Clearwater Paper Corp (CLW) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Clearwater Paper fourth-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. Linda, Please go ahead.

Thank you. Good afternoon and welcome to Clearwater Paper's fourth-quarter 2011 conference call. Our press release this afternoon includes the detail regarding our fourth-quarter and full-year results, and you will find a presentation of supplemental information posted on the Investor Relations area of our website at clearwaterpaper.com.

Additionally, we provide non-GAAP information in this afternoon's discussion. A reconciliation of the non-GAAP information to comparable GAAP information is included in the press release and supplemental material provided on our website.

I would like to remind you 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 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, 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.

On today's call with me is Gordon Jones, Chairman 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. We reported net earnings of $11.5 million or $0.48 per diluted share for the fourth quarter of 2011, compared to net earnings of $37.8 million or $1.60 per diluted share for the fourth quarter of 2010.

On adjusted basis, fourth-quarter 2011 net earnings were $13.3 million or $0.55 per diluted common share, after excluding $1.8 million in after-tax charges related to sale of the Lewiston, Idaho, sawmill on November 28, 2011. Our 2010 net earnings would have been $21.2 million or $0.90 per diluted common share, after excluding $10.5 million in after-tax charges related to the Cellu Tissue acquisition and a $27.1 million benefit from the Cellulosic Biofuel Producer Credit.

As a reminder, fourth-quarter 2010 results included only four days of Cellu Tissue's operating results following its acquisition by us on December 27, 2010. Fourth-quarter 2011 earnings before interest, taxes, depreciation, amortization, or EBITDA was $52.2 million compared to $34.6 million in the fourth quarter of 2010.

Fourth-quarter 2011 adjusted EBITDA, which excludes $2.9 million in pretax adjustments associated with the sale of our Lewiston, Idaho, sawmill, was $55.1 million. Fourth-quarter 2010 adjusted EBITDA, which excludes $17.2 million in pre-tax Cellu Tissue acquisition-related expenses was $51.9 million. Net sales in the Consumer Products segment were $268.5 million for the fourth quarter 2011, as compared to fourth-quarter 2010 net sales of $142.9 million.

The increase in net sales was predominantly attributable to the inclusion of Cellu Tissue's operating results for the full fourth quarter in 2011, compared to inclusion of only four days of operating results in the fourth quarter of 2010. Consumer Products' operating income for the fourth quarter of 2011 was $15 million, compared with operating income of $11.3 million for the fourth quarter of 2010.

Excluding $6.3 million in pretax Cellu Tissue acquisition costs, fourth-quarter 2010 operating income would have been $17.6 million. The decrease in operating income was primarily the result of higher operating costs, including higher pulp, transportation, packaging materials, and MG, with the increase predominantly attributable to the addition of Cellu Tissue.

Net sales in the Pulp and Paperboard segment of $197.9 million for the fourth quarter of 2011 were down 2.3%, compared to fourth quarter 2010 net sales of $202.6 million. Pulp and Paperboard operating income for the fourth quarter declined to $16.5 million, compared to $29.1 million for the fourth quarter of 2010.

Excluding $15.4 million in pretax sawmill sale related adjustments, operating income would have been $31.9 million for the fourth quarter. The increase in operating income, excluding the impact of the sawmill sale, was primarily due to an increase in paperboard sales volume and pricing, partially offset by higher input costs for chemicals and wood fiber, which consists of sawdust and wood chips.

The segment impact related to the sawmill sale at Pulp and Paperboard was partially offset at the corporate level by a LIFO inventory reserve adjustment and other related adjustments which resulted in a pretax impact for the total company of $2.9 million of expense or a $1.8 million after tax impact, as I previously mentioned.

Net interest expense of $10.4 million in the fourth quarter of 2011 was flat with the fourth quarter of 2010. Net interest expense in the fourth quarter of 2011 versus the fourth quarter of 2010 reflected a full quarter of interest related to our $375 million note issued in October 2011.

This increase was offset by fourth-quarter capitalized interest of $1.4 million and no interest in our industrial revenue bonds, which were repaid in the third quarter of 2011. We expect capitalized interest associated with Shelby to be $14 million in 2012, and $18.2 million over the entire construction phase of the project.

Regarding taxes, we recorded a 47.8% tax rate for the fourth quarter of 2011. Excluding discrete tax items during the quarter our tax rate was 35.6%. We expect the effective tax rate, excluding discrete items, to be approximately 35% for 2012. We did not convert any black liquor tax credits into Cellulosic Biofuel Tax Credits during the fourth quarter of 2011, and do not expect to during 2012.

