than that as a result of all the tax credits. So you have to take into account—

Chip Dillon – Vertical Research Partners

Make that adjustment.

James Rubright

--cash tax.

Chip Dillon – Vertical Research Partners

Got you. So in other words, the EPS may be a little less because of the fact that you have a higher book tax rate, if I’m hearing you correctly, although you’ll have less cash taxes.

James Rubright

Yeah. The NOLs are available and you can use a portion of the other tax benefits. It doesn’t offset 100% of your tax provision, and they generally don’t offset a lot of the state taxes that you pay, and then there are other taxes that you pay. So you will have some cash taxes even in a year in which better NOLs would have offset all of your federal taxes. But I don’t remember exactly what our—we can follow up later with what we expect in terms of cash taxes, but there will be a very significant difference between the book and cash tax rate.

Chip Dillon – Vertical Research Partners

Got you. And one last quick one – it looks like from fourth quarter to fourth quarter, the segment EBIT in packaging was down about a fourth – you know, 43 million; and certainly Hodge was part of it but you did have some offset, I guess, from the settlement. My question is if you looked at published OCC prices, and again they may not be exacting matching to your experience, it looks like they were down somewhere on the order of $70 year-over-year. Given your purchases, it would seem like that could have been a 50 million benefit that I know could have been offset by other things, but am I in the ballpark there, and are there other things you could point to that might have offset some of that benefit?

James Rubright

Yeah, I didn’t follow all of the numbers that you cited at the beginning, so I can’t track through or confirm the predicate cash. But with respect to OCC itself, our purchases are a little over 4 million tons a year, so on a headline basis there’s a credit with respect to the pass-through of that ultimately into the mill system. But we sell a significant amount of DLK and there’s an offset of DLK, and then it also compresses margins in our recycling business. So I think a $40 a ton change in OCC pricing, it’d probably be $30 a ton flow-through to RockTenn. And Steve, if I’m off on that, let me know; but I think that’s about what we would realize.

Chip Dillon – Vertical Research Partners

Yeah, I was just citing the market pricing. RICI is saying that it was down about 70 third calendar quarter this year versus third calendar quarter last year, so even if you cut that by a third, you’d still be looking at—I don’t know, $32 million, and assuming you don’t use the full 4 million, just maybe 3 million-plus for your corrugated segment. So I didn’t know if—

James Rubright

You’re not wrong. The thing that—from a book income standpoint, you’ll recall that because of the acquisition accounting, we started out at zero with respect to maintenance outage expense, and then as we had four quarters of maintenance outages and since we amortize it over the course of the year, that then built. Our full run rate of amortization of maintenance outage is about $80 million a year, which we’ll have next year, so that’s 20 million a quarter; but in the third quarter, if you go back a full year, we would have had one or two quarters of amortization. So that’s a major book difference in income.

And then as I mentioned, essentially for the last 15 to 17 months, we’ve been sitting there without a containerboard price increase in a generally healthy market. If you don’t have an increase, you’re going to typically see erosion, particularly in a relatively weak economy, and we’ve indicated we felt we had over $200 million in price erosion over the period of time from January of 2011, when we first announced the Smurfit transaction, until the end of the summer when we announced the price increase, and I guess we announced it in August and it ultimately became effective in September. So that was the major offsetting factor.

Chip Dillon – Vertical Research Partners

Got it.

Steven Voorhees

Chip, the maintenance outage item that Jim mentioned had an impact of $18 million on the year-over-year comparison that you were talking about.

Chip Dillon – Vertical Research Partners

Okay. And obviously if you annualize that 200 million of pricing, that’s 50 million, which is what I was looking for, so that’s very helpful. Thank you.

James Rubright

And all that 200 million wasn’t all—it’d be wrong to think that’s domestic containerboard, because it includes export containerboard, it excludes export pulp pricing, and some erosion in the consumer segment. You know, there was a price decline published for both FBS and CRB, so I think if you heard me say it first, you would have thought that was all box pricing and that’s just not right. It was spread across our business.

