Packaging Corporation of America ( PKG)

Q4 and Full Year 2010 Earnings Conference Call

January 25, 2010 10:00 AM ET

Executives

Mark Kowlzan – CEO

Rick West – SVP and CFO

Paul Stecko – Executive Chairman

Tom Hassfurther – EVP, Corrugated Products

Analysts

Chip Dillon – Credit Suisse

Mark Weintraub – Buckingham Research

George Staphos – Merrill Lynch

Richard Skidmore – Goldman Sachs

Mark Connelly – CLSA

Andrew Feinman – Iridian Asset Management

Eric Steve – Goldentree

Jonathan Hirschtritt – Sheffield Asset Management

Presentation

Operator

Thank you for joining Packaging Corporation of America’s fourth quarter and full year 2010 earnings conference call. Your host today will be Mark Kowlzan, Chief Executive Officer of PCA. Upon conclusion of the narrative, there will be a Q&A session.

I will now turn the conference call over to Mr. Kowlzan. Please go ahead when you’re ready.

Mark Kowlzan

Good morning and welcome to Packaging Corporation of America’s fourth quarter earnings release conference call. I’m Mark Kowlzan, CEO of PCA and with me on the call today are Paul Stecko, Executive Chairman of PCA, Tom Hassfurther, who runs the Corrugated Business; and Rick West, PCA’s Chief Financial Officer. Thanks for participating in this morning’s call and after the presentation, we will be glad to take any questions.

Yesterday, we reported fourth quarter 2010 net income of $55 million or $0.54 per share which included a $5 million or $0.05 per share addition to income from cellulosic biofuel tax credits generated in 2009 and after tax non-cash charges totaling $3 million or $0.03 per share from asset disposals related to the Counce, Tennessee and Valdosta Georgia mills major energy projects and paper machine assets earlier to April 2005 at the Tomahawk mill.

Reported results for the fourth quarter of 2009 were $59 million or $0.57 per share which included income of $44 million or $0.42 per share from alternative fuel mixture tax credits and energy project asset disposal charges of $1 million or $0.01 per share.

Net sales, for the fourth quarter recorded $627 million, up 18% compared to fourth quarter of 2009 net sales of $532 million. Excluding income from biofuel tax credits and asset disposal charges net income was a fourth quarter record of $53 million or $0.52 per share versus fourth quarter of 2009 net income of $16 million or $0.16 per share. This $0.36 per share increase in earnings was driven by higher containerboard and corrugated products price and mix of $0.44 per share and higher volume of $0.05 per share.

These increases were partially offset by higher cost for recycle fiber of $0.05 per share, labor related cost including medical cost of $0.04 per share, transportation cost at $0.02 per share, chemical cost of $0.02 per share and the higher tax rate of $0.01 per share.

Excluding income from biofuel tax credits and for asset disposals and closure charges, earnings for 2010 were $166 million for our record $1.62 per share compared to $96 million or $94 per share in 2009. Net sales were also a record $2.44 billion compared to $2.15 billion in 2009.

Looking at operations, our corrugated products volume was up 3.1% over last year’s very strong fourth quarter setting a record for fourth quarter shipments. Our demand is relatively steady throughout the quarter with shipments per work day up 4.3% in October, 2.2% in November and 2.5% in December over last year.

Since the fourth quarter of 2008, a low point in the economic downturn for us, total shipments are up 11.6%. Our outside sales of containerboard also remained very strong of both domestic and export shipments up 8.6% over last year’s fourth quarter. The increase sales volumes benefited our earnings by about $0.05 per share compared to last year’s fourth quarter.

All of our mills had an outstanding quarter producing 639,000 tons of containerboard up 39,000 tons or 6.4% over the fourth quarter of 2009 driven by exceptional productivity and operating efficiencies.

The high mills productivity enabled us to build half of the containerboard inventory necessary to offset the 2011 production losses related to energy project work at Valdosta and Counce mills including the pines and the rebuild of two of the Counce recovery boilers.

Looking at pricing our containerboard and corrugated products prices were up significantly year-over-year reflecting higher containerboard prices both domestic and export plus a full pass over to boxes of our containerboard price increases which along with mix improved earnings by about $0.44 per share compared to last year’s fourth quarter.

Moving to cost, industry published price for old corrugated containers or OCC, excluding delivery costs increased more than we expected when we provided our earnings guidance and we are up about $75 per ton in the fourth quarter of 2010 compared to the fourth quarter of last year and up $35 per ton compared to the third quarter of 2010. The higher OCC cost reduced our earnings year-over-year by about $0.05 per share and lowered our earnings by about $0.01 per share compared to our fourth quarter earnings guidance. Based on January published prices, OCC is now about $10 a ton above the fourth quarter average.

Wood fiber costs were down slightly with the better weather compared to last year’s very wet fourth quarter, plus we did a very good job of getting winter in and turbine built earlier this year which kept the wood costs down.

Read the rest of this transcript for free on seekingalpha.com