Clearwater Paper Corp (CLW) 2009 Q2 法說會逐字稿

Good day everyone, and welcome to today's Clearwater Paper Corporation second quarter conference call. Today's call is being recorded. With us today from the company, we have Gordon Jones, president and Chief Executive Officer; Doug Spedden, Controller and Treasurer.

At this time for opening remarks and introductions, I would like to turn the call over to Linda Massman, Vice President and CFO. Ms. Massman, please go ahead ma'am.

Thank you. Good morning and welcome to Clearwater Paper's second quarter 2009 conference call. Our press release this morning includes all of the details regarding our second quarter. And you will find a presentation of supplemental information posted on the investor relations area of our website at www.ClearwaterPaper.com. Additionally, we provide certain non-GAAP information in this morning's discussion. A reconciliation of the non-GAAP information to comparable GAAP information is included with the press release.

Before we get started, I would like to remind to you that this presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as amended. These forward-looking statements are based on current expectations, estimates, assumptions, and projections that are subject to change, and actual results may differ materially from the forward-looking statements.

Factors that could cause actual results to differ materially include those risks and uncertainties described from time to time in the company's filings with the Securities and Exchange Commission, including the company's Form 10-K for the year ended December 31, 2008, and more recent quarterly filings on Form 10-Q.

Any forward-looking statements are made only as of this date, and the company does not undertake to update any forward-looking statement.

Results for the quarter continued to be very strong. Contributing to these results were strong operating performance from our consumer products segment and improved results from the pulp and paperboard segment coupled with benefits from alternative fuel mixture tax credit, renewable energy tax credit, and a favorable allowance adjustment related to state investment tax credit.

We reported net earnings of $75.4 million or $6.43 of earnings per share for the second quarter of 2009 compared to net earnings of $5 million or $0.44 of earnings per share in the second quarter of last year. Our second-quarter 2009 result reflects pretax income associated with the alternative fuel tax credit of $76.4 million and debt retirement cost of $6.3 million associated with the refinancing of the $100 million credit sensitive debentures as well as favorable tax benefits totaling $13.4 million related to renewable energy tax credits and a reduction in evaluation allowance for state investment tax credit. Excluding these items, our second-quarter 2009 earnings were $17.9 in dollars or $1.52 of earnings per share.

Our consumer products segment had second-quarter 2009 operating income of $32.2 million compared to $7.1 million the second quarter of 2008.

Net sales of $139.4 million for the quarter were 13% higher than net sales for the same period last year of $122.9 million.

Our pulp and paperboard segment had operating income of $87.8 million for the second quarter of 2009 compared to $6 million with a second quarter of 2008. Operating income for the most recent quarter was $11.4 million, excluding the income recognized from the alternative fuel tax credit.

Net sales of $174.4 million were 6% lower than the second quarter of last year's net sales of $185.1 million.

Regarding maintenance costs and downtime, we had higher repair and maintenance costs of $2.5 million when compared to the second quarter of last year. This was primarily the result of accelerating a portion of the scheduled major maintenance work into the first and second quarters of this year due to softer than expected order backlog.

We had originally estimated that our 2009 scheduled major maintenance downtime would cost approximately $14 million during the third quarter 2009. As we indicated last quarter, we elected to move some of the repair and maintenance work that we had planned for 2009 into 2010 and expect maintenance downtime to cost approximately $9 million during 2009, of which $1.5 million was spent in the first quarter, and $1.8 million was spent in the second quarter with the balance of $5.8 million to be spent in the third quarter. This delay in repair work will not have any effect on our operating efficiencies.

Our wood products segment had an operating loss of $4.5 million compared to a loss of $3.6 million in the second quarter of 2008. Net sales of $16.6 million were 40% lower than the second quarter of last year.

With regards to the offer alternative fuel tax credit, the company recorded $76.4 million of income during the second quarter associated with the use of black liquor as an alternative fuel mixture in our recovery boilers at both of the Idaho and Arkansas mills. This income was for the period from late January through June 30.

The alternative fuel tax credit that pertains specifically to the second quarter were $45 million. Through June 30, the company has received refundable tax credit payments totaling $57.6 million.

