Clearwater Paper Corp (CLW) 2012 Q4 法說會逐字稿

Ladies and gentlemen, welcome to Clearwater Paper fourth-quarter and full-year 2012 results conference call and webcast. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will be given at that time.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. John Hertz, Senior Vice President, Chief Financial Officer. Sir, you may begin.

Alright, thank you Steve. Good afternoon, and welcome to Clearwater Paper's fourth-quarter 2012 conference call.

Our press release this afternoon includes details regarding our fourth-quarter and full-year results. And, you'll find a presentation of supplemental information posted on the Investor Relations area of our website at Clearwaterpaper.com. Additionally, we provide certain non-GAAP information in this afternoon's discussion. A reconciliation 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 that this presentation contains 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, 2011, and our quarterly filings 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.

With that, I will report on our full-year and fourth-quarter results. 2012 was a year of significant accomplishments and cost structure improvements for Clearwater Paper. On the financial side of things, we are reporting net sales of $1.9 billion and diluted earnings per share of $2.72 per share, which is a 64% increase over 2011 EPS of $1.66 per share. Adjusted EBITDA came in at a record $228 million, or 12% of net sales, and we were generated $199 million in cash flow from operating activities, or 11% of net sales. On the operational accomplish side of things, our new TAD paper machine in Shelby was started on time, in December of 2012, and construction costs for that facility and the upgrades in Las Vegas are now expected to be under budget at $270 million. Further, we achieved a $10 million synergy run rate in Q4 related to the Cellu Tissue acquisition. We also optimized our asset base by selling our foam business and moving a bathroom tissue line from Lewiston to Las Vegas to improve efficiency. Finally, in the fourth quarter, we acquired a whole log chipping operation near the Lewiston mill. Which combined with our lean manufacturing and cost optimization initiatives are all expected to save us at least $19 million annually by 2014.

Now, turning to the fourth quarter. Net sales came in at $463 million, that is down 4% sequentially from the third quarter due to 6% lower shipment volumes in Consumer Products and a 1% average price per ton decline in paperboard. Compared to the fourth quarter of 2011, net sales are up $13 million, that is excluding the impact of the sawmill that we sold in November of 2011, due mainly to a 6% improvement in tissue shipment tons. Fourth-quarter gross margin came in at 14.3% which is slightly down versus the third quarter gross margin of 14.7% as sequential reductions in pulp and fiber costs were offset by increased chemicals, transportation and labor-related costs. Additionally, we saw lower fixed cost absorption as paperboard reduction was down approximately 5,000 tons due to the maintenance downtime, and tissue production in Las Vegas was down approximately 2,000 tons associated with the TAD paper machine conversion. Compared to the fourth quarter of 2011, gross margin declined 250 basis points, and that is without -- with taking out the Lewiston sawmill primarily as a result of the year-over-year decline in paperboard prices.

SG&A expenses of $31 million were 6.7% of fourth-quarter net sales, as compared to 6.4% in the third quarter and 6.1% in the fourth quarter of 2011. The primary reason for the increase was approximately $2 million in nonrecurring executive relocation- and retirement-related costs in the fourth quarter of 2012. Corporate spending was $13 million of the total $31 million in SG&A spend for the fourth quarter and was flat with the third quarter. Compared to the fourth quarter of 2011, corporate spending increased $2 million and that is after adjusting for the impact of last year's sawmill sale, due primarily to the nonrecurring executive-related costs and the reallocation of certain G&A spending from the divisions in 2011 to the corporate bucket in 2012. Fourth-quarter earnings before interest, taxes, depreciation and amortization, or EBITDA, was $56 million, as compared to $59 million in the third quarter. The sequential decline in EBITDA was primarily due to the lower shipment volumes within Consumer Products and a lower average price per tone within paperboard. EBITDA margin of 12.2% was essentially flat with the third quarter and improved from the adjusted EBITDA margin of 11.8% in the fourth quarter of 2011 on lower input costs.

