Packaging of America (PKG)

Q2 2011 Earnings Call

July 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

Thomas Hassfurther - Executive Vice President of Corrugated Products

Paul Stecko - Executive Chairman

Analysts

Chip Dillon - Citigroup

Phil Gresh - JP Morgan Chase & Co

Joshua Zaret - Longbow Research LLC

Mark Wilde - Deutsche Bank AG

George Staphos

Andy Feinman - Iridian Asset Management

Unknown Analyst -

Mark Weintraub - Buckingham Research Group, Inc.

Anthony Pettinari - Citigroup Inc

Presentation

Operator

Thank you for joining Packaging Corporation of America's Second 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're ready.

Mark Kowlzan

Good morning, and welcome to Packaging Corporation of America's Second 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. After the presentation, we'll be glad to take any questions.

Yesterday, we reported second quarter net income of $39 million or $0.39 per share, which included after-tax income of $1 million or $0.01 per share from an adjustment to reserves related to medical benefits and a $1 million, or $0.01 per share charge from asset disposals related to major energy products. Reported results for the second quarter of 2010 were $38 million, or $0.37 per share which included an after-tax charge of $1 million, or $0.01 per share from energy project asset disposal charges. Net sales were a record $665 million, up 8% compared to the second quarter of 2010 net sales of $615 million. Year-to-date sales were $1.29 billion compared to $1.17 billion in 2010. Excluding the reserve adjustment and asset disposal charges, second quarter 2011 earnings were $40 million, or $0.39 per share.

Second quarter 2010 earnings, excluding asset disposal charges, were $39 million or $0.38 per share. Earnings improved compared to last year from higher containerboard and corrugated products mix and price of $0.09 per share and higher volume of $0.06 per share. These improvements were essentially offset by increased costs for chemicals at $0.04 per share, transportation of $0.03 per share; labor of $0.30 per share, energy of $0.02 per share, recycled fiber of $0.01 per share, and legal cost of $0.01 per share.

Operationally, this is probably as difficult and as successful a quarter that we've ever had considering the planned outages at all 4 of our mills and continuing energy project for Counce and Valdosta. These outages worked remarkably well and the mill started up and run very efficiently after the outages. As a result, our productivity and our costs were better than forecasted, which coupled with higher than anticipated box volume and containerboard sales, produced earnings of $0.04 per share above our preview and guidance.

Looking at the specific details of operations, our corrugated demand was strong throughout the quarter, setting an all-time record for both total corrugated shipments and shipments per work day, up 3.2% over last year's second quarter. This was a tough comparable considering total shipments in the second quarter last year were up 8%. The quarter also ended very strong with June total and per work day shipment of 5.9% over last June. Our outside sales of containerboard were also very strong, up 22,000 tons compared to last year's second quarter. With the mills running so well, we are finally able to release more tons to the export markets.

I should also point out that last year, our second quarter containerboard sales were unusually low because of our precarious inventory situation. Increased volumes in both containerboard and corrugated products improved earnings by about $0.06 per share compared to last year's second quarter. Our mills produced 606,000 tons, setting a new second quarter daily production record based on actual days operated. In total, we had about 40,000 tons of maintenance and project downtime during the quarter. We ended the quarter with our containerboard inventory down 18,000 tons below the end of the first quarter and about 25,000 tons below 2010 year-end levels.

As you recall, we built about 25,000 tons of additional inventory at the end of 2010 to get us through planned outages this year and energy projects slowbacks throughout the rest of 2011. Most of the planned downtime is now behind us with only slowbacks related to the rebuild of the 2 recovery boilers at Counce mill remaining. Our inventory levels at the end of June were right on plan which is no small accomplishment considering the higher-than-planned volume.

Our energy projects remain on or slightly ahead of schedule but the time to complete a rebuild in all recovery boilers is difficult to predict.

I'd also note that our second quarter results included about $0.03 per share in earnings benefits from the project from increased productivity at Valdosta, lower purchased electricity from the pressure, capacity utilization of the new Counce turbine and lower electricity prices from TVA Green energy and center payments.

Industry-wide corrugated products shipments for June, as reported by the FBA yesterday, were essentially flat with last year and industry containerboard inventory decreased 39,000 tons to 2,155,000 tons, which except for last year, is the lowest level in 32 years.

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