We continue to evaluate whether the alternative fuel tax credit will be subject to corporate income tax. For the second quarter, we assumed that the credits were subject to income tax for financial reporting purposes.

The company successfully completed a private placement of $150 million of senior unsecured notes in 2016. The notes have an interest rate of 10.625 and were issued at a price equal to 98.792% of face value. We used $107 million of the net proceeds to satisfy the company's obligations with respect to the $100 million credit sensitive debentures plus accrued interest through December 1, 2009. The credit sensitive debentures were originally issued by an affiliate of Potlatch Corporation, and prior to the spinoff from Potlatch, we retained the obligations to pay all amounts due to holders of these obligations. We expect to use the remaining net proceeds of the note for general corporate purposes including potential acquisitions and capital expenditures.

Our income tax provision was $22.9 million for the second quarter of 2009 compared with $2.7 million during the second quarter of 2008. The income tax provision for the most recent quarter was calculated using an annual effective tax rate of 37%. However, inclusion of two discrete items for the second quarter resulted in a 23% overall effective tax rate.

These two discrete items included an IRS Section 45 deduction related to renewable energy tax credits to owners of electric generation facilities that produce and sell electricity from qualified facilities. This credit is related to the years 2006 through 2008. The second item was a reduction in the valuation allowance related to state investment tax credit.

Regarding our balance sheet and liquidity, we are pleased to report that we have paid down the $40 million that was outstanding under the revolver at the end of the first quarter. We also have over $77 million of cash at June 30, 2009. We believe we have ample liquidity to run our business.

Our financial ratios remain very strong. Total debt to total capitalization, excluding the accumulated other comprehensive loss, was 27.2%. While EBITDA to interest expense, excluding the alternative fuel mixture and energy tax credit and the reduction in the valuation related to state investment tax credit, was 12.5 times. The same ratios for the first quarter 2009 were 30.3 and 10.4 times, respectively.

I will now turn the call over to Gordon.

Thanks Linda. We have had an outstanding quarter despite the continued challenges of the economy. We have performed very well in our consumer products segment. As mentioned, net sales for the quarter were 13% higher than last year's second quarter. This was largely the result of a 7% increase in net selling price and strong shipments due to great production results. With regard to the 7% increase in net selling price, this was the realization of two price increases that were implemented in the second and third quarters of last year. We have not implemented any additional price increases this year.

We experienced excellent production in papermaking, record converting production, and lower input costs for pulp, freight, energy and packaging supplies. During the second quarter, we continued to purchase parent rolls from third parties to support our improved capacity at our Elwood, Illinois converting operation. We have a number of capital projects planned or underway that are expected to bring our papermaking and converting processes closer to being in balance by the end of the year. We expect to buy purchased paper throughout the year.

While we are excited about our results in this segment, the market outlook for consumer products remains dependent on a number of factors including the amount of promotional activity undertaken by other tissue companies and customers, and the cost trends for many of our commodity inputs. For example, we are starting to see modest increases in pulp and other key commodity costs. But overall, we continue to feel optimistic about our position in the private-label market.

Our pulp and paperboard segment has performed well in the difficult current economic environment as well. Second quarter net sales were 6% lower than the same quarter last year and were primarily attributable to fewer paperboard shipments coupled with a 32% decline in market pulp net selling prices. These negative comparisons were partially offset by significantly higher market pulp shipments and 3% higher paperboard net selling prices. Despite the decline in pulp prices that affected this segment, the company still benefited overall from this decline as we remain a net buyer of pulp. The pulp and paperboard business also benefited from lower year-to-year input costs during the quarter for wood fiber, chemicals, freight, and energy.

During the quarter we took 13 days of downtime at the Lewiston, Idaho pulp and paperboard operation. Approximately eight days of this downtime was associated with scheduled maintenance, and the rest was market-related. We will continue to monitor the market closely and adhere to our principle of matching production to demand as we determine what is appropriate for us and our customers.

