WestRock Company
Q4 2014 Earnings Call Transcript

Published: 4 Nov 2014

[Operator:]

Good morning. My name is Wendy. I will be your Conference Operator for today. At this time, I would like to welcome everyone to the Rock-Tenn. Fourth Quarter Fiscal 2014 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker remarks, there will be a question-and-answer session. (Operator Instructions) As a reminder, slides are being presented today as part of the conference call. These slides can be accessed at www.rocktenn.com under the Investors page. Ladies and gentlemen, this call is being recorded today, November 4. (Operator Instructions) Your speakers for today’s call are Mr. Steve Voorhees, Chief Executive Officer and Mr. Ron Dickson, Executive Vice President and Chief Financial Officer. Mr. Voorhees, you may begin your conference.

[Steven C. Voorhees:]

Thanks Wendy. Welcome to our call. I am Steve Voorhees, Chief Executive Officer. I am joined this morning by Ward Dickson, Chief Financial Officer, Jim Porter, President of our Paper Solutions business and Mike Kiepura, President of our Packaging Solutions business. During the course of the call, we’ll make forward-looking statements involving our plans, expectations, estimates and beliefs, related to future events. These segments may involve a number of risks and uncertainties that could cause actual results to differ materially from those that we discussed, during the call. We describe these risks and uncertainties in our filings with the Securities and Exchange Commission, including our most recent 10-K and 10-Qs filed for the quarters ending December 31, 2013, March 31, 2014 and June 30, 2014. We will also refer to non-GAAP financial measures during the call. We’ve provided reconciliations of these non-GAAP measures to the most directly comparable GAAP measures in the appendix of the slide presentation, which is available on our website. I’m going to begin by discussing our operating results, and then Ward will discuss our balance sheet, pension and other financial measures. I’ll complete our prepared remarks with comments on our outlook. Then Ward, Jim, Mike and I will be available for your questions. The Rock-Tenn team delivered solid operating results in the September quarter. We made progress both in the marketplace and at our operating locations. We improved productivity by $41 million in the September quarter and $108 million for the entire fiscal year. Adjusted earnings were $1.31 per share and free cash flow for the quarter was $261 million or $1.80 per share. Over the last 12 months free cash flow grew by more than 9% to $6.10 per share above our guidance figure $6 per share. Our free cash flow of almost $900 million for the fiscal year represents a very attractive return and our equity market capitalization of about $7 billion. During the quarter, we repurchased $3.2 million Rock-Tenn shares at an average price of approximately $50. During fiscal year 2014, we bought back $236 million worth of Rock-Tenn stock this amounted to $4.7 million shares on a split adjusted basis. Our remaining Board approved authorization was $8.7 million shares. On October 24, we announced that the Rock-Tenn Board had authorized a 7% increase in our dividend to a new annual rate of $0.75 per share. During fiscal year 2014, we implemented our balance capital allocation approach by investing $534 million back into our business via capital expenditures, investing $474 million in acquisitions that have improved our business and we returned $337 million to our shareholders in dividends and share repurchases. All of this was accomplished within our two times leverage ratio target. We’re continuing to deliver attractive free cash flow returns for our shareholders have the opportunity to improve these returns by deploying our cash flow to support our operating and business strategy, and by returning capital to our shareholders through share repurchases and consistent increases to our dividend. Sales for the quarter $2,608 million set another record. Included in our fourth quarter adjusted EPS of $1.31 is $0.10 per share in income from the recording of divisional value of spare parts of the former Smurfit containerboard mills. At the point of comparison, last year September quarterly adjusted EPS of a $1.33 included a $0.05 gain from the recording of the additional value of spare parts of the former Smurfit mills, its $0.04 benefit from the successful renegotiation of our steam contract with Seminole mill and another $0.04 gain from an insurance settlement of property damage claims at Demopolis. Also in last year’s September quarter we benefited from an effective book tax rate of only 31% due to $0.09 per share impact of certain favorable tax items. These four items aggregated to $0.22 per share in last year’s September quarter. Summering, our EPS of $1.31 per share and this year’s September quarter reflects very strong operating performance compared to last year and also compared to our expectations entering the quarter. Our total company credit agreement EBITDA margin over the last 12 months is 16.4%, about 60 basis point higher than the 15.8% for the 12 months in the September of 2013. Our balance sheet continues to be in great shape, the leverage ratio of 1.92 times that consistent with our two times leverage target. Turing to our corrugated packaging segment, Industry containerboard mill operating rates averaged 96.7% for the quarter this was higher than the June quarter rate 96.28% and slightly lower than last year’s September quarter operating rate of 97.3%.Our containerboard mill operating rate for the quarter was 95% lower than the June quarter rate of 97% and lower than the prior year quarter of 97%. Our corrugated segment shipments increased by 8% compared to last year Tacoma contributed the majority of this increase. Excluding these Tacoma tons our shipments increased by 2%. We have been quick to analyze and respond to changes in our customer demand and this quarter was no different. In aggregate, we took 36,000 tons of downtime during the quarter most of it from two medium machines at Seminole and West Point. During the quarter, we brought both machines back up and they continue to operate today to meet our solid customer demand. At the end of September, our containerboard inventory was 4.6 weeks of consumption, about the same as we carried one year ago. Industry production of containerboard for export markets increased by over 13% from the prior year and increased over 8% on a sequential quarter basis. Rock-Tenn’s export shipments of 319,000 tons in the quarter, increased by 35,000 tons or about 12% sequentially and by 80,000 tons or about 34% over the prior year quarter. We shipped approximately 60% of our export shipments to Latin America, 20% to the Middle East and 10% each to Europe and Asia. We had good and stable demand for our export volumes during the quarter. Foreign exchange impacts from the strengthening dollar cause a modest decline in pricing. Currently, overall global demand is strong and pricing has stabilized. The Tacoma Mill continues to perform quite well. EPS accretion during the September quarter was seven times per share. Our mill system we’re in very well throughout the quarter. We established new daily production records at Fernandina Beach, Hodge, Hopewell and Battle Creek. We completed construction and started up our new woodyard at Florence mill on time and on budget. The Florence woodyard is currently operating well ahead of its anticipated start-up curve. Our Hopewell mill exceeded expected production rates