Clearwater Paper Corp (CLW) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Clearwater Paper third-quarter 2010 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, with the instructions following at that time. (Operator Instructions).

As a reminder, this call is being recorded. And now your host for today's conference, CFO Linda Massman. Please begin.

Thank you. Good morning, and welcome to Clearwater Paper's third-quarter 2010 conference call. Our press release this morning includes the detail regarding our third 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 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, 2009. Any forward-looking statements are made only as of this date, and we undertake no obligation to update any forward-looking statements.

On today's call with me is Gordon Jones, Chairman, President, and CEO. 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 business segments before we take questions.

Net sales for the third quarter of 2010 increased 6.5% to $352.9 million from $331.5 million in the third quarter of 2009. Net earnings were $15 million, or $1.27 of earnings per diluted share, compared to net earnings of $46.2 million, or $3.92 of earnings per diluted share, in the third quarter of last year. Excluding the alternative fuel mixture tax credit from our results in the third quarter of 2009, net earnings were $16.5 million, or $1.40 per diluted share.

These results were in line with the preliminary announcement of our results made on October 12, 2010, in conjunction with the debt financing we recently completed. After adjusting for $3.1 million in transaction costs related to the pending acquisition of Cellu Tissue, third-quarter 2010 earnings were $16.9 million, or $1.43 per diluted share.

Additionally, we had scheduled major maintenance costs of $4 million in the third quarter of 2010 compared to $1.1 million in the third quarter of 2009, representing an increase of $2.9 million, or an estimated after-tax $0.15 per diluted share impact on third-quarter results.

Adjusted EBITDA for the third quarter of 2010, which excludes the Cellu Tissue transaction costs, increased 3.1% to $43.4 million versus $42.1 million for the third quarter of 2009, which excluded the alternative fuel mixture tax credit. Our adjusted EBITDA margins were 12.3% and 12.7%, respectively, for the third quarter of 2010 and the third quarter of 2009.

Our Consumer Products segment had third-quarter 2010 net sales of $144 million, representing an increase of 2.7% compared to the third quarter 2009 net sales of $140.2 million. The increase in net sales was driven by a 4.3% increase in volume, partially offset by 1.6% lower net selling prices, driven by increased customer product promotions.

Segment operating income was $10.8 million for the quarter as compared to $32.1 million for the third quarter of 2009. The reduction in operating income was primarily attributable to higher pulp costs.

Our Pulp and Paperboard segment reported net sales of $231.5 million for the quarter, an increase of 13.3% versus the third quarter of 2009 net sales of $204.2 million. The segment had operating income of $28.2 million for the third quarter of 2010 versus $53.5 million last year, which included the alternative fuel mixture tax credit income of $47.1 million.

As mentioned previously, we had scheduled major maintenance expenses of $4 million in the third quarter of 2010 at our Arkansas facility. As a reminder, our Arkansas facility incurs major maintenance expense approximately every 18 months, whereas in Idaho, it is approximately every 12 months. We will complete the balance of our 2010 scheduled major maintenance work in Idaho during the fourth quarter of 2010.

Net interest expense of $3.8 million was down $0.5 million versus the third quarter of 2009 due to the capitalization of interest associated with the new converting facility under construction in North Carolina and increased interest income associated with our higher cash and short-term investment balances.

The Company's actual income tax rate for the third quarter of 2010 was 39.3% compared to 36.9% for the same period last year. The tax rate for the third quarter of 2010 includes amounts for interest accrued relating to uncertain tax positions, primarily involving whether our alternative fuel mixture tax credit is subject to taxation. The annual estimated effective tax rate for 2010, excluding discrete items, is approximately 34.8%.

Subsequent to September 30, 2010, the Internal Revenue Service issued guidance clarifying the treatment of the Cellulosic Biofuel Producer Credit, or CBPC, and the ability to claim it in conjunction with the alternative fuel mixture tax credit. The guidance enables companies to claim both the CBPC and the alternative fuel mixture tax credit at the same facility in the same tax year, so long as the credits were calculated on different gallons of fuel.

This will enable us to amend our 2009 corporate income tax return and claim approximately 24.5 million gallons of fuel under the CBPC for that portion of black liquor produced in early January 2009, prior to the time when we started claiming the alternative fuel mixture tax credit. This will equate to an additional federal income tax credit of $24.7 million, pretax. We expect to record these benefits in the fourth quarter of 2010. We are still evaluating the periods after early January 2009, where we have already claimed the alternative fuel mixture tax credit.