Fourth-quarter net interest expense of $7 million was essentially flat with the third quarter. Compared to the fourth quarter of 2011, interest declined $3 million due to capitalized interest. We do not expect to capitalize any interest in 2013. Our effective tax rate for the quarter was 30.2%, which is down 10 points from the 40.2% in the third quarter and down 18 points from 47.8% in the fourth quarter of 2011, due mainly to state tax credits associated with hiring and capital spending at our Shelby facility, as well as the impact of a true-up of the full-year 2012 effective tax rate within the fourth quarter. Our effective tax rate for 2012 was 42.5%, and we expect it to be 40% plus or minus a couple of points in 2013. Net earnings was $20 million, or $0.84 per diluted share, compared to $19 million, and $0.80, respectively, in the third quarter. The increase in EPS was primarily due to the lower effective tax rate, as well as a decline of 168,000 diluted weighted average shares outstanding. As compared to the fourth quarter of 2011, earnings are up $7 million, or $0.29 per diluted share, after adjusting for the sales of the sawmill.

Non-cash expenses in the quarter included $21 million of depreciation and amortization, $2 million of equity -based compensation and $3 million of non-cash pension-related expense. Employee headcount at the end of 2012 was approximately 3,860. That's versus approximately 3,710 at the beginning of the year. Capital expenditures were $50 million in the fourth quarter 2012, which included $23 million related to the TAD project, bringing total TAD project expenditures to date to $254 million. Capital expenditures in 2013 are expected to be approximately $91 million, which includes an estimated $[16] million associated with the TAD project. As was previously mentioned, we now estimate that the TAD project will cost $270 million, excluding capitalized interest.

Long term debt outstanding at December 31, 2012 was $524 million, which was consistent with the September 30, 2012 balance. Please note that on January 17, 2013, we issued $275 million of 4.5% senior notes due in 2023. Net of total [operating] expenses of $4 million and $[60] million of breakage cost associated with redeeming the 10.625% notes, we netted approximately $105 million. As a reminder, a redemption of the 10.625% notes triggered a $13 million make-whole premium that will impact other incomes in expense in the first quarter. We intend to utilize the net cash proceeds to repurchase common stock pursuant to our previously announced $100 million stock repurchase program. We plan to fully execute the program and 2013 and intend to execute $50 million of the authorization through an accelerated share buy-back program and the remaining $50 million through open market transactions throughout the year.

During the fourth quarter, we re-purchased approximately 231,000 shares of common stock at a total cost of $9 million, which completed our $30 million buy-back authorization at a total program average share price of $35.15. As of the most recent measurement date of December 31, 2012, our Company-sponsored pension plans were under-funded by $79 million. That is down from $89 million the prior year. We contributed $3 million to these plans in the fourth quarter of 2012, bringing total 2012 contributions to $21 million. We expect to contribute approximately $20 million to these plans in 2013.

With regard to our liquidity, we ended the fourth quarter with $33 million of unrestricted cash in short-term investments. We generated $38 million of cash from operating activities in the quarter, or approximately 8% of net sales. Our leverage ratios remain strong. Our total debt to total capitalization, excluding accumulated other comprehensive loss, was 44.4% on December 31, 2012 compared to 45.1% on September 30, 2012. EBITDA to net interest expense for the fourth quarter 2012 was 8 times. So in summary, Clearwater Paper fourth-quarter 2012 financial performance provided a strong finish to a solid full-year 2012, and we believe that we are well-positioned to achieve our stated objective of at least $300 million of EBITDA in 2014.

I will now turn the call over to Linda Massman, who will discuss the Company's segment performance and outlook.

