Clearwater Paper Corp (CLW) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Clearwater Paper second-quarter 2011 earnings conference call. At this time, all participants will be in a listen-only mode, but later, we will conduct a question-and-answer session, which instructions will be given at that time. (Operator Instructions). As a reminder, today's conference is being recorded.

Now, I would like to introduce your host for today, Linda Massman, Chief Financial Officer. Linda, please go ahead.

Thank you. Good morning and welcome to Clearwater Paper's second-quarter 2011 conference call. On today's call with me is Gordon Jones, Chairman, President and CEO. Our press release this morning includes the detail 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 in the supplemental material provided on our website.

I would like to remind you that this presentation will 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, 2010. Any forward-looking statements are made only as of this date and we undertake no obligation to update any forward-looking statements.

We have a lot to discuss on today's call, so let's go ahead and get started. This morning, we had the pleasure of announcing a 2-for-1 stock split and a $30 million stock repurchase program. Both of these announcements demonstrate our confidence in the future growth and earnings potential of Clearwater Paper.

The stock split comes in light of the significant appreciation in our share price since the spinoff of the Company in December of 2008. We believe the stock split will improve the liquidity of our stock. Our Board of Directors also authorized the repurchase of up to $30 million of the Company's common stock.

While we remain committed to building value for shareholders through a disciplined approach to growth, our strong balance sheet provides us with the flexibility to implement a share repurchase program to help offset dilution from the issuance of shares under the Company's equity incentive plan and to return value to our shareholders. We intend to use cash on hand to fund any share repurchases under the program.

We continue to make good progress on integrating Cellu Tissue. We have been very focused on increasing the value that this acquisition brings to the Company and our shareholders, and we have worked hard to identify additional cost savings from synergies to offset the cost pressures that we are facing. As a result of this work, we are increasing our estimated net annual cost savings from synergies to a range of $35 million to $40 million. We expect to achieve this rate of savings by the end of 2012.

The incremental synergies represent estimated operating cost reductions across most cost categories compared to historical costs of each company operating separately.

I will now review our second-quarter financial performance before handing the call over to Gordon, who will discuss the performance in our operating segments and our progress at our new tissue facility in Shelby, North Carolina.

Please remember that when comparing second quarter of 2011 versus second quarter of 2010, a significant portion of the variances are driven primarily by the inclusion of Cellu Tissue in this year's results, as we closed the acquisition on December 27, 2010.

In addition, like last quarter, to assist you in analyzing the business on a comparable basis, we will discuss pro forma pricing and volumes as if we had owned Cellu Tissue during the second quarter of 2010.

Net sales for the second quarter of 2011 were $494.6 million as compared to $343.9 million in the second quarter of 2010. EBITDA for the second quarter of 2011 was $52.4 million versus $49.2 million for the second quarter of 2010. This resulted in an EBITDA margin for the second quarter of 2011 of 10.6% versus 14.3% in the second quarter of last year.

Our second-quarter 2011 EBITDA results included $9.1 million of Cellu Tissue integration-related expenses and expenses associated with our expansion in Shelby, North Carolina. Approximately half of the $9.1 million is related to starting up Shelby and will be ongoing. However, we will begin to have revenue at Shelby to offset these costs on an ongoing basis as well.

The remaining half of the $9.1 million are nonrecurring costs associated with the Cellu Tissue integration.

Net earnings for the second quarter of 2011 were $13.9 million, or $1.17 per diluted share, compared to net earnings of $20.6 million, or $1.75 per diluted share, for the second quarter of 2010. Our Consumer Products segment had net sales of $269.1 million in the second quarter of 2011 versus net sales of $145.4 million in the second quarter of 2010, with the increase primarily due to the inclusion of Cellu Tissue's operations in our 2011 results.

Segment operating income was $6.9 million for the quarter compared to $25.6 million for the second quarter of 2010. The lower operating income was primarily the result of increased operating costs, including $9.1 million of integration-related expenses and Shelby costs, as well as $1.1 million of increased amortization expense associated with acquisition accounting.

