KapStone Paper and Packaging Corp. (KS)

Q2 2010 Earnings Call

August 05, 2010 11:00 a.m. ET

Executives

Roger Stone - CEO

Andrea Tarbox - CFO

Analysts

Michael French - Morgan Joseph

Steve Chercover - D.A. Davidson

Ron Gutfleish - Elm Ridge

Eric Hollowaty - Stephens Inc

Kevin Casey - Casey Capital

Mark Wilde - Deutsche Bank

Roger Feldman - West Creek Capital

Gail Glazerman - UBS

Presentation

Operator

Good day, ladies and gentlemen and welcome to the second quarter 2010 KapStone Paper and Packaging Corporation earnings conference call. My name is Kindle and I'll be your operator for today. At this time, all lines are in a listen-only mode. Later we'll conduct the question-and-answer session. (Operator Instructions)

Before I turn the call over to your host, the company has asked me to read these forward-looking statements. The information in this earnings call contains certain forward-looking statements within the meaning Federal Securities Law. These statements reflect management's expectation regarding future events and operating performance and speak only as of August 5, 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 underline any forward-looking statements can be found in the company's filings with the Securities and Exchange Commission such as its annual and quarterly reports. The company disclaims any obligations to revise or update such statements to reflect their occurrence within after the date of this earnings call.

I will now like to turn the conference over to Roger Stone, Chairman and Chief Executive Officer. Please proceed.

Roger Stone

Thank you. Good morning and thank you for joining us. As usual, Andrea Tarbox, our CFO is with me. We had a good second quarter which we believe is just the beginning of many excellent months to come. Andrea will now discuss our numbers and I'll return to share with you the basis and enthusiasm of our company's results and then we'll open the phone for question. Andrea?

Andrea Tarbox

Good morning. The presentation for today's review of second quarter 2010 is located on our website at www.kapstonepaper.com in the investor section for those of you who haven't already found it. I have to admit that I was pretty excited for the call this quarter because not only it is a great story to tell but this quarter is the most straightforward that we've had. Therefore, I don't have to go through my normal lengthy upfront explanations to describe lack of comparability.

This quarter, I only have exceptions. The first, the alternative fuel mixture tax credits that we earned $49 million of pretax income last year in Q2 that has since expired. And secondly, when we look sequentially at the results from Q1, 2010 to Q2, 2010, remember that Charleston have its tri-annual outage in Q1 which cost approximately $7 million and reduced production by 17,000 tons.

Now, let's jump right to slide number 3. Higher prices and volume coupled with improved product mix drove revenue higher by $43 million or 27% for Q2, 2010 versus a year ago to a record $199 million. Average revenue per ton was up $585, up $50 per ton over Q1, 2010; and up $59 per ton versus a year ago on both higher prices and improved product mix. The operations have rebounded nicely and continue to grow stronger and more profitable.

Our mills are running forward with an operating rate of approximately 99% in Q2, 2010 versus 85% in Q2, 2009 and 96% in Q1, 2010. In Q2 this year, we produced 323,000 tons of paper, an increase of 19% over last year. Sequentially, from Q1 when we reported Charleston tri-annual maintenance outage, production has increased 8%. We sold 326,000 tons of paper in 2Q this year, up 14% over last year. Sequentially, from Q1, tons sold over up 3% from last quarter.

Our strong rapidly improving operation is delivering cash. Our adjusted EBITDA for Q2, 2010 was $25 million versus a year ago, when adjusted EBITDA was slightly negative. Sequentially, adjusted EBITDA of $25 million in Q2 was up $17 million compared to the $8 million generated in Q1.

Strong operating cash flow for the second quarter of $35 million enabled us to reduce our net debt to $106 million at June 30, down 27 million for March 31, 2010.

Slide 4 is a summary of our second quarter compared to the prior year. In addition to net sales of $199 million and adjusted EBITDA of 25 million, our adjusted net income for Q2, 2010 is $8 million, up $20 million and adjusted diluted EPS is $0.17, up $0.59 from Q2, 2009; including 18 million additional outstanding shares that was negatively impacted fully diluted shares by $0.24.

Turning to slide five, which analyzes the $46 million increase in net sales from Q2, 2009 to Q2, 2010, our sales volume was up, almost 4,100 tons or 14% and contributed $24 million of additional sale.

Increases in selling prices added $12 million and an improved selling net contributed $8 million, while the weaker Euro negatively impacted revenue by a $1 million.

The quarterly changes in our average revenue per ton are depicted on slide six; pricing has recovered, driving average revenue per ton to $585 versus $495 at the bottom of the trough in Q3 2009. The average revenue per ton in Q2 2010 however only reflects approximately 1/3rd of the benefit from the April 2010 $60 per price increase.

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