Chip Dillon – Vertical Research Partners

Which by the way, I notice you did for the first time split out your pulp between the two segments, and I didn’t realize so much of it was in containerboard, so that makes all the sense in the world. Thanks.

Operator

Your next question comes from Philip Ng, Jefferies.

Philip Ng – Jefferies

Morning, guys. Just curious to get your thoughts on your price mix dynamic for corrugated. It was down sequentially. I would have thought it would have picked up with export prices moving higher, so just want to get some thoughts on that.

James Rubright

As I mentioned, there was sort of a period of continuing erosion which was relatively slight. We didn’t really see any significant benefit from export pricing or pulp pricing in the quarter; in fact, I believe they were lower. So those things offset the small benefit that we got from the late publication of the containerboard price increase.

Philip Ng – Jefferies

Okay. And since you guys do have a box price increase coming in, that should be a positive. I do remember last year during the seasonally slower period, you saw some box price erosion. Certainly from a demand-supply dynamic, containerboard is a lot tighter now, so I just want to get some thoughts on that. And then lastly, with this box price negotiation, is there an opportunity for you to reset the contracts so you have a quicker pass-through going forward?

James Rubright

As I’ve indicated, I’m not of the view that we really need to make adjustments in our contracts. Those contracts have generally benefited us with respect to stability, and pass-throughs, as I mentioned, that you might lose them on the way up, you get them on the way back down. So I just think it is an element of our business that really doesn’t sort of stand at the forefront of our thinking.

As I said, in this fiscal year, we’re going to get 80% of the price increase just as we model out the price increase, and just because of timing we didn’t get it all in October. So it’s not—I just don’t think it’s the right thing to focus on from our standpoint, and it’s not really something that we have as a priority.

Philip Ng – Jefferies

Okay. And then can you give us some mileposts on the synergies? I know Hodge has been a drag for you guys, but going forward can you talk about some of the opportunities and some of the major projects that you have in place, and the timing of it?

James Rubright

Well, I think Steve detailed where it is from a segment standpoint, and there is a slide on that. The 250 million is a lot of purchasing synergies and then some business improvements across the mill system. We do reduce it by the effective loss at Hodge because we feel like that was part of what we anticipated as a performance improvement, and since it’s a drag we netted that out to get down to the 250 million.

I think the largest single component of increased benefit over the course of the next 12 million is the 40—what did we say, 40 or 50 million from the remaining three natural gas projects—

Steven Voorhees

Yeah, it’s 30 on the three projects. If you include Stevenson, it’s in the 40 to 45 range.

James Rubright

Yeah – 30 left, natural gas projects. There’s a significant amount of actual turnaround in the recycling division, both from the standpoint of plant consolidation and headcount reduction that I mentioned. Steve, purchasing, we think we’re going to get another, what?

Steven Voorhees

Around 30.

James Rubright

Another 30, so there are a number of components like that. Our box plant operations are going to improve significantly as a result of a lot of things we did this year. You didn’t see the full run rate of benefit of the plant closures we’ve made, and we continue to look at opportunities to improve the overall cost structure and performance of the box plant system. So they’re pretty well spread across the entire business unit.

Philip Ng – Jefferies

Okay, thanks guys.

Operator

Your next question comes from Alex Ovshey, Goldman Sachs.

Alex Ovshey – Goldman Sachs

Thanks, good morning. On the SBS side, can you just talk about what kind of impact you may be seeing on the pricing side from some of the new capacity that’s coming online in Asia, and whether or not you expect to see potential for a more material decline in SBS prices as that capacity fully ramps up?

James Rubright

Well, I certainly think that the $20 price decrease that we saw in SBS was a result of lower, essentially, order backlogs or unfilled orders in SBS, and I think that that partly reflected availability and therefore lower backlogs, the availability I think was created by the pushback into the U.S. of exported SBS. It’s a little—and I’m doing it based on reported numbers. We don’t have the visibility really because we don’t export SBS, but certainly the global growth of coated boards in Asia combined with the decline in Asian demand contributed to that.

