Packaging of America (PKG)

Q1 2011 Earnings Call

April 19, 2011 10:00 am ET

Executives

Richard West - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Mark Kowlzan - Chief Executive Officer and Director

Paul Stecko - Executive Chairman

Analysts

Phil Gresh - JP Morgan Chase & Co

Mark Connelly - Credit Agricole Securities (USA) Inc.

Stephen Atkinson - BMO Capital Markets Canada

Eric Seeve - GoldenTree Asset Management

Richard Skidmore - Goldman Sachs Group Inc.

George Staphos

Andy Feinman - Iridian Asset Management

Chip Dillon - Crédit Suisse AG

Mark Weintraub - Buckingham Research Group, Inc.

Anthony Pettinari - Citigroup Inc

Presentation

Operator

Thank you for joining Packaging Corporation of America’s First Quarter 2011 Earnings Conference Call. Your host today will be Mark Kowlzan, Chief Executive Officer of PCA. [Operator Instructions] I will now turn the conference over to Mr. Kowlzan. Please go ahead when you are ready.

Mark Kowlzan

Good morning, and welcome to Packaging Corporation of America's First Quarter Earnings Release Conference Call. I'm Mark Kowlzan, CEO of PCA, and with me on the call today is Paul Stecko, Executive Chairman of PCA; Tom Hassfurther, who runs our Corrugated business; and Rick West, PCA's Chief Financial Officer. Thanks for participating in this morning's call, and after the presentation, we'll be glad to take any questions.

Yesterday, we reported first quarter record net income of $37 million or $0.37 per share, which included after-tax noncash charges totaling $2 million or $0.02 per share from asset disposals related to major energy projects. Reported results for the first quarter of 2010 were $19 million or $0.19 per share, which included income of $9 million or $0.09 per share from alternative fuel mixture tax credits and asset disposal charges of $2.5 million (sic) [$3 million] or $0.02 per share.

Net sales were a first quarter record $630 million, up 14% compared to first quarter 2010 net sales of $551 million. Excluding income from asset disposal charges, net income was $39 million or $0.39 per share versus the first quarter of 2010 net income, excluding both income from fuel credits and asset disposal charges of $12 million or $0.12 per share.

This $0.27] per share increase in earnings was driven by higher containerboard and corrugated products mix and price of $0.35 per share and higher volume of $0.06 per share. These increases were partially offset by lost volume and higher costs from severe weather of $0.02 per share and by increased costs for transportation of $0.03 per share; chemicals, $0.03 per share; medical and workers' compensation cost of $0.02 per share; labor of $0.02 per share; and incentive compensation accruals of $0.02 per share.

Our first quarter earnings were $0.03 per share lower than the guidance we're provided on January 24 due in large part to unusually severe winter storms that impacted both our mills and box plants . These storms, which involve heavy snow, ice and rain, caused the facility equivalent of one work day during the quarter across the entire box plant system. Wood harvesting cost and energy consumption in our mills were also higher with the extreme cold as well as heavy rain in the south.

Finally at our Counce, Tennessee linerboard mill, severe storms disrupted the supply of purchase electricity from TVA to the mills resulting about 1/2 day of loss paper machine production. Once the major energy project is completed, later this year at Counce, we will be able to sustain operations without purchase power from TVA.

Operationally, even with the exceptionally bad weather and two annual maintenance outages, which performed quite well during quarter, our corrugated product shipments were the highest since our record first quarter of 2006 shipments, up 3.1% over last year for total shipments and up 1.5% per workday with one more FBA workday this quarter.

However, as we said during our fourth quarter earnings conference call on January 25, most of our box plants did not work on January 23, which is counted as a workday by the FBA. And as mentioned earlier, we lost the equivalent of 1 additional workday in our box plant system due to severe snow, ice and rain storms.

First quarter 2011 volumes were also up against a very tough comparable, with total shipments of 14% in the first quarter last year. The quarter-end is strong with March setting a new total shipments record for any month, outperforming August of 2005 shipments by about 1%. As reported by the FBA last Friday, industry corrugated shipments for March were also up 4.1% in total and per workday, and industry containerboard inventory dropped 166,000 tons to 2.3 million tons, which is the second lowest level in 30 years.

Our outside sales for containerboard compared to last year's first quarter were up in total about 1%. Increased volumes in both containerboard and corrugated products improved earnings by about $0.06 per share, compared to last year's first quarter. All of our mills had an outstanding quarter, producing 602,000 tons of containerboard, up 33,000 tons over the first quarter 2010 driven by strong productivity, lower annual outage production losses and no wood fiber shortage downtime.

We did have production losses of about 22,000 tons due to annual maintenance outages during the quarter, with both of our linerboard mills in Counce, Tennessee and Valdosta, Georgia each downed for five days. The Valdosta annual maintenance outage continued into the second quarter and work was scheduled to be completed on April 6.

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