Clearwater Paper Corp (CLW) 2009 Q4 法說會逐字稿

Good day and welcome to Clearwater Paper fourth-quarter 2009 earnings conference call. Today's conference is being recorded. On the call today are Gordon Jones, CEO, and Linda Massman, CFO. At this time, I would like to turn the conference over to Ms. Linda Massman. Please go ahead, ma'am.

Thank you. Good morning and welcome to Clearwater Paper's fourth-quarter 2009 conference call.

Our press release this morning includes all of the details regarding our fourth 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 and in the supplemental material provided on our website.

Before we get started, I would like to remind 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 expressed or implied by risks and uncertainties described from time to time in our filings with the Securities and Exchange Commission, including our 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 we undertake no obligation to update any forward-looking statements.

Before we get started, I want to introduce Sean Butson, who will be running our investor relations effort. Sean is part of the investor relations firm IR Sense, and in addition to investor relations, has experience as a sell-side analyst. We believe we have a great opportunity to communicate Clearwater Paper's story and plan to be more proactive in our IR communications efforts during 2010.

I will begin today's call with financial highlights for the quarter, and will be followed by Gordon, who will provide commentary on the different segments, provide an update on our growth strategy, and discuss our 2010 outlook for the business before we take questions.

Results for the quarter continued to be very strong, driven primarily by strong operating performance in our Consumer Products segment and solid results in our Pulp and Paperboard segment. We reported net earnings of $47.2 million, or $4.01 of earnings per diluted share, for the fourth quarter of 2009, compared to net earnings of $1.7 million, or $0.15 of earnings per share, in the fourth quarter of last year.

Our fourth-quarter 2009 results reflect pretax income associated with the alternative fuel mixture tax credits of $47.1 million. Excluding this item, our fourth-quarter 2009 earnings were $17.4 million, or $1.48 of earnings per diluted share. EBITDA margins before alternative fuel mixture tax credits were 16.4% for Q4 2009 versus 6% for Q4 2008.

Our Consumer Products segment had fourth-quarter 2009 operating income of $28.7 million, compared to $15.7 million for the fourth quarter of 2008. Net sales of $138.3 million for the quarter were 8% higher than net sales for the same period last year of $128.1 million.

Our Pulp and Paperboard segment had operating income of $56.4 million for the fourth quarter of 2009, compared to $1.7 million for the fourth quarter of 2008. Excluding the income recognized for the alternative fuel mixture tax credits, operating income for the most recent quarter was $9.3 million. Net sales of $173.6 million were 3% lower than during the fourth quarter of last year, when net sales were $178.4 million.

Regarding total maintenance costs and downtime, we had repair and maintenance costs that were $4.4 million lower when compared to the fourth quarter of last year. As you might recall from our comments on our third-quarter call, this was primarily the result of rescheduling a significant portion of our major maintenance downtime originally planned for the third quarter of last year to 2010.

Our Wood Products segment had an operating loss of $3.5 million, compared to a $4.8 million loss in the fourth quarter of 2008. Net sales of $20 million were 31% higher than the fourth quarter of last year.

In the fourth quarter, the Company recorded $47.1 million of pretax income due to the use of black liquor as an alternative fuel mixture in our recovery boilers at both the Idaho and Arkansas mills.

For the full-year 2009, the Company recorded pretax income of $170.6 million and received cash of $87.4 million from the alternative fuel mixture tax credit. The balance of $83.2 million is reflected in taxes receivable. There is an additional $18.1 million tax receivable on our balance sheet that represents tax refunds for taxes already paid and tax credits.

Our position is that the alternative fuel mixture tax credits are not subject to corporate income tax. However, as noted during our prior quarterly call, since this tax position has not yet been confirmed by the IRS, we have reserved for this uncertain tax position under the accrued tax liability line on our balance sheet. Due to this reserve, it will appear on the income statement as if the alternative fuel mixture credits are taxable. If our tax position is confirmed, the accrued tax liability would be released to income.

Our income tax provision was $35.3 million for the fourth quarter of 2009, compared with $1.5 million during the fourth quarter of 2008. The income tax provision for the most recent quarter was 42.8%, mostly due to an accrual for an uncertain tax position.

Regarding our balance sheet and liquidity, we are pleased to report that we had $190.8 million of cash and short-term investments at December 31, 2009. Cash and short-term investments increased by $41.3 million in the fourth quarter, driven by strong operational performance. As a result, we had a $42.5 million net cash position, which includes cash and short-term investments, less outstanding debt, providing us liquidity and capacity to pursue growth objectives that Gordon will talk about a little later.

Regarding our pension plan status, at year-end our underfunded pension liability balance was $95.9 million, which was impacted by a significant reduction in the discount rate, partially offset by strong asset returns during the year.