Our Pulp and Paperboard segment reported net sales of $225.5 million for the quarter, an increase of 13.6% versus second-quarter 2010 net sales of $198.5 million. This segment had operating income of $34.5 million versus $22.7 million in the second quarter of last year. The increase in operating income was largely attributable to higher paperboard volumes and pricing.

Net interest expense of $11 million in the second quarter of 2011 was up from $4.1 million in the second quarter of 2010, primarily due to the $375 million of senior notes issued in connection with the Cellu Tissue acquisition. We capitalized $1 million of interest in the second quarter of 2011 associated with our Shelby expansion. We have capitalized $1.5 million of interest through June 30, 2011 and expect to capitalize a total of $3.3 million through the balance of 2011.

The actual income tax rate for the three months ended June 30, 2011 was 38.3% compared to a rate of 38% for the same period of 2010. The estimated annual effective tax rate for 2011, without discrete, items is estimated to be 35.2%. In addition, we do not expect to convert any additional black liquor credits to cellulosic credits through the balance of 2011.

Regarding our balance sheet for the quarter, we had $40.2 million in capital expenditures, which includes $28.9 million associated with our Shelby expansion, compared to $10.2 million of total capital expenditures in the same period last year. Through June 30, 2011, we have had capital expenditures associated with Shelby of $40.2 million and we expect to spend an additional $93 million through the end of 2011, which totals $133 million for 2011. This has not changed from our original estimate given to you previously.

We also expect that we will pay off the IRBs before the end of the current quarter to simplify our capital structure and avoid some administrative costs associated with this debt. The IRBs are connected with our subsidiary located in Ladysmith, Wisconsin that we acquired as part of the Cellu Tissue transaction.

As of our last measurement data of December 31, 2010, our pension plans were $55.4 million underfunded. During the six months ended June 30, 2011, we have contributed $8.5 million to these plans. We are required to contribute an additional $4 million through the balance of 2011.

With regard to our liquidity, we had $126.5 million of unrestricted cash and short-term investments at June 30, 2011, representing a decrease of $32.8 million from March 31, 2011. Our ratios remain very strong. Total debt-to-total-capitalization, excluding the accumulated other comprehensive loss, was 47.8%. EBITDA to net interest expense for the second quarter of '11 was 4.8 times.

Gordon will now discuss the performance of our operating segments and provide an update on Shelby.

Thanks, Linda. In addition to the good news Linda shared regarding the increase to our estimated net annual cost savings from synergies associated with our acquisition of Cellu Tissue, I would like to update you on our progress related to the Shelby expansion plans.

We celebrated our grand opening of the converting and distribution facility on June 21 of this year. We currently have our first two converting lines in place and expect that these converting lines will contribute approximately $1.7 million to our operating income for 2011, which includes approximately $0.8 million of depreciation and amortization. We still expect these first two converting lines to produce an average of $8 million of operating income on an annual basis, which includes approximately $2 million of depreciation and amortization.

The total Shelby expansion project, including the paper machine, is progressing as originally planned, and we still expect the total project to cost between $260 million to $280 million and to be completed by the end of 2012. In addition, we still expect the internal rate of return for this project to be approximately twice our cost of capital.

Our Consumer Products segment revenue grew substantially due to the addition of Cellu Tissue. When including Cellu Tissue volumes in the second calendar quarter of 2010 for comparative purposes, total tissue tons sold in the second quarter 2011 were 128,762 compared to 138,065 pro forma tons sold in the second quarter of 2010.

The decrease in volume was primarily due to the reduction of external parent roll sales so that we could leverage this paper internally to make finished cases. Keep in mind that there is a yield loss when converting parent rolls to finished cases. In addition, we also rebuilt our inventory to meet customer service levels, given the strong demand we have been experiencing.

Pricing on this same pro forma basis including Cellu Tissue was up 3.1% to $2088 per ton in the second quarter of 2011 from $2026 per ton in the second quarter of 2010, due mainly to an improved mix of finished cases versus parent rolls. 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.