We had capital expenditures of $137.7 million during 2011, which included $90.4 million related to construction of our Shelby, North Carolina, converting and paper-making facility. We continue to estimate that the TAD paper machine and tissue converting facility will cost approximately $260 million to $280 million. Capital expenditures for 2012 are expected to be between $215 million and $220 million, which includes an estimated $165 million to $170 million associated with Shelby.

At December 31, 2011, our company sponsored pension plans were under funded by $89.1 million, compared to under funding of $55.4 million at the end of 2010. The decline in funded status was primarily due to a lower discount rate and low equity returns measured at December 31, 2011. We expect to contribute approximately $20 million to our company-sponsored pension plans during 2012.

With regard to our liquidity, we had $63.4 million of unrestricted cash and short term investments at December 31, 2011, representing a decrease of $81.6 million from December 31, 2010. This decrease was primarily due to capital expenditures associated with our Shelby facility, partially offset by positive cash flow generation from operations.

Our long-term debt outstanding at December 31, 2011 was $523.7 million, compared to $539.1 million at December 31, 2010, and reflects $375 million of senior notes issued in October 2010, and $150 million of senior notes issued at a discount in 2009. Our financial ratios remain strong. Our total debt to total capitalization, excluding accumulated other comprehensive loss, was 46.6% at December 31, 2011, compared to 48.8% at December 31, 2010. Adjusted EBITDA to net interest expense for the fourth quarter of 2011 was 5.3 times.

Lastly, as part of our previously announced share buyback program, during the fourth quarter we repurchased 41,700 shares of outstanding common stock at average price $32.30 per share. Since announcing the $30 million share buyback program on July 28, 2011, we have repurchased 333,300 shares at a total cost of $11.3 million. We have $18.7 million remaining under the original $30 million program for additional share repurchases. I will now turn the call over to Gordon.

Thank you, Linda. As Linda pointed out, we finished the year with solid operating results, and we believe we are positioned well for 2012 and beyond. For the full year, net sales came in just under $2 billion, while adjusted EBITDA of $196 million was our best ever.

To recap the year, in June we announced the grand opening of our Shelby, North Carolina, tissue facility in conjunction with the start up of our first two converting lines. Later that month, we announced the expansion of our FSC certified product offerings of premium and ultra bath tissue, and ultra paper towels, which had been well received by our customers.

In July, we announced a two-for-one stock split and a $30 million share buyback program. Finally in November, we sold the sawmill at Lewiston, Idaho, for approximately $30 million and signed a long-term residual fiber supply agreement with the buyer, Idaho Forest Group.

Consumer Products net sales of $268.5 million were up significantly versus the fourth quarter of 2010, mainly due to the inclusion of a full quarter of Cellu Tissue results versus inclusion of only four days during the prior year's quarter. Tissue volume of 123,046 tons declined 8.3% from the third quarter of 2011 and 7.3% from the fourth quarter of 2010 on a pro forma basis, had we included Cellu Tissue results for the entire 2010 quarter.

The declines were attributable to softness in our contract manufacturing and machine glazed tissue markets. We also converted more parent rolls into finished cases in 2011, which resulted in yield loss associated with the process of manufacturing converted cases, and we curtailed parent roll sales to build some retail inventory to support customer service needs. This reduction in tissue volumes was mostly offset by a 6.3% increase in pricing to $2,182 per ton compared to the pro forma price per ton in the fourth quarter of 2010.

This higher pricing was the result of a previously discussed 2.5% price increase, the vast majority of which was implemented in the fourth quarter of 2011, with the balance expected to be realized in the first quarter of 2012. We also improved mix, as we converted more parent rolls into finished cases. As a reminder, these volume and pricing figures are available on our website as supplemental materials in the Events and Presentation section of the Investor Relations page.

Consumer Products operating income was down slightly to $15 million versus adjusted fourth quarter 2010 due to increased cost. Shelby contributed modestly to our fourth-quarter 2011 operating income, and we estimate that we realized approximately $2.4 million in net cost savings from synergies associated with the Cellu Tissue acquisition.

Our Pulp and Paperboard segment had net sales 2.3% lower than the same quarter last year. Paperboard volumes rose 4.8% to 185,487 tons, and paperboard pricing increased 2.4% to $970 per ton versus the fourth quarter of 2010. Pulp revenues declined due to our consuming more pulp internally, and we experienced a decline in lumber revenues as a result of the sale of our sawmill.

