KapStone Paper and Packaging Corporation (KS)

Q1 2010 Earnings Call

May 6, 2010 3:00 pm ET

Executives

Roger Stone - Chairman and CEO

Andrea Tarbox - CFO

Analysts

Fritz von Carp - Sage Asset Management

Michael French - Morgan Joseph

Steve Chercover - D.A. Davidson

Rob Young - William Smith & Company

Aaron Holloway- Stephens

Jack Ripstein - Potrero Capital

Adam Ritzer - CRT Capital

Tim Priadle - West Creek Capital

Presentation

Operator

Welcome to the First Quarter 2010 KapStone Paper and Packaging Corporation Earnings Call. During the presentation, all participants will be in a listen-only mode. After the speakers' remarks, you will be invited to participate in a question-and-answer session. As a reminder this conference is being recorded.

Before we begin, the company has asked me to read the following statements. The information in this earnings call contains certain forward-looking statements within the meaning of the Federal Securities Law. These statements reflect management’s expectations regarding future events and operating performance and speak only as of May 6, 2010.

These forward-looking statements involve a number of risks and uncertainties. A list of the factors that could cause actual results to differ materially from those expressed in or underlined any forward-looking statements can be found in company’s filings with the Securities and Exchange Commission such as it's annually and quarterly report. The company disclaims any obligation to revise or update such statement to reflect the occurrence within after the date of this earnings call.

I will now like to turn the conference over to your host for today’s call Mr. Roger Stone, Chairman and CEO of KapStone. Please proceed.

Roger Stone

Good afternoon and thank you for joining us on this very interesting day. As usual Andrea Tarbox, our CFO is with me. Considering a short first quarter of 90 days, a loss of about 17,000 tons per once every three year shutdown at Charleston and temporary weather related input cost increases. I believe we are off to what should be an excellent year.

Andrea will now give you an in-depth look at numbers and I will return with some final comments before we open up the thoughts. Andrea?

Andrea Tarbox

We have a presentation, which we have posted on our website for those of you, who haven’t found it already. It's at www.kapstonepaper.com. It's in the investor section. Yes, well it's under both. So we have it in two places just trying to make it a little easier for you guys.

Anyway, let's jump now right to slide number 3, which shows the highlights of Q1 2010 versus Q1 2009, and this slide clearly illustrates to turnaround from a year ago.

During the first quarter of 2010, we sold 316,000 tons of paper, up 45% from Q1 2009. Our mills were running full with an operating rate of 96% in Q1 2010 versus 72% in Q1 2009, and we produced 299,000 tons of paper in Q1, 2010.

Our operating cash flow compared to a year ago is up $27 million to $23 million, including $13 million received from the black liquor credit.

Net debt is down $303 million to $133 million, or 70%. Interest expense is down 82% to approximately $900,000 Finally, KapStone's market cap was up over 500% at March 31, 2010, and so far despite today's hammering, we still are at least we were 20 minutes ago.

Slide 4, shows our financial results year-over-year. The company's tri-annual plan maintenance outage at the Charleston mills took place in Q1 2010. The average reduced production at Charleston by approximately 16,700 tons and lowered operating income by approximately $7 million. Our Q1 results reflect the benefits of our mills running full more than offset by the lingering effects from depressed product pricing.

Now on a strong recovery, our less favorable product mix now improving $7million of cost related to the Charleston tri-annual maintenance outage, increased cost primarily resulting from higher wood cost due to the extremely wet weather in the south east, also starting to improve, and 2009, non-recurring gain on the sales at dunnage bag business.

Net sales of a $176 million were up $35million while net income of $6 million was down $5million year-over-year, adjusted EBITDA for Q1, 2010 of $8 million excludes the $22 million black liquor credit and $7 million was added back for the tri-annual Charleston maintenance average.

When net income for Q1, 2010 is adjusted for the same items the result is an adjusted net loss of $3million versus last year’s loss of $1million. Diluted EPS for the fourth quarter of 2010 was $0.14 per share compared to $0.39 a year ago.

Adjusted diluted EPS for the fourth quarter of 2010 was a loss of $0.06 per share consistent with the year earlier.

Turning to slide 5, we'll take a closer look at the $35 million net increase in sales from Q1, 2009 to Q1, 2010, due to improving economic condition our sales volume was up almost a 100,000 tones or 45% and contributed $57 million of additional sales.

However our average revenue per ton dropped 10%, or $50 per ton to $535. The lower average revenue per ton is a result of a $12 million of lower prices on kraft paper and linerboard, and $4 million due to a heavier mix of export linerboard sales. Revenues were also lower by $6 million due to the absence of the dunnage bag sales.

Slide six further illustrates the impact of the economy on our ton sold and our average revenue per ton over the last seven quarters. In Q3 of 2008, we sold 322,000 tons at an average price of $605 per ton. Our ton sold reached their lowest level in Q1 2009 while our average revenue per ton bottomed in Q3 2009. In Q4 2009 we reached a turning point, as average revenue per ton increased $8 over Q3 2009 and increased again in Q1 2010 by $32 per ton or 6.4% to $535 per ton.

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