following our mill reconfiguration project completed in the June quarter. The mill has achieved significant energy savings and continues to run at record operating rates, despite a mix shift to (indiscernible). We recently completed an end up assessment of our containerboard mill system. And we’ve identified several projects most of which involve capital that will improve the productivity and cost structure of our mill system. These projects represent the opportunity to invest between $250 million and $350 million at paybacks in the range of three to four years. One project currently under way, is that our Stevenson Alabama mill where we are investing $46 million to convert to accommodate cost at pulping process, which will improve yield and reduce cost. The new process is expected to start up in June of 2016 and is projected to generate $18 million in annual cost savings from reduced fiber and chemical consumption. Turning to our corrugated box operations. Industry box volumes on a per day basis as reported by the Fiber Box Association were essentially flat in the September quarter. Industry box volumes on per shipping day basis increased by 1.5 % in the month of September alone. Rock-Tenn’s box volumes for the month of September exceeded our expectations going into the quarter, our volumes increased by 5.2% in total and 0.2% on a per day basis over the last year, we benefited from both solid industry demand and the progress we’re making on our commercial and operational excellence initiatives. Our focus on operational excellence continues to bear fruit. Throughout fiscal year 2014 our box plant co-workers supported by the six segment methodology and capital investment have improved efficiency across our box plant system. Flexo folder gluer productivity improved by 12%, die cutter productivity improved by 7% we reduced rate by 5%. We’re focused on sustaining and increasing these productivity improvements going forward. During the September quarter, we successfully installed two new EVOL flexo folder gluers and in Austin, Pennsylvania and Chesterfield Missouri box plants this brings the total installed this year to seven. These investments are greatly enhancing the capabilities and productivity of our box plant system. An example at our Humboldt Tennessee plant, earlier this year we upgraded the plant by installing both the EVOL and rotary die cutters. The installation of this equipment allowed us to remove four existing flexo folder gluers and two die cutters resulting in significant productivity improvement. Compared to March of this year Humboldt’s production per man-hour has improved by 60%. We reduced waives by about 1% from the levels we experienced in the fiscal year 2013 and we have one made at the warehouse. The equipment waste and (indiscernible) machine and warehouse supported further cost savings. During the next three years, we expect to install the remaining 23 EVOLs out of the 30 unit order we placed about one year ago. The net financial result of the volume in customer growth activities in the quarter with an increase in corrugated packaging segment sales to $1.83 billion, corrugated packaging segment EBITDA margin for the September quarter was 20.8% flat with the prior year and up 3,040 basis point sequentially. The combination of our focus on commercial excellence operational excellence and focus capital investment is driving noticeable improvement and positive momentum to our results. Our average day box shipments for October increased by 2.4% as compared to last year. We are experiencing good demand with both existing and new customers. Turning to our consumer Packaging, we see SBS markets is well balanced. SBS industry backlogs as of October 22 stand at 554,000 tons; Rock-Tenn’s backlogs are at five weeks. Sale re-demand is stable and industry backlogs stood at a 130,000 tons on October 22. Rock-Tenn’s CRB backlogs now stand at approximately two weeks. On October 24 we announced the permanent closure of our 55,000 ton uncoated recycled paperboard mill in Cincinnati. Final production will wrap up by the end of the calendar year. In our Consumer Packaging segment, total sales were up 6% and segment EBITDA was up $6 million both over the prior year quarter. EBITDA margins were 18%. Our folding cartons sales were up 5.4% as compared to the prior year, while the industry was up 1.2%. For the last 12 months our folding cartons sales outpaced the industry with a growth of 2.8% versus 1.2% for the industry. Our operational excellence initiatives continued to pay dividends in our folding cartons operations. We installed a new flux at our Nicholasville Folding Carton Plant in June and are already setting production records there. Later this month, we’re installing a press in our Knoxville folding carton plant that is supported by a long-term customer commitment. We expect productivity improvements in Knoxville, somewhere to what we’ve experienced in Nicholasville. And we recently ordered new products for (indiscernible), Iowa plant, also supported by long-term customer commitments. Folding carton sales continued to be strong in October. We started an all-time monthly sales record, the sales that were up 5.4% over the previous October. Merchandising Displays achieved record sales of $229 million in the quarter, up 24% over the last year. About half of the growth was organic and about half this from acquisitions. In late August we completed the acquisition of A.G. Industries from American Greetings. This acquisition more than doubles our permanent display business and includes a long-term contract with American Greetings. The acquisition was accretive in its first month of operation. Last quarter, we said that we expected slightly lower sales and to maintain margins in the September quarter as compared to the June quarter. Our sales increased due to the acquisition of AG Industries and also due to the on-boarding of several new clients sooner than we expected. While this is positive news to accommodate the increased amount and the expedited nature of the new business, we incurred cost that negatively affected our margins for the quarter. We anticipate that some of these growing pains will continue through the December quarter of fiscal year 2015 then normalized and we expect to see EBITDA margins in the 10% to 12% range later in the fiscal year. Rock-Tenn operates one of the largest promotional display businesses in the world. Our scale enables us to maintain an efficient cost structuring that provides us the resources to invest in creativity and innovation. The most recent Shopper Marketing Expo Rock-Tenn captured 27 Design of The Times Awards more than twice the number of awards of any other company. The judging panel included over 60 executives from major consumer products companies and retailers. Rock-Tenn’s combined packaging solutions offering of merchandizing displays, corrugated boxes and folding cartons is gaining traction and makes us uniquely positioned to help customers win in the marketplace by supporting their efforts to increase sales and reduce cost. Our Recycling Segment volumes were approximately 12% lower than last year. This was due primarily to the previous closures of underperforming recycling plants and the generally soft global recovered fiber markets. Segment EBITDA margins were up by 80 basis points as compared to last year’s quarter. We continue to right size our Recycling business by optimizing the plant footprint and administrative functions. I’ll now turn over to Ward, who will discuss various financial aspects of our business. Ward?