Pulp and Paperboard operating income increased to $31.9 million, that is after excluding the impact of the sawmill sale, due to higher sales, offset partially by higher costs for chemical and wood fiber.

Now I would like to spend a few minutes on our outlook for 2012. We expect the Consumer Products segment to sell approximately 128,000 to 130,000 tons per quarter on average during 2012, with the first quarter of 2012 expected to be at the low end of the range.

We have recently experienced an increasingly competitive tissue marketplace and expect that this will continue through 2012. The initial two converting lines at Shelby are expected to contribute approximately $8 million of operating income in 2012, which includes approximately $2 million of depreciation.

Offsetting some of this benefit will be an estimated $5 million of additional costs associated with the start-up and construction of the paper machine and new converting lines. For 2012 we expect these costs to be heavily weighted to the second half of the year. We expect the paper machine to start up in December 2012, and expect that it will produce approximately 70,000 tons per year when fully operational in 2014, with approximately 75% of that amount estimated for 2013.

Lastly, we are expecting annual net cost savings from synergies from the Cellu Tissue acquisition to ramp up during 2012 to the $35 million and $40 million range expected annual run rate by the end of the year. Specifically, net cost savings from synergies are expected to be approximately as follows for 2012 -- about $3 million in the first quarter, $4 million in the second, $5 million in the third, and $8 million in the fourth.

Before discussing the outlook for Pulp and Paperboard, I want to briefly mention the litigation matter we disclosed last quarter concerning the manufacturer of our TAD paper machine for our Shelby facility. That manufacturer, Metso Paper, was sued by a private label competitor of ours. The competitor alleges breach of contract against Metso and is seeking to enjoin Metso from delivering to us our TAD tissue machine.

The allegation is that Metso's sale of a TAD paper machine to Clearwater Paper violates a restrictive covenant in the competitor's contract with Metso. Metso informed us that they intend to vigorously defend the lawsuit, and they are that. We were not sued by either of the parties, but elected to intervene in the matter to make sure our interests, the interests of our workers, and the community in North Carolina, and the interests of the competitive marketplace are being represented in the lawsuit and are not being treated in the abstract.

The matter is currently in discovery and scheduled for trial in May. At this stage, the lawsuit has not delayed the start up of our Shelby facility, and construction of the TAD paper machine and paper machine facility are currently proceeding as planned and on schedule.

Moving on to the Pulp and Paperboard segment, we expect continued solid performance despite some recent softness in the market. As of now, we expect 2012 paperboard volumes to be similar to 2011 levels, and pricing to remain about flat with the fourth quarter of 2011. We expect pulp sales to be minimal as we anticipate utilizing almost all of our pulp internally.

We estimate our scheduled major maintenance expense in the Pulp and Paperboard segment will be approximately $18.3 million during 2012, which will include approximately $15 million of expense in Idaho during the first quarter of 2012 and approximately $3.3 million of expense in Arkansas during the fourth quarter of the year.

Regarding total company cost of sales, while we expect our Consumer Products segment to benefit from lower pulp costs in the first quarter of 2012, we expect pulp costs to increase in 2012. In addition, virtually all costs are expected to be higher, including higher transportation costs associated with fuel, higher labor costs, increased chemical cost related to the price of starch and caustic, and higher wood chip and sawdust cost.

In summary, I said on our third quarter call that we expected a much better fourth quarter, and certainly our results have confirmed that expectation. We will have a busy year with our ongoing integration of the Cellu Tissue operations and our efforts to realize expected cost savings from synergies, as well as our efforts in regards to the Shelby start-up. We want to thank our loyal customers and other stakeholders for their continuing confidence, and we are committed to the professional execution of our many initiatives.

Before we move to questions, I want to mention that we will be presenting at the Vertical Research Partners Paper and Packaging Conference on Thursday, March 8 in New York. Details are provided on our website, and if you are interested in meetings, please contact Sean Butson or our Vertical Research Partners to arrange. Thank you for turning into our prepared marks, and operator, we will now take questions.

(Operator Instructions)

Steven Chercover, D.A. Davidson.

Two quick questions. First of all, you indicated what the EBITDA impact was of the lumber operations in the quarter. Were the revenues from lumber scrubbed out of those numbers for Pulp and Paperboard?

Yes.

Okay. So for both quarters and for the full year?