We see it as relatively stable right now, and if you look at operating rates of domestic bleached board mills, they’ve been in the—I think last week it was 94%. But they have been in the low to mid-90s pretty consistently for a while now, and our unfilled orders as reported for the industry have been relatively stable, so I don’t see conditions changing now.

Looking into the future at what rate China will actually bring on coated capacity, whether they’ll slow it down, at what rate China and the rest of Asia is going to grow are things that are very difficult to forecast, so I can’t say whether conditions are going to improve, stay the same or get worse as we move over the next six to nine to 24 months.

Alex Ovshey – Goldman Sachs

Okay Jim, that’s fair. And then just putting together all the information you gave us on the benefit of higher containerboard prices, the change in the free cash flow level next year versus this year, do you also have an estimate on when you would expect to hit your targeted leverage ratio of less than 2 times?

James Rubright

Steve, do you have a view with respect to that? I think that it’s optimistic to think that we’d get there within 12 months, but it’s not optimistic beyond that.

Steven Voorhees

I’d agree with that.

Alex Ovshey – Goldman Sachs

Okay, thank you very much. Helpful.

Operator

Your next question comes from Mark Connelly, CLSA.

Mark Connelly – CLSA

Thank you. Jim, two things – as your portfolio reshapes with the box plant closures and everything else you’re doing, are we going to see your net export exposure change either in size or geography much from what you laid out for us earlier? And the second question – most of the companies we’re hearing from this quarter are telling us they’re not concerned about fiber availability or cost this winter. Your comments are a little more focused, I assume, on just weather, or is there anything regional that you’re looking at as well?

James Rubright

Okay, thanks Mark. I’ll take the second question first. We may be more pessimistic than others. I have seen what others have said, but it’s our forecast and a lot of it is winter weather. There is stuff specifically in our Virginia markets where we have our West Point and Hopewell mills. We’ve decided it’s a good idea to burn trees for electric power in the United States, and so we have some wood burners that are coming onstream in the Virginia market, and then there’s a competitor that’s bringing up a mill in the Virginia market. So I think there where we’ve got over a million tons of capacity, we’re going to see some regional pressure on virgin fiber pricing; but again, I haven’t tried to pencil out everybody else’s.

And then if you don’t mind, Mark, please ask me your first question again.

Mark Connelly – CLSA

Sure. Just wondering – you had given us a nice layout of all of your export exposure. I’m just curious whether you think that’s going to change, either geographically or in size, given what you’re doing with your portfolio over the next year or so.

James Rubright

Okay, thanks. No, I don’t think it will change. We set a very high bar for ourselves with respect to business retention in box plant closures, and we’re above 90% at the current run rate with respect to retention of business as we close. We’re higher than that in folding cartons, but because of the shifting radius of the folding carton plant and the box plant (inaudible) can’t have the same answer; but 90% is fine. And given the effectiveness of the redoing of our sales effort and so forth and the fact that our volumes are growing, I think actually that our domestic system will expand.

The best way to grow your system is to be cost competitive, which we are making significant strides on, so I would say no. I think you’ll see us in about the same mix of export to domestic, although it really depends on how effective we are growing domestically. But I don’t see it declining.

Mark Connelly – CLSA

Super. Thanks very much.

Operator

Your next question comes from Anthony Pettinari, Citigroup.

Anthony Pettinari – Citigroup

Good morning. You discussed some amount of capital spending getting bumped from 2012 to 2013, and I’m wondering—I think previously you discussed a CAPEX run rate for the system of 350 million over the long term. I was wondering if that’s still applicable and if you think you can there by 2014. And then maybe kind of a related question – I think previously you had said that the net capacity increase from all of the performance improvements and capital investments once they’re all completed, I guess, by 2014 would be 600,000 tons, and I’m wondering if you could give any update on that.

James Rubright

Yeah, that’s the gross capacity increase. It’s not net. We did close our Matane, Quebec mill. That was an 180,000 ton reduction. The last piece of the production increase would be a project at Hopewell that we had estimated doing in ’13 and then we switched that to ’13 and ’14. So the net increase if all we do is reduce Matane would be about 400,000 tons; but we’ve pretty consistently said we’re only going to produce to our system demand, but the effect of these projects is to significantly reduce the cost of production and really modernize the affected mills. So I don’t know what the net production change will be, but the production capacity change if we did it today would be about 400,000 tons, and that still is a good estimate.