[Ward H. Dickson:]

Thank you, Steve. While we realized slightly lower price and mix in the quarter, we did experienced higher pricing in many key areas such as domestic containerboard, FPFs and folding cartons. Average domestic mill containerboard prices were up by $23.00 per ton as compared to the prior year quarter. Domestic box pricing was flat and export containerboard pricing was down slightly. One of the most significant reasons for the slightly lower pricing mix for the quarter was due to a mix shift within our corrugated segment towards increased export shipments. Average selling prices in consumer packaging were up nicely. Recycled fiber selling prices were down. We experienced approximately $26 million or about a $0.11 per share in cost inflation during the quarter as compared to last year. Energy prices were up significantly, primarily due to a 13% increase in natural gas prices, as reflected in the NYMEX index. We experienced tighten inflationary pressures on freight, chemical and wood cost. Recycled fiber prices were down approximately 20% year-over-year. We continue to gain momentum in our cost savings and productivity improvements and generated $41 million and benefits during the quarter over the prior year. Core activities are in areas such as procurement and Six Sigma projects. The majority of which improved operating efficiency, reliability and quality at our manufacturing locations, as well as the impact of capital projects that reduced cost and allow us to better serve our customers. If you take a moment to think about what our segment income bridge will look like for the full year, it has three key components. Due to strong containerboard SBS and converting pricing, sales price and mixed gains were $276 million. Inflationary headwinds totaled $228 million and began to moderate in the fourth quarter. Our productivity gains of $108 million were within our guidance range and we had very good momentum in these efforts as we exited the year. Based on what we see at this time, we believe that inflation will not be as significant and impact on our business in fiscal 2015 as last year and we expect our productivity improvements should offset anticipated inflation. During the quarter, we generated free cash flow of $261 million or $1.80 per share. Over the last 12 months we have generated free cash flow of $6.10 per share. Our biggest use of cash, during the quarter was $162 million for the repurchase of Rock-Tenn stock. At the end of September, our net debt was approximately $2.95 billion. Our LTM credit agreement EBITDA was over $1.57 billion, and our credit agreement debt-to-EBITDA ratio was 1.92 times. We have more than $1.5 billion in liquidity available to us for general corporate purposes. We extended the maturity of our $700 million accounts receivable securitization facility from December of 2015 until October of 2017. Other than some amortization under our bank term loan facility, we have no debt facilities maturing until fiscal 2017, one of our bank credit facility matures. We expect to extend the maturity of our bank credit facility well in advance of the maturity date. Let me highlight some key assumptions for the first quarter of fiscal 2015. Our effective tax rate for the September quarter of 35.6% was in line with our expectations. We expect that tax rate for the first quarter and the full fiscal year of between 34% and 36%, excluding the impact of any discrete items. At September 30, we had used almost all of our U.S. federal and foreign net operating losses. We still have approximately $57 million of various state net operating losses and credits available for use in future years. We also have significant remaining U.S. federal cellulosic biofuel, Alternative Minimum Tax and other federal tax credits that can be used to offset a total of $228 million of U.S. cash taxes, which we expect to use during fiscal years 2015 and 2016. Based on current assumptions, we estimate our cash taxes at approximately a mid-teens percent during fiscal 2015 and mid-20s percent during the fiscal 2016. We have completed our year-end pension work with our actuaries and as expected the pension plans of beneficiaries of this year’s transportation bill. Our estimated cash contributions into our U.S. and Canadian pension plans in fiscal 2015 are approximately $160 million, estimated pension expenses $10 million, excluding the expected impact of the lump sum settlement, for a net contribution in excess of expense of $150 million. We expect the fiscal years of 2016, 2017 and 2018 cash pension contributions will be approximately $160 million, $135 million and $90 million respectively. We recently completed the first phase of a pension lump sum offering to former employees approximately 5,000 former employees or 54% of those receiving an election pocket accepted the pension lump sum by our – or annuity offer, which was paid from pension assets, approximately $249 million in liabilities were permanently removed from our pensions. The $48 million pretax non-cash charge equivalent to $0.20 per share represents the portion of deferred pension, actuarial losses recorded in the shareholders equity section of our balance sheet. And accumulated other comprehensive loss and now has to be recognized under GAAP accounting into the income statement as a result of a lump sum settlement. We’re closing on the second lump sum program this quarter and we expect to remove another approximately a $170 million in liabilities and an additional 6,000 participants from our pension rolls. Our qualified pension plans unfunded liability was approximately $1.1 billion, an increase of only $114 million from September 30, 2013 to September 30, 2014. Discount rates used in valuing the pension obligations of U.S. and Canadian plans declined 65 basis points and 56 basis points respectively as compared to last year. The impact of the lower discount rates contributed $327 million to higher pension liabilities and the adoption of new mortality assumptions added almost a $100 million of liabilities. Service cost and interest cost also impacted the liability negatively, this was partially offset by very strong asset performance in both the U.S. and Canadian pension plans both of which exceeded our expected return on assets set at the beginning of the year. As an update to our CapEx guidance we expect that our 2015 capital expenditures will be in range of $500 million to $550 million. In July, we estimated our fiscal 2015 CapEx at $500 million, but as we closed the year we had a number of high return generating (no) capital projects that Steve discussed earlier to which we expect to allocate capital, which may result in increased investment to the higher end of the range. We’re planning major scheduled maintenance downtime of 294,000 tons during the fiscal 2015 as compared to 262,000 tons in fiscal 2014. All of that maintenance related downtime is scheduled to occur between now and late spring. Now, I’ll turn it back over to Steve, who will discuss our business and the outlook.

