Packaging Corp of America (PKG) 2003 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the Pack aging Corporation of America First Quarter Earnings Conference Call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference. Mr. Paul T. Stecko, Chairman and Chief Executive Officer of Packaging Corporation of America. Mr. Stecko, you may begin.

Thank you. And good morning, everyone. Welcome to PCA's first quarter earnings release call. With me on the call. With me on the call today is Richard B. West our Chief Financial Officer. I'd like you to thank you for Participating, and as always, we'll take questions when we get through the presentation. So, let me get right into it.

Today, we're reporting first quarter net income of $7 million or 7 cents a share. This compares to first quarter 2002 earnings of 10 million or 9 cents a share, and fourth quarter 2002 net income of 12 million or 12 cents a share. Net sales for the first quarter were $423 million, that's up 2% compared to last year's first quarter of $415 million.

EBITDA for the first quarter was 66 million versus 70 million in the first quarter of last year. The 2 cent per share reduction in earnings compared to last year's first quarter was driven primarily by higher energy costs and higher recycled and virgin fiber costs, which taken, together amounted to about 4 cents a share.

Our first quarter 2002 results also included a dividend from PCA's 33 and a percent ownership in Southern Timber Venture, and that was just over 1 cent a share.

These earnings reductions were partially offset by improved volume and improved price for both containerboard and corrugated products, compared to last year's first quarter.

Looking at first quarter earnings this year compared to fourth quarter 2002 earnings of 12 cents a share, lower mill production from our annual maintenance outages, reduced earnings by about 4 cents a share. Lower prices for both containerboard and corrugated products reduced earnings by 3 cents a share, and higher energy costs reduced earnings by almost 2 cents a share. Again that's all compared to the fourth quarter. Increased corrugated products volume and lower cost improved earnings by 4 cents a share, compared to the fourth quarter, which partially offset these previous items.

Before I get into details of the quarter, I would like to start off by saying that we think we had a very solid quarter operationally. We faced more than the average number of what I call tough and difficult challenges due to external conditions. Which to a large extent our mills and box plants were over -- were able to overcome. And here's a case where our fiber and energy flexibility really paid off and we were not as affected to the extent that many of our competitors were by the run up in the prices of both natural gas and fiber. Severe weather conditions especially in the northeast, the south and Texas caused increases in costs as well as several box plant closures. Wet weather conditions in the south made logging conditions very difficult, causing critically low wood inventories and periodic machine slow backs at our line are board mill at Counce, Tennessee. The situation was more acute on hardwood than pine, and we were able to minimize our hardwood usage. 10 of our box plants were down for about two days each, due to weather, and three other plants were down for one day as a result of ice storms and record snowfalls in parts of the U.S. These box plant closures required shifts of production and other operational changes, in order to meet customer needs.

OCC cost rose during the quarter when the Chinese reentered the market, and they were a little over $20 a ton higher than the first quarter of last year. Again, we're not affected as much as most of our competitors because only about 15% of our net recycled fiber usage is purchased.

Rapidly rising energy costs also impacted our earnings. However, the impact was minimized as a result of our relatively low reliance on natural gas as a purchased fuel. Natural gas, which hit $10 per million BTUs in March, accounts for only about 10% of our mill total purchase fuel needs. And half of that 10% was hedged, in the first quarter at relatively attractive prices. Annually, over 75% of our purchase fuel in our mills is bark or wood waste and coal which, together, costs well under $2 per million BTUs. Our box plants do burn oil and natural gas, and we were hurt there by the run-up in natural gas and oil prices. But our box plants consume only about 2 million BTUs per year, compared to $17 million in our mills. Where we're not nearly as reliant on natural gas.

Also during the quarter, we did successfully complete two major annual maintenance outages as our accounts in Valdosta liner board mills as planned. The Valdosta maintenance outages also included modifications to the press section of the paper machine, which has reduced energy consumption, enhanced our sheet strength, and allows us to run lighter weight grades much more efficiently.