Our Pulp and Paperboard segment net sales were 13.6% higher than the same quarter last year. Higher net sales for the quarter were driven by a 10.4% increase in paperboard pricing and a 7.3% increase in paperboard volumes to 201,991 tons. The increase in net sales was partially offset by an 8.4% decline in pulp pricing to $718 a ton and a 16.3% decline in pulp volumes to 11,140 tons, largely due to the increased internal consumption of Company-produced pulp.

We had no major maintenance expense in either the second quarter of this year or the second quarter of last year. We expect to spend $7 million related to major maintenance expense in the third quarter of 2011.

I would like to provide you an update on our price increase initiatives as they relate to retail tissue and bleached paperboard. With respect to tissue, last quarter, I stated that our plan was to raise prices for certain of our products. I also mentioned that branded companies had announced price increases for some, but not all, tissue products. For example, no price increases were announced on facial or napkin.

Overall, what we have seen are retail price increases being implemented as a combination of price increases and promotional reductions. The scope of this retail tissue price increase is mainly across high-end TAD bathroom tissue and household paper towels and some selected conventional paper products. We have increased prices for similar premium bathroom tissue and household paper towels, although, as is typical, not all of these price increases can be implemented immediately due to the contractual and other factors.

When fully implemented and calculated against all of our retail tissue volume, we expect this price increase to end up in the 2.5% range. We expect approximately half of this increase to be reflected in the fourth quarter and the remainder during early 2012.

I would also like to provide you with an update on the paperboard market. I stated on the last call that bleached board is doing well and that we continue to be pleased with that business. I mentioned that there was a $40 per ton cup and plate increase that we had implemented. I can report that the $40 per ton cup and plate increase was fully implemented by the end of the second quarter of 2011.

During the second quarter of 2011, we announced a $50 per ton folding carton price increase to be implemented near the end of the second quarter. It now appears that this price increase will more likely be in the $20 to $25 per ton range and we continue to work on implementation. The general state of the economy continues to be an important factor in this business.

Before we move to questions, I want to mention that we have a number of investor events planned for the second half of the year. We will be presenting at the Jefferies 2011 Industrial and A&D Conference in New York on August 9 and the Oppenheimer Sixth Annual Industrials Conference in New York on September 27. If you are interested in meetings at these events, please contact Sean Butson.

Thank you for tuning in to our prepared remarks and, operator, we are now ready to take some questions.

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

Thanks. Good morning, guys. A couple quick questions. First of all, one of the large branded players in tissue said, if I am not mistaken, that they were regaining share versus private label. Do you believe that came at your expense or is there a possibility that the private label market is actually shrinking in this economic environment?

We heard that comment. I am not sure exactly where that comes from, Steve, but our business is still doing quite well. If they are gaining share, it is not from us. We are doing very well. Our volumes are doing as expected and are actually up.

Okay. Second question, as pulp prices start to come back, do you anticipate that your realizations in tissue are going to improve? And are you in a position to lock in tons at prices significantly below list?

Well, one of the things we have done as part of the acquisition is we have really participated in very aggressive buying and taking advantage of the new volume. As you remember, we used to be a buyer at Clearwater of about 85,000 tons. Now, we are about a 400,000 ton buyer. So we are using that volume to try to take advantage of it. But if pulp prices do go down, that is an opportunity for us. All these kinds of things are negotiated with our pulp suppliers and we are working hard in order to try to get those prices down.

I might just mention that that 400,000 tons is a number as though we had sold 60,000 tons into the market. So as we take that 60,000 tons and integrate it, it is really a function of how much of that do you integrate to get to 400,000. And then at pretty obvious math, a $10 drop in the pulp price is $4 million to us annually, straight to the bottom line. So we are going to push awfully hard on pulp price.

A couple more quick questions, then I will turn it over. Could you describe -- either Gordon or Linda -- where you found the incremental synergies? I mean what buckets would they fall into?

Yes, they are in the similar buckets to what we had stated in our original estimate of $15 million to $20 million. So a lot of them are in freight, additional freight savings. And quite a bit of additional cost savings along the procurement, so some of our cost structure, including packaging supplies and pulp and whatnot.