[Steven C. Voorhees:]

Thanks Ward. Rock-Tenn is focused on customers, productivity and improving our business and in capital investment and acquisitions. Over the past year, we started offering many customers and integrated offering displays, cartons and boxes. All of the objective to be the clear partner and (inaudible) provider of winning solutions for our customers. Well this is a long-term endeavor. We’re seeing new business as a result of being able to provide our customers in immigrated offering. Moving to productivity, we achieved over $100 million in productivity improvement last year, including of our $40 million in the September quarter. We’ve had a sustained focus on continuous improvement during my entire carrier at Rock-Tenn. Continuous improvement as expected, reinforced and rewarded throughout Rock-Tenn. Over the past several years, we’ve achieved an excess of $100 million annually, through our embedded Six Sigma, Procurement and Home Office programs. We have significant opportunity to improve our performance with capital investment in our box plant system, the most prominent investments being in the converting equipment in our box plants. And we’ve now identified more opportunity in our mill system. Our supply chain or logistics costs are an excess of $1 billion per year and I see the opportunity for improvement in this area as we better integrate our supply planning with our transportation warehouse system. The aggregation of these opportunities gives me the confidence to set our fiscal year 2016, through fiscal year 2018 productivity improvement target at $200 million each year. This will require continued capital investment in the range of $500 million to $550 million for the next three years. In 2014 we invested approximately $260 million in our corrugated mills, $135 million in our box plant system and $110 million in total and our consumer packaging and merchandising displays business. The balance was invested in the recycling business and towards various corporate projects including financial systems, infrastructure, and security. Fiscal years 2015 through 2018 we expect capital expenditures to be allocated in a similar matter with more than half in our mill system. Our capital allocation priorities remain to first focus on the opportunities in our businesses then on acquisition to make us a better business, then use share buybacks to return capital to our shareholders within our two times leverage target. Our fiscal year 2014 results reflect these priorities and I expect to maintain this construct in fiscal year 2015 and beyond. We are investing the time and resources to evaluate the merits of a master limited partnership structure for virgin mill assets and view the master limited partnership opportunity as a way to access lower cost equity capital for our business. We’ve spent conservable time to understand the complexities of the structure as it relates for our operations and how we do business. We have recently filed our private letter ruling request with the Internal Revenue Service. We are evaluating the specific merits of the potential MLP pieces structure as would apply to Rock-Tenn, their lawyers, tax advisors and bankers. I continue to be optimistic about the opportunity. Turning to the outlook for the quarter, corrugated box, folding carton, and display markets have been very strong in October. The November and December can be uncertain as we head into the holiday season. We will be watching these trends carefully over the next two months. As of the end of October, supply and demands balanced at our containerboard mills. Containerboard and box pricing is stable. As new containerboard capacity begins production, we will monitor our demand for containerboard through our box plant system from domestic customers and from export customers. We will continue to match our supply to meet market demand. We see a fairly benign overall cost environment for our fiscal first quarter. We expect to see only modest seasonal increases towards cost during the quarter and recovered fiber cost will remain soft through the rest of the calendar year. Oil and natural gas cost are helpful right now as five natural gas prices are less than $4 per MMBtu and oil is about $80 per barrel. We’re planning on 75,000 tons of maintenance related downtime this quarter. We expect inventory levels within our corrugated business to increase by approximately 75,000 tons in the second quarter fiscal 2015 and then reduce to current levels by the end of fiscal year 2015. We will continue to maintain inventory levels to support our business and our customer needs. My current views at our adjusted EPS range for the first fiscal quarter will between $0.80 and $0.90 per share. I continue to remain confident in the Rock-Tenn’s ability to provide our shareholders the strong current cash flow returns and also with our ability to improve these returns by deploying our free cash flow to further developing our strategy and also by returning this capital to our shareholders through dividends and share repurchases. Ward, Jim, Mike, and I are now available to respond to your questions.

[Operator:]

(Operator instruction) The first question today is from Mark Weintraub with Buckingham Research Group.

[Mark Weintraub:]

Thank you, two questions. First is quickly on the operational productivity. You outlined targets of $200 million starting fiscal year 2016 and beyond you got just over $100 million this year. How should we think of fiscal 2015, I know you’ve mentioned it should off that inflation, but could you help us quite a bit by what type of targets you might have for 2015?

[Ward H. Dickson:]

Yeah, we see that as we move (indiscernible) we see as we move from fiscal 2014 toward that target that we will start to claim in a linear path. So we will, as we go into FY 2015 we will start to get some of the benefits from the capital investments that we made both in our mill and converting operations, we will continue to focus on productivity improvements coming out of our Six Sigma efforts and continued cost reductions from the procurement organization. So we do see it in our range that will put as on a path towards the $200 million.

[Mark Weintraub:]

Okay. So more than the $100, so most likely in the 130 to 160 type range, is that a reasonable framework.

[Ward H. Dickson:]

I think if can put a range on, it would be 125 to 150.

[Mark Weintraub:]

Okay, great. And then second – on the MLP private letter that you filed, can you provide us either with any details of which what might have been in that private letter request and also do you have any sense as to when or if on the more tour it might you lifted such that RS would have respond to you.

[Ward H. Dickson:]

We are not in a position to, want to describe the details. What we requested and we’ve really don’t have much inside into the timing that it would be processed.

[Mark Weintraub:]

Okay.

[Ward H. Dickson:]

So, I am sorry I can help you more, but that’s what the answer is.

[Mark Weintraub:]

Sure. Thank you.

[Operator:]

Thank you. The next question is from George Staphos with Bank of America.

[George L. Staphos:]

Hi, guys. Good morning, thanks for all the details. It perhaps you want be able to answer this question kind of figure that, what market getting. Do you see the potential to you is not only your virgin containerboard mills in an MLP structure but could it also include from your advantage point some of your other assets and virgin to fiber conversion?

[Ward H. Dickson:]

Yeah. We are not in a position to answer that one either.

[Steven C. Voorhees:]

Okay. I thought I would try those too. Thank you. In terms of the productivity ramp up, over the next year, do you – you call that several things and again we appreciate the direction, would it be a heaviest to any one of that three or four buckets you called out, would it be heavier to procurement, would it be heavier to the return you are getting on the conversion investment and corrugated where would we see as we have that visibility the most progress.