Thanks, John. Before I get into the segments, I would like to take this opportunity to congratulate Tom Colgrove and Dan Johansen in the new roles as President of the Consumer Products and Pulp and Paperboard Divisions, respectively. Tom has successfully run our Pulp and Paperboard Division for the last four years, and, prior to that, spent more than 25 years with Kimberly-Clark and Procter & Gamble. Dan joined the company 40 years ago, and spent the majority of his career and our former Wood Products Division and in our Pulp and Paperboard Division in both sales and operating roles. I would also like to welcome Beth Ford and Kevin Hunt who joined our Board of Directors last month. Beth has spent 25 years in various leadership positions in multiple industries, including flavor and fragrances, consumer package goods, publishing and oil and gas and is currently Executive Vice President, Chief Supply Chain and Operations Officer at Land O Lakes. Kevin brings more than 25 years of private-label consumer experience to the Clearwater Paper Board and is a former Chief Executive Officer, President and Director of Ralcorp Holdings which manufactures, distributes and markets private-brand food products. With the promotions of Tom and Dan, in the addition of our new board members, I am confident that Clearwater Paper has the leadership in place to achieve our strategic goals and generate additional value for shareholders.

Regarding our Company goals, I wanted to give you an update on our business strategy and long-term vision. December of 2012 marks the four-year anniversary from our spinoff from Potlatch, and we thought this would be a good time to review these items. In January, we finalized the strategy development and are now in the process of communicating a five-point plan to all employees across the Company. The plan is called DRIVE and has specific three-year goals that focus on number one, developing, engaging and protecting our employees. Two, realizing, growing and enhancing financial performance. Three, improving our processes and systems. Four, valuing and deepening our relationships with our customers. And five, ensuring sustainability for our Company and the communities in which we operate. Employees are very engaged in the initiative and have already begun to jump in head-on to meet the plan's specific goals. And, we believe the achievement of these goals will ultimately produce additional value for the shareholders of our Company.

Now a discussion of our segment results. Consumer Products net sales were $281 million for the fourth quarter 2012, down 4% versus the third quarter primarily due to a decline in shipment tons to 130,733. More specifically, retail tons were down 3% and non-retail tons were down 9% due to tight parent roll inventory. In addition, as Jon discussed, we had the 2,000 tons of lost production associated with the Las Vegas conversion, and the division did build some inventory in the quarter, which is to go at year end to prepare for the first quarter sales. Partially offsetting the sequential volume decline was a 2% increase in total tissue average net selling price per ton to $2,147, as the retail versus non-retail shipment mix improved from 53% retail in Q3 to 55% retail in Q4. Also benefiting total selling price was a richer product mix within retail, as retail pricing was up 1% versus the third quarter due to higher shipment of facial tissue while non-retail pricing was flat.

Consumer Products net sales were up 5% versus the fourth quarter of 2011 due to a 6% increase in volume. As a reminder these volumes and pricing figures are available on our website as supplemental materials in the Events and Presentations section of the Investor Relations page. Also beginning this quarter, we are providing a break out of volumes and pricing for retail versus non-retail. We are also providing sequential bridges by division in addition to the consolidated bridges that we have been providing. Consumer Products operating profit margin for the fourth quarter 2012 was $23 million, or 8%, versus $18 million and 6% in the third quarter and is up mainly due to the richer mix of retail versus non-retail and lower pulp costs flowing through our financing's in the quarter. Although, we did see market pulp costs rising approximately 5% towards the end of the quarter. Consumer Products operating margins improved from 6% in the fourth quarter of 2011, due to better retail pricing and lower input costs.

As Jon mentioned in his summary of 2012, our new paper machine in Shelby started up under budget and on time in December of 2012. In the fourth quarter, we also finished the improvements to our Las Vegas TAD machine, which enabled the facility to produce both TAD ultra bathroom tissue and household towels. The Shelby paper machine produced approximately 1,800 tons of paper in the fourth quarter. We expect it to produce 55,000 tons in 2013 and to be at a 70,000 ton per year run rate in the fourth quarter of 2013.

Now stepping up to how that flows through on a total division basis for 2013. We expect incremental CPD production tons to be 41,000 tons. Of which, we expect to ship 26,000 tons. We also expect to build 10,000 tons of incremental inventory, and a remainders is converting yield loss. Of the incremental shipment tons, we expect the line share to be retail. Between Shelby and Las Vegas we incurred a total of $3 million in start-up related costs in the quarter, $1.8 million of which was capitalized to the Shelby paper machine. We now have four converting lines operating at Shelby with an additional napkin line starting up in 2013. The four operating lines produced approximately 3.6 million cases in 2012.