That is correct, for the 2011 results, yes.

Very good. Okay, and then obviously you guys are excited about Shelby, but some of your competitors are not excited about having you in the mix. How concerned are you about the amount of new private label TAD tissue that is coming into the marketplace? Are the folks who are, I guess trying to block your project, targeting the same customers as you?

Well, when it comes to litigation, or even then, we really cannot comment on it, Steve, but they are a competitor of ours, and they are, to our knowledge, bringing on some extra TAD capacity. But in the general scope of things, we still feel very good about the tissue business, and as you know and we have talked this with our marketplace many times, the population is really key when it comes to tissue. As long as population grow and tissue demands continue to grow, so we feel good about it. There are some extra machines, or machines beyond what we currently have coming on over the next few years, but we are not panicked by that at all. We just really think that that is going to match up with the demand characteristics of the market. So we still feel very good about being in the tissue market.

I am not looking for any commentary on the lawsuit, but are the machine components being delivered, or you are just building the foundation?

Well, again, we really cannot comment on where we are, but we are right on track with all of the things that you might expect to have happen, from the kinds of things that you mention there to everything else, and that we still anticipate being up and running by the end of this year, by December of 2012. So we are right on track with that. We are within budget, on schedule, everything seems to be going very well.

Okay. That is encouraging. Final question. I might have missed your commentary on pricing. You said it is going to be competitive in pricing on the tissue side? Do you expect your mill nets to go up or down or sideways when you consider mix as well?

Well, it is hard to know. I mean, we know that it is a competitive market out there, and there are some extra tons coming on which we anticipated all along when we made our announcement. So as these tons come into the marketplace, there is a tendency for people to get a little bit more competitive. We have seen a little bit more competitive activity in the tissue market, but we are not worried by that. As I said earlier, we had a price increase, and that has gone very well. So we still feel very comfortable about where we are, but it is a competitive market out there and we would not want anybody to think that it is not a competitive market.

Sure. I apologize if I sneak one more in. Do you have the sense that any of your branded competitors are trying to maybe squelch the private label threat?

We do not get that sense. We always say we try to offer very high-quality products which work for all of our customers. They are trying to do the same thing from a branded perspective, but I do not see that there is any major league point of attack at any particular category or segment of the business. It is just a normal kind of competitive market, where we are all working hard to satisfy our customers and gain our market share.

Very good, thanks so much.

Ian Zaffino, Oppenheimer & Company.

My question would be, as far as the price increases that you had in place in the fourth quarter, given that you are saying it is more competitive, should we assume that it is going to be less than what you had in the fourth quarter, or is there something where it is being contracted and you really should see those price increases continue?

Yes. I think, Ian, it really depends on mix of product and how much more we convert into retail product, and typically when we see these kind of competitive marketplaces, we usually end up seeing some pressure around promotion and how we support our product in store.

In fairness, Ian, on the price increase, price increase has been successful, and really has been implemented. We are just realizing the benefits here in the fourth quarter, and there are a few more benefits to realize in the first quarter, but that increase went through at the levels that we had talked about before. In fact, it came through a little bit faster than we had originally talked about before. We talked about 1.25% in the fourth quarter and 1.25% in the first quarter, and our folks actually did a little bit better than that in the fourth quarter, and it will be less than half of that in the first quarter. I think the point there is that the price increase is in.

Okay, and then on the volume side, I know you attributed some of it to the converting more parent roll. Can you give us a breakout of how much was related to that, how much was related to the competitive environment, as far as the volume decline? Thanks.

We are really not planning on disclosing that. We think that is information that our competitors do not need to hear, but it is really the things that we have mentioned in the script. The concept there about we have always wanted to take parent rolls and convert them into retail, and we are continuing to do that, and we are doing that, I think, that at a very healthy pace. The other things about making sure that you can satisfy all your customers' needs by having the proper amount of inventory in the proper places is another key part of that. The reasons that we talked about in script are really the ones, but we are not able, Ian, to start giving you percentages of what each of those impact was relative to that number. I think the thing to think about on our business is it still remains very good, very solid. We have nice high-demand business, and I think one of the fun things is as we continue to convert more into the retail side of the business, we are going to continue to look good. Ian, are you still there?

Yes, thank you very much.

Okay. Sorry. I hope that answers your question. Thank you.

Yes, that is good. Thank you.

Graham Meagher, T.D. Securities.