[Ward H. Dickson:]

Just we’ve been on pretty consumption in the healthy $100 million plus range with the continuous improvement programs we had in place. So now I think we’re seeing the opportunity through capital investment in the mills, in the box plans, and also supply chain, supply chain wouldn’t come from capital investment, but we’re operating at just much better in supply chain than we ever have certainly something smart for acquisition and the timing, it’s pretty well distributed among those categories and you almost have to get into the timing of the capital with the timing of the productivity improvements to provide very much more detail on that.

[George L. Staphos:]

Okay.

[Ward H. Dickson:]

Our capital on the box plant system is ahead of our capital on the mill system, so I think near term you’d expect more in the box plants than the mills, but then mills will catch up in a year or two.

[George L. Staphos:]

Okay.

[Ward H. Dickson:]

As we always starting with the Florence woodyard this year and then going to the Stevenson project and beyond.

[George L. Staphos:]

All right. Thanks Steven I had my two alternate over.

[Operator:]

Thank you. The next question is from Adam Josephson with KeyBanc.

[Adam J. Josephson:]

Thanks, good morning everyone, and congratulations on a really solid quarter. Steve you’ve mentioned that overall global demand for exports is strong and the pricing has stabilized steadily. Given that global economies a period of weak enough late. Can you try to explain, give any thoughts just still why you’ve experienced this recent strength after you experience some being export price declines earlier in the quarter.

[Steven C. Voorhees:]

Adam, Jim’s closest to markets and I’ll ask Jim Porter to respond.

[Adam J. Josephson:]

Thank you.

[James B. Porter III:]

Good morning, Adam.

[Adam J. Josephson:]

Good morning, Jim.

[James B. Porter III:]

Global softening I don’t know that I can necessarily comment on that necessarily. We’d certainly seen some currency movement relative to the dollar, but our customer portfolio globally is strong. We work very hard to try to build a diverse customer relationship really in all parts of the world and we see in the principally agricultural markets very solid demand. And so this has been a strategy for us to try to strengthen our both our domestic and international sales and we think we’ve got a very strong customer base and hence demand.

[Adam J. Josephson:]

And Jim what on the domestic market, you’ve been in terms of the U.S. box market, you’ve been losing share in recent quarters, but you could have gain share in the month of September and obviously October is quite good too. And did you do expect this to continue, do you expect to gain share in the months and quarters to comp based on recent organizational changes you’ve made or what thoughts do you have along those lines. Thank you?

[Ward H. Dickson:]

So, Adam, let me ask Mike Kiepura to answer that one…

[Michael E. Kiepura:]

Adam, I would say that we’re seeing momentum picking up after we bought Smurfit-Stone, we closed 21 box plants and we went through the inefficiencies in closing those plants and the movement of accounts and so forth and that’s pretty well behind us. And so I think the things that we’re doing from both the commercial and operational standpoint coupled with the change we made about six months to go to bring more of an enterprise wide solution set to our customers of both boxes and folding cartons and displays is gathering some nice momentum in the market. So we’re optimistic that as we saw late August, September and into October that we’re seeing positive comparisons year-over-year and that will continue going forward.

[Adam J. Josephson:]

Thanks a lot, Mike.

[Operator:]

Thank you. The next question is from Scott Gaffner with Barclays.

[Scott L. Gaffner:]

Good morning.

[Steven C. Voorhees:]

Good morning, Scott.

[Scott L. Gaffner:]

I just wanted to look at the shipments for a minute. Because I guess I’m a little confused I thought especially within Corrugated Packaging, I thought during the quarter you talked about shipments possibly being down 3% to 4% year-over-year and if I heard you correctly, I think you said you’re up 0.2% per day. It was helping maybe if you could sort of add a little bit of color there at the difference in the numbers?

[Ward H. Dickson:]

Sure, I did said a 3% to 4% I think in early September, turned out our September shipments were in excess of our expectations, 0.2% is for the September month only I think for the quarter we were down 2.5%.

[Scott L. Gaffner:]

Okay.

[Ward H. Dickson:]

So, which is better that I thought and actually about the same as we thought going into the quarter, but the shipments in July and August weren’t quite as great as we thought in September we made a lot of ground woods ended up being the same level that we thought going into the quarter.

[Scott L. Gaffner:]

Okay. And then, taking that one step further then I think you said October was up 2.4% year-over-year, are you seeing some increasing demand in certain regions or certain areas of your business that are starting to inflect positively that led to that improvement in September and continued gains in October?

[Ward H. Dickson:]

There are variations from segment-to-segment, some segments like e-commerce and process goods for us our stronger produce we’re in a seasonally softer period of time in the fiscal fourth quarter. So we were little bit softer and then of course we have the West Coast and the drought in the western part of the country that hurts there as well. Beverage is clearly soft and I think that’s was documented in the industry. So, some of those segments are up somewhere down but, I think we’re also experiencing good progress with both our existing customers and the on-boarding of new business with existing customers and new customers. So, as I mentioned before, our commercial efforts are bearing fruit to generate the positive momentum going forward.

[Scott L. Gaffner:]

Okay, thank you.

[Operator:]

Thank you. The next question is from Anthony Pettinari with Citi.

[Anthony Pettinari:]

Good morning.

[Ward H. Dickson:]

Good morning Anthony.

[Anthony Pettinari:]

In your outlook slide you referenced potential acquisition interest in packaging adjacencies, I was wondering is that a reference to other substrates other than containerboard and boxboard. I think AGI has some exposure whether it’s plastic or metal. What are the packaging adjacencies that you were referring to? And are there attractive opportunities outside those containerboard and boxboard?