As I'm sure you all know, the economy continued to remain difficult during the quarter. However, we were able to achieve our fifth consecutive quarter over quarter -- excuse me -- our fifth consecutive quarter of year over year growth, in our corrugated products volume per workday. It's been a quarter that we're glad to have behind us, but pleased with our performance operationally and how we'll we handled the challenges we faced. Now, I’ll get into a little more specific details about these operations. Our corrugated products volume in the first quarter was up 2.6% per workday, compared to the first quarter a year ago. This 2.6% increase in corrugated products volume was up against a tough comparable as our first quarter 2002 corrugated products volume was also up 2.5% compared to the previous year. In addition, our volume per workday was strong each month of the quarter, compared to a year ago. With January being up 2.8%, February 2.7%, and March up 2.3%.

Industry corrugated shipments for the quarter were down by 1.2% per workday. So, again, PCA continued to outperform the industry from the volume standpoint.

With our higher corrugated products shipments, an additional 12,000 tons of corrugated container -- excuse me -- with PCA's higher corrugated product shipments, an additional 12,000 tons of containerboard was consumed by PCA's box plants. This allowed us to increase the containerboard production for the quarter to 531,000 tons, up 11,000 tons from last year's first quarter.

Industry containerboard inventories at the end of March now stand at 2,738,000 tons, which is 130,000 tons below last year -- below, excuse me, 130 tons below year end inventories. Considering that for the industry, business was relatively slow in the seasonally slowest quarter of the year, we do enter the second quarter with industry wide inventories at reasonably low levels.

First quarter 2003 containerboard pricing, as reflected in Pulp and Paper Week, on the average for the quarter was about $14 a ton higher for both linerboard and corrugating medium, compared to the first quarter of 2002. Compared to the fourth quarter of 2002, first quarter containerboard pricing was down about $6 a ton, reflecting a partial quarter's impact of February's 10 and $15 per ton decrease in industry published prices for linerboard and medium, respectively.

PCA's mill manufacturing cost is traditionally a little higher in the first quarter because our annual maintenance outages, as well as, higher costs for fuels, wood, and higher energy usage. Recycled fiber prices, as I mentioned, were about $20 a ton higher than last year which lowered PCA's earnings in the first quarter by about 1 cent per share. Our wood costs were up only about a percent and a half ,which impacted earnings by about a half a cent a share, despite some extremely difficult logging conditions. We kept the wood cost impact lower to some extent by lowering our hardwood consumption at Counce, and we no longer use any hardwood at Valdosta. Our low reliance on natural gas as a purchased fuel source minimized the impact of higher energy prices which escalated throughout the quarter. With total energy costs and usage reducing earnings by about 2.5 cents per share, compared to the first quarter of 2002, and almost 2 cents a share compared to the fourth quarter of 2002. Again, these energy costs increases are modest compared to increases being reported by others.

Fixed cost across the company excluding depreciation were flat compared to the first quarter 2002. Depreciation expense was up about $1 million or about a penny a share.

Moving to cash generation and our balance sheet, we made several full year and shutdown type cash payments in the first quarter which totaled about $20 million. After making those payments, we generated 39 million in cash from operations, the cash generated from operations was used for capital expenditures of 23 million. We repurchased 215,400 shares of PCA common stock for approximately 3.6 million bringing our total share repurchases to date to 4.4 million shares or $75 million. And finally we also paid down 4 million and long-term debt bringing our total long-term debt down to 738 million. The remaining cash was not used, which increased our cash on hand by $9 million to 140 million. I should point out that on April 1, we did use 26.5 million in cash to make our semiannual interest payment on our 9 5/8 % senior subordinated notes.

Now I'd like to take a quick look at the second quarter. With an expected seasonally driven pick-up in corrugated products volume in the second quarter, PCA’s mill production should increase by about 25,000 tons compared to the first quarter. This 25,000 ton increase is after taking into account our five-day annual mill maintenance outage as Tomahawk at the end of April as well as a scheduled six-day-outage at our Filer City mill in June. After completing these outages we have no planned annual maintenance outages for the rest of 2003, as our practice has been to try to take our outages when energy costs are the highest and demand is the lowest and that's at the beginning of the year. And, again, we've done that this year.

We should also see some improvement in energy cost in the second quarter as the price of natural gas has fallen. And we will use less energy as we enter warmer months. These earnings improvement items could be partially offset by a higher OCC prices if they rise during the quarter and, of course, OCC pricing has been volatile and very difficult to predict.

The announced containerboard and box price increases, should be partially realized in the second quarter as these increases are phased in, with the full impact of these increases being realized in the third quarter.

