Packaging of America Earnings Call Insights: Docs Price Increase, Energy Projects

On Tuesday, Packaging Corporation of America (NYSE:PKG) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Docs Price Increase

Mark Weintraub – Buckingham Research: Just first of all on the docs price increase to the extent you could give us a little bit more color on how that is progressing relative to other historic initiatives or prior initiatives and in particular when you talk about a corresponding increase should we interpret that meaning that you’re shooting for a full pass through $50, $55 per ton or is it conceivable that it could vary from that to the upside or any other color you can give on that?

Mark W. Kowlzan – CEO: Mark for both legal and competitive reasons we can’t get into a lot of details on forward pricing expectations. But again as we said during the call we did build a partial quarter’s realization into the fourth quarter outlook and we do expect the full realization into the first quarter of 2013, because remembering you historically we put box price increases through faster than the competition in part because of our local customer mix and we’ll provide more detail during the first quarter our earnings call in January, but also keeping in mind that with our 9,000 customers we do go out and talk to all of these customers. But in general historically we’ve been successfully completing these pass through ahead of competition. Tom, do you want to add anything to that?

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Thomas A. Hassfurther – EVP, Corrugated Products: Not much more than what you said Mark. I would say this is – we’re handling this as a routine price increase. As Mark we’ve got 9,000 customers we’ve got to go out and inform on a one on one basis because of our value proposition we can’t just send out a letter notifying them of a price increase. So, right now this is in an all-consuming job and as Mark mentioned we expect total realization in the first quarter of next year.

Paul T. Stecko – Executive Chairman: Mark, the last part of your question, this is Paul Stecko. The word corresponding, the only intent of that word is that it’s related to the fact that when – box prices normally follow containerboard increase. So, those two are related and that containerboard prices are up and now box prices have been box prices have been announced by us, so don’t read anything more into that word. In terms of what our rehabilitation is, we don’t disclose that. That’s a matter between us and our customers and what we charge in boxes varies widely because the nature of our customer and product mix varies widely and so, it’s not one number. It’s an average number and average numbers are sometimes misleading but that’s not something we normally disclose until we have completed if you will our box price increase.

Mark Weintraub – Buckingham Research: Then, a question if I could on the dividend and your thoughts about potential changes going forward. You do look like you’re going to be reporting record earnings in 2012 and presumably with the box price increase going in 2013 hopefully can be even better. Not that long ago you were paying $1.20 dividend and it’s lower than that right now. When might you be reconsidering what an appropriate level for the dividend is and kind of what are the key criteria that would lead you to conclude what you might conclude?

Mark W. Kowlzan – CEO: Mark, as we’ve historically said, dividend matters are Board matters and so with that, with Paul here, I’m going to let Paul talk about that, seeing he’s Chairman of the Board.

Paul T. Stecko – Executive Chairman: Thanks Mark, appreciate that. It’s a complicated question because there’s a lot of things that go into it, so just to keep it short that there have been positive developments with us finally coming to a conclusion on this matter and that is the price increase is obviously positive, it will obviously produce a lot of cash which we have to figure out what to do with. The other thing that’s happened since mid-June or our shares have gone from about $25 to little over $35 and that’s the good news, the bad news is it’s lowered our yield and so the one way you’ll fix that obviously is increase the dividend, so I think they are the two positives in terms of getting closer to doing something. The one negative is I think everybody knows is the tax situation with regard to the treatment of dividends which we won’t know until the end of the year, but all in all this is a matter that the Board will discuss and from my perspective as Chairman of that Board we’re getting pretty close to determining what and how much we want to do here and that’s about all I can say of that at this point.

Energy Projects

Chip Dillon – Vertical Research Partners: You mentioned the higher earnings you expect from the energy projects which I think gets us to about $0.51, if you could clarify that or verify that and then also where do you see your capacity now in light of the expansions, at least when I look at the last K, you had about 1,043,000 million tons at Counce and 556,000 at Valdosta and can you just sort of give us an idea of how much increase you think you will be able to get production wise as a result of the projects being better than expected?

Mark W. Kowlzan – CEO: I’m going to answer part of that and I’m going to let Rich walk you through the reconciliation of the returns. But if you think about our capacity at the beginning of the year we’ve got announced capacity of 2,575,000 tons. It looks like we’re on a run rate about (2.6 million) with that obviously we did see some benefit starting in 2010 when we made some of the paper machine modifications at Valdosta as part of the capital project for drawing efficiency improvements. We’ve added about 120,000 tons of capacity or about 5% over the three year period. Now we’re not going to sustain that type of rate. We’ll be back into the normal type of creep 1% or so. With that Rich, why don’t you walk through the reconciliation of the returns?