With respect to CAPEX, sustained CAPEX for the system could be 350 million, and that’s why we’ve given that out in our guidance. What it will be will depend upon opportunities that we see at the time, and the 480 to 500 and then $400 million estimates for ’12 and ’13, we really haven’t changed them. It’s just spread over the course of those two years.

Anthony Pettinari – Citigroup

Great. Thanks for the clarification. And then maybe just one final question – you’ve obviously got a number of facilities in the northeast, the mid-Atlantic. Can you discuss what impact on operations or production, if any, you’ve seen from Hurricane Sandy; and given your inventories are relatively lean and industry inventories are pretty lean, do you think the hurricane could have an impact on the containerboard industry?

James Rubright

Yes, thank you for raising that question because it’s something we should cover. With respect to our major facilities, we did not sustain any significant damage so we were fortunate in that respect, and our people did a great job of taking the actions they needed to take to secure the facilities. As a result, although we had some production reductions in our containerboard and paperboard systems, and there will be some costs associated with that, the assets were well protected and they’re back operating.

Because of the transportation disruption in the northeast, recycled fiber access depending upon the marketplace has been somewhat challenging. We have a very large mill in Syracuse, New York; another recycled mill in Connecticut, another one in Stroudsburg, Pennsylvania, so fiber supply into those mills has been affected but they are operating. So there is some cost associated with that that would be difficult to estimate.

We have several – and I’m going to say four or five – box plants in the northeast region that today cannot operate. The transportation network and the power supply simply doesn’t exist to allow them to operate, and then more seriously is the disruption of our customer base in the northeast. And as you point out, we do have a large concentration of plants and sales in the northeast United States so it is impossible at this juncture to estimate the total amount of loss because it’s impossible to estimate the effect on demand and any effect on the ability of customers in the northeast to produce.

So I would say that while it will be noticeable for us and it will probably occur primarily in this quarter, it’s difficult for me to estimate that effect but there will be one.

Anthony Pettinari – Citigroup

Thank you. I’ll turn it over.

Operator

Your next question comes from Al Kabili, Credit Suisse.

Al Kabili – Credit Suisse

Hi, thanks. Good morning guys. I jumped on early and so you may have addressed this, but just on the box price realization occurring mostly at the end of March, it seems a little bit more of a delay versus some of the larger peers have indicated. I was wondering if you could address that, particularly as you have less vertical integration on the box side as well.

James Rubright

Well, I’m going to clarify what I said because if I said what you repeated back to me, it’s not what I intended to say. What we said was we would have realized the majority of the increase on a run rate basis by the end of the second quarter. That doesn’t mean we’re going to get it all then, not now. In fact, if you do the math on what I’ve said and we get 270 million over the course of a year of a universe of 330 million, you would see that we will be recovering a significant portion of that over the course of the next two quarters, and it is on a ramp-up basis. But we will have the vast majority of what we will recover in total by the end of the March quarter.

Al Kabili – Credit Suisse

Okay. And is that just the delay in the timing, or the lag in the timing, is that just all contractually related? Can you just talk about how the non-contract pricing is—how you see the non-contract pricing shaping up? Is that going to be considerably that that end of March period?

James Rubright

Well, certainly you’re open—if you’re not limited by a contract, and particularly if it’s containerboard to the independent market, that is the clearest opportunity to increase prices that will benefit the full quarter. With respect to the box price increase, as you know, some people announced the box price increase October 1. There were other competitors who announced October 22, 23, or whatever, so you have an issue with respect to specific accounts, with respect to when the increase could be effective. And in other situations, you may face competitive issues that may limit your ability to get it on any particular day, and everybody faces those issues.

I can’t speak to our competitors’ realizations or what they’ve said. I’m just telling you we have modeled out our system, and that modeling suggests that over the course of this year, we’re going to get 270 million of the increase is our best estimate.