Of course, the key variable by far continues to be the growth of the U.S. economy and the resulting impact this will have on corrugated products demand. When we consider all of these items, we expect that earnings in the second quarter should improve to about 12 cents a share.

With that, we'd be happy to entertain any questions but as always, I have to remind you that some of the statements we've made on this call constitute forward looking statements, these statements are based on current expectations of the company and do involve inherent risks and uncertainties including those identified as risk factors in our annual report on Form 10-K which is on file with the SEC. Actual results could differ material from those expressed in these forward looking statements. And with that I would ask the operator to open the lines up for any questions that you might have from -- from either myself, Richard B. West or William J. Sweeney.

Thank you. If you have a question at this time. Please press the one key on your touch-tone telephone. Once again, if have you a question at this time, please press the one key now. Our first question today is from Mark Connelly with CSFB.

Good morning, Paul T..

Good morning, Mark.

Just a couple of broad questions. Last quarter you talked about Chip A. availability, both hardwood and soft wood. Can you tell us how this quarter is starting out? Obviously the weather is a little better but it's still pretty wet in some places. And, second, can you talk about any specific cost reduction efforts that you currently -- that you still have underway? You’ve talked about some programs in the past couple of quarters but can you tell us what's going on now?

I sure can. The wood situation is very, very weather related. The good news is we have had some dry weather at least where our mills are located. I think in general in the south things have improved a little. But, you know, it rains a lot in the spring, also. The early parts of the spring. And I think really probably for the next couple of months until we get into May, beginning of June, I think it's week to week based on weather. But we've had a fairly good run of it the last few weeks. We're in fairly good shape wood-wise. Of course, we have the ability to flex our fiber. Hardwood has been the bigger problem, it grows in the bottom lands, in the swampier parts of the terrain versus plantation pine. So, if you're in, say, the white base, white paper business where you might be using 60, 70% hardwood this is a bigger problem than it is in containerboard.

With regard to cost savings projects, quite frankly, other than the press rebuild which was not a big project, it's a couple million dollars, it counts, that will reduce our cost because we can run light weights much more efficiently. We've gone to a no draw press with a lighter sheet, the sheet obviously tends to break more with no draws in there you get much better up time, much better runnability. that’s a stronger sheet because we can get more moisture out of it and have a dryer sheet. So, that's going to save us some money. But quite frankly, we're not a company that has, other than we converted to coal a couple of years ago, no one or two big projects, in order for us to reduce costs, we've got to do 2 or 300 things just a little better every year, both in our mills and in our box plants. Quite frankly I’m happy it's that way because if you have some -- if you're running well, then you don't have to focus on big problems. You can focus on doing those 2 or 300 things a little better. We have no magic bullets. No massive head counts or restructuring or anything like that. It's just plain blocking and tackling and as you referred to us one time, we're boring. We don't have anything magic, we just grind it out.

Does that mean Paul T., we should expect capex through the year to be relatively stable?

Our capex, yes, the answer is yes. Our capex has been, if you look at the last four years as a stand alone company. Our capex has been in the $110 million, $112, $113 million range [Audio Break Begins] [except] for one year we got up to $130 when we put in three new [corrugators] but that had been planned for a long time. So, yeah, I would expect our capex to be in that 110 or so range.[Audio Break Ends]

Okay. Thanks very much.

Thank you.

And our next question is from Chip A. Dillon with Smith Barney. Please go ahead.

Yes, good morning. I was going to ask you about the situation with your wood contracts I know since you sold a lot of your wood, your wood fiber, you obviously have some contractual arrangements with getting the wood out of the forest, mostly in the form of Chip A.s. Would there been any kind of price escalator on the second quarter on wood cost fronts you factored into the 12 cents that is sort of a lag from what we experience for the first quarter? And secondly, as we look at the U.S. economy continuing to change more and more, you know, we see a loft basic manufacturing going offshore, is the type of box customer that you have changing over time? Is the mix of your business changing over time?