First question for you, on the sawmill costs, I just want to make sure we were looking at this the right way. So it is a $2.9 million net cost. There is $15.4 million in the Pulp and Paperboard. So does that mean the difference there, $12.5 million, that was a benefit to corporate?

That is exactly right, Graham.

Okay. And that is all related to the LIFO adjustment there.

Most of it is, yes. Those were all pretax numbers.

Pretax, of course. So that means that corporate is sort of running at that $11 million level, it had been a little bit lower than that the prior couple of quarters. How should we think about corporate going forward?

I would say that is pretty much in the range. I mean it runs about $10 million a quarter, give or take.

Okay, and then slide 4, this is the comparison of the segments quarter-over-quarter, just looking at the Consumer Products -- sorry, the benefit of $25 million on the cost side, are you able to break that out at all between fiber, chemicals, transportation, energy, maintenance, or, can we assume that most of that is fiber?

Graham, we will have some of that breakout on a total Company basis in the 10-K that we will file here shortly, bit we do not break it down by segment. So you will have to try to draw your own conclusions. We do have a line in there, as you probably remember, called fiber, and pulp will be a big part of that. Sequentially, pulp has benefited us, probably less so on a fourth quarter to fourth quarter basis, but sequentially third quarter to fourth quarter, it has been a benefit.

Okay. All right. That's all I had. Thank you.

(Operator Instructions)

Richard Kus, Jefferies.

Following on Graham's question around pulp cost, as you look forward to the first quarter, do you expect that benefit sequentially to be similar or greater than you saw in the fourth quarter?

I do not know that we have categorized it that way, but if I go back to last quarter's call when we talked about how pulp prices flow through to the system, if you go back and look at the quarter that relates to the quarter that we are currently in, and look at those pulp prices, you could make a good assumption about that. That as pulp prices continue to go down, we continue to see a benefit. If pulp prices go up, we start to lose that benefit, and we are running about a quarter behind on that. So, yes, we are seeing some benefits in this particular quarter from the quarter where they started going down in the third quarter, and then, depending on what happens in the fourth quarter, of course, could affect first quarter.

Okay, I see. Have you started to see pulp costs rise yet?

Well, there has been a little bit of pressure. I mean, the pundits out there are predicting that pulp prices have kind of bottomed a little bit, and there is some efforts by some producers to raise price, particularly offshore. That is where we think that they would go first. Typically the most volatile spots are non-North American locations. So as they try to raise those prices offshore, if those get successful that might creep back to North America. Most of the pundits are saying that we are kind of bouncing a little bit on what might be an apparent bottom on pulp, and pulp prices would be expected to go up in the latter half of the year.

Okay, I see what you are saying. Lastly, on SBS, we have heard some anecdotal evidence that prices have been a little bit soft in that market. Would you comment on what you guys are seeing?

Sure. Well, we feel, I guess just in general, awfully good about the SBS market, and what our customers, or how they are supporting us and how our sales force is making it happen out there. One of the things that we had talked about on a previous call was the folding carton increase, and it started at a $50 number, went to a $25 number. That particular increase was difficult to hold in place. So demand continues to remain solid for us, and we do not feel bad about that, but one of the publications had recently put the folding carton price down $20, I believe, and that never helps when a publication pushes it down $20. We will kind of wait and see. I think that right now we would categorize the market as still good. It is not robust. It is not like it was a couple of years ago when everything was going good.

We do know that a couple of our competitors, at least one for sure, has confirmed that they have taken a little bit of market down time. I also really believe that the key thinking about SBS is if, and this is our plan, we would control our order book, or control the supply relative to our order book. So as long as we are matched up well, we are going to continue to run. I think this still continues to be an excellent market to be in, but it is a little bit softer than we would like it. One other thought, without answering too much of the question here, but making sure you know where we are coming from, is that we are right now in a softer, seasonal time of the year on SBS, and that market typically picks up in the spring. So it might be too soon to tell, really, where that market is going to go. That will be more of a function of the economy, but we anticipate that we will have stronger backlogs very shortly, as we head into a normal spring pickup.

Okay. Very good. Thanks very much guys.

I am showing no further questions at this time. I would like to turn the conference back to your host for any concluding remarks.

Okay. Well, we thank everyone for their attention and their interest in the Company. As I mentioned before, we feel very good about where we are, and we are anxious to keep you all posted. So thank you very much, and this concludes the call.

Okay, ladies and gentlemen. This does conclude your conference. You may now disconnect, and have a great day.

Thank you.