Now turn into our 2013 outlook for the Consumer Products division. I would start by pointing out that we have included slides in our supplemental materials providing our general outlook on volume, price and mix, input costs and maintenance and repairs for Q1 and for the full year 2013. Overall, we believe the wind is still firmly at the back of private label tissue as it grew 4% in 2012 in the US, despite expected population growth of only 1%. Private label continues to gain share, and we believe that we are well-positioned to grow our 37% nationwide share of the US private label tissue market. For the full year 2013, we expect to ship an incremental 4.6 million cases versus 2012, a 9% increase, as result of our expansion effort. Tissue price and mix will improve with the addition of TAD bath tissue cases, and we expect input costs as a whole to increase in the first half of 2013 and then decline in the second half, resulting in being net stable for the year versus 2012.

While publisher reports are now calling for pulp to rise through July and then remain at those levels throughout the remainder of 2013, we are seeing signs that we are near peak pulp prices for the year and expect prices to start falling as we move into the second half of 2013. We believe first half 2013 increases in external pulp and natural gas will begin to be offset by reductions in transportation costs in the second quarter due to bathroom tissue coming online in Shelby, as well as inventories coming back in line. Specifically for the first quarter of 2013, we expect our price and mix of tissue products to remain to stable and expect shipment volumes to increase to approximately 134,000 tons. As to input costs, we began to see an increase in external pulp pricing in late Q4, and we have seen that continue into Q1. Because of the TAD bath tissue launch, compounded by strong market demand and our tight inventory levels in the month of January, we are seeing a couple of nonrecurring cost pressures in the first quarter. We expect to purchase 4,000 to 5,000 tons of external parent rolls in the quarter. Which will likely constrain margins. And two, internal parent roll transportation costs will likely be up in the first quarter. We expect the rest of our input costs to remain stable.

Pulp and Paperboard net sales of a $182 million for the fourth quarter of 2012 were down 3% versus the third quarter due to a 2% decline in paperboard volumes to 190,339 tons and a 1% decline in paperboard pricing to $936 per ton caused by market-related erosion on plate, folding and cup products. Compared to the fourth quarter of 2011, Pulp and Paperboard net sales were flat; that's excluding the sawmill. Pulp and Paperboard operating margins for the fourth quarter 2012 is $26 million, or 14%, as compared to $34 million, or 18%, in the third quarter. The decline is due to the pricing reduction, $2 million higher scheduled maintenance expense and an increase in labor-related charges. Compared to the fourth quarter of 2011, Pulp and Paperboard operating income decreased 19%, after adjusting for the sawmill sale and related costs due lower net sales and operating margins.

Now, regarding our 2013 outlook for Pulp and Paperboard. For the full year 2013, we see the broader paperboard market being stable to improving, although somewhat dependent upon GDP growth. We are planning for stable production and shipment volumes throughout the year. While pricing was soft early in Q1, we are seeing our strongest January and February backlog since our spinoff in 2008. As it relates to our input costs, John mentioned the whole log chipping facility that we acquired in December, and as a result we expect to see a $2 million to $4 million annual improvement wood fiber costs. We see chemical and transportation costs remaining stable throughout the year and slightly higher natural gas costs. We currently expect to see approximately $14 million in major maintenance charges in the year, with $3 million falling in the first quarter relating to the Arkansas mill and $11 million falling in the third quarter related to the Idaho mill.

Specifically for the first quarter of 2013, while production is expected to be stable, sales [volume] will be down approximately 14,000 tons in Paperboard on a one-time basis versus Q4 of 2012, as we are initiating a consignment inventory program with a significant customer. We saw a little bit of incremental pressure on pricing here in the first part of the quarter, and we expect overall price and mix to be stable to slightly down for the full quarter. We expect to see the benefits of our whole log chipper begin in the first quarter and all other input costs to remain stable, with a reminder that we have they $3 million in incremental major maintenance planned at the Arkansas mill.