Al Kabili – Credit Suisse

Okay, all right. Thank you, I appreciate that. I guess just also quickly on Hodge, if you can just comment—I think operationally it’s a little better. Assuming kind of where we are today in terms of how Hodge is running, is there an appreciable tailwind in ’13 versus ’12 given the rebuild issues, or if you can address kind of how you see the expected improvement in Hodge. Thank you.

James Rubright

Yeah. I think based on the higher cost that we’ve incurred there, the project is in the range of $100 million and we expect a return in the 20 to 25% range today. That’s really—you know, the return’s down because the cost of the project is up, but on a full run rate basis that’s about what we expect in terms of the improvement over a 2011 operating baseline. I think I’ve detailed pretty clearly what we think is the effect in the fourth fiscal quarter would be as well as the next quarter coming forward, and then achieving the balance of it after the April—I believe it’s the April second outage.

Al Kabili – Credit Suisse

Okay. And then just one last quick one is just on consumer packaging – can you say how much of the pricing pressure we’ve experienced in this fiscal fourth quarter, how much of the published price decreases and whatnot we’ve experienced thus far, and what’s left to go on that? Thank you.

James Rubright

We’ll have to follow up on that. We’ve said 60 million, and the 60 million includes a lot of things in addition to just folding carton price declines. That’s something we probably should just detail if you’re interested in that and the specifics of that after the call.

Al Kabili – Credit Suisse

Okay, we’ll follow up. All right, good luck in the upcoming quarter. Thanks.

Operator

Your next question comes from Dave Zorub, BlueMountain Capital.

Dave Zorub – BlueMountain Capital

Good morning. A couple questions. Apologize if I missed this, but the run rate of 250 million synergies at the end of the quarter, can you tell us just of that 250, how much was actually realized over the fiscal year that just ended?

Steven Voorhees

I don’t have that number at my fingertips. What I did try to express was the increase on a combined basis of ’13 over ’12, so we’d have an additional 135 million in ’13 over what we realized in ’12.

Dave Zorub – BlueMountain Capital

So that 135 is actual dollars, not run rate exiting ’13?

Steven Voorhees

Exactly.

Dave Zorub – BlueMountain Capital

Steve, could you give us a feel – would you expect the majority of that 135 to be a pick-up from the run rate exiting this year, or to be from these synergies--?

Steven Voorhees

Well, it’s a combination of both, so we’re at 250 at the end of fiscal year ’12, and I said we’d be up at 400 by the end of ’13. So there’s projects coming and there’s projects going out, but then that is relatively close between 135 realized versus an additional 150 run rate.

Dave Zorub – BlueMountain Capital

Okay, thank you. And then stepping back for a moment, could you help us just think about the big picture for the business as we look out a couple years versus the plans that you’ve laid out. If I think about a bridge, you did 1178 of credit agreement EBITDA in the year, and if we don’t think about for the moment ’13 versus ’14 or any particular time period but just big picture, Jim, I think you said the full benefit of the price increase would be something like 340 when realized. And then you’ve got arguably another of your 550 of synergies—I don’t know exactly what the right number is, but an incremental, maybe 300, something like that, so that’s, call it, 550 to add to that base of 1178. You mentioned the headwind of 60 million of pricing this coming year, not sure what other headwinds you would put against that. But could you help us just sort of think about a big picture bridge for the business when we get to the end of ’14? You’ve executed on the investments and presumably the returns in Smurfit, you know, conceptually what you envision the business profitability looking like at that time.

James Rubright

Well, I think you’ve taken a number of the major components and said here are the potential increases in income. I think from the—what you have to take into account are the ramp of expenses that are going to offset some of that. Our payroll is 2 billion, so put some percentage inflation on payroll and then add essentially healthcare and workers’ compensation costs, and you see you’ve got a fairly significant 60 to $70 million ramp every year there. Add healthcare mandates, if they actually come to pass, and you’ll see there’s a fair run rate there, and then you have commodity cost inflation on all the other inputs. Now, they’re all cyclical, so where they are going to be at any point in time is a good question, but presumably they’re going to match inflation, so you’ve got to overcome the ramp of your increasing costs with cost declines, so some of the performance improvements are going to be used to overcome that ramp of other costs. What other opportunities we’ll have to reduce costs in our businesses, I can’t say today; but it seems like we always find some, so it’s a function of how much we can exceed the ramp in costs.