Anything on the staffing front?

Not necessarily more synergies on that front. It is pretty de minimis. I mean, we had already included a lot of that in the $15 million to $20 million.

Okay. And final question -- hopefully this isn't a sensitive issue -- but there was an accident whereby 32,000 tons of I believe it was your tissue landed in the Lochsa River. Was that tonnage already sold, and if so, was it going to a third party or was it your tissue that was en route to be converted elsewhere?

That was an internal transfer and didn't have a very big impact for the quarter. It was unfortunate.

It was just 32 -- probably 32 tons, not 32,000. Just one truckload.

Okay, I might have -- I guess probably the wire service that we found it on was mistaken. So was that going to be taken -- where -- to Wisconsin or something?

We are thinking it was Lewiston that was heading to Elwood to be converted, just paper, conventional paper there, heading to Elwood. Hundreds of truckloads a day come out of that mill. This one just happened to be an accident where the truck slid into the river.

So we are working with the environmental authorities in cleaning it up. The good news, of course, is it is toilet tissue and it is very -- not a major environmental problem.

Steve, it was about eight rolls, so really not much. And definitely was the transportation carrier that is responsible for that.

Yes, I mean, they said that there were 8000 pound rolls, but clearly that is not the case. So a little bit of loss in sales, conceivably, for you, but the environmental issue is not yours.

No. Yes.

Yes, just one truck.

Thank you both.

Graham Meagher, TD Securities.

Good morning, everybody. I just wanted to drill down just a little bit more on the $9 million costs with the Cellu Tissue integration and the Shelby expansion. You mentioned half of those were related to the Cellu Tissue integration. Are those mostly severance and relocation type costs or are there other types of costs in there?

Yes, there is quite a bit of different mix of costs in here. Some of it is some severance and bonus, like you mention. Some of it is consulting fees, travel, some additional maintenance we have spent on some of our Cellu Tissue facilities that are a little bit more one-time in nature. So it is really a pretty broad range.

And do you have sort of an estimate going forward to share with us on would that come down in the next quarter or do you expect that to remain fairly constant for the next few quarters as you continue to integrate?

Yes, I think we expect these costs to continue through the balance of this year, not necessarily at this particular rate. But they were included in our net synergy number that we have given, so they were very much expected as costs that we would have to incur as part of integration. And that is really why we say that we expect to hit that run rate savings of $35 million to $40 million by the end of 2012. Because even though we will start realizing some growth synergies, we do have some of these costs to work through here in the short term.

Of course. And just thinking about the expanded synergy target, and you noted that lots of those are sort of in the same buckets, a lot of them in freight. So is it fair to say that there wouldn't necessarily be more incremental costs associated with this higher number?

You know, I don't think that there is. I think most of the costs that we are seeing as the net synergy are in the buckets that we talked about. So some of that incremental maintenance expense we talked about, severance and bonus, which we have for the most part gotten through a lot of that. And then, like I say, the traveling and integration costs associated with outside resources.

The numbers are comparable. I mean from $15 million to $20 million to the $35 million to $40 million is net to net.

Good. No, it's a good number. Just making sure we are looking at it the right way.

The other question was on paperboard shipments in Q2. They looked pretty strong and particularly sequentially there. Was there a bit of catch-up from Q1 (multiple speakers)?

Yes, we had an outage during Q1, and that was one of the things that drove that number down to that 171. You're probably looking at the supplementals that are on the website. And 201 is really just a good reflection of a good, solid business. And there might have been a little bit of catch-up associated with that, but not too much. Our operations are running very well.

Great. And lastly, just wanted to just confirm that the CapEx for 2011, you had mentioned Shelby was unchanged CapEx budget there. So still in the $175 million to $180 million range for the year?

Yes, absolutely.

Great, thanks very much. That is all I had.

Ian Zaffino, Oppenheimer.

Great, thank you very much. As far as the buyback that you are doing, how did you arrive at that $30 million number? You know, what is the pace of how quickly you're going to do that and what is the chances that you are going to take that higher?