[Steven C. Voorhees:]

I think there are opportunities for us outside of containerboard and boxboard. I think the packaging adjacency as you named several of them. Like we would look acquisitions for how they fit within our business. I think if we were outside of what we do, I think, we’d start looking at both the – whether there’s any common operational synergies associated with that, or whether there’s customer synergies. And so, for example, A.G. Industries does the plaster can work and that was a perfect fit with our permanent supply business. And further it supports our development strategy to sort of customers to help them be successful.

[Anthony Pettinari:]

Okay, that’s helpful. And then just circling back to those September and October box shipments, it seemed to little bit stronger than you had original expected, would you attribute that primarily to the integrated offering that you’ve been able to provide with your reorganization, or is it really more driven just by improved underlying demand from customers?

[Steven C. Voorhees:]

I don’t know what box demand in our cover was for the industry. And so it’s hard for me to identify how much of that would be industry. Our business we need transforming operations, we need strong commercial scales, and I feel like they are instructively intertwined with one another. And I think we have good momentum in both of those areas. And I think the integrated offering gives us something else that we can talk about our customers. So I’d identify all three of those, I would – so if I had to focus on one, it would be the operational improvement that we have really across our converting plant systems to what we’ve make substantial progress just over the past one, two, three years on that improvement that paid dividends, because you can do a better job with certainly your customers with that operational capability.

[Anthony Pettinari:]

Okay, I’ll turn it over.

[Operator:]

Thank you. So next question is from Mark Wilde of Bank of Montreal.

[Mark Wilde:]

Good morning Steve, good morning Ward.

[Steven C. Voorhees:]

Hello Mark.

[Mark Wilde:]

I have just two questions. One Steve do you have a good quarter in terms of margins in containerboard and corrugated, but you still got that gap to the peers which it’s your still probably anywhere from 250 bps to 500 bps. Can you talk about closing that gap over the next I don’t know three to four years? Is there any reason you shouldn’t be ride on the peers in terms of margins.

[Steven C. Voorhees:]

Well, we don’t know where we are, and I think our competitors were strong competitors and that would continue to improve. I think we’re very capable, and I think we’ve mapped out I think I relatively clarifying about what we can do to improve our productivity and (indiscernible) have that compares to what other people will do. I can’t, it’s kind of difficult for me to comment on. I think the capability we have is very strong and I think we can continue to show improvement and it’s kind of hard for me to say when we will close the gap, what I can do is, I can try to make as margin for Rock-Tenn as we’re capable of doing that, and it’s a competitive business, so…

[Mark Wilde:]

Yeah, I guess there is as structurally is there anything. Just when I look at like mill cost models from some of the consultants it looks like – you’re in ride in the pack there.

[Steven C. Voorhees:]

It’s a fact of picking area to where I think we could improve that would be supply chain.

[Mark Wilde:]

Okay.

[Steven C. Voorhees:]

Like you do math out or what we spend a very large amount of money on trade, and so one of the reasons I pointed that out in comments as, that’s something which I’ve think as a rich opportunity for us and we’re getting a much better handle on them we ever have.

[Mark Wilde:]

Okay. The other question I had Steve you just mentioned the potential for acquisitions and you’ve mentioned both domestic and offshore. And I just wondered if you were in a look of offshore do you have buyers to either going into emerging markets where there may be more over time versus finding an opportunity in a more developed market.

[Steven C. Voorhees:]

I tend to look at to the ones of customers and we have a large number of customers in Latin and Central America which by our containerboard product. So if there were an opportunity to call integrate forward in those areas that would be a opportunity for us. I think the other area that comes up is Europe and I think something in Europe would be driven more by the needs of consumer proximate needs which would be – have global purchasing organizations which are located in Europe. We don’t have a strong, I guess, bias or interest in Asia. So probably are going to pick areas that would be South America, Central America and Europe, but all of those would have to pass a hurdle setting with our existing business structure.

[Mark Wilde:]

Okay, that’s really helpful, good luck in coming quarter and the coming year, Steve.

[Steven C. Voorhees:]

Thanks Mark.

[Operator:]

Thank you. The next question is from Alex Ovshey with Goldman Sachs.

[Alex Ovshey:]

Thank you, good morning, guys.

[Ward H. Dickson:]

Hi, Alex.

[Alex Ovshey:]

Great quarter. Just to come back on the MLP topic, hypothetically if you were to get a favorable ruling from the IRS, have you done enough work now where, if you are comfortable with how the operational structure would look in MLP scenario to move down that path if you were to get a favorable ruling.

[Ward H. Dickson:]

So we have spend a lot of time and effort over the last three to five months on this topic. And I would say our efforts to-date have been around two areas, one, preparing for the private letter ruling request. And then two, doing the feasibility analysis of the potential MLP structure. And in that is the initial value creation opportunity and then we also have looked at the structural, operational and governance issues that would come with the MLP structure with inside of Rock-Tenn. And I think what I would say is I would reiterate what Steve said in his comments is that we are optimistic about the opportunity. I think at the conference that Steve presented too early and in the quarter he said that we’re not intimidated by complexity. So we still have more work to do with our tax and financial advisors to ensure that there is the value creation opportunity, but we do think it wants additional time, effort and resources on the topic.

[Alex Ovshey:]

Okay, got you, but that’s very helpful. And then Steve, you mentioned $1 billion of supply chain costs which were focused on continuing to optimize. In the context of the sharp correction, Brent and WTI, where the prices can you talk about what the potential direct impact could be just from the correction in energy prices recently?

[Steven C. Voorhees:]

The direct impact would be the impact on diesel prices which flows through pretty promptly in freight rates through the filled fuel surcharge which is declined based on what the Energy Information Administration publishes as price changed.

[Alex Ovshey:]

Got it. Steve and then let me – how much of the billion doors would just be that cost of diesel?

[Steven C. Voorhees:]

We’ve got a table and in the presentation I just point toward that.

[Alex Ovshey:]

Okay. Very good, thank you very much.

[Steven C. Voorhees:]

Okay.

[Operator:]

Thank. The next question is from Chris Manuel with Wells Fargo.

[Christopher D. Manuel:]

Good morning gentleman. Congratulations on a strong finish to the year.