Richard B. West – SVP and CFO: Jeff the number you referenced of course that was more in line with what the original project was then we’ve had some things that happened lower — as Mark mentioned lower fuel and electricity prices then what we’ve built into the project which is been offset by some better productivity that we expect. But just to put everything in perspective as you recall at the beginning of the year we said in 2012 we expected 21% per share in direct benefits from the tranche that included all savings, incremental profit less the added depreciation for this year. Also we expected $0.10 per share in avoided downtime and that was partially offset by $0.05 in higher interest expense from the non-capitalization of interest and that gave us the total earnings improvement from the energy project in 2012 of $0.26 per share. If you look at our reported numbers we have avoided the downtime and we’re getting the $0.10 per share and avoiding the downtime and it’s just what we were looking at the beginning of the year and as you saw from our results, our interest expenses are attributable to the capitalized interest. So, capitalized interest of $0.05 is essentially the same. However, the direct benefits from the project have increased from $0.21 per share to $0.32 per share which increases the total earnings benefit in 2012 to $0.37 per share. Now the additional improvement in earnings of $0.11 per share is really coming from three areas. One, an additional $0.01 per share from energy cost savings. Energy prices have not gone up this year. Over time, that number will improve as Mark said in his comments. This year, we’re also getting an additional $0.05 per share from chemical cost savings and finally we’re getting an additional $0.05 per share from more productivity and production increases than we expected at the beginning of the year. So, when I go back and look at the energy project from where we started in really 2009, when we came up with the estimates and where we’re looking at today and towards the future, overall the three biggest benefits of the energy project are energy cost reduction, incremental production and chemical savings in that order. Now, I’ll turn it over and he may have some more comments on how we were able to achieve the higher than expected benefits this year.

Mark W. Kowlzan – CEO: Well again, when you think about a recovery boiler you’re trying to achieve two different things here. You’re trying to achieve steam generation with the organic composition and also trying to recover cooking chemical. So, you’ve got a very complex reaction taking place with bottom of the boiler in the reduction zone. So, we knew we were going to essentially double the amount of steam generation in these boilers, but we were pleasantly surprised with the efficiency gains in the chemical reduction efficiencies in the units both at the Valdosta and Counce, which now have allowed us to produce essentially more cooking liquor, more uniformed pulp and more pulp in general. So that has blend itself to more paper machine productivity. So, again, quite an added benefit from the project.

Chip Dillon – Vertical Research Partners: That’s very helpful color, and one other question. I was still looking back and if you study calendars which I do find better things to do, but on my cursory look we average about 20.4 shipping days in September normally and so given 100,000 day shipment rate it look like the inventory situation this month that was reported this morning would normally have about 140,000 if you will ton headwind that it seems like that didn’t impact inventories at all, we still had the normal increase and I thought, I didn’t know if you had any comment about why you thought was a case as it more that, I mean the production seem to be high I can only conclude that they’re just worth the tons available to get out into the marketplace, but maybe you have better color than I have?

Richard B. West – SVP and CFO: Yeah, we have only 19 box plant workday in September which is a minimal number. I would have expected a bigger inventory increase. On the other hand we hope to build about 10,000 tons of specifically PCA of inventory to get ready for October. October has 23 cutoff days; however, we are unable to build any inventory in September because our demand remained so strong maybe we should not be surprised.

Mark W. Kowlzan – CEO: Yeah and let me just amplify, September is a strange month. What we’ve discovered it’s like discovering (indiscernible) comment maybe we should have known it, but it’s been since like 1984 was the last time there was a two day difference in shipping days year-over-year, so usually it’s only day. So, we would have thought with that few shipping days the inventories would have risen more, but they didn’t and I don’t know if people took downtime in the industry. I know we couldn’t build inventory because our demand was strong because September was a record for us volume day on a per work basis. So, I really don’t have a good explanation for that. But one other point on that I saw the FBA numbers this morning and it showed that roughly on a per work day basis demand was up about 2.5% and on a total volume it was down about 7% or so I don’t have the exact numbers in front of me, but that’s close. What we normally do is average the two numbers, but you really shouldn’t do that this time because it’s such a rare event that there is two days difference. You simply can’t make up two full days during a month. So, the kind of the way if somebody asked me how would you put your spin on the numbers, I would deduct one of those days and that would make the total volume down about 2.5% and a per work day up 2.5. So, it kind of fees like a flat month to us for the year — I would say the industry it feels like a flat month for them year-over-year whereas, we’re up 5% and down 2.5%, so we’re up a couple of percent, so it’s kind of tracking the way it’s been tracking all year compared to PCA for the industry. On organic growth, we’ve been 2% to 3% better and then if you throw our acquisitions in, we’re about 6% better, but it’s a strange month. This hasn’t happened since 1984, where we’ve had a two day difference in shipping days and that does skew numbers somewhat.