Let me talk about the wood. First of all, most of our wood that comes into the mill Chip A. is Chip A. -- that's an interesting name talking about Chip A.s here, is actually round wood. We do get residual Chip A.s from sawmills. We do get a little bit of whole tree Chip A.s that some people do Chip A., but most of our wood comes in as round wood which we Chip A. in our own mills, Chip A.. At Valdosta the wood situation is very good. A lot of mills have shut down in that part of the country. If you look at the Information, I know you're aware of. At Counce, the wood situation is more competitive and that's why we maintain a 33 and a percent ownership in Southern Timber Venture and we buy a fair amount of our wood from them. But that's on a fixed price Contract, for the first so many years. So we're really not going to face any escalators. Most of it is supply and demand. The run-up in wood cost in the first quarter that a lot of people experienced was primarily due not to the price of the stumpage increasing, but to the freight increases. You had to go out further and shipping stumpage, wood, is pretty freight intensive, and that's what's driven the price up. So, no, I think our wood costs should remain fairly stable, unless demand increases in relation to supply. With regard to customer mix. I think the only trend that's probably worth noting is that, you know, consolidation does occur in customer bases. And as companies acquire companies, some of the customers continued to get bigger and you know, that probably increases the need to have a little more national comp business to protect yourself in that regard, but other than that, I don't see any dramatic changes in our customer bases.

Okay. Thank you.

Our next question is from Bill Hoffman from UBS Warburg.

Good morning. Just a couple follow-up questions regarding the customer side of things. You know, you continue to outperform the industry with regards to volume gains. I just wanted to get a sense whether there's any specific industry segments where you're seeing more strength and or less at this point? At least to date? And then going forward, whether you're hearing from your customers about their order levels picking up at all? More than just normal seasonality?

A little bit about our volume. One of the things I should mention, we have, Chip A. Dillon talked a little bit about capex. We continue to spend at about 75% or so of capex, but it's very, very bimodal in terms of spending. We probably spend 50 to 55% in our mills and 100% in our box plants. So, we have continued to invest in our box plants to be able to do a better job for customers, in terms of product features, service, et cetera. So, one of the reasons besides a darn good selling effort and producing a great product, is we have continued to invest in the business. And we think we've been pretty fortunate in selecting customers that are growing. About half of our business, just a rough number is in food, food servicing, food processing. And that's a business that's held up fairly well even in tough economic times. And our business has been pretty steady. If you look at the first quarter, demand was up roughly 2.5% per quarter, so, in terms of pick-up, no, I can't say we've seen any dramatic pick-up. We have seen fairly steady increases and, again, we have outgrown the industry so in terms of asking us you know, does it look like the economy is moving up? We're probably not the right people to ask because I don't think we reflect the trend as express bid the industry numbers that were down about a little over a percent. So, I would say steady but we're not seeing any pick-up. Recognize, and of course, we have grown, you know, roughly 3% above the industry.

Okay. That's helpful. Then just one other question. With regards to your box plant network. I think before you indicated the potential to pick-up box plants on an opportunistic basis. I want to get a sense of what the market conditions are for adding new box plants to your network at this point?

Well, we have just added another small, very small sheet plant in [Donnet] Texas, which is down near [McAllen]. We did that about a month ago. And we'll be better to be able to serve some customers along the Mexican border in Mexico that have relocated there that give us an instant base of business, but I don't think much has changed. I think people are waiting for the market to pick up and that's a better time to sell, than now. And I think a lot of people who are sellers think that. And that's probably the biggest impediment to purchasing a box plant at this point.

Thank you.

Thank you, Bill.

And our next question is from Lise Shonfield with J.P. Morgan.

I just had a question on pricing. When price increases were announced for containerboard medium, it seemed to me that one of the justification or perhaps the key justification for the price increase, was that you amongst others in the industry were facing higher fiber costs and higher energy costs. It seems as though those cost issues are easing as we go into the second quarter. I just wondered how that is impacting your negotiations with your customer and whether it's getting the price increases through more difficult.

I would say that what you say is certainly true, but we have gone from, and again, we're the least effected, so I should be the last person complaining, but I'm going to complain anywhere. We've gone from disaster pricing in energy to high prices in energy. Natural gas used to be a 2 to $3 item. It hit $10, now it's back to $5.50, $5.60, but $5.60 natural gas is still expensive natural gas. OCC was down at 35 to 40 for a long time, now it's at a higher level. So, I think that the good news is that pricing has moderated a little, but it isfrom a cost viewpoint, at higher levels than trend line, if you will. So, I think there's still some difficult challenges out there and that's one of the reasons that the pricing, in my opinion, needs to move up.