So now, looking so now looking at the whole picture, for the first quarter versus the fourth quarter. We expect increased consumer shipment volumes will be more than offset by a decline in sales volumes in paperboard due to the consigned inventory program. In addition, we expect the external pulp pricing and the one-time effects of incremental purchase paper and transportation costs could put 1 to 3 points downward pressure on CPD operating margins, although we are working internally to try to offset these headwind's. Interest expense will be $5 million higher in the first quarter as compared to the fourth quarter, due primarily to the lack of interest capitalization. And then, we've got the $13 million for the early redemption of the bonds and also impacting other income and expense. And, John already mentioned that the effective tax rate is expected be 40% plus or minus a couple of points.

In summary, we delivered a solid fourth-quarter and full-year 2012. Our acquisition of Cellu Tissue is now fully integrated, and our Shelby project is ramping up quickly. Further, we believe that our DRIVE plan and changes to our management team and the addition our new Board members position us well to achieve our strategic goals and deliver on our goal of $300 million of adjusted EBITDA in [2015].

Thank you for listening to our prepared remarks, and we will now take questions.

(Operator Instructions)

Graham Meagher, TD Securities.

Hi. Thanks for taking my questions. First, just wanted to note that we do appreciate the improved disclosure that you have provided this quarter. First question, Linda, can you just discuss the sort of competitive behavior you are seeing from both the branded and private-label producers as you are selling the output from Shelby into your retailers?

Yes, I would say that the market remains very stable. We are actively engaged with our customers as we are working to begin selling out Shelby. We are in great detailed dialogue with them now. I would say it is a pretty normal operating environment from our perspective, and our focus right now is on really getting that TAD bath tissue product to the shelves of our retailers as quickly as we can.

Okay, great. Thank you. Maybe, just on the paperboard market, you gave a little bit of color on January or February. Do you expect pricing to come back a little bit as we move into Q1, Q2?

I would say that we did see some softness in Q1. I guess we are encouraged by the strong backlogs we're seeing in January and February. I think it might be too early to know exactly what is going to happen with pricing, but definitely encouraged that we are beginning to see those stronger backlogs.

Great. Thanks. That is all I have.

Steve Chercover, D.A. Davidson.

Thanks. First of all, I guess, Linda kind of answered it. You did accumulate 14,00 tons of inventory in the Paperboard, is that what you for this new customer?

What we are going to do is move that into a consignment sales relationship with them. So, it will be our inventory that we will own for a while.

Steve, this is John. The way I'd think it is we shipped that product and because it is now going to be on a consignment relationship with that customer, that shipment does not get to be recognized as sale. So, it's going to stay as our inventory until they actually pull into their manufacturing line.

Presumably that has some benefit to them -- since you own it, does that mean that that mill net somehow creeps up a bit because you're providing them with that kind of working capital service?

There is definitely going to be a small incremental working capital cost to us. We think that is more than offset with this more strategic relationship we will develop with this particular customer. Clearly, already a strategic relationship has been developed with this customer. That is why we are even moving into this type of relationship. But it will ultimately help us, as well, because it does allow us to build a stronger, more consistent shipping volume with this customer, which gives us more flexibility as we progress through the year to be able to react to what is going on in the marketplace.

And I apologize. I'm having technical issues, so I might have missed it. Is that an onshore customer?

Yes.

Okay. Great. Also with respect to Shelby, it sounds like you had a great start up. Were there any kind of start-up expenses that we should incorporate within our estimates that presumably go away?

Steve, this is John. I think we said we actually incurred about $3 million of start-up cost, but $1.8 million of that was capitalized, so the net $1.2 million, you can say, goes away in the first quarter. I would remind you that right now, we are on household towels and we have got to convert over to bathroom tissue. So, that will be the first time we will have done that, of course, on that machine, and there could be some start-up related costs associated with that. We do not anticipate that moving the needle. It would be probably not material.