[Steven C. Voorhees:]

Thanks, Chris.

[Christopher D. Manuel:]

For fiscally, I would say. Two questions, I want to ask. The first was I noticed – or may I’ve missed it but if I knows the (inaudible) for cash flow guidance usually you do that for the out year. Would there be any reason as we try to talk to some of the components for what 2015 for cash flow versus 2014 would look like. Appreciating some of the difference for book versus cash tax that’s stepping up but in some of your productivity initiatives than other things and less inflation of vis-à-vis productivity this year, is there any reason you weren’t at least have another 6.10 per share or more of free cash flow in 2015 versus 2014.

[Steven C. Voorhees:]

We just decided that we are not going to give the free cash flow guidance. I think as we looked at it, it seem to confuse people more than help people, I think you’ve identified tax and also pointed towards pension as (inaudible) which will be changing and I think I would point out productivity and pointed out the pieces on raw materials to the extent that we can. But I expect we are going to generate continued free cash flow, strong free cash flow for some time to come.

[Christopher D. Manuel:]

Okay. With respect to kind of you box shipment levels through most of 2014 of fiscal 2014 you were a bit behind industry level. Looking at I think you’ve mentioned in October you are up almost 2.5%. Do you think that as you work through your fiscal 2015 that you ought to be back to a level at add or near industry levels and maybe what would be some of the puts and takes that would make you better and make you worst as you think on a go forward basis?

[Steven C. Voorhees:]

I think that we are clearly seeing momentum, as we head into and start our new fiscal year and the commercial and operational improvements help to make us I think more competitive in the marketplace. So that we’re optimistic about how we’ll compare relative to 2014 into the industry, but in terms of trying to project specifically what that will be we’re not going to do that, but I think combined with, as I mentioned, the approach that we’re taking to differentiate ourselves from the marketplace and bring innovation to the marketplace is bearing fruit relative to growth with existing customers and with new customers and the cost efficiencies in the improvements that things like the levels that we’re installing in our box plant system in terms of helping us on our quality, our cost, our on-time delivery. I think most all the indicators are pointing in the upward direction to say it would be a positive year-over-year comparison for us.

[Christopher D. Manuel:]

Okay, thank you.

[Operator:]

Thank you. The next question is from Debbie Jones with Deutsche Bank.

[Debbie Jones:]

Hi, good morning.

[Steven C. Voorhees:]

Good morning, Debbie.

[Debbie Jones:]

I was hoping if you could comment on the Tacoma acquisition and the integration appears to be going pretty well. I recognize there is seasonality, but would you consider the contribution for the quarter as you said run rate going forward or do you see more benefits that you could gain over the next 6 to 12 months?

[James B. Porter III:]

This is Jim. We’re just really delighted with the Tacoma acquisition and the operating team, sales team, our customer interactions, supply chain, et cetera is all just working together better than planned. So we’re quite pleased with the progress that’s been made there. And yes there are improvements yet to come. We’ve still got further integration to the portfolio of products that the mix of how we supply those to our customer base and further improvements in our supply chain before we start to think about the implementation of some of our capital and further just execution issues. So we think there is a bright side ahead.

[Debbie Jones:]

Okay, thanks. That’s helpful. And I guess my follow-up question just on the exports and how is that’s – it haven’t that coming in as a percentage of your mix versus your expectation and then have you seen any incremental pricing pressure over the last 30 to 60 days on exports as we’ve kind seen the dollar strengthening here?

[James B. Porter III:]

Relative to our expectations, we’re really ride on the plan that we would have anticipated with of course the flexibility that we never quite know what demand is going to be, but as we look at our channel mix between our internal plants, our domestic customers, and our international business would we really will ride out where we thought we might be. And as I said earlier, where it’s hard to try to build a very diverse portfolio of customer both in the U.S. and internationally and we’re quite pleased with how that is operating today. Relative to pricing, you’re right there is currency pressure due to euro, but we’ve also seen energy prices go down, so freight is somewhat of an offset. So there is pluses and minuses as relative to price, but overall (indiscernible) are both reasonably solid.

[Debbie Jones:]

Okay, thanks. That’s helpful. I’ll pass it on.

[Operator:]

Thank you. The next question is from Philip Ng with Jefferies.

[Philip Ng:]

Hi, good morning guys. I guess what the POR filing you guys have informed that front. How should we’ve been thinking about the cash process, if you guys do move forward of MLP, are you going to be looking at M&A little differently at least on the valuation front?

[Steven C. Voorhees:]

I think it’s little bit early for us to applying on that.

[Philip Ng:]

Okay.

[Steven C. Voorhees:]

There is just a long way to go before all that comes together.

[Philip Ng:]

Okay, that’s fine. And then, we think about demand for 2015 encouraging to see good we mentioned both on export side and domestically, but how should we be thinking about on the pluses and minuses? Demand in there it should benefit from lower gasoline prices, but what about this potential impact or dimensional way changes by FedEx and EPS of the world?

[Steven C. Voorhees:]

Just I think you’re on the position for what apply to be in the box and carton business, but the customers want lower cost and get the lower cost by through design and just using box fiber for the same application. In the meantime our products are fantastic products in the marketplace and they do use of products retired primarily to non-durable goods and population drives that, and I think what you talked about we’ve seen the slope of what you’re saying of when oil prices go up, demand goes down. And so what you’re saying about well may be lower oil prices put more money in people’s pocketbooks and they can buy more products boxes and is there. I’d take some comfort in enquires and industry box demand in September and I’ll be watching carefully to that cover number and what happens to the holiday season.

[Philip Ng:]

Okay, but generally it sounds like you guys a little more update on demand outlook and then some of the commercial initiatives you’ve made have been providing bearing some fruit?

[Steven C. Voorhees:]

The current economic environment (indiscernible) September is encouraging certainly our results in October are encouraging as well.

[Philip Ng:]

Okay. Thanks guys.

[Operator:]

Thank you. The next question is from Al Kabili with Macquarie.