Okay. And with regards to energy, Specifically, and natural gas I think you said you hedged partly in the first quarter. How did your hedging contracts work for the remainder of the year? And if prices were to remain at current levels, what sort of quarter over quarter impacts should we see on the energy front for you?

Well, we've got a couple of things going for us. One is, and that's demand. And so we would expect that our energy pricing would improve in the second quarter, you know, a penny a share. Again, we were not hurt very badly in the first quarter. We were only up 2 cents compared to the fourth quarter. And, again, we also have two shutdowns in the second quarter. But we probably pick up a penny or so in energy in the second quarter.

And you still hedged in the second quarter then?

Oh, yes.

Lise Shonfield; Okay, fantastic. Thank you.

And our next question is from David Martin with Deutsch Banc. Please go ahead.

Good morning, Paul T..

Good morning, Dave.

A few clarifications getting back to this energy question. I believe you said at your box plant level you use about 2 million of BTUs annually?

Yeah, a pretty good number.

You quoted a mill number as well and I missed that.

17 million.

[Inaudible] BTUs annually?

That's total BTUs-- in the mill, 17 and 2 would total 19 for the company.

Okay. Then moving to prices. Can you comment a bit on your box prices, say on average at the end of the quarter versus the end of the fourth quarter and the impact mix would have had on that?

Well, mix is always difficult to quantify. We -- because – what happens -- the display business is big and then it dies in December and it's slow in January. But basically, our pricing first quarter over first quarter, we were up a little bit. And fourth quarter over first Quarter, we're down a touch. So up a touch, year over year, down a touch fourth quarter to first quarter. And I emphasize a touch.

Okay.

That's as quantitative as I get when it comes to box prices.

Then on your mill production, looking at it on a year-over-year-basis, you're up roughly 11,000 tons.

Yeah, that's 100% due to the 11,000 tons more box demand.

Okay. Any impact from currency movements and shipments in the export market?

None, minimal. Obviously it helps a little bit but we are so small and only about 5% of our mill production is exported. So it's not a big ticket unless there's a huge swing.

Okay. Then lastly. On interest expense, I believe you were down roughly 600,000 on a quarter over quarter basis. What's kind of the appropriate run rate we should be using for the full year of '03?

Rick will give that you number.

It should be essentially the same as what we had in the first quarter, however, if we elect to pay down, you know, our term loans at the end of June when the collars expire on those, we'd save about on an annual basis about $4 million in interest expense and $2 million for the last six months of the year.

Yeah, just to amplify on that. We had -- we ended the quarter with, I think, 140 million in cash on hand. You know, we're getting maybe 1.3% for that cash. The collar on that term loan requires us to pay 6.7% so it doesn't take a rocket scientist to figure out that you can pay off 80 million of that and pick up about 5.4%. It's hard not -- it's hard to conceive of not doing that when the time comes.

Okay. Thank you.

If there are any additional questions please press one at this time. We have a question from Andrew Fineman (ph.) from Eridian (ph.) Asset Management. Please go ahead.

Thank you. Looking at the second quarter, 12 cents, I guess, is versus 29 cents last year. So can you just tell me what has to happen to get back to some good 30 cent quarters?

Well, last year, Andy, year over year, our earnings were down by about rough number--40--50 cents call it. And 56 cents of the 50 was price. So to get back to 30 cent quarters the biggest driver by far, is going to be price. And as I said earlier, we have an announced price increase. They are phased in. Usually you go out -- you raise the price on containerboard and then about a month later you get – you start getting box prices increases, usually takes a few months to phase in the box price increase. So we won't see the full benefit of this box price increase until the third quarter.

Okay. Thanks.

Thank you.

Our next question is from Eric Fell with Casta Capital. Please go ahead.

What is your forecast for operating cash flow for the year?

We don't get annual forecasts. We like to do quarter by quarter. And the reason for that is simple. This is a very volatile industry. Things can change dramatically in terms of price, cost of materials, natural gas, so we have not give an full year forecast. A lot of the analysts that have given a full-year forecast on us, as a matter of fact, they all have, but we don't do that. We give it quarter by quarter.

All right. Thanks.

I'm showing no further questions at this time. Please continue, Mr. Stecko.

I'd like to thank everybody for participating and talk to you again next quarter. Thank you very much. Thank you very much.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and you may disconnect at this time. Have a good day.--- 0