Our financial ratios remain very strong. Total debt to total capitalization, excluding the accumulated other comprehensive loss, was 23.2%, while EBITDA to net interest expense for the fourth quarter of 2009, excluding the alternative fuel mixture credits, was 12.2 times.

I will now turn the call over to Gordon.

Thanks, Linda. We posted another strong quarter as the economy began to show some early signs of recovery. Although there are still mixed views on the outlook for the U.S. economy, we are hopeful that it's on the right track.

Our Consumer Products segment continued to perform well, both on a sales and an operating-profit basis. Our 8% revenue improvement in the fourth quarter versus prior year was volume driven, which was slightly offset by a 2% reduction in net selling prices.

We maintained near record production levels again this quarter and shipped 7.4 million cases in the fourth quarter. Pricing has remained relatively stable since price increases were implemented in 2008. We experienced excellent production in paper making and converting, and lower year-over-year input costs for pulp, transportation, energy, and packaging supplies.

Our Pulp and Paperboard segment performed well in the fourth quarter, even after excluding the impact of alternative fuel mixture tax credits. Fourth-quarter net sales were 3% lower than the same quarter last year, which was primarily attributable to slightly lower paperboard shipments and lower average net selling prices.

Partially offsetting these declines was a 90% increase in market pulp shipments to about 9,600 tons, due to the improving pulp market and low pulp sales in 2008. The Pulp and Paperboard business also benefited from lower year-over-year input costs during the quarter for wood fiber, chemicals, transportation, and energy.

As stated earlier, our Wood Products segment reported a loss of $3.5 million for the quarter, compared to a loss of $4.8 million a year ago. Net sales were 31% higher in the fourth quarter of 2009 versus last year, driven by 66% higher shipment volumes, partially offset by a 20% reduction in net selling prices.

I would now like to provide you an update on our growth strategy. As part of this discussion, it's important for you to understand how we view the market opportunity and the process by which we arrived at our decision. In terms of market opportunity, it is clear to us that the biggest opportunity exists in growing our Consumer Products segment by expanding our product offerings, our production capacity, our customer base, and our geographic reach.

The product area that has shown the most potential is the ultra bath tissue segment, which is at the upper end has been dominated by national brands. The geographic area that offers us the most opportunity is the East Coast with its high population density and fairly fragmented private-label tissue market.

Our product opportunity is to provide customers a viable private-label alternative with through-air-dried, or TAD, products that effectively compete in this growing part of the market. Specifically, over the last three years the ultra segment of bath tissue has grown from about 20% to nearly one-third of the category, and the TAD component of that segment has increased from the high 60% range to approximately 80%. Clearly, TAD quality ultra bath tissue is gaining share, and our customers have communicated to us that this is what they want.

With respect to process, we have evaluated many alternatives to fill this need over the past several months, including M&A opportunities, facility acquisitions, long-term paper supply agreements, and greenfield opportunities to build this capability ourselves. After our review of the opportunities and alternatives, we believe the solution that delivers the best return is to build our own facility.

As we announced in earnings release today, our first step is finalizing the site selection and constructing a converting facility in the Southeast. We will also be simultaneously working on the feasibility and timing of building a TAD paper machine.

We have already narrowed down the location of our converting facility to four remaining possibilities from over 50 potential sites. Our converting site, which we hope to announce as soon as negotiations are finalized, will be built in the Southeast. This site will have two initial converting lines expected to run both conventional and TAD paper, will cost approximately $30 million to build, and is expected to be completed in the second quarter of 2011.

Our expectation is that approximately 40% of the project costs will be incurred in 2010 and the remainder in the first half of 2011. In the first full year of this facility's operation, we would expect that this investment could contribute over $10 million of EBITDA driven by additional case shipments, significant reductions in transportation costs, reductions in outsourced converting costs, and a reduction of warehousing needs. The converting project alone carries an anticipated IRR far in excess of our cost of capital with a projected NPV that is expected to be very favorable.

Simultaneous with the commencement of the construction of this facility, we will continue to work on further evaluation to build a TAD paper machine and additional converting lines. Although we are not prepared to announce our definitive plans for construction of a TAD machine today, we are able to share some details on the type of capabilities we are pursuing.

The TAD machine we are interested in building would be a high-capacity machine that's able to produce approximately 70,000 tons annually or the equivalent of approximately 10 million cases. This type of machine typically takes about two years to build and generally costs over $120 million. That would be excluding land and building costs.

We would expect the paper-machine project to be EBITDA-positive by the end of the first year of operation. Associated with the TAD paper machine, we would plan to add five additional converting lines for an additional $40 million cost.

