KapStone Paper and Packaging Corporation ( KS)

Q3 2010 Earnings Call

November 04, 2010 11:00 am ET


Roger Stone - Chairman and CEO

Andrea Tarbox - CFO


Steve Chercover - D. A. Davidson

Michael French - Morgan Joseph

Rob Young - William Smith & Company

Adam Ritzer - CRT Capital

Eric Hollowaty - Stephens Inc.

Fritz von Carp - Sage Asset Management



Welcome to the Third Quarter 2010 KapStone Paper and Packaging Corporation Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

The information in this earnings call contains certain forward-looking statements within the meaning of Federal Securities Law. These statements reflect management's expectations regarding future events and operating performance and speak only as of November 4, 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 underlying, 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 obligation to revise or update such statements to reflect the occurrence of events after the date of this earnings call.

I will now like to turn the conference over to your host Mr. Roger Stone, Chairman and CEO. Please proceed.

Roger Stone

Good morning and thank you for joining us. As usual Andrea Tarbox, our CFO is with me. It is always nice to have this call, when things are turning out as planned. We think we had an excellent quarter with record production, earnings and EBITDA margin and although we are running well and doing well over time we think we can do better.

Now, Andrea will discuss our numbers and then I will return with some closing comments before opening the phones for questions. Andrea?

Andrea Tarbox

The presentation for today’s review of third quarter 2010 is located on our website www.kapstonepaper.com in the investor section for those of you who haven't already located it.

I know you are going to be disappointed because I don’t have any housekeeping items that you would need to better understand the numbers this time. The numbers clearly speak for themselves so let’s just dive into KapStone’s results for the third quarter of 2010.

Starting with slide 3, to summarize our third quarter it was a record breaker. Third quarter of 2010 results for KapStone broke quarterly records for net sale, adjusted EBITDA, production, net income and adjusted net income.

Higher prices and improved product mix drove net sales higher by $37 million, or 22% for the third quarter of 2010 versus a year ago to a record $207 million. Average revenue per ton was $614, up a $119 per ton or 19% versus a year ago on both higher prices and improved product mix.

Record adjusted EBITDA for Q3 2010 was $39 million, up $31 million or 388% versus a year ago, when adjusted EBITDA was $8 million. Sequentially, adjusted EBITDA of $39 million in Q3 was up $14 million or 56% compared to $25 million earned in Q2. Adjusted EBITDA margins have more than tripled in the past year to 19% in Q3 2010.

Strong operations are delivering substantial cash flows. KapStone generated $30 million of free cash flow, or $0.63 per share for the third quarter. Net debt is now $79 million at September 30th, down $28 million from June 30, 2010 and down approximately $400 million since our acquisitions of the Charleston operation in July 2008.

Slide 4 is a summary of our third quarter compared to the prior year’s quarter. In addition to net sales of $207 million and adjusted EBITDA of $39 million, our adjusted net income for Q3 2010 is $18 million, up $25 million or 357% and adjusted diluted EPS is $0.39, up $0.59 or 295% from Q3 2009, including approximately $10 million additional outstanding shares, which negatively impacted fully diluted shares by $0.10.

Slide 5 analyzes the $37 million increase in net sales from Q3 2009 to Q3 2010. Increases in selling prices added $28 million and improved product mix contributed $12 million. The weaker Euro negatively impacted revenues by $2 million year-over-year, as a large percentage of our DuraSorb sales are sold in Euros. Sales volume was down slightly 500,000 tons reducing revenues by approximately $1 million.

Our mills ran very well this quarter as depicted on Slide 6, producing a record 329,000 tons of paper with an operating rate for the quarter of 100%. We sold 327,000 tons up slightly from Q2 2010 and down 1.5% from Q3 2009. Our finished goods inventory in tons is down 30% versus a year ago and down 26% from year end. Ordered backlogs remain strong.

Slide 7 shows the impact of much improved pricing and product mix, which increased average revenue per ton by $119 from a low of $495 a year ago, to $614 in Q3 2010. Revenue per ton should benefit in the future from the realization of the $40 per ton Kraft paper price increase announced in August that will be mostly implemented in Q4 and higher prices for export linerboard.

The significant improvement in our product mix over the past year is illustrated by the pie chart, which show increases in domestic Export linerboard up 25,600 tons, DuraSorb up 9,900 tons, Kraft Paper up 6,600 tons and Kraftpak sales up 4,600 tons, offsetting these increases for the reduction of 51,600 tons of Export linerboard sales. Our product mix now closely reflects our normalized mix.

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