As stated earlier, our wood products segment reported a loss of $4.5 million for the quarter compared to a loss of $3.6 million a year ago. Net sales were 40% lower in the second quarter of 2009 versus last year, driven by a 17% reduction in net selling prices and a 26% decline in shipments. The negative comparisons were partially offset by lower saw log prices. This segment continues to be impacted by the poor housing market, and we do not expect this segment to fully recover until a normal housing market returns.

To summarize, our business is doing very well. We are especially pleased with our consumer products or tissue business, and we look forward to the improvements in the economy which should help our pulp and paperboard and wood products segments. We will continue our work to improve results, but due to potential changes in our commodity cost inputs, we remain cautious about our ability to perpetuate the strong performance achieved year-to-date. We are also cautious on our future expectations for alternative fuel mixture and renewable energy tax credits, and we will manage our balance sheet conservatively as a result. As a newly formed company, we will concentrate on customer service and drive hard to build stakeholder value.

We are now happy to take your questions.

(Operator Instructions). David Woodyatt, Keeley Asset Management.

Being a relatively new public company, could you spend a moment or two discussing the -- what you would consider to be the sort of normal seasonality of the different parts of your business?

Sure, David. Briefly on consumer products, frankly there's not that much seasonality associated with it. The tissue business, which of course includes all the different categories of tissue, from bathroom tissue to facial tissue to paper towels, napkins, and there's a little seasonality, for instance, associated with some of those, but in general, the consumption and production and shipments of our tissue business is, frankly, pretty steady throughout the year.

Pulp and paperboard business does a little better beginning in the early spring and accelerates through the summer and then begins to taper off a little bit in the fourth quarter.

The wood products business is more seasonal as it relates to the typical housing year when building begins to happen in the spring and continues through the summer and the fall.

So in general we have some that are seasonally related, but our major two businesses, particularly consumer products, is not very seasonally related.

So I assume then in the aggregate, if we can ever talk about a normal year, you would expect what, the second and third quarters over all to be slightly higher than the first and fourth?

They could be. Yes. It certainly could be. The volumes would be up during those particular periods. That may or may not, depending on the year, translate to results, but you would expect a little bit higher volumes in pulp and paperboard shipments in the same way and in wood products through the spring and summer, early fall.

Yes. Okay. Thank you.

Ross Haberman, [Haberman Fund].

Good morning, gentlemen. A great, great quarter.

Could you talk about the tax credit? I know you touched upon it. From what you could tell today, on a monthly basis, are you still applying for it? And could you just go over -- I guess you booked the $76 million income this quarter. I didn't quite understand. You broke that up between the first and the second quarter. I wonder if you could clarify that again.

Absolutely. With regard to are we still applying, the answer is yes, we absolutely are until this is no longer available. And in that -- what we had said about the tax credit was that that's $76.4 million, and that included the time frame from the end of January through June 30. Okay? And then the credit that was specific to the second quarter was $45 million.

Yet you booked the whole $76 million quarter.

Exactly. Exactly. And then the portion that was specific to the second quarter was $45 million. And then the third piece of data (technical difficulty) was the actual cash. The credit payments that we've received were $57.6 million.

And the difference between the $57.6 million and the $76 million is what?

Is just the amount of money that would be sitting in our receivables.

I see. And has the government come out with any new edicts or ideas on how long -- I think the original speculation was that this might go away by the end of the calendar year. Is that still the thought?

I believe that the legislation expires at the end of the year, so there has been a lot of speculation about whether or not it might be terminated earlier, and of course we just don't know that. It's all in the -- I think in Congress and the administration's hands. But I believe the original alternative fuel credit legislation expires at -- right at the end of December of this year.

And just one follow-up question. In terms of your competitors and their pricing schemes, what are you seeing there? And are you seeing any of them being a lot more competitive or discounting recently?

Well, we don't see a lot of change. From my remarks you probably picked up that we are anticipating maybe a few additional promotional costs associated with running the business. And those would be our customers or us responding to customer requests and the competitive environment of our competitors, but really it hasn't happened as of yet. Obviously we are hoping that those expenses don't get very big relative to promotions, but it certainly could happen. So far, business continues to be solid. Prices are holding.

And thanks, guys. The best of luck.