It was really a balance of what we feel like we need from a liquidity perspective to fund our growth opportunities, as well as the amount of dilution we have seen with regard to our shares outstanding. So it was a balance of those two that played a part.

Okay. And then on the pricing aspect, I think you have seen some of your competitors raise prices. Is there an opportunity to raise prices more than what you are seeing now or you are really seeing your customers say no mas.

Well, it is always a good question about what we can and can't do with prices. But we stay very close to our customers, and what we are really after is getting value for what we are providing to them. So we are not afraid to raise our price and we work hard to try to raise prices. But it really ends up being a movement with our customers about how those prices can go up and how they can't go up.

So I would say that there is still some potential opportunities there, but we will have to wait and see if we can convince those customers about the value we are going to provide.

All right. Let me ask you this a different way. If you look across your portfolio, what is the gap between you and the branded players from a pricing standpoint now versus what it has been on an historical level?

I don't know that it has always changed much over any kind of length of time. I mean, there is a gap between us and the brands. That gap, we have tried to provide some color to that gap by just asking folks to take a look at what is on their grocery store shelves, about the difference in pricing. Now that doesn't necessarily reflect our pricing straightaway to what those store owners are paying for it, but it is a pretty good indication of what the price differences are if you look at that particular shelf.

But I don't think that the gap is necessarily growing, getting bigger or smaller; it is a pretty standard gap.

Okay. All right. Thank you very much.

Kevin Cohen, Imperial Capital.

Thanks. Good morning. I am just wondering if you could talk a little bit, Gordon, about the price hike of 2.5%. Is that just price and does that exclude the benefits of promotional activity reductions and potential changes in sheet count?

Well, there is always changes that goes on in sheet count and those other kinds of things; those are consistent. But when we look at that 2.5% number, that is, as I mentioned in my script, across all of our tissue. You know, so we put it against the whole retail side of tissue. And that is why we come up -- we tried to provide good color to that, so that folks could see what it is.

But, no, that is pure price. That is 2.5% on price, and then as things can change on sheet counts, those kinds of things are also happening. But it is hard to exactly determine what those are because they happen pretty sporadically throughout the year.

Okay, so we should infer then that the sort of blended price increase, reflecting all three drivers, is probably closer to the sort of headline that other guys are putting out there on the consumer side, then?

I don't know that I would get that far. I think the way to think about us is to take our price up on average under those time frames that I mentioned at 2.5%. And if there is greater realizations, there is greater realizations. Because those still have to be enacted and conducted and accepted into the market by our customers. So I don't think honestly I would do that if I were you. But -- it is a way to think about it, but I am not sure I would build that into your model.

That's helpful. And then on the SBS side, maybe if you could just elaborate a little bit on your degree of confidence in that $20 to $25 per ton incremental price hike, given demand has been pretty good and the market seems pretty tight. Pulp and fiber have eased off a little bit. Maybe just a little bit more granularity in your thoughts there would be great.

Well, the market is still good. The bleached board market is still good. We have felt awfully good about that business for a long time. We still feel good about it.

This last increase, as I mentioned, at $50 looks like it is moving more to about half of that kind of level at $20 to $25. We are a real function of what is going on in the economy much more in that bleached board business than we are in tissue. We have always said tissue is driven from population, but board has a stronger relationship with the economy.

So it is going to be really what goes on in the economy, how much pull do we get out of the different categories that we sell into. And that is what is going to determine the success or not of that. But we just wanted to be open that it looked like the $50 wasn't going to happen and it looks like this particular increase is going to be more in the $20 to $25 range. And we are still working on it.

That's great. And then just lastly, before turning it over, the Company clearly will have very strong free cash flow even after the tissue expansion. To the extent that you guys are building up cash, is it safe to say for the foreseeable future there will not be an additional tissue expansion?

When it comes to us, I mean, we are deadhead focused against trying to get Shelby up on time and we are on great track and spending that within the budget. Same way about Cellu Tissue acquisition. We don't have any plans for any more paper machines or things of that sort. That is not where we are going. We're working hard on our integration, hard on Shelby and hard on just running our business.