Regarding our balance sheet and liquidity, we had $356.7 million of cash and short-term investments at September 30, 2010, representing an increase of $165.9 million, or 87%, from December 31, 2009. This was primarily driven by strong operational performance and the receipt of $101.3 million in taxes receivable, related primarily to the alternative fuel mixture tax credit.

Our long-term debt outstanding at September 30, 2010 was $148.4 million, which does not reflect the $375 million of 2008 senior notes that were issued on October 22nd, 2010 in conjunction with the pending acquisition of Cellu Tissue.

Our financial ratios remain very strong. Total debt to total capitalization, excluding the accumulated other comprehensive loss, was 21.9%, while adjusted EBITDA to net interest expense for the third quarter of 2010 was 11.4 times. These, again, are not reflective of the additional financing or the pending acquisition of Cellu Tissue.

I will now turn the call over to Gordon.

Thanks, Linda. As Linda pointed out, we had solid financial results again this quarter. Higher pulp prices had the effect of helping our Pulp and Paperboard business and negatively impacting the operating income in our Consumer Products business.

Our Consumer Products segment continued to deliver revenue growth, driven by a 4.3% increase in volumes shipped versus the third quarter of 2009, which was partially offset by a 1.6% reduction in net selling prices. We maintained very high production levels and shipped 2291 more tons than we did in the third quarter 2009. As a reminder, these volume and pricing figures are available on our website as supplemental materials in the Events and Presentations section of the Investor Relations page.

Pricing continued to be stable, with promotional spending creating some pressure as compared to last year. Higher input costs for pulp was the driver of lower earnings for the quarter in this segment.

Our Pulp and Paperboard segment had net sales 13.3% higher than the same quarter last year. The increase was attributable to paperboard price increases, slightly offset by a volume decrease of 7% caused by downtime associated with scheduled major maintenance at Arkansas.

The increase in net sales in terms of dollar amounts was also driven by a 42.8% increase in pulp prices, combined with a 40.9% increase in shipments versus the third quarter of 2009.

As it relates to executing on our growth plans, we continued to make good progress. On the organic front, we are still targeting late 2012 for the completion of our new paper machine in Shelby, North Carolina, and expect the first two lines on the converting facility to be operational in the second half of next year.

Regarding the Cellu Tissue acquisition, we issued $375 million of senior notes due 2018 at a rate of 7 1/8%. We also announced earlier this week that the Hart-Scott-Rodino waiting period ended. We still expect that the acquisition will close in the fourth quarter of this year.

As it relates to our outlook for the business, we will make some general comments about the market environment, but will not comment on expectations for the business combined with Cellu Tissue until after the transaction closes, except that we would expect capital expending of $40 million to $50 million annually for the combined Company for 2011 and 2012, assuming the transaction closes in the fourth quarter.

All of my following comments are descriptive of the market conditions as they relate to standalone Clearwater business.

We do, however, expect additional transaction-related expenses associated with the Cellu Tissue transaction of approximately $25 million to $30 million in total, which includes financing and advisory fees and $3.1 million already incurred in the third quarter. We also expect to incur approximately $40 million in bond breakage costs associated with tendering for Cellu Tissue's outstanding notes.

In our Consumer Products segment, the promotional environment continues to be competitive and volumes are expected to remain steady. In the Pulp and Paperboard segment, we expect continued solid performance. Our expectations are that pulp costs will continue to moderate a bit and other input costs will be stable.

Year-to-date 2010, we have had capital expenditures of $23.1 million, and we continue to expect that our total capital expenditures will be in the range of $40 million to $45 million for the full year, which includes $12 million related to the initial two converting lines at Shelby, North Carolina.

As a reminder, we have estimated the total project -- that's paper machine and converting lines -- will cost approximately $260 million to $280 million, with the aforementioned $12 million to be incurred in 2010 and substantially all in the remainder in 2011 and 2012.

Major maintenance costs are expected to be approximately $2 million to $3 million in the fourth quarter of 2010 to finish the scheduled major maintenance work in Idaho.

At this point, thank you for listening to our prepared remarks and, operator, we will now take some questions.

(Operator Instructions). Ian Zaffino, Oppenheimer.

Question would be on the pulp side. What was your effective pulp costs in the third quarter versus the second quarter? And what is the price that you pay, and if we could somehow track at. Because if you look at what pulp has done over the past couple months, it really hasn't done a whole lot. I'm just curious to see why there is such a large movement in your margin, which you attribute to pulp. Thanks.

Ian, this is Linda. We don't actually disclose the absolute cost for pulp. We combine it as wood fiber, which includes other fiber inputs. But we did see the trends you're seeing in the marketplace with regard to pulp moderating a bit late in the quarter.

But keep in mind that our inventory flows through cost of goods on an average cost basis; therefore, our cost of sales will lag the current costs slightly.