Bob Amenta, JP Morgan Asset Management.

Thank you. Just one quick follow-up on that tax credit. So is the $19 million receivable, would that be kind of through June 30, what you haven't collected?

The receivable is actually what we have accrued through June 30, yes.

All right. So if nothing else happened after June 30, you still would expect $19 million and then roughly $15 million a month. Is that still an accurate ballpark to assume from July 1, forward?

Yes, that's correct.

Okay. And then I am on the bond side, and I got involved shortly after the new deal, so I didn't get a chance to ask, but what is going on with the trends? Or what are you guys seeing in terms of the trend away from a grocery channel? I know that's more of a bigger-picture question, but since I'm new to the credit, are you -- is there continued movement? Your numbers are obviously strong.

And then related to that, I don't know if it's meaningful, but the SUPERVALU sale of stores out west, has that even hit the radar screen for you guys? Is that even big enough to matter, that potentially losing that business? Or --?

No, we don't anticipate a problem with that particular change, and SUPERVALU obviously is doing what they need to do, and we are delighted by them as a customer of ours. But the overall grocery market continues to do quite well with respect to private label, if you compare that to mass merchandising sort of markets. We still feel very good about what's happening relative to the private label business and the store brand business inside the grocery stores. That seems to fit very well with our strategy. It fits well with our customer base, so we don't see those share prices eroding at all. If anything, they might be slightly going just a little bit the other way.

Okay. That's all I had.

Great quarter.

Joe Stivaletti, Goldman Sachs.

Good morning. You talked about how strong your balance sheet is, all the capital that you have access to in terms of cash and whatnot. And you talked about potential acquisitions in CapEx, and I just wondered if you could talk about those two things in terms of what you are thinking right now for CapEx. Is there any major projects? And also what your thoughts might be about acquisitions? And I guess as it relates to those two things, what your current thinking is in terms of your sort of leverage parameters in terms of as you potentially pursue either expanded CapEx or acquisitions.

Yes. So Joe, first of all on CapEx, what we had said -- I believe it was in our fourth-quarter call -- was that we anticipate capital spending for 2009 to be in the $15 million to $20 million range. So that will give you a good perspective of what we plan on spending this year. And what we've also said is at this point we don't intend to make any modifications to that as a result of the black liquor credit refund.

And I will let Gordon take the question on M&A.

On -- Joe, for acquisitions of things, we're always keeping our eyes and ears open. We're actively taking a look at what might be available out there that -- what might fit for us.

The thing that we had mentioned I think previously on some calls is still our strategy about, from a consumer products standpoint, working in the midwest and the east to grow our capacity and our capabilities, east of where we are today. We obviously have a very nice market share in private label, and we would like to -- at grocery stores -- and we would like to continue that and expand that market in that particular segment.

So we're looking at things that really make sense for us. We really can't comment on where we are. I would say we don't have anything material at this point to report. Certainly we are keeping our eyes and ears open though.

So -- but what is your thinking on sort of your -- where you might be willing to take your leverage? Now you are below one times net debt to EBITDA on a trailing basis. I just wondered what you thought, where your comfort level is?

Yes Joe, I think obviously our capital structure as it exists today is something we are very comfortable with. We've not really given any indication of how much leverage we would take on, but I would tell you that you can obviously look at a lot of the other players in this market and see what their balance sheets look like, and I would say that we are probably a little bit more conservative than most companies.

The only other question I had was on the -- really on the pulp side of things. Can you update us on what your -- with this current level of activity, what your net pulp buy is per quarter? And what your views are in terms of -- at the outlook for pulp prices during the rest of this year?

We have in the past talked about our pulp net buying position, Joe, and it's really the same. It's about 7,000 tons a month. And that's as a net buyer of pulp. And of course, we bring that into our Lewiston, external. That supports our mill there and the quality needs that we have for all of our products, both consumer and the paperboard side. So we're net buyers, and pulp prices have increased a little bit.

One of the interesting things about our position is that not only are we net buyers, we are actually -- when we say net buyers, that's because we buy the significant amount of pulp, of course, but we are also selling into the market. So we have some advantages in our pulp and paperboard division when we run our pulp dryer. And those tons that you see on this report about the sales of pulp is us running our pulp dryer more in the second quarter than the first quarter, and that's really because the prices have improved a little bit.

