Packaging of America Earnings Call Insights: Bookings and Billings and Impact of Downtime

Packaging Corporation of America (NYSE:PKG) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Bookings and Billings

George Staphos – Bank of America/Merrill Lynch: Happy belated New Year. First question I had, can you give us the traditional rundown on what your bookings and billings look like early in the first quarter recognizing it’s still early?

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Richard B. West – SVP and CFO: George, for the first 11 days, from the bookings point of view, we’re up 4.5%, billings 3.5% as the month goes on bookings and billings equalize, so again, 4.5% and 3.5% for the first 11 days of January.

Mark W. Kowlzan – CEO: George, I might add, that’s maybe a percent better than we expected because that’s a per workday number and we have two fewer workdays in the first quarter, so that will affect the total number. So, it’s good, but it’s not as good as it sounds because there are less workdays in the first quarter which will affect the total number, but we’re a little better than we had expected coming out of the chute.

George Staphos – Bank of America/Merrill Lynch: So, consistent with some of the other things that we’ve seen in our work. I guess, second question I had is around, the box plant network and vertical integration. I was hoping given it’s the end of the year that you’re reporting that you could give us an update on actually where your vertical integration was for the year. Can you comment a little bit on the plant closure that I guess, you did in the fourth quarter, how they relate to your overall network?

Richard B. West – SVP and CFO: Regarding integration over the fourth quarter we are 83.5% integrated, full year, just under 83%, it’s 82.5% full year, and then, again, what was your second question?

George Staphos – Bank of America/Merrill Lynch: That was basically just, the plant closures, since you need the capacity to some degree thing that go (indiscernible) that you would go and invest what was behind the actual plant closing here?

Mark W. Kowlzan – CEO: We have one plant in the Southeast, that for a period of time, we had quite frankly, we had, had a customer that was no longer part of that mix and so we had an opportunity. It’s a very small plant, but we had an opportunity to ship that volume into another plant in the nearby region and basically, the total plant closure cost, we did have another plant in the Midwest that was not a plant closure per se but we did some modification to the buildings and took some write off regarding building demolition.

George Staphos – Bank of America/Merrill Lynch: Last one and I’ll turn it over. I know there was some incentive comp in the $0.05 in the fourth quarter in terms of higher labor and benefit cost, but is that a run rate, let’s call it $0.04 or how would you have us think about it, that we should think about for the rest, for 2013, on a quarterly basis.

Mark W. Kowlzan – CEO: Paul, you want to get into that?

Paul T. Stecko – Executive Chairman: Yeah, since I still look at compensation, that number was between $0.02 and $0.03 in the fourth quarter. We had an all-time payout on our incentive compensation plan as we beat our all-time record earnings by 27%. What that number will be in the future will depend on what our level of earnings will be. So our incentive compensation plan has a feature that I would define as affordability when you make a lot of money you can afford to pay higher bonuses and when you don’t, you can’t and then we have some performance criteria both external and internal. So the answer to your question is it will be a function of our earnings this year and it’s not necessarily a run rate number. It will follow, as I said, our earnings if they go higher, then there is high probability we will pay out more and if our earnings go lower, there is high probability we will pay out less. So, it’s not a run rate number.

Impact of Downtime

Chip Dillon – Vertical Research Partners: First question can you give us a little bit of direction between the downtime impact. You gave us the first quarter admits in the one machine at Counce, but how much more in terms of tons will we see in the second quarter versus I guess the 7,000 we’ll see from that outage in the first?

Mark W. Kowlzan – CEO: Again the first quarter with the accounts machine going down you are going to see directly say 7,000 tons come out of the system with accounts machine down, but also by moving the remainder of the comps into the second quarter basically the first quarter is about equal for the second quarter when you look at the difference in the number of days with the leap year fact, again because with added day last year that leap year added and say, another 7000 plus tons. So, in essence, first quarter second quarter will be about the same and as far as (indiscernible) impact.

Chip Dillon – Vertical Research Partners: I guess as a related question, could you maybe give us either the final kind of score? I know you were seeing some continued gains from the energy projects and it’s been a while, I guess, it was November 2011, when you completed them, but where that stands in terms of how you see the savings either EPS or EBITDA wise and then how much more there might still be if any in 2013?

Mark W. Kowlzan – CEO: As we said on the third quarter call, we expected $0.37 for the year and we achieved that. As far as any incremental benefits going forward, we don’t expect to see any. So, again, the project achieved more than we had expected and as we talked last year until the second and third quarter calls, we will be very comfortable with that $0.37 contribution from the projects.

Richard B. West – SVP and CFO: The only change to that Chip is, if energy prices would spike and go up, we’re going to see benefits in terms of cost avoidance because basically, we buy no fossil fuel (indiscernible) everything is self-generated. But that’s the cost avoidance. It will protect earnings from going down, it won’t add to earnings and I guess the only other thing, we usually can creep capacity either by a percent year. This project will probably enable us to be able to do that and we couldn’t have done that without this project. So, we may get – what we’re talking maybe 1% of capacity in terms of being able to creep, so you can theoretically say, well you couldn’t have done that without the project, but basically as Mark said, we’ve got essentially all of our earnings out of this with the (big proviso), it does give us cost avoidance protection.

Chip Dillon – Vertical Research Partners: Just a last quick one. You mentioned how stable the wood prices have been, wood costs, and as we go into 2013 and beyond, there are different forces at play, whether it be, I would guess, higher chip availability with lumber coming back, but then again you’ve got these alternative energy type plants being built, pellet plants, so, what do you sort of see for your wood costs, percentage increase as we look out this year and maybe even to next year?

Mark W. Kowlzan – CEO: Well again, Chip, just looking at – coming into this 2013, we’re pretty comfortable and wood costs were flat through the year. We did our winter wood build at Counce and again, very comfortable where we were, however during that, Christmas period we started to see weather patterns shift through the south and a lot of the heavy rain starting to move up from Texas through Louisiana into the mid-South, so we were impacted pretty dramatically for about a 3.5 week period and that forced us to start consuming our winter wood build at a much more rapid rate than normal and so, that’s one of the primary reasons we’ve talked about wood costs going up on the short-term. Again, we had a reprieve this week. The weather is better. The other regions, we’re not seeing any of the impact as far as anything unusual, as far as saw mill, chips. We have seen an uptick in availability of chips, residual chips available at our northern mills and our southern mills. So, again, as far as anything that’s out on the horizon, if the weather behaves itself and gets back into a normal pattern, then there’s nothing that should move wood costs either way, so we’re not expecting anything dramatic in that regard.

Paul T. Stecko – Executive Chairman: This is Paul. The only thing I’d add you said that two variables as wood products improve there is going to be chip availability, which is definitely a plus. And then there is the uncertainty of these pellet wood plants that could or could not come online and once more short-term oriented and the other that were more long-term. So, I would say if you look at the cut rate versus the growth it is pretty good. The question is can chip plans start to eat into that balance and those pellets, not chip. Most of the pellets are going offshore to Europe and places like that for environmental reasons for subsidized energy and the question is will that continue — will Europe continue to subsidies energy when they’ve got problems in terms of cost, Greece, Spain etcetera. What will happen long-term will economics prevails or where government subsidy prevails that’s probably the most important variable and that’s a tough one to call.