Okay, so you're running through higher pulp that you purchased in the first quarter or so? Is that kind of what the $1000 pulp sort of --?

In a nutshell, like I said, the average cost, so it will include some of the previous month's cost.

So, we would assume that that pulp would remain relatively -- or really, that your margins, just by where pulp has gone over the preceding months -- your margin should come back up?

Our margins will follow the trends of pulp, yes.

On, like you said, like a four-month lag, or whatever that number is.

Yes, I didn't actually say the months, but yes, it's an average cost.

Okay, all right. Thank you very much.

Yes.

Thanks, Ian.

Steve Chercover.

Good morning, Steve.

I guess my question is along the same lines. When I'm looking at pulp in Q3 versus Q2 -- I just want to go sequentially -- I figure that if you're -- you're buying what, 7000 tons a month?

That's about right. 85,000 tons a year -- net.

Yes, so if it was 21,000 tons in the third quarter and let's say pulp was up $40, and that's $800,000. And your ASPs were down 6 on 55,000 tons, is another $300,000. I mean, I could see $1 million in margin erosion, but not $10 million. Is there some kind of accounting -- something else happening?

Yes, Steve, I think it goes back to the average costs and how many months go into that average cost. So our cost of sales will lag current costs as a result of that accounting method. So it's not as easy as the calculation you just displayed.

No, well, nothing is ever that simple. But it still seems extraordinary. I mean, Clearwater, back in the Potlatch days, used to make $10 million a quarter. So I'm just wondering if we're going back to normalized levels of profitability, and the past two years have been economic [rents] perhaps attributable to the good economic environment for private-label products.

Yes. Steve, it really is, frankly, just an accounting issue. One of the other things to keep in mind is that we're a net buyer of 85,000 tons of pulp. So we actually buy more pulp than that, because we're selling pulp on the outside. So that fits into the equation. Remember, we're selling into the external pulp market at the same time, and that benefit is accruing a bit over to the paperboard side of the business.

But it really is an accounting thing. I think maybe the best way of looking at this is to take a quick look at the supplemental pages that we attached as part of the webcast. I don't believe they were attached to the release, but they're on the webcast, the supplemental webcast.

And volume is still up in tissue -- I mean, as mentioned in our remarks, we have high volumes in tissue, the private-label business is still doing very well. If you just look at that top line, and the way we typically report it is in tons, the tonnage continues to flow at 55,000 tons. So very good volumes in private-label tissue and very good success with our customers. Same way in paperboard.

Pricing, you can see, has moderated a little bit. If you do compare the third quarter of 2010 to the third quarter 2009, you see that going down from that 2656 number to 2614. So that's the 1.6% that the price has gone down. But just quarter-to-quarter, as you mentioned you like to look at it, it's basically flat. I mean, it's gone down $6.00; you could attribute that to mix.

So what we've got is a very good, solid business that's growing in private-label, solid with our customers. And the effect that you're seeing on our statements is all about how it has to be treated from a cost of goods sold standpoint. That's all of what it is. There's nothing other -- no hidden costs or anything of that sort that you can attribute to it. It's just all about the cost of pulp.

Because anything in terms of discounting at retail is reflected in that 2614 ASP, correct?

Absolutely.

That's right.

Absolutely. Yes, I mean, I think it a bit of a wake-up call, I guess, for folks, when you look at that and you see that operating income in the Consumer Products division was down. But really, from an accounting standpoint, that's what it is. And it is, as Linda mentioned, about the average cost system that we use and that really just changes the costs associated with the tons that we sold during this quarter.

So that's what drove those margins down, and when it goes the other way, it goes the other way too. But business is very solid, looking good and not feeling uncomfortable at all about it.

I don't think you should, but it really is extraordinary. I don't want to -- does this change your view in any way about your level of pulp integration? How are you feeling?

No, same thing. I think we've mentioned in previous calls that -- and as folks know, we're going to be a larger buyer post-acquisition than we are now. We're going to be a larger buyer of pulp. But we've looked at and modeled this through all different pulp markets.

And it's just that what you're not necessarily seeing in the numbers here is the pulp market's moderated bit, come down off the peak, and it just hasn't instantly flown to our income statement, and that's a function of the average costing system that we use on cost of goods sales.

So that's the thing that -- to kind of keep in mind, is that, yes, pulp price has moderated, but we've got inventory that we paid for at a higher price and that average cost has made the change.

Okay, I'm not going to say I understand it, but thank you.

Yes, well, it's interesting. I mean, it all depends what happens now to pulp prices from here, Steve. If pulp continues to go down, we continue to work through the pulp inventory that was purchased at a higher price.