So even though we might spend more as a net buyer of pulp by buying it in, we get that -- a little bit of that back inside our pulp and paperboard division by selling more pulp to the outside.

Where it's going to go is -- I would leave that to you and the others to figure that out. I certainly read all the things about the dynamics in China and others about increasing their demand. I know it's just -- obviously those things are hard to predict. But overall, when the pulp market changes, I think it's best to think of us in that net buyer category and then dampen the effect of that increased cost by what we can sell for that pulp dryer.

All right. Thank you.

Dan Stratemeier, Goldman Sachs.

A follow-up on some of those -- the pulp and commodity cost questions. I know you came into the year 40% hedged on nat gas. How are you thinking about hedging for the remainder of the year in whatever commodities that you can hedge?

The chemical costs you do have, can you give us a little bit of an overview what the trends are there?

And then the wood fiber costs, where are you there? What do those trends look like year-to-date? And how do you think those will go for the remainder of the year?

Yes. So with regard to natural gas, that is the only commodity that we forward buy, and we currently set at about 50% forward purchase for the remaining part of the year, and we are at about $2.75 above the index currently. So with regard to whether or not we continue to hedge, obviously that's something that we look at on a consistent basis, to look at where the market rates are versus what we can forward purchase at.

With regard to virtually all of our commodity cost inputs, they are all down pretty materially year-over-year, Q2 to Q2. And as Gordon said in his comments, we do see late in the quarter some modest increases across some of our key commodities. Where those are likely to go is obviously difficult to predict, and we rely probably on very similar information that's available to you folks as well.

When you say over index, what index do you mean? Gas?

The natural gas index.

So today, what are you buying -- what price are you buying at?

Like I said -- I would say the spot purchase today is close to about $4 (multiple speakers)

$4 today? Thank you.

Wayne Anglace, Delaware Investments.

If you could tell me if there's any limitations for you repurchasing the legacy Potlatch bonds early or if you've got any intention to take care of that from an interest saving standpoint?

Yes. When we did the refinancing with the high-yield unsecured notes, we actually did take care of those credit-sensitive debentures, and so those are essentially off our balance sheet. At this point they're replaced with a $150 million of high-yield unsecured notes.

Right. But I'm trying to get a sense for what your interest payments will be for the rest of the year, and I'm just wondering if you intend on paying the interest on those notes throughout the remainder of 2009.

Oh yes. That would have been part of the $107 million that we paid for the CSDs to remove those from the balance sheet, and you will see a portion of that $107 million is sitting in restricted cash. So we obviously assumed the current rate on those is the interest payment that we'd make through the end of December, which was 12.5%. However, there is some risk that the rate could go as high as 14%. So we ended up having to cover that entire maximum amount of interest. So the difference between 12.5% and 14.0% sits in the restricted cash account on our balance sheet.

Okay.

Yes, so in interest expense you will really see just the interest on the high-yield unsecured notes along with the amortization of the discount.

Okay. Very good. Thank you.

[Matt Berg], [G Corp].

I just want to follow up on uses of cash. I want to know how much thought there has been to paying a dividend.

Yes. At this time the Board has not made a decision to pay a dividend. But it's something that we continue to look at.

And so that will be up for review at the next Board meeting? Or how should we think about that? There seems to be quite a bit of cash piling up on your balance sheet.

Yes, it's -- it's actually a good question. It's an ongoing question that the Board looks at all the time, Matt. And certainly at the Board meetings. But that -- it's not reserved for just the Board meetings. It's a -- we are always taking a look at it.

Okay. Thank you very much.

Thank you. And at this time, we have no further questions.

Okay. Well, we would like to thank everyone for their participation this morning. We appreciate it very much. As mentioned in my remarks, we feel like we had an excellent quarter, and we feel very good about our business, and thank you for taking the time to join us today.

Thank you. Ladies and gentlemen, this does conclude today's presentation. We appreciate your participation. You may disconnect.