That's great. Excellent quarter. Very well done. Thanks.

Okay. Thanks, Kevin.

(Operator Instructions). Roger Spitz, Bank of America.

Thanks and good morning. Two things. What was the organic tissue growth year over year and/or sequentially, based on just legacy Clearwater without the Cellu Tissue? I don't think we have those comps.

You don't, Roger, because it is really difficult for us to do that, because we truly have begun integrating Cellu Tissue into our operations. I mean, we have started moving paper around the country and producing and converting at different facilities. So it is virtually impossible for us to just break that out into a like-to-like to the historical Clearwater numbers.

How about this -- is excluding the yield losses from taking more Cellu Tissue parent rolls and putting them down to converted -- I am just trying to look at some sort of same stores underlying volume growth that you had in terms of tissue sales. Is there any way to look at it?

Maybe the right color to put on that is we are definitely experiencing great demand. Okay? It is definitely up on an organic basis. I probably won't give you the exact numbers. But also indicative of that is we have had to build some inventory this past quarter just to kind of catch up with some of the demand we have experienced and to get our service levels back in order.

Okay. Great. Secondly, I think you gave Shelby's two converting lines expectation that will contribute $2.5 million of EBITDA this year, if I did that math correctly, and that you are still looking for $10 million of EBITDA, which has always been, I think, your number going forward.

Just so I understand, the $2.5 million being the -- half the run rate, are there some other one-time or startup costs related to this year that that would be a $5 million, given that it has already started up [before] half the year?

There are two key factors. One is there is a ramp-up curve associated with those converting lines that will impact that number. So you can't just absolutely divide by one half. And also, we are in a higher pulp market than kind of average historical cost, which will also impact that number here in the short term.

Perfect. Thank you very much.

Steve Chercover, D.A. Davidson.

I'm back. It sounded from Linda's response to a previous question that the repurchase is done in part to mitigate dilution, although I am sure that you will also agree that the stock is cheap. I am just wondering, are you going to try and be opportunistic in your approach -- I mean, buy on dips? And I also want to know whether the Board considered initiating a dividend, because I would think that that might also broaden the appeal of Clearwater shares to a new set of investors.

Steve, again, good question. Overall, the repurchase plan was very much focused on the dilution, as we tried to say in the script. And we are going to buy from time to time; we are going to figure out exactly what the right timing is to do that. But it is our plan to do that share repurchase in order to buy back in that dilution, obviously, where it makes sense. The thing I think to focus on there is it is up to $30 million.

On the dividend side, we are always taking a look at that, trying to figure that out. But we thought that this particular repurchase was still the right thing to do, particularly when it related to dilution of the shares that come from our compensation program. And we just didn't want to sign ourselves up right away for an ongoing long-term kind of dividend. So dividend is not off the table. We always talk about it. But we are just not prepared to take any action on it just yet.

Okay, thanks again.

Yes, thank you.

This does conclude our Q&A session for today. I would now like to turn the conference back to your hosts for any concluding remarks.

Okay, thank you very much. We appreciate everybody listening. Obviously, you may have picked up our tone; we feel very good about where our business is. A lot is going on. With our stock split announcement, we hope that that demonstrates the confidence that we have and the Board has in the Company.

Our share repurchase program is, again, about addressing dilution and trying to provide some value back to shareholders. Our synergies, we are very excited about that. We promised the market that we would notify you when we had identified firm synergy improvements, and these are firm synergy improvements, up to $35 million, $40 million.

The Cellu Tissue integration is going very well. Shelby is up and running. The paper machine will be on track by the end of 2012. Price increases continue to march forward.

And I might also mention a release we had about FSC certification across our premium and ultra grades. We think that is a great enhancement to our customer base.

So the bottom line, we feel good about where we are. We appreciate your participation in the call, and we look forward to continuing to march the Company down a very positive track. So thank you very much for participating.

Ladies and gentlemen, this does conclude your conference. You may now disconnect and have a great day.