[Albert Kabili:]

All right, thanks. Good morning. I guess question for Jim is on the productivity spending and opportunity there. If you could just help us size up what the implications are for your mill capacity over the next four years? How much of that $200 million in productivity savings and 2016 through 2018 is just be a more mill capacity versus various cost savings?

[James B. Porter III:]

Our focus is not capacity addition. We were very keen on manufacturing exactly the right products for our customer base and delighting them every day, trying to make investments, and how we operate and how our capital structure is laid out to reduce cost and improve efficiency, but there is – there is none of that $200 million that is a capacity or share enhancing investment.

[Albert Kabili:]

Okay, I appreciate that Jim. And then next question I had I guess to Steve on the integrated offering. Can you just size up for us where we are as far as penetration of that and kind of how quickly you know you see that moving up and as this –can this really move the needle as far as your volume and performance going forward and what’s the advantage for the (indiscernible) compelling advantage for the customer there? Thanks.

[Steven C. Voorhees:]

Al, Mike is closes to that, so I’m going to let Mike respond to that.

[Michael E. Kiepura:]

I think that it’s we’re making good progress. We’ve only been organized this way for the past six months or so. So there is some effort that’s getting organized, still work to do on refining our innovation platform and what we can bring to the customers. And then you have to keep in mind that the sale process, typically on the folding carton or display side, it’s a longer sale process. Major customers have contracts that are typically on the order of three years. So that’s going to effect the rate at which we can penetrate. But I would say at this point we’re very encouraged by the signals and the response that we’re getting in terms of new business that we’ve sold that we’ve begun to on board into our network of plants across the company. So we think that focusing our strategy on driving for differentiation through innovation and a wider fiber based solution offering to our customers is being well received and we think we’ll continue to be well received as we continue to refine our process for doing so.

[Albert Kabili:]

Okay, alright, thank you I appreciate it and me also looking the upcoming fiscal year here.

[Michael E. Kiepura:]

Thanks Tom.

[Operator:]

Thank you. The next question is from Chip Dillon with Vertical Research Partner.

[Chip Dillon:]

Hi, good morning. Steve you had mentioned in the beginning that you saw, I believe you said $250 million to $300 million in projects that had three to four year paybacks and you mentioned Stevenson? I just wanted to make sure, I heard that those were not separate projects like each one was out large but that’s a total and could you give us some examples or of either other projects like Stevenson or the timeframe over which these expenditures will take place?

[Steven C. Voorhees:]

Stevenson is one of those projects and we have a number of other projects that go into the $250 to $350 volume which would be of our multiyear period of time. I’m not sure we ready to example, I’ll give Jim Porter an opportunity to provide examples.

[James B. Porter III:]

Yeah, we don’t have a list that we prepared to share, but in operating our mills, there is just a – almost an unlimited runway of investment opportunities to reduce energy cost to improve efficiency, to improve our chemical consumption processes and we’ve had enough time to really get into the (weeds) of understanding the maintenance CapEx as well as the business improvement capital projects and we’ve gone through that comprehensive asset review and come up with some really exciting things that we’re prepared to tackle. So beyond that I don’t know that we could share anymore granularity.

[Chip Dillon:]

But I guess it’s fair to say that’s the total and that’s probably over several years, not just in 2015 that you will be speaking about…

[Steven C. Voorhees:]

Yes, exactly. Yes and I tried to speak about by putting capital guidance out there for the next several years. So it is within the $500 to $550 that we described during the time out.

[Chip Dillon:]

Yep, which is very helpful and just one last quick one. If Jim could you talk a little bit about the export market in the sense that I know that I believe that most of the virgin board, line to board, you send overseas is in agricultural type uses. If you could clarify that and tell us if the – the end customers are at the box level overseas are changing in any way over time?

[James B. Porter III:]

Changing over time? No, I really would not say that. I – and you’re right. The virgin containerboard consume globally is largely focused on the agricultural markets and as those markets and emerging markets consumption grow the demand for virgin containerboard increases. And so, we’ve tried to position ourselves with that customer base around the globe that uses virgin containerboard and we tried to build a supply chain network that is consistent reliable and one in which they can count on. So we’re optimistic that that part of our business will continue to grow over time.

[Chip Dillon:]

Got you. Thank you.

[Operator:]

Thank you. The next question is from George Staphos with Bank of America. Mr. Staphos, please check your mute button. We’ll move on to the next question. The final question today is from (indiscernible) with Barclays.

[Unidentified Analyst:]

Hi, good morning guys. How are you?

[Steven C. Voorhees:]

Good morning.

[Michael E. Kiepura:]

Good morning.

[Unidentified Analyst:]

This question sort of comes from the fixed income side, which is my area of expertise and if I may there is a follow up on sort of the MLP discussion. But as you think about the potential and I understand you don’t want to discuss all the outcomes yet, but how do you think about your two times leverage target and just generally the balance sheet in the context of potentially selling assets into an MLP?

[Steven C. Voorhees:]

I think we still believe that the current leverage targeted model that we’re driving our capital allocation to – can fit within the MLP structure.

[Unidentified Analyst:]

And maybe – let’s just say that you’re again committed to investment grade that there isn’t an outcome here that you want to be in investment grade regardless of the outcome on the MLP side?

[Steven C. Voorhees:]

I mean we have said that we are comfortable at both cross-over and investment grade ratings. And we’ve said that we would be – if we found the right acquisition opportunity, we would be – we will have a willingness to lever up with the commitment to bring the leverage ratio back down to historical levels. So I think we like the investment grade rating that we have today. It gives us tremendous flexibility.

[Unidentified Analyst:]

Okay, that’s great. I appreciate the color guys. Thanks.

[Operator:]

Thank you. I show no further questions. I’d like to turn the call over to speakers for closing remarks.

[Steven C. Voorhees:]

Okay, thanks Wendy and thank you all for joining our call.

[Operator:]

Thank you. This does conclude today’s conference. Thank you for joining. You may disconnect at this time.