Well, I mean, I expect it will. But I mean, at the risk of sounding silly, it seems like perhaps the inventory that you are running through the P&L today, it's as if the inventories were held for a year or more, of pulp. I don't know -- we'll talk (multiple speakers).

No, not really, because, of course, we've got limited amounts of inventory and we haven't wanted to buy pulp when it was at the high end of the market. So we will try to flush through that inventory as quickly as we can.

The basic thing that, again, I would ask you to concentrate on is 55,000 tons of Consumer Products tissue, very similar to the previous quarter 55,000 tons. No other quarter in any of those listed in the supplemental, all the way back to the spin, has been as good. That's like our second-best and almost the best quarter we've had in shipping tissue. So private-label tissue, tissue business is solid, pricing is flat; it's pure accounting.

Okay.

And the other thing, Steve, to keep in mind, is on a general company basis, when you combined what happens with pulp to Consumer Products, remember that -- and mentioned in my remarks briefly -- some of the benefit of that flows through to the Pulp and Paperboard division.

So I'd encourage you to take a look at the overall EBITDA estimate of the Company, which was in line with what we had when we did our debt offering, as Linda mentioned. So we are in alignment of where we are. But the money moves back and forth, also keeping in mind that we transfer pulp at market to the Paperboard division. That has an impact on the Consumer Products division, and it also has a positive impact on the Paperboard division.

No, I certainly recognize there's a bit of a waterbed effect there.

Right, right.

Okay. Thank you.

All right. Appreciate it. Good questions, Steve, thanks.

Roger Spitz, Bank of America.

Thanks and good morning.

Good morning, Roger.

Are you saying -- just to make sure -- I think this is what you're saying -- is that the strong Consumer Products EBIT that we've seen over the past quarters was based on rising pulp costs, and you benefited from rising prices moving through to revenues ahead of the rising pulp prices moving through COGS. Is that the way to think about that?

Not quite, Roger. Our last price increases were done in 2008. So we haven't had any rising prices. In fact, we've seen more of a promotional environment.

But it's truly as simple as if you look at the cost trends of pulp, it's a matter of bringing in those average costs. And if you look at pulp over the course of this last year, it was actually rising for quite a bit of the period of time, before flattening out and then just recently starting to come off and moderating a little bit. So it's just a matter of working through that flow of the trends on pulp.

Okay. And we've talked about in Consumer Products the lag in moving pulp through COGS, but there is offset with -- on the Pulp and Paperboard side. Is that lag -- is it sort of the same lag, so it's a very nice offset, or is there a difference in the lag and running through pulp -- in the timing of the lag of running pulp through Consumer Products versus the pulp benefit to Pulp and Paperboard?

Yes, and in that case it's more of the wood chips and the sawdust, and that's more on a LIFO basis, so it's not exactly the same. That even gets trickier than average cost, to try to calculate, because you start getting into LIFO layers and such.

And then of course, when they sell pulp, that's going to be -- the immediate market price would be reflected in their results.

Okay. Am I correct that Consumer Products division itself is purchasing maybe 225,000 tons of pulp, either from yourself or externally? Is that the right kind of pulp number to think about?

Yes, that's our capacity, and some of that comes, of course, in slush pulp directly from the mill, and the rest of it comes from outside purchase pulp. So in aggregate, yes. So if you were, for instance, running our Consumer Products division, you are paying a higher pulp price internally and you're paying a higher pulp price for what you buy from the outside as well.

So -- and of course, the benefit of the Company is kind of -- as the previous caller, Steve, mentioned -- it's sort of a waterbed effect on the slush pulp that comes from our pulp mill operations into converting. It's the external pulp that changes. But the entire division swings with higher pulp prices coming both internally and externally.

I guess I was also sort of asking whether there is much wastage from pulp into the paper. Is it one-to-one or do you have to buy 5% more or 10% more pulp than what your capacity is?

Well, there is some waste in the process, no doubt about that. There is waste in converting and there's a bit of waste, but not a lot, from the pulp side. But there's some associated with that.

Yes, most of the waste for us in tissue comes in our converting operations off of our winders and those kinds of things, and it's not related that much to pulp. But there's some waste in both sides.

All right, thank you very much.

Thanks, Roger.

[Dan Winn], Goldman Sachs.

Thank you very much for taking the call. I know you don't like to talk about the promotional environment very much, but can you give us a feeling of maybe incrementally quarter-over-quarter if there has been a little bit of a decrease or an increase in the competitive environment?

It seems like some of the big players are starting to feel some of the pain from the pulp prices that you have extensively mentioned here. So on the margin, if you can mention anything at all incrementally about that, it would be helpful. Thank you very much in advance.