How are the machine controls working? Is this -- I guess neither of you were there for the start up of Las Vegas. Is there anyone there who could shed some perspective as to how it compares?

I would say that we couldn't be more pleased with our start up of Shelby. I just have to say I am very proud of the team and what they have accomplished. It started up incredibly well on anybody's standards, okay? We do have Tom Colgrove who has a tremendous amount of experience bringing up tissue machines in his former life, as well. I think what we are the most proud of is the facility started up on time, under budget and quite frankly, what we did not say is it's really on quality.

Our consumer testing has been going very well. We're definitely on target with regard to quality with the bath tissue. With regard to both strong and soft. Now, it is really up to the sales team to remain fully engaged with our customers as they are, and getting that product to the retailers' shelves as quickly as we can.

And just how quickly does that have to be tested at retail?

You know we have been going through that already with a large number of our customers because we have been able to get some product off of the Las Vegas facility. So, we are well into the selling process at this point and feel pretty good about how excited the customers are to get this product.

Terrific, thank you very much.

Yes.

Ian Zaffino, Oppenheimer.

Thank you very much. Just a quick question. The 3.5% retail price increase. That was some mix, right? Just trying to [compare] what the apples to apples pricing would be, ignoring mix.

It was definitely mix related. And, we said we sold a little bit more different retail mix more to facial, and that would have caused that change.

Okay. So basically, it's just sort of flat pricing with a 3.5% benefit from mix.

Yes, exactly. There has not been any big market changes in pricing that we have experienced. So, yes that would be mix related and individual customer relationships.

Okay. Thanks. That's it.

(Operator Instructions)

James Armstrong from Vertical Research.

Good afternoon. My first question is more of a clarification. When you gave your $300 million EBITDA target, what year was that for again?

James, that was 2011 cost structure to achieve in 2014.

Okay. To achieve in 2014. I just wanted to make sure. Okay, then, on Shelby, if it was at 100% today, do you think that you could place all the tons with a minimal impact to the market, and what is your ramp-up curve going to look like to get to 100%? For instance, will you be at 50%, 60% in the first quarter, 70% in the second, how does that look?

Maybe, I'll take the first question first, which was I think more about tissue capacity and if we were fully ramped up. And maybe I will change the context of little bit because we will be ramping up through the course of the year. We do have a slide in our investor deck that is quite telling. It shows, I think, the first part of the chart is 2011 tissue demand versus capacity, and it shows of the two are matched up pretty nicely at 97%. Then given what has been announced from a capacity increase perspective in the marketplace, as well as what we have seen historically with regard to tissue growth, primarily driven by population, it shows that at the end of '13 that ratio is very consistent at 97%, and we don't have any reason to believe that wouldn't continue to be the case.

So, the additional capacity announcements I think are fine and the market will absorb that. With regard to how does Shelby ramp, we gave you some indication as to how that flows off with the 55,000 tons, but specifically, we have to go through the selling process that is going to be individually driven by each of our customers and what their needs are and what their plans are and get this to the shelf. I would say, today, our closest indication would be that while we are going to have to build some inventory and make sure we can meet the normal and customary good customer service that we provide our retailers, most of that volume will be in kind of the third and fourth quarter. We will see some of it in the first and second quarter, but it will definitely take a larger ramp in the back half of the year.

And that is a shipment volume comment. From a production volume, we do see that growing linearly through the year.

Yes, the production side. That helps a lot. And lastly, how much of the $100 million authorization has been used to date?

Well, I will answer it this way. We were in the quiet period when we finished our last authorization. But, won't be out of the quiet period until a couple days after this [call].

Okay. Perfect. So nothing really has been used as of yet?

Sure. Okay. Thank you.

Thank you. I am showing no one else in queue at this time. I like to hand the conference back over to Miss Linda Massman for closing remarks.

Yes, I would just like to thank everybody for joining us on the call, and we look forward to catching up with you soon. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect, and have a wonderful day.