As we pursue this growth strategy and the capital commitments associated with it, we do not think it's currently prudent to pay a special dividend, begin paying a regular cash dividend, or implement a stock buyback. Going forward, we will continue to review whether the payment of a dividend best serves the Company and our stockholders, but for the foreseeable future, which means 2010, we do not anticipate paying a cash dividend.

I would now like to provide some comments on our outlook for 2010. As we enter 2010, for our Consumer Products and Pulp and Paperboard businesses, current pricing is stable, volumes are expected to be steady with the exception of planned maintenance, and input costs are expected to increase, driven primarily by pulp and energy costs.

For 2010, we expect an increase in capital expenditures to approximately $40 million to $45 million from the $19 million in 2009. This $40 million to $45 million includes $12 million related to the new Southeast converting lines.

We also expects to have major maintenance expense of $20 million to $25 million in 2010, due primarily to $7 million of scheduled maintenance deferrals from 2009 and expect more than 80% of this maintenance expense will be incurred in the first quarter. As a result, we expect to see the impact of this scheduled maintenance to be noticeable in first-quarter results, and then have performance resume the more normal quarterly trends throughout the rest of 2010.

In closing, I am very pleased with our business performance and accomplishments during our first year as a standalone company within the backdrop of a very tough U.S. economy. Since our spin-off in 2008, we have put our own corporate infrastructure and services in place, refinanced our outstanding debt, strengthened our balance sheet, completed our strategic planning process, put our growth plan into action, and positioned ourselves well for solid performance in 2010. Thank you very much for your attention and interest in our Company, and Operator, we will now take some questions.

(Operator Instructions). Ian Zaffino, Oppenheimer & Co..

Several questions here. What are you going to do as far as a pulp supply for the TAD machine? That would be the first question. And then, when you talk about input prices going up, can you kind of quantify that a little bit? Then I have a follow-up.

Basically for pulp supply, Ian, that's a good question. But 70,000 tons of finished capacity does require some extra pulp from us, but we are, as you know, we are a net buyer of pulp right now, so we're very comfortable in purchasing into the pulp market, like we understand the pulp market very well. We know what qualities of pulp are required to be able to make the tissue qualities that we need.

So we feel very comfortable about being able to do that, and that would be probably from a combination of existing suppliers, maybe new potential suppliers, but either way we feel good about getting the pulp supply.

Ian, I think regarding the cost inputs, the easiest way to try to quantify that, since we mentioned it would be pulp and natural gas, I think we've already seen quite a bit of run-up in pulp costs that have been published through RISI and other publications. I would say, you know, that's a pretty good indication of what to expect, and then with regard to natural gas, we really rely on the natural gas futures index with that.

Going back, regarding the potential back -- regarding the pulp, is there a potential to backward integrate or is that just not feasible? And then, you mentioned your WACC. Can you give us an idea of what your WACC is and what you're looking at?

It's probably not feasible to really consider backward integration. I mean, we of course have pulping facilities in the paperboard side of our business and Cypress Bend, Arkansas, and also in Lewiston, and Lewiston's pulping operation does support our tissue machines.

But we're experienced at being able to purchase pulp. Our TAD machine that's down in Las Vegas is not backward integrated with a pulp mill. It receives its pulp from a number of sources. Some of it is inside the company, but a lot of it is outside of the company.

We just look at our business as more downstream. We want to focus on the customer out, and we think by doing this with converting and then continuing our evaluation of a TAD paper machine, pulp is an integral part of that, but we just feel really comfortable being able to get those tons.

Regarding the WACC for Clearwater Paper, obviously that's a calculation that includes a lot of assumptions. But given our assumptions and the math we've run, we would estimate that to be somewhere between the 9% and 10% range.

Two more questions, and then I'll let someone else hop on. Can you talk about the economics of the TAD machine? And then, the other question would be the maintenance. You talked about that as being CapEx, but is that going to be expensed? Those are the two questions. Thanks.

The first part of that question, I'll answer, Ian, then I'll pass the second half to Linda. The first half, the economics of the TAD paper machine, we're still right in the middle of sharpening pencils and rolling up our sleeves, and of course negotiations have to be done to really finalize not only what type of paper machine that is.

I mean, we know that it's -- in our head, it's a TAD paper machine, but there are several suppliers that offer that to us. So we need to understand exactly what the costs are associated with that, and the payback. And we are right in the middle of evaluation process. We don't have the ability to really tell you where we are on it right now, but we hope to do that in the near future.

And Ian, I think your question was around the major maintenance expense that we are estimating to be $20 million to $25 million in 2010. That is actually (multiple speakers). Yes, that's an expense. It is not capital. (Multiple speakers) capital estimate of $40 million to $45 million is a separate investment.

(Operator Instructions). Steve Chercover, D.A. Davidson & Co..

First question with respect to the LIFO adjustment, which at $13 million was a little bit ahead of the previous comments. What happened there? And do you think we ought to kind of reconsider the EBITDA number to be, I guess, most conservative and back that out of EBITDA?

Steve, the LIFO adjustment is obviously something that's difficult to predict. Basically, we're trying to get a read on what's happening with prices when we develop an estimate on that. So, bottom line, it was larger because prices were lower than we had originally estimated. And it is (multiple speakers)

And those were Logs?

Right. Right. Primarily logs. And with -- going forward, I would say LIFO will always be an impact to the Company, but it's going to be dependent on what happens to that LIFO inventory, the log prices and the like.

Do you see anything in the current quarter that we should be aware of? I mean, at the end of Q3 you said we should expect $5 million to $10 million. Are you aware of anything currently?

No.

You gave us quite a bit there on the growth strategy. Have you secured parent rolls to furnish tissue for the first two converting lines that will come online well before any TAD machine is built?

Working on that as we speak, Steve. We do purchase some parent rolls now. We have -- I think we reported on previous calls that our converting operations are running very, very well, and of course, paper machines are running very well, but converting is currently outrunning papermaking a little bit so we're already into the parent roll purchase side of the market.

So, part of this announcement is our assessment that we will be able to obtain the parent rolls for those lines at the time that we need it. (multiple speakers)

And obviously, those are top-quality rolls, either TAD or very good conventional tissue?

Exactly. Exactly. Top-quality rolls from good suppliers and probably suppliers that we already have. Doesn't mean that we couldn't get it from some new suppliers, but we're very comfortable that we can take care of the parent roll needs.

But you're right on in that we are adding two converting lines and until a decision gets made about the paper machine, a final decision about the paper machine, we're going to need more parent rolls of tissue -- towel, bath, whatever. And we're going to be buying it on the outside. So we will increase our outside purchasing of parent rolls. But we're comfortable we can do it.

I mean, clearly, an expenditure of $120 million, plus additional converting, plus the building, is going to require Board approval. Can you give us the odds if you were to handicap it? Is this a 50-50 proposition or 75-25 go-ahead scenario?

I can't really give you the odds. I'm going to -- I wouldn't want to pre-empt the Board's decision about that.

I can tell you that the Board has been involved every step of the way. They know exactly what's in the earnings release and what we are saying on the scripts. So they are very supportive of it, and I think of it in terms of what's the strategic direction of the Company, where are we taking the tissue business, and when you analyze the script and you look at our earnings, you can see where we are going and the Board is very supportive of that.

But we still owe the Board the numbers and ourselves the evaluation and the financial metrics to make sure that it all fits for us. We feel comfortable about where we are, but we're not there yet. We can't give you a definitive answer about that paper machine just yet.

Two more questions, if I could. Starting with paperboard, your realizations went up in the quarter. Is that a function of mix or are those price increases that are sticking, because I was frankly a wee bit surprised there.

Well, the paperboard business has been, of course, an interesting business. A lot of matching of supply to demand in 2009.

And, there's been -- it's mostly a mix-related issue, I guess, Steve, to answer specifically your question. I know you've seen some of the announcements that have been out there about paperboard price increases and, of course, we are pursuing those in a competitive way and talking to customers about our need to get prices up. And as we spend time talking to customers about that, we're working to try to get those prices up.

But I think with the numbers you look at in history are much more mix-related than anything else.

And finally, for tissue, maybe it's just an observation from my small part of the world, but it seems like it's getting better for the consumer, put it that way. Prices seem to be coming down at retail. It's almost fungible between buying the branded and the private label at my local store. Is that pressure coming at you from the retailers to lower price or are the branded guys responding to the private-label threat?

I don't know whether -- what's in their head about whether they are responding to private-label or they are just doing their own marketing analysis.

But promotional levels have increased on some of the branded products, and our commitment to our customers is to respond to those promotional changes and to keep them going. I can tell you, having spent time with a number of our key customers, and certainly not all of our key customers but a number of them, they are very, very interested in private label, about their store brands, their own brands, all of that is very, very important to them. So, we support them with promotions as the market dictates, and I think that's probably what you're seeing.

At this time, we have no further questions. I will turn the conference back over to Mr. Gordon Jones for any additional or closing remarks.

I really -- we have nothing to add, other than we all thank you very much for participating today. Obviously, from our remarks, we feel very good about where we are and what we've done and the direction we are focused on. We look forward to talking to you after the end of the next quarter. Thank you very much for participating.

That concludes today's conference. We thank you for your participation.