I think that the best place to refer you to, Dan, is really that supplemental sheet that's attached to our webcast. And that's really reflective of the promotional environment. Again, if we just do a bit of history, there were two price increases in tissue in 2008, there were no price increases in tissue in 2009, there have been no price increases in tissue to date in 2010.

So any change in those numbers isn't because there has been an increase in the base price, if you will, of tissue; it's been a difference in the promotional environment. So there has been a greater promotional environment, but not a huge, extensive promotional environment. As noticed just in quarter two to quarter three, I mean our tissue price per ton has really only moved from 2620 to 2614, and that's basically, in our opinion, a bit of a mix change there.

So promotions have been around, they've always been part of the industry, they happened and were happening when base prices were going up in 2008; they're always going to be there.

So I think just one thing that I would mention as a thought about the tissue business, and one of the reasons that we like the tissue business, is that promotions in this business come and go. It's not wiped across the entire grade for the history of mankind here.

This is -- you have a promotional increase that hits at the end of a store aisle over a particular weekend; it comes, it goes off. So it comes and goes. And those are the good things about the tissue market. But that promotional environment is always going to exist out there.

Okay, thank you. And if I could follow up on the Paperboard side of the business. I think on your last conference call, you mentioned that either the second or the third price increase was ongoing, or there was an -- you were pushing through an ongoing price increase in many of your grades there. Could you give us an update on that and what your expectations are for the next three and six months? Thank you.

I don't know that I can tell you the next three or six months, but let me give you a quick update about where we are with our customers. We have instituted increases in the first part of 2010. Another increase was a midsummer increase in July. And then there has been an October increase which has been quite successful.

I would add that October increase that has been successful is not necessarily on every single grade of paperboard that we make. For instance, it may not have been as successful on cup, but it's been very successful on folding carton. So you can't take an increase that gets announced on bleach board and necessarily wipe it across the entire volume tonnage.

But backlogs have been very good for us, the paperboard business is very strong. And we are, frankly, just now finishing the execution of the third price increase for us in 2010. There were multiple increases in 2008, four of them, in effect, and then really none in 2009, and then these three that have begun back in January of 2010.

Thank you.

Does that answer your question? Good.

It does, thank you.

Roger Spitz, Bank of America.

(Multiple speakers) a follow-up. Hey, a couple things. You told us that the cost of the Paperboard scheduled maintenance was $4 million, of course. You also said that resulted on 10% lower volumes. Can you provide any guidance on the lost EBITDA on that lower volume in Paperboard?

Well, the lower volumes that we were talking about are the volumes associated with the outage that was taken in Arkansas in the quarter that we're reporting on. So that's really the change in volume.

That same chart -- it may end up being my favorite chart in that supplemental graph -- shows 184,000 and change of Paperboard tons for quarter three 2010. Just the difference there between what we would consider a full-out running quarter is the difference in the outage time at Cypress Bend, the downtime associated with that.

So that's where that comes from, Roger. But Paperboard business is, with the exception of that downtime taken at Cypress Bend, Idaho operation continues to run well, Cypress Bend is running well, coming up out of its outage, and backlogs are very strong.

The $3 million acquisition costs related to Cellu Tissue, is that in the income statement all in SG&A and is it all in corporate and in eliminations in the segment breakdown?

It is all in SG&A, and most of it is in the inter-segment.

Okay, very good. And lastly, on the $24.7 million in cellulosic credit, does this -- you mentioned it was pretax. Is this subject to a tax or is this simply you apply $24.7 million to US-generated income tax and it's just a pure credit off of income?

It is taxable. You'll have to tax effect that number.

You tax effect it, okay. But is it a credit off of income? I mean, are you like in a shield income, to the tune of $24.7 million?

Yes. So you need to have income in order to take the tax credit.

Right, okay, thank you.

Thank you. I'm showing no further questions or comments at this time. I would like to turn the conference over to Mr. Gordon Jones for any closing remarks.

Okay, well, thank you very much. And we appreciate everyone's interest in the company, and I just want to make a couple of just quick summary remarks.

When we look at our two businesses, we feel very good about where our business is. The Consumer Products division, tissue sales are up. We've tried to make that point on the call, that tissue sales are there. Pricing is down, but only slightly and basically flat in most of recent [quarters-to-quarters].

The Paperboard business is up and running flat out, excellent backlogs, integration is progressing very well with the Cellu Tissue side. So we still feel very good about that. And our Shelby, North Carolina new facility is right on track.

So the bottom line for us on our major priorities, we feel terrific about where we are and we're looking forward to the future very much. Thank you all for participating.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.