And then as you get out to 2014, I’d have to speculate with respect to what I thought containerboard domestic and export pricing would be, and it is not our policy to comment on our belief with respect to future actions with respect to containerboard pricing. But it is fair to note that the industry is operating at very high operating rates as we speak and very low inventory rates, and my view with respect to the containerboard business generally I think is highly confirmed by the strength of export pricing, and notwithstanding the global depression returning and increasing export pricing for containerboard. So again, you’ve got to ask me what in 2014 do I think containerboard export pricing going to be, what is pulp pricing going to be, as well as what is going to happen to domestic containerboard pricing in an environment in which you have essentially a non-substitutable commodity in an economy that could potentially return to historic levels of growth of 3 to 4% instead of 1.5.

So I actually think that we are pretty bearish with respect to the long-term prospects of our business because we tend to focus on potential cost increases and then not really focus on what potential revenue increases exist, either through further pricing initiatives or volume growth in a growing U.S. economy.

Dave Zorub – BlueMountain Capital

Okay, I appreciate that. I guess one last question – I don’t ever see much written about the impact that the housing market may or has had on your business; but given that there are some people who believe that we’re starting to see perhaps finally the beginnings of a real recovery in housing, could you talk about just what kind of impact a recovery in housing could have on your business, if any?

James Rubright

Yes. If you believe that housing drives a robust domestic economy, a restored demand for housing would be very positive for us in the long term because you’d see—again, you go back to that 3 or 4% economic growth in the United States and all of a sudden, you don’t have enough containerboard capacity in North America, nor would you have enough paperboard capacity. And again, if we were able to sustain or provide the basis for some global growth in the economy, particularly with the exporting countries that export into the United States, you could again have a higher rate of absorption of the capacity in Asia that we responded to a question about earlier. So all of those things would be long-term positive.

They also might be short-term negatives because if you had a spike in economic activity, the first thing you would see is a demand domestically for recycled fiber, so you could see short-term pressure on recycled fiber which is highly cyclical; and again, on the cost of energy, again dependent upon deliverability. So you might see some short- term earnings pressure in an environment which was very healthy with respect to the long-term.

Dave Zorub – BlueMountain Capital

Do you have a sense for in sort of a more normal housing market, what kind of percentage impact that could have on volumes for containerboard?

James Rubright

No. We’ve always thought of packaging as GDP minus, because we’re always figuring out ways to make packaging more efficient, make containerboard lighter and so forth. So whatever GDP is growing, we’re going to be something trailing that; but again, it would be easy to see GDP grow 3 or 4% because we’ve done so significantly, and then if you had containerboard growing at 2.5, that would be in excess of creep, again contributing to further tightening of a relatively tight domestic containerboard market.

Dave Zorub – BlueMountain Capital

Okay. And sorry, one last question which is really just a follow-up to my earlier. I just wanted to make sure I was on the same page, but when we look at sort of the moving parts, and again using that 1178 of credit agreement EBITDA coming out of this past year, it looks like on a gross basis when we add in sort of the opportunity for price recovery and incremental synergies, that would get you somewhere close to 1.9 billion of EBITDA, and then against that we would have to factor in some of the expense headwinds you mentioned – pricing, healthcare, et cetera. Is that sort of consistent with the way you look at the business?

James Rubright

I think you’re asking me to more specific with respect to forecasting future EBITDA than would be wise for me to do.

Dave Zorub – BlueMountain Capital

Fair enough. Thank you.

Operator

Once again, to ask a question please press star, one. One moment, please.

At this time, there are no further questions.

James Rubright

All right, thank you all very much for joining our call.

Operator

This does conclude today’s conference. Thank you for attending. 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: RockTenn's CEO Discusses F4Q2012 Results - Earnings Call Transcript
This Transcript
All Transcripts