Packaging of America (PKG)

Q3 2011 Earnings Call

October 18, 2011 10:00 am ET

Executives

Thomas A. Hassfurther - Executive Vice President of Corrugated Products

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

Mark W. Kowlzan - Chief Executive Officer and Director

Paul T. Stecko - Executive Chairman

Analysts

George L. Staphos - BofA Merrill Lynch, Research Division

Phillip Marriott

Steven Chercover - D.A. Davidson & Co., Research Division

Anthony Pettinari - Citigroup Inc, Research Division

Mark A. Weintraub - Buckingham Research Group, Inc.

Mark W. Connelly - Credit Agricole Securities (USA) Inc., Research Division

Andrew Feinman - Iridian Asset Management

Chip A. Dillon - Vertical Research Partners Inc.

Mark Wilde - Deutsche Bank AG, Research Division

Phil M. Gresh - JP Morgan Chase & Co, Research Division

Presentation

Operator

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

Mark W. Kowlzan

Good morning, and welcome to Packaging Corporation of America's Third 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 third quarter 2011 net income of $42 million or $0.42 per share, which included after-tax charges of $1 million or $0.01 per share from asset disposals related to major energy projects. Results excluding these charges were net income of $43 million or $0.43 per share compared to the third quarter of 2010 net income of $62 million or $0.60 per share, which excludes income from cellulosic biofuel credits and asset disposal charges.

Higher volume improved earnings by $0.04 per share compared to last year's third quarter but was more than offset by inflationary driven cost increases totaling $0.18 per share, sales mix of about $0.02 per share and price changes of $0.01 per share. The cost increases were in transportation, $0.04 per share; recycled fiber, $0.04 per share; labor and benefits, $0.04 per share; energy, $0.02 per share; chemicals, $0.02 per share; and other items, $0.02 per share.

Excluding special items, net income for the first 9 months of 2011 was $122 million or $1.21 per share compared to $113 million or $1.10 per share in 2010, an $0.11 per share increase.

The earnings increase was driven by pricing mix of $0.41 per share, increased volume of $0.15 per share, lower interest expense of $0.03 per share and lower energy usage of $0.03 per share. These items were partially offset by inflation and other cost increases of $0.51 per share for essentially the same areas noted in the third quarter.

Net sales in the third quarter were $671 million, up 4.4% compared to the third quarter of 2010, and year-to-date net sales were a record $2 billion, up 8.7% over 2010.

Overall, we had a very good quarter operationally with record corrugated shipments and mill production, and we continue to make significant progress on our major energy projects at our Counce, Tennessee and Valdosta, Georgia linerboard mills.

Higher input costs, however, continued to be an issue, significantly reducing earnings.

Looking at the specific details of operations, our corrugated demand was very strong throughout the quarter, up 6.6% over last year. Acquisitions added 1.4% of the 6.6% volume improvement. But even after adjusting for these acquisitions, we still have record shipments. Our outside sales of containerboard also remain strong, equal to last year's third quarter and up 3,000 tons over the second quarter of this year. Increased volumes in both containerboard and corrugated products improved earnings by about $0.04 per share compared to last year's third quarter.

Our mills produced 650,000 tons, setting a quarterly record, up 4,000 tons from the third quarter of 2010. Each of our 4 mills ran extremely well, taking advantage of the normal efficiencies following an annual outage. We ended the quarter with our containerboard inventories down about 22,000 tons below the 2010 year-end levels. So you can see we're in good shape here.

Moving to price and mix. Our prices were down slightly compared to last year due mainly to changes in our sales mix. The change in mix reduced our earnings by $0.02 per share, and other price changes reduced our earnings by about $0.01 per share.

As stated earlier, higher input costs and other inflationary cost pressures reduced our earnings by about $0.18 per share compared to last year's third quarter. Looking at these cost increases, higher outbound transportation cost reduced our earnings by about $0.04 per share compared to last year's third quarter. The increase in costs was driven by higher diesel prices and fuel surcharges, as well as increased demand on the nationwide truck fleet and rail systems. Published prices for recycled fiber or old corrugated containers, excluding delivery costs, were up above $55 per ton compared to the third quarter of 2010. The higher recycled fiber cost reduced our earnings by about $0.04 per share. Last year's third quarter was the low point of recycled fiber prices in 2010. And since that time, prices have increased above 50%. Recycled fiber prices in the third quarter were also up about $15 per ton over the second quarter of this year. Prices for recycled fiber in fell in October and are now about $5